Table of contents

INTRODUCTiON

PROTECIONISM & THE CRISIS OF 2008 1. An overview of protectionism prior to the crisis of 2008 2. Was there an increase in protectionism as a response to the crisis? 3. Brazil in the context of the Global Crisis

5 5 6 11

INDUSTRIAL POLICY AND PROTECTIONISM 1. Why Industrial Policy? 2. Responding To Market Failures
2.1. Learning Externalities 2.2. Externalities Among Sectors and Problems of Coordination 2.3. Informational Externalities and Diversification 2.4. Barriers to Entry and Externalities Associated with Exports 2.5. Externalities of Foreign Direct Investment

14 14 15 15 15 16 17 17 18

3. Conclusions

CASE STUDY: GOODS AND SERVICES IN THE OIL AND GAS (O&G) SECTOR 1. Introduction 2. Industrial Policy In The Oil And Gas (O&G) Sector
2.1. Survey of Industrial Policy Actions (A) Local Content Requirement Policy in Exploitation and Production (E&P) (B) PROMEF and Congeners (C) Other Measures

19

19 19 19

2.2. Policy Evaluation (A) What are the Goals? What is the Best Way to Achieve them? (B) Which Sectors? (C) Sunset Clauses (D) Competition and Innovation (E) The Optimum Local Content Rule (F) Foreign Direct Investment

21

3. Conclusions

25

CASE STUDY: MEDICAL, HOSPITAL, AND ODONTOLOGICAL EQUIPMENT (MHOE) 1.

27

Introduction 27 27
27

2. Industrial Policy For Medical, Hospital, And Odontological Equipment (Mhoe)

2.1. Survey of Industrial Policy Actions (A) Preference Margin in Public Procurement (B) Other Measures

2.2. Policy Evaluation

27

(A) What are the Goals? What is the Best Way to Achieve them?
(B) Which Sectors? (C) Sunset Clauses (D) Competition and Innovation (E) The Preference Margin in Public Procurement (F) Foreign Direct Investment

3. Conclusions

32

ANNEXES Industrial Policy In South Korea Industrial Policy In Norway

33 33 34

FINAL CONSIDERATIONS

36

NOTES

38

BIBLIOGRAPHY

41

TABLES, FIGURES & GRAPHS (order of appearance)

Graph 1: Percentage (%) of G-20 trade protection measures by large groups Graph 2: Index of coverage of G-20 trade measures Graph 3: The share (%) of main product groups in Brazilian exports Graph 4: The appreciation of the real and commodity prices Figure 1: Classification of Public Policy Figure 2:  The Fleet Modernization and Expansion Program (PROMEF) Schematic Summary Figure 3: The Exploitation and Production (E&P) Supply Chain 23 9 9 11 12 14 20

Table 1: Preference Margins in Medical, Hospital, and Odontological Equipment (MHOE) 29 Figure 4: Determinants of Technological Improvement for Developing Countries 31

Introduction

n Brazil, the discussion about the guidelines of industrial policy again

moved to the fore when the Industrial, Technological and Foreign Trade Policy (PITCE) was introduced in 2003. The appreciation of Brazilian real that began in 2008 (and interrupted briefly between September, 2008 and April, 2009) combined with the worldwide economic crisis, raised the discussion to a position of prominence on the public policy agenda.
Exchange-rate appreciation can lead to the de-industrialization of the economy (the Dutch disease), but this is not the only cause. Increasingly intense competition from the Chinese in the domestic market and in third-party markets served to underscore issues already emphasized in government policies. The issue of technological innovation raised by PITCE and reinforced with the Poltica de Desenvolvimento Produtivo (PDP) [Productive Development Policy] was seen as one of the main challenges facing public policy and the private sector in its goal of making Brazilian industry more competitive. The increase in Brazils share of worldwide exports is directly dependent on raising productivity where technological innovation plays a crucial role. In September 2008, the world economic and financial crisis became the center of attention. As a member of the G-20 and an active participant, Brazil argued in favor of monitoring and that the recession should not lead to protectionism, a position that is discussed in meetings of this group to this day. In April 2011, the government introduced a new set of measures, later expanded in 2012, called the Plano Brasil Maior [Greater Brazil Plan]. At the core of the plan were the same guidelines as in previous plans - innovation as a key factor in increasing productivity which consolidated the aim to increase productivity and improve technology in the production chains. One of the instruments selected to increase the density of the production chains was a local content policy. However local content policies establish performance requirements for the foreign investor, and are therefore contrary to the rules of the World Trade Organization (WTO). The justification for this interpretation is that local content rules distort the flows of trade by reducing the potential market for imports and therefore could be considered a protectionist measure. Nevertheless, this study is based on the following premise: before rejecting any consideration of the issue of local content, in the light of WTO rules (always subject to interpretation), the principal question to ask is whether the policy tool fulfill the functions that governments want. Guimares (2012) identifies two justifications for local content policies. One is macroeconomic in nature and short-term, designed to assure domestic demand. The second has specific long-term goals associated with industrial development. In Brazil exchange rate controls, a macroeconomic issue in nature, were used along with the import substitution industrialization model. This was a long-term perspective extending
3

from the 1950s until the end of the decade of the 1980s. Local content requirements were designed to minimize the use of foreign exchange reserves and the same time, encourage domestic production. As Tavares Jr. (2012) argues, this policy had positive effects in terms of the creation and consolidation of a diversified industrial base, but its long-term use was one of the factors contributing to low investment in technological innovation in Brazil. A return to local content requirements cannot be justified as a means of economizing the use of international reserves in the Brazilian economy at this moment. However, when the matter of strengthening the local productive chains is raised in the context of industrial policy, local content appears to be understood as one of the instruments that could contribute to this goal in a framework in which the question of technological innovation continues to be the principal focus of industrial policy. In this case, the problem is to understand how local content policy meets the proposed objectives. Further, the analysis must be done on a sector basis since the potential domestic supply response to restrictions on imports will vary. Another perspective on local content requirements (LCR) policy is whether its use was a response to the worldwide economic crisis. Although the local content issue had previously been raised in some sectors in Brazil (petroleum and gas), the worldwide crisis created a scenario in which the issue of protectionism gained force. In this case, the discussion turned to the issue of the crisis and protectionism. The overall objective of the study is, therefore, to offer a reflection on the issue of industrial policy in terms of its goals and instruments that contribute to the discussion of Brazilian policy, keeping in mind the considerations raised above. Thus, the first chapter offers a brief analysis of the post 2008 world economic context. Were there signs of a new wave of protectionism? How did Brazil react to this new situation? The purpose of this section is to try and understand the extent to which the effects of the crisis contributed to industrial policy guidelines post-crisis. Once again, this chapter does not intend a detailed analysis of the issue. The idea is to make some general observations that permeate reflections about industrial policy and protectionism in Brazil. The second chapter offers a theoretical analysis of the guidelines of industrial policy where the issues of market failures and externalities are highlighted as markers for government interventions. The third chapter starts from the assumption that the heterogeneity of the features that characterize different production chains requires the use of case study analysis. Furthermore, the impact of each policy tool must be analyzed separately. Therefore local content requirement policies were selected for analysis in the oil and gas sector and in the medical, hospital and odontological equipment sector1. These sectors were chosen for the following reasons: they are technologically intensive; they have been given a high priority on the government agenda (exploration of petroleum reserves and improvement in health services); and for both the share of foreign investment is a factor which influences the question of access to new technology and the supply of inputs. The fourth chapter offers some results and conclusions.

P r o te cti o n i s m a n d the cr i s i s o f 2 0 0 8

At the G-20 meeting in April 2009, the appropriate international agencies were asked to monitor the data on trade and investment of member countries of the group. The fear that the economic crisis would lead to a repetition of the protectionist wave of the 1930s was a recurrent theme in the discussions about the effects of the worldwide recession. This section offers a general view of protectionism. Next the issue of the guidelines for Brazils industrial policy in the post-2008 context is examined.

comparative advantages that were taking place in world trade. The proliferation of investigations into unfair trade practices and voluntary agreements for the restriction of exports, that make up non-multilateral protectionist trade barriers were characteristic of this period (Pereira, 1998). In the 1990s, a new consensus on the benefits of the liberalization of trade and financial investment became standard. In Latin America, the discussion of the exhaustion of the import substitution model marked the end of the decade (Pereira, 1998). The creation of the World Trade Organization (WTO), that marked the end of the Uruguay Round of discussions, consolidated the commitment to a

1.
AN OVERViEW OF PROTECTiONiSM PRiOR TO THE CRiSiS OF 2008 The issue of protectionism can be analyzed from two perspectives. In the first protectionism is understood to be an answer to international and/or domestic crises. In this case, protection is justified as a form of mitigating the decline in employment and income as a result of the crisis. Here the crisis of the 1930s is an example of the generalized use of instruments of trade protection. In the second perspective, protectionism is viewed as an integral part of industrial development policy. The import substitution model adopted in Latin America through the middle of the decade of the 1980s is an example. The two perspectives are not mutually exclusive. One of the assumptions that served as a guideline for the import substitution model was the shortage of foreign reserves (a macroeconomic question). The lack of reserves was understood to be one of the roadblocks to development of Latin American countries in the decade of the 1950s. By the first half of the 1980s, the proliferation of non-tariff barriers, the increase in the number of investigations into unfair trade practices and voluntary agreements to restrict exports led to the concept of a new protectionism that was applied, particularly in the foreign trade policy of the United States. The strong appreciation in the dollar brought into sharp and made it clearer the changes in the patterns of
5

multilateral discipline in the direction of a liberal order in the trade of goods and services. Even the increase of the preferential trade agreements was considered a positive step towards liberalization. One example was Mercosul, characterized as open regionalism. A common external tariff barrier was adopted to create a Customs Union that included Argentina, Brazil, Uruguay, and Paraguay and promoted tariff reduction on the domestic agendas of the member countries. The consensus view was that the benefits of liberalization of trade and finance began to diminish toward the end of the 1990s. The Asian Crisis, the low rate of growth in a large number of the Latin American countries, and the Argentine crisis, among other problems, were given as examples that liberalization by itself would not assure the hoped economic growth. Note that the crisis that occurred in the Latin American and Asian countries during this period cannot be attributed solely to trade and financial liberalization. In Brazil, exchange rate appreciation (one of the principal factors of the anti-inflationary program of 1994) together with trade liberalization, coexisted with a scenario of low rates of economic growth and a reduction in the number of jobs in various sectors. As Cordoba and Laird (2006) point out, trade liberalization is an instrument that requires an institutional and economic structural environment for its benefits to be assured. In the absence of these conditions, the costs of liberalization lead to protectionist pressure.2

The Doha Round began in 2001 as the Development Round and reflected the concerns of the developing countries that the gains promised with the commitments of the Uruguay Round had not materialized in a satisfactory fashion. There was no demand for greater trade protection but rather for a greater degree of autonomy in local policies. A review of foreign investment, countervailing duties, and intellectual property agreements became part of the agenda for countries like India and Brazil (one example is the issue of intellectual property). The agricultural impasse that began in 2003 led to the relative stagnation of the Doha Round. On the other hand, however, the growth in the worldwide economy up to 2008 was a factor that ameliorated the demands for protectionism but not the discussion about the guidelines for industrial development policies. In the Brazilian case, as mentioned above, the appreciation of the foreign exchange rate led to growing deficits in the current account balance of the balance of payments. The contagious effect of the Asian crises, the Russian moratorium and macroeconomic issues led to the abandonment of exchange rate policy as an anchor of the anti-inflation stabilization program in January 1999. However, the debate about external vulnerability in Brazil revived the question of the role of industrial policy and foreign trade (Pinheiro, et.al. 2002). In 2003, the issue of industrial policy gained strength with the introduction of Industrial, Technological and Foreign Trade Policy (PITCE). Earlier policies had stressed the creation of production capacity (the import substitution model) or efficiency in production processes (in the 1990s), but not the issue of competitiveness in international trade (Salerno and Daher, 2006). What was new in the PITCE was the emphasis on the issue of technological innovation. In 2008 the Productive Development Policy (PDP) was published providing broader coverage and proposals for linking production chains.3 None of these programs are identified with the issue of protectionism. They emphasize, however, the role of the State in the promotion of industrial development, in particular and those sectors associated with new technologies.
6

2.
WaS THERE aN iNCREaSE iN PROTECTiONiSM aS a RESPONSE TO THE CRiSiS? Reports prepared by the WTO for joint publication with the OECD and UNCTAD about trade measures introduced by the G-20 countries after the crisis do not suggest the emergence of a new wave of protectionism, as can be seen in the Box on G-20 Trade Measures. However, some points should be noted: i)  A ll of the reports expressed concern with the low rate of removal of the protectionist measures adopted; ii)  The high incidence of sector-based measures for sectors that were already considered to be sensitive in some countries even before the crisis is stressed. Thus, the crisis, by enacting measures for protection for temporary/permanent relief, delayed the implementation of the necessary structural changes in the face of changes in the patterns of comparative advantages; iii)  The clear indication of concern that the increase in protectionism did not occur immediately after the onset of the crisis, but rather beginning in the middle of 2011, where uncertainties regarding the direction of economic recovery began to dominate the international scenario; iv)  Added to the issue of sensitive sectors, currency misalignments begin to be included in the list of justifications for protectionist measures; and v)  The three most recent reports highlight the increase in non-tariff measures associated with the guidelines of industrial policy.

