Carried Away? The Art of the Deal, Brazil-Style

December 5, 2016 9:15 AM

Over the past week, President-elect Donald Trump grabbed headlines with a deal he struck with Carrier to induce the company to keep about half of the 2,000 jobs it had announced were moving to Mexico. In exchange, the company received some $7 million in tax breaks from the federal government. The president-elect’s particular style of industrial policy might seem novel to Americans, but it was tried just recently in Latin America’s largest economy. Former president Dilma Rousseff, impeached earlier this year, is no Donald Trump—and Brazil is certainly no United States. However, during her first term in office, the government’s attempts at salvaging manufacturing jobs looked much like the recent pact with Carrier.

In 2012, Brazil’s growth was faltering. Manufacturing as a share of GDP, which had been declining over several years, caught President Rousseff’s attention. Although most economists who closely followed the plight of Brazilian manufacturing knew the observed decline reflected both Brazil’s isolation from global supply chains and a fatal lack of competitiveness in traditional manufacturing sectors, the government thought it could restore them to their former glory at the stroke of a pen. The pen came to be called the “Plano Brasil Maior”, or the “Bigger Brazil Plan.” The rhetoric at the time sounded much like “making Brazil great again” by restoring the role of manufacturing and manufacturing jobs.

Rousseff offered no clear strategy. The growth plan consisted of a hodgepodge of policies aimed at particular sectors, involving protectionism (in the form of higher import tariffs and the more widespread adoption of local content requirements) and selective tax breaks for so-called “special sectors.” These “special sectors” came to be those that lobbied the government more aggressively for fiscal benefits, promising in return more investments and more jobs. The plan also envisaged the concession of cheap credit provided by public banks to companies that engaged in “boosting productivity” and “focusing on the potential of the local market” for their goods.

The effect of these policies on sectors not contemplated was immediate: Since the government had promised that it would help any sector that favored hiring and investing locally, those that did not receive benefits cut investment and reduced production to pressure the government into giving them the same benefits. Some were successful, some were not. The bottom line is that Rousseff made some headlines, the program was widely touted by the press, but ultimately it failed to create the jobs promised, manufacturing activity continued to decline, and fiscal benefits took a toll on government finances at both the national and subnational levels. Rousseff’s failed attempt at “industrial policy” was finally abandoned in 2014, as Brazil’s economic and political problems became more evident.

Based on this experience, what can be said of a seemingly similar approach to salvaging manufacturing staged by Trump? Granted, there are many differences between the United States and Brazil, but the lesson is that there are very clear limits to government intervention in the private sector and micromanaging of corporate plans. Perhaps some jobs will be saved, perhaps some companies will make marginal adjustments to their investment plans. Ultimately, however, the drive for competition will prevail, and the results will be lackluster at best. At worst, the government ends up with a much weaker fiscal position and not much to show for it.