Industrial Policy, Sectoral Maturation, and Postwar Economic Growth in Brazil: The

Resource Curse Thesis

Author(s): R. M. Auty
Source: Economic Geography , Jul., 1995, Vol. 71, No. 3 (Jul., 1995), pp. 257-272
Published by: Taylor & Francis, Ltd.

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 Industrial Policy, Sectoral Maturation, and Postwar
Economic Growth in Brazil: The Resource Curse Thesis*

R. M. Auty
Department of Geography, Lancaster University, Lancaster LA1 4YB, UK

Abstract: Resource-rich countries like Brazil have tended to favor autarkic

(self-sufficient) development, in contrast to the export-oriented East Asian
development model. Autarkic policy prematurely triggers a rapid expansion of
heavy and chemical industry (HCI), which matures too slowly. The primary
sector must therefore meet the foreign exchange and revenue transfer needs of
the economy. But because the primary sector shrinks in relative size as per capita
incomes rise, autarkic development proves unsustainable. Yet reform is then
blocked by the vested interests that benefit from the rents which autarkic policies
confer. Economic growth becomes erratic and slow. In this way a favorable
natural resource endowment becomes a curse rather than a blessing, and
resource-rich countries underperform, with interesting consequences for regional
policy and the role of frontier regions like the Amazon.

Key words: economic development,

industrial policy, income and regional
inequality, resource curse.

The Brazilian frontier region, which mestic market helps industrialization by

comprises the Amazon forest in the north making possible the early capture of the
and the grasslands of the center west, iseconomies of scale which characterize much
twice the size of the rest of Brazil, but it
of modern manufacturing.
presently accounts for only one-eighth of Yet, despite its more favorable resource
Brazil's population and barely 10 percentendowment, Brazil's per capita GNP has
of its GDP (Fig. 1). Yet even without thegrown at half that of South Korea since
rich resources of the frontier region,the late 1960s, its life expectancy is five
Brazil is well endowed compared withyears less and its per capita income is
most developing countries. For example,
barely two-thirds that of South Korea.
eastern Brazil has almost 30 times the
Brazil's income is also much less equitably
land area of South Korea and three times
distributed. Whereas the income of South
its population. Eastern Brazil alone,
Korea's richest quintile is seven times that
therefore, has a greater choice of develop-
of its poorest quintile, that of Brazil's
ment options than South Korea.
richest quintile is 33 times higher than
A large geographic area confers two strong
the poorest quintile (Sachs 1989). The
advantages for development (Ginsburg
unequal income distribution in Brazil also
1957). First, the resulting varied natural re-
source endowment of farmland and miner- has a strong regional dimension: the per
capita income of the northeast is only
als provides a wide range of exports with
one-third that of the southeast (Fig. 1).
which to generate foreign exchange and to
Such a maldistribution of income has
diversify away from overdependence on a
hitherto been regarded as an inevitable
single commodity. Second, Brazil's large do-
consequence of economic development
(Williamson 1965), but Asian experience
suggests that this may not be the case.
* The financial assistance of the World Bank The markedly weaker socioeconomic
(RPO 675-41) is gratefully acknowledged. The performance of a resource-rich and mar-
findings are entirely those of the author and ket-rich country like Brazil compared
should not be attributed to the World Bank. with a resource-deficient and market-

257

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258 ECONOMIC GEOGRAPHY

Nortl

Population 42m 146m

Life expectancy 46 60
23.3
% households below poverty line 44.0
% households with electricity 60.2 343
Infant mortality 100 in 1,000 60 in 1,000

Population % of % of
(m) total total GDP

SOUTH EAST 62.2 42.5 582

Sao Paulo 32.0 21.4 36.0

Rio 12.5 8.6 12.0

SOUTH 22.1 15.1 17.7

NORTH EAST 42.2 29.0 13.6

NORTH WEai 19.5 13.0 10.5

//
South/Southeast total: % of total population; 58 GDP; $200bn
North/Northwest total: % of total population; 42 GDP; $63.5bn

Figure 1. Regional contrasts in Brazil. Source: Filnancial Times, 29 December, 1992.

modest country like South Korea is an ond section, I use a four-stage East Asian
example of the resource curse thesis. development model (based on resource-
Resource curse refers to the process by deficient South Korea, Taiwan, and Japan)
which a bountiful natural resource endow- to demonstrate how the resource curse
ment proves a handicap to development works. I show why resource-rich countries
rather than a blessing. Evidence that tend to deviate from the more constrained
well-endowed countries underperform is policies associated with the East Asian
emerging from studies of the mineral- model. The third section traces the slow
exporting countries (Nankani 1979; Auty maturation (that is, the slow, achievement of
1993a), including those exporting oil global levels of technology and competitive-
(Gelb 1988), as well as the newly industri- ness) of manufacturing subsectors in Brazil
alizing countries (Auty 1994a). But some
compared to South Korea and explains it
caution regarding the resource curse using steel and auto assembly as examples.
thesis is in order. First, it is not a The penultimate section examines macro-
deterministic law, merely a strong ten-economic aspects, tracing the implications
dency. Two prominent exceptions areof slow industrial maturation for Brazil's eco-
resource-rich Indonesia and Malaysia,nomic performance. The concluding sec-
whose success is explained elsewheretion summarizes the policy implications, in-
(Auty 1994b). Second, focusing on a singlecluding some concerning the role of regional
causal factor like the resource endowment policy and of the Amazon region in partic-
necessarily understates the role of other ular, for Brazilian development.
significant factors, like the benefits of
early universal primary education and Development Models: East Asian
land reform in South Korea. Versus Autarkic
In this paper, I apply the resource curse
thesis to explain the decelerating pace of The East Asian Development Model
postwar Brazilian development and to sug- Paul Kuznets (1988) developed a four-
gest some policy implications. In the sec- stage East Asian developmenit model,

