Posted by: Dirk | May 14, 2008

Time to push for industrialization in Brazil

H. W. Singer wrote an article in 1950 in which he lamented that developing countries might miss the opportunity to industrialize because of a terms of trade-related problem (p. 482):

At this point it might be worth noting the curious ambivalence which price relations in foreign trade play for the underdeveloped countries. Good prices for their primary commodities, specially if coupled with a rise in quantities sold, as they are in a boom, give to the underdeveloped country the necessary means for importing capital goods and financing their own industrial development; yet at the same time they take away the incentive to do so, and investment, both foreign and domestic, is directed into an expansion of primary commodity production, thus leaving no room for the domestic investment which is the required complement of any import of capital goods. Conversely, when the prices and sales of primary commodities fall off, the desire for industrialization is suddenly sharpened. Yet, at the same time, the means for carrying it out are sharply reduced. Here again it seems that the underdeveloped countries are in danger of falling between two stools: failing to industrialize in a boom because things are as good as they are, and failing to industrialize in a slump because things are as bad as they are.

Brazil’s development bank BNDES has now been given green light by Brazil’s president Lula da Silva to support the country’s industry:

O BNDES será o principal agente da nova política industrial, com financiamentos estimados em cerca de R$ 210 bilhões entre 2008 e 2010, somente nos segmentos de indústria e serviços.

This seems like an interesting development. The prices of primary commodities are relatively high, which would fit Singer’s idea described above. On the other hand, Brazil has found new oil in the recent months and lately pondered to join OPEC (discussed at RGE). This would point to a future problem: Dutch Disease. Exporting more primary products will lead to a strong currency and will make Brazil’s other exports more expensive on world markets. An investment programme would help to mitigate this, also it might be a little early. However, Brazil’s currency enjoys a strong run these days.

Maybe there are two reasons behind the decision to push for more industrialization in Brazil. They happen to push in the same direction.

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