Letter IEDI n. 1000–Coronavirus Crisis and Industrial Strategy
The IEDI has been intensifying its agenda of debates and reflections on the future of Brazil and its industry, with the aim of identifying the necessary conditions for us to have an economy capable of overcoming the serious crisis resulting from the coronavirus pandemic. An industry aligned with international standards—in terms of competitiveness, productivity and technological sophistication—will ensure an important contribution for the country to rediscover a solid trajectory for its development.
The coronavirus pandemic has made the economic and social context in Brazil, as well as in the rest of the world, much more complex and challenging, requiring emergency actions to preserve life, jobs and businesses.
Faced with this new situation, which is already causing profound transformations in the domestic and international economy, the IEDI seeks to, through this document, foster a dialogue in the country on the strategies that must be followed for the economy, society and the industry, bearing in mind the need to accelerate the removal of obstacles that have long hindered our progress, always aiming for Brazilian socioeconomic development.
The assiduous participation of the IEDI Councilors in the meetings promoted by the Institute and their valuable suggestions for improving this document were decisive contributions. The work also counted on the collaboration of the technical staff of the IEDI and specialists on topics of importance for the progress of the country.
The industry, one of the most important engines of economic growth and a prominent source of new products, new technologies and new ways of producing, is at the center of our reflections. Its strategic role has reemerged with the coronavirus pandemic, given the interruption of links in global value chains and the difficulty of obtaining essential medical and hospital equipment and materials to face this crisis.
Although the industry is the starting point for our reflection, it is not the only aspect to be emphasized. Resuming the path of sustained growth and social-economic development implies building pillars of action with the aim of cleaning up the State, reducing distortions in our economic environment, improving industrial competitiveness and productivity and promoting better living and social-mobility conditions to Brazilians.
In addition, given the challenges imposed by the coronavirus crisis, emergency actions are essential to preserve lives, jobs and businesses, ensuring better conditions for resuming growth.
Actions in this direction have been taken worldwide and, in the economic field, include, among others: deferral or exemption for a certain period of time from federal, state and municipal taxes, fees and contributions; design of lines of financing for businesses' payroll and working capital, with the participation of Treasury resources; regulation of reduced working hours and wages, with compensation by the government; direct income transfers to more vulnerable families and informal workers; federal government financial support to states and municipalities; as well as measures to increase liquidity and the authorization for the purchase of public and private assets by the Central Bank.
Brazil, following what other countries have been doing, has adopted this range of initiatives whose real effectiveness will depend on the constant improvement of their implementation, so that the economic agents and individuals to whom they were designed are indeed benefited.
Currently, important gaps continue to exist, such as micro and small companies' difficulty to access financing programs and the need to gradually incorporate larger companies into these schemes, deferral of payment of state and municipal taxes and the release of companies' tax credits, stuck in the different spheres of government.
There is also a serious risk of a worsening of larger companies' liquidity position, which requires coordination of actions between government, public banks and private banks to design horizontal and time-bound mechanisms that promote credit flows.
The IEDI's recommendation on this topic is that the different spheres of the public sector systematically monitor the economic and social conditions in the coming months and do not hesitate to adapt the programs or reinforce them. If the benefits of the initiatives do not reach companies and individuals or prove insufficient for the purposes for which they were created, the burden for the country will be a painful delay in economic and employment recovery, in addition to an even greater fiscal cost.
In any case, even if the coronavirus crisis strongly increases public spending and debt at first, initiatives to rebalance public accounts remain crucial. It is essential that we preserve the efforts already made and ensure a medium and long-term trend towards fiscal balance.
This is the first pillar of a program to overcome this crisis: a favorable trajectory of public accounts associated with a significant improvement in state governance. These are precedent conditions for preserving very important achievements, such as low inflation and low interest rates. They are also requirements for other adjustments that are essential too.