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 THE RESOURCE CURSE THESIS 259

with particular reference to the experi- tion of much of the labor force into pro-
ence of Japan, South Korea, and Taiwan. ductive employment is one of two neces-
The first stage is one of initial import sary prerequisites for the elimination of
substitution, supported by transfers (sub- poverty and for greater income equality
sidies) from agriculture or foreign aid. (Squire 1993). The second prerequisite is
This stage is quickly abandoned in the the supply of resources to assist the poor-
resource-deficient countries upon which est in society (mainly through the early
the East Asian development model is provision of universal primary education
based, because the industry which results and basic health care, as well as land re-
is uncompetitive and does not use scarce form).
capital resources efficiently. Such a slow- The unusually low income inequality of
maturing manufacturing sector places an Taiwan (where inequality fell steadily as
excessive burden on the primary sector per capita income rose) and South Korea
(that is, the natural resource base) for (where inequality also fell prior to the HCI
transfers and foreign exchange, which a Big Push (Chowdhury and Islam 1993))
resource-deficient economy cannot sus- casts doubt on the widely accepted con-
tain for very long. clusion of Simon Kuznets that growing
The second stage of the East Asian income inequality is an inevitable conse-
model combines orthodox macroeconomic quence of economic development (William-
policy with a competitive industrial policy son 1965). Rising inequality is not inevita-
that provides incentives to encourage ble, but it is strongly associated with the
labor-intensive manufactured exports in policies adopted by the resource-rich coun-
line with the countries' comparative ad- tries of Latin America and sub-Saharan Af-
vantage. The utility of an orthodox policy rica (Sachs 1989). This finding has impor-
is a robust conclusion that finds support in tant implications for regional policy, which
a wide range of studies, including Balassa are considered in the paper's conclusion.
(1985), Ranis and Mahmood (1992), Sachs The turning point heralds the third
(1985), and the World Bank (1993). At the stage of the East Asian model, when labor
core of orthodox policy is a twin comllit- shortages cause wages to rise (even under
ment to medium-term fiscal balance and a conditions of labor repression). The labor
competitive exchange rate. The first com- shortages increasingly force manufactur-
mitment prevents the cumulation of fiscal ers to switch to capital- and skill-intensive
deficits (which become inflationary and heavy and chemical industry (HCI) in
distort investment). The second coimmit- order to raise worker productivity and
ment ensures that competitive export thereby accommodate higher wages.
diversification occurs (a key feature of Many developing country governments,
Indonesia and Malaysia (Auty 1994b)). including the resource-deficient Asian
Colmpetitive diversification ensures that ones pursuing orthodox macroeconomic
key import requirements can be mnet and policies, intensified their industrial poli-
enhances resilience to external economic cies during the drive to HCI by targeting
shocks. strategic industrial sectors for infant in-
Such policies, if consistently pursued, not dustry support. There is as yet, however,
only trigger rapid economic growth, they no definitive proof that such increased
also bring relatively equitable growth. This state intervention was beneficial, despite
is because they cause light manufacturing the plausible case made for it by Amsden
to expand rapidly so that surplus labor is (1989) with reference to South Korea and
quickly absorbed from rural areas. In both by Wade (1990) with reference to Taiwan.
Taiwan and South Korea the labor market For example, Ranis and Mahmood (1992)
turning point (when labor becomes rela- and the World Bank (1993) conclude that,
tively scarce and Nages begin to rise) oc- at best, a competitive industrial policy like
curred within a decade of the adoption of that of South Korea and Taiwan may be
export-oriented policies. The rapid absorp- neutral and that their rapid GDP growth

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260 ECONOMIC GEOGRAPHY

is mainly explained by sound (orthodox) would otherwise be the case. Both South
macro management. Korea and Brazil accelerated their HCI
The controversial policy of sectoral Drives into Big Pushes (Table 1).
targeting uses special incentives, such as Yet, despite theoretical arguments in
cheap loans, tax breaks, and import favor of a Big Push (Murphy et al. 1989),
protection. In the East Asian model, empirical evidence (Auty 1990) shows that
however, such incentives are tapered as it strains domestic implementation capac-
part of a competitive industrial policy ity (so that its demand for skilled labor
which maintains pressure for rapid sec- and capital outstrips domestic supplies).
toral maturation. This tapering aims to This breach of implementation capacity
prevent the capture of industrial policy by triggers inflation, which eventually re-
those who benefit most from the rents quires deflation in order to stabilize the
(returns in excess of those required economy, a move which depresses eco-
by an
efficient producer) that such a policynomic growth and may spiral out of
creates. control if macroeconomic policy is not
The third stage (HCI Drive) mayrigorous.
be
pursued as an HCI Big Push (Rosenstein- The HCI Big Push imposes a distinctive
Rodan 1943). A Big Push seeks to three-stage sequence onto economic per-
maximize the economies of scale through formance, comprising (1) an HCI con-
simultaneous entry into several HCI struction boom that generates macroeco-
sectors which have complementary de- nomic imbalances which, after four or five
mand. For example, a steel mill is years, lead to (2) a slowdown in GDP for
established along with downstream steel- two or three years (as the deflationary
consuming industries like auto assembly policies adopted to stabilize the economy
so that all the new plants can be larger, bite), which depresses HCI capacity use
and therefore more competitive, than and viability, but is followed by (3) an

