Latin America Advisor

A Daily Publication of The Dialogue

Should Brazil Do More to Boost its High-Tech Sector?

High-tech contributes less to Brazil’s economy now than it did in the 1980s. // File Photo: Brazilian Government. High-tech contributes less to Brazil’s economy now than it did in the 1980s. // File Photo: Brazilian Government.

Brazil’s high-tech industry—despite the sweeping economic changes brought by globalization and consumers adopting new technologies—has been shrinking, Folha de S.Paulo reported last month. The segment made up 9.7 percent of the South American country’s GDP in the 1980s but has fallen to about 5.5 percent today. What explains the drop? Should policymakers in Brazil be concerned about the trend? If so, what actions should Brazil take to reverse the decline?

Welber Barral, senior consultant at BMJ Consultores Associados and former Brazilian foreign trade secretary: “Although Brazil’s high-tech industry has evolved over the last decades, it has not kept pace with the agribusiness and services sectors. Thus, it has lost participation in the total GDP. This trend can be explained by the unstoppable efficiency of the agribusiness sector, and also by the ‘servicification’ of the whole economy. Besides, an overvalued currency in the last two decades favored imports of final technological products, reducing local investment in this industry. The high-tech industry is crucial to promote innovation, in addition to its power to generate wealth and high-paying jobs. A diverse country such as Brazil, with a large and young population, should certainly be concerned with expanding its high-tech industry. A fiscal reform and lower taxes on wages could engender incentives in this direction. Previous government import-substitution initiatives were relevant to promote the high-tech industry, but created rent-seeking distortions in the long run. Modern and more efficient policies should focus on reducing the overall cost of doing business in Brazil, while promoting scientific education and a highly qualified workforce.”

Amanda Mattingly, senior director at The Arkin Group in New York: “Even as Brazilians have embraced a digital, online lifestyle, the country has not done enough to nurture its own high-tech industry or to create the conditions for new tech companies to grow and develop in recent years. The tech sector has faced similar challenges as others trying to do business in Brazil: corruption, bureaucratic red tape, complicated legal and tax codes, and a lack of investment in human capital. However, according to a recent McKinsey and ‘Brazil at Silicon Valley’ report, this trend could be reversing as national and international investors are looking at Brazil as a next best bet in tech and innovation. Reportedly, Japan’s Softbank, the major shareholder in Uber, is investing $5 billion in Latin American start-ups with its eye on Brazil as a place of opportunity. Meanwhile, the Brazilian government started a program called TechD, a $4.6 million public-private partnership looking to invest in tech start-ups, incubator projects, and IT companies and consortiums. President Bolsonaro’s push for privatization across various sectors will also increase the drive for efficiency, benefiting tech startups looking to provide new IT solutions. With growing enthusiasm in the tech sector in Brazil, start-ups such as ride-share service 99, food delivery service iFood and digital bank Nubank, as well as new competitors will continue to develop and expand their reach in e-commerce, the sharing economy, IoT solutions and delivery services across the country. While Brazil is behind other major economies when it comes to its high-tech industry, there is evidence that it is ripe for a tech boom today.”

Alberto Pfeifer, coordinator of the Group for the Analysis of International Conjuncture (GACInt) at the University of São Paulo: “Rather than seeing this as a drop, a dysfunctional arrangement drove a surge in high-tech industries in the 1980s. Among the factors were the apex of the import-substitution industrialization model following decades of indiscriminate governmental intervention in Brazil’s economy. Also, there was a red-tape extravaganza and conspicuous subsidies of all sorts, Himalayan tariff barriers, the duplicity of quantitative foreign-exchange restrictions within a controlled exchange-rate regime, a cozy intellectual protection system, benevolent state acquisitions, a regressive tax structure and the development of high-tech industries that benefited a few at the expenses of the collective well-being. For a long time, Brazilian consumers were forced to purchase poorer and costlier products and services than similar foreign ones. Additionally, fostering high-tech industries led to lower productivity gains, as compared to countries that embraced trade liberalization. Thirty years later, the focus should turn to high-tech as an omnipresent element of a productive system. The good news is that Brazil has enviable high-tech sectors outside traditional manufacturing. This includes agritech (where Brazil is second to none in terms of agricultural technology), fintech and the banking system, aerotech (Embraer), tech-intensive mining (Vale) and deep-water oil-drilling (Petrobras). Brazil should let competition and high-tech in, and let high-tech champions go outside. In parallel, it should reduce the general cost of doing business with more rational social assistance, pension, tax and fiscal systems, as well as updated physical infrastructure and improved human capital.”

Gabrielle Trebat, director for Brazil and the Southern Cone at McLarty Associates: “The decline in high-tech manufacturing in Brazil can be attributed to multiple factors, but most notably is Brazil’s steadfast commitment to industrial policy programs coupled with a closed economy. This state-led approach to economic development dates back decades and links tax incentives to local content requirements and R&D investments which, in the context of Brazil’s high tax burden, provides an important offset for companies. These policies were the focus of a 2013 WTO complaint filed by the European Union and Japan, protesting Brazil’s industrial policy programs. In the filing, which Brazil ultimately lost, the European Union cited the cost of smartphones that raised the price of devices 50 percent higher as compared to other countries, despite the tax benefits enjoyed by local manufacturers. But the consequences of Brazil’s industrial polices go beyond the high price tag for smartphones; they have inhibited the growth of high-tech industries as the programs do not respond efficiently to the realities of highly innovative industries with rapid product development timelines reliant on access to global supply chains. For high-tech companies, it is difficult to source components locally to comply with program requirements, given significant capacity gaps in the domestic supply chain. As a result, Brazil’s industrial policy ends up reinforcing preferences for older technologies while the country’s closed economy inhibits access to needed components that could accommodate those upgrades. There is optimism that the Bolsonaro administration with its neoliberal economic approach could loosen policies that have constrained the development of the high-tech industry. The intention to open Mercosur is a good start, but there are also regulatory fixes that could address the problem. For example, by exempting high-tech manufacturers from local sourcing obligations when domestic firms are unable to supply needed components and/or expanding options for R&D investment to offset the lack of local sourcing.”

The Latin America Advisor features Q&A with leaders in politics, economics, and finance every business day. The publication is available to members of the Dialogue’s Corporate Program and others by subscription.

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