Does the Manaus Free Trade Zone Have an Impact on Industry Efficiency?

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INSIGHT

ong>Doesong> ong>theong> ong>Mong>anong>ausong> ong>Freeong> ong>Tradeong>

ong>Zoneong> ong>Haveong> ong>anong> ong>Impactong> on

Industry Efficiency?

Industrial policies aim at encouraging development ong>anong>d economic growth by increasing ong>theong>

competitiveness of local firms ong>anong>d promoting structural trong>anong>sformation. Therefore, ong>theong> design of

industrial policies that meet ong>theong>se objectives is strategic for ong>theong> country. In practice, however, mong>anong>y of

ong>theong>se policies have resulted in high fiscal costs without ong>anong>y empirical evidence of ong>theong> alleged beneficial

effects.

An industrial policy common to several countries is ong>theong> free trade zone, areas where compong>anong>ies receive

tax exemptions to encourage trade ong>anong>d accelerate industrial development in a given region. In Brazil,

ong>theong> ong>Mong>anong>ausong> ong>Freeong> ong>Tradeong> ong>Zoneong> (Zona Frong>anong>ca de ong>Mong>anong>ausong> - ZFM) was created over half a century ago with

ong>theong> aim of developing ong>anong>d boosting ong>theong> industry ong>anong>d economy of ong>theong> Norong>theong>rn region.

Neverong>theong>less, ong>theong> efficiency of this model has been put into question. In 2018, ong>theong> World Bong>anong>k pointed

out that policies to support compong>anong>ies in Brazil presented limited results ong>anong>d have a high fiscal

cost. 1 In fact, few studies evaluate ong>theong> impact of tax ong>anong>d non-tax incentives on ong>theong> development ong>anong>d

industrialization of ong>theong> region.

The present study, carried out by researchers from ong>theong> Climate Policy Initiative/ Pontifical Catholic

University of Rio de Jong>anong>eiro (CPI/ PUC-Rio), seeks to contribute to this debate by ong>anong>alyzing ong>theong> impact

of ZFM on Braziliong>anong> industry, especially with regards to productive efficiency (PE) ong>anong>d energy efficiency

(EE). The researchers note that ong>theong> efficiency levels of ZFM ong>anong>d Brazil are similar ong>anong>d remain stable

throughout ong>theong> ong>anong>alyzed period. This meong>anong>s that, despite ong>theong> high volume of tax reliefs grong>anong>ted to

ZFM’s industries, ong>theong>re is no evidence of efficiency gains.

Evaluating all industries at ong>theong> aggregate level may not adequately represent ong>theong> firms of ong>theong> most

importong>anong>t industries in ong>theong> region. Thus, this ong>anong>alysis considers ong>theong> most significong>anong>t industries in ong>theong>

ZFM, including ong>theong>ir associated tax exemptions, production, ong>anong>d representativeness in ong>theong> workforce.

Researchers find that ong>theong> energy ong>anong>d productive efficiencies of ong>theong>se main industries in ong>theong> ZFM did

not show a marked difference from those in ong>theong> rest of Brazil. In oong>theong>r words, ong>theong> operation of firms at

ZFM has not trong>anong>slated into ong>anong> increase in productive ong>anong>d energy efficiencies, not even in ong>theong> cases

of ong>theong> most significong>anong>t industries of ZFM.

1 World Bong>anong>k, 2018. “Jobs ong>anong>d growth: Brazil’s productivity agenda”.


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MANAUS FREE TRADE ZONE OVERVIEW

When ong>theong> government applies lower taxation in ong>anong> industrial sector or in a specific region, a distortion

is created: ong>theong> benefited firms cong>anong> prosper ong>anong>d increase ong>theong>ir market share, even if ong>theong>y are not ong>theong>

most efficient firms. In this context, ZFM becomes ong>anong> especially interesting industrial policy, since

several tax reliefs are grong>anong>ted to firms located in ong>theong> ong>Mong>anong>ausong> Industrial Park (Polo Industrial de ong>Mong>anong>ausong>

- PIM). The purpose of such benefits is to keep ong>theong> sectors of ong>theong> region competitive against more

developed regions of ong>theong> country ong>anong>d foreign compong>anong>ies.

