Brazil’s new industrial policy plan: three sources of optimism and three words of caution

In this blog, Policy Analyst Mateus Labrunie discusses Brazil’s new industrial policy, Nova Indústria Brasil, which was launched in response to decades of deindustrialisation. Mateus is optimistic about the policy’s potential impact, but also provides words of caution based on his experience in industrial policy development.

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Nova Indústria Brasil: Brazil’s new industrial policy plan

On 29 January 2024, the Brazilian government launched its new industrial policy plan, Nova Indústria Brasil, as a result of the works of the National Industrial Development Council (CNDI). The policy is timely as since the 1980s, Brazil’s large and diversified industrial base has been hollowed out in a process of premature deindustrialisation.

Some industrial policy attempts were made in Brazil in the 2000s, but these had limited effects and were unable to fundamentally transform the country’s production structure. Now, in a new global and national context, in which environmental concerns are at the top of the agenda and geopolitical shifts open new opportunities, Nova Indústria Brasil comes as an important attempt of the Brazilian government to upgrade the country’s productive activities and link them with environmental and social ambitions.

The policy aims to achieve Brazil’s “neo-industrialisation” through six missions that address food security, healthcare resilience, infrastructure, digitalisation of industry, energy transition, and national security. It suggests several important policy measures, such as an expansion of the role of the Brazilian Development Bank (BNDES) and Innovation Agency (FINEP), an expansion of the SME development programme Brasil Mais Produtivo, and mechanisms of public procurement and local content requirements. The budget commitments are also significant, with over R$300 billion (US$60 billion) committed until 2026. The policy statements also emphasise the performance monitoring of subsidised actors – an essential feature of the historically successful industrial policies of East Asian countries.

As a development economist specialising in industrial policy, it’s difficult to contain my excitement. However, as Gramsci advises, it’s important to balance optimism with caution. In this article, I present three reasons for optimism and three words of caution based on my experience working with governments from around the world at Cambridge Industrial Innovation Policy.

Three reasons to be optimistic

Three major trends bring optimism towards the new policy:

1. Larger international “policy space”. Since the 1980s, developing countries were discouraged, and in some cases forbidden, to use industrial policies for economic development by international organisations informed by the economics mainstream. Today, the scenario is very different. Industrial policy has been gaining traction in academia and policy circles, with leading countries becoming very explicit about their industrial policies and committing an unprecedented amount of resources to them. Important examples are the CHIPS and Science Act and the Inflation Reduction Act in the US, which combined reach over US$1 trillion, and the European Chips Act and European Green Deal in the European Union, commanding around €650 billion altogether. The adoption of these policies in central countries creates international legitimacy for industrial policies in developing countries.

2. Global search for resilient and environmentally sustainable production. Global supply chain disruptions such as the ones caused by the COVID-19 pandemic and the armed conflict in Ukraine have called attention to the need for resilient global supply chains. This is further intensified by the economic rise of China, which is seen by some Western governments as a threat to their economic security. In this context, the public and private sectors of Western countries are starting to promote the geographical diversification of global supply chains from China towards other countries and regions. This trend is known as near-shoring. In addition, the global imperative towards environmental sustainability is making governments and companies of the Global North seek greener ways of producing. This often involves relocating production to countries, such as Brazil, that have a cleaner energy supply and the potential to scale up renewable energy and other sources of energy such as green hydrogen.

3. Macroeconomic conditions. Despite the prevailing global discourse against industrial policies, Brazil implemented several important policy initiatives in the 2000s, such as the Industrial, Technological and Foreign Trade Policy (PITCE), the Productive Development Policy (PDP), and the “Brasil Maior” Plan (PBM). These had important positive effects but were unable to fundamentally transform the country’s production structure, which instead became even more dependent on agricultural and mineral commodities. A common explanation for this limited impact is the macroeconomic environment that prevailed in the country in the period, with one of the highest interest rates in the world and an overvalued exchange rate, which was fundamentally harmful to industrial activity. Since 2020, however, the Brazilian exchange rate has been at a level much more beneficial to industrial exporters (at around 5:1 relationship with the dollar, instead of the 2:1 that prevailed during the 2000s and first half of the 2010s). Furthermore, the stringent fiscal regime that prevailed in the country from 2015 (known as the “expenditure ceiling” rule, which did not even allow for expenditure increases related to population growth) was made more flexible by the new Lula administration, allowing for more meaningful and properly endowed industrial policy actions. Interest rates dropped significantly in the 2018-2021 period but have since then rebounded and continue to be among the highest interest rates in the world. This, however, is being addressed through the expansion of subsidised credit through Brazilian development agencies such as BNDES and FINEP.