G-20 Trade Measures 1st Report: September, 2009 Covers the period from April to August 2009. The forecast for declining volumes of trade and investment for 2009 shaped and deepened the worldwide recession. But there was no indication of the establishment of trade protection measures. However, an increase in tariffs, non-tariff barriers (especially in the steel and automotive sectors); and new subsidies for agricultural exports were observed. The fiscal and financial packages were considered positive for the recovery of the world economy. However, some of the points contained in these packages included trade restrictions such as performance clauses that favored local industry at the expense of imports. Therefore, the incidence of protectionist measures was consistent with episodes prior to the recession. 4 The risk that was stressed was that new measures continued to be introduced and that measures for temporary relief became permanent. 2nd Report: March, 2010 Covers the period from September 2009 to February 2010. No increase in the number of trade restriction measures was observed in comparison with the first report. However, the new trade measures introduced were concentrated in labor-intensive sectors. The concern with the performance clauses associated with financing packages continued. In addition, the stimulus package for the economic recovery via increases in government procurement accentuated the preference for local companies and products. The report called attention to the slow recovery of the world economy and the unemployment generated that led to continued demands for protectionist measures. 3rd Report: June, 2010 Covers the period from November 2009 to the middle of May 2010. There are no substantial differences in comparison with the previous report, because they cover almost the same period. It points out, however, that the principal trade measures referring to dumping investigations and subsidies and safeguards, are legal instruments for trade
7

protection. Is also identifies the issue of sectoral policies for those sectors considered sensitive by governments, (automotive, steel, textiles and clothing). These are sectors that presented problems prior to the crisis in some countries, but which are targeted for support measures with potentially restrictive effects on trade flows. 4th Report: November 2010 Covers the period from May to October 2010. The report coincides with a period in which the economy and world trade began to recover. Restrictive measures on trade continued to be introduced but at a slower pace. The same thing occurred, however, with the pace of withdrawal of measures implemented after 2008. Therefore, monitoring of protectionism should continue. Two issues were contributing to the demand for protection even in a more favorable international environment: high unemployment rates in some of the G-20 countries, and exchange rate appreciations perceived to be the fruit of deliberate policies by trading partners desiring to obtain additional competitive advantages, sometimes known as beggar thy neighbor policies. 5th Report: May 2011 Covers the period from the middle of October 2010 to April 2011. Number of trade restrictions increased. The report points to restrictions on exports of food and minerals, an increase in tariffs for imports and non-automatic licenses. It is the first time that the report clearly expresses concerns about possible increases in protectionism. 6th Report: October 2011 Covers the period from May to October 2011. The report highlights the signs of an increase in protectionism as a response to currency issues and macroeconomic disequilibrium in some countries, already anticipated in the report for November 2010. In addition, industrial policies that involve import substitution measures return to use once again. The commitment to withdraw protectionist measures as a response to the crisis continues at a slow pace.

G-20 Trade Measures 7th Report: May 2012 Covers the period from the middle of October 2011 to the middle of May 2012. The report begins with the following statement: The last seven months did not show any slowdown in the imposition of new restrictive measures on trade by the economies of the G-20. At the same time it stresses the issue of a protectionist bias in the guidelines of industrial policies of some countries in the G-20. Government procurement as an instrument to encourage domestic industries and sectoral policies devoted to the increase of local content are examples cited as forms of protectionism although they are difficult to monitor (evaluate). In the general list of protectionist measures, the most used over these periods are dumping investigations. 8th Report: October 2012 Covers the period from the middle of May 2012 to the middle of October 2012. It does not point out any change in the trade policies of the G-20. It warns of the persistence of policies designed to be temporary. Only 21% of the trade-related measures that had been introduced since October 2008 have been removed.
SOURCE: WTO/OECD/UNCTAD (2012) REPOrT MEASUrES, VaRIOUs IssUEs.
ON

Therefore, although the reports of the G-20 do not suggest an intensification of protectionism that reminds the 1930s, they do call attention to the use of measures that have the potential to distort the flow of trade. That raises the next question: How can this protectionism be measured? According to Cadot and Malouche (2012), tariffs on imports have declined in last two decades in the developing and developed countries and the number of countries that have consolidated their tariffs under the most-favorednation clause of the WTO has increased.5 In addition, the use of a number of non-tariff measures (NTM) has increased in the developed countries as well as in the large emerging economies. Here the analysis enters a grey area. Some NTMs such as phyto-sanitary barriers and technical standards are designed to assure norms and standards of safety and quality that are considered important for the well-being of society. Trade measures, such as investigations of dumping and subsidies, although they restrict the flow of trade, are legal instruments recognized by the WTO and could be discussed in mediation panels if their use is considered unfair. Graph 1 shows the percentage of restrictive measures by principal groups collected by the WTO for the G-20 countries. Since the start of the publication of these reports in 2009, 710 trade restriction measures have been identified. It is clear, therefore, that there has been a concentration of trade remedies, which would be expected in times of crisis associated with exchange rate disequilibrium. In the second place, border measures, such as changes in tariffs, import licenses, technical barriers and phytosanitary requirements were computed. Finally, there are export measures that relate to the limits on exports of agricultural and mineral products, and/or subsidies for agricultural exports. Although it would be desirable to estimate a qualitative index of protectionism, here it encounters the problem of how to measure the restrictive effect of NTMs in the aggregate. It would be necessary to calculate the tariff equivalents of all the NTMs, a task that is not always
8

G20 TrADE

AND

INVESTMENT

possible.6 A first approach therefore can be the use of an index of incidence to give an overall view of the use of trade related measures. The report of the G-20, for example, shows the index of coverage7, shown on Graph 2. There is no period in which the coverage index approaches 1.5%. In cumulative terms, 3.5% of world imports and 4.4% of the imports by the G-20 were targeted by trade measures.8 Note that the results confirm reduction in the use protectionist measures after 2009 and their more frequent use beginning in the middle of 2011. Using the same methodology, a report published by the WTO (2012) which takes a total of measures of all

its members, shows that the difference between trade remedies and border measures diminished because many developing countries have neither the qualified human resources nor the institutional structure to permit them to initiate investigations on unfair trading practices.9 The data permit a comparison of the period from the middle of October 2010 to the middle of May 2012. For the total accumulated measures the percentage attributable to the G-20 countries was 47%. Even if trade remedies are excluded, the percentage is still 40%. Thus, the G-20 countries are responsible for a large share of the introduction of protectionist measures. It should

Graph 1: Percentage (%) of G-20 trade protection measures by large groups*

70 60 50 40 30 20 10 0
9 0 0 0 1 1 2 2 00 01 01 01 01 01 01 01 /2 /2 /2 /2 /2 /2 /2 /2 08 02 05 10 04 10 05 10

Trade remedy Border Exports Others

SOURCE: WTO/OECD/UNCTAD (2012)

PERIOds, aCCORdInG tO tHE ORdER sHOwn On

*tHE

nUMBER OF MEasUREs In EaCH OF tHE

9-

9-

0-

0-

0-

1-

1-

2-

GRaPH 1 Is: 80; 95; 56; 54; 122; 108; 124; and 71.

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/2

/2

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/2

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Graph 2: Index of coverage of G-20 trade measures

1.2 1 0.8 0.6 0.4 0.2 0
0 0 1 1 9 2 01 01 01 01 00 01 /2 /2 /2 /2 /2 /2 905 10 04 10 810 05 10 /2 01 2

05

/2

01

Part. % in world imports Part % in Imports of G-20

0-

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1-

1-

00

01

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01

00

01

/2

/2

/2

/2

/2

/2

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2-

SOURCE: WTO/OECDE/UNCTAD (2012)

11

05

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not be surprising that these conclusions are similar to those in the reports about the G-20. The most recent global report of the G-20 (middle of October 2011 to the middle of 2012), shows that some countries are returning to import substitution policies. Furthermore, the number of restrictions associated with government procurement policies has increased. Another source following protectionist measures is the Global Trade Alert (GTA) coordinated and prepared by Evenett (2012). In the latest report published in 2012, the share of the G-20 in the increase in protectionism was noted. According to the report, in 2009, the group was responsible for 60% of all protectionist measures. This percentage increased to 75% in 2011, and in the first half of 2012 rose to 79%. Just like the reports from the WTO, the GTA is subject to criticism because it includes measures that need to be analyzed to see if there is a restrictive effect on trade, besides the fact that measures need to be verified if they strictly adhere to the rigor of the WTO which must respond to its members. Nevertheless, just
10

In another article in 2010, Kee, Neagu and Nicita attempt to answer the following question: Has protectionism been rising since fall 2008?. To do so, the authors compare the Overall Trade Restrictiveness Indices (OTRI) for various countries between 2008 and 2009. The results of the calculations which took into account only tariff policies and the antidumping measures of the countries show that there were no generalized increases in protectionism resulting from the global financial crisis. The increase in tariffs and antidumping measures in the countries studied explained a total of less than 2% of the collapse in world trade. Although many nations have increased their tariffs on selected products, only a few countries, like Malawi, Russia, Argentina, Turkey and China showed a significant decline and impact on their trade flows. The United States and the European Union on the other hand, use one of the principal tools of trade policy: antidumping measures to protect their domestic industry. But even after taking into account antidumping measures, the evidence supplied in the article suggests that the impact on trade as a result of changes in trade policy during the period analyzed was minimal. Datt and others (2011) examine the reports of the WTO and the GTA. They call attention to the fact that the response to the crisis in 2008 included measures for trade liberalization, promotion of trade and restrictions on trade in the form of NTM, all giving the advantage to sectoral analysis. They found the growth in global supply chains (the verticalization of production chains) as one of the reasons for the nonproliferation of protectionism as a response to the crisis. They agree with the observation of the WTO and the GTA that the extension of the crisis and the macroeconomic disequilibrium expressed in the foreign exchange issue could be leading to a change in the global context and that the risk of an increase in protectionism could not be discarded. In short, the studies cited above do not show a significant impact on world trade as a result from protectionist measures. This result, however, could be related to the selective sectoral nature in the use of various instruments.11

as with the reports from the WTO, the main message is that there is an increase in protectionism in comparison to the immediate post-crisis moment. This added to the uncertainties with regard to the global economic recovery beginning in 2011. According to Henn and Mc Donald (2011), analysis of the data of discriminatory trade policies, and implemented between July 2008 and April 2010, shows that in aggregate terms there was a decline of only 0.2% in international trade due to the increased use of discriminatory measures. On the other hand, at the product level, they conclude that the reduction varied between 5% (border measures) and 7% (behind the border measures). In this article, the authors infer that measures like the application of antidumping measures and other less conventional protectionist measures such as NTMs, discriminatory procurement policies, domestic subsidies and remedial policies contributed more strongly to the recent decline in international trade flows.

10

3.
BRaZiL iN THE CONTEXT OF THE GLObaL CRiSiS12 Brazil was also affected by the crisis. In 2009, gross domestic product fell by 0.3%, recovering in 2010 and increasing by 7.5%, and then slowing down again, 2.7% in 2011 with the worsening of international conditions in the middle of 2011. According to Irwin (2012), the crisis of 2008 did not bring about a repetition of the protectionist movements of the 1930s due to the fact that different exchange rate regimes were in effect. During the crisis of the 1930s, many countries were operating under the gold standard, but during the current crisis the majority of countries were operating under flexible exchange rates. Flexible exchange rates give greater autonomy to governments in the management of their monetary policies as well as functioning to attenuate the impact of external shocks.13 In summary, governments have a larger number of instruments to deal with external disturbances. In the case of Brazil, however, other factors must be taken into account in the analysis of the foreign exchange effect.

The first is the strength shown in the behavior of commodity prices, which began to recover in the middle of 2010. On the one hand it contributed to minimizing the effect of the crisis by improving the terms of trade and increasing foreign reserves. On the other hand it intensified the appreciation of the domestic currency, which again placed the issue of deindustrialization and primarization of Brazilian exports on the agenda (Pereira, 2011 and Pereira and Souza, 2011). Graph 3 illustrates the issue of primarization of exports and graph 4 shows the rapid appreciation of the effective exchange rate associated with the rise in commodity prices.14 The second refers to the issue of the competitiveness of Brazils industrial products. In world trade, the share of Brazil in exports increased from 0.9% to 1.4% between 2000 and 2011. This increase can be explained by the performance of agriculture exports, as Brazilian manufacturing continued to have a share of less than 1% during this period.15 The third highlights the increase in the coefficients of imports in the industry as an indicator of the lack of competitiveness of the Brazilian products, accentuated

Graph 3: The share (%) of principal product groups in Brazilian exports

70

Basic Goods Semimanuf. Manuf.