The ZFM is divided into three sectors: commercial, agricultural, ong>anong>d industrial; ong>theong> industrial sector

being ong>theong> main one. When ong>theong> ZFM was structured in 1967, one of ong>theong> major criticisms of ong>theong> model

was that ong>theong> PIM industries would become assemblers of imported components. In order to fight this

possibility, ong>theong> government established minimum national content rates for products ong>anong>d maximum

import limits for inputs in 1976. This measure, however, was later replaced by ong>theong> Basic Productive

Process (Processo Produtivo Básico - PPB) defined as ong>theong> minimum set of operations that characterizes

ong>theong> industrialization of ong>theong> product in question. 2

The main PIM sectors consist of electronics ong>anong>d IT, two-wheel vehicle production, chemicals, plastics,

ong>anong>d metallurgy, all of which are eligible for several tax reliefs. The tax exemptions that firms may

receive include lower Import Duty (Imposto de Importação - II); State Sales Tax (Imposto sobre a

Circulação de Mercadorias e Serviços - ICMS); Excise Tax (Imposto sobre Produtos Industrializados - IPI);

Social Integration Program (Programa de Integração Social - PIS/PASEP); ong>anong>d Social Contribution on

Billing (Contribuição para o Finong>anong>ciamento da Seguridade Social - CONFINS). 3

In order to obtain ong>theong> benefits, ong>theong> compong>anong>y must comply with a series of requirements conditioned

to its activity: ong>theong> profits obtained must be reinvested in ong>theong> region, productivity ong>anong>d competitiveness

must be increasing, ong>theong>re must be ong>anong> increase in job offer, ong>anong>d oong>theong>rs (in accordong>anong>ce with ong>theong> Basic

Productive Process). 4

According to ong>theong> Federal Revenue of Brazil (Receita Federal do Brasil - RFB), estimated tax expenditures

for ong>theong> ZFM, Western Amazon (Amazônia Ocidental) ong>anong>d ong>Freeong> ong>Tradeong> Areas (FTA) for ong>theong> industrial,

agricultural, service, ong>anong>d trade sectors more thong>anong> doubled from 2010 to 2015. 5 In 2015, ong>theong>y reached

R$ 27.8 billion. In 2015 alone, tax expenditures intended for ZFM’s industrial sector exceeded R$ 6

billion. 6

This study evaluates ong>theong> energy ong>anong>d productive efficiency indicators of ong>theong> entire ZFM against those of

ong>theong> entire country in order to understong>anong>d if ong>theong> tax exemptions grong>anong>ted to ong>theong> region by ZFM promotes

improvements in industrial efficiency.

To measure ong>theong> evolution of ong>theong>se indicators, this study uses ong>anong>nual data for ong>theong> period 2003 to 2015

at ong>theong> firm-level from three databases: Annual Survey of Industry (Pesquisa Industrial Annual - PIA),

Annual Social Information Report (Relação Anual de Informações Sociais - RAIS), ong>anong>d average industrial

2 Brasileiro, V.M.M.. “Análise do trabalho desenvolvido pela SUDAM e pela SUFRAMA para o desenvolvimento da Amazônia”

(Analysis of ong>theong> work developed by SUDAM ong>anong>d SUFRAMA for ong>theong> development of ong>theong> Amazon Region). Page 5. Available at:

https://bit.ly/2miyfaG. Accessed on: September 12, 2019.

3 For PIS/PASEP ong>anong>d COFINS, ong>theong> exemption is given only for internal receipts ong>anong>d sales, through a zero tax rate.

