Brazil got globalization all wrong. In fact, its approach to trade can at times practically read like a how-not-to guide.
Faced with globalization’s potential impact on national industries, it maintains a crony and closed economy, when a more efficient adaptation to increased trade would maintain a relatively open economy while implementing policies to compensate for job losses and other negative impacts of increased international competition. After all, opening up to trade increases productivity, which helps a country escape the middle-income trap, where Brazil is firmly stuck. But unilateral protection to local companies is politically appealing, and a powerful tool in a pre-election year. Companies trot out the old argument that policymakers must erect barriers to help them save jobs – which also, conveniently, protects profits – and the government complies, despite the all evidence pointing to the contrary. All this has measurable costs to the population.
We saw this at work when Brazilian ethanol producers sought government protection from American exports. Nothing wrong with asking, as vested interests are rent-seekers by nature. But it is the job of an effective government to say to no ludicrous proposals, and this one falls under that category.
To start, Brazil is among the world’s least open economies to international trade. The sum of imports and exports (merchandise trade) is only 18 percent of GDP and, since 1960, it has never surpassed 25 percent.
Brazil merchandise trade as % of GDP, 1960-2016.
Source: World Bank.
Even communist and embargoed Cuba trades more with the world – around 32 percent of GDP. Latin America’s average is 36 percent, and the OECD countries, 43 percent. A lower share of trade-to-GDP is a feature of rich countries with big internal markets like the US and Japan. But in middle-income countries like Brazil and Argentina, it is a barrier to development.
Merchandise trade as a percent of GDP, selected countries, 2016.
Source: World Bank.
The fact is, nobody does protectionism quite like Brazil. To understand how this works, let’s take a look at one heavily protected industry – the ethanol and sugar business, whose history is intertwined with that of the nation.
Sugarcane has been a mainstay of the Brazilian economy for centuries. The first decree promoting the cultivation of sugarcane and the construction of sugar mills dates from 1516. By the 1700s, sugar exports made up most of the country’s GDP. In 1931, the Brazilian government determined that five percent of ethanol be mixed into imported gasoline; in the United States, feasibility studies on such mixtures were established by the Clean Energy Act only in 2007.
When the 1973 oil crisis threw the industrialized world into a tailspin, the Brazilian government created ProAlcool, a program that heavily subsidized producers and promoted ethanol as an alternative to expensive oil imports. The program grew after the second oil crisis but lost momentum in the 1980s and 1990s, as oil prices declined and sugar prices soared; ethanol-fueled cars peaked at 76 percent of the fleet in 1986. By the time Brazil’s economy boomed, buoyed on the surging commodities prices in the late 2000s, the ethanol industry had been sidelined, even if demand was still robust from the growth of flex fuel cars, which make up the majority of the Brazilian fleet and run on both gasoline and ethanol.
The commodities super-cycle of the early 2000s drove much of the growth in South America in the period. In Brazil, it was no different. What’s more, in 2007 Petrobras, the Brazilian state-owned oil company, announced the discovery of the largest oil field in the Americas in the past 40 years. The government pushed for an all-in strategy that would make its state-controlled oil giant the largest listed company in the world; in 2012 the company unveiled a $235 billion investment plan. It was all a mirage. A combination of incompetence, corruption and a reversal in oil prices drove the company to the brink of bankruptcy in 2016, though it has since recovered.
As the government’s 