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0
01 00 02 03 04 05 06 07 08 09 11 20 O 20 20 20 20 20 20 20 20 20 20 10 20 ct 20 12

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Ja

SOURCE: SECEX/MDIC

n-

Graph 4: The appreciation of the real and commodity prices*

180

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01_08 03_08 05_08 07_08 09_08 11_08 01_09 03_09 05_09 07_09 09_09 11_09 01_10 03_10 05_10 07_10 09_10 11_10 01_11 03_11 05_11 07_11 09_11 11_11 01_12 03_12 05_12 07_12 09_12

Commodities Prices Index Real Effective Exchange Rate Index

* IndICEs aRE BasEd On JanUaRY 2008. THE PRICE IndEx Is COMPOsEd OF tHE 23 PRInCIPaL COMMOdItIEs sELECtEd BY SECEX. THE IndEx OF tHE REaL ExCHanGE RatE Is COMPOsEd OF tHE EURO, tHE DOLLaR, tHE ARGEntInE PEsO, tHE JaPanEsE YEn, tHE CHInEsE YUan and tHE POUnd StERLInG. PREPaRatIOn: IBRE/FGV (2012)

by the exchange rate issue. According to calculations by FIESP (2012), the import coefficient for total industry in Brazil increased from 16.2% to 23.1% between 2006 and 2011 and for the transformation industry the coefficient increased from 14.4% to 21.9%. The results vary from sector to sector, but the sharp increase in the coefficients has come to be a part of the agenda among government and segments of the private sector.
16

issue. Improving the competitiveness of Brazilian products is an issue that has been part of the discussion in Brazil since the 1990s. The competitiveness agenda includes questions about infrastructure, the tax system, and education, among others (Bonelli, 2011). Nevertheless although there is a consensus about the agenda of horizontal policies to improve the competitiveness of Brazilian products there is no consensus regarding the guidelines of industrial policy and foreign trade when discussing selective measures. The correction of market failures as an argument for the use of industrial policy should be analyzed with great care as shown in the following chapter. Indeed, when protectionist measures are used there is always the risk that new distortions will be created. The introduction of the Plano Brasil Maior [Greater Brazil Plan] occurred in the context of international uncertainties about the recovery of the international economy and the increased intensity of the debate in Brazil about the risks of de-industrialization associated with the appreciation of exchange rate.17 The issue of
12

The fourth factor to be highlighted refers to the results of the trade balance, which continued to be in surplus, even with the appreciation in the exchange rate. In 2008, the trade balance was US$24 billion, followed by a balance of US$25 billion (2009), US$20 billion (2010) and US$29 billion (2011). What do these observations indicate? The appreciation of the exchange rate and the primarization of exports on the post-crisis raised in its strongest form the question that has permeated the discussions of industrial policy and foreign trade in Brazil. It is not a merely situational question or one that relates only to the currency

strengthening the productive chains gained even more strength when the government identified the growth in demand as an opportunity to stimulate domestic supply in the productive chains with new investments (petroleum, shipbuilding, energy and health). The strategic guidelines in the Plano Brasil Maior (2011) are:
18

In the most recent report of the WTO on the G-20 the temporary increase in import tariffs on 100 products (8 digit classification code) announced by the present government in September 2012 was mentioned. The average tariffs for these products increased from 13.6% to 23.4%. In this group intermediate goods figure predominantly, which will increase the costs of final products. The share of these products on the list of imports is small (3.1%), but they accumulated a deficit of US$1.5 billion in the January-July period in 2012. The same report, however, notes that there was a temporary tariff reduction of around 800 products in the capital goods, IT and telecommunications sectors.20 If we believe that understanding the use of these instruments and the goals of industrial policy is a way to contribute to the discussion instead of asking whether or not there is a protectionist bias in the policy inaugurated in 2011, it is then important to ask whether the increase observed in tariff rates did not follow a logic dictated by the guidelines of industrial policy. Or if the reduction in tariffs signifies a concern with the competitiveness of products. A second clarification refers to the issue of production chains. In the past, local content requirements (LCR) associated with government procurement policies performed an important role in the creation of domestic demand for the supply chains. In the current scenario, where the pace of technological innovation has accelerated, local content requirements (LCR) could consolidate domestic supply in a continued lag behind international competitors. The China effect must also be considered. If it was possible in the past to guarantee comparative advantages in labor-intensive goods, meeting the demands of countries at a lower level of development, today this is much more difficult because of the competition from China. Finally, it is worth considering whether or not the strategy of an industrial policy that gives priority to issues of local content might create barriers to free trade agreements, those that have been precisely the channels for the construction of global and regional supply chains, as observed in the Asian region (Baumann, 2010).
13

To promote innovation and technological development; To create and strengthen critical skills in the domestic  economy; To increase the technological and productive density  of value chains; To expand the internal and external markets for  Brazilian companies; To assure inclusive and environmentally sustainable  growth; To increase the levels of productivity and competitiveness  of Brazilian industry. The core continues to be consistent with the plans announced over the last 10 years. The issue of technological innovation however was given greater emphasis in the issue of local production chains. Thus there were five Productive Systems Blocks identified: Block 1: Electro-electronic, mechanical and health  systems
19

Block 2: Scale intensive production systems  Block 3: Labor intensive productive systems in  Block 4: Agribusiness production systems  Block 5: Commerce, logistics and services  As already mentioned, the share in the global production chains was one of the attenuating forces in the demand for protection. In the case of Brazil, however, the same reasoning increased the demands for protection. Greater emphasis was given to the issue of local added-value, which had been the focus of discussion and controversy. The issue is not, however, whether Brazil is, or is not, more protectionist, but rather if these measures, such as local content requirements (LCR), help to achieve the objective of creating a technologically efficient and advanced industrial base that can be inserted into the global supply chains. Several observations maybe helpful in clarifying this conclusion.

I n du s tr i a l Po l i c y a n d P r o te cti o n i s m

1.
WHY INDUSTRIAL POLICY? 21 Ideally, the goal of industrial policy should be the diversification of the economy into new sectors as a way of assuring an increase in productivity of the economy. Thus it is important that the sectors covered by industrial policy are developed to be competitive. Although this sometimes implies some sort of temporary protection, the success of an industrial policy must eventually be measured by the exposure of sectors benefiting from this industrial policy to international competition. By this measure, a good many of the policies adopted by countries in response to the crisis, including Brazil (see the previous chapter) would be hard to be included in this concept of industrial policy. For the purpose of organizing these concepts, public policies are classified as to their type: providing public goods or market intervention; and their vertical transversality (limited to a few sectors) or their horizontal transversality (having a broader sectoral spectrum) (see Figure 1). 22 Figure 1: Classification of Public Policy

Providing quality education, investing in infrastructure, assuring property rights and reducing the bureaucracy of doing business are examples of horizontal policies in the provision of public goods. The creation of University Schools of Engineering, for instance, implies a provision of public goods, but of a vertical nature, because it satisfies certain sectors (electronics, for instance), but not others. Here a distinction between sectors and activities should be made. Activities are actions that potentially impact a number of sectors, but are not normally part of the companies target activities (innovation, for instance).23 In turn, in the right lower quadrant of Figure 1 policies that distort prices for specific sectors (subsidies and trade protection for certain sectors, for example) are included. Finally, there are market interventions designed to affect specific activities (subsidies for research and development, subsidies for training the labor force, subsidies for capital investment), but not specific sectors (left lower quadrant). That said, we can define industrial policy as actions designed to affect the economys productive structure, so as to increase production and the technological capability in certain sectors. In other words, the industrial policy is designed to be selective, that is, it is associated with vertical policies, notwithstanding the fact that it can be horizontal in terms of market intervention (the colored area in Figure 1). Based on this definition of industrial policy, some authors make distinction between light industrial policy (right upper quadrant, associated with
Provision of Public Goods

TRANSVERSALITY
Horizontal Vertical

POLICY TYPE

Light Industrial Policy

public goods, and the left lower quadrant, which changes the relative prices for activities, particularly research and development), and heavy industrial policy (right lower quadrant, associated with interventions that distort the relative prices of the sectors).24

Market Interventions

Light Industrial Policy

Heavy Industrial Policy

Thus, the question raised is: under which circumstances are industrial policy actions justified? The answer has to do with the correction of failures in the functioning of the market and the provision of public goods, with the balance to be made with regard to government failures. If there are no significant market flaws (or if they are

SOURCE: ADaPTED FROM STEIN (2011).

smaller than the government failures), there is no need for

14

industrial policy. The following section will identify the principal market flaws that would theoretically justify the use of the industrial policy, empirically testing whether there is evidence that such distortions are sufficient to justify the governments attention, and if so, what policy type would be the most appropriate. The answer to these questions depends on the type of market failure at stake. Three types will be considered: learning externalities, externalities among sectors, and informational externalities.

with modern technologies or with older ones. In this case, excessive protection of a given sector may lead to development with outdated technologies or means of production, with little potential for generating externalities. It becomes clear, therefore, that policies that distort relative prices export promotion or trade protection, for instance do not necessarily lead to an increase in public welfare.30 In these circumstances, although these sectors can be developed, once they are affected by industrial policy, they can end up not providing significant gains in productivity to the economy.

2.
RESPONDING TO MARKET FAILURES 25 2.1 Learning Externalities
26

2.2 E  xternalities Among Sectors and Problems of Coordination The reasons for industrial policy associated with the infant industry are based on externalities that are manifested within the industry (or sector). However, externalities may exist among sectors, which, in the final analysis, would also justify the use of industrial policy. In the case of the infant industry, the industrial policy may be viewed as a tool for resolving coordination problems among private agents. The same may be said about inter-sector externalities. But while the externalities associated with the infant industry argument are reduced and eventually eliminated as the sector achieves a certain size, this does not usually occur in the case of externalities among sectors. In other words, although both are problems of coordination, the solution, in terms of industrial policy, tends to be different in the two cases. The big push argument fits perfectly in the description of externality introduced in the preceding paragraph.31 In brief, certain investments would only become economically feasible if made simultaneously, and, in that case, government action in the coordination of individual decisions could be possible. However, the argument only makes sense if the economy is closed, that is, if it is not possible to purchase intermediate inputs on the international market. This means that it is relevant only for certain non-tradable intermediate inputs, such as infrastructure, education,
15
29

One of the oldest and most frequently used reasons to justify the need for an industrial policy is the infant industry argument. One of the pre-requisites for this argument is the presence of externalities in dynamic learning, that is, a reduction in the cost of production for each individual company for the amount produced by all companies over time i.e. learning by doing.
27

Pioneering

companies do not internalize the cost reductions their production offers to other companies in the future, and therefore there is the possibility that if the initial production cost is sufficiently high, the economy will not be able to produce these goods without the intervention of the government. In this case, providing protection to the sector that is experiencing dynamic learning makes economic sense if the learning is quick enough (which would reduce the cost of policy). It should be remembered that even when protection is the optimum choice, the level of protection should be reduced over time, as the costs incurred by companies are being reduced, and should be eliminated when the learning possibilities are exhausted.28 The externalities associated with dynamic learning have been repeatedly related to spillovers of knowledge . In addition, many times industries having the potential for learning by doing have a choice to be developed

and services. In this case, either the argument declines in relative importance in horizontal policies (in the case of infrastructure and education) or it loses much of its appeal if the intermediate input is available from multinational companies via foreign direct investment.
32

large countries, like China) in the same region or production space. In other words, eventually it might be better to remain in less dense or sophisticated areas of the production area, where the competition with other countries is less intense.35 Note that this more recent approach has some resemblance with the more traditional supply chain approach.36 Basically, some sectors especially those in manufacturing would have strong links to the rest of the economy, because they require a lot of inputs from other sectors in their productive process. Similarly, there would also be sectors that are subject to many demands from others. In this case, because of externalities, it would make sense to shift the economy to sectors that foster stronger supply chains. 2.3  I nformational Externalities and Diversification Another type of market failure is connected with the fact that the local use of technologies already used in other countries is not immediate, and requires adaptation to the new context. To put it another way, the production functions for a given good are not identical in all countries, because a good part of the technology is tacit and depends on the economic and institutional environment in which it is placed. This implies uncertainty about whether a given activity can take place locally; in other words, whether the firms involved in the new activity will be sufficiently productive. And if information about productivity is only revealed after the investment, and the return on this investment is not entirely captured, there is room for government intervention.37 This suggests that market equilibrium generates little investment in new activities and the level of diversification is quite low. This is a similar problem to that confronted by companies that invest in innovation but here the return on investment may be protected by patent and intellectual property laws. This suggests an industrial policy that, in general terms, provides incentives to investment in new sectors ex ante and eliminates unproductive sectors ex post. Incentives
16