4 BRAZIL. Law No. 8,387, of December 30, 1991.

5 Estimated tax expenditures are estimated revenue losses from total exemptions.

6 ZFM ong>anong>d FTAs were excluded from ong>theong> calculation, referring to special tax rates ong>anong>d purchases of goods.


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tariff. 7 Merging ong>theong>se databases allows ong>anong>alysts to track ong>theong> evolution of energy ong>anong>d productive

efficiencies for Brazil ong>anong>d for ZFM. The firms’ EE indicator is defined using ong>theong> added value divided by

ong>theong> amount of electricity, while productive efficiency corresponds to ong>theong> firm’s added value divided by

ong>theong> number of employees. Figure 1 shows such indicators for ong>theong> period from 2003 to 2015.

Figure 1: Evolution of energy ong>anong>d productive efficiencies for ong>theong> aggregate industrial sectors in Brazil ong>anong>d ong>theong> ZFM

Source: Climate Policy Initiative with data from PIA, RAIS, ong>anong>d ANEEL

Figure 1 shows that ong>theong> energy ong>anong>d productive efficiency levels of ZFM ong>anong>d Brazil are similar ong>anong>d

remain stable throughout ong>theong> ong>anong>alyzed period. Despite ong>theong> high volume of tax benefits grong>anong>ted to

ZFM’s compong>anong>ies, ong>theong>re is no indication of efficiency gains. Thus, ong>theong> stability of ong>theong> energy ong>anong>d

productive efficiencies of ong>theong> Braziliong>anong> mong>anong>ufacturing industry also applies to ong>theong> ZFM, despite

disparities in tax benefits.

7 Braziliong>anong> Institute of Geography ong>anong>d Statistics (IBGE), Ministry of Economy, ong>anong>d National Electric Energy Agency (ANEEL), respectively.


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ESTIMATED TAX EXEMPTIONS

As previously mentioned, ong>theong> efficiencies – energy ong>anong>d productive - of Brazil ong>anong>d ZFM demonstrate

similar trends. This indicates that, despite ong>theong> inherent fiscal attractiveness in ong>theong> ZFM, ong>theong>

mong>anong>ufacturing industry in this region has a similar reality to ong>theong> Braziliong>anong> industry in terms of efficiency

levels. Thus, ong>theong> similarity of ong>theong>se efficiency indicators, requires a disaggregated ong>anong>alysis to better

understong>anong>d ong>theong> sector’s dynamics ong>anong>d ong>theong> possible effect of tax benefits.

CPI ong>anong>alysts estimate exemptions per sector to assess wheong>theong>r ong>theong> sectors that receive most of ong>theong>

tax benefits in ong>theong> ZFM have different patterns thong>anong> industry across Brazil. Estimation at ong>theong> sector

level requires calculating ong>theong> ratio of ong>theong> deductions ong>anong>d revenue for Brazil excluding ong>theong> ZFM. With

this tax rate, it is possible to calculate ong>theong> difference between what each sector of ong>theong> ZFM has actually

paid in deductions ong>anong>d what ong>theong>y would have paid if ong>theong>y were not part of ong>theong> ZFM (estimated tax rate

multiplied by ZFM’s revenue). With this subtraction, it is possible to recover ong>theong> value of ong>theong> tax relief

for each ZFM sector that surpasses Brazil’s.

Table 1 shows ong>theong> share of each sector in ong>theong> total amount of tax exemptions that ZFM surpasses ong>theong>

rest of ong>theong> country. In addition, ong>theong> table also presents sectors with ong>theong> highest shares in ZFM’s total

production ong>anong>d ong>theong> largest concentration of ong>theong> workforce in ong>theong> ZFM compared to ong>theong> country.

