Brazil feels the jaws of a familiar trap closing on its leg — and it is determined to struggle. As its finance minister told the Financial Times in a recent interview (paywall alert):
“We don’t want to lose our manufacturing sector. Brazil is not merely an exporter of commodities… We are not going to just sit by and watch while other countries devalue their currencies to give them a competitive advantage.”
As cheap Chinese goods manufactured flood into the country, as the US, the EU and Japan deploy unconventional financial techniques that keep interest rates low and therefore tend to depress the value of their currencies in international markets, and as Brazil’s booming commodity exports and high domestic interest rates keep its currency expensive, Brazil’s manufacturing sector is under pressure. Automobile manufacturing is particularly hard hit, with production falling an alarming 30 percent in January.This is an old battle in Brazil; the US, Canada, Argentina, Australia and Brazil were all commodity producers in the 19th century; the English speaking countries went on to become first world economies with a healthy mix of industrial, mining, services (like banking) and agriculture. Brazil and Argentina, despite some industrial achievements (especially in Brazil), never quite climbed out of the commodity pit.The power of rent seekers and vested interests in both Brazil and Argentina helps explain their failure. Some of these groups were foreign — owners of mines, investors in railways and so on — and some were domestic: oligarchic families, self-defeating populists, large landowners. Protectionism in both countries historically turned very quickly into a counterproductive mix of special interest giveaways that mostly reduced growth and efficiency without building a powerful industrial sector. (Brazil had more success than Argentina).Now the Brazilians are taking another look at the protectionist toolkit, wondering whether there are any drugs on the shelf that have fewer side effects than the nostrums they used to take.The finance ministry is clearly hoping that a more technocratic, nuanced approach can give better results at less costs than the old protectionism. In particular, it is looking at replacing payroll taxes (in Brazil, 20 percent of total payroll) for hard hit manufacturing companies with a lower tax on their total revenue. This in effect subsidizes employment in industries facing tough foreign competition; textiles in particular, the Brazilians hope, will benefit from this treatment.It’s easy to blame Brazil for protectionism, but to be fair, when the US, the EU and Japan are all pursuing unorthodox monetary policy and China is systematically promoting exports through, among other things, a policy of state-directed lending through the financial sector, the Brazilians can be excused for looking to their defenses.The question isn’t whether Brazil is justified in unorthodox measures; the question is whether these measures will work. That remains very much to be seen; special, rent-seeking interests remain extremely powerful in Brazilian politics and the country is not all that far from the bad old days of hyperinflation.The idea of shifting the tax burden from employment to other activities is, in itself, a very good one. Via Meadia would like to see payroll taxes permanently abolished or deeply cut in the US in some revenue neutral tax shift to consumption taxes or, to make our dear green friends happy, carbon taxes. We should be promoting employment rather than taxing it to death.Perhaps Brazil should think more about reducing the payroll tax generally on all its employers rather than restricting the relief to a handful of favored, pet companies. In any case, Via Meadia wishes Brazil every success in climbing out of the commodity pit; the world needs a strong, prosperous and self-confident Brazil.