Industry and challenges of competitiveness

Sep 25, 2014 by admin    No Comments    Posted under: Economy

Brazilian industry loses its competitiveness already at the start. Still at the stage of construction, the investor who decides to construct a factory in Brazil spends up to 8.75% more compared to another nation. When the time comes to produce, the problems pile up, bureaucracy increases and the costs of operation multiply. If you want to export, you must overcome up to 17 different customs procedures and a precarious infrastructure to be able to put the product in the international market. In the end, the result of this perverse equation is a product that is 33.7% more expensive than a similar one manufactured by the main partners of the country.

At this rate, the national industry is falling behind. Last week, a new indication that something is wrong was published in Brazil. The country lost one more position in competitiveness ranked by the World Economic Forum. In 2012, the Country occupied 48^th. place, while dropped to 56 ^th. in 2013; and now in 2014 it is in the 57 ^th.. The result left the Brazilian economy behind nations such as Chile, Panama, Costa Rica and Barbados.

The list of problems that hinder national competitiveness is extensive. It includes the lack of infrastructure, lack of productivity, high tax burden, insufficient labor and a lagged technological basis. Other factors that complete the framework are high interest rates and the appreciated currency. All this is so-called “Brazil’s cost” that suppresses businesses.

Reflection of these obstacles is evident in escalating trade deficit of manufacturing industry, which ended up last year with a deficit in the amount of US$ 59.7 billion. Until 2007, the trade balance was positive at US$ 18.7 billion. “Over the past 25 years, Brazil has been losing intensity of its industry and was turning increasingly inward to its domestic market, without an oxygenation that external competition is able to give,” says former Secretary of Economic Policy of the Ministry of Finance, Julio Sérgio Gomes de Almeida.

The trade balance of the industry has worsened particularly after the international crisis of 2008. The world economy being in recession and an existing little propension to consume, there was a surplus of products on the market. As a result, booming emerging economies, such as Brazil, have become a target of imported products. “The industry is the one most exposed to the asymmetries between the national market and competitors. It has to face domestic and outside pressures” says the Managing Director of the Brazilian Association of the Textile and Clothing Industry (Abit), Fernando Pimentel.

The situation also worsened due to the real (Brazilian currency) which appreciated against the currencies of major trading partners. With more expensive products, the Brazilian industry lost space abroad and domestically. “It is not a function of the exchange rate to offset the lag of costs in other segments. But each time the real appreciated, the export prices became higher and the import cheaper “, says José Augusto de Castro, President of Brazil’s Foreign Trade Association (AEB).

A classic example of how the country is expensive is the increased travel of Brazilians to shop abroad. The favorite destination has been the outlets in the United States. Per year, tourists bring from abroad more than 50 thousand tons of clothes in their luggage. Today, says Pimentel, a same piece costs 30 percent more in Brazil than abroad. Appreciation of the Brazilian currency has also created a mismatch between the prices of Brazilian and imported products in the footwear industry.

“The vast majority of inputs is national and was paid with hard currency. All of this caused a difficulty in forming competitive prices to compete in the international markets with other producer countries, notably from Asia,” said Hector Klein, President of the Brazilian Association of Footwear Industries. The difficulty of competing is evident especially with the Chinese products. In July of this year, the average price of Brazilian footwear was US$ 8.47, while the Chinese footwear ranged from US$ 5 to US$ 6. 

This big difference has caused that Brazil lost space in the United States, the largest economy in the world. In 1993, the best year for American exports, the share of import of Brazilian products accounted for 13%, and China had 7%. Today, Asians account for 80% of purchases of the United States.

Among producers of machinery and equipment, the additional costs to manufacture in Brazil are even more devastating. Today, domestic production is 37% more expensive compared with the production in Germany and in the United States. In addition to the cost of inputs, there are some other factors that are increasing the costs: high interest rate, non-recoverable taxes and logistics. 

With this difference in prices, not only the entrepreneurs in the capital goods sector have been hit by imports but also producers of raw materials. In the steel sector, indirect imports increased by 73.6% between 2008 and 2013. Last year, the industry’s production fell 1 percent and kept the same pace until July. “You can’t have a strong economy with a weak industry. There needs to be a correction of asymmetries in costs in relation to competitors “, says the Executive President of the Brazil Steel Institute, Marco Polo Mello Lopes.

In the evaluation of Carlos Braga, professor of international economic policy at the International Institute for Management Development (IMD), the industry has reason to complain. In addition to so called “Brazil’s cost”, the exchange rate still would have to depreciate between 10% and 15% to give more impetus to companies. On the other hand, the professor claims that the low competitiveness of the industry is also a reflection of the high degree of protectionism of the Brazilian economy. But he warns: to promote economic openness requires internal cost reduction and a series of adjustments. 

Source: www.estadao.com.br