Much has been said about the industrial shrinkage in the Brazilian economy, as the relative share of the sector in Brazil's GDP has, mostly, fallen continuously since the 1980s, reaching its lowest point in the first quarter of 2019. For some analysts, this is a normal process because, as economies develop, services gain weight in the productive structure.

The IEDI has been warning that in Brazil this process is fundamentally associated with a specific set of factors that have greatly compromised the competitiveness and the progress of our industrial productivity. Today's Letter IEDI provides evidence of Brazil's uniqueness in the process of manufacturing value added decline as a share of GDP.

The study (in Portuguese) prepared by Paulo Morceiro and Milene Tessarin of Fipe/USP, at the request of the IEDI, compares Brazil to other economies and concludes that the country is an outlier when it comes to industrial retrogression. Our case is much more serious in relation to both the overall world economy, as well as the cases of developed or other emerging countries. That is, we are an outlier.

The work, soon to be available in full on the IEDI website, covered a time span of over 48 years (from 1970 to 2017) and assessed industrial development from an international perspective comparing 30 countries, which together account for about 90% of the global manufacturing industry. The results were not encouraging.

At current prices, while the share of manufacturing in the world as a whole declined 1/3, from 26.2% to 17.3% between 1971 and 2017, in Brazil it halved, falling from 23.2% in 1971 to 11.3% in 2017. Part of this, however, was due to the behavior of industrial prices, which tend to grow much less than average inflation for two reasons: the industry is the main source of productivity gains, enabling cuts in costs and final prices, and it is also the sector most subject to international competition, limiting price pass-through.

Correcting this price influence does not bring any significant change to the overall trend. At constant prices, excluding sector inflation, the share of manufacturing in Brazil's GDP also fell sharply: from 21.4% in 1971 to 12.6% in 2017. This is where we differ from others, as the world industry saw its share of GDP rise from 15.7% to 17.3% in the same period.

One might point out that the global industrial advance was due to the accelerated industrialization of China. This is true, but it does not alter the discrepancy between the Brazilian trajectory and the rest of the world. At constant prices and excluding China, world manufacturing as a percentage of GDP goes from 15.8% in 1971 to 15.1% in 2017. That is, it was practically stable, whereas Brazil sees the weight of its industry halve.

Are there other cases of industrial decline? Other cases, yes; as acute as ours, no. The data in Morceiro and Tessarin show that, at constant prices, only 10 countries (Brazil included) out of the 30 analyzed showed a fall in the share of manufacturing in GDP. Most countries (13) registered progress in industrialization and in 7 the share of the industry was constant.

Among the ten countries that are in the same situation as Brazil, only in three (Argentina, the Philippines and Russia) the industry started to lose ground while they still had a low level of per capita income (less than US$ 20,000 per year, PPP adjusted). In the international economic literature these cases are called “premature deindustrialization”. All other countries had already become rich and developed sophisticated segments of services by the time this process started to happen.

If Brazil stands alongside Argentina, the Philippines and Russia in this group of premature industrial decline, it stands out for the intensity of its relative manufacturing decline. The information gathered by Morceiro and Tessarin shows that, between 1970 and 2017, Brazil accounted for the 3rd largest fall in manufacturing as a share of GDP, behind only Australia (1st) and the United Kingdom (2nd). What sets us apart, however, is that these two countries had already achieved high levels of income by the time the decline began and continued to see their incomes rise at much higher rates than Brazil in the ensuing years.

In short, Brazilian industry lost share in our economy by whatever measure is used (current or constant prices), is among the most acute cases in the world and is a leader when it comes to premature cases of industrial decline. But there is more bad news:

  • In Brazil, manufacturing lost share of GDP at a rate far above other countries’. In just 12 years (1986-1998), our industry lost 13.5 p.p. as a share of Brazilian GDP (from 27.1% to 13.8%), while in the US it took 42 years for a similar loss (from 26.1% to 12.3% between 1966 and 2008). That is, the United States, as well as several other developed countries, were able to better manage this process.

  • Brazil's industrial retrogression limited growth. In the declining phase of manufacturing share, Brazil's GDP per capita increased only +25%, while in the United States it almost tripled. This is because, unlike the US, the fastest growing service activities in Brazil were low sophistication ones. 

  • Between 1980 and 2017, Brazil's real growth in manufacturing value added (MVA) was +24% only, while in the world the expansion reached +204%, or +135% excluding China. We ranked last among the 30 countries analyzed.

  • The progress of Brazilian MVA per capita was also very low: +28% versus 79% for the world economy. Once more, we were in last place.

The full text is available in Portuguese.