Ricardo Amorim's interview to Dow Jones on challenges for Brazil´s industry.

Dow Jones Newswires

By Tom Murphy


DJ Mature Brazil Industry Hits Snags But No Sign Of Dutch Disease
-Brazilian manufacturers’ share of GDP is sliding.
-But Brazilian GDP pie has expanded as industry thrives.
-Muscular Brazilian real is a challenge to industry.

   By Tom Murphy

SAO PAULO (Dow Jones)–Brazilian manufacturing faces a midlife crisis, but its doubts and infirmities are not likely to include full-fledged Dutch disease.
In relative terms, the industrial segment of Brazil’s economy declined from 36% of gross domestic product in 2001 to 29% in 2010.
From such comparisons come frequent fretful comments by leaders of Brazil’s trade associations. Their worry is so-called Dutch disease, the 1970s phenomenon by which Holland’s currency became so overvalued because of huge gas exports, that its manufactured products were rendered uncompetitive.
“But Brazilian industry is still going strong,” said economist Ricardo Amorim, president of Sao Paulo’s Ricam Business Consultants. “Ten years ago, our industry was tenth biggest in the world. Last year, it was sixth.”
One reason is that, while industry’s share of the pie may be shrinking, the pie itself has grown. Since 2001, Brazilian gross domestic product has expanded, in real terms, more than a third.
“Brazil has a large and varied economy helping make it resistant to Dutch disease,” said former central bank president Affonso Celso Pastore. “Such talk is industry rhetoric.”
Nevertheless, while safe from dreaded Dutch disease, manufacturers seem increasingly apt to catch cold and infection. Arthritis adds a certain rigidity. These lesser afflictions sometimes go by the name of “de-industrialization.”
“De-industrialization is the process by which local production is substituted by imports,” said economist Roberto Giannetti da Fonseca, international affairs director of Fiesp, the powerful Sao Paulo Federation of Industries.
That process is already underway, said Fonseca.
“In the first quarter of 2011, imports met 21.6% of Brazilian demand for manufactured goods,” said Fonseca. “That’s up from only 15.5% in the first quarter of 2006.”
A similar phenomenon takes shape on the export side, although the curve is not as steep. In first-quarter 2011, Brazilian manufacturers exported 17.5% of their output, down from 20.8% five years before.
The heart of the matter is the Brazilian real, the muscular emerging market currency that bulked up nearly 40% against the U.S. dollar in the past two years. The strong real makes imports seem cheap to Brazilian consumers while undermining local manufacturers.
Key manufacturing segments are taking direct hits, according to a study by the Foreign Trade Research Foundation. Brazilian textile exporters suffered a 6.1% decline in profit margins between the first quarter of 2010 and the first quarter of this year; steel margins were down 5.5%, while motor vehicles declined 7.6%.
“Brazil is losing out on the re-opening of the world market because of the strong real,” said Fonseca. “And de-industrialization is becoming more acute.”
A Fiesp study shows that overall Brazilian demand for manufactured products increased 4% from the first quarter of 2010 to the first quarter of this year. “Fully 64% of the marginal increase in demand was met by imports,” Fonseca said. “Domestic manufacturers met only 36%.”
According to Andre Nassif, an economist at Rio de Janeiro’s Fluminense Federal University and author of a 2008 study of the phenomenon, “De-industrialization is not here yet, but we’re closer to it than we were before.”
He added, “Foreign exchange and growth are intimately related. The goal should be a small under-valuation of the currency, say 4% to 5%.” Instead, according to Nassif, the Brazilian real is significantly over-valued today.
Another danger comes from massive oil exports expected to begin around the middle of the present decade as Brazil develops huge offshore reserves.
“We have to handle this very carefully,” said Nassif. “If we don’t, we could see more currency appreciation. But if we do it right, as I think we will, we can create a whole chain of production from drilling equipment to petrochemicals.”
Amorim, of Ricam Consultants, warned that foreign exchange may be the wrong focus.
“Foreign exchange appreciation is more a case of a weak dollar than a strong real,” he said. “The weak dollar makes Brazil less competitive but it also makes everybody else less competitive. We don’t just trade with the United States.”
By focusing on foreign exchange, Brazil is neglecting deeper issues. “Excessive taxation is the worst,” said Amorim. “High interest rates, poor infrastructure and deficient education are the real problems. Solve these and we’ll have a wall against any economic disease.”