State and Development

The world economy has seen a resurgence of industrial policy in recent decades. National development programs are at the center of a variety of polarizing geopolitical axes: carbon emissions, world manufacturing shares, and integration into rival trade and investment blocs. The primary antagonism between the US and China over core technologies has shaped both industrial policy’s revival among countries that abandoned it at the height of neoliberalism, and its further development as an economic tool among countries that historically adopted it.

In Brazil, however, the reaction to China’s growth has been different. Chinese commodity purchases have shaped the structure of the Brazilian economy in contradictory ways, stimulating growth for raw materials industries while constraining investment possibilities for higher value-added, newer technology ventures. Xi Jinping’s visit to Brazil in November 2024 for the G20 summit underscored China’s influence over the future of the Brazilian economy. In Latin America, almost all countries—with the exception of Brazil, Colombia, and Mexico—have signed memorandums of understanding with China as part of its Belt and Road Initiative. Discussions about new cooperation projects between the two countries, including Brazil’s possible accession to the Initiative, are ongoing. How the Brazilian economy will grow and evolve in coming years is therefore uniquely conditioned by the presence of Chinese demand and investment.

Deindustrialization and “denationalization” in Brazil

In contrast to US industrial policy, which has been driven by the protectionist measures for new technologies; to European industrial policy, which has prioritized reduced carbon emissions; and to East Asian industrial policy, which has sought to cultivate innovation and promote industrialization, Brazilian industrial policy confronts the problem of moving up the value chains it shares with its largest trading partner—China—while counteracting the major structural economic trends produced by that partnership. In the diplomatic realm, Chinese progress has broadened international negotiation possibilities through the creation of the BRICS currency bloc—currently expanding and diversifying geographically. In the economic realm, Chinese growth eased Brazilian balance of payments restrictions and increased aggregate demand.¹ However, by stimulating the Brazilian primary sector—agriculture and mining—Chinese purchases have made Brazil heavily commodity-dependent, as defined by the United Nations Conference on Trade and Development (UNCTAD).² The country has become a major exporter of oil, soy, meat, iron, and various other minerals, and a major importer of capital goods and electronics from China.³

Chinese development has inverted the Brazilian growth model away from the industrialization objectives of the 1970s back toward its longer historical pattern of export-commodity specialization. This pattern continues to thrive despite the various industrial policies attempted—albeit in a fragmented way—in every government of the Worker’s Party (PT), including the current administration. Sociopolitical coalitions that have emerged out of Brazil’s export-commodity specialization significantly complicate the process of structural change. Between 2012 and 2022, the Brazilian manufacturing industry’s share of global manufacturing value added declined by an average 0.73 percent per year.⁴

Although deindustrialization is widely discussed in Brazil, a different structural process has resulted from Brazilian fiscal policy that also constrains the pattern of economic growth. This is the process of “denationalization,” or the increasing role of foreign ownership and investment in the Brazilian economy. In the last decade, Brazil ranked among the world’s largest recipients of foreign direct investment (FDI). The low presence of national companies in areas most remote from natural resources means the Brazilian government’s industrial policies that rely on FDI are limited in how they can contribute to public goals of structural transformation. Denationalization, in the context of fiscal limits, makes it politically difficult to adopt industrial policies targeting new sectors and innovation processes.

The current challenge is to build a path for sustainable development that simultaneously creates jobs and income, reduces social inequalities, and leads to a substantial reduction in deforestation—Brazil’s main contribution to climate change.

Industrial policy and climate change in Brazil

Climate change has assumed a central role in restructuring contemporary industrial policy. Great power competition, however, has complicated the formulation of the uniform programs and measurements for transitioning energy systems and mitigating the effects of climate change.

Promoting these changes involves reviving and newly discussing Brazil’s relationship with China. The resumption of an industrialization program can help to bridge the divergent motivations of altering Brazil’s national economic structure and transitioning global energy systems away from fossil fuels. Brazil is a party in the Paris Agreement and has set a target of net zero emissions by 2050. Simultaneously, the country needs to overcome technological delay in the manufacturing sector. To face these challenges, Brazil can leverage some significant assets, such as its clean energy mix. In fact, for the world’s fastest-growing countries, such as China and India, reducing dependence on coal would already significantly impact CO₂ emissions reduction. Brazil’s large hydroelectric base and ongoing expansion of wind farms and solar energy could potentially increase industrial production with much cleaner energy.⁵

However, the country’s energy issue is not only related to supply expansion, but also to pricing. Brazilian energy is expensive, and the price policy has become overcomplicated following Eletrobras’ privatization. Another hurdle comes from the type of diversification and current supply composition, with the significant presence, beyond hydropower, of wind and solar energy, as well as gas-based sources that complement them. Given hydroelectricity’s limitations, expanding supply will require more investment in renewable sources, and reducing rate prices remains a key distributive challenge.⁶

Brazil also has promising possibilities in electric vehicle production, especially hybrid engines. Currently, Brazil exports manganese, niobium, nickel, lithium, graphite, and bauxite to China. The key task in these supply chains is to internalize important segments of these vehicles’ production chains. The 2023 Growth Acceleration Program (Programa de Aceleração do Crescimento, PAC) and the 2024 New Industry Brazil (Nova Indústria Brasil, NIB) already include a policy for industrializing lithium. The Chinese company BYD has begun producing batteries in the Manaus Free Trade Zone. Although small in scale, such ventures signal prospects for an industrial production program combining electric engines with ethanol and biodiesel.

