SUNS  4360  Tuesday  26  January  1999

Rio de Janeiro, Jan 22 (IPS/Mario Osava) -- The over 40% devaluation of Brazil's real has forced the local economy to shift course fast, in some areas back toward an import substitution model.

Sectors like the footwear industry and agriculture are keen on recuperating the levels of exports lost in the past few years of an overvalued currency.

For the footwear industry, the aim is to stage a return to 1993 levels, when it exported 201 million pairs for $1.8 billion. In 1998, the industry only exported 130 million pairs, for $1.3 billion, according to the association of the Brazilian footwear industry.

Other sectors not only saw their exports slump, but lost a chunk of the domestic market as well, due to the rapid opening of the market and the adverse exchange rate policy.

The case with the greatest influence on national development was that of manufacturing of machinery. That industry's imports rose threefold since 1993, its exports stagnated, and the number of wage-earners in the sector was cut in half, to 154,000.

>From 1993 to 1998, the sector's imports climbed from 2.62 to $8.4 billion, according to the Brazilian Association of the Machinery and Equipment Industries (Abimaq). In consequence, around 1,300 companies either went under, left the sector or became importers.

The devaluation of the Real, which has driven up the cost of exports, has brought the possibility of a return to the manufacturing of machines or parts to substitute foreign-made ones.

But former president of Abimaq Einar Kok said it would be very difficult to reconstruct the chain of production, because many companies have been dismantled.

Large machinery manufacturers, which have become dependent on imported parts, would face high costs until domestic production was reactivated, he said.

In 1980, at the height of the import substitution policy, imported machines had only a six percent share in the sector. By 1998, that proportion had climbed to 37 percent.

Domestic sales by Brazil's machinery industry stood at $14.29 billion last year - 5.6% down from 1997, and the lowest level seen this decade, according to Abimaq. Exports amounted to $3.7 billion, five percent below the previous year's total.

This year, the industry expects an up to 10% rise in exports. The exchange rate, "more realistic" than in the past, will boost the competitiveness of the sector, said Luis Carlos Delben Leite, president of Abimaq.

The recent devaluation of the Real will allow Brazil to reduce imports by $5.5 billion and increase exports by 4.5 billion, predicted Juarez Rizzieri, president of the University of Sao Paulo's Institute of Economic Research.

If such forecasts pan out, the country's $6.43 billion trade deficit will turn into a nearly four billion dollar surplus.

Textile factories and toy-makers have also been hit doubly hard by the external competition boosted by a Real strengthened by high interest rates, another negative factor.

Nevertheless, the current financial crisis and the transition toward a free floating currency could sink the economy, bringing a return of high inflation rates, as occurred in Asia, Mexico and Russia.

For that reason, interest rates will remain high, and economic recession will be experienced during at least the first half of the year.

According to Elcio Giacometti, president of the association of the local footwear industry, in order for Brazil to boost its exports in the context of today's heavy international competition, tax reforms must be added to the devaluation of the local currency.

Other business leaders also cite rigid labour legislation and the high costs and inefficiency of Brazil's ports as factors that drive up the cost of exportable products, making them uncompetitive.

Other industries, due to their high level of dependence on imported inputs, will also be hit hard by the new exchange rate. It will take manufacturers of electric and electronic goods, for example, three months simply to adjust to the new high prices of imports, said Benjamim Funari Netto, president of the sector's business association.

Last year, that sector's imports, which mainly consisted of parts, totalled $11.1 billion, compared to only $3.2 billion in exports.
The devaluation of the Real will drive up the sector's costs, thus curtailing sales both at home and abroad, as occurred in Asian countries that import large quantities of commodities.