Table 1

Three HCI Big Push Sequences, Brazil and South Korea

1 2 3

Stage Pre-push Construction Stabilization Rebound

South Korea late 70s push
Time period 1968-73 1974-78 1979-83 1984-88
GDP growth (%/yr) 10.0 8.7 5.2 9.7
Inflation (%/yr) 15.6 22.6 14.2 4.2
Fiscal gap (%/GDP) (1.7) (1.9) (2.6) (0.1)
Current account gap (%/GDP) (5.6) (4.9) (5.7) 3.4
Brazil late 50s push
Time period 1951-55 1956-60 1961-67 1968-73
GDP growth (%/yr) 6.7 8.1 4.6 11.2
Inflation (%/yr) 16.1 21.8 53.7 21.0
Fiscal gap (%/GDP) n.a. (2.4) (3.5) (0.5)
Current account gap (%/GDP) 1.3 (1.1) (0.3) (2.2)
Brazil late 70s push
Time period 1968-73 1974-79 1980-84 1985-88
GDP growth (%/yr) 11.2 5.5 1.5 4.7
Inflation (%/yr) 21.0 41.4 132.1 317.8
Fiscal gap (%/GDP) (0.5) (1.5) (3.0) (12.4)
Current account gap (%/GDP) (2.2) (4.9) (3.8) (0.3)
Sources: Korea: World Bank (1989). Brazil: VWo-ld Bank (1
and Baer (1989).

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 THE RESOURCE CURSE THESIS 261

economic rebound (provided stabilization tries of Latin America and sub-Saharan

has been successful) as hitherto excess Africa and also with the large market-rich,
HCI capacity is finally activated. An HCI low-income Asian countries, notably India
Big Push is therefore risky, even when it and Maoist China. It draws on structural-
is implemented within a well-managed ist macroeconomic policies, which set a
economy which can quickly achieve eco- lower priority on fiscal and current
nomic stabilization, like that of South account prudence than orthodox policies
Korea (Auty 1992). In less well managed do (Table 3). Structuralist policy stresses
economies, stabilization is protracted and state intervention through (1) incentives
economic growth is severely retarded, as to speed the restructuring of the economy
is shown for Brazil below.
away from primary product exports (Preb-
The final (fourth) stage in the East
isch 1962 [1950]); and (2) public spending
Asian development model involves rapid
to stimulate domestic demand for locally
trade and industrial policy liberalization
produced goods (Furtado 1976). Within
in response to the increasingly complex
this looser macro framework, the structur-
nature of the economy. State intervention
is reduced and is concentrated on the alists favor an autarkic industrial policy,
correction of market failures through the which stresses domestic production and
provision of infrastructure, the upgrading provides infant industries with more
generous incentives than the East Asian
of labor skills, and the supply of incentives
for research and development. model's competitive industrial policy.
Overall, the rapid and equitable eco- Large resource- and market-rich coun-
tries like Brazil and Mexico have been
nomic growth generated by the four-stage
East Asian development model trans-tempted to seek especially high levels of
formed resource-deficient, low-incomeindustrial self-sufficiency by the size of
East Asian countries like Taiwan and their domestic market (which promises
South Korea (Table 2) into newly industri- the early capture of economies of scale).
alized countries within little more than a Moreover, the rents from their primary
generation. sectors appear to remove the foreign
exchange constraint on slows industrial
maturation which the market-lnodest,
The Autarkic Development Model resource-deficient countries face. Basi-
The autarkic development model is cally, the resource-rich countries (includ-
associated with the resource-rich coun- ing those which lack large domestic

Table 2

Investment Efficiency and GDP Growth by Policy Phase, Taiwan and South Korea

Competitive Industrial Policy

Policy Phase Autarkic Industrial Policy Export-led HCI-driven Liberalized

Dates: Taiwan 1950-58 1959-71 1972-81 1982-91
South Korea 1952-62 1963-73 1974-82 1983-91

Investment (% GDP)
Taiwan 12.2 17.2 27.4 21.4
South Korea n.a. 19.9 29.1 30.9
Incremental capital output ratio
Taiwan 1.5 1.8 3.0 2.6
South Korea n.a. 1.9 4.1 3.0
GDP growth (%/yr)
Taiwan 7.9 9.5 9.1 8.2
South Korea n.a. 10.4 7.1 10.2

Source: Auty (1994a, 17).