Thus, preference should be given to what has been previously defined as light industrial policy. As it is an issue of collective action, the government must only adopt policies that assure that there is appropriate coordination among the economic agents. Moreover, if the externalities are associated with innovation, it would make more economic sense to promote the activity, and not the sector receiving the benefits. Recently, externalities among sectors have been used in a somewhat different way. To summarize very briefly, certain products are linked among themselves, so that the productivity for a certain product would be greater if the country had already achieved high productivity in a closely related product. A number of factors could explain proximity among products comparable intensities of factors of production, similar levels of technological sophistication, and a shared supply chain and certain products would be located in higher density areas of production (in other words, there would be many products nearby).33 All other factors remaining constant, countries that shift their productive structure towards a more dense area of production space, and that are therefore better able to avail themselves of externalities, tend to grow more rapidly. Usually the more densely populated areas of production are associated with the more sophisticated products or where productivity is higher. Thus, countries that limit their production structure to regions more distant from the more sophisticated and higher productivity products, usually produced by the rich countries, would have greater difficulty converging with the income levels of more advanced nations. Industrial policy, therefore, should try to position the country as close as possible to the basket of exports of the rich countries.
34

However, these prescriptions should take into consideration the presence of other countries (especially

should be given only to the pioneering company and not to the imitators. Trade barriers and export subsidies are inadequate because it is not possible to discriminate between pioneering companies and imitators. Loans and guarantees on the part of the government, although they are able to discriminate, suffer from serious problems associated with political influence in the allocation of funds, corruption and other moral hazards. 2.4 B  arriers to Entry and Externalities Associated with Exports Some authors argue that there are externalities associated with export activity. In that case, the need of some kind of public policy would be reinforced. Aitken, Hanson, and Harrison (1997) use micro-data from Mexican companies to study this problem and find evidence that the likelihood of a company to export is greater if it is located near a multinational company, but it is unchanged by the proximity of a local export company. This seems to indicate that the externalities are not connected with the export activity in itself, but to some other aspect of the multinational companies activity. They may be generated, for instance, by the productivity increase of domestic companies through the transfer of technology and more modern organization models (more details in the next section). This thesis is reinforced by evidence that for companies from more developed countries, normally more up to date in terms of technology and organization, the externalities associated to export are not significant.38 It is also possible to argue that there are barriers to the entry of local companies in foreign markets. In addition to tax barriers, import quotas and public health standards that must be met, there are also barriers to entry associated with the need to establish business contacts and the knowledge of the foreign market conditions. Thus the presence of multinational companies seems to generate externalities associated to the creation of new export connections (greater diversity of products and destinations), at least for the Chinese companies.39
17

Furthermore, if the cost for trying new products is incurred by consumers, and if they know the quality of the local product, but not that of the imported product, this cost becomes a barrier to the entry of other countries exports. 40 In this case, some type of subsidy for exports could be justified, but only when the difference between the high quality product and the low quality product is significant, when the difference in the production cost between the products is low, when the differentiation level between the exported product and that produced abroad is high, and when the export destination market is highly protected. In any event, the subsidy should be reduced over time, as the asymmetry problems are reduced. However, instead of subsidies, it would seem to be more appropriate to take direct measures to reduce the information asymmetry, such as, for example, promotion of the country as a quality goods producer or investments in the certification and/ or approval of products. 2.5 Externalities of Foreign Direct Investment Many countries use policies to attract foreign direct investment with the justification that there are associated externalities that come with it. Basically, multinational companies can generate spillovers to domestic companies through three channels: (i) through the generation of externalities from export activity; (ii) through the increase in competition in the local market; and (iii) through the transfer of technology and organizational methods. The first channel was the subject of the preceding section. With regard to the second channel, Greenaway, Sousa and Wakelin (2004) found indications that the main channel by which foreign direct investment increased the exports of British companies was through increased competition in the domestic market. In either case, there are other instruments that are better suited to assure and reinforce competition in the domestic market than promoting foreign direct investment, especially policies to promote competition and opening the economy to international competition.

The third channel deserves greater attention. A number of authors stress that externalities are only appropriated and used by domestic companies only under certain conditions. For instance, multinational companies spillovers are better leveraged if there is a well developed domestic credit market that permits the insertion of local suppliers into the production chain of foreign companies.41 Thus, if the governments intention is to encourage foreign direct investment, this policy must be combined with other actions that increase financial intermediation in the domestic market. Moreover, there is evidence that the foreign direct investment increases the productivity of domestic companies only if there is a sufficient stock of human capital.
42

3.
CONCLUSIONS Industrial policy measures, particularly the heavy ones, are only justified in the presence of market failures, particularly with externalities. It therefore might be useful to sort industrial policy initiatives according to their purpose. If the purpose is that of preserving already established sectors or diversifying the industry into segments correlated to existing ones industrial policy writ small the best option is to remove obstacles preventing the development of these sectors instead of protecting them. The priority should be given to initiatives unlocking productivity growth rather than to actions to compensate for the lack of competitiveness. Promotion for investment in human capital, investments in infrastructure, improvement of the business environment and reduction of the complexity in taxation and the reduction of regulatory uncertainties should be at the top of the list.46 This is, in other words, basically an agenda for light industrial policy. However, if the goal is to make large investments through the creation of completely new sectors in the economy industrial policy writ large it is quite likely that the use of heavy industrial policy measures is required. In this case, the economic literature and historical experience suggest that a few simple rules and careful implementation are needed. Heavy industrial policies should be used for a finite period when used at all, and the regime for promotion and protection (such as import barriers and domestic content policies) should be gradually removed. More than just choosing winners, industrial policy should also be able to eliminate the losers, because otherwise the policy creates and develops sectors that are uncompetitive and incapable of being inserted into the international market. In addition, given the need for a well-prepared government bureaucracy, with a complex institutional arrangement (to be able to deal with the coordination of different government authorities, and between them and the private sector), and systematic monitoring, a focus must be maintained. It is not possible to make too many strategic bets at the same time, with the real possibility of not succeeding at any of them.
18

In this case, the promotion of foreign direct

investment must be combined with educational and labor training policies, otherwise the focus should be on sectors in which there already are a reasonable number of skilled workers. The relationship between foreign direct investment and the labor market works both ways. In fact, if the skilled labor is a necessary condition for foreign investment to generate externalities for domestic companies, multinational companies also generate positive externalities for domestic workers in terms of better wages.43 Finally, the evidence on the externalities of foreign direct investment and the channels by which they are disclosed are, to a great extent, inconclusive. 44 Thus, instead of policies to provide incentives to foreign direct investment, it may make more sense to promote policies that eliminate the barriers that prevent local companies from building relationships with multinational companies, improving the access to quality inputs, credit, and technology. Since Brazil still
45

has many barriers to the free flow of direct investment (foreign or domestic), it makes more sense to remove them instead of offering some sort of subsidy to encourage the inflow of foreign capital.

Cas e S tud y : G oods a n d S e rv i c e s In t h e Oi l a nd Ga s (O & G ) S e c t o r

1.
INTRODUCTION Based on the theoretical discussion and the empirical evidence outlined in the previous chapter, a specific case of industrial policy adopted in Brazil can be analyzed. The Oil and Gas (O&G) sector was selected because it has already accumulated more than ten years experience with local content requirement (LCR) policies in exploitation and production (E&P) activities, which provides the data to analyze the results and identify the lessons for other sectors.47 An analysis of the literature on the issue was complemented by a workshop held with companies of the sector (hereinafter referred to as Workshop-O&G) and interviews with government interlocutors.

basis, with minimum thresholds detailed in items and sub-items. However, unlike former rounds, it was possible for the regulator to authorize exceptions to compliance with the LCR clause in the event that the product or service was unavailable in the domestic market.48 Second, the definition of local content has been also changed. In Round 1, the local content criterion was established by the companys location (in the case of products) or the place where the services were provided. In Round 2, the local content of products began to be measured in accordance with the definition of national production goods, that is, machines or equipment where the value accounts for at least 60% of nationalization index. In Round 3, the concept was expanded to services, using the commercial presence definition (services provided by a firm established in the country) that is, those in which imported materials and services correspond to less than 20% of the sale price. Finally, in Round 7, the concept of local content ceased to be dichotomous. For each item and sub-item, the local content share is calculated as the ratio between the sum of values for non-imported components and the sum of product prices. In other words, the local content definition became more rigorous. Finally, the procedures required for proof of local content have also been altered over the years. Up to Round 2, no specific evidence was required. Beginning in Round 3, the regulators began to require quarterly reports showing what had been locally produced and what has been imported. In addition, the submission of certificate of origin by suppliers also began to be required. From Round 7 on, the evidence of local content was required to be certified by agencies accredited by the regulator. (B)  P ROMEF and Congeners Created in 2004, the Programa de Modernizao e

2.
INDUSTRIAL POLICY IN THE OIL AND GAS (O&G) SECTOR 2.1 Survey of Industrial Policy Actions (A) L  ocal Content Requirement Policy in Exploitation and Production (E&P) After the opening of the petroleum and gas industry to foreign investors, a number of rounds of bidding for the oil and gas exploration blocks took place. From the first auction, in 1999, all of the rounds included LCR. However, the rules have been changed throughout this time. These changes may be classified into at least three categories. First, the nature of local content requirements has been modified throughout the Rounds. Until Round 4, although minimum local content criteria were taken into account when qualifying companies to participate in the earlier Rounds (and given a 15% weight), no commitments were required. In Rounds 5 and 6, minimum local content thresholds were fixed, with companies being authorized to offer additional percentages in some activities, which were considered in the determination of the winning bid. Finally, beginning with Round 7, maximum and minimum local content percentages were established on an overall
19

Expanso da Frota (PROMEF ) [The Fleet Modernization

and Expansion Program] is charged with the revitalization of the Brazilian shipbuilding industry based on orders of ships by Transpetro. In fact, the program was created by Transpetros need to modernize and increase its fleet to reach its goal of providing 100% of Petrobras cabotage requirements and 50% of its ocean service needs.

PROMEF was developed based on three essential premises: (i) to build ships in Brazil; (ii) reaching minimum local content levels (65% in the first stage and 70% in the second); (iii) offering conditions to help domestic shipyards to become competitive on a worldwide basis. Although
49

Moreover, since economic agents have a clear perception of the risks associated with funding domestic shipyards, the government created the Fundo de Garantia para a

Construo Naval (FGCN) [Shipbuilding Guarantee Fund],

Law 11.786/2008, later modified by Law 12.058/2009. This is a fund to guarantee the credit risk the risk associated with the uncertainty about the timely receipt of the contracted value for reasons of noncompliance by the Brazilian shipyard with the construction schedule or performance and associated uncertainties about noncompliance with all of the shipyards obligations or the quality of the vessel of funding transactions for Brazilian shipbuilding with funds arising from the FMM. The FGCN is a private fund, and the Federal Government is authorized to contribute up to R$ 5 billion to its capital fund.50 Finally, Petrobras has other programs similar to PROMEF. There is the Programa de Renovao da Frota

it was developed based on the needs of Transpetro, it can be analyzed as a public policy to promote shipbuilding (and the shipbuilding parts industry). Thus the analysis of the program will be placed in the context of a group of the most recent measures adopted for supporting the sector, which are summarized in Figure 2. Within the scope of PROMEF, the funding both for Transpetro and the shipyards is provided by the Fundo da

Marinha Mercante (FMM) [Merchant Marine Fund], whose

financial agent is the Brazilian National Bank for Economic and Social Development (BNDES). The funding conditions follow the general rules set forth for the funds of the FMM. It should be noted that the funds from the FMM usually come from the Adicional ao Frete para Renovao

de Apoio Martimo (PROREFAM) [Maritime Support

Fleet Renewal Program], for the construction of platform supply vessels in Brazil with a 75% local content ratio, and the Programa Empresa Brasileira de Navegao

da Marinha Mercante (AFRMM) [Merchant Marine Fund

Renewal Freight Surcharge] charged on freight services provided within Brazil. However, with the increase of financing from the fund, the Federal Government was authorized to extend up to R$ 15 billion in credit to the financial agents of the FMM (Law 12.249/2010).

(EBN) [Brazilian Navigation Company Program], in which

Brazilian ship owners are contracted by Petrobras for 15 years, under the condition that they build their ships in domestic shipyards.

Figure 2: The Fleet Modernization and Expansion Program (PROMEF) Schematic Summary

TRANSPETRO

SHIPS
BRAZILIAN SHIPYARDS Tax Relief Technological Training Labor Training

Funding from the FMM Guarantees from FGCN

INPUTS
LOCAL INDUSTRY

Minimum Local Content Requirement (65%-70%)

SOURCE: BRaZILIaN INsTITUTE OF ECONOMICs (IBRE) (2011).

