Blog Democracy and Economy
Macroeconomics and Environmental Management: Reindustrialization as a Strategy for Economic Stability in the Context of Environmental Crises
by Carmen Feijo
According to developmental literature, economic development is defined as a structural change with the incorporation of technical progress. This synthetic definition emphasizes the importance of building a diversified, complex, and technologically sophisticated productive structure in a long-term growth perspective. On the other hand, as has been long defended by structuralist theorists, manufacturing industry plays a central role in the development process. This is because it is in manufacturing where we observe greater static and dynamic gains, providing greater productivity gains that spread throughout the economy. As it is capital-intensive, it is also where we observe greater development and dissemination of technical progress. Mature industries, in turn, are strongly associated with technologically sophisticated services, which currently lead the economic dynamism in developed countries.
The Brazilian economy is a paradigmatic case of rapid industrialization and rapid deindustrialization. From 1947 to 1985, manufacturing, according to Paulo Morceiro (2021), grew from less than 15% of GDP to around 27%. The period of economic stagnation from the mid-1980s was accompanied by a systematic decline in manufacturing in the productive structure, reaching 17% in 1995 and receding to 11% in 2019. A consequence of the loss of space for manufacturing is the lower dynamism of the Brazilian economy and the expansion of low-tech service sectors. Observing the recent period of GDP growth, we find that from 2014 to 2023, the GDP of the transformation industry receded by an average of 1.8% per year, while the economy grew only 0.5% per year in the same period. In contrast, the agricultural and extractive industries expanded by 3.3% and 2.0% per year, respectively, and as they have weaker links with other sectors of activity, they contribute relatively little to aggregate growth.
Thus, the Brazilian reindustrialization project, through the New Industry Brazil policy, presents itself as an alternative to the resource-based production matrix for the recovery of the Brazilian economy’s ability to grow sustainably. By diversifying our productive structure, reindustrialization, if successful, puts us back on the path of development.
Moreover, reindustrialization is necessary to increase resilience to climate crises. A productive structure based on the exploitation of natural resources, with the intensification of natural disasters, increases physical risks, or the destruction of natural capital. This represents a threat to the country’s economic stability, as physical risks induced by climate change have significant impacts on production and trade, especially for goods intensive in natural resources. And as climate crises accentuate cyclical fluctuations, increasing the perception of risk among investors, especially international ones, increases the economy’s external vulnerability.
Reindustrialization, economic growth, and environmental management must, therefore, be complementary strategies to ensure long-term sustainable economic growth.
It is worth noting that climate crises compromise economic growth on the supply side in two ways: a) by destroying natural capital that affects aggregate production together with other physical and human capital and intangible assets, and b) by restricting the supply of ecosystems, resulting in a loss of productivity or an increase in aggregate costs.
The threats to the supply structure demand investments in mitigation and prevention of environmental impacts. In other words, without productive investment, there is no way to face the threats of climate crises to the productive structure.
However, despite its importance, the capacity for investment may be restricted by short-term macroeconomic policy. Therefore, the recovery of sustainable economic growth requires the integration of supply and demand factors in a new sustainable development convention, where public policy space can be expanded for discretionary investment public commitment to structural change and diversification.
For advancing the discussion on the policy space for reindustrialization and diversification of the Brazilian economy, it is necessary to understand macroeconomic policy as part of the finite natural ecosystem, or to consider, in the management of macroeconomic policy, the cost of action and the cost of inaction in the face of environmental threats.
The cost of action implies the increase in production costs when assuming a commitment, for example, to reduce greenhouse gas emissions. This cost, in turn, must be confronted with the cost of inaction, understood as the disturbances generated by environmental damage, which also imply a reduction in aggregate productivity, as exemplified by the recent tragedy in Rio Grande do Sul. This type of cost brings much greater losses than the costs of action, if they had occurred.
Bringing environmental management into macroeconomic policy implies coordinating short-term macroeconomic policies with industrial and environmental policies, whose time horizon is long. In other words, to face the challenges of implementing a productive transformation in the context of climate transition, it is necessary to assume that interventionist public policies will play a central role in inducing private investors to invest in long-term returns. Thus, public institutions of economic policy and the regulatory apparatus must be adapted to support private and public investment decisions with uncertain returns. It is in this sense that reindustrialization today implies a new development convention, centered on public institutions of financing and regulation, coordinating and inducing private investment decisions with long-term returns.
Reference:
Morceiro, P. Influence Methodological on Brazilian Deindustrialization, Bazilian Journal of Political Economy, vol. 41, nº 4, pp. 700-722, October-December/2021.
Carmen Feijo- Professor at the Federal Fluminense University (UFF), CNPQ researcher, and coordinator of the Finance and Development Research Group (FINDE/UFF)
Blog Democracy and Economy
The Finance and Development Research Group (FINDE) brings together researchers from universities and other research and teaching institutions, interested in discussing academic issues related to the advancement of the process of financialization and its impacts on socio-economic development in modern economies. Twitter: @Finde_UFF
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