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262 ECONOMIC GEOGRAPHY

Table 3

Features of Competitive and Autarkic Industrial Policy

Competitive Autarkic

Industrial policy
Market impact Market-conforming Market usurping
Incentives duration Tapered off Renewed
Economy openness High Low
Sectoral targeting Sequenced HCI Most HCI
Macro policy
Overall stance Pragmatic orthodoxy Structuralist
Budget balance Tight Deficit accumulation
Exchange rate Competitive Overvalued
Some policy outcomes
HCI maturation rate 5-10 years Decades
Non-HCI viability Strong Weak
Foreign exchange Unconstrained Constrained

Turning point Rapid arrival Delayed arrival

Income distribution Equitable Skewed

GDP growth rate High Modest

GDP sustainability High Erratic
Inflation Moderate High

markets, like most mineral economies) into new industrial sectors than are
leapfrog the labor-intensive second stage competitive industrial policies, so that
of the East Asian model (Mahon 1992). As maturation of the new sectors is exces-
a result, a policy option which is rendered sively lengthy. Under autarkic policies,
more feasible by a rich natural resource industrial maturation takes several de-
endowment has five adverse and cumula-
cades, as opposed to the five to eight years
tive consequences for economic develop- that orthodox economics suggests is the
ment.
maximum allowable if the discounted
First, the overly optimistic projection of
benefits of the matured industry are to
development prospects engendered by compensate
a for the discounted costs in-
rich resource endowment encourages the
curred during the infant protection phase
pursuit of more lax macro policies than
(Kreuger and Tuncer 1982).
appears prudent under more straitened
circumstances. Such lax policies include
Third, such lengthy maturation en-
public spending, which outstrips revenues trenches vested interests which capture
the
and is inflationary; exchange rate overval- rents. The longer such rent-seeking
uation, which leads to trade imbalances groups are tolerated, the greater becomes
and the rapid accumulation of foreign their capacity to resist reforms aimed at
opening
debt; and levels of state intervention that the economy up to international
cumulate and severely distort efficiency competition. This is the process of policy
incentives. Gelb, Knight, and Sabot (1991)capture.
Fourth, the expansion of a slow-
show,with reference to sub-Saharan Afri-
can examples, that the adoption of lax
maturing manufacturing sector becomes
policies can depress the economy-wide
an increasing burden on the primary
efficiency of investment below the level
sector, whose relative size automatically
required to sustain rising per capitashrinks as development proceeds and
income within little more than a decade. urban-oriented activities become domi-
Second, autarkic industrial policies are nant. The result tends to be recurrent
more likely to encourage premature entry fiscal and current account deficits, which

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 THE RESOURCE CURSE THESIS 263

cause economic growth to become both source endowment is taken in terms of

more erratic and slower. looser macro and industrial policies. The
Fifth, by leapfrogging the labor-inten- second (labor-intensive export) stage of
sive second stage of the East Asian the East Asian model is leapfrogged. This
development model, the labor market results in tardy industrial maturation and
turning point is delayed. Under the increasing income inequality. By the time
autarkic development model, this post- the economic and social costs of this
ponement concentrates the benefits of policy are realized, the vested interests
industrialization on employers and a which benefit from autarky create a
unionized labor aristocracy in the pro- formidable obstacle to its reform. The rest
tected manufacturing sector. A corollary is of this paper explores the divergence of
that large numbers of workers are margin- Brazil from the East Asian development
alized in both rural and urban areas. In model, beginning with the slow rate of
rural areas, population growth leads to the industrial maturation.
fragmentation of peasant farms, which in
the absence of land reform become too Brazil's Tardy HCI Maturation
small to generate the investment needed Brazil embarked on an HCI Drive
to raise productivity. The lack of such almost two decades before South Korea,
investment places increasing strain on the and its sectoral maturation rates exceeded
natural environment in the peasant sec- South Korean rates by several orders of
tor. Yet without the rapidly expanding, magnitude (Auty 1994c). This may be
labor-intensive manufacturing sector of shown with reference to the steel and
stage two, migration to the cities invari- auto assembly sectors, which are repre-
ably outstrips the provision of jobs and sentative of, respectively, capital-inten-
also of infrastructure. sive and skill-intensive HCI.
Ironically, even as economic growth
falters and income inequality widens, the Steel: Regression Following
opponents of orthodox reform cite the Premature Entry
short-term adverse effects of such reforms Brazil started integrated steel produc-
on the poor as a reason for adopting tion in 1944, but in order to maximize
alternative "growth-based" structuralist self-sufficiency (autarky) the first plant
solutions to economic problems. Such produced a wide product mix, at the cost
solutions usually entail populist booms, of running too many suboptimal mills. Yet
which are primed by high public spending when new capacity was sanctioned during
and invariably prove counterproductive the (President) Kubitschek Big Push of
(Sachs 1989; de Castro and Ronci 1991). 1956-60, instead of boosting the first plant
This is because the initial sharp rise in to a viable size, a multiplant expansion
real incomes caused by higher public was preferred. Brazil built two new
spending quickly uses up spare domestic integrated plants and expanded the first
productive capacity and triggers inflation plant only modestly. Brazil's simultaneous
and current account deficits, which re- plant expansions diluted the scale econo-
quire draconian deflation in order to mies, as well as technical and managerial
stabilize the economy. Sachs (1989) shows skills. The error was repeated in a second
that within four years of the initial expansion during the 1974-79 Big Push
stimulus of a populist boom incomes are (launched by President Geisel): the three
likely to have fallen below preboom existing mills were all expanded and two
levels, while the problems of public new mills were built. In contrast, South
finance deficits and foreign debt have Korea rapidly expanded its first plant to
become even more intractable. world-scale size between 1973 and 1981
Recapping, the basic sequence under before building a second plant.
the autarkic development model is one in One consequence of this is that, al-
which the advantage of a favorable re- though Brazilian steel output grew as fast