20

(C) O  ther Measures While local content policies are the most conspicuous and important features of industrial policy for the O&G sector, other measures have also been adopted. Without intending to be exhaustive or offer a deeper analysis, some of these measures are listed below.
51

Gas Industry]. In addition, under the PROMEF, there

is also the Rede de Inovao para a Competitividade

da Indstria Naval e Offshore (RICINO) [Network for

Innovation in Competitiveness of the Shipbuilding and Offshore Industry], created in 2009. The Network covers partnerships between an important research institution in the area, the Centro de Excelncia em Engenharia

With specific reference to PROMEF, a series of tax relief measures has been granted. These releases deal with both the sale of vessels (in Brazil and to other countries) and to the purchase of inputs for shipbuilding (whether domestically produced or imported). In the case of activities linked to Exploitation and Production (E&P), a similar program has been created in connection with capital goods, with the institution of a special export and import customs regime (Repetro). In both cases, the policy is designed to reduce taxes levied on the locally produced goods to align its tax obligations with those of imports (for inputs) or exports (for end products). However, since the Brazilian tax system is, to a great extent, a cumulative one, these tax release only affect companies adjacent to the sectors receiving the benefits and not the entire chain. Moreover, there are difficulties in receiving the tax credits, which weakens the tax release mechanism. In addition, special credit lines have been created, both for capital investment - the BNDES P&G and

Naval e Ocenica (CEENO) [Center for Excellence in

Shipbuilding and Oceanic Engineering], and agencies linked to shipyards and shipping companies. 2.2 Policy Evaluation (A) W  hat are the Objectives? What is the Best Way to Achieve them? The first characteristic of the industrial policy associated with the oil sector that comes to attention particularly with respect to the LCR policy is the difficulty of clearly identifying the objectives. On the one hand, one of the objectives is clearly to generate domestic income and employment growth. On the other hand, there is the concern with the diversification of Brazilian economy in the direction of new sectors or production chains linked to oil, particularly those that are more technologically intensive. In fact, these concerns were raised by the O&G sector participants during the Workshop-O&G, and by the authors who addressed the theme.53 In the case of the PROMEF these two objectives are more explicit (see section 2.1). In principle, the two objectives are not incompatible, but require different public policies. Taking the framework described in the preceding chapter (see Figure 1), the development of new sectors or production chains may occasionally need heavy industrial policies, particularly if the externalities associated with these sectors are large. In many circumstances these externalities are not taken into account by private agents. It is precisely the differences between private and social values of the investment that generates the opportunity for LCR policies. For already established sectors, it makes more economic sense to use horizontal or light industrial policies, which is the case for the Oil and Gas (O&G) sector,

Prominp Participaes, - and for working capital (Prominp Recebveis), and for investment in innovation (Inova Petro).52 Specifically with regard to innovation, there are
also funds from the CT-Petro sector fund, which is funded by a share of oil royalties. These funds may be used to finance innovation in the sector (which also includes the petrochemical industry). However, just as with a significant portion of sector funds, only a small portion of these funds is actually released by the government. Finally, there is also a legal provision that, in the fields having an extra share, 1% of company revenues will be allocated by those companies for investment in research and development. Still under the heading of innovation and investment in human capital, there are a number of initiatives for labor training put into practice by the Prominp [Program

for Mobilization of the Brazilian National Oil and Natural

21

to help them become able to take advantage of the increased demand generated by investment. But LCR are also associated with costs. If the inputs are arranged in increasing order of international competitiveness, the private decision of companies will be to reach a certain level on the nationalization scale. Public policy usually implies forcing companies to advance more up the scale. This advancement has benefits the above-mentioned externalities but also has costs associated to the acquisition of relatively more expensive inputs. Note that these costs are materialized even in the cases of success in developing local suppliers. By way of illustration, there is extensive evidence showing that, when the LCR policy in the Norwegian oil industry was loosened, significant productivity gains associated with greater degrees of freedom in the purchase of inputs occured. These gains indicate that there are costs
54

In the center sits the operator, and farther away from the center, the less specific to the oil sector the product or service becomes. Thus, for products and services closer to the center, the externalities associated with industrial policy tend to be stronger, and some sort of heavy industrial policy (particularly that of LCR) may make sense. However, for products and services farther from the center, light industrial policies and/or horizontal policies may be more appropriate. For example, notwithstanding the benefits to the metallurgy industry from increased oil sector demand, it should be not subject of local content policy, but rather of measures making it capable of taking advantage of an increased demand. This perception was also externalized by a large number of the economic agents of the sector during the WorkshopO&G. One of the concerns raised refers to the fact that the local content rule in E&P has an impact on the entire production chain, but the operators have only limited control of their direct suppliers. The same issue has been raised by direct suppliers with regard to their suppliers. Obviously, not all sectors near the center of Figure 3 should necessarily be subject to local content policy. As pointed out in section 3 of the previous chapter, given the costs associated to heavy industrial policies, they should be used in moderation. They should be limited to cases in which the sector development implies a significant increase in terms of the existing capabilities that cannot be achieved with light industrial policies alone. A more detailed discussion of the sectors that should and those which should not be subject to local content policy is beyond the scope of this study. Some surveys in this regard including considerations of costs and benefits have already been made.56 In addition to that, there is already a reasonable awareness of the bottlenecks in each sector.57 (C)  S unset Clauses Once the sectors to be covered by local content policy have been defined, it is important that the incentives be properly created. In particular, the theoretical literature (see the preceding chapter) and the international

associated with industrial promotion policy, even when the minimum LCR are not very high, as in the Norwegian case.
55

Thus, local content policies are desirable where the social benefits associated with them are greater than the losses resulting from the increase in production costs. From societys point of view, there is an optimum local content level, and moving beyond that point losses exceed gains. In other words, policies for the promotion of new industries should not have the maximization of local content as the goal, but rather gains to society. Excessive use of LCR tends to generate negative results, and, to the limit, makes the sector subject to the initial investment unfeasible in terms of international competitiveness. In addition, LCR policies tend to bring more benefits in situations in which the difference in competitiveness between the local inputs subject to the policy and their imported counterparts is relatively small. In this case, the penalties in terms of costs tend to be smaller. (B) W  hich Sectors? The distinction among goals may also be translated in terms of differentiation between production chains and sectors contemplated by the policy. Figure 3 briefly describes the value and supply chain of the E&P industry.

22

Figure 3: The Exploitation and Production (E&P) Supply Chain

Petrochemicals

ms Ite ed g r Fo

Mechanical Equipment
Modules / Systems
Engineering, Procurement, and Construction (EPC) and Shipyards Underwater Installations

Com pon en ts

Chain Drivers Direct Suppliers Related Sectors

Pip es

icals em Ch

Metallu rgy

Seismic Area

OPERATOR

Well Services

ec t ri c al Equ Ca ipm st ent Ite ms

El

q eE

uip

Other Related Sectors

rs

Logistic Support

E) HS ) t ( PI n me (E Larg ron nt rs nvi pme E he d i n Ot ity, a on Equ r u c e S , i t Health rotec Individual P

en

SOURCE: BRaZILIaN NaTIONaL PETROLEUM INDUsTRY ORGaNIZaTION (ONIP) (2011).

experiences suggest that policies of this kind should be temporary, and that the protection of the domestic market should be gradually reduced. The contraposition of Brazils experience with industrial policy and those of East Asian countries helps to illustrate the point. Take the example of South Korea. The companies and sectors that were the focus of industrial policy have always been exposed to mechanisms that combined incentives and penalties. Some type of goal was always set, normally associated with exports, which if not achieved, implied penalties or the elimination of benefits. Furthermore, the government signaled, in credible fashion, that protection would be reduced over time and this in fact occurred. The two mechanisms led to significant gains in productivity, required to meet the export targets and to protect itself in the domestic market against the anticipated reductions and eventual removal of protection.
58

In Brazil, however, the domestic market was insulated from international competition for many years, and no signs of reductions in the levels of protection were given to companies. Thus, although Brazil has succeeded in diversifying its economy, it was unable to achieve a level of international competitiveness in a number of sectors contemplated by the industrial policy. Meanwhile in the Oil and Gas (O&G) sector, there were no indications that the local content policy would be temporary, or that the levels of protection for the domestic market would be gradually reduced. So, there is a risk that the sectors contemplated by the policy, excessively protected, would be developed using outdated technologies, and therefore be unable to guarantee competitiveness in the international market. (D) Competition and Innovation An issue related to the discussion of the temporary nature of Brazilian industrial policy has to do with its
23

Note that this is exactly the

policy prescription set out in the preceding chapter.

Ene

rgy

Int
eg

ra

to

effect on incentives to invest in innovation. Excessive and indefinite protection reduces the incentives for investment in research and development and innovation. Again, from the theoretical point of view and with respect to the provision of proper incentives to innovation, industrial policy should be such that domestic industry is gradually exposed to international competition.
59

(E) The Optimum Local Content Rule Even though it has been used to leverage certain sectors linked to the O&G sector, the local content rule can be improved. During the Workshop-O&G some questions on the issue were raised, many of them related to the difficulties and excessive bureaucracy in the measurement. It should be pointed out that many of these issues have also been identified in the literature addressing the issue.65 First, considerable costs (both monetary and transaction) are currently associated with this policy. The required level of detail and bureaucracy are excessive, mainly when the proof of local content requires certification (beginning in Round 7).66 In addition, the operators must commit themselves to LCR at the time the auctions of the oil and gas blocks are carried out. But the investments are only made between seven and ten years later. The operators argue that it is very difficult to determine the local content that will be used so far in advance, because there is considerable uncertainty about the conditions under which the oil will be extracted and the technology that will be used as well as the existence (or not) of the ability of domestic suppliers to provide inputs and equipment. Finally, the Brazilian LCR policy for the O&G sector, to a great extent, uses the required percentages of inputs domestically purchased as its main instrument. It is a demand policy. There are other policies devoted to supply innovation, investment funding, and labor training (see section 2.1) but they are clearly less important here. Meanwhile, other countries based their policies to add density to the production chain on incentives rather than on LCR. Norway is an example. Although its demand policy was a significant part of the Norwegian strategy, the measures focused on supply were the more important aspect. No goal or LCR were imposed. The operators provided a list of suppliers to which the Norwegian government could add local companies. A company that in fact contracted Norwegian suppliers would have its chances of winning increased in subsequent selections for the exploitation of oil and gas
24

The

empirical evidence confirms this understanding, showing that one of the main levers of investment in innovation is the competitive pressure exercised by competitors (either domestic or those from other countries).
60

Again, the example of South Korea is instructive. The focus of that countrys industrial policy was on the achievement of international competitiveness in certain sectors. If it were possible to achieve this objective linking the domestic economy to inputs, so much the better. If not, no barriers to imported inputs were imposed. On the contrary, many times imports of certain inputs received incentives. It is no accident that the importance of imports, especially of capital goods, for the increase in industry productivity in South Korean is stressed by a number of authors. The same can be said about Japan.
61 62

Even China, where local content policies are more actively used, there is a very pragmatic posture with regard to the creation of local supply chains for its industries, encouraging domestic purchase only when it does not threaten the international competitiveness of the sector. In fact, a large share of Chinese exports still consists of the mere assembly of products from imported inputs.
63

Once again, LCR policy, by providing excessive and indefinite term protection, tends to discourage investment in innovation, which is crucial for reaching standards of international competitiveness. In this case, as pointed out in section 2.1, the risk is that the sectors covered by the policy will be condemned by the policy to develop with outdated technology that would impede the maximum use of the externalities associated with learning and the insertion of the production chain into the global production chain. Note that companies in the Oil and Gas (O&G) sector located in Brazil invest less than those of other countries.
64

blocks. Thus the emphasis on the internationalization of Norwegian suppliers was as important as the concerns about increasing local content.67 (E) Foreign Direct Investment It is clear that the development of the oil and gas sector in Brazil is critically dependent on foreign direct investment. First, estimates indicate that the demand generated by the E&P segment in Brazil through 2020 is approximately US$ 400 billion, with a significant portion being investment.68 This is a substantial amount, which Brazilian producers (mainly Petrobras) are unlikely to raise by themselves. Although Brazil has become a large oil and gas production frontier with the discovery of oil in the pre-salt layer, the country still competes with other countries for investment in the sector. Thus, should the local content policy make the oil and gas exploitation and production more difficult or expensive; or if it creates extremely large obstacles for operators, there is the risk that foreign investment might migrate to other countries. The same can be said for other links in the production chain in the sector. Moreover, the success of the development policy for the sector is dependent, to a great extent, on the capabilities of domestic companies up and down the production chain. The experience of other countries suggests that the partnership with foreign companies is a powerful tool for achieving this goal. In this sense, the Norwegian case is an emblematic one. The concept of so-called Goodwill Agreements, voluntary agreements in which foreign companies would improve their chances in future bids, in the event that they invest in innovation whether financially or through shared knowledge with Norwegian research institutions working in the Oil and Gas (O&G) sector.69

