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TO OPEN OR TO OPEN, THAT’S THE QUESTION

TO OPEN OR TO OPEN, THAT’S THE QUESTION. Edmar Bacha ANNUAL MEETING OF THE BRAZILIAN-AMERICAN CHAMBER OF COMMERCE New York, April 14, 2014. BRAZIL: SINCE 1981, A PRISONER OF THE MIDDLE INCOME TRAP. EXIT FROM MIDDLE INCOME TRAP DEPENDS ON INTEGRATION TO INTERNATIONAL TRADE.

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TO OPEN OR TO OPEN, THAT’S THE QUESTION

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  1. TO OPEN OR TO OPEN, THAT’S THE QUESTION Edmar Bacha ANNUAL MEETING OF THE BRAZILIAN-AMERICAN CHAMBER OF COMMERCE New York, April 14, 2014

  2. BRAZIL: SINCE 1981, A PRISONER OF THE MIDDLE INCOME TRAP

  3. EXIT FROM MIDDLE INCOME TRAP DEPENDS ON INTEGRATION TO INTERNATIONAL TRADE • Exitfrommiddleincometrapdependsonhigherprodutivity • Higherproductivitydependsonfirmswithtecnology, scale, scope, andcompetition • Post-WW-II examples: • Israel andAsiantigers (industry) • Europe’speriphery (services) • Australia, New Zealand, Norway (commodities) • IsMexico a counterexample?

  4. BRAZIL: ONE OF THE MOST CLOSED ECONOMIES IN THE WORLD • Big economies, big exporters: US (1/2), China (2/1), Japan (3/4), Germany (4/3), France (5/5), UK (6/10) • Brazil: 7th largesteconomy in the world, butonlythe 21st largestexporter • Brazil’s GDP, 3.3% of world. Brazil’sexports, 1.3% of world. Giant in termsof GDP, dwarf in termsofexports • Ratioimports/GDP Brazil: 13%. Lowestvalueamongthe 176 countries consideredbythe World Bank. • Paradox: Brazil the 4th most preferred destination for foreign direct investment • Open capital account, closed current account: recipe for impoverishing growth

  5. CURRENT INDUSTRIAL POLICY: MORE PROTECTIONIST • Response todeindustrializationandsectoralexternaldeficits: • Increaseof nominal tariffsonimports • Discriminatorymanipulationof taxes (increase in taxcompliancecomplexity) • Generalizationof local contentpolicy • Disseminationof ‘basicproductive processes’ • BuyBrazilianactwith 25% preferencemargin • ‘Nationalchampions’ selectionbyBNDES • Petrobras as the sole operatorandwith a mandatory 33% stake in subsaltoilfields • Resultislesscompetitivenessandlowerproductivity

  6. ALTERNATIVE INDUSTRIAL POLICY: INTEGRATION INTO INTERNATIONAL PRODUCTIVE CHAINS THREE PILLARS • 1. Reductionofthe ‘Brazilcost’ • Taxes andlogistics • Simplificationoftheindirecttax system: national VAT • Ceiling on the expansion of government spending to allow reduction of tax rates • Trade facilitationmeasures: roads, railways, ports, andcustoms

  7. PILLARS OF ALTERNATIVE INDUSTRIAL POLICY (CONT.) • 2. Trading lowertariffs for a more devaluedexchange rate • Pre-announced gradual programofreductionoftariffsandnontariffbarriers • Sequencingofliberalization: inputs first, final products later • Exchange rate policy: reference rate withintervention in case marketsdon’tmaketheadjustment (Unresolvedquestionofarticulationwithpolicyofexchange rate floating) • 3. Trade agreements • Unilateralismvsnegotiation • What to do with Mercosur: backtracking on the external common tariff or a joint opening up?

  8. CONCLUSION • Besides opening up, Brazil needs higher savings and investment, better education, and a leaner and more effective State • Opening up, a necessary but not asufficient condition – as shown by Mexico • Hirschmanian perception is that the opening up to trade will succeed in mobilizing the country to implement the other reforms Brazil needs to overcome the middle-income trap

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