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264 ECONOMIC GEOGRAPHY

as that of South Korea, the Brazilian such as shipbuilding and automobile

plants remained relatively small and
assembly (Ministerio da Viacao 1957).
uncompetitive 40 years after the first Automobile assembly was encouraged
plant started up. The South Korean plant through a package of import duty rebates,
became a world leader in less than eight favorable tax treatment, and a highly
years. Whereas South Korea deployed its protected domestic market. Although pro-
cheap labor to build steel capacity one- duction expanded rapidly to 75,000 units
third cheaper than Japan, a new Brazilian by 1962, that was far below the level
plant cost between 30 and 200 percent needed for one assembler to capture the
more than that of the industrial countries economies of scale (Lucke 1988), let alone
(Guerra 1989). High construction costs the five firms which the government had
meant high capital service charges. In licensed.
addition, excess capacity in Brazil led to Brazil's automobile sector had a dualis-
low capacity use and low productivity, tic structure, comprising a potentially
further sapping competitiveness. modern sector dominated by MNCs to-
The expansion during the Geisel Big gether with a few domestic firms capable
Push was intended to complete steel of emulating international standards (in
maturation and finally remove the need components) and a lagging sector of
for high tariff protection (World Bank inefficient local firms which required high
1975). It planned to cut the labor input levels of protection in order to survive.
per tonne of steel by more than half, to 16 The high cost of components meant that
man-hours per tonne (on a par with West even an efficient assembler needed high
Germany and only slightly behind Japan). levels of protection. Only Volkswagon
But the Geisel Big Push was overambi- (VW) made profits in the mid-1960s
tious and incurred delays and sizable cost (World Bank 1983), but even its costs
overruns. When the Brazilian economy were 15 percent above competitive world
abruptly deteriorated in the early 1980s levels (Bergsman 1970).
the mills faced a depressed domestic Bergsman (1970) argues that Brazil's
market with insufficient revenue to com- auto sector could have matured by the
plete their expansion and service the late 1960s, a decade after assembly started
debt. None of Brazil's plant expansions and as fast as South Korea. To do this it
justified the capital invested (Carvalho needed to shut down all but two assemlbly
1988). In spite of a sharp growth in steel firms, each producing one model. For
exports to one-third of output in 1981-85, example, the long production runs of VW
the exports were unprofitable and the in Brazil, the largest assembler, already
foreign debt of the steel sector alone pushed it close to European Commlunity
reached U.S.$15 billion (one-seventh the (EC) levels of competitiveness and techni-
national total) in 1986. Brazil therefore cal efficiency. VW could halve the gap
still lacked a mature steel plant 40 years
with the EC by relaxing domestic content
after commencing integrated production,requirements from the 95 percent level
whereas the South Korean industrial demanded under the government's au-
policy, which stressed international com-
tarkic policy (too high to allow low-cost
petitiveness from the outset, matured assembly)
that to 80 percent and importing
country's steel sector in less than eight
body parts and power trains. But the
years. policy was unreformed, so that the other
(suboptimal) assemblers survived in a
Automobiles: Regression through protected market while VW earned exces-
Protracted Protection sive rents, as reflected in its high internal
rate of return.
The 1956-60 Kubitschek Big Push As with steel, the Brazilian automobile
combined an expansion of steel with sector regressed in the 1980s when
growth in downstream consuming sectors domestic demand collapsed. Autolatina

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 THE RESOURCE CURSE THESIS 265

(1988) estimated that the sector was then which grew7 fourfold in that decade and
at least five years away from international outstripped the Brazilian market.
competitiveness. Yet high levels of pro-
tection persisted and discouraged techni- Tardy Maturation and Export Weakness
cal innovation. The suboptimally sized
auto assemblers extended the life of their Brazil's tardy industrial maturation was
models (with consequent aging of technol- associated with a closing of its economy
ogy) to offset relatively short production that adversely affected its capacity to cope
runs. By the late 1980s the average with external shocks. In fact, Brazil had
Brazilian car design was 11 years old, begun moving toward greater autarky
compared with 4.5 years in the Organiza-during the period of enforced import
tion for Economic Cooperation and De- substitution of the 1930s recession. The
velopment (OECD) and South Korea share of exports in GDP fell from 29
(Ferro 1989). Brazilian productivity was percent in 1929 to only 9.2 percent in
half that of the United States and Japan 1950 (Simonsen 1988a). But the Ku-
and below newly industrializing country bitschek Big Push then took the level
(NIC) competitors, and the sector re- down to 5.3 percent by 1960 (IBGE 1989),
mained uncompetitive (Table 4). a rate that was less than half the Syrquin
In contrast to Brazil, South Korea and Chenery (1989) norm for a large
targeted auto assembly almost two de- country (Perkins and Syrquin 1989). The
cades later. This was still too early, norms are based on data covering the
because domestic demand was to remain postwar economic performance of more
below the level required to support a than one hundred countries. Although
viable producer for another decade. Yet Brazil's export ratio did recover to 8.1
by the mid-1980s the largest firm, Hyun- percent under the partial reform of the
dai, had captured a respectable share of "Economic Miracle," it declined again
the North American market. To do so, it under the Geisel Big Push.
initially subsidized exports from high- Within this relatively small export
margin sales on the protected domlestic subsector, resource-based exports still
market. But by the late 1980s, Hyundai accounted for 82 percent of all Brazilian
and two other Korean assemblers were exports in 1980. At that time, Brazil's HCI
able to operate above the minimal viableexports were less than 2 percent of GDP
size largely on the basis of domestic sales, and less than one-fifth of total exports,

Table 4

U.S. Market Competitiveness of Auto Production ($s U.S.)

Japan Korea Brazil Brazil Spain U.S.