In 2015, of all ong>theong> extra tax benefits given to ong>theong> ZFM, two sectors stood out: two-wheel vehicle

production ong>anong>d audio ong>anong>d video. Of ong>theong> total estimated tax benefits that ZFM had, ong>theong>se sectors

received 27% ong>anong>d 16% of that amount, respectively. As for production, ong>theong> two-wheel vehicle

production sector accounted for 15% of ong>theong> total gross value of ZFM’s industrial production, while ong>theong>

audio ong>anong>d video sector accounted for 13%. As for ong>theong> expressiveness in ong>theong> workforce, of all firms in ong>theong>

audio ong>anong>d video sector in Brazil, 24% are concentrated in ong>theong> ZFM. The ZFM two-wheel vehicle sector

employs over half (56%) of all personnel working in this sector in Brazil.

Table 1: The most representative sectors of ZFM in terms of tax exemptions, production, ong>anong>d workforce

Tax exemptions

(%)

Estimated tax

exemptions

Production (%) Workforce (%)

Gross value

of industrial

production

Ratio of ZFM’s

firms

Ratio of total

ZFM’s employees

Two-wheel 27 15 18 56

Audio ong>anong>d video 16 13 24 42

Non-alcoholic

beverages

8 12 3 3

Plastic 7 4 2 3

Communication 6 17 14 27

Machinery ong>anong>d

equipment

3 4 1 5

Source: Climate Policy Initiative with data from PIA, RAIS, ong>anong>d ANEEL


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Figure 2 shows, for ong>theong> year 2015, ong>theong> dispersion of ong>theong> industrial sectors in Brazil ong>anong>d ZFM in relation

to ong>theong>ir energy ong>anong>d productive efficiencies, ong>anong>d ong>theong> 45º line.

The sectoral ong>anong>alysis points out that despite ong>theong> differentiated tax system, ong>theong> two-wheel vehicle

sector ong>anong>d ong>theong> audio ong>anong>d video sector have similar levels of productive efficiency ong>anong>d energy efficiency

compared to ong>theong> rest of ong>theong> country, given that both sectors are on ong>theong> dotted 45º line. In this sense,

tax benefits have not made ong>theong> ZFM industries in ong>theong>se sectors more efficient thong>anong> those in ong>theong> same

sectors in ong>theong> rest of ong>theong> country.

Figure 2: Dispersion of ong>theong> productive ong>anong>d energy efficiency of ong>theong> sectors for Brazil ong>anong>d ong>theong> ZFM ong>anong>d ong>theong> 45º line for ong>theong> year 2015

Source: Climate Policy Initiative with data from PIA, RAIS, ong>anong>d ANEEL


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SECTORAL ANALYSIS

Audio ong>anong>d video sector

It is difficult to differentiate ZFM’s audio ong>anong>d video sector from that of Brazil, since both efficiencies are

very similar. This indicates that for this sector, ong>theong> location of compong>anong>ies in ong>theong> ZFM does not trong>anong>slate

into comparative advong>anong>tages in terms of productive ong>anong>d energy efficiencies.

It is worth noting that this similarity between ong>theong> indicators of Brazil ong>anong>d ong>theong> ZFM is not justified by a

total concentration of this industry in ong>theong> PIM. Only 24% of ong>theong> firms of this sector are located in ong>theong>

ZFM.

Source: Climate Policy Initiative with data from PIA, RAIS, ong>anong>d ANEEL


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Two-wheel vehicle production sector

Despite being ong>theong> most benefited sector from ZFM’s tax exemptions, compared to ong>theong> rest of ong>theong>

country, ong>anong>d having factories of large compong>anong>ies installed for decades in ong>theong> region, ong>theong> two-wheel

vehicle sector does not show ong>anong>y indication of improvement in its levels of efficiency over ong>theong> years.

As in ong>theong> audio ong>anong>d video sector, ong>theong> similarity between Braziliong>anong> ong>anong>d ZFM’s indicators cong>anong>not be

justified by a total concentration of this industry in ong>theong> PIM, since only 18% of ong>theong> firms of this sector

are located in ong>theong> ZFM.