3.
CONCLUSIONS The central feature of Brazils industrial policy for the Oil and Gas (O&G) sector in Brazil is the determination of minimum local content requirements (LCR). It is a heavy industrial policy, which, therefore, should be exception, not the rule. The first point to be made is that the indiscriminate use of such tool is not advisable. The local content policy for the Exploitation and Production (E&P) sector and the shipbuilding sector needs to be more selective, and include a smaller number of sectors, preferably those with a good balance between externalities generated and policy costs (including government costs in terms of follow-up and coordination of the agents involved). Besides, even in the (limited number of) sectors chosen, the protection provided by the local content rule should be temporary, and should be progressively reduced over time. A significant share of the success of South Koreas experience, often mentioned as an example of successful industrial policy, is in following this approach. Otherwise, it is likely that, even though the sectors manage to develop, they will be unable to become internationally competitive. The Brazilian experience with industrial policy has plenty of examples. It is not by chance that the local content policy in the E&P sector has not been able to assure the insertion of Brazilian companies into the international supply chain. The effects of greater selectivity as suggested in the preceding paragraph - are reinforced by the fact that, even when specific time limits are scheduled, it is often difficult for the government to commit itself, in a credible way, to the forecast date for the expiration of the policy. Indefinite and exaggerated protection also tends to reduce the incentives to invest in innovation. Although policies designed to reduce the cost of innovation are important, innovation must bee considered an imperative for Brazilian companies. The gradual exposure of Brazilian companies to competition are a powerful tool for achieving this objective and helping the sectors
25

subject to this policy to avoid developing with outdated technologies. Again, Brazils experience with industrial policy leads us to this conclusion. Moreover, while the industrial policy in the O&G sector may be justified by vertical externalities created, that is, those generated along the production chain, that does not mean that the creation of domestic production chains should be pursued at any cost. The policy objective should not be one of maximizing local content, but rather of the maximization of the cost-free benefits generated in terms of welfare to society. If the local production chain is strengthened at the cost of inputs that are significantly more expensive, in the final analysis the competitiveness of the sector is jeopardized. In this case, since these sectors in Brazil must compete for foreign direct investment with other countries, there is the risk that this capital will migrate to other nations. And even in the case where investment is attracted, the costs will be probably greater than the benefits. In this regard, when compared to policies based on LCR, the benefits of policies guaranteeing conditions for domestic companies to be competitively inserted into global production chains are usually shown to be better. 70 This refers to what has been defined in

section 1 of the previous chapter as light industrial policy. Even for the (few) sectors in which LCR policies may be appropriate, better results are obtained, i.e. externalities are better exploited, when accompanied by light industrial policy measures. Therefore, in the Brazilian case, less emphasis on LCR would be desirable (including the reduction of costs involved in simplifying the rule). Greater emphasis should be given to light industrial policies and their articulation with local content policy in (the few) cases it is used. Here the Norway and South Korea experiences are quite illustrative. It is true, however, that at the time these countries had already made significant investments in basic education, infrastructure, and they already had a very favorable business environment and tax system. Furthermore, in the sectors that were the focus of industrial policy, they had invested heavily in labor training through the creation of universities and centers specifically devoted to these sectors. 71 Instead of exaggerated and indefinite protection for intensive innovation sectors, the governments provided subsidies in private research and development activities, and invested themselves in these activities.

26

Ca s e S tud y : M e d i c a l , Ho s pi tal, a n d O d o n t o l o g i cal E qu i pm e n t ( M h o e )

1.
INTRODUCTION While the Oil and Gas (O&G) sector was chosen for its long experience with local content policies in exploitation and production (E&P) activities, the Medical, Hospital, and Odontological Equipment (MHOE) sector was selected because of its use of a new tool of industrial policy at least in the recent period preference margins in public procurement. As was the case in the Oil and Gas (O&G) sector, a workshop was held with companies of the sector (hereinafter referred to as Workshop-MHOE), and interviews conducted with government interlocutors.

(B) Other Measures In addition to preference margins in public procurement, other industrial policy measures have been put into practice in the MHOE sector. Without intending to present an exhaustive list or to offer a deeper analysis, some of these measures are listed below. 72 First, within the scope of the articulation of government policies for the sector, the Executive Group of the Industrial Health Complex (GECIS) was created in 2008, being coordinated by the Ministry of Health (MS). With regard to financing, the Brazilian National Bank for Economic and Social Development (BNDES) has two programs to assist the MHOE sector. The first is BNDESProfarma, focused on the industrial health complex, which has benefited the pharmacological sector to a greater degree. This program has specific credit lines to increase production capacity, exports, innovation and support for mergers and acquisitions giving rise to large companies capitalized in Brazil. In addition, while not specifically directed to the sector, there is also a fund providing financial support to areas on the technological frontier (BNDES-Funtec). Again, medical equipment represents only a small portion of the disbursements.73 Finally, as in the Oil and Gas (O&G) sector, there is a sector fund for the promotion of innovation focused on the health sector (CT-Sade). However, the same limitations on funding as with other funds are observed. Finally, the role of the National Health Surveillance Agency (ANVISA) should be noted. In regulating the standards for the quality of medical products and equipment, ANVISA affects the barriers to entry in the sector. ANVISA is also responsible for the registration and the approval of products for sale. Given the complexity of the process, queues for registration are created. By giving priority to specific products, ANVISA affects the competitive dynamics of the domestic market.74 2.2 Policy Evaluation (A) W  hat are the Goals? What is the Best Way to Achieve them? Like the Oil and Gas (O&G) sector (see the preceding chapter), the industrial policy for the MHOE sector is to
27

2.
INDUSTRIAL POLICY FOR Medical, Hospital, and Odontological EQuipment (MHOE) 2.1 Survey of Industrial Policy Actions (A) Preference Margin in Public Procurement Law 12.349/2010 and Decree 7.546/2011 govern the use of public procurement in the promotion of domestic industry, allowing a margin of preference of up to 25% for local products over imported goods in auctions administered by the Federal Government. The preference margin may not exceed five years. The criteria for determining the margin include: (i) the generation of employment and income; (ii) the impact on the tax revenue of federal, state, and municipal levels; (iii) technological development and innovation carried out in Brazil; and (iv) the additional costs of products and services. In turn, Decree 7.767/2012 defined the margins of preference of the MHOE sector. The definition of national product follows the Basic Productive Process (PPB) sector (when approved) or the declaration of origin (in the event that there is no Basic Productive Process (PPB)), in accordance with the Ministry of Development, Industry, and Foreign Trade (MDIC) regulation Portaria 279/2011. Materials used in health and hospital equipment were included with preference margins between 8% and 25%, according to Table 1.

a great extent based on the determination of preference margins for domestic products in public procurement and thus is a policy designed to create demand. Furthermore, as in the O&G, there appear to be multiple objectives, which once again raises the question about the use of a single policy to achieve multiple objectives. However, in the case of a policy for the MHOE sector, the multiplicity of objectives is clearer than in the O&G sector. Law 12.349/2012 sets forth four criteria for establishing the preference margins in public procurement, highlighting the tension between macroeconomic objectives (creation of employment and income) and more specific and long term objectives (development of technology intensive sectors). Again, for already established sectors that need to improve their competitiveness, the most appropriate choice is light industrial policies that allow these sectors to achieve productivity gains. The use of heavy industrial policies, like the determination of preference margins for public procurement is not only unnecessary, but can make achieving additional gains in competitiveness difficult by protecting domestic producers from international competition. In this case, the benefits in terms of employment and income, hardly justify the cost in terms of price increases. This unfavorable trade-off tends to be especially serious in the case of health products. We can use a concrete example to illustrate this point. In a prospective study of the sector made by the Brazilian Agency for Industrial Development (ABDI), the neonatal segment, particularly incubators, was identified as an industrial policy priority.75 The study points out that this is a segment in which Brazil has mastered the international technological standards and has the skilled labor required both in the private sector and in the universities. Not surprisingly, domestic companies export a large share of their production - even to developed countries. Clearly the policy is not about developing a new industrial segment, and, therefore, there is no reason to adopt heavy industrial policies here. There is certainly room for gains in competitiveness, which would justify the use of light industrial policies, as is pointed out by this study made by ABDI. However, infant incubators and
28

warmed cribs appear on the list of products included with 15% preference margins (see Table 1). This shows that within the scope of the Plano Brasil

Maior (PBM) [Greater Brazil Plan], measures involving

preference margins in public procurement have been listed among the actions to protect local industries and markets. In other words, they are not seen as a (temporary) instrument to promote the development of new sectors, but as measures to protect the domestic market and domestic producers. (B) Which Sectors? Once again the distinction among goals can be translated in terms of the differentiation of industrial segments... Again the ABDI prospective study helps to illustrate the point. Four priority segments were selected: (i) neonatal; (ii) medical imaging (digital radiology and ultrasound); (iii) hemodialysis equipment; (iv) optically based medical equipment (endoscopes and similar devices). These four segments appear in the list of products covered by preference margins (see Table 1), but accompanied by a series of other devices and components. The products on the list range from components and products with low levels of technological sophistication to more sophisticated items. In some sectors, Brazil already has a developed and competitive industry (incubators, for instance), but in others it does not (medical imaging, for example). These differences imply different needs in terms of industrial policy, and preference margins are hardly the most appropriate solution for all sectors. Furthermore, as emphasized in section 3 of the previous chapter, given the costs associated to heavy industrial policies, they should be used in moderation. Only in cases in which the sector development implies a significant leap in terms of the existing capabilities, that cannot be achieved with light industrial policies alone - and even so, with a judicious weighing of the costs and benefits. In other words, if the objectives of the preference margin option go beyond mere domestic market protection, it is necessary that this policy be more selective in the choice of sectors. In this case, the four sectors selected in the ABDI study offer a good starting point.

Table 1: Preference Margins in Medical, Hospital, and Odontological Equipment (MHOE)

Product
 alloon catheter for angioplasty, guide catheter, double J catheter, and medical-hospital application B Heart valves Cochlear implant Quick test for communicable diseases Dialyzer for hemodialysis Biomaterial Grafts and Fillings One time use centrifugal pump for extracorporeal circulation or assisted circulation Coils for aneurysm Linear cutter stapler Vascular endoprostheses (graft and stents) Blood Unit Colostomy, ileostomy and urostomy units Male and Female condom Surgical and procedural gloves Infusion pump, serum, blood sets Hypodermic needles Membrane oxygenator Arterial Blood Filter Odontological and Surgical instruments Syringe Orthopedic, odontologic and mammary implants

Preference Margin

25%

Health Material

20%

15%

Disposable surgical drape Disposable Scrub Clothing Blood Gas Monitor a Circuits Hearing-aid with implant transmitter Cochlear Artificial Cardiac Pacemaker Automatic cardioverter-defibrillator X-ray Computed Tomography Machine Angiography Machine C-arms for Surgical Procedure Hemodialysis Machine Linear Accelerators Ultrasound image equipment Doppler ecography machine with spectral analysis Endoscopes Myoelectric prosthesis for superior and inferior limb Glucometer Holter Monitor Multiparametric monitors Electrocardiography (ECG) Monitor Odontologic handpiece and micro motors sets Extracorporeal Circulation Machine Respiratory and portable ventilators Hearing-aid device Mammography Machine Biochemistry Analyzer Flow Cytometry Machine X-Ray Machines for Dual-energy X-ray absorptiometry and Odontologic Use X-Ray Machines
29

8%

25%

Health Equipment

20%

Product
Electrocardiograph and Electroencephalography Colonoscopy Machines Pulse oximeter Infusion pump Electric scalpels Infant incubator and warmed infant crib Autoclave Light Therapy Cardio defibrillator and cardioverter Surgical Instrument Washer Disinfector Laboratory/hospital cooler or freezer Ophthalmologic surgery microscope Medical Products Washer and Disinfector Surgical table Wheelchairs for bath, without propulsion mechanism and motorized Odontologic chairs Hospital bed Surgical Lights

Preference Margin

Health Equipment

15%

8%
SOURCE: DECREE 7.767/2010.

