RETURN ToREPORTS r RESTRICTED

| WITH FILE Ct?X Report No. WH-210a

This report is for official use only by the Bank Group and specificaiy authorized organizationsor persons. It nay not be pubished, quoted or cited without Bank Group authorization. TheBank Group does not accept responsibility for the accuacy or completeness of the repwt.

INTERNATIONAL BANK FOR RECONSTRUCMON AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

CURRENT ECONOMIC POSITION

AND PROSPECTS

BRAZIL

(in four volumes)

VOLUME III

BRAZIL'S EXPORTS OF MANUFACTURES

November 30, 1971

South America Department

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CURRENCY EQUIVALENTS

Currency Unit: Cruzeiro. (Prior to May 15, 1970,the currency unit was called the"novo cruzeiro" or "new cruzeiro";the adjective was dropped in Maywithout any change in the value.)

Exchange Rates Effective November 9, 1971

Selling Rate: US$1.00 = Cr$5.636Buying Rate US$1.00 = Cr$5.600

Average Exchange Rates:1969 1970

US$1.00 = NCr$4.06 Cr$4,5941JS$1 million = NCr$4,050,000 Cr$4,594,000NCr$ million US$246,305 US$217,675

BRAZIL's EXPORTS OF MANUFACTURES 1/

CHAPTER I - RECENT TRENDS

1. Two trends characterize the development of Brazil's exports of man-nufactured products in the last decade:

(a) high and recently increasing annual growth rates;

(b) spreading diversification with regard to productsand countries.

A. Growth

2. Brazil's exports of manufactured products increased remarkably inthe last decade. Manufactured export growth averaged34.1 percent annuallythroughout 1960-70 reaching the extraordinary level of 50 percent in both1969 and 1970. The significance of this export expansion becomes clearer ifthese rates are compared with the percentage increase of other variables.

1/ There are several definitions of manufactured exports in trade statis-tics and documents:

A. Based on the Standard International Trade ClassificationAlternative 1: Classes 5, 6, 7, 8 and some other products of

classes 0 through 4. This definition is usedfor example, in UNCTAD-document TN/12/Suppl. 2.

Alternative 2: Classes 5, 6, 7 and 8. The GATT. - statisticsare based on this definition.

Alternative 3: Classes 5, 6, 7 and 8 without item 68 (no-iron-metals). This definition was used, for example,by UNCTAD in the Commodity Survey 1967.

B. Based on the Nomenclatura Brasileira de Mercadorias (NBM).Alternative 4: Classes 5, 6, 7, 8 and some other products of

classes 2 and 4. This is the normal definitionof the Carteira de Comercio Exterior (CACEX)since two years.

Alternative 5: Classes 5, 6, 7 and 8. This definition was usedin official Brazilian statistics till 1968.

Definition 4 (broad definition) and 5 (narrow definition) areused in this study.

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Table 1: AVERAGE OF ANNUAL GROWTH RATESOF MANUFACTURED EXPORTS, 1958-70

(in brackets the compounded growth rates) /e

Period1958-70 1960-70 1964-70 1968-70

Products

Brazil's Exports of ManufacturedProducts /a (US$), broad definition .. .. 33.3 (25.4) 49.6

Brazil's Exports of ManufacturedProducts /a (US$), narrowdefinition 35.7 (28.0) 34.1 (26.8) 32.0 (22.8) 54.3

World Trade with ManufacturedProducts /b (US$) 11.2 ( 9.6) 11.2 (11.3) 12.9 (12.7) 15.2

Brazil's Total Exports /a (US$) 7.2 ( 6.0) 8.4 ( 7.2) 11.6 (10.5) 20.1

Brazil's Production 6f ManufacturedProducts /c (Volume-Index) 7.6 ( 6.2) 6.7 ( 6.0) 7.1 ( 7.3) 10.2

World Industrial Production Id(Volume-Index) 6.3 ( 5.9) 5.8 ( 5.4) .5.7 ( 5.6) 5.5

/a Source: Table 1 in Annex;/b SITC - Classes 5-8, Source: United Nations, Yearbook of International

Trade Statistics, several volumes;/c Source: United Nations, Monthly Bulletin of Statistics, several vol-

umes, and IBRD, Economic Reports 1968 and 1971;Jd Source: United Nations, Monthly Bulletin of Statistics, several vol-

umes./e (The compounded growth rate was calculated with the formula log

X = a + bt. The growth rate is w = (antilog b) - 1.)

3. World trade in manufactured products developed much more slowlythan Brazilian exports. In the period 1960-70, the annual increase in worldtrade of 11 percent was -- on the average -- accompanied by an increase of Bra-zilian exports of manufactured products of 34 percent. 1/ Nevertheless, theshare of Brazilian manufactures (narrow definition) in world trade of theseproducts (SITC-Classes 5-8) is still negligible (0.1 percent in 1969). Alsothe share of Brazilian goods in LAFTA--manufactures imports remained low(one percent in 1969).

1/ See United Nations, Monthly Bulletin of Statistics, March 1971 and com-pare with Table 1 of Statistical Annex.

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4. The share of manufactures in Brazil's total exports grew from onepercent in 1958 to about 4.9 percent (6.5 percent for broad definition) in1964 and 11.3 percent (resp. 16.6 percent) in 1970. Nevertheless, thoughBrazil has reduced noticeably its heavy dependence on coffee exports, itsexport commodity structure is not yet "normal"; since the share of manu-factures in total exports is on the average still only half as high as indeveloping market economies. 1/

5. Moreover, Brazil's exports of manufactures developed faster thanits industrial production, especially in 1968-70. During this period the ex-port growth rate was nearly five times higher than that of production. Man-ufacturing industry has become more and more export-minded. The share of ex-ports in its production value (food industry excluded) rose from 0.9 percentin 1958 to 2.4 percent in 1969.

6. Finally, the average annual growth rate of Brazil's manufacturedexports is astonishingly high as compared with the percentage increase ofworld industrial production (last line of Table 1). Taking into accountaverage import elasticities with respect to gross national product of theworld (around 1.9), of the developed countries (around 2.5), and of the de-veloping countries (around 1.4) 2/ one could expect an annual percentage in-crease of Brazilian manufactured exports of around 12 percent (elasticitytimes growth rate of production). However, the actual growth has been con-siderably higher, especially in the last two years. It has been six timeshigher than the growth rate of world industrial production throughout thelast decade, and nine times higher in 1968-70. 3/

B. Diversification

7. Brazil is now exporting nearly every manufactured product, e.g.,clocks to Switzerland, refrigerators to the United States, furniture toScandinavia, clothes to Italy, testing and measuring instrument to Germanyand photoelectric cells to the Netherlands. 4/ The diversity of Brazil's

1/ See United Nations, Monthly Bulletin of Statistics, March 1971 and com-pare with Table 1 of Statistical Annex.

2/ According to United Nations Conference on Trade and Development. Tradeand Development Board, Tenth Session, Geneva, 26 August 1970, Review ofInternational Trade and Development 1969/70. Part One, Recent Trendsin Trade and Development, ID/B/309, page 15.

3/ The elasticity of the manufactured exports of Brazil with respect toworld industrial production is 4 in the period 1960-70, for

2Log X1 -6.1016 + 4.0608 log X3; R 0.943, DW = 2.444

(+ 0.3322)With X3 = index of world industrial production, 1958 - 100.

4/ See Anuario Estatistico de Exportacao, Porto de Santos 970, edited byM. E. Fernandez.

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manufactured exports is illustrated by the highly aggregated figures of Ta-ble 2. These figures show that there was no specialization in specificclasses of products; the growth rate of each NBM class shown is high. Thisobservation remains the same for individual products. Manufactures with ahigh content of raw materials readily available domestically do not showhigher growth rates. Brazil is, for example, comparatively rich in vege-table oils; yet the respective export growth rate is relatively low. Thusthe contribution of class 5 exports to the (absolute) increase in total man-ufactured exports in 1962-70 and especially in 1968-70 is low. Diversity isalso shown by the fact that the growth rates of NBM classes 2, 7 and 8 --very low as a percentage of total exports at the beginning of the period --exceed those of the other classes. Particularly significant is the rapidgrowth of class 8, "diverse manufactured productstt; developing countrieshave a low share in world trade of these products. Thus, it is remarkablethat the contribution of class 8 to the total (absolute) increase of manu-factured exports exceeds that of class 5 in 1968-70.

Table 2: MANUFACTURED EXPORTS OF BRAZIL BY CLASSES, 1962-70

PercentageShare inTotal Man- Participationufactured in TotalExports Average of Annual Absolute

(%) Growth Rates (%) IncreaseClasses of NBM 1962 1970 1962-70 1968-70 1962-70 1968-70

5 Chemical, pharmaceuticaland similar products 31.3 8.5 15.3 21.1 5.9 4.9

6 Machinery, vehicles,parts and accessories 25.5 21.3 33.3 53.9 20.8 22.3

7 Manufactured productsclassified to mainraw material input 11.4 32.7 72.6 62.3 35.2 36.3

8 Diverse manufacturedproducts 2.0 4..9 52.9 115.4 5.2 6.9

Sub-Total 70.2 67.4 36.5 54.3 67.1 70.4

2 Prepared raw materials 3.7 12.4 68.3 87.0 13.4 16.0

4 Foodstuff and beverages 26.1 20.0 32.1 28.4 19.4 14.3

9 Manufactured productsnot elsewhere mentioned 0.0 0.2 0.1 - 0.7

TOTAL 100.0 100.0 36.1 49.6 100.0 100.0

8. The export diversification process can be examined in another way.As the variety of products increased so did the number of exporting firms.Tabulations of the number of Brazilian firms exporting manufactures (narrowdefinition) show a three-fold increase over the 1967-70 period. The numberof companies exporting chemicals, pharmaceuticals and similar goods has al-most tripled; the number of firms which export machinery, vehicles and partsnearly doubled; the number of companies exporting manufactures classifiedaccording to the main raw material input increased 3.5 times; exporters ofdiverse manufactured, products increased four-fold.

9. Not only export products but also national markets for Brazilianmanufactured exports have been diversified. However, this trend is not asobvious as is the product trend because LAFTA has been the most importantbuyer of Brazilian manufactures in earlier years as well as in 1970. One-third of all manufactured exports (broad definition) and around 47 percent(narrow definition) were directed to LAFTA countries in 1967 as well as in1970. This importance of LAFTA is not surprising in view of the geographicpropinquity of these countries to Brazil. In addition, the growth of under-developed countries offers rapidly growing opportunities to countries equip-ped to supply the variety of equipment best suited to their conditions.Brazil may be better placed in this respect than, for example, the U.S.

10. Market diversification is evidenced by the decline in the U.S. per-centage share of Brazil's manufactured exports -- from 36 percent in 1967(broad definition) to 20 percent in 1970 -- and the corresponding increase inthe share of the EEC and "other" countries. This indicates that Brazil isincreasingly selling to nontraditional markets.

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CHAPTER II - ANALYSIS

11. The fast growth of the manufactured exports of Brazil in recentyears can be explained mainly by two factors:

(a) The Brazilian Government has changed its development strategy;promotion of nontraditional exports, especially of manufac-tures, plays the key role in this new policy.

(b) Exports of many manufactured products have become profitabledue not only to export promotion policy but also to the pro-gress which some industrial sectors have achieved in tech-nology, cost reduction and marketing. In some cases the pro-fit on exports even exceeds the profit on sales in the domesticmarket.

A. Export Promotion Policy of Brazil

Impact of the Former Import Substitution Policy on Manufactured Exports

12. A major objective of the development policy of the Brazilian Gov-ernment pursued from the end World War II until the mid-1960s. was importsubstitution, which was encouraged by indiscriminate protection. Thetwo main advantages of such a policy are: First, it avoids the uncer-tainties of estimating and the hazards of creating new markets for new in-dustries; import statistics define secure markets for new domestic indus-tries.. Second, in the face of inelastic and more or less stationary worlddemand for traditional export goods, import substitution can -- at least inthe first stages of industrialization -- partly bridge the foreign exchangegap.

13. Exports of manufactures had no place within this strategy. Mostexports were subject to licensing and frequently were prohibited, even whenworld market prices exceeded domestic prices. However, exports were permit-ted in cases of underutilization of installed capacity. Thus, the level ofinternal demand influenced exports via an availability effect. 1/ It is noteasy to demonstrate this effect statistically because of lack of data. Thefollowing graph, which shows the annual growth rates of industrial output

1/ This availability effect or surplus theory has often been discussed ineconomic literature. See, for example, Henry J. Bruton, Latin AmericanExports and Import Substitution Policies. Research Mlemorandum No. 32,Center for Development Economics Williams College Williamstown, Mas-sachusetts, November 1969, and N.H. Leff, Export Stagnation and AutarkicDevelopment in Brazil, 1947-62. The quarterly Journal of Economics,Vol. 31, May 1967, i. 289.

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and of manufactured exports, supports the argument only partly, since indus-trial output is not the variable the argument is based on., Data on capacityutilization, however, are not available. Fortunately, the "Instituto dePlanejamento Economico e Social" (IPEA) of the '`Ministerio de Planejamentoe Coordenacao Geral" has produced a paper (Carlos von Doellinger, Hugo deBarros Castro Faria, Jose Eduardo Carvalho Pereira, Maria T.T. Horta:Exportacoes Dinamicas Brasileiras, Rio de Janeiro 1971), in which (p. 33)a regression analysis shows that the elasticity of manufactured exports(narrow definition, value in constant US$ prices) with respect to the "indicede utilizacao da capacidade instalada" is -2.71 for the.period 1963-68,thussupporting the above mentioned argument.

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Change of Development Strategy

14. The import substitution phase of the Brazilian industrializationappears to have terminated in the mid-1960S. By then, imports consistedmainly of technologically more complex capital goods and domestically un-available combustibles and other raw materials. Correspondingly, the ratioof manufactured imports to total industrial supply had decreased markedly(see Table 3). Thus., by that time it had become more difficult to transformimport demand into demand for domestically manufactured products. The pos-sibilities for continued import substitution were nearly exhausted. Therecessions of the Brazilian economy in the mid-1960s. can be explainedpartly by this fact.