Cost Mazda Excel Fox Escort Escort Escort

Variable
In-house 1,950 n.a. 875 950 1,300 2,050
Local purchase 2,075 n.a. 3,275 3,675 3,750 2,075
Import 600 n.a. 1,675 1,050 - 600
Subtotal 4,600 3,950 5,825 5,675 5,050 4,725
Fixed Cost 1,200 1,300 1,025 1,225 1,559 1,925
Total ex-factory 5,800 5,250 6,850 6,900 6,620 6,650
Cash industries - - (720) (825) - -
Freight and duty to U.S. 640 625 425 425 525 -
Distribution 375 375 375 375 375 375
Warranty 125 250 275 275 250 250
Total landed cost 6,959 6,500 7,175 7,150 7,750 7,250

Source: Autolatina (1988).

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266 EC(NMIC GE()OGRAPHY

whereas South Korean HCI exports wer

13.6 percent of GDP and half total 19
exports. Such tardy industrial maturatio
heightened Brazil's reliance on the p
mary sector for foreign exchange (as
shown by the high share of resource-
based exports in total exports noted 1987).
above). Yet the share of the primary The Big Pushes transformed the struc-
sector in GDP declined at a rate faster ture of the Brazilian economy. HCI at first
than the Syrquin and Chenery norms lagged behind the Syrquin and Chenery
predict, shrinking to barely two-fifths of (1989) norm, but the Kubitschek Big Push
the norm by 1970. This premature shrink- closed the gap, and by 1970 the share of
age was caused by the persistent bias Brazilian manufacturing in GDP was 50
against the primary sector (and exports) percent above the norm, with HCI
under an autarkic development policy. responsible for most of this extra share.
This combination of slow HCI matura- But the rate of expansion slowed through
tion and rapid shrinkage of the primary the next decade and faltered in the early
sector prevented Brazil from exporting its 1980s. Brazilian per capita GDP growth
way out of the 1980s debt crisis. Despite reflected these trends. At first it was
levels of foreign debt (relative to GDP) impressive: per capita GDP doubled in
and of recession in the early 1980s similar 1950-70 in real terms and almost doubled
to Brazil, South Korea did succeed in again through the 1970s. But economic
stabilizing its economy and in resuming growth actually decelerated sharply
rapid economic growth (Tables 1 and 2). through the 1970s, as the "Economic
This owed much to a combination of Miracle" stalled, and grew much more
astute orthodox macro management and slowly in the 1980s.
the rapid maturation of South Korea's
manufacturing sector, which was able to The Kubitschek Big Push Cycle
export and generate the foreign exchange
to service the debt (Sachs 1985). The manufacturing growth rate ex-
Summarizing, Brazil's autarkic policy ceeded 10 percent during the Kubitschek
stressed industrial self-sufficiency at the ex- Big Push of 1956-60 compared with 7.9
pense of both technical efficiency and com- percent during the previous five years
petitiveness. Brazilian infant industry sup- (IBGE 1987), and drove GDP growth
port was not time-constrained like that of (Table 1). Industrial self-sufficiency also
South Korea, but tended to be extended. rose: the share of imports in capital goods
The excessively high and prolonged protec- consumption declined from 59 to 13
tion of the HCI sector that resulted re- percent between 1955 and 1962 (Teitel
duced the incentive for producers to reach and Thoumi 1986). But the investment
world standards. Whereas the maturation demands of the Big Push outstripped the
rates for South Korean steel and car assem- resources of local financial, capital goods,
bly are less than eight and ten years respec- and labor markets, triggering fiscal and
tively, those for Brazil are orders of magni- trade gaps (Anglade 1985).
tude greater. The lengthy Brazilian The government responded to the fiscal
maturation rates had a cumulative adverse gap by expanding the money supply, and
impact on the country's economic growth. inflation jumped from 12 percent to 53
percent on a sharply rising trend. Its
Deteriorating Macroeconomic response was tardy. Economic stabiliza-
Performance tion was protracted (seven years com-
.P~erf ormance^^ ^pared with four for South Korea af
Table 1 summarizes the main phases in Big Push), so that the HCI reb
postwar Brazilian economic growth, iden- strongly lagged (Table 1). T

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 TIHE RESOURCE CURSE THESIS 267