Finally, there is an excessive emphasis on the use of the trade balance as a criterion for the selection of the sectors covered by the policy, even in the most parsimonious selection of sectors made in the study by the ABDI. If this measure made sense when the scarcity of foreign exchange was a significant bottleneck, today there is no economic justification for the use of this criterion. It is not possible to be competitive in all links and segments of the industrial health complex. The important thing is that conditions be created for those sectors in which Brazil potentially has a comparative advantage for growth. Besides, in sectors such as MHOE, international competitiveness assumes an intense trade flow in the purchase of inputs and sale of products. Actually, several countries in development phase similar to that of Brazil and indeed, many of the developed countries, have deficits in their trade balances in medical equipment and products. (C) Sunset Clauses Once the (few) sectors to be covered by the preference margin policy for public procurement are determined, it is necessary to create incentives properly. Especially since the theoretical literature (see preceding chapter)
30

and international experience suggest that these policies should be temporary and that the levels of protection of the domestic market should be gradually reduced. Law 12.349/2012 says that the margins may not last for more than five years, which is followed in Decree 7.767/2012. However, it should be stressed that nothing prevents the preference margins from being extended or renewed at the end of the five yearterm, which has already occurred with several domestic industry protection initiatives that had a scheduled expiration date.76 This means that it is important that the commitment by the government to reduce or remove market protection is credible. (D) Competition and Innovation Just as in the Oil and Gas (O&G) sector, the agenda is focused on innovation in the development of new industrial segments in the Medical, Hospital, and Odontological Equipment (MHOE) sector. In addition to specific policies (see more details below), it is important that innovation is seen as an imperative for the companies in the sector. One of the most powerful incentives to innovate comes from competition. Thus, in the case of sectors that already have technological

capabilities (incubators, for example), the indefinite protection of domestic companies from international competition tends to reduce the incentives for innovation. The theoretical literature and the Brazilian experience in other sectors show that in each case the sector tends to establish itself with low competitive basis, significantly decreasing the possibility of international insertion of the domestic companies.77 In addition, it is unlikely that the less technologically advanced sectors will succeed in breaking the technological frontier except in the long term. For these sectors the absorption (and adaptation) of already developed technologies is shown to be more important. The international flow of people, goods and investment is a powerful tool. But this flow must be accompanied by light industrial policies to assist local companies in absorbing and adapting this technology (see Figure 4). This conclusion gains in importance in the light of the evidence that the import of inputs is an important channel through which companies of developing sectors acquire and absorb technology. The importance of this factor in the

development of East Asia countries has been emphasized by several authors.78 (E) The Preference Margin in Public Procurement Although the use of government procurement in certain situations is a good alternative for industrial policy, some aspects of the preference margin rule in public procurement can be improved. With regard to this issue the companies of the sector raised two outstanding points during the MHOE Workshop.79 First, the demand for medical products and equipment by the Brazilian Unified Health System (SUS) is decentralized and heterogeneous making a centralized procurement process more difficult (states and municipalities have different health policies, with different procurement procedures standards for materials and equipment). In this regard, an effort is underway by the Ministry of Health (MS) to the standardization of these procedures. Furthermore, the budget of the MS is limited, a factor that weakens industrial policy as an instrument. This is

Figure 4: Determinants of Technological Improvement for Developing Countries

TECHNOLOGICAL FRONTIER

Transmission Channels

Trade

Foreign Direct Investment

Diaspora and Other Networks

Technological Absorptive Capacity

Governance and the Business Climate Basic Technological Literacy Finance of Innovative Firms Pro-active Policies

Policies to: - create competencies - build infrastruture - foster an innovationfriendly business climate

Technological Absorption

Spillover Effects

Returns to Scale

Dinamic effects magnify technology transfer

DOMESTIC TECHNOLOGICAL ACHIEVEMENT

SOURCE: WORLD BaNK (2010).

31

a further justification for being more cautious in the use of this tool. (E) Foreign Direct Investment Just as in the Oil and Gas (O&G) sector, foreign direct investment is an important element of industrial policy of the MHOE sector. As already shown, it is an important mechanism in assisting the spread and absorption of technology, and tends to create externalities in terms of up-grading the labor force. The ABDI study raises the concern that a significant portion of the domestic production in the MHOE sector comes from large multinational companies. In particular there is the fear that decisions made by the main office may lead to a sudden halt in the production of certain kinds of equipment in Brazil. Therefore, according to the same study, this creates a need to maintain the center of decision-making for certain segments in Brazil, so as not to be subject to investment decisions made by multinational companies. However, more than the need to maintain the decision-making center of these companies in Brazil, this reality signals, in fact, the need to maintain a favorable environment for investment and production on a competitive basis. The same competitiveness factors that lead a multinational company to close a factory in Brazil are faced by domestic manufacturers, which may also culminate in the interruption of production.

Excessive and indefinite protection tends to discourage investment in innovation. Although expected to expire after five years, there is nothing to prevent the margins from being renewed at the end of the period. This suggests that the emphasis of industrial policy in the sector should be shifted towards light industrial policies to improve domestic companies competitiveness. In fact, although it is possible to identify initiatives in this direction, they have been clearly shown to be insufficient to achieve the desired objective. For instance, even in programs specifically designed for funding companies in the industrial health complex, companies in the Medical, Hospital, and Odontological Equipment (MHOE) sector have a very small share. The same can be said about more horizontal initiatives such as the Law of Innovation and the Law of Goods. In summary, more than the maximization of domestic production (or minimizing the deficit in the trade balance of the sector), the purpose of industrial policy for the MHOE sector should be devoted to promoting international competitiveness in selected segments. In this case, heavy industrial policies should be used in moderation when required, and in a limited number of sectors. Otherwise the welfare costs of the industrial policy will probably exceed the benefits. This prescription is even more important than in the Oil and Gas (O&G) sector. One of the costs associated with the definition of preference margins in public procurements in the MHOE sector is the increase of prices paid for products by the Ministry of Health (MS). In other words, because the budget of the MS is limited, fewer people will have access to these components and equipment in the public health system. In a country where the access to health care is still limited, these costs should not be overlooked.

3.
CONCLUSIONS The core of Brazilian industrial policy for the Medical, Hospital, and Odontological Equipment (MHOE) sector appears to be the definition of preference margins in government procurement. Although government procurement can be used as a powerful industrial policy tool, the apparent policy purpose is the protection of the domestic market, and not the promotion and encouragement of innovation or gains in competitiveness.80

32

Ann exe s

INDUSTRIAL POLICY IN

S OUTH K OREA

81

With the occupation of the Korean Peninsula by Japan in 1905, there was a transfer of economic institutions and practices by the Japanese, which generated a substantial wave of industrialization and technological transfer. Industrialization began with light industries but by the decade of the 1940s Korea had a reasonably good sized heavy industrial park, particularly in the chemical industry.82 With the partition of the country after the end of the Second World War, North Korea gained most of the industrial park because up to that time South Korea had specialized in agricultural activity. The Korean War (1950-1953), destroyed the capital stock almost entirely, and the migration of Koreans from the north to the south generated a significant increase in human capital. Like Japan, South Korea had at that time a stock of human capital (in terms of average levels of education of the labor force) greater than countries with similar income levels, and this increased dramatically in later years. Furthermore, in the immediate postwar period, in addition to heavy economic dependence on the United States, the South Korean economy was characterized by high levels of protection, negative real rates of interest and a banking system that was almost entirely publicly owned, which directed credit to interested organized groups. This scenario, however, changed drastically after the military coup in the middle of the 1970s. The multiple exchange rate system was abandoned and export targets were established. Although companies that did not meet their targets were not penalized, there is evidence that shows that those who met the targets received favorable treatment from the government in terms of taxes and other incentives. At the same time, various practices were put in place to promote exports. In addition to the devaluation of the exchange rate, exporters began to receive preferential access to capital, tax reliefs on imports of inputs, accelerated depreciation of imported capital goods and subsidized prices for electric power and rail transportation.

The financial system was also reformed, with progressive increases in interest rates that encouraged domestic savings (which doubled between 1965 and 1970), the development of the financial sector and a more efficient use of capital. This reform, however, was undermined in 1972 with new reductions in interest rates and an increase in direct Government control of the banking system, channeling credit to companies and sectors deemed to be high priority, particularly the heavy industry and chemical sectors, and industrial policy became more selective and discretionary. For high priority sectors, the benefits from access to credit under favorable conditions were reinforced through tax incentives as well as trade and tariff barriers. Thus, as in the Japanese case, the allocation of credit (and other tools of government control) resulted in an economy with large business conglomerates (chaebols). By the end of 1970s, the beginning of the end of the military government and the impact of the oil crisis brought about the gradual end of the more selective part of the industrial policy. Despite variations in this policy, the protection for specific sectors consisting mainly of import tariffs, reductions in taxes and subsidized rates of interest were gradually reduced over time. With specific reference to trade barriers, not only were the differences between priority and non-priority sectors reduced, but the effective average protection of the economy was reduced. In addition, the schedule for the gradual reduction of trade-in tariff barriers was announced in advance in a credible manner.83

33

INDUSTRIAL POLICY IN

N ORWAY
government

84

With discovery of oil and gas in the North Sea, the of Norway decided to promote the development of a competitive local industry for the extraction of these natural resources. The first step was to choose the location for the installation of this industry. The principal justification for the choice of a single location was the need to concentrate economic activities in order to obtain economies of agglomeration that would permit Norwegian companies to increase productivity as a result of being close to foreign companies that had mastered the necessary technology. In addition, various practices were put in place to promote the emergence of a local industry for the extraction of oil and gas. The Concessions Law of 1963 represents the most significant measure that the Norwegian government took in this regard. This law was the first mechanism designed to develop local suppliers of goods and services, once it determined that: (i) multinational companies wishing to locate in Norway were required to subcontract Norwegian companies; (ii) government agencies were given authorization to provide benefits to companies according to how well they acted in the interest of Norway.85 When the first licenses were issued in 1965 the Norwegian government did not have much bargaining power compared to the large oil companies. But this situation changed after the beginning of the following decade when many oil companies were excluded from various regions of the world. With the discoveries in the North Sea shown to be more promising and the international price of oil rising, the Norwegian government saw its bargaining power increase. As a result, in 1972 it passed a law giving preference to Norwegian companies in the competition process when they were competitive.86 But there was not much reason for the Norwegian government to give so much weight to the hiring of local firms because of the lack of capacity or interest in supplying goods and services to the oil and gas extraction industry.

Another measure that was adopted was the requirement that the operator supply the Ministry of Petroleum and Energy with a list of companies that would be participating in the competition to supply goods and services. With this list in hand, the government was able to add Norwegian companies to the list of potential suppliers. In addition, the government was to be informed which companies would be the actual suppliers even before the operators announced their choices. The goal was to give the ministry the right to change the decision. However, in only one occasion did the government wind up changing the decision of a company. Increasingly the influence was exercised at an earlier stage where the government had the opportunity to promote local content. The Norwegian government also used other strategies to promote local capabilities such as delaying the fourth round of concessions. The third round took place during the first half of the decade of the 1970s and the following round did not take place until 1978, precisely to give Norwegian companies the opportunity to become more competitive against the others. This round took place right at the time the price of petroleum doubled, generating an additional impetus for the Norwegian authorities and the oil and gas extraction companies to reach a consensus with regard to goals for the development of local industry. There was an increase in political intervention during this period, but there was also an increase in the influence of unions, local companies and governmental agencies that together combined to influence even the choice of technology to be used.87 Although various types of governmental measures designed to promote the development of local industries were adopted, specific requirements regarding local content based on minimum percentages, or something similar were never specified.88 Nevertheless, the Norwegian authorities made it clear that choosing local suppliers would facilitate negotiations for future licenses.

34

The measures adopted by the government apparently had the desired effect. Norway today is one of the world leaders in the production of oil and natural gas. Furthermore, Norwegian companies like Aker Kvaerner and StatoilHydro are part of a select group of multinational companies in the sector. Norway also has an industrial structure replete with small and medium suppliers totaling more than 500 companies. The significance of the sector in the economy is growing. In 2002 the sector accounted for 18.6% of Norwegian GDP. But by 2007 the share of these companies had increased to 23.7% even though there was a decline of almost 30% in the production of oil and gas. This result can be explained by the exports of goods and services related to the sector, since 10% of the global earnings from services in this industry go to suppliers from Norway.89 One of the most important elements of support for policies for the development of local industry associated with the extraction of oil in Norway were incentives not just for the development of the local economy, but also for the transfer of technology. One example of this type of policy were the Goodwill Agreements, designed to guarantee and increase the prospects in future auctions for companies from other countries that invest in research and development together with Norwegian research institutions devoted to the oil and gas sector.90 The greater the involvement, the better were the chances of success. If the company provided financial support its chances would be increased for the next round of concessions. If in addition to financial resources, the company also offered a transfer of know-how, the company would earn even more points for the following concession auction. This system remained in place until Norway joined the European Union. The Norwegian government also encouraged investment in research and development via reductions in taxes. Expenses in this kind of investment were tax-deductible which effectively meant an investment by the government

of 78% of the costs of these expenditures since these would have been paid in taxes if there had not been the deduction. In addition to tax deductions, the Norwegian government was also the principal source of funding for investment in research and development until the middle of the 1990s. Since then, private funding has come to finance more than 50% of expenses with this activity. 91 Furthermore, the Norwegian government adopted policies to support the development of human resources locally, designed principally with two objectives in mind: (i) to facilitate the transfer of know-how between employees of domestic and international companies by means of specific institutions; (ii) and encouraging the training of a highly qualified labor force through teaching institutions.92 Also during this period was created the Norwegian Petroleum Consultants - NPC, an institution to facilitate interaction and exchange of information between the employees of transnational and domestic corporations for the development of local capability. This agency was created by 10 Norwegian companies and was designed to help them compete with foreign companies in terms of breadth and depth of capabilities.93 The University of Stavanger was created in 1969 with a focus on meeting the petroleum and gas industries needs in terms of local labor force. The location of the University, close to the oil and gas industry, provided greater interaction between the Academy and the private sector. Initially, the oil and gas industry had a strong influence on the courses offered by the University, because it participated in the committees that developed the curriculum. Moreover, there was a large amount of exchange of individuals between the universities and the companies that provided an even finer tuning between university coursework and company practice. 94 The success of the University can be seen by the fact that it is today the principal supplier of Masters degrees in areas associated with oil and gas in Norway.