Table 3: IMPORTS AS PERCENTAGES OF TOTAL SUPPLY, SELECTED YEARS

Consumer Goods Producer Goods All ManufacturedYear Durables Non-durables Intermediate Capital Goods

1949 64.5 3.7 25.9 63.7 19.0

1955 10.0 2.2 17.9 43.2 11.1

1959 6.3 1.1 11.7 32.9 9.7

1964 1.6 1.2 6.6 9.8 4.2

Source: Joel Bergsman, Brazil Industrialization and Trade Policies, OxfordUniversity Press 1970, p. 92.

15. In this situation, the Brazilian Government began to develop a newdevelopment strategy which centers on the promotion of nontraditional ex-ports, especially manufactured exports. Export promotion is expected to in-fluence economic development in several ways:

(a) Exports are expected to overcome the demand barrier: foreigndemand is to stimulate industrial expansion and to take overthe role which import demand played during the import substi-tution phase;

(b) Increasing manufactured exports provide the import capacityneeded to accommodate growing needs for technologically morecomplex machinery and equipment as well as for some combusti-bles and raw materials which cannot be produced domestically.Thus, export promotion seems a logical extension of the strategyof import substitution in view of both the demand barrier andthe foreign exchange constraint; and

(c) Unlike import substitution which tends to be inflationary andto distort internal price relationships because of excessive

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protection export promotion is expected to exert downward pres-sure on the price level, increasing the scale of domestic pro-duction and strengthening competition in the domestic market;entrepreneurs gaining export experience become more aggres-sive, dynamic and flexibile because of exposure to competitionin international markets.

16. These are the objectives of the new export promotion policy. Toachieve them, the Government has taken several measures. They include ex-change policy, fiscal measures, financing incentives and other promotionactivities.

Exchange Policy

17. In August 1968 the Brazilian Government adopted a flexible or"floating peg" exchange rate policy. Implementation of this policy hassmoothed short-run fluctuations in export profits and alleviated exporters'uncertainty. However, the pace of devaluation apparently has not been suf-ficient to compensate the disincentive to exporters of manufactured goodswhich resulted from delays in exchange rate adjustment during 1961-68.

Elimination of the Fluctuations

18. Inter-adjustment periods and adjustment magnitudes have averaged45 days and 1.62 percent since August 27, 1968. The shortest period betweenany two consecutive devaluations was 14 days, the longest 57 days. Thesmallest adjustment was 0.65 percent, the highest 2.61 percent (see Table14, Statistical Annex). The policy of mini-devaluation achieved two objec-tives. First, it deterred speculation and halted the massive short-termcapital flows which had had a chaotic effect on monetary management andcredit availability. Second, it provided the exporter with the prospectof a relatively firm relationship between internal production costs andworld market prices. Previously, with the cruzeiro being devalued every12 months or so, and a highly elastic world demand for nontraditional Brazil-ian exports yielding more or less constant dollar prices in the internationalmarkets, cruzeiro returns would remain constant for prolonged periods whileprices of inputs and wages were rising steadily. Thus, profit margins onexport sales, if they existed at all, were subject to enormous fluctuation.

19. Exchange policy-related profit fluctuations influenced exports ofmanufactures in several ways, as interviews with 32 exporting firms haveshown:

(a) In the case of durables, entrepreneurs concentrated theirexports in immediate post-devaluation periods. They slowedexports afterwards, putting products in stock and waitingfor the next devaluation. Financing costs were maximizedand export profits reduced;

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(b) In the case of nondurables continuous export production wasimpossible;

(c) In the case of export goods with a long production periodproducers were especially troubled by uncertainty since itwas impossible for them to predict with any precision thecruzeiro value of their product; and

(d) In addition, relationships between the size of exchange rateadjustments and the amount of intervening internal pricelevel increase varied widely. Thus, entrepreneurs did notknow whether or not profits on export sales would reappearwith the next devaluation so that rate of return calculationsfor investments in export production capacity were extremelyhazardous.

20. The new exchange policy has corrected this situation and -- as entre-preneurs stress -- is largely responsible for the high growth rate of manufac-*tured exports over the last two years. The psychological aspect is impor-tant; entrepreneurs regard the floating peg policy as an indication of theGovernmentts responsiveness to their problems. Former uncertainty as tothe Government's intentions has been overcome.

Remaining Disincentive for Exports

21. The floating peg has abolished profit fluctuations but not allexchange rate disincentives for exports. The development of the real ef-fective exchange rate since 1960 demonstrates this fact. The effective ex-change rate is calculated by dividing the current cruzeiro value of manufac-tured exports by the dollar receipts for such exports (see Table 4). Torelate the trend of the exchange rate to the trend of internal costs orprices the former is deflated by the industrial wholesale price index (Index18 in the Getulio Vargas Foundation's Conjuntura Economica). Over the 1960-70 period the effective rate (column 3 of Table 4) declined by 25.4 percentin real terms as Brazil's industrial wholesale price index increased 23 foldwhile the cruzeiro price of dollars increased 14 fold. Dollar inflationdoes not justify this lag in exchange rate adjustment (column 5 of Table 4).If the real exchange rate is multiplied by the U.S. industrial wholesale priceindex (Index 63a of IMF - International Financial Statistics) the US$ pricesof Brazil's manufactured exports are shown to have increased by 18 percentmore than have those of U.S. products. The gap between Brazil's devaluationrate and its relative internal inflation (i.e., absolute internal inflationminus U.S. inflation) can be regarded as an important disincentive to exports.Moreover, in the case of its non-U.S. trading partners who have experienced

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less inflation than has the U.S. the export disincentive is even greater. 1/On the other hand, between 1965 and the present, exchange rate depreciationhas kept pace with Brazilian inflation.

Table 4: THE REAL EFFECTIVE EXCHANGE RATE FOR MANUFACTURED EXPORTS,1960-70/a

Effective RealExchange Wholesale Effective WholesaleRate for Industrial Exchange IndustrialManufactured Price Index Rate, 1964=100 Price IndexExports for Brazil, Index of for USA

Year Cr$/US$ 1964=100 quotient (1) 1964=100 (3) x (4)

(1) (2) (3) (2) (4) (5)

1960 0.179 14.4 102.7 100.0 102.71961 0.246 20.5 9 ;0 99.0 98.01962 0.354 29.7 98.2 99.0 97.21963 0.531 54.5 80.3 99.0 79.51964 1.212 100 100.0 100.0 100.01965 1.811 193 77.2 101.3 78.21966 2.181 214 84.2 103.5 87.11967 2.622 269 80.5 105.1 84.61968 3.309 350 77.9 107.7 83.91969 4.044 421 79.2 111.3 88.11970 4.570 492 76.6 115.6 88.5

/a Defined as the quotient of the value of exports in Cr$ and the valueof exports in US$.

Source: (a) Export values: CACEX, (b) Wholesale-Price Index for Brazil:Conjuntura Economica, several volumes, (b) Wholesale Price Indexfor USA: IMF, International Financial Statistics, several volumes.

1/ The choice of 1960 as the base year for calculating the impact of dif-ferential trends in exchange rate adjustment, internal inflation andexternal inflation was arbitrary. In the event that the exchange ratewas undervalued in 1960, the analysis would exaggerate present exchangerate over-valuation; if the exchange rate was over-valued in 1960, thereverse would be the case. Thus, additional calculations were made basedon assumed price elasticities of demand for imports and exports, designedto identify that exchange rate which would yield neutrality in externalpayments on current account. The exchange rate thus identified is 23percent higher than the average exchange rate prevailing in 1970. Tothe extent that current account neutrality is not the objective, thedifference is smaller.

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22. In August 1968 it was stated that one objective of the flexibleexchange rate policy then adopted was to arrest the decline in the real ef-fective exchange rate. This has been accomplished to date. From August1968 until February 1971 Brazil's industrial wholesale price index regis-tered a 47.1 percent increase, the U.S. wholesale price index a 10 percentincrease and the cruzeiro exchange rate a 37.8 percent increase. Thus de-valuation has slightly more than kept pace with differential Brazilian in-flation since the flexible exchange rate policy was adopted. Nevertheless,the distortion in internal external price relationships carried over fromyears of rapid inflation and delayed exchange rate adjustment should betaken into account in evaluating the fiscal incentives provided by the Go-vernment for manufactured exports.

Fiscal Incentives

23. The battery of fiscal incentives available to Brazilian manufac-tures exporters includes not only exemption of respective inputs, exportproducts and export profits from tariff, sales and income taxation but alsothe concession of subsidies in the form of tax credits. This section ofthe report describes the incentives in detail and attempts to quantifytheir significance.

Description of the Incentives

IPI Incentives

24. The IPI is a federal tax on value added 1/ incident at varyingrates on manufactures. The value added nature of the tax is administeredby permitting producers of final and/or exported products to deduct fromtax liabilities, calculated by applying the tax rate to product value,amounts equal to the sum of IPI taxes paid on inputs. IPI related manu-factured export incentives have the following elements:

(a) The exporter is exempted from IPI payments he would other-wise have to make on export products.

(b) The exporter receives a credit equal to the value of IPItaxes paid on inputs used in manufacturing the export prod-uct; these credits may be applied against other tax liabil-ities; recently, they have also been redeemable in cash.

(c) The exporter receives an additional credit whose value isrelated to the IPI rate applicable to the respective exportproduct; as opposed to (a) and (b) above this credit is clearlya subsidy; initially (July, 1968) the credit was conceded at

1/ According to the text of the law it is a tax on the production value.But because of the credit on the IPI tax paid on previous stages ofproduction it becomes a tax on Brazilian value added.

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a percentage equal to half the applicable IPI percentage upto a maximum of 10 percent; more recently (July 1969) thesize of the credit was raised to 100 percent of the applica-ble IPI rate up to a maximum of 15 percent; most recently(from January 1971) authority is delegated to the FinanceMinister to set the rate of the IPI credit at any.level deemedappropriate; as in the case of (b) above, these.credits areredeemable either against other tax liabilities or in the eventthat such liabilities are not sufficiently large, in cash.

The basis against which percentages of IPI tax credits are applied is theFOB cruzeiro value except when goods are transported and/or insured by aBrazilian company in which case the IPI credit. is based on CIF value. 1/

ICM Incentives

25. The ICM is a tax on value added administered by state governmentsin a manner similar to that of the IPI. It differs from the IPI in thatonly essential foodstuffs and certain products subject to special federalexcise taxes (the "sole" taxes) are excluded from its base and that itsrate is generally 17 percent (subject to some upward variation in the caseof poorer states and to some downward variation in the case of interstate(but not international) trade). ICM-related manufactured export incentiveshave the following elements:

(a) The Federal Constitution of 1967 exempts exports from final-stage ICM taxation;

(b) Initially, and unlike the IPI incentives, there was no exemp-tion in form of rebates against I01 taxation of previous stagesof production; then in 1970, the important industrial statesof the Center and the South of Brazil granted rebates againstICM taxation of raw materials used in the product-ion of manu-factured exports on condition that the raw materials be producedin the same state in which the export is produced; moreover,these.rebates are made in the form of credits redeemable onlyagainst other ICM liabilities to the same state;

(c) As of January 1970, the central and southern states conceededadditional credits, or subsidies, to manufactures exportersat rates equal to IPI rates on respective products up to amaximum 15 percent; however, unlike the IPI credits, importedinputs are excluded from the product value against which theICM credit is applied (so that it relates only to value-addedin Brazil); these ICM credits have only been redeemable againstother ICM liabilities but recent negotiations involving exporters

1/ This provision is an incentive to use ships under Brazilian flag andsupports, therefore, the Brazilian merchant marine.

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and Federal and state government representatives indicate eitherthat funds will be made available to gradually redeem accumulatedICM credits or that their redemption against federal tax liabil-ities will be permitted.

Other Indirect Tax Related Incentives

26. In addition to those related to the IPI and IC4i there are otherindirect tax-related manufactured export incentives. The most important isexemption from the financial operations tax as it incides on respective ex-port credit and transport insurance and export exchange operations. Therate of the financial operations tax as it incides on the insuring of exportcredit and transport is 2 percent of the value of the insurance premium.Exchange operations are subject to an 0.3 percent tax rate.

27. Other indirect tax related incentives include: rebates ofpetroleum products and electricity sale taxes paid on inputs used in exportproduction processes whenever respective tax payments exceed 2 percent ofFOB export value; and, exemption from applicable port and merchant marinetaxes.

Drawback

28. The basic idea of the Drawback incentive is to give Brazilianexporters duty free access to imported inputs used for the production of ex-port goods, that is, to make it possible for export producers to buy suchinputs at world market prices and not at domestic prices which may be higherbecause of protectionism or inefficiency at home. Two basic alternativemethods for implementing the Drawback are available at the option of theexporter:

(a) Exporters pay no duty on imports of raw material and inter-mediary products. This alternative requires the exporter tosecure prior approval from CACEX of a plan of export produc-tion and inputs needed.

(b) After embarking his products the exporter obtains a tax creditequal to the value of import duties paid on respective importedinputs (Chapter II). I/

29. The Drawback is available only for raw materials, semi-manufacturedproducts, intermediate goods and packaging materials. Moreover, if a firmobtains prior authorization to import these goods duty-free, it is automat-ically exempted from the IPI tax and from those taxes mentioned in paragraph26 as they relate to these imports. Export incentives per se do not include

1/ According to Chapter III the CPA (Conselho de Politica Aduaneira) canrefund the import taxes paid to the exporter. This provision is merelya slight variation of Chapter II.

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the duty free importation of capital. However, export firms can obtain dutyexemptions for imported capital equipment in connection with approved invest-ment projects.

