Charting new directions: - Alfred Herrhausen Gesellschaft

Charting new directions: Brazil’s role in a multi-polar world 31Gradualism is a distinctive featureof China’s transition from economicplanning to the market, but it is also afeature of China’s other policy changesyuan’s official value was reduced gradually, and inthe meantime markets were established to allowexporters to exchange their foreign earnings intothe yuan under market determined rates. By 1994,the official track was merged with the market track,bringing the yuan’s value to a competitive level, andgreatly enhancing China’s non-primary goods export.In 2001, China joined in the World Trade Organization,which removed external constraints on China’sexports. As a result, China’s exports increased by arate of 29% per annum between 2001 and 2008.In the 1980s, China’s primary good exports wereconcentrated on agricultural goods, which benefitedfarmers by increasing their income, as describedabove. They were then able to develop small-scaleindigenous industries, which in turn changed China’sexport structure. In the early 1990s rural industriesaccounted for half of China’s industrial output, and40% of China’s exports.Though China treated capacity building as a toppriority of industrial policy even before its opendoor policy, the close door approach did not resultin achievements commensurate with the effortsexerted. During the 1980s, China began to take acompletely different approach by treating foreigndirect investment (FDI) as a coherent part of a nationalplan to upgrade the country’s industrial structure. Inthe first 20 years, FDI was concentrated in labourintensiveindustries, raising fears that FDI wouldreinforce China’s place in the trade trap. However,China’s export has become increasingly sophisticatedin the last decade, and FDI has played a positive rolein this process. FDI now accounts for half of China’sexports.Gradualism is a distinctive feature of China’stransition from economic planning to the market, butit is also a feature of China’s other policy changes.Toward the end of the 1970s, China also followed theLatin American model by borrowing from the worldfinancial market, mainly to finance its technologicalimport. Yet the scale of China’s borrowings wasmuch smaller than that of Latin American countries,and China stopped borrowing soon after signs of amarket downturn became visible. Moreover, thereliance on FDI to upgrade its export is also a resultof pragmatism. The Chinese government was ableto resist the temptation of pursuing national prideand was not shy to use FDI to upgrade China’stechnology.Lessons for BrazilThe east Asian success stories provide lessonsfor Brazil. Resource export can be a catalyst forsustainable, nationwide economic growth. The keyis to generate positive externalities that promote thedevelopment of manufacturing. There are severalreasons why manufacturing is critical for Brazil.First, the development of manufacturing canhelp Brazil reduce its dependency on the exportof resources, which has an appreciation effect ona country’s currency. Internationally, it reduces acountry’s competitiveness in manufactured goods,and domestically it increases the relative price ofservice goods which further depresses the growthof manufacturing. To balance these negative impacts,Brazil needs to have a concrete plan to boost domesticmanufacturing.Second, for a large country like Brazil thedevelopment of manufacturing is an indispensablestep toward higher income levels. Services growfaster when a country experiences a boom of resourceexports, leading some to believe that a country canjump over the period of manufacturing. However, thisis wrong in two respects. First, growth generated bya resource boom is unsustainable as services donot generate exports and in the end, when resourceexports slow down, a country will encounter currentEscaping the trade trap: The east Asian experience | Yang Yao