response reflected the inability of Ku- Kubitschek Push and 3.6 during the
bitschek's two civilian successors to pur- 1961-67 stabilization phase (Balassa 1981).
sue a coherent policy (de Castro and But the low ICOR and rapid growth
Ronci 1991). partly reflected the use of spare manufac-
Economic growth almost halved in turing capacity from the 1963-67 slow-
1961-67 after more than a decade during down ("Brazil" 1987). Moreover, the
which it averaged 7 percent. Per capita effective protection rate was still 47
income grew by barely 1 percent. The percent for the manufacturing sector in
economic slowdown led to spare HCI the late 1960s and sizable export subsidies
capacity: usage rates dropped to 60 were required to counter the attraction of
percent in the capital goods sector and as production for the protected domestic
low as 30 percent in heavy engineering market (Griffin 1989).
(Castro Andrade 1982). As HCI profitabil-
ity fell, levels of tariff protection rose even The Geisel Big Push Cycle
higher than in the Big Push construction
stage, rather than shrinking as required The military governments did not push
by infant industry policy (Bergsman 1970). reform of the autarkic policy far enough.
The effective protection rate (which mea- Three problems persisted: widening in-
sures the level of protection relative to come inequality, the rapid expansion of
value added, rather than to total cost) rose state intervention, and the foreign ex-
from a high of 171 percent in 1958 to a change constraint. All three problems
remarkable 276 percent in 1963 (Levy became intractable through the 1970s as
1989). Brazilian manufacturers therefore the military government grew more con-
had even less incentive to become glob- ciliatory in the face of understandably
ally competitive. Yet traditional (primary) mounting concern over income polariza-
exports were discouraged by an overvalu- tion and pressure for the restoration of
ation of the exchange rate. democracy (Baer 1989).
The drift into autarkic policy was Income polarization led to a risky
reversed by the military regimes that held "growth-based" response to the 1973 oil
office between 1964 and 1974. Freed from shock. Instead of deflating the economy in
immediate electoral pressures, the Cast- order to shift production from domestic
ello Branco government (1964-67) deval- demand to exports to pay for more
ued the exchange rate, implemented expensive oil, Brazil chose to sustain GDP
financial reform, and cut public expendi- growth by borrowing from abroad. For-
ture. Three years of austerity and stabili- eign investment could only be justified if
zation in 1964-67 laid the basis for the it was effectively deployed in foreign
"Economic Miracle," during which export exchange-generating activity. But the
promotion was given greater priority than Geisel Big Push was largely designed to
hitherto through new fiscal and financialmake the country almost self-sufficient by
incentives for exporters. 1979 (Balassa 1981), targeting petrochem-
Brazilian industrial output grew at 13 icals, fertilizer, pulp, steel, nonferrous
percent annually during the "Economic metals, and capital goods for the domestic
Miracle" of 1968-73, propelling the econ-market.
omy along at 11 percent. The HCI Drive The second underlying problem, the
continued, but not as a concerted Big growth in the role of state-owned firms,
Push. The rate and productivity of invest- was not a serious one before the mid-
ment improved: the incremental capital 1970s. But as the state enterprises ex-
output ratio (ICOR, which measures how panded through the Geisel Big Push their
many incremental inputs of capital are finances deteriorated sharply and their
required to produce an extra unit of efficiency of capital use more than halved
output) averaged an impressive 1.7 in the (Trebat 1983). Although they held half the
early 1970s compared with 2.5 during thenet assets of the top 8,000 Brazilian firms

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268 ECONOMIC GEOGRAPHY

in 1981, state firms generated only 25 1984). The discredited military proved
percent of sales (Griffin 1989). Not sur- unable to restore economic equilibrium.
prisingly, given the dominance of the Instead of adopting the relatively ortho-
increasingly inefficient state firms, the dox measures of an exchange rate depre-
economy-wide efficiency with which capi- ciation and lower protection, as in the
tal was invested declined. The ICOR fell mid-1960s, the government retreated into
from 1.7 during the last years of the even greater import controls.
"Economic Miracle" to 3.8 in 1973-79 to The politically weak Sarney regime
12.0 in 1979-82 (Balassa 1985). finally triggered an HCI rebound in the
Low investment efficiency and slow
mid-1980s, but it proved short-lived be-
HCI maturation meant that, in contrast tocause it was engineered by a populist
South Korea, Brazil did not expand its
boom designed to allow Brazil to "grow
capacity to generate foreign exchange fastout" of its economic difficulties. Real
enough to service its debt. The foreignwages rose by 16 percent in the first two
debt quintupled from the early 1970s toyears of the plan, and the surge in
$70.6 billion in 1980. Brazil's debt servicedemand raised manufacturing capacity
use from 75 to 100 percent ("Brazil"
was a very different order of magnitude to
that which South Korea faced when the
1987). As a result, the rate of inflation
debt crisis struck. South Korean debt
accelerated toward 700 percent, causing
service in 1981 was a manageable 19
an exchange rate appreciation that curbed
percent of export earnings, compared
exports and sapped debt service capacity.
with 66 percent for Brazil (Table 5).
Real wages fell by 27 percent in 1987,
Whereas South Korea stabilized its econ- more than offsetting the earlier rise, and
omy in 1979-81 and resumed rapid investment fell as confidence in the
export-led growth after a brief slowdown economy evaporated. Although the ICOR
(Table 1), Brazil was not consistent in itsrecovered, it averaged 5 in 1982-88
policy (Bacha 1986; Enders and Mattione(IBGE 1989), which is barely half as

Table 5

Balance of Payment Impacts of External Stocks and Policy Response

Policy Responses to External Stock

External Stock Added Net Export Import
(%GDP) Foreign Finance Promotion Substitution Deflation
1974-78
Brazil -3.3 30 15 66 -11
South
Korea -10.5 -88 90 128 -30
1978-81
Brazil -2.5 -33 38 49 47
SouthKorea -9.4 -18 -7 8 116

Memo Item: External Debt Ratios

External Debt/Exports Debt Service/Exports

1973 1978 1981 1987 1973 1978 1981 1987
Brazil 209 368 278 282 35 66 66 87
South Korea 123 100 103 67 21 16 19 15

Export/GDP Ratios
1963 1973 1981 1987
Brazil 5.7 12.8 8.5 3.8
South Korea 2.3 24.2 30.8 25.9

Source: Balassa (1989).