Income Tax Incentives

30. A number of income tax-related benefits are available to manufac-tured product exporters:

(a) Profits earned on such exports are exempt from corporateincome taxation; the percentage of total profit attributa-ble to eligible exports is taken to equal the share of exportsales in total sales for purposes of administering this bene-fit; and,

(b) exporters may deduct from income subject to taxation the follow-ing expenses incurred in connection with export sales:

- commissions paid abroad;- interest paid abroad;- exchange operations costs;- expenditures incurred abroad for the promotion and

advertising of respective products.

31. Furthermore legislation enacted but not yet implemented concedesrebates on income taxation of foreign royalty, technical assistance andinterest remittances by manufactured export producers at the rate:

(a) of 25 percent of respective tax liability, when exportsrepresent at least 100 percent of the remittance value andan increase of 5 percent or more in relation to exports ofthe previous year;

(b) of 50 percent, when exports represent at least.150 percentof the remittance value and an increase of 10 percent or morein relation to exports of the previous year; and,

(c) of 70 percent, when exports represent at least 200 percentof the remittance value and an increase of 15 percent ormore in relation to exports of the previous year.

Effects of the Incentives

32. Comprehensive evaluation of the full impact of the incentivesdescribed above on the behavior of Brazil's manufactured exports is impededby two factors: (a) the time elapsing between promulgation of the more im-portant elements in the incentive structure and the latest period (1970) forwhich relevant export data are available is too short for the incentives tohave had their full impact; and (b) world and domestic demand have also af-fected Brazil's manufactured exports and it is extremely difficult to isolatethe influence of-demand from that of the incentives. Nevertheless, it is

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possible to quantify the impact of the incentives in the sense of identify-ing the reduction in export as opposed to internal sales prices which theypermit at the same level of unit profits.

33. The calculations made in this respect are described in detail inAnnex II to this Volume. Briefly, the results are the following:

(a) exemption of manufactured exports and of 4inputs used in theirproduction from the IPI, the ICM, import duties and other in-direct taxes permits respective export prices to be reduced --on average -- by 24 percent below internal sales prices at thesame unit profit margin;

(b) subsidization in the forn of the IPI and ICM credits (paragraphs24c and 25c) permit respective export prices to be reduced --on average -- by 13 percent below internal sales prices at thesame unit profit margin; and

(c) subdization in the form of exemption of profit from exportsales (paragraph 3 ) pernits respective export prices to bereduced -- on average -- by 3.3 percent below internal salesprices at the same unit profit margin (assuming that domes-tic sales, in fact, are profitable).

34. The combined effect of the tax-related incentives (not in thenature of the sum,, but of the product of the above-listed elements) is topermit manufacturers to price their exports -- on average -- 36 percent lowerthan their domestic sales at the same unit profit margin on all sales.Note that this does not mean that the prices of Brazil's manufactured ex-ports actually averaged 36 percent less than the price of the same productson the domestic market, but merely that it is likely that unit profits inexport sales would not be lower than on domestic sales if this were thecase (see paragraphs 65 and 67 for a discussion of actual differences betweenexport and domestic prices). Moreover, this analysis abstracts from theimpact on unit profits of the economies of scale and other improvements inefficiency which might flow from export production. Table 5 shows theexport-domestic price differential effect of the various incentive cate-gories by categories of manufactured products.

35. Can incentives of this magnitude be regarded as "dumping", as somehave asserted? Probably, they should not be so regarded. Firstly, exemp-tions from taxes and duties on export products and inputs for export pro-duction -- by far the most important in the Brazilian case -- are also concededto exporters by most other exporting countries. They are quite a naturalmeasure; export prices should only reflect opportunity costs if they are toensure the optimal allocation of a country's resources. Indirect taxes andduties cannot be treated as costs in this context, they are transfer paymentsnot reflecting the use of productive factors. In fact, exemptions of taxeson exports and duties on imported inputs for export production should notbe considered as genuine incentives. They are a necessary removal of adisincentive to exporters set up by indirect taxes. Certainly it would be

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Table 5: THE EFFECTS OF THE INCENTIVES TO EXPORTERS OF MANIFACTURED PRODUCTS, MAY 1971

(% of Domestic Sale Price at which Expo.tscan be qA Rait profits)

4 & $qReduca.% UM 1XECtEXEMPT liS ONLYIncome Tax Without With

Value IPI-ICM Subsidy as IPI-ICM Rebate RebateSubsidies at . %5 Factory Subsidies of ICM of ICM All Rxemptions

Fe. Sector Factory Price Price only on(,nuts An M q and Subsidies(i) (2) 3~) (4 (56)

1 Canned and preserved food 12.2 0.024 0.89 0.89 0-79 0.682 Sugar 10.0 0.022 0.91 0.90 0.80 0.703 Confectionary products 10.0 0.051 0.91 0.89 0.80 0.684 Mleat daily cereal other foods 3.8 0.039 0.96 0.93 0.82 0.755 Severages 29.8 0.038 0.77 0.62 0o58 0.126 Fats and oils 8.8 0.028 0.92 0.91 0.80 0.717 Tobacco products 30.0 o.Oll 0.77 0.24 0.22 0.168 Thread and yarn 9.8 0.019 0.91 0.85 0.77 o.689 Textiles 24.0 0.018 0.81 0.84 0.75 0-5910 Knitwear 24.0 0.020 0.81 0.83 0.75 0.5911 Clothing 20.0 0.036 0.83 0.85 0.77 0.6112 Sacks, bags and linen goods 10.0 0.022 0.91 0.89 0.80 0.7113 Shoes 24.0 0-055 0.81 0.82 0.76 0.5714 Lumber 6.0 0.035 0.94 0.90 0.82 0.7415 Wood products and furniture 29.4 0.049 0.77 0.80 0-74 0-5316 Wood pulp 8.0 0.041 0.93 0.88 0.81 0.7117 Paper and products 26.2 0.032 0.79 0.81 0.75 0.5718 Printing and publishing 20.0 0.045 0.83 0.83 0.77 0.6119 Leather 10.2 0.040 0.91 0.88 0.79 o.6820 Leather goods (except shoes) 30.0 0.029 0.77 0.79 0.73 0.5421 Rubber products 30.0 0.017 0.77 0.81 0.73 0.5522 Plastics 30.0 0.029 0.77 0.81 0.73 0.5423 Synthetics 15.0 0.029 0.87 0.85 0.78 0.6524 Chemicals 8.8 0.032 0.92 0.85 0.81 0.7125 Chemical products 25.4 0.026 0.80 0.75 0.71 0.5526 Petroleum products 0.4 0.045 0.99 0.93 0.85 0.8027 Non-metallic mineral products 16.0 0.051 0.86 0.84 0.79 o.6328 Glass and products 16.0 0.038 0.86 0.83 0.79 0.6529 Iron and steel 20.0 P.046 0.83 0.86 0.81 o.6430 Non-ferrous metals 9.6 0.008 0.91 0.86 0.80 0.7231 Metal oastings 10.0 0.024 0.91 0.86 0.80 0.7132 Metal products 18.0 0.018 o.85 0.85 0.77 o.6433 Agricultural machinery 10.0 0.047 0.91 0.87 0.80 0.6934 Non-electrical machinery 16.8 0.031 0.86 o.84 0.78 0.6435 Electrical machinery 13.8 0.033 0.88 0.84 0.79 0.6736 Domestic applianoes 22.8 0.027 0.81 0.81 0.76 0.5937 Shipbuilding 17.8 0.020 0.85 0.85 0.77 0.6438 Railroad vehicles 9.2 0.021 0.92 0.87 0.81 0.7239 Automobiles 26.4 0.024 0.79 0-79 0.71 0.5440 Bicycles and motorcycles 30.0 0.024 0.77 0.80 0.72 0.5441 Airplanes 10.0 0.031 0.91 0.85 0.81 0.7142 Precision instruments 28.0 0.026 0.78 0.78 0.73 0.5543 Miscellaneous 29.4 0.052 0.77 0.78 0-73 0.52

Average lL.7 0.033 0.87 0.84 0.76 0.64

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unreasonable to say that export incentives are highest in a country whichhas the highest indirect tax rates and exempts its exports therefrom. Sec-ondly, while the i.,come tax exemption and the IPI-ICM credits amounting toabout 16 percent of domestic sales prices and 18 percent of factory pricesmore clearly constitute export subsidization, they probably are at leastpartially offset by over-valuation of the cruzeiro. The disparate long-term trends in cruzeiro devaluation, Brazilian inflation and external in-flation mentioned above (paragraph 21) indicate that the cruzeiro was overvaluedin 1970. This conclusion is reinforced by the results of calculations ex-plained in Annex III to this volume which indicate that the exchange ratewhich would have yielded equilibrium in Brazil's trade account (i.e., goodsand nonfactor services) in 1970 was 23 percent greater (i.e., more devalued)than the actually prevailing average rate.

36. If this argumentation is accepted, the question arises why theGovernment has not devalued the cruzeiro more and, instead, has granted taxcredits to exporters. To begin, the export promotion strategy was adoptedat a time when substantial exchange rate over-valuation had already accu-mulated. Chronologically, adoption of this strategy was accompanied byadoption of the flexible exchange rate policy which, by and large, hasforestalled any additional over-valuation. The alternative approach -- noexport subsidies and more rapid devaluation -- probably was not advisable.First, the resulting price signal to exporters would be the same irrespec-tive of the price elasticities of world demand and domestic supply of theseveral products; especially important in view of Brazil's concentrationon coffee and other agricultural exports. This alternative, therefore,would not have fit smoothly in actual market conditions and might not havemaximized exports or foreign exchange earnings (minimized the costs of theincentives). Tax credits to exporters could be superior to devaluation inthis context provided that the structure of the fiscal incentives reflectthe conditions of the markets. Secondly, more rapid devaluation of thecruzeiro would have put more pressure on the internal price level than theauthorities were willing to tolerate. However, it should be noted thatthe present structure of incentives, does not seem to make sense. Thereseems to be no reflection of different elasticities, and incentives do notseem to be lower for products in which Brazil tends to have a comparativeadvantage. Presumably, the lack of logic in the structure of the incentivescan be explained by the fact that the structure of the IPI tax rates, whichdetermines the structure of the incentives mainly, had been fixed for fiscalpurposes long before the export promoting policy was implemented and hasnot been adapted to the requirements of this policy.

Credit Facilities

Pre-export Financing

37. Pre-export or production credit is available to manufactured ex-port producers from the following sources:

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(a) The Foreign Commerce Department (CACEX) of the Banco doBrazil. CACEX administers two lines of export productioncredit. One, utilizing resources accruing to the Fundo deFinanciamento de Exportacao (FINEX), as destined to financethe production of made to order exports with production pe-riods longer than 180 days; very few operations actually havebeen financed under this credit line to date. The other CACEXexport production credit line is available to cover producers'working capital requirements and has been more actively util-ized; CACEX credit generally is heavily subsidized, bearingaverage nominal interest rates of only 8 percent;.

(b) The General Credit Department (CREGE) of the Bank of Brazil.CREGE working capital credit is generally available to theindustrial sector at nominal interest rates of around 20 per-cent;

(c) The National Economic Development Bank (BNDE). The BNDE pro-vides working capital financing to industrial enterprise outof its Working Capital Financing Fund (FUNGIRO) at nominal in-terest rates of around 20 percent; and

(d) Private Commercial Banks. Private commercial banks have beenthe most significant source for financing export productionsince the implementation of Central Bank Resolution 71 ofNovember 1967 which sets up a special rediscount facility inthe Central Bank for export production financing.

38. Resolution 71 rediscounts are made available to the commercialbanks at an annual nominal interest rate of only 4 percent and final bor-rowers' interest rates charged by the banks on respective credits arelimited to 8 percent. Assuming a 10 percent real opportunity cost forcapital in Brazil and 20 percent inflation, this interest rate representsa subsidy equal to about 24 percent of the value of the financing. 1/ Anexporting firm seeking to finance its production with Resolution 71 creditsapplies to CACEX for a certificate which is presented subsequently to thecommercial bank. CACEX takes into consideration the exports of the firmduring the preceding 12 months in certifying the amount of Resolution 71financing for which the firm is eligible. Amounts range from 27 to 80percent of anticipated FOB export values in inverse relationship to theterm of the financing (i.e., 120 days -- 80 percent financing; 360 days --27 percent financing). The average length of export production periods andthe existence of other sources of finance for longer term production periods

1/ Assuming that the real opportunity cost of capital is 10 percent andthe rate of inflation 20 percent, the nominal opportunity cost of capi-tal equals 1.20 x 1.10 or 32 percent. Thus, credit made available atan 8 percent nominal interest rate is subsidized to the extent of1.32 - 1.08 or 24 percent.

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have been such that nearly all Resolution 71 credits to manufacturing indus-tries have been granted for 120 days. Resolution 71 has been followed by anumber of other Resolutions expanding the magnitude of this export produc-tion rediscount credit line. The marginal increment authorized by the latestResolution (182), however, can be used only for financing contracts not ex-ceeding US$200,000. This provision has been made because of the complaintsof small firms. Commercial banks apparently prefer to lend Resolution 71funds to large firms in order to minimize both risk and administrative costs.

Table 6: REFINANCING POSSIBILITIES OF COMMERCIAL BANKSFINz-NCING EXPORT PRODUCTION, 1967-1971

Ceiling Maximum available(as percentage of normal Resources

Resolution Date rediscount ceiling)/a (in Mio CR$)

71 11-1-67 10 58.4

111 2-27-69 20 133.4

122 8-18-69 30 200.0

135 2-18-70 40 270.0

- 182 4-22-71 50 380.0

/a. Commercial banks are normally eligible for "liquidity rediscounts"equal to 5 percent of their deposits. Resolution 71 rediscounts arelimited in amount to the above listed percentage of these "normal"rediscount lines.

