Understanding Brazil’s Economic Development

The study of the Brazilian state’s role in industrialisation has been split into two contested focuses: the ‘Entrepreneurial State’ (ES) and Important Substitution Industrialisation (ISI). Kesidou (2004) argues that the former theory is more important in examining the state and industrialisation in Brazil.

This essay is in no way implying that either ES or ISI led to good institutions or policies, but rather suggesting a superior framework to examine the Brazilian phenomenon.

This essay will be outlining the theory of the ES and then discussing why Kesidou sees the theory as superior to ISI in terms of justifying innovation and the growth of industry. This essay will ultimately find that ES is a better way of examining Brazilian industrialisation due to its focus on intensive state intervention rather than merely protectionism.

ES is a theory that focuses on the role of state intervention in guiding and driving the industrialisation of Brazil.[1] In contrast, ISI was a protectionist policy that was instated to protect infant industries.[2] Proponents of ISI, as the policy that led to Brazilian success, argue that infant industries, such as the initial auto industry, were only able to start because ISI protected local businesses from cheaper foreign imports.[3] This form of protectionism was meant to shut out unnecessary imports, forcing firms to purchase locally.[4] In theory, ISI could work, but all policies require a decent institution to implement it.

The ES seeks for the state to take a managerial role in the economy.[5] Without an ES, the imports and exports to target would be arbitrary and misinformed. Shapiro (1994) argues that no firms, with or without protectionism, were planning on building cars.[6] The state took the role as an entrepreneur and formulated institutions and policy to prop up a new industry, with the idea that it would complement the creation of many new industries.[7] Kesidou argues that, while protectionism protected local industry, the success of the auto industry in Brazil is, fundamentally, the result of the state’s capacity to build effective institutions that helped steer the industry in the right direction.[8] Mazzucato (2013), in her book titled “The Entrepreneurial State”, argues that the role of the ES is to guide and promote innovation in order to achieve development.[9]

The role of the ES is, ultimately, to guide the private sector by promoting innovation, distorting the market to avoid market failure, setting goals for development and regulating when necessary. The ES is the institutional framework which, Kesidou argues, drives development.

While ISI did have an effect on Brazil’s industrialisation, ES is the main cause of its success. Infant industries may have been threatened by foreign exports, but it was a state initiative to formulate the auto industry. ISI contributed to the defence of the growing industry through prohibiting foreign imports, and then providing incentives to export cars overseas. The state subsidised the auto industry, meaning that protectionism was recognised as insufficient to prop up the industry.[10] In fact, while protectionism is seen by some as essential to growing a domestic market, the Brazilian state saw it necessary to intervene in order to limit the expansion of the domestic market.[11] This was as a result of a problem with ISI in that, due to protectionist policies, they struggled to export, but were able to import – leading to a balance of payment crisis.[12]

Fundamentally, the argument between recognising ISI or the ES as key to understanding Brazilian industrialisation, is irrelevant. Without institutions such as those in the ES, you cannot formulate or implement policies such as ISI. Policies need effective institutions, meaning that even if ISI was a key factor in Brazilian industrialisation, the institutions that put it into practice would be responsible.

ES is ultimately a theory that seeks to justify the state’s role in driving innovation, directing market functions and acting as a guiding force for the private sector. ISI acts as a protectionist policy to defend infant industry. Without ES, industries such as the auto industry would never have been established in order to need protectionist policies. ISI also relies on state intervention and effective institutions to formulate and enforce. Overall, using ES to understand the Brazilian phenomenon is much more effective than focusing on ISI.

References

  • Guimarães, Alexandre Queiroz. “State Capacity and Economic Development: The Advances and Limits of Import Substitution Industrialization in Brazil.” Lusi-Brazilian Review 47, no. 2 (2010): 49-73.
  • Kesidou, Effie. “The Political economy of technology policy: The automotive sector in Brazil.” In Innovation, Learning and Technological Dynamism of Developing Countries, edited by Sunil Mani and Henny Romijn, 107-134. Tokyo: United Nations University Press, 2004.
  • The entrepreneurial state. The Economist. Accessed March 11, 2016. http://www.economist.com/news/business/21584307-new-book-points-out-big-role-governments-play-creating-innovative-businesses.

Footnotes

[1] Effie Kesidou, “The Political economy of technology policy: The automotive sector in Brazil,” in Innovation, Learning and Technological Dynamism of Developing Countries, ed. Sunil Mani and Henny Romijn (Tokyo: United Nations University Press, 2004), 110.

[2] Ibid., 109.

[3] 115, foreign imports can be beneficial for consumers of a state, but typically at the cost of local industry. Protectionism has been justified as allowing infant industries enough time to establish themselves before free trade is instated.

[4] Ibid., 116.

[5] Ibid., 110.

[6] Ibid., 117.

[7] Ibid., 116.

[8] Ibid., 117.

[9] The entrepreneurial state, The Economist, accessed March 11, 2016,  http://www.economist.com/news/business/21584307-new-book-points-out-big-role-governments-play-creating-innovative-businesses.

[10] Kesidou, “The Political economy of technology policy: The automotive sector in Brazil,” 124.

[11] Ibid., 123.

[12] Alexandre Queiroz Guimarães, “State Capacity and Economic Development: The Advances and Limits of Import Substitution Industrialization in Brazil,” Lusi-Brazilian Review 47, no. 2 (2010): 50.