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 THE RESOURCE CURSE THESIS 269

efficient as the South Korean ICOR autarky in 1964-73 is associated with the
during its HCI rebound. "Economic Miracle." But the subsequent
policy reversal damaged economic perfor-
Simonsen (1988b) argues that Sarney un-
derestimated the need to switch from for-
mance in a compounding fashion through
the 1970s and 1980s. The Geisel Big Push
eign to domestic financing after the debt
lacked a sustained HCI rebound, and
crisis. His basic diagnosis applies to the
Brazil's slow-maturing manufacturing sec-
Brazilian economy throughout its postwar
autarkic development phase: slow-matur- tor failed to generate the resources
ing, domestically oriented HCI requires required to service the debt and support
economic recovery. Brazilian industry,
domestic financing. But better still to have
followed the export-oriented East Asianwhich
de- had lagged behind world standards
velopment model and achieved faster for sec-competitiveness and technology, re-
gressed in the 1980s. A negative synergy
toral maturation and sustained rapid eco-
nomic growth. developed between the diverging de-
mands of the protected HCI (for transfers
Conclusion and a closed economy) and prudent
macroeconomic management (for fiscal
Like many resource-rich countries, Bra- balance and a competitive exchange rate/
zil leapfrogged the second stage of the East open economy). In this way a rich
Asian development model, in which light resource endowment proved a curse
industry diversifies exports and absorbs sur- rather than a blessing.
plus labor. Instead, Brazil accelerated its The regional policy implications of the
HCI Drive through Big Pushes pursued autarkic development model have hith-
within the context of an autarkic develop- erto been largely ignored (Storper 1991).
ment policy. This resulted in slow indus- The emphasis on HCI for domestic
trial maturation, so that as per capita in- demand favors capital-intensive industry
come rose and the export-generating located near the major market. This
primary sector shrank in relative size, for- conflicts with the strong potential compar-
eign exchange and government revenues ative advantage in labor-intensive, export-
became constrained because the expand- oriented manufacturing of lagging regions
ing manufacturing sector depended exces- like northeast Brazil. But the use of
sively on tariff protection and transfers. Yet regional policy to correct such flawed
policy reform was then blocked by rent- macroeconomic policy is likely to fail for
seeking groups in the protected urban- two main reasons. First, regional policy is
industrial sector. too weak to counter the much stronger
There is evidence that even the com- macroeconomic forces which, under au-
petitive industrial policies of South Korea tarkic policies, work against the lagging
region. Second, regional policies often
led to some policy capture, despite efforts
to retain incentives to mature (Auty involve capital-intensive projects (Katz-
1993b). The benefits of sectoral targeting man 1977), like the Camacari petrochem-
now seem likely to be limited and difficult ical growth pole in Bahia. The latter drew
to secure. For example, the initial support upon southern capital to produce prod-
for strong intervention policies like sec- ucts for processing and sale in southern
toral targeting, which the new strategic markets with minimal local linkages. In
trade theory appeared to promise during the context of the resource curse thesis,
the 1980s, has recently been sharply Brazilian regional policy has been used to
qualified (Krugman 1993). Such interven- buy off disadvantaged groups and post-
tion is now thought not worth the risk of pone the required fundamental macroeco-
retaliation from aggrieved trading part- nomic and industrial policy reform.
ners, which would jeopardize the undis- The exploitation of the Amazon reflects
puted net gains from free trade. a similar process of a flawed regional
In the case of Brazil, the shift away from policy response to basic macro policy

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270 ECONO(MIC GE()OGRAPHY

errors. First, pressure for land redistribu- Autv, R. M. 1990. Resoturce-based industrial-
tion in favor of peasant farmers in eastern ization: Sowing the oil in eight developing
coluntries. Oxford: Clarendon Press.
Brazil was deflated by promoting migra-
tion into the "empty" frontier region. This . 1992. The macro impact of the Korean
is an environmentally destructive process HCI Big Push re-evaluated. Jotlrnal of
Developmlent Studies 29:24-48.
which was given added impetus by a . 1993a. Sustaining development in
series of incentives that transformed
mineral economies: The resource ct rse
socially unprofitable investments in thatthesis. London: Routledge.
region into privately profitable ones 19931. Auto-assemblv in mid-sized
(Binswanger 1991). Second, instead ofNIEs: Market structure and competition
deepening industrial policy reforms in policy. Paper presented at the Korean
order to hasten HCI maturation and Institute for Industrial Economics and Trade
(KIET) Seminar on the Automotive Indus-
diversify industrial exports, the Geisel
try, Seoul.
government reacted to the first oil shock
mainly by boosting import substitution, 1994a. Industrial policy reform in six
large nevwl industrializing countries: The
which included investing in Amazonian
resource curse thesis. World Develop,ment
growth poles to substitute hydro for oil
22:11-26.
and also to generate exports of minerals . 1994b. Patterns of developmeent: Re-
and resource-based products like alumin-
sources, policy and economic growth. Lon-
ium (Braz-Pereira 1988). don: Edward Arnold.
In this way, regional policy in the . 1994c. Econom1ic developmaent and
northeast and Amazonia has been used to industrial policy. London: Mansell.
dampen pressure for reform of the flawed Bacha, E. L. 1986. External shocks and growth
autarkic development strategy and prospects: Case of Brazil. World Develop-
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Baer, W. 1989. The Brazilian economy. New
provide an alternative to required funda-
York: Praeger.
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Amazon have compounded the resource World Development 7:1023-42.
curse effect in eastern Brazil. Yet the
1981. Policy responses to external
success of resource-deficient, market- shocks in selected Latin American countries.
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Brazil did not need to exploit the Amazon ness 21:131-64.
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