39. The impact of Resolution 71 on exports of manufactured productscannot be estimated by means of statistical data. It depends on the pro-portion of the working capital costs to unit costs and the length of theproduction period. Statistical-data on these variables are not available.But interviews had by the Mission with 32 exporting firms together withanswers to questionnaires distributed by the Mission at least give an ideaof the impact. All companies contacted have used Resolution 71 resources,and nearly all ranked the Resolution 71 incentive in importance immediatelyafter the IPI and ICM exemptions and credits. About 40 percent of allfirms said that this financing incentive to export was at least as effec-tive as the income tax exemption. Thus, subsidy value of Resolution 71can be roughly estimated to average around 1.5 percent of factory priceof manufactured exports.

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Post Export Financing

40. Financing for export sales is provided by CACEX and those commer-cial banks which are authorized to deal in exchange transactions. A producerwith an export exchange contract can discount the full value of the contractat an average discount interest rate of 8 percent with authorized commercialbanks provided the term of the contract is no more than 180 days. The Bancodo Brazil, then, will accept these contracts at a 4 percent interest costto the commercial bank. Including the exchange risk which he bears, thetotal nominal interest cost to the exporter of this financing amounts toabout 25 percent on an annual basis or to about 4 percent in real terms. 1/

41. Longer term financing of manufactured export sales is made avail-able by CACEX and by FINAME (a BNDE subsidiary). The respective CACEX creditline, funded mainly by the Inter-American Development Bank, 2/ finances up to85 percent of CIF export values on one year terms in the case of durableconsumer goods and on terms of up to 8 years for producers' goods. The rateof interest has been 7 to 9 percent per annum depending on the export productand the country of destination. Since the borrower bears the exchange risk,the total interest cost to him has averaged approximately 25 percent. FINAMEcredit is available for financing all sales, either internal or external, ofdomestically produced capital goods at terms of up to three years with oneyear grace. Because of term limitations, however, it has not been used forexport financing. Recognizing the need for more, long-term capital goodsexport sales credit, FINAME is now establishing a new line of such creditbearing eight year term (including two years grace) and nominal interest ofabout 28 percent.

42. Tne CACEX direct financing facility is of limited significancerelative to the overall manufactured export flow as the following tableshows.

1/ Assuming the exchange rate is decalued by 15 percent annually, thatthe foreign exchange contract is valued at US$100 and that the exchangerate at the time of discounting is US$1.00 = Cr$5.00 and calculatingall interest costs on an annual basis, the exporter receives 5(100-8) =

CR$460 at discounting for a contract which will be valued at5(1.15) (100) = Cr$575 12 months later and thus pays an interest rate

of57of 5 _ 1 = 25 percent.

2/ 60.85 percent of the export credits (sum) and 74.88 percent of all ex-port credit operations (number) were refinanced by IDB.

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Table 7: DIRECT FINANCING OF EXPORTS, 1965-1970

FinancedValue of Of which were exports as Percentageexports destined to percentage ofwhich Argentina of manufac- Value of financed Numberwere tured financing exports Operationsfinanced exports(million (classes (million

Year US$ fob) (percent) 5-8) US$)

1965 1,011 91 0.9 0,897 89 24

1966 4,607 75 4.7 3,451 75 87

1967 5,327 66 3.7 5,056 95 119

1968. 2,281 48 1.8 1,911 34 125

1969 8,780 79 4.8 8,199 93 238

1970 19,307 65 6.3 18,002 93 410

Source: Table 15 of Statistical Annex.

Even in 1970, such financing covered only 6.3 percent of manufactured ex-ports. Most of the CACEX-financed exports were destined to Argentina (seecolumn 2 of Table 7). On the other hand, the term structure of CACEX ex-port financing has improved: up to the end of 1969 there were only fiveoperations with terms of 5.years or more; in 1970, 16 loans of 5 yearterm and 13 of more than 5 year term were made (see Table 16 of StatisticalAnnex). Nevertheless, it is clear that medium and long-term financingof manufactured export sales has not yet had much promotional impact; moresuch financing -- along the lines of the new FINAME credits -- is required.

Other Credit Incentives

43. Three other credit facilities of some significance are availableto exporters of manufactured products:

(a) According to Resolution 43 of CONCEX (January 22, 1969) CACEXmay finance for up to 360 days 85 percent of the cif value ofdurable consumer and capital goods exported on consignment.HIowever, interest rates are high; CACEX charges 12 percent andthe borrower bears the exchange risk;

(b) Under CONCEX Resolution 49 of July 11, 1969, CACEX has financedat an interest rate of 12 percent dollar expenses associatedwith foreign marketing operations such as market research,

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samples remittances, printing, transportation, and distribu-tion of advertising materials, participation in Fairs and ex-hibitiations, and installation and opening of offices. Thefund available for this purpose amounts to US$300,000 - US$500,000annually;. and

(c) CACEX finances engineering, economic and other studies designedto promote Brazilian exports.

Other incentives

44. Beside the fiscal and credit incentives available to manufacturedgoods exporters, there are other incentives which are sometimes overlooked.Their impact cannot be measured quantitively but is, nevertheless, important.

Promotional Activities

45. In the import substitution phase Brazilian firms were producingmainly for the domestic market. Thus, Brazilian entrepreneurs had hadlittle experience in selling abroad when the Government implemented its newstrategy. Obviously, Brazilian exporters of manufactured products have hadto face relatively large marketing and organizational difficulties. To over-come some of the handicaps, the Government has extended marketing assistanceto exporters through the Bank of Brazil -- particularly CACEX -- and theMinistry of Foreign Relations (Itamaraty). CACEX is charged with promotion-al activities in Brazil, Itamaraty abroad.

The Bank of Brazil

46. The Bank (CACEX) has created an Export Promotion Center (CEPEX)which assists firms in marketing operations, keeps entrepreneurs informedabout incentives and export procedures and provides other services such asconducting seminars for exporters and potential exporters. CEPEX producesa number of publications, including:

(a) a weekly bulletin (Informacao Semanal da CACEX) on new Decreesand Laws, trade statistics, etc.;

(b) an exporters' manual (Manual do Exportador Brasileiro) whichcontains all regulations connected with fiscal and financingincentives and export procedures;

(c) sectoral export brochures containing information on incentivesand regulations relevant to enterprises in the sector, addressesof foreign firms importing respective products, and notices ofinternational fairs where sectoral enterprises might exhibittheir products; and

(d) a series called "Folhetos Paises" containing information onindividual country markets.

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47. Judging from interviews it appears that CEPEX has contributed con-siderably to the growth and diversification of Brazil's manufactured exports.In many cases, it was CEPEX which had made the entrepreneur aware of exportincentives and of the profit margin on sales abroad. CEPEX had also beeneffective in persuading entrepreneurs to exhibit their products at inter-national fairs.

48. The Bank of Brazil also is expanding rapidly its network of foreignbranches which -- inter alia -- are in a position to provide dollar financingto importers of Brazilian products and otherwise to promote Brazilian trade.

Itamaraty (Ministry of Foreign Affairs)

49. Brazil's embassies and consulates have been instructed to identifyexport possibilities and give general marketing assistance abroad. However,staff limitations appear to have prevented them from being very active inthis field. Allocation of additional qualified staff and, possibly theopening of trade promotion centers abroad probably could contribute signi-ficantly to Brazilian export performance.

Export Promoting Effects of Other Agencies

50. Other development efforts of the Brazilian Government have exportpromotional effects as by-products. The regional development agency forthe Northeast (SUDENE), for example, has established three export promotionoffices in Salvador, Fortaleza and Recife. It is too early to judge theirperformance. Another example is the BNDE's Industrial Modernization andReorganization Fund (FMRI) created in 1970 to finance the rehabilitationof traditional industry (textile, food products and footwear). Amongst thecriteria for extending FMRI credit is the export potential of the enter-prises to be reorganized and re-equipped.

Export Credit Insurance

51. Exporters' credit is necessary for competitive reasons. Commer-cial and political risks are associated with these transactions. To guardagainst them, credit insurance facilities have to be established. Especial-ly in less developed countries such facilities need government financialsupport, at least in their early stages, in order to cover administrativecosts and to provide funds for the payment of claims. The monetary author-ities in Brazil have provided a limited system of export insurance initiatedby Decreee 62940 of July 2, 1968. The Brazilian Reinsurance Instituteoffers guarantees for periods of up to three years. The impact on manufac-tured exports, however, seems to be insignificant to date.

Paperwork

52. During the import substitution phase of Brazil's economic develop-ment, exports were licensed. In order to export, producers of manufactured

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products had to fill out a large number of forms and to comply with manyother bureaucratic requirements. The government's objective was to preventcapital flight and to insure adequate internal supply. Some entrepreneursdeclared in interviews that they would not have exported during that timeeven if exports would have been profitable. They indicated that the psy-chological effect of the Government's attitude was a larger impediment toexports than the bureaucratic requirements themselves.

53. In 1964, the Government began to simplify export procedures. Doc-umentary requirements have been reduced by 90 percent since that time. Atpresent (save for drawback and export credits) there is only a single form,which serves several functions, and only two signatures are required. Pro-ducers stated that red tape no longer hampers exports although some improve-ment could still be made. 1/ Most important in this connection is the factthat the psychological climate has changed; exporters have been made tofeel that they are the leaders of the economic development of Brazil.

Evaluation of Interviews with Exporters

54. Government policies designed to promote exports have been explainedand their impact quantified to a certain extent. Further insight into theimpact of these policies is provided by responses to questions put to ex-porters by the Mission:

(a) in interviewing representatives of 33 enterprises (includingone export consortium); and

(b) through the submission of 150 questionnaires (of which 20 werefilled out and returned).

55. In response to a question as to what percentage of their addition-al exports since 1967-68 could be attributed to government incentives 14 of32 firms attributed 100 percent, seven firms 75 to 100 percent, two firms 50to 75 percent, three around 50 percent, one around 33 percent and one around10 percent. Four firms said that their exports were not affected at all.Signifcantly, those interviewed said exports would not decline to previouslevels if government incentives were abolished owing to economies of scale

1/ Some producers still complain of the paperwork as the following examplecan show which is taken from a questionnaire: "There is only officialauthorized to sign the forms and he is out of town (or on leave, orsick, or making inspection trips to the interior). Due to this sortof delays we had a Letter of Credit overdue and could not makeembarkation. In another case we missed the flight we had cargoreservation on."

- 26 -

which have been realized. The growth of production (for domestic and ex-ternal markets) has reduced unit costs so that some producers are competi-tive now, even without the tax credits and income tax exemption. More-over, producers have become aware of the benefits of marginal pricing andcosting; during the period of high inflation rates firms had had no needof such practice, but have become accustomed to applying it in connectionwith export market penetration.

56. In general, nearly all producers recognized that they had becomemore flexible, more aggressive and more competitive in selling on externalmarkets. They have learned a great deal about marketing and quality control.Thus, they strengthend their position on the domestic market as well asabroad at a time when internal competition was becoming stronger due tothe reduced inflation rate and, in some cases, to the policy of the inter-ministerial Council on Prices (CIP).

57. Without exception exporters stressed that they would continueexporting even if rising domestic demand allowed them to sell all theiroutput in the domestic market at relatively high prices. They declaredthey would not substitute domestic sales for exports but rather wouldenlarge capacity in order to meet domestic demand.

58. The firms were asked to rank the incentives according to impor-tance and to indicate which they considered negligible. The results aredifficult to compare because of factors such as product variations inincentive magnitudes, similar incentives received for other reasons (e.g.,income tax credits conceded for purposes of regional development) etc.Moreover, some entrepreneurs apparently had not conceptualized the flexibleexchange rate policy as constituting an incentive so that their ranking ofit probably does not reflect its true importance. Nevertheless, thoseinterviewed overwhelmingly regarded to IPI-ICM tax exemptions and creditsas being the most important of the incentives. About 15 percent rankedthe flexible exchange rate first. Two entrepreneurs said that the Resolu-tion 71 credits had to be seen as the most effective incentive. One firmranked the income tax exemption first. Second rankings were less uniform;with the income tax exemption, the flexible exchange rate and Resolution71 credits sharing equally in the vote for second place. Except in threecases, import duty drawback was deemed to be of least or even negligible im-portance both because of the small percentage of imported in total inputsand because of the complicated paperwork. A number of firms, among thembig firms, did not use the drawback though they imported some raw materials.For these firms the administrative costs (salaries of employees, time ofthe export manager) exceeded or almost equalled the benefit of the Draw-back. However, some producers declared that they planned to use the Draw-back in the near future.

- 7 -

59. Nearly '.ercent of those interviewed declared that the importanceof the incentives as an i,ndicator or increased government responsiveness tothe problems of exports equalled the importance of the price effect of taxexemptions and credits. Some producers added that the Government hascreated an export enthusiasm and made producers regard exporting as a pa-triotic obligation.

60. Representatives of smaller firms asserted that the system of in-centives to exporters favors larger companies. They supported this asser-tion with four arguments:

(a) the IPI tax rates and, therefore, the tax credits are on theaverage high for products which are produced by larger firms;

(b) the initial costs of exporting and the costs involved inmarketing abroad are -- in relative terms -- higher for smallfirms. One entrepreneur stated: "The incentives assist theproduct rather than the producer.' This disadvantage pre-sumably could be overcome by the formation of export consor-tia. However, there are only few export consortia in Braziland the success of these is impeded by the hetereogenity ofconstituents' products. In addition, after gaining exportknowhow constituents have tended to abandon such consortiain order to save the membership fee (a fixed amount and -- incase of the interviewed consortium -- 5 percent of the f.o.b.value of exports);

(c) small firms often can not afford to employ personnel withrelatively high salaries to do the paper work and the corres-pondence involved in exporting; and

(d) smaller firms often could not obtain Resolution 71 creditsbecause commercial banks had already exhausted their redis-count ceilings by lending to larger firms.

61. These arguments probably have some validity. As shown by thegraph below, concentration of total activity with larger firms is greaterin the case of manufactured exports than in the case of total industrialproduction.