35

Final Considerations

he global crisis of 2008 raised the fear that a new wave of protectionism

similar to that of 1929 would be repeated. This concern led the governments of the largest world economies - represented in the G-20 - to request that international agencies monitor the trade and investment measures that countries might eventually adopt. By the end of 2010, the risk that outright protectionist measures would aggravate the world crisis had subsided, but this did not mean that those countries had not used trade and/or investment policies to stimulate domestic demand. Fiscal and financial stimulus packages were the preferred instruments for the majority of governments. And since these packages were applied to sectors that were considered sensitive, there was some concern that trade flows might be distorted. However their contribution to attenuating the decline in demand was considered to be essential to avoid worsening the crisis. The principal measures used were trade remedies, that were viewed as legal, and which did not signify a change in the direction of trade policies of these countries. The multilateral discipline of the World Trade Organization (WTO), regional and bilateral trade agreements that limited the degree of freedom to use protectionist measures and the integration of countries through global production chains were considered to be the principal factors that explained the small increase in protectionism that could be identified.
But by the end of 2010, it was clear that the global economic recovery would take several years. The euro crisis and problems in the United States economy, among others, led to a global outlook marked by uncertainty. Moreover, countries were unable to complete the Doha Round that would have sealed the commitment to multilateral discipline. In this more somber scenario, the reports produced from the monitoring of trade and investment measures taken by the G-20 called attention to the resurgence of the inward-looking policies and strategies associated with development. These included both preference margins for domestic producers and local content requirements for government procurement, increases in import tariffs, subsidies for domestic producers and new rules for foreign direct investment. These moves were motivated, in part, by currency misalignments that led to a strong appreciation of the local currency in some countries.

36

In Brazil, the strong increases in commodity prices and sharp appreciation of the real after 2009 led the discussion about exports primarization and de-industrialization to a preeminent position in discussions about the direction of industrial policy. The introduction of the Plano Brasil Maior [Greater Brazil Plan] in 2011, combined with other measures that the government has adopted since then that have been labeled protectionist (such as raising quotas for imports), have been interpreted as a possible shift in the direction of the inwardlooking development policies practiced in the past. This study argues that the discussion about industrial development strategy in Brazil dates back to the early 2000s. A consensus has formed since then around the importance of the role of technological innovation in increasing the productivity and competitiveness of goods and services produced in Brazil. On the other hand, the issue of selective sectoral policies and the use of policy tools that interfere directly with relative prices have never been completely abandoned. The situation after 2008, which featured a sharp increase in the coefficients of imports in industrial sectors, intensified this debate. However, as pointed out in the Plano Brasil Maior, technological innovation and the consolidation of local production chains continued to be at the core of industrial policy. In the latter case there is also the issue of local content policies. The use of local content policies in the oil and gas and medical equipment sectors was analyzed for reasons that were given in the introduction. The analysis started with the assumption that the emphasis should be on understanding the relationship between the instruments and the objective of industrial policy technological innovation. In the case of medical equipment the goals of public health policies should also be included. The specific conclusions of the analysis for each sector that are contained in the final subsections of these case studies will not be repeated here. It is sufficient to point out that in both cases it was argued that these policies could further impede Brazils progress in making improvements in the level and use of technology. Finally, the study called attention to the question of consolidating local supply chains using foreign trade policies and industrial strategies. Brazil can not return to the past, to a time when the pace of innovation in technology was slower and when productive chains could be supplied by local suppliers with costs that could be handled. The benefits of integrating global production chains (which require lower import tariffs for intermediate goods, and investments in logistics) and/or encouraging the growth of regional production chains must be taken into consideration. Local content policies, if not properly managed and limited will keep the country from participating in this kind of productive integration. The result would be a production structure with high costs, contradicting the objective of improving Brazils competitive position in world markets.

37

Note s

 The Plano Brasil Maior [The Greater Brazil Plan] defines five blocks of sector competition and identifies the areas considered to be priorities on the Government agenda. The industries in the Petroleum and the Industrial Health Complex are included in this category.  See Pereira (2006) for an analysis of the effects of liberalization on the Brazilian economy.  For an analysis of the policies see Cando-Pinheiro (2011) and Cano and Silva (2010).  Note that the Report does not mention episodes prior to the recession to illustrate its argument. It can be inferred that the principal message refers to the moments of the crisis/ low growth such as the foreign debt crisis of the Latin American countries and the beginning of the 1980s in the United States (appreciation of the dollar, low growth and unemployment) when protectionist measures proliferated.  This is the case of Brazil and a large number of Latin American countries, for example.  One example illustrates this difficulty. At the Uruguay Round, one of the principal problems was how to transform subsidies on agricultural exports by the developed countries into tariff equivalents or quantitative measures. In the 2008 crisis various packages of subsidized financing were used and the problem of how to measure the effects of these measures on trade flows is not an easy one to solve.

13

 T he devaluation of the exchange rate as the result of a decline in external demand reduces the negative impact on domestic income.  A lso influencing the appreciation of the exchange rate is the increase in the inflow of portfolio investment (fixed income bonds in particular) that led the Government to increase the tax on financial operations (IOF) in 2011 (WTO/OECD/UNCTAD 2011)  B razilian products accounted for 2.8% of world exports in 2000 and 5% in 2010.  I n certain sectors, the coefficients exceeded 50% in 2011, such as: electronics material, industrial machinery, extractive industries and data processing equipment. Meanwhile there were sectors with high coefficients in 2006 (above 35%). But the sectors with very low coefficients that also had an increase in coefficients also drew attention such as metal products (7.3% in 2006 and 14.3% in 2011), clothing (from 4.1% to 10.2%) and automobiles (10.8% to 22.4%).  T he discovery of the reserves of oil in the Pre-Salt and the high levels of agricultural commodity prices led to a discussion of the possibility of the Dutch disease in Brazil. (Bonelli, 2011)  F or a description of the Plano Brasil Maior [Greater Brazil Plan] see: www.brasilmaior.gov.br.

14

15

16

17

18

19

 Frequency index: calculated as the ratio between the number of trade-related tariff lines and the total number of lines. Coverage index calculated as the ratio of the value of imports impacted by trade-related measures and the total amount of imports.  There are no estimates for previous years making it impossible to compare with pre-crisis periods.  During the period October 2011 to the middle of May 2012, 182 restrictive measures were identified, of which 43% were for trade protection and 40% were border measures.  In the GTA, the definition of trade protection measures is broader. During the 42 month period covered by the reports of the WTO, the monthly average of trade restriction measures was 17% and in the 44 months. Analyzed by the GTA it was 25%.  It is beyond the scope of this study to list the measures adopted by countries.  It is beyond the scope of this analysis to examine in detail the instruments that the government used to deal with the effects of the 2008 crisis. 38

 In this block are included the petroleum and gas and the health industry complex, that will be analyzed in the following chapters.  T he majority of these reductions can be explained outside the tariff regime. Temporary reductions may be allowed because of the lack of a similar product produced domestically or other arguments that attest to the importance of the tariff reduction to guarantee the supply of the product in the domestic market. Part of such section was based on Cando-Pinheiro (2012). Classification extracted from Stein (2011).

20

21 22 23

10

 Obviously, the distinction between sector and activity, or between horizontal and vertical policy is not always clear. However, these distinctions are useful to organize the discussion. See Harrison and Rodrguez-Clare (2010), for example.  P art of this section was based on Cando-Pinheiro et alli (2007) and Cando-Pinheiro (2012).  T he concept of externality refers to the impact of the decision by one economic agent on others who do not participate in it.

24 25

11

12

26

27 28

 See Melitz (2005) for references.  See Miravete (2003) and Melitz (2005).  I n this context the term spillover is used as a synonym for externality.  S ee Rodrguez-Clare (2007) and Saur (2007).  T his argument was firstly presented in Rosenstein-Rodan (1943), and later formalized in Murphy et alii (1989), and, more recently, in Rodrik (1996).  S ee Pack and Saggi (2006).  S ee Hidalgo et alii (2007).  S ee Hausmann et alii (2007).  S ee Harrison and Rodriguez-Clare (2010).  T his argument refers to Hirschman (1958).  S ee Hoff (1997), and Hausmann and Rodrik (2003).  S ee Barrios, Grg and Strobl (2003), and Bernard and Jensen (2004).  S ee Moran (2011) for references.  S ee Raff and Kim (1999).  S ee Alfaro et alli (2004, 2010).

51

 O f course there are measures not specifically devoted to the O&G sector, but which have an effect on the sector. These measures, although important, will not be listed.  T he Program for Mobilization of the Brazilian National Oil and Natural Gas Industry (Prominp) is a program created by the government for coordinating and putting into practice industrial policy in the oil and gas sector.  S ee, for instance, Guimares (2012).  S ee Kashani (2005).  T he Norwegian experience will be discussed in greater detail in coming sections and in the Annex.  S ee, for example, Brazilian National Petroleum Industry Organization (ONIP) (2010).  S ee, for example, Oliveira and Rocha (2012).  S ee Lee (1997). Other aspects of the South Korean industrial policy will be highlighted in the next chapter.  S ee, for example, Miyagiwa and Ohno (1999).  S ee Aghion and Griffith (2005) for references.

29

52

30 31

53 54 55

32 33 34 35 36 37 38

56

57 58

59 60 61

39 40 41 42

 S ee Rodrik (1995), for instance. For a description of South Koreas technology and foreign trade policy see Tigre (2002).  S ee Noland and Pack (2003) for references in such a respect.  S ee Wang and Wei (2010).  S ee Oliveira and Rocha (2012) for further details.  S ee Brazilian National Oil Industry Organization (ONIP) (2011) and Guimares (2012), for example.  S ee Guimares (2012) for further details.  F or further details on the Norwegian experience in industrial policy in the Oil and Gas (O&G) sector see Bain & Company and TozziniFreire Advogados (2009) and the Brazilian Institute of Economics (IBRE) (2011).  F or further details see Brazilian National Petroleum Industry Organization (ONIP) (2011).  I n such a respect, see Gronhaug (1989).

62

 See Borensztein, De Gregorio and Lee (1998), and Xu (2000).  F or more details, see Moran (2011).  S ee Crespo & Fontoura (2007) for discussion in such a respect.  S ee Alfaro & Rodrguez-Clare (2004).  S ee Hausmann, Rodrik and Sabel (2008).  N ote that the E&P segment is a sub-set of the O&G sector. Since the local content policy is the principal industrial policy initiative in the O&G sector, the focus will be on exploration and production in this Chapter.  F or further details, see Guimares (2012), on which the description of the evolution in local content requirements for bidding on oil and gas blocks was based.  S ee Transpetro (2011).  F or further details on the Shipbuilding Guarantee Fund (FGCN), see NUNES and LOBO (2008).

43 44

63 64 65

45 46 47

66 67

48

68

69 70

49 50

 See Moran (2011) for references and discussion in this respect.  T he scarcity of skilled labor and the difficulties of training a very large number of workers in a timely basis are further reasons for the local content policy in the Oil and Gas (O&G) sector to be more selective.

71

39

72

 T here are measures that are not specifically designed for the Medical, Hospital, and Odontological Equipment (MHOE) sector, but which can have an effect on it. These measures, although important, will not be covered in this section.  F or further details see Interfarma (2012).  O ther developing countries pursue industrial policies for the industrial health complex, but with a much greater emphasis on medication. For further details see the Brazilian Agency for Industrial Development (ABDI) (2011).  S ee the Brazilian Agency for Industrial Development (ABDI) (2008).  O ne example is Information Technology sector. In its most recent iteration, the IT Law reestablishes Law 8.248/1991, and many of its elements were renewed over the years and the sector continues to enjoy protection from imports.

80

 S ee Organization for Economic Cooperation and Development (OECD) (2011) for more details on the use of demand policies, particularly government procurement, to promote innovation.  T his section was adapted from Cando-Pinheiro (2012). For lessons from the South Korean experience for the Brazilian case see also Ferreira Jr and Canuto (1990) and Canuto (1993).  S ee Noland and Pack (2003), on which a large part of the description of the South Korean experience was based.  S ee Lee (1997) for details.  S ection adapted from IBRE (2011).  S ee Hanisch and Nerheim (1993).  S ee Hatakenaka et alli (2006).  S ee Engen (2007).  S ee Nordas et alli (2003).  S ee Bain & Company and TozziniFreire Advogados (2009).  S ee Engen (2007).  S ee Bain & Company and TozziniFreire Advogados (2009).  S ee Bain & Company and TozziniFreire Advogados (2009).  S ee Hatakenaka et alli (2006).  S ee Bain & Company and TozziniFreire Advogados (2009).

81

73 74

82

83 84 85 86 87 88 89 90 91 92 93 94

75

76

77

 In this respect, the electronics sector is a good example. With regard to computers, the evidence indicates that market protection policies implied a cost in terms of a development lag of at least three years in computers produced (and used) in Brazil in comparison with international standards, and caused welfare losses of around 20% of observed expenditures for this equipment [Luzio and Greenstein (1995)].  S ee, for instance, Pack (2001).  O ther studies also address these points. See Association of Pharmaceutical Industry Research (Interfarma) (2012) for an approach that while more focused on medication, can also be applied to the MHOE sector.

78 79

40

Bi bli og r a p h y

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