According to a news report published on November 23, 2014 — “GM struggles with first Latin American slowdown in a decade” — Brazilian car sales have shrunk sharply during the year and will likely continue during the next. Production fell by 16.8 percent during the first half of 2014, causing Brazil to slip from being the fourth largest country for vehicle sales down to the fifth. The forecast of October 2015 predicts that by the end of this year automobile sales will decline 27.4 percent from 2014 and will not be expected to grow until the last quarter of 2016. The drop in the demand and production of automobiles is considered the worst in the past quarter century, prompting both automobile companies and the Brazilian government to take immediate actions to protect one of the most important industries in the country.
As a result, key automobile companies (e.g. Fiat Chrysler Automobiles, Volkswagen, GM and Ford) temporarily laid off 10 percent of its workforce in 2014 to reduce the cost of production. However, by the first half of 2015, 6,000 workers in the auto industries were permanently laid off, and another 20,000 were put on furlough. The Brazilian government set forth an extended tax break on car sales and created programs to help industries pay for workers’ salaries for a maximum of five months. In addition, a law was passed that allows banks to speed up the process of recovering cars from consumers in default.
What is apparent from the news article is that all government laws and policies implemented during the crisis focused intensely on aiding the automobile companies instead of assuring the wellbeing of the workers/consumers. Temporary salaries paid by the government will reduce production costs for the companies, but the workers remain at risk of being laid off after the five month period. Consequently, workers who purchased their cars through financing (which accounts for 65 percent of retail sales) now have a greater chance of defaulting on loans. The Brazilian government’s policy of focusing on a single industry at the cost of the wellbeing of the public began during the development of the automobile industry during import substitution industrialization (ISI) in the 1950s. During ISI, Latin American countries sought to promote domestic growth by isolating their economies from the international market through high tariffs on foreign imports. The policy gave rise to foreign-owned automobile industries within Latin America that, under high import tariffs, had no option but to move their production sectors into local markets. This resulted in a wave of new technologies and production strategies flowing into the region. For an economy that has been historically reliant on primary product exports, the rise of Brazil’s automobile industry solved the lack of forward and backward linkages, thereby stimulating overall economic growth. Backward linkages were associated with the need for raw materials such as steel, rubber, and glass during production; while forward linkages were associated with the demand for gasoline, service centers, and roads. Spillovers were significant: the growing automobile industry generated more job opportunities, more consumer demand, and a stronger economy. The industry has no doubt since become an important sector in the Brazilian economy.
The importance of the automobile industry helps explain why Brazil’s government policies during the current automobile crisis focus heavily on assisting the companies as opposed to individual workers/consumers during the time of crisis. The idea that maintaining growth of the country’s main manufacturing sector helps promote overall economic growth persisted in the 2014 automobile crisis. Government tax breaks, assistance on workers’ wage, and laws to alleviate pressure on banks in situations of consumer default were all put into place to keep car manufacturers interested in remaining in the economy. The problem of inequality resurfaces as the elites of the motor industry retain their wealth, while the majority of the country’s population continuously falls victim of the fluctuation in the market. Looking back to the1950s, although the growing automobile industry improved the economy and the living condition of the general population, the domestic automobile market was still limited to the elites, which limited the economies of scale for automobile company owners. Despite increasing budget deficits, the Brazilian government provided subsidies for every dollar invested giving manufacturers the incentive to invest and operate in the market. The neglect of institutional development increased inequality and constrained the Brazilian population to a life that became heavily reliant on the performance of the automobile industry.
The situation of the non-elite population during 1950s is still clearly visible today. An estimate in the Business Insider states that “every new job in the car industry generates 3.7 additional jobs elsewhere” through forward and backward linkages. As mentioned before, the spillover effect when the automobile industry performs well results in less underemployment, more demand, and a healthier economy. It is then reasonable to deduce that the continued decline in Brazil’s automobile industry will result in more unemployment, less demand, and a weaker economy. With many households just beginning to have the ability to purchase vehicles, and with as many as 65 percent of automobile purchases done through financing, the Brazilian government’s new financing law only serves to exacerbate the decline in aggregate demand and the increase in inequality as it did 50 years ago. The government should consider changing its focus away from the automobile industry.
The Brazilian government’s policies on providing political and financial support to the automobile industry during the current crisis may temporarily alleviate the issue, but such strategies did not prove effective in the past (as government subsidies increased deficit and encouraged debt-led growth) and are certainly not sustainable in the future of Brazil’s economic development. At the end of the day it is essentially the non-elite consumers who really determine domestic aggregate demand, and a fall in aggregate demand will negatively reflect back on the automobile industry. The government may continuously implement policies to “save” the automobile industry, but without parallel programs to improve the standard of living of the general population and expand its middle class, poor consumer demand will continuously backfire on all automobile-related industries, and government interventions will continuously be demanded.
References
Franko, Patrice M. "Chapter 3: Import Substitution Industrialization." The Puzzle of Latin American Economic Development. 3rd ed. Lanham: Rowman & Littlefield, 2007. Print.
Leahy, Joe. "GM Struggles with First Latin American Slowdown in a Decade." Financial Times. 23 Nov. 2014. Web. 22 Sept. 2015. Available at: http://www.ft.com/intl/cms/s/0/03559e76-70af-11e4-9129-00144feabdc0.html...
Lehman, Stan. "Auto Sales Plummet in Brazil, Hamstringing Key Industry." The Detroit News. 16 June 2015. Web. 20 Nov. 2015. Available at: http://www.detroitnews.com/story/business/autos/2015/06/16/auto-sales-pl...
Levine, Asher. "UPDATE 1-Brazil Auto Production Plunges Further in September." Reuters. Thomson Reuters, 6 Oct. 2015. Web. 20 Nov. 2015. Available at: http://www.reuters.com/article/2015/10/06/brazil-autos-idUSL1N1261572015...
"The Automotive Industry Is In A Major Crisis And It's Only Getting Worse." Business Insider. Business Insider, Inc, 17 May 2014. Web. 22 Sept. 2015. Available at: http://www.businessinsider.com/the-automotive-industry-is-in-a-major-cri...