- 28

O qf ExJl / 1. Nonmetallic minerals

L,50I,ne 2. Metallurgy/' 3. Mechanical machinery

110 .and equipment4. Electrical machinery

and equipment5. Transport equipment6. Wood and products

X6 /0 > i'7. Furniture'D / 8. Paper and products

9. Rubber products10. Leather products11. Chemicals

15 { -1 12. Pharmaceuticalproducts

30 ttX 13. PerfumeryX 14. Plastical products

15. Textiles20 :/X6 /9 16. Clothes

17. Food18. Beverages

lo / xlt °/a59-4e£m r>.> 20 19. Tobacco/ Cdx-.5, ,y /,Y20. Printing and publish-

,I / 1O¢C X" H,wrs: ing_21. Other products

40 2g 3o -D S0 X to62. On the other hand, the degree of producer concentration in the manu-factured export field has declined significantly in recent years, indicatingthat the incentives have been of some importance for smaller as well as largerfirms.

Table 8: EXPORTS OF TIHE TEN LARGEST FIRMS, ASPERCENTAGE OF TOTAL EXPORTS,

967, 1969, 1970

NBM Class 1967-L-8 1969 1970

5 71 82 55

6 75 60 49

7 77 55 46

8 52 36 31

/a Total exports in class.Source: Table 18 of Annex.

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B. Profit Margin on Export Sales

63. Comparison of unit profit margins on export and domestic sales ofthe same manufacturers is extremely significant in that it indicates theextent to which the export of such products would be profitable in the ab-sence of the fiscal incentives and provides some insight into the interna-tional competitiveness of Brazil's manufactured export industries. Whileno precise data on profit margins is available, information obtained throughthe above mentioned interviews and questionnaires as well as comparison ofdomestic and export sales prices for the same products in the context ofthe price differentials permitted by the fiscal incentives does providesome idea as to the relative profitability of export and domestic sales.

64. One question asked during the interviews and listed in the ques-tionnaires was: "What profit margin do you earn on domestic sales relativeto profits earned on export sales of the same products." Some answers wereunclear and some entrepreneurs refused an answer, but 38 answers show aclear difference between the profit margin on export sales and domesticsales. Export profits were stated to be: -- larger than profits on domesticsales in 20 cases; - more or less equal in 10 cases; -- lower in 9 cases.Although the number of firms answering the question is too small to allowa conclusion as to which subsectors profit more from export than fromdomestic sales it can at least be said that higher export profitabilityoccurs over a wide range of production lines. 1/

1/ The following list categorizes relative profitability by product line:

(a) Firms which declared higher profits produced: - organic chemicals(1), -chemicals, especially tannic acids (1), - automotive ac-cessories (1), - sports cars (1), - bulldozers (1), - computeraccessories (1), - typewriters (1), - shotguns (1), - iron andsteel (1), - plywood (1), - veneers (1), - furniture (1), - shoesand tanned leather (3), - orange juice concentrate (1), - pro-cessed foodstuffs (1), - edible oils (2), - ornaments (1).

(b) Firms with more or less equal profit margins produced: - machin-ery, tools and spare parts (1), - transformers and similar elec-trical equipment (1), - iron and steel (2), - parquet (1), -ladies underwear, bras, girdles (1), - lenses (1), - edible oils(3).

(c) Firms with larger profit margins on domestic sales produced: -menthol crystals (1), - passenger automobiles (1), - sewingmachines (1), - ceramic machinery (1), - clocks (1), - hardboard(1), - cotton good pieces (2), - cocoa butter (1).

30 -

65. The relation between profit margins on exports and on domesticsales of the samre products can be indicated in an indirect way by comparingthe ratio actual export price/domestic market price witn tne ..ypVLheticalrelationship given in Table 5 (column 6). If the actual ratio is higherthan the hypothetical one, then the profit margin on exports is higher thanon domestic sales. On the contrary, if the hypothetical ratio exceeds theactual ratio, exports yield a smaller net profits.

66. This procedure requires knowledge of export and domestic prices ofspecified, single products. Price statistics in such detail were not avail-able to the Mission. Therefore, a list with several broadly defined prod-ucts was given to CACEX which quoted respective average 1970 export priceson the bases of available export documentation. This list was then sent tothe Inter-Ministerial Price Control Authority, CIP, which quoted 1970 domes-tic prices (all taxes included) for the same products. The resulting export/domestic price ratios are shown in Table 9 (column 1). Most of the resultsseem reasonable; there are, however, some figures which indicate that pricesof different products (incomparable sizes or qualities) have been compared. 1/

67. When compared with the above mentioned "hypothetical" priceratios, these "actual" price ratios indicate that in 28 cases the marginon export sales must.be higher than on domestic sales, in 8 cases it islower and in 4 cases more or less the same (deviations of not more than±0.02). This result confirms the findings from interviews and question-naires: Regarding many manufactured products, exports are more profitablethan domestic sales if all incentives to exporters are taken into account.However, it also shows that if the subsidy elements (tax credits and incometax exemption) were abolished, exports would be more profitable than domesticsales in 12 cases only, less profitable in 24 cases and more or less the

1/ Refrigerators, for example, are supposed to be products which areproduced at relatively low costs in Brazil. F. >tasson showed thatthe domestic prices of refrigerators (taxes excluded) were lower thancif prices of comparable imported refrigerators in June 1970. (F.Masson, Protection, Prices and Efficiency in the Brazilian ElectricalAppliance Industry, AID-Rio, September 1970, Table 1, p.19. The re-lations between the domestic prices (excluding taxes) and the cifprice of comparable import goods are 0.8 (12 feet refrigerators),0.5 (10 feet), and 0.7 (12.7 feet). Thus, the export price is ex-pected not to be as low as it is listed in Table 9. A similar argu-mentation applies to cash registers. On the other hand, the figurefor chairs seems too high though a producer of furniture declaredduring an interview: "We can survive on the domestic market onlybecause we export."

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Table 9: CONPARISON 5ETWEEN EXPORT PRICES AND DOMESTIC PRICES(Average prices, 1970)

FXport Price Divided by Domestic PriceI Hypothetical Export Price'Indirect Tax

Actual ExemptionsExport and All

Product Price Drawback Only lncentives~~~~~~~~~~~(1)4 (2) (3)

Cotton thread, title 20/2 0.70 0.77 0.68Wool thread, quality 60/64.s 0.70 0.77 0.68Cotton fabrics (gauze), wridth 1.30m 0.70 0.75 0.59Fluffy cotton fabrics, bucle 0.70 0.75 0.59Jute fabrics, type 7-1/2 x 1.00 0.70 0.75 0.59Fabrics of nylon fibres 0.70 0.75 0.59Knitted jackets (made from imported thread) 0.70 0-75 0.61Enitted non-elastic cotton underwear 0.70 0.75 0.61Knitted shirts (made from imported thread) 0.70 0.75 0.61Bathing suits (nylon) 0.70 0.75 0.61Jute sazks 0.70 0.80 0.71Rubber sandals 0.66 0.76 0.57Tanned leather (boYine) 0.69 0.79 0.68Conveyer belts from vulcanized rubber 0.68 0.73 0.55Electrical sewing machines for domestic use(standard machine) 0.98 0.76 0.59cteel scissors (9 inches) 0.48 0.77C 0.64TYPewriters (with 15 inches carriage) 0.43 0.78 0.64Refrigeratcrs (9.6 feet) 01l 0.76 0-59Diesel rotors (6 cylinder and 77 HP) 0.91 0.78 0.64Air purps (without motor) 0.°2 0.78 0.64Cash registers 0.15 0.78 0.64Steel screws (5/161 - TJU1F x 3/8") 1.10 0.77 0.64Flashlights (without battery) o.65 0.76 0.-9Fclding bicycles (wheels 20 x 1.75) 0.37 0.72 0.54Cellophane paper (type "putt ", with 400 mm) 0.78 0.78 o.65Acetate (of cellulose) 0.78 0.78 0.65Lamp - black 0.36 0.80 0.71Paints (oil-base) 0.82 0.71 0 5KPig iron 0.83 0.81 O.CFerronickel (type FN-4) 1.51 0.81 o.64Steel plate (7,938 x 25,400 x 1,000 x 2,000) 0.79 0.81Iron plate laminated cold

(SAE 1,045 - 3 x 127 x 3,500 mm) 0.90 0.81 0.64Drawn steel (5' x 51' x3/8 x 12,000 mm) 0.99 0.81 0.64Steel wire, black annealed (SAE 1,008 (10) 0.84 0.81 0.64Electrolytic copper 99.9% of Cu in rolls of37 x 0.16 mm 0.69 0.80 0s72Cellulose 0.53 0.81 0.71Wood pulp and long fibres of pine wood 0.85 0.81 0.71Paper (wit: .aier line for books, etc.) 0.67 0.75 0.57Chairs 1.45 0.74 0.53Mattress kl. 23 x 1.83) 1.01 0.74 * 0.53

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same in 4 cases. Thus, tax credits and income tax exemption have contributedconsiderably to the development of manufactured products. 1/ Yet this doesnot mean that the jL-cduction of these goods is not efficient by internationalstandards; as demonstrated, tax credits and the income tax exemption canbe regarded as offsetting the disincentive for manufactured exports consti-tuted by distortions in overall internal-external price relationships.

1/ A recently published IPEA study (C. van Doellinger et al., loc. cit.,p. 60ff), approaches this issue by comparing actual unit profit mar-gins for 13 products, calculating unit profits on export sales atvarious levels of abstracting from the effect of the fiscal incentives:A - no incentives; B - IPI exemption only; C - IPI and ICM exemptionsonly; D - IPI and ICM exemptions and Ut credit; and, E - IPI and ICMexemptions and credits (note that the fmnact of the other fiscal incen-tives is not measured). Export/domestic profit ratios, are calculatedat each of these levels of abstraction; negative ratios, therefore,representing losses on export sales. The results indicate (A) that withno incentive the export of only one of the 13 products would be profit-able; (B) that with all incentives save the tax credits export of 2of the 13 products would be profitable but at a lower rate than in thecase of domesAic sales; and (C) that with all incentives export of 10of the 13 products would be profitable, even more profitable than domes-tic sales for 5 of the 10 products.

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Table 10: COMPARISON OF PROFIT MARGINS, 1970

Produot A B C D E

Menthol crystals -. 78 -.04 .00 .01 0.760Thick steel plates -1.99 -1.72 -1.26 -. 79 -0.310Jute fabrics .13 - - .99 1.860Extract of black ocacia -2.55 -1. 79 -1.14 .386 0.371Orange juice -2.86 -1.93 -1.29 .641 1.930Sewing rmachines -2.88 -1.71 -1.03 -. 35 0.330Valve receivers -5.85 -4.08 -2.46 -. 814 0.921Bulbs of glass -. 59 -. 05 - .44 .93 1.4lhoParquet -1.80 -. 95 -. 29 .38 1.0140Dry cells -2.00 -1.63 -1.13 -. 62 -0.120Pneuratic tires -2.08 -1.89 -1.03 -. 16 0.705Typewriters _5.34 _4. m -3.07 -1.99 -0.910Licuifiers -5.76 -4.58 -2.36 -. 51 1.340

Nota, that some figures of this table could be doubted. Tablo 10 as well anTable 9 shows, for example, that the products which yield a loss when export-odinclude typewriters. This is a contradiction to the following statement of alarge producer and exporter of conmercial typewriters; "to each percent profiton domestic sales we have 5 percent profit of export sales" (cited from ques-tionnaire).

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CHAPTER III - PROSPECTS FOR MANUFACTURED EXPORTS

A. Prospects for 1971 and 1972

68. The Brazilian Government has estimated the growth rate of manufac-tured exports (narrow definition) at 58 percent in 1971 and at 50 percent in1972. Mission estimates, based on a class by class forecast, are slightlyless optimistic; 53 percent for 1971 and 42 percent for 1972. The Missionestimates closely accord with the expectations of interviewed entrepreneurs;the weighted average of anticipated 1971 growth in their own exports equal-ling 51.3 percent.

69. Interestingly, 16 out of 38 entrepreneurs expected exports to growno more rapidly or less rapidly than domestic sales. The expectations ofsome of these 16 represent the situation of certain industrial subsectorsfacing specific marketing problems:

(a) Textiles firms expect high growth rates in the domesticmarket, but an annual increase of exports of only around5 percent. They attribute this export growth prospectmainly to import restrictions in the U.S.A., in the U.K.,and France. 1/

(b) Soluble coffee exports are expected to increase slowly(the rate is around 5 percent) in accordance with in-ternational agreements.

(c) Some firms concentrated on exports until 1969-70 (forexample, producers of orange juice concentrates andvegetable oils). They now expect to be able to markettheir products in the domestic market because of high-er family incomes. Even small domestic sales meanshigh growth rates at the beginning.

70. Also, the expectations of some entrepreneurs may have reflectedunawareness of some recent developments regarding the incentive system.For example, some entrepreneurs did not plan to export more than 50 percent

1/ In September 1970, for example, a new quota of cotton fabrics importsin the U.S., was established. Brazil was allowed to export to the U.S.75 million m2 in the first year and then annually 5 percent more. Thus,the growth is restricted. In addition, Brazilian textile exporters com-plain about discrimination on the part of U.S., customs officials. TheU.S., duty rate on normal towels, for example, is 15 percent, on orna-mented towels it is 40 percent. Officials now treat normal towels withloose ends of the loom as ornamental towels though towels with suchfringes are cheaper. The loose ends are normally left over; they donot mean ornaments.

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of their production because of their impression that the tax credits couldonly be redeemed against tax liabilities generated by domestic sales; asindicated the Government now is redeeming these credits in cash. In anyevent, on the whole, there is great optimism among Brazilian entrepreneursregarding the future development of both foreign and domestic demand suchthat they are investing heavily in capacity expansion although not in mostcases exclusively for export capacitv expansion.