Raising competitiveness and productivity should be the second pillar of the economic and social development program, with emphasis on Tax Reform, which should (i) promote the simplification of the tax system by lowering the costs of paying taxes and reducing legal uncertainty, (ii) eliminate tax cascading and the accumulation of taxpayers' credits, with their prompt return, (iii) completely exonerate exports and investments and, (iv) through taxation at destination (comprehensively and with horizontal rates), eliminate dysfunctional incentives to the ways activities are carried out, which end up adding systemic costs. Likewise, giving sequence to the Labor Reform will be another tool for increasing productivity, promoting greater legal security and adapting to new forms of work.
The IEDI also evaluates as relevant some additional wide-reaching initiatives: the development of the capital market and the new role of the BNDES; the decrease in the cost of credit; adjustments in economic regulation and improvements in the business environment, reducing legal uncertainty; and the promotion of investment in infrastructure.
The economic recovery after the coronavirus crisis may have investment in relevant infrastructure as an instrument for accelerating employment and economic growth, with the necessary regulatory advances and the establishment of financing mechanisms capable of attracting private investment. It may also require the recovery of the public portion of investments, largely complementary to private spending in the area.
In the same direction, it is necessary to accelerate the agenda for a competitive participation of the Brazilian economy in the world. The country should open as many fronts as possible to negotiate trade agreements, emphasizing gradualism, horizontality and transparency, and take the initiative to reduce its internal barriers to trade flows. Entering the OECD would also be relevant in this process, as it would enable us to align standards and procedures with the main world economies, which have shown more favorable outcomes than ours.
The reduction of the so-called “Custo Brasil”, which represents about 22% of Brazilian GDP according to an estimate by the Ministry of Economy’s Special Secretariat for Productivity, Employment and Competitiveness, is absolutely necessary to enhance the country's gains with the advance of international integration.
The contribution of industrial activities comprises the third pillar for the construction of Brazil's future. The sector's help will be maximized if, as many other developed and developing countries do, we adopt an industrial strategy that, ultimately, aims to increase the productivity and competitiveness of the sector and the country. Actions in this direction, which have been gaining prominence in the world over the past few years, should be reinforced in the post-coronavirus period.
In the strategy to be adopted by Brazil, the following actions should be mentioned:
1. Creating conditions to absorb the technologies emerging with the Industry 4.0 revolution, underway worldwide, and also promoting, through horizontal tools, the development and application of these innovations;
2. Boosting innovation, by supporting the R&D activities of public and private science and technology institutions, strengthening basic and technological education and designing consistent programs that articulate universities, research institutes, the productive sector and the government;
3. Fostering the modernization of the industrial park, using horizontal and time-bound instruments, with the objective of boosting productivity and competitiveness and improving the environmental performance of Brazilian enterprises;
4. Mobilizing industrial skills, without compromising the objective of business productivity and competitiveness, to face social challenges, many of them aggravated by the coronavirus crisis, such as health security, sanitation and environmental sustainability;
5. Increasing exports of manufacturing goods, especially the more complex and technology-intensive products, which presupposes a greater competitive presence of our economy;
6. Adding value to agriculture and livestock activities in which Brazil has great potential for development or enjoys a recognized competitive advantage.
The IEDI believes that the principles and guidelines recommended in this document will be of great value in putting Brazil on the path of long-term economic and social development.
However, the huge contingent of Brazilians without the minimum conditions regarding income and access to health, housing, quality education, safety and sanitation brings the certainty that a fourth pillar is needed for our development: accelerating public policies in the social field and making them more effective in changing this reality.
A country with low social mobility is condemned to be less competitive and less innovative. It is urgent that we redefine the allocation of public resources in order to eliminate these distortions. The pandemic further underscored the need for action.
Progress in the country's social architecture have the capacity to make the consumer market even more vigorous and to raise labor productivity, which would strengthen the industry as well as all other sectors of the economy.
This document will be forwarded to public authorities and to the political and academic communities, serving as a guide for dialogue between the Institute and society.