The resurgence of industrial policy requires a broader public-private interdependence to enable better coordination among government, tech industries, universities, and research laboratories. Important negotiation initiatives with foreign companies are ongoing—such as BYD’s partnership with the University of Campinas for developing solar panel technologies.⁷ Solar panels are China’s leading export product, and Brazil is currently a major importer. Developing local production of these technologies and integrating parts of this supply chain—along with advancing battery manufacturing and segments of the hybrid electric vehicle industry—presents significant opportunities for Brazil. These opportunities can be fostered through tariffs, financing, and government procurement. Additional opportunities can be seen in relation to BYD’s investments in big data and artificial intelligence, which have an increased potential to impact information and communications technology (ICT) infrastructure.

Brazil’s large-scale production of bioethanol, biodiesel, aviation biofuel, and green hydrogen represents another opportunity for the country, given global demand and the country’s existing technological capabilities. Broadly speaking, the priority areas highlighted in the memorandums of understanding for technological cooperation with China—particularly bioenergy and ICT—could strengthen the connection between research and investment in Brazil. Amid growing trade tensions between the US and China, Brazil has the potential to enhance its commercial and diplomatic leverage to attract high-tech projects from these competing powers and increase the local content of investments from Chinese and American companies—in this manner, Brazil could follow a strategy similar to that of the US, China, and other Asian countries. Increasing the local content of these projects, however, requires more than negotiation skills. It relies on domestic initiatives and financial compensations, including increasing the resources available to BNDES, Finep, and university research laboratories.⁸

Industrial policy and the Amazon

Brazil’s main environmental challenge is not in emissions related to the energy mix, but in those linked to deforestation, through which the country contributes significantly to greenhouse gas emissions. Considering specific sectors, agriculture and livestock are the main sources of emissions, while land use, land management, and deforestation are the primary externalities of their expansion. The extensive deforestation that occurred in Jair Bolsonaro’s government resulted from deregulation, which favored uncontrolled expansion. Under Lula’s new term, inspection mechanisms were restored and deforestation rates decreased in 2023. These positive trends, however, will become increasingly insignificant if current expansion and accumulation patterns remain unchanged.

Addressing this issue is particularly challenging as it involves confronting the political influence of large agribusiness owners. Brazil has already approved the creation of a carbon market, but due to agribusiness’ strength in Congress, the proposed “cap and trade” system excludes agriculture, which is responsible for the largest gas emissions.⁹

What distinguishes the experience of the United States, China, and several Asian countries in facing commercial and technological challenges today is their governments’ and planning bodies’ strong commitment to industrial policy focused on innovation and structural change. In these countries, industrial policy has emerged as a top economic priority. In Brazil, the PAC, the NIB, and the Ecological Transformation Plan (ETP) from 2023, as well as the letters of intent for technological cooperation with China signed in 2024, represent attempts to address these challenges against an economic context defined by deindustrialization and a strong dependence on commodity exports. These programs prioritize infrastructure, productive development, reindustrialization, export diversification, digitalization, artificial intelligence, healthcare systems, decarbonization, and bioeconomy as key areas for investment allocation and research and development efforts. In order for the programs to be effective and transform into investment projects that impact the productive structure, they critically require not only coordination but also scale, fiscal resources, targeted credits, strategic trade policy, and government procurement focused on innovation.

Unleashing the state

During previous PT governments, various industrial policies targeting structural change did exist in principle. However, in a period marked by increased expansion of export agribusiness, they proved insufficient to counter the processes of deindustrialization and the deterioration of the industrial structure. Investments in infrastructure—an essential foundation for the country’s systemic productivity—are a central goal of the new PAC. It therefore marks a partial recovery in Brazil’s economic prospects. However, these investments remain at a low level compared to Brazil’s current needs—due to its prolonged stagnation—and when compared to other countries undergoing structural transformation are accordingly inadequate. Investments in Brazil during the 1970s accounted for about 10 percent of GDP. Today they represent only around 2.6 percent, with expansion largely relying on uncertain public-private partnership initiatives.

Without an increase in the state’s investment capacity—which has been stagnant for years at the federal level—any process of structural transformation either fails to launch or proceeds in a lopsided and uneven manner. Currently the country operates under fiscal targets for primary expenditures, which constrains the inclusion of public investment in strategic infrastructure in the budget. This makes such expenses dependent on private investment flows and FDI, which are unlikely to meet the desired transformation process in terms of volume or direction. The National Bank for Economic and Social Development (BNDES) has undeniably gained prominence in Lula’s third term, following several administrations during which it lost its historical focus on industry and saw its role as a long-term lender diminished. The bank is now strongly committed to industrialization and structural change, developing new financial initiatives aligned with the priorities set out in NIB and ETP. Its expansion as a long-term investor is, however, limited by its dependence on the National Treasury. Regardless, the actual impact of BNDES on this transformation process relies not only on new financing mechanisms to expand credit but also on private investment and state-owned companies’ decisions.

An institutional question also arises regarding the relationship between state and market. As observed, the industrial policy in the United States, China, and other Asian countries has involved not only the selective targeting of sectors and activities but also public procurement policies to drive innovation. Public procurements were historically strategic in Brazil in many areas, such as petrochemicals for the health sector.  Recently, however, procurement policy has been following a cost-based model shaped by efficiency and transparency, focusing essentially on obtaining the lowest prices, with no medium-term concerns for technological development.¹⁰

Maria da Conceição Tavares’s observations on the central question of a developmentalist state are still very relevant:

“The issue at stake is the very power of the state. […] A planning bureaucracy alone is not enough, nor are state-owned banks and companies. For a development plan to succeed, there must be a degree of structural economic coordination and control over investments and overarching public policies, which, in turn, require a high level of political cohesion within the state and some form of social pact.”¹¹

This article was translated from Portuguese to English by Glenda Vicenzi.