71. By 1972, on the other hand, the rate of manufactured export growthcan be expected to begin to decelerate: first, because of the large baselevel which such exports will have attained by the end of 1971; and, second,because the "push"exerted by the export incentives will have diminished tosome degree as limits are reached on the extent to which the Government canincrease these incentives. Other factors of less immediate relevance tend-ing to slow the very rapid rate of manufactured export growth of the 1968-71period are the multiplier effect on internal denand of the investment boomwhich Brazil is now undergoing and limitations on the supply of skilled la-bor, entrepreneurship and certain domestically produced raw materials.

B. Prospects for 1973-76

Estimates

,-* .Considering that continued rapid growth of Brazil's manufacturedexports is relatively unconstrained on the demand side this report simplypoints a specific rate of longer term growtih and explores the constraintsit might encounter, primarily on the supply side. Growth of manufacturedexnorts in N.B.M. classes 6,7 and 8 (machinery, manufactured products clas-sified by the main raw material input, diverse manufactured products), there-fore, is projected to decelerate such that absolute annual increases will begreater than the absolute annual increase of the preceding year by 15, 10 and5 percent in 1973, 1974 and 1975, respectively, and remain constant there-after. Absolute annual increases of manufactured exports in the prepared rawmaterials, foodstuffs and beverages and chemicals categories are projected toremain constant starting in 1973.

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Table 11: PROJECTED GROWTH OF BRAZIL'S MLNUFACTURED EXPORTS, 1971-76(In millions 1970 US$)

N.B.M. - Class 1971 1971 1973 1974 1975 1976

5 Chemical, pharmaceutical Value 47 55 64 72 80 89and similar products Percent increase 21 17 16 13 11 11

6 Machinery, vehicles and Value 150 216 290 375 463 550accessories Percent increase 54 44 34 29 23 19

7 Manufactured products Value 236 340 470 607 750 890classified by main raw Percent increase 58 44 38 29 24 19material input

8 Diverse manufactured Value 36 53 73 95 1i8 140products Percent increase 62 47 38 30 24 18

5-8 Manufactured exports Value 469 665 900 1150 1400 1670narrow definition Percent increase 53 42 35 28 22 19

2 Prepared raw materials Value 95 134 172 210 250 290Percent increase 68 41 28 22 19 16

4 Foodstuffs and beverages Value 114 137 160 182 205 230Percent increase 25 20 17 14 13 12

5-9 Manufactured exports Value 679 940 1230 1540 1850 2190broad definition Percent increase 49 38 31 25 20 18

Brazil's Allocative Efficiency

73. Surprisingly, Brazil's manufactured export production processesare relatively capital intensive and have a higih skilled labor content. 1/These characteristics contradict the theory that the factor endowment of acountry determines its comparative advantage in international trade: coun-tries are supposed to export goods which are abundant factor intensive andimport goods which are scarce factor intensive. As a result, less developedcountries, generally abundantlv endowed with unskilled labor but poor in ca-pital and skilled labor, are expected to import capital-intensive productsor products with a high skilled labor content and to export.labor intensiveproducts.

1/ Partly based on the findings of William G. Tyler, A Combinacao de Fa-tores de Producao nas Exportacoes Industriais do Brazil. RevistaBrasileria de Economia, Vol. 24, 1970, p. 109-128, and: The LaborSkill Content of Brazilian Trade in Mlanufactures, Mimeographed October,1970.

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74. Indirect evidence of the relative capital intensivity of Brazil'smanufactured exports is provided by data on value added per employee in 21Brazilian industries as of 1969 (see Table 12). From this data it is esti-mated that weighted average value added per employee in export productionis 8 percent greater than weighted average value added per employee in in-dustrial production over all. Thus, Brazilian manufactured exports appear,on the average, more capital intensive than its total manufacturing produc-tion. 1/

75. The embodied skill content of Brazil's manufactured exports wasindexed by Tyler 2/ who concluded that "Brail's export composition impliesa skill intensity similar to those of highly development countries, rankingbetween France and Austria." Such skill intensity probably can be regardedas being inconsistent with Brazil's overall human resource development.

76. Although available data may be regarded as insufficient to supportconclusively the hypothesis that Brazil's manufactured exports are capitaland skilled labor intensive, other characteristics of the economy stronglysupport this hypothesis. These characteristics are:

(a) distortions in the capital and labor markets; and

(b) the prevalence of foreign enterprise.

77. Distortions prevail in the capital market as well as in the labormarket. They tend to lower the price of capital for investment in industryand raise the effective price of labor. In the capital market, they wereor are due to financing and investment incentives originally extended topromote investment in manufacturing industry during the import substitutionphase (real interest rates sometimes were negative) and now extended to pro-mote manufactured exports and alleviate regional disparities. These incen-tives tended and partly still tend to favor capital intensive industriesand the establishment of more capital intensive techniques.

1/ For 1965, a similar result was found by Tyler, who thoroughly discussedpossible objections to the use of the highly aggregate IBGE data. SeeW.G. Tyler, A Combinacao ..... op. cit.

2/ W.G. Tyler, The Labor Skill ..... op. cit., p. 28.

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Table 12: CAPITAL INTENSITY IN BRAZILIAJUN MAUFACT URED E)TORTS,AS MEASURED BY VALLE ADDED PER EMPLOYEE IN

MANUFACTURINC INDUSTRsIES, 1969

Percent of Manu- Value added perSector factured Exports Employed (NCrz) (1) x (2)

Non metallic minerals 2.74 13702 375Metallurgy 18.71 17245 3226Machinery 15.39 19703 3032Electrical and commun-ication equipment 3.13 19861 622

Transportation eauipment 2.38 20321 498Lumber and wood products 8.23 10839 892Furniture 0.20 9798 20Paper and allied products 0.07 16785 12Rubber 0.38 27361 104Leather 0.06 10250 6Chemicals 6.75 34928 2357Drugs 1.34 38799 520Perfumes, Soaps andallied products 2.62 34161 895

Plastics 0.23 19795 46Textiles 6.97 12132 846Apparal and shoes 0.90 9412 85Food and kindred.products 24.94 18389 4586Beverages 0.32 19369 62Tobacco 0.42 32292 136Printing and publishing 0.48 14078 68Miscellaneous 3.74 14660 548

TOTAL 10.0.0 17544 18936(=287.8 Mio. US9

Sources: a) Exports CACEX.

b) Value added per worker: IBGE, "Producao Industrial 1969."The data were not adjusted for incom.plete coverage, whichis some 80 percent.

78. In the labor market, the imperfections have been and are in partdue to the system of social welfare and labor legislation; for example, tominimum wage laws, liberal vacations pay, severance pay and Christmas bo-nuses. These measures resemble those of more developedl countries. In ad-dition to these paymenits, firms often have to supply and pay for workertraining and to bear frequent absenteeism; tiiey also have to compete for

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scarce skilled labor by offering relatively highi wages. These facets ofthe labor market have attributed to distortions in the wage/interest raterelationship and favored the substitution of capital for labor within therange of possible factor substitution.

79. It is important to recognize that the effect of both the labor dis-tortion and the capital distortion on the costs of an individual industry isnegatively correlated with its capital intensitv, i.e., the magnitude in-creases with increasing labor intensity of an industry. On the other hand,the influence of these distortions in factor prices mav, in some cases, berendered negligible by other factors such as raw materials availability.For example, while the capital intensivitv of chemical export production issecond only to that of druge, chemical exports consist in large part of pro-ducts with a large raw material component (for example, menthol crystals,essential oils, tanning and bleaching extracts), such that it is probablythe availability of the raw material which enables Brazil to export theseproducts, not the capital intensity.

80. With respect to the influence of forei;n enterprise on factor mix,it has been shown 1/ that in Brazil international firms are not only moreprevalent in the more capital intensive industrial sectors but tend also toemploy more skilled labor and to introduce modern, capital-intensive tech-niques which are familar to them. Thus, the average capital intensity ofmanufactured exports in specific categories appears to be positively re-lated to the degree to which these exports are produced by internationalfirms. A calculation 2/ of the percentage share of international firms inthe production of manufactured exports -- such firms being defined as inter-national if 25 percent or more of their capital is owned by foreign firms orpersons -- shows a large concentration of such firms in the relatively ca-pital intensive macl-hinery category of manufactured exports.-

Table 13: TIE CONTRIBUTION OF INTERNATIONAL FIRMS TOBRAZIL'S M\NITFACTURED EXPORTS,

1967 AND 1969

(in percent)

1967 1969

National National Inter- National National Inter-Private State national Private State national

N.E.M. Class Firms Firms Firms Firms Firms Firms

5 83.2 - 16.8 73.0 - 27.06 28.2 - 71.8 24.5 - 75.57 21.8 56.5 21.7 36.5 33.1 30.48 79.3 - 20.7 79.1 - 20.9

TOTAL 39.2 27.0 33.8 41.2 15.0 43.3

1/ Fernando Fajnylber, Sistema Industrial..., op. cit., P. 101ff. Seealso Table 20 in the statistical annex, which shows, that those sec-tors, in which international firms are producing, are high concentra-ted.

2/ Ibidem, p. 212.

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81. A final point should be made with respect to the causes of the sur-prisingly capital and skilled labor intensive nature of Brazilian manufactur-ed exports. Data on the destination thereof sh0ow that the largest part ofthe raw-material intensive manufactured exports (i.e., classes 2, 4 an<' 5)are destined to the more industrialized countries while *more than 50 percentof the products in the highly calital intensive categories (6, 7 and 8) areexported to Brazil's LAMFA trading partners. Obviously geograpnical propin-quitv and the LAFTrA trade incentives tend to offset the comparative disad-vantages for Brazil vis-a-vis othier industrial suippliers inlherent i?n its re-latively poor supply of calital and skilled labor.

Entrepreneurial Skill Prohlem

82. Aside from exnplainin. in part the relatively capital andi skilledlabor intensive nature of Brazil's manufactured export production the highconcentration of international firms in this field is also related to limitsof Brazil's supply of entrepreneurial skills. Exporting. requires rmore suchskill t1han does production and sale for the domestic market, it requires e.-perience in selling, different products in widely different countries, know-ledge of foreigTn consumers tastes. familiarity with trade reglations, flex-ibility, ability to modify production lines, effective representation indifferent world trade centers, etc.

83. Brazilian manufacturers had had little export experience at thetime the manufactured export promotion policy was initiated. Thus, thepolicy tended to favor foreign enterprises which have an advatage in ex-porting on account of their external contracts, market knowledge and ad-mqinistrative capabilities. As Table 13 indicates the contribution of in-ternational firms in, Brazil's manufactured exports is very large, espe-cially in the dyn3aric machinery andj transportation equipment category.Also, the manufactured exports of international firms have increased muchmore rapidly than those of national firms:1/ average exports of interna-tional manufacturers having increased from USS193,600 per firm in 1967 toUSS272,200 in 1969 while those of national manufacturers decreased fromUSS36,100 to LSS63,100. 2/

84. The inherent volatilitv of this situation tends to be exacerbatedby the relatively better financial situation of the international firm, en-dowed as it is witn access to external sources of capital. For example, na-tional firms have accused their international counterparts of bidding awayscarce skilled la3or. The Brazilian Government has sou,gIht to offset the adi-vantages of the foreign firmr, by lilting its access to thle internal capital

1/ Fajnzylber has calculated the percentage increase of m,anufacturedl ex-* ports (NBll classes 5-8) of national and international firrms. As the

result, the value-index (1967=100) for international firms is 139 in1969, for national firm?s only 126. (Fernandeo i>.1.inzlber, Sistema in-dustrial . , op. cit., p. 248).

*2/ Ibidem, p. 224.

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market and creating a special mechanism (tile Resolution 63 procedure) where-by national firms have access to foreign sources of investment and workingcapital finance through the intermediation of local commercial and invest-ment banks. Recently, however, the Government imposed minimum limits on theterm of this particular type of financing but not on financing secured abroadby international firms.

Table 14: PERCENTAGE SHARE OF MANUFACTURED EXPORTS OF INTERNATIONALAMD NATIONAL FIRMS TO LAFTA-COUNTRIES, 1967 and 1969

(total manufacture exports of firms = 100%)

National Firms International FirmsClasses 1967 1969 1967 1969

5 13.5 13.8 23.8 35.86 46.3 83.6 62.4 84.77 40.8 76.6 78.9 57.38 84.5 35.9 62.1 67.2

5-8 36.2 57.5 64.0 70.5

Source: Fernando Fajnzylber, Sisterna Industrial...., op. cit., !. 243-4.

85. Another potential constraint on the growth of Brazil's manufacturedexports has to do with the concentration of international manufacturers inexport to LAFTA countries. This can be attributed in part to the fact thatBrazilian affiliates can export to LAFTA countries duty free while theirparent companies cannot. Thus, Brazil's manufactured exports are more closelylinked with the economic development and trade policies of thie LAFTA countriesthan is at first apparent. Though only two international firms stated duringtne interviews that market settlements with their parent companies existed, itc.an be assumed that some industrial markets (in Europe and/or North America)are closed for the .Brazilian affiliates of international firms. In eithercase the effect would be to constrain manufactured exports from Brazil.

The Regional Prohlem

36. Since manufacturing industry already was concentrated in the Center-South of Brazil, export promotion policies, in effect, have tended to inten-sify rather than alleviate regional income disparities. This, naturally, isa rather inevitable result and may be re-arded as insignificant in view of theoverall economic benefits deriving from export expansion and diversification.O)n the other hand, the re-ressive income redistribuition effect of the exportpromotion program could have been alleviated or offset had the practices ofBrazil's regional development agencies been better reconciled with it. Com-petent authority has asserted, for example, that SUDE'NE has foregone valuableopportunities for fostering exporting industries and for using comparatively

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labor-intensive technologies. 1/ Instead, it has emphasized capital andintermediate goods industries, which were regarded as dyniamic and linkage-rich but not as potential ex;ort industries. This bias against manufacturedexports is manifested by thle priority criteria 2/ for the use of 34/18 re-sources. The essentiality criterion, for example, awards capital goods andbasic intermediate goods 20 points, textiles, however, only 10 points. Theregional input criterion awards 15 points to a project if at least 80 percentof its material inputs originate in the Northeast: an export-oriented firmimporting (under the Drawback regulations) rawq materials or ot.her inputs inorder to become competitive in the world market, gets no points. Anotherexample is an award of 10 points to import substitutinig projects while exportfirms get an award of 10 points only if at least 40 percent of their salesare for export. Manv Northeast filrms desiring to modernize and/or expandtheir enterprises in order to export have found it difficult to obtain 34/18financing for their proJects. Whether the recently established export pro-motion agencies in Salvador, Fortaleza and Recife (see paragraph 50) canchange this trend remains to be seen.

