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Part I
Economic Reforms in Brazil and the Lessons from South Korea and China
Few concepts have gained more currency among business people and politicians in recent years than the idea of the BRICsāthe giant, emerging economies of Brazil, Russia, India and China, whose weight and influence is supposedly changing economic and political realities. Grouping the four, however, obscures a simple fact: while the rise of China and India represents a real shift in the power balance, Russia and Brazil are marginal economies propped up by high commodity prices.
āFinancial Times, 04th December 2006
Brazil is to commodities what China is to manufactured goods.
ā The Economist, 17th April 2008
Twenty-five years ago, when South Koreaās output was $1,900 a head, Brazilās was $1,600. Now Brazilās has risen to $7,000 while South Koreaās is three times larger at $20,000.
āFinancial Times, 02nd May 2008
Introduction
The 1980s and 1990s were a period of profound changes in the global economy. State-led policies that for decades had set the rules for a considerable part of the world economy showed, in the last two decades of the twentieth century, clear signs of collapse. The developed economies were the first to implement a series of measures that put an end to the state interventionism of the inter- and post-war periods. In the early 1980s the US, Japan and Western Europe opened a new era in global business by joining efforts to reduce the role of the state; abandon restrictions on capital flows; give a new boost to the capital market (which thanks to the advent of Internet technology managed to process a stunning amount of real-time cross-border transactions at a low cost for the first time in history); privatise state-owned enterprises in key sectors of the economy; lift trade barriers; and finally, encourage their largest companies to pursue a leading position in the global market. This revival of the neo-liberal orthodoxy turned into a period of great capitalist expansion, which had an immediate impact on the then planned economies and on all developing capitalist countries.
This shift back to a more market-oriented economy quickly rippled throughout the world and forced entirely distinct economies to adjust themselves into what became a more competitive and globally integrated business environment. It witnessed the dramatic collapse of the former Soviet Bloc, influenced gradual changes in China and triggered off structural reforms in Latin America and in both South and South-east Asia. The reforms that were carried out in the West (particularly in the US and the UK) became, to a large extent, the model to be followed by other economies.
The Latin American economies were the ones that most enthusiastically embraced the wave of market-oriented reforms that sprouted in the Western developed world. Strongly affected by the debt crisis of the 1980s, the Latin American countries found themselves compelled to contest the effectiveness of the state in promoting growth and to abandon the very basis of their state-led model of development. This policy shift had a profound impact on the continent. It was in contrast to long-established beliefs and challenged the intellectual background that dominated the pro-development debate in the region during the post-war period, that is the need for a strong and controlling state committed to giving a ābig pushā in their economies and propelling them into a new level of development. Leading Latin American economists were known, particularly in the mid-twentieth century, for supporting the premise that the state was the only force strong enough to diversify the continentās commodity-based economy and to sponsor the expensive process of industrialisation which could unleash its economy from a chronic status of underdevelopment.
The shift of Latin America back to a more market-oriented economy in the 1990s marked the end of a four-decade period of import substitution industrialisation (ISI) and of a business framework that was strongly driven by inward-looking development. This forced the Latin American economies to adapt themselves to a radically new business environment. Large state-owned enterprises were put on sale, and greater freedom of capital flows allowed the entry of a record amount of foreign investments. In addition, the lifting of trade barriers brought competition to a business environment that was until then mostly dominated by local companies. The main role left for the state after the reforms was one of ensuring macro-economic stability and the sound management of public accounts, a task that quite commonly involved the adoption of strict monetary policies. According to the neoliberal discourse, once Latin America was finally freed from its excessive reliance on price controls and subsidies, the means of finding the best way to allocate its resources would be left to the market.
The promise of a new era of growth through the implementation of market-oriented reforms concealed, however, deep challenges. First, Latin American companies were suddenly exposed to an unprecedented degree of competition, which in most cases came from the global giants. Second, there was the very condition of Latin Americaās poor macro-economic scenario, which, when compared to the stability of the developed economies, was not the most encouraging at that time to induce investments. Third was the continentās lack of expertise to deal with the new economic instability that came with the liberalisation of its capital market. Fourth was the regionās chronic neglect of what turned out to be crucial elements of any economy willing to succeed in the global market like transport infrastructure, education and basic research (innovation capacity). And finally was the difficulty of implementing wide-ranging reforms when their own countries were going through periods of economic and political instabilities.
In reality, in the 1990s, the Latin American economies engaged in a process of global integration in which the developed economies had already reached a leading position. This new global business environment was not a playing field founded on equal opportunities. In almost every aspect, companies based in developed economies were in better position to compete. They had easier access to credit, better transport infrastructure, highly developed human capital, greater investments in R&D, long-established global presence and better-known brands. Once trade barriers were lifted, the chances of the Latin American companies to compete with the global leaders were markedly lower. This was, therefore, the beginning of a period of great changes for Latin America, whose prospects of creating global companies were relatively less promising. To make matters worse, the challenges brought about by the introduction of neo-liberal reforms were magnified by the fact that Latin America, as a late-industrialising continent, had always made use of some sort of industrial policy. This sudden shift from state-led development to one ruled by market-oriented global competition made the future of the continentās domestic industrial sector even more uncertain. This was a completely new business scenario for the Latin American countries whose policy tradition, as we have just seen, was at stake.