Source: Climate Policy Initiative with data from PIA, RAIS, ong>anong>d ANEEL

It is worth noting that even most relevong>anong>t sectors of ong>theong> ZFM do not stong>anong>d out in relation to Brazil,

given ong>theong> similarity of efficiency indicators. This finding concludes that ong>theong> benefits received by ong>theong>

ZFM are not trong>anong>slated into higher levels of efficiency.


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CONCLUSION

The researchers demonstrate in this study that, despite ong>theong> tax benefits, ZFM industries are very

similar, in terms of energy ong>anong>d productive efficiencies, to industry in general. Therefore, despite ong>theong> tax

exemptions, this industrial policy has not contributed to ong>anong> increase in ong>theong> country’s productivity ong>anong>d

energy efficiency.

This sector disaggregated ong>anong>alysis allows policymakers to better understong>anong>d ong>theong> dynamics inherent

to each industrial sector. This work reveals that ong>theong> ZFM firms are not more efficient thong>anong> those in ong>theong>

rest of ong>theong> country, yet ong>theong>y benefit from significong>anong>t tax exemptions. These benefits have not led to ong>anong>

improvement in ong>theong> efficiency of ong>theong> firms.

Such findings set ong>theong> stage to discuss ong>theong> Braziliong>anong> industrial structure ong>anong>d ong>theong> costs associated

with it. This study emphasizes how lower production costs, arising from tax benefits, cong>anong>not be

associated with increases in efficiency. Ultimately, this work highlights ong>theong> need for policymakers to

better understong>anong>d ong>theong> role that ZFM plays in promoting efficiency ong>anong>d in stimulating growth for ong>theong>

region ong>anong>d for ong>theong> country. It is necessary to investigate ong>theong> possibility that ong>theong> consequences of tax

exemptions are related only to ong>theong> attractiveness to ong>Mong>anong>ausong>.

AUTHORS

Juliong>anong>o Assunção

Executive Director

Climate Policy Initiative/Pontifical Catholic University

of Rio de Jong>anong>eiro (CPI/PUC-Rio)

Associate Professor, Department of Economics, PUC-Rio

juliong>anong>o.assuncao@cpirio.org

Among>anong>da Schutze

Head of Policy Evaluation, Energy

Climate Policy Initiative/Pontifical Catholic University

of Rio de Jong>anong>eiro (CPI/PUC-Rio)

among>anong>da.schutze@cpirio.org

Rhayong>anong>a Holz

Assistong>anong>t Analyst, Energy

Climate Policy Initiative/Pontifical Catholic University

of Rio de Jong>anong>eiro (CPI/PUC-Rio)

rhayong>anong>a.holz@cpirio.org

Suggested Citation

ASSUNÇÃO, Juliong>anong>o; HOLZ, Rhayong>anong>a; SCHUTZE, Among>anong>da. Insight. ong>Doesong> ong>theong> ong>Mong>anong>ausong> ong>Freeong> ong>Tradeong> ong>Zoneong> ong>Haveong> ong>anong> ong>Impactong>

on Industry Efficiency? Rio de Jong>anong>eiro: Climate Policy Initiative, 2020.

March 2020

Climate Policy Initiative (CPI) works to improve ong>theong> most importong>anong>t energy ong>anong>d long>anong>d use policies around ong>theong> world. We support decision

makers through in-depth ong>anong>alysis on what works ong>anong>d what does not. CPI’s Brazil program partners with ong>theong> Pontifical Catholic University of

Rio de Jong>anong>eiro (PUC-Rio). This work is funded by ong>theong> Instituto Clima e Sociedade - iCS.

www.climatepolicyinitiative.org

Content licensed under Creative Commons Attribution 4.0 International.

The texts in this publication may be reproduced in whole or in part

provided that ong>theong> source ong>anong>d ong>theong> respective authors are cited.

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