Table 15: RFCIONAL DISTRIBUTION OF 1tflUFACTURING INDUSTRIESIN BRAZIL, 1969

(Percent, Brazil = 100)

Value ofState Production Value Added Personnel Salaries

Sao Paulo 57 58 50 61Guanabara 9 10 10 10Rio de Janeiro 7 7 6 6Rio Grande do Sul 7 6 8 8Parana 4 3 3 2Santa Catarina 2 2 4

TOTAL /a 85 86 81 88

/a Detail may not add to total because ox rounding.

Source: IBGE, Producao Industrial 1969.

1/ See Albert 0. liirschman, Desenvolvimento Industrial do Nordeste Brasil-eiro e o Mecanismo de Credito Fiscal do Artigo 34/18. Revista Brasil-eira de Economia, Vol. 21, No. 4, Dec. 1967.

2/ Ministerio do Interior, Superintendencia do Desenvolvimento do Nordeste,Departamento de Industrializacao, Regulamento dos Incentivos Fiscais eFinanceiros. Decreto No. 64.214, 18 de 'Marco de 1969, Recife, 1969.

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87. Internally, therefore, major constraints on future export growthinclude the supply of skilled labor, the extent to which social pressureswill permit manufactured exports to be capital rather than labor intensivein nature, limitations on the supply of entrepreneurship and the extent towhich society will tolerate foreign ownership of its factors of production.With regard to the first, a practical suggestion can be made: namely, thatthe Government provide more training in industrial skills. To date, payrolltaxes have been imposed on certain industries to reimburse firms providingtraining of an amount and type which satisfies special training boards setup for each industry. This system could be improved for example, by grant-ing subsidies per man if firms 1/ employ and train unskilled labor.

88. Another suggestion has to do with the structure of the exportincentives. The lack of any present relationship between this structureand the relative international competitiveness of the various exportingenterprises could at least partially be overcome by untying the subsidyelement of the export production wage bill. Both suggestions combineddiffer only slightly from a recommendation given in an OEEC study: "Industryand Trade in Some Developing Countries". The studv holds that industryshould be encouraged both to produce more labor intensively and to trainunskilled workers "by subsidizing labor, in medium and large scale industry,possibly at the rate of 10 to 50 percent of the unskilled wage bill, depend-ing on the country. The subsidy would not actually be paid as a percentageof the wage bill, but as a subsidy per man ... Care would have to be takenthat the existence of such a subsidy did not result in higher wages." 2/

89. Social pressure for more job opportunities probably will not takecognizance of the capital intensivity of manufactured export production and,therefore, not force any modification of the export production factor mix.This can be asserted because, despite spectacular growthl and crucial import-ance in a balance of payments sense, the number of personnel involved inmanufactured export production is relatively very sm,all. In 1969, the numberof employees directly engaged in export production can be roughly estimatedat around 33,000 (see Table 16). Moreover, the foreign exchange contributionof rapidly growing manufactured exports will facilitate rapid development ofthe rest of the economy thereby generating job opportunities indirectly.

1/ The quickest and most efficient training is on-the-job training. See:F. H. Harbison, tluman Resources Development in Modernising Economics.International Labor Review, May 1962, p. 445-448.

2/ Ian Little, Tibor Scitovsky, Maurice Scott, Industry and Trade in someDeveloping Countries. A Comparative Study. Published for the Develop-ment Centre of the Org,anization for Economic Cooperation and Develop-ment by Oxford University Press, London, New York, Toronto, 1970, p. 24.

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Table 16: E>SLOYT1ES DIRE`CTLY ENGAGED IN PRODUCTION OFM,WNUFACTURPED EXPORTS, 1969

Employeesdirectly

Total Production engagedTotal in export

Ex7orts Employees Production(in Mill Crz) (in 1000 NCrz) (1) (2)

Nonmetallic minerals 31.8 20.8 1,527Metallurgy 217.8 32.5 6,706Machinery 179.2 31.8 5,626Electrical and communicationequipment 36.4 36.8 989

Transportation equipment 27.7 45.4 611Lumber and wood products 95.8 19.4 4,926Furniture 2.4 18.1 130Paper and allied products .8 33.2 23Rubber 4.5 53.0 84Leather .7 22.3 33Chemicals 78.5 81.3 96Drugs 15.6 52.9 295Perfumes, soaps and alliedproducts 30.4 62.2 489

Plastics 2.7 33.9 80Textiles 81.1 24.6 3,300Apparel and shoes 10.5 18.8 559Food and kindred products 290.2 55.0 5,277Beverages 3.7 30.5 121Tobacco 4.9 50.6 97Printing and publishing 5.6 21.4 260.Miscellaneous 43.5 21.9 1,987

Total 1,163.8 33,216

Source: a) Exports: Compuited from CACEX data.

b) Production and employment: IBGE, Oroducao Industrial 1969.The data were not adjusted for incomplete coverage, becauseit can be assumed tihat all firms not covered are nonexportingsmall firms.

90. Nevertheless, a third suggestion which may be made in this contextis that the Government fully reconcile its regional developmiient and exportpromotion policies.

- 45 -

91. Finally, while distortion of factor pricing may represent a con-siderable cost for the economy, Brazil's concentration on capital and skilledlabor intensive manufactured export production may, in fact, be the bestcourse in view of resurgent protectionism in the world market and its con-centration upon labor intensive products. As in Brazil, the possibilitiesfor continuing import substitution are exhausted in many other semi-industri-alized countries. It can be assumed that these countries, too, will changetheir development strategies. Japan with its very high growth rates ofexports and GNP has become the pattern for many LDCs 1/ and the positiveexperiences Brazil has had with its new strategy will certainly encourageothers to follow. In addition, more and more economists have acknowledged-- as the literature shows 2/ -- that semi-industrialized countries do bestin choosing an outward looking strategy and in promoting manufactured exports.

92. If the number of countries promoting manufactured exports increase,the import-competing industries in the importing countries may respond tothe pressure of growing international competition by demanding protectivemneasures. This possibility, however, is of limited significance for Brazil'smedium-term prospects for manufactured exports, for two reasons. First, itis timne-consuming to develop and refine an export promotion policy in acountry which has concentrated on import substitution. It takes time alsobefore entrepreneurs become export minded. Thus, for some time to comeBrazil will be one of the few semi-industrialized ccuntries in a positionto supply a rapidly expanding volume of manufactured exports. Secondly,Brazil has taken the dangers of protectionism into consideration by foster-ing capital and skilled labor intensive manufactured exports despite thecomparative disadvantages involved. To cite an official of CACEX: "Exportingthe products of light industries -- possible comparative advantages notwith-standing -- would be to switch on a time bomb."

-1/ Therefore Japan's export promotion policy is often described and dis-cussed in literature. See, for example, Export Promotion in Japan andits Application to Latin America. In: United Nations, Economic Com-mission for Latin America, Economic Bulletin for Latin America, Vol.XV, No.1, first half of 1970, p. 52-127.

2/ See, for example, Bela Balassa, Growth Strategies in Semi-IndustrialCountries. The quarterly Journal of Economics, Vol. LXYYIV, 1970,p.1-47.

I I

ANNEX I

INDEX TO STATISTICAL APPENDIX

Table No.

Brazil's Exports of Manufactured Products, 1952-72 ... . . . . 1

Exports of Manufactured Products, 1962-71 According to NBMClassification .... . . . . . . . . . . . . . . . . . . . . 2

Annual Increase in Exports of Manufactured Products, 1962-71 . . 3

Brazil's Exports of Chemical, Pharmaceutical and Similar Products1962-70 .... . . . . . . . . . . . . . . . . . . . . ... . 4

Exports of Machinery, Vehicles and Accessories, 1962-70 . . . . 5

Brazil's Exports of Manufactured Products Classified by theMain Raw Material Input, 1962-70 . . . . . . . . . . . . ... . 6

Brazil's Exports in New NBNM Class 8, 1962-70 . . . . . . . . . . 7

Brazil's Exports of Manufactured Products to DifferentRegions, 1967-70 . . . . ... . . . . . . . . . . . . . . . . . 8

The Exports of Manufactured Products by Regions ofDestination, 1967 ... . . . . . . . . . . . . . . . . . . . 9

The Exports of Manufactured Products by Regions ofDestination, 1970 . . . . . . . . . . . . . . . . . . . . . . 10

The Exports of Manufactured Products by Regions ofDestination, 1969 .... . . . . . . . . . . . . . . . . . . 11

Number of Firmis Exporting Products of NBN Classes 503,1967 and 1970 .... . . . . . . . . . . . . . . . . . . . . 12

Brazil's Floating Peg . . . . . . . . . . . . . . . . . . . . . 13

Exports Financed by CACEX, 1965-70 ... . . . . . . . . . . . . 15

Periods of Export Financing, 1965-70 ............. . 16

Refinancing of Brazil's Export Financing by the Inter-AmericanDevelopment Bank, 1970 ... . . . . . . . . . . . . . . . . . 17

Participation of the 10 Largest Firms in the Exports of WBTClasses 5-8, 1967, 1969 and 1970 ... . . . . . . . . . . . . 18

Concentration in Manufacturing Industry and International Firms,1968 .... . . . . . . . . . . . . . . . . . . . . ..... . 19

I

Table 1: BRAZIL'S EXPORTS OF MANUFACTJURED PRODUCTS, 1952-72(Value in millions of US$, FOB)

EXPORTS OF MANTUPACTURED PRODUCTS

NBM Classes, 5-8 PlusSome Products of Classes

Total NBI Classes 5-8 2 and 4 SITC Classes 5-8Year Exports Value % of Total Exports Value % of Total Exports Value % of Total Exports

1953 1,539-3 8.9 0.61954 1,561.8 9.4 0.6 .. .. 11.2 0.71955 1,423.2 15.2 1.7 ..

1956 1,482.0 13.1 0.9 ..

1957 1,391.6 12.7 0.9 .. .. 18.2 1.31958 1,243.0 12.2 1.0 .. .. 16.5 1.31959 1,282.0 13.2 1.0 .. .. 18.1 1.41960 1,268.8 23.7 1.7 .. .. 28.6 2-31961 1,403.0 38.5 2.7 .- e 42.7 3.01962 1,214.0 33.1 2.7 47.l 3.9 37.2 3.11963 1,406.5 37.4 2.7 51.3 3.6 41.7 3.01964 1,429.8 69.9 4.9 9214 6.5 76-4 5.31965 1,559.5 109.5 7.0 1i6s0 10.C 120.7 7.71966 1,741.4 96.8 5.6 154J1 8.8 124.3 7.11967 1,654.0 142.7 8.6 209.12 12.6 163.3 10.01968 1,881.3 130.0 6.9 2c4-4.,l 10.8 153-1 8.11969 2,311.2 181.6 7.9 257.8 12.5 224.5 9.71970 2,711 1 306.9 11.3 455.4 16.6 360.0L/ 13-3v1971 2,900. L 469.61L 16.2 2/ 679.6!J 23-4 > 550-° 2 19. L.~

1971 2,950.0 . 486j! 16.5V"1972 3,408.01" 7291" 21. 4/

j Estimated by staff.1/ Estimated by Central Bank of Brazil.

Sources: 1953-70: CACEX and United Nations Yearbook of International Trade Statistics, severalvolumes.

Table 2: EXPORTS OF MANUFACTURED PRODUCTS, 1962-71 ACCORDING TO NBM CLASSIFTCATION

(Value in millions of US$, FOB)

Value andClasses of NBM % of Total 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

Chemical, pharmaceutical Value 14.8 16.6 17.6 14.5 25.1 28.9 26.4 31.5 38.7 47.0cj and similar products % 31.3 32.3 19.1 9.3 16.3 13.8 12.9 10.9 8.5 6.9

Machinery, vehicles Value 12.0 10.6 18.3 28.9 33.3 43.6 41.1 60.2 97.1 150.06 and accessories % 25.5 20.7 19.8 18.5 21.6 20.8 20.1 20.9 21.3 22.1

Manufactured products Value 5.4 8.8 32.1 63.0 34.6 65.7 57.7 80.4 148.9 236,0classified by the main

7 raw material input % 11.4 17.2 34.7 40.4 22.4 31.4 28.3 27.9 32.7 34.8

Diverse manufactured Value 1.0 1.3 2.0 3-1 3.9 4.5 4.8 9.6 22.2 36.08 products % 2.0 2-5 2.1 2.0 2.5 2.2 2.4 3.4 4.9 5-3

Sub-totall' Value 33.1 37.4 69.9 109.5 96.8 142.7 130.0 181.6 306.9 469.0% 70.2 72.7 75.7 70.2 62.8 68.2 63.7 63.1 67.4 69.1

2 Prepared raw materials Value 1.7 4.6 6.5 16.6 22.8 16.1 16.2 32.0 56.4 95.0%0 3.7 9.0 7.0 10.7 14.8 7.7 7.9 11.1 12.4 14.0

4 Foodstuff and beverages Value 12.3 lo. 16.0 29.9 34.4 49.2 55.4 72.7 91.3 114.0% 26.1 19.4 17.2 19.1 22.2 23.5 27.2 25.2 20.0 16.8

Manufactured products not Value - - 0.0 0.0 0.2 1.2 2.5 1-5 0.8 1.09 elsewhere mentioned %- - 0.0 0.0 0.1 0.6 1.2 0.5 0.2 0.1

TOTAL'-/ Value 47.1 51.3 92.4 156.0 154.1 209.2 204.1 287.8 455.4 679.0% 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

/ Figures are rounded off and, therefore, do not sum up always.