Three words of caution

In addition to these enthusing factors, our experience at Cambridge Industrial Innovation Policy of working with various governments worldwide suggests that there are several issues the Brazilian government must be mindful of and plan for:

1. Ensure that missions are embedded in industrial sector realities. The mission-oriented approach, developed by Professor Mariana Mazzucato of University College London, has been gaining traction in policy circles in Europe and Latin America, and has influenced the design of Nova Indústria Brasil. This approach is useful to connect modern industrial policies to broader social and environmental issues. However, putting too much focus on the high-level missions may move focus away from the fact that the industrial activities that are needed to support the missions are still organised in sectors. These sectoral realities need to be understood and domestic actors supported to ensure the feasibility of the missions and the best outcome for the country when pursuing them. In other words, sectoral knowledge and strategies are still needed and underpin the activities needed to achieve missions. This was acknowledged by a Commission co-chaired by Mariana Mazzucato and David Willets that “missions are not a replacement for support to sectors and technologies” as they are “a precondition of its success because, otherwise, there will not be the underlying technological and sectoral capability on which to draw in order to deliver challenges and missions”.

2. Enhanced policymaking capacity and coordination is necessary. In recent years, there has been a hollowing-out of the Brazilian civil service, strongly affecting the country’s state capacity. The new National Unified Public Tender (Concurso Público Nacional Unificado) seeks to address this and is a step towards re-building policymaking capacity. This strong push should make sure that industrial planning capacity is contemplated. Examples that can be used as inspiration are Singapore’s and Japan’s state capacities in sectoral industrial planning. These countries have strong state capabilities with civil servants who have in-depth knowledge about their country’s sectors and long-term development plans. Furthermore, my PhD research about the Brazilian industrial digitalisation policies found that inter-ministerial and inter-agency coordination can be improved in Brazil, as significant overlaps and gaps remain in the policy system. Creating coordination instances between the different agencies is thus essential for a complete and well-balanced policy system.

3. Failures are inevitable. Having an industrial policy does not guarantee success. While firms and other innovation actors can be incentivised to develop new products and services or to improve their production processes, in the end, they still need to survive the test of the market and outperform their competitors. Even highly successful national industrial policy experiences such as those of South Korea and Taiwan in the 1960s and 1970s had cases of outstanding failure. In South Korea, the same industrial policy that wasted billions on the failed company Shinjin also produced Hyundai and Kia – two of the largest car manufacturers in the world today. The right approach should be to take risks and expect successful cases to pay for failed ones. Identifying cases of failure should also not be rushed, as many investments take a long time to mature. Finnish company Nokia, which for a period dominated the global mobile phone market, got into the electronics business in the 1960s and did not turn a profit for 17 years. Japanese car manufacturer Toyota is an even more dramatic example as its success relied on 40 years of consistent protection and government subsidies. However, it is also important that once it is identified that some cases are fundamentally flawed, the state removes its support. Such was the case of US solar energy company Solyndra, which was heavily supported by the US government, but went down a technological route that did not make sense once raw material and energy prices changed. In short, innovation is risky, and some policy instruments can help avoid and mitigate failures but cannot avoid them altogether. Learning to accept and to learn from failed cases is thus an important aspect of successful industrial policies.

Learning from international policy experience

Finding the right balance between enthusiasm and careful implementation is a significant challenge for Brazil in its current endeavour. The country is in a very promising moment in its history, with both international and national contexts providing reasons for optimism towards a successful structural transformation. However, there are still many uncertainties and factors that have the potential to derail the efforts of Nova Indústria Brasil.

To help navigate these uncertainties, it is essential to monitor what other countries are doing and learn from previous policy experiences. This will help to identify opportunities and avoid the pitfalls that other countries have faced.

At Cambridge Industrial Innovation Policy, we believe that making industrial policies effective is the key to improving lives globally. We hope that Brazilian policymakers keep themselves updated with the lessons that the international experience can provide.

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