Brazil and the World Economy
Brazil was the last major economy in the region to catch the wagon of market-oriented reforms that had reached the Latin American railways so rapidly. Although the first steps to open up the economy were taken in the early 1990s, it was only in 1994 that the country begun to commit itself to a fully fledged programme of reforms. Of all Latin American economies, Brazil was the one with the most at stake. The Brazilian state had invested heavily during its phase of ISI and, over nearly forty years, managed to build a relatively diversified industrial sector. Brazilās industrialisation process was also unique in Latin America for managing to achieve a reasonable degree of vertical integration (notably in mining, auto and auto parts, aerospace and telecommunications).1
The opening up of the Brazilian economy in the 1990s brought about deep changes to the productive sector. It began with the implementation of a series of measures that were aimed at reducing the role of the state in the economy and the privatisation of several state-owned enterprises. Mining and steel were the first sectors to be privatised, which were followed by the whole set of state-owned petrochemical and fertilizer industries and the aerospace companies Celma and Embraer. In the service sector, the privatisation programme included the entire telecommunications network and part of the power generation and distribution systems, as well as railways and ports. All barriers against the entry of foreign capital were lifted, and global companies were allowed to invest in practically all segments of the Brazilian economy, including those that were traditionally kept as state monopolies like oil and oil refining, telecommunications and power generation. With the withdrawal of the state from core industries, the government shifted its focus of attention towards the creation of a regulatory framework. The main goal was to ensure the creation of a secure, reliable and friendly business environment for private investment, both foreign and local. Finally, the government carried out a wide-ranging cut on trade barriers. Practically all non-tariff barriers were lifted, and import tariffs were smashed from an average of 51% in 1987 to 14.2% in 1994.2
This quick opening up of the domestic market, which by itself entailed considerable challenges for the local economy, coincided with another equally decisive measure, the implementation of a monetary policy that made use of an āexchange rate anchorā to keep inflation under control. This measure, strongly based on high interest rates, kept the Brazilian currency (Real) overvalued in the most critical period of Brazilās economic opening. Local exporters were therefore doubly hit with the opening up of the economy. Whereas the lift of trade barriers opened the doors for an unprecedented inflow of imports, the overvaluation of the local currency made imports more competitive at the same time that it considerably reduced the capacity of the Brazilian companies to sell abroad. The immediate result of Brazilās market-oriented reforms was a complete reversal of its trade balance and a drop of its current account. After an entire decade of annual average trade surpluses of US$12.7bn, the country witnessed from 1995 to 2000 an accumulated deficit of US$24bn.3
The introduction of market-oriented reforms brought about profound changes to domestic companies. First, there was an impressive growth of foreign direct investments, which jumped from a meagre US$731m in 1990 to US$32bn within just one decade. Second, there was the equally astonishing rise of mergers and acquisitions, which in the same period accounted for more than 2,000 transactions, the majority of them being cross border. Third came the steady transfer of state-owned companies to private control. And finally was the complete restructuring of long-established supply chains, particularly in the automotive, food processing, mining, oil and oil refining industries, which after the market reforms gained a new but still undefined shape.
The 1990s were a decade of great uncertainties even to the biggest Brazilian companies. In almost every sector of the Brazilian economy, large local companies were severely affected by the new business environment that came about with the opening up of the economy. Despite the initial belief of the Brazilian business community that they were prepared to compete in a more open environment, the acquisition of leading traditional domestic companies by multinational corporations forced them to reconsider their initial optimism. Signs of vulnerability of the local companies in the face of foreign competition were clearly evident in the years following the reforms. In the Brazilian automotive sector, for instance, a vivid debate was raised when three of its largest domestic companies (Metal Leve, Cofap and Freios Varga) were sold to foreign groups.4 In the food processing sector, one of the most affected sectors by the mid-1990s wave of mergers and acquisitions, Brazil witnessed its most traditional brands being acquired by global giants like NestlĆ©, Cargill, Sara Lee, ADM and Bunge foods. In telecom equipment manufacturing, after years of strong protectionism, two entrants (Nortel and Alcatel) were equally quick to acquire the star pupils of Brazilās infant industry promotion, Batik, Zetax and Promon. Even in the mining and steel industries, where participation in the privatisation process was initially restricted to domestic investors, as soon as barriers against foreign investment were lifted, global players like Arcelor (currently ArcelorMittal) and Nippon Steel moved quickly to consolidate their position in the Brazilian market.
Practically all sectors were hit by a wave of intense ownership restructuring.5 The reform had a tremendous impact on big business in Brazil, which consequently brought several implications to the domestic economy as a whole. The end of state-led policies and the opening up of the economy transferred to private capital a leading role in the local economy that until then had been chiefly attributed to the state. As a consequence, the long-term strategies of the state were somewhat replaced by a new business environment that became more focused on the global rationality of large international corporations as well as on the most immediate demands of the market. This was a completely new business environment in which local companies back in the mid-1990s didnāt have much expertise. Although those supporting the reforms were relentless in highlighting that the withdrawal of the state would make the economy less ādistortedā and therefore more in tune with its real ācomparative advantagesā, little was known about the long-term implications of such change to Brazilās relatively developed and diversified industrial sector.
Industrial Development and Foreign Trade
With the opening up of the Brazilian economy in the early 1990s, three key aspects of its move towards greater integration into the world economy were brought into light: first, the impressive growth of foreign investments; second, the sudden surge of cross-border mergers and acquisitions; and finally, the unprecedented rise in foreign trade. Whereas the first two changes are strongly interrelated and can only shed a dim light on the outward-looking objectives of the Brazilian economic reforms, the last one shows a radical shift in the way Brazil started to interact with other economies. It marked the end of ISI in Brazil, which until then had usually neglected the export sector, and rehearsed its first steps into intra-firm trade that came about with the wave of cross-border mergers and acquisitions in Brazil and with the recent consolidation of the global value chains.
After a whole decade of annual trade surpluses of more than US$10bn between 1985 and 1994 and an interval of sharp deficits from 1995 to 2000, Brazilās foreign trade has since reached a new all-time record. This impressive growth of foreign trade, which reach...
