State Intervention and Industrialization: The Origins of the Brazilian Automotive Industry

In recent years state intervention has fallen from favor among development economists and within policy-making institutions. Latin America in particular has been singled out as a region in which years of misguided import substitution policies have led only to overly protected, inefficient industries and mountains of public debt. This thesis resurrects a successful example of state sectoral planning: Brazil's effort to produce motor vehicles. Initiated in 1956, the auto plan was part of a general import-substituting development effort in which the industry was to play the role of leading sector through its ability to attract foreign capital and technology and generate linkages. The plan restricted imports and forced transnational utomotive companies to choose between abandoning the lucrative Brazilian market and, with the assistance of financial incentives, producing vehicles with 90-95% Brazilian-made content within five years. This entailed no small effort on the part of all concerned. Brazil had only the beginnings of an industrial base and up until that point virtually all vehicles had been imported. Steel production had begun nine years earlier and coffee still comprised more than 50% of the country's exports. With the auto plan, Brazil entered uncharted territory: the world of high-technology consumer goods with which it had no direct experience and the know-how for which was in the hands of transnational firms. As the first Latin American country to attempt domestic production, Brazil could not benefit from the experience of neighboring countries. Moreover, there was little precedent in Brazil or the region in negotiating with transnationals in any manufacturing activity. Previous foreign investment had been restricted largely to public utilities, railroads, and raw materials. Despite the intensification ofcompetition outside national markets between the large auto manufacturers, cross-national investment in production facilities was occurring only within Europe. Firms competed for peripheral markets by exporting complete vehicles or knocked-down kits which only had to be assembled. Production targets largely were achieved espite these obstacles. By 1961, only six years after the plan's initiation, eleven firms were producing over 145,000 vehicles with an average domestic content share of 93% by weight and 87% by value. Most of the major players in the international auto industry, including Ford, General Motors, Volkswagen and Mercedes Benz, participated. Production reached 280,000 by 1968 and eight firms, all foreign controlled, remained, although only three were responsible for 89% of all