Source: 1962-70 CACEX, 1971 staff estimates.

Table 3: AIINUAL INCREASE IN EXPORTS OF MANUFACTURED PRODUCTS, 1962-71

(In %)

Unweighted AverageClasses of NBM 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1962-70 1968-70

Chemical, pharmaceutical5 and similar products 12.6 6.3 17.8 72.8 15.4 8.9 19.3 22.9 21.6 15.3 21.1

Machinery, vehicles6 and accessories 11.5 71.8 58.1 15.3 31.0 5.8 46.4 61.4 54.5 33.3 53.9

Manufactured productsclassified by the main

7 raw materials-input 64.6 262.7 96.4 46.1 89.8 12.1 39.3 85.2 58.5 72.6 62.3

Diverse manufactured8 products 35.8 50.9 58.1 24.4 16.2 7.4 100.1 130.6 61.8 52.9 115.4

Sub-total 12.9 87.1 56.5 11.5 47.4 8.9 39.7 69.0 52.8 36.5 54.3

2 Prepared raw materials 167.7 40.1 156.7 37.2 29.6 0.6 97.7 76.3 68.4 68.3 87.0

4 Foodstuff and beverages 18.9 60.3 86.8 15.3 43.8 12.7 31.1 25.6 24.9 32.1 28.4

Manufactured products not9 elsewhere mentioned - - - - 508.4 100.6 39.7 48.7 30.5 - -

Total manufacturedexports 8.9 80.0 68.8 1.2 35.7 2.4 41.0 58.2 49.1 36.1 49.6

Total exports 15.9 1.7 9.1 11.7 5.0 13.7 22.9 17.3 7.0 10.9 20.1

Source: Tables 1 and 2.

Table 4: BRAZIL'S EXPORTS OF CHEMICAL, PHARMACEUTICAL AND SIMILAR PRODUCTS 1962-70

(In 1000 of US$, FOB)

Value and % ofTotal Exports ofManufactured

Classes of NBM Products 1962 1963 1964 1965 1966 1967 1968 1969 1970_

5 Inorganic chemical Value 550.8 363.8 386.1 1,554.24 1,046.2 811.5 995.9 1,586.9 1,980.4Elements and Products % 1.2 0.7 0-4 1.0 0.7 0.4 0.5 0.6 0.4

Organic chemical Value 9,561.7 11,314.6 11,301.5 5,150.0 13,980.9 16,872.0 13,331.6 12,172.0 13,129.0* Products % 20.3 22.0 12.2 3.3 9.1 8.1 6.5 4.2 2.9

Pharmaceutical and Value 829.0 941.7 1,208.8 1,673.1 2,407.3 2,472.3 2,115.3 3,867.0 4,735.75 Medical preparations % 1.8 1.8 1.3 1.1 1.6 1.2 1.0 1.3 1.0

Training and bleaching extracts;Materials for tanning and painting. Value 268.0 230.1 594.7 1,391.7 1,656.3 1,586.9 2,182.4 3,145-7 3,622.6dyes % 0.5 0.4 0.6 0.9 1.1 0.8 1.1 1.1 0.8

5.6 Essential oils, aromatic products, Value 3,455.9 3,402.6 2,873-8 3,209.6 4,688.8 6,201.1 6,477.7 7,527.2 8,835.9perfumery % 7-3 6.6 3.1 2.0 3.0 2.9 3.2 2.6 1.9

5.7 Manufactured fertilizers Value 0.4 0.4 0.4 - - 1.5 9.6 48.9 11.1*% o0.0 0.0 0.0 - - 0.0 0.0 0.0 0.0

8 Artificia] plastic materials, Value 32.3 39.2 350.1 703.2 481.8 390.8 318.5 670.7 575.55- Synthetic resins % 0.1 0.1 0.4 0.4 0.3 0.2 0.2 0.2 0.1

Value 61.6 312.2 932.3 893.7 812.6 599.2 939.1 2,448-5 5,763.25.9 Diverse products 0% .1 0.6 1.0 0.6 0.5 0.3 0.5 0.9 1.3

TOTAL Value 14,750-7 16,604.5 17,648.5 14,575.7 25,073.8 28,935.3 26,370.2 31,466.8 38,658.',% 31-3 32.3 19.1 9-3 16.3 13.8 12.9 10.9 8.5

Percentages are rounded off and do not always sum up to the total percentage.

Source: CACEX.

Table 5: EXPORTS OF MACEIHERY, VEHICLES AND ACCESSORIES, 1962-70

(In 1000 of US$, FOB)

Value or% of TotalExports of

ManufacturedClasses of NBM Produots 1962 1963 1964 1965 1966 1967 1968 1969 1970

Electric machinery and equipment, Value 558.1 504-5 1,683.6 4,392-5 4,901.9 5,014.3 5,988.4 8,996.0 17,183.86.0 parts and acoessories % 1.2 1.0 1.8 2.8 3.2 2.4 2.9 3.1 3.8

Motor-machinery and accessories, steam Value 57.8 120-4 982.1 608.9 849.6 1,427.8 233.6 1,971.5 1,833.86.1 kettle generators and equipment % 0.1 0.2 1.1 0.4 0.6 0.7 0.1 0-7 0.4

Farm machinery and equipment, incl. parts Value 35.6 47.0 98.5 433.9 285.3 419.6 443.6 677-4 1,282.76.2 and accessories, excl. tractors % 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.2 0-3

Machinery and equipment for transport, Value 277.9 527-3 1,251.7 4,163-5 4,376.1 2,954-1 5,662.5 9,157.1 14,222.86-3 elevation, earth moving and road makineg % 0.6 1.0 1.4 2.7 2.8 1.4 2.8 3.2 3.1

Textile machinery, equipment for textile- Value 11.6 10.1 114.8 445.3 450.1 448.7 350.4 558.0 965.26.4 industry, parts and accessories % 0.0 0.0 0.1 0-3 0-3 0.2 0.2 0.2 0.2

6.6 Machinery and equipment for other Value 1,205.8 2,203.0 2,596.0 3,990.2 6,849-4 6,690.1 6,574.3 5,654.7 8,263.06 industries, parts and accessories % 2.6 4.3 2.8 2.6 4.4 3.2 3.2 2.0 1.8

6 Other machinery and Value 1,193.8 2,398.1 4,080.1 7,554.0 10,455.4 17,420.3 17,947.7 26,285.0 38,475.1.equipment % 2.5 4.7 4.4 4.8 6.8 8.3 8.8 9.1 8.4

6.8 Vehicles, parts and Value 8,696.2 5,022.0 7,459.1 7,290.6 5,140.2 9,254.2 3,897.3 6,850.8 14,872.2accessories % 18.4 9.8 8.1 4.7 3.3 4.4 1.9 2.4 3.3

TOTAL Value 12,036.9 10,632.5 18,265.9 28,878.8 33,308.0 43,629.2 41,097.8 60,150.5 97,098.6%O 25.5 20.7 19.8 18.5 21.6 20.8 20.1 20.9 21.3

Note: The sum of Classes 6.0-6.8 is 10,832.5 in 1963 and not 10,632.5 as official statistics denounce. Percentages are rounded off.

Sourcet CACEX.

Table 6: BRAZIL' S EXPORTS OF MANUFACTURED PRODUCTS CLASSIFIED BY THE MAIN RAW MATERIAL INPUT, 1962-70

(In 000 of US$, FOB)

Value orof Total

Exports ofManufactured

Classes of NBM Troiieta 1962 1963 1964 1965 1966 1967 1968 1969 1970

Manufactures of leather and furs Value 329.4 1-4 502.5 0.1 5.1 24.3 37.1 181.0 639.27.0 (excl. sections 8.2, 8.3, 8.4, % 0.7 0.0 0.5 0.0 0.0 0.0 0.1 0.1

8.7 and 8.9)

Manufactures of rubber ebonite, Value 273.5 428.8 5,353.2 3,471.4 1,638-3 813.9 567.0 1,102.7 4,033.17.1 etc. (excl. sections 7.8, 8.2, % 0.6 0.8 5.8 2.2 1.1 0.4 0.3 0.4 0.9

8.3, 8.4, 8.7 and 8.9)

Manufactures of wood and cork Value 684.6 678.1 679.3 665.8 944.6 846.3 1,429.0 1,929.2 1,174.47.2 (excl. sections 8.0, 8.1, 8.2, 1.5 1.3 0.7 0.4 0.6 -.4 0.7 9.7 03

8.4, 8.7, 8.8 and 8.9)

Paper and paper products7.3 (excl. sections 7.4, 7.8, 8.3, Value 69.3 28.2 60.7 68.8 165.0 166.9 79.6 191.1 570.4

8.5, 8.7, 8.8 and 8.9) % 0.1 0.1 0.1 0.0 0.1 0.1 0.0 0.1 0.1

(exnl. sections 7o n8netal 8inerals Value 498.9 448.2 717.8 1,128.6 1,116.9 4,598.5 7,385.5 7,873.5 9,444.3748.7 and 8.9) %1.1 0.9 0.8 0.7 0.8 2.2 3.6 2.7 2.1

Manufactures of precious and semi- Value 19.8 44.8 92-5 200.1 510.8 520.1 594.2 1,154.6 1,978.27$5 precious minerals, adornment % 0.0 0.1 0.1 0.1 0.3 0.2 0.3 0.4 0.4

6 Ordinary metals used in metallurgy, Value 1,254.2 3,289.3 17,217.9 44,733.3 20,023.4 48,233.7 32,503.3 48,520.4 103,492.77. iron and steel and joining products % 2.7 6.4 18.6 28.7 13.0 23.1 15.9 16.8 22.7

Metal industry and products of7.7 metal (excl. sections 8.0, 8.1, 8.2, Value 326.1 365.8 482.8 1,273.7 3,487.0 2,703.9 3,091.3 5,345.2 8,688.8

8.6, 8.7 and 8.9) % 0.7 0.7 0.5 0.8 2.3 1-3 1.5 1.9 1.9

7.8 Textiles (excl. sections 8.2, 8.3, 8.4 Value 1,914.4 3,556.6 6,956.6 10,989.2 6,649.7 7,742.7 12,016.9 14,077.2 18,873.08.7 and 8.9) % 4.1 6.9 7.5 7.0 4-3 3.7 5.9 4.9 4.1

Value 5,370.2 8,841.1 32,063.4 62,981.0 34,590.8 65,650.3 57,704.0 80,375.0 148,894.1TOTAL % 11.4 17.2 34.7 40.4 22.4 31.4 28.3 27.9 32.7

Note: The sum of Classes 7.0-7.8 is 62,531.0 in 1965 and not 62,981.0 as official statistics denounce.

Source: CACEX.

Table 7: BRAZIL'S EXPORTS IN NBM CLASS 8, 1962-70

(In 000 of US$, FOB)

Value or %of TotalExports ofManufactured

Classes of NBM _ Products 1962 1963 1964 1965 1966266 1967 1968 1969 1970

Equipment and material for sanitary8.0 installations, for heating and Value 84.2 253.2 125.2 185.2 131.2 161.9 212.7 285.1 409.4

8.0 inaation e 0.18 0.49 0.14 0.12 0.09 0.08 0.10 0.10 0.09ilflumination

8.1 Furniture and accessories Value 27.2 58.2 79.3 128.8 255.1 261.8 501.6 584.4 1,512-3°%0 0.06 0.11 0.09 0.08 0.17 0.13 0.25 0.20 0 .33

Articles for travelling, suitcases, Value 9.3 5-1 16.4 35.4 41.2 70.7 24.2 47.1 86.48.2 pouches, baskets, purses, etc. % 0.02 0.01 0.02 0.02 0.03 0.03 0.01 0.02 0.02

Ready made clothing (excl. Section 7.4), Value 118.2 73.1 190.6 135.9 220.6 394.5 462-3 750.6 3,014.18-3 stockings excl. elastic ones) % 0.25 0.14 0.21 0.09 0.14 0.19 0.23 0.26 0.66

Value 137.9 126.3 171.7 306.9 182.0 297.6 450.2 1,850.1 8,273.28.4 Footwear % 0.29 0.25 0.19 0.20 0.12 0.14 0.22 o.64 1.82

Apparatus and instruments for Value 70.8 283.4 398.8 543.2 523-3 396.2 434.3 1,269.4 1,791.48.5 professional and scientific 0.15 0.55 0.43 0.35 0.34 0.19 0.21 0.44 0.39

use, clocks, etc.

8.6 Office appliances (excl. paper) Value 8.5 13.8 9.8 10.5 7.8 2.2 4.4 93.1 49.8%fi0 0.02 0.03 0.01 0.01 0.01 0.00 0.00 0.03 0.01

Notions and articles for personal Value 47.1 34.2 67.0 87.9 91.1 161.1 168.7 297.3 543.88.7 use not elsewhere listed, toy, 0.10 0.07 0.07 0.06 0.06 0.08 0.08 0.10 0.12

articles for sport and gymnastics

Articles for braiding, cutting, Value 4.3 1.2 30.9 133-0 341.2 376.7 355.4 265.1 146.48.8 molding, etc. % 0.01 0.00 0.03 0.09 0.22 0.18 0.17 0.09 0.03

Other manufactured products, Value 451-4 453.3 936.1 1,539-5 2,060.1 2,356.7 2,206.4 4,203.1 6,417.68.9 weapons (excl. for military use) % 0.96 0.88 1.01 0.99 1-34 1.13 1.08 1.46 1.41

Value 958.8 1,301.8 1,965.2 3,106.3 3,863.2 4,488.4 4,820.2 9,645.3 22,244.4TOTAL 0/O 2.03 2-53 2.13 1.99 2.51 2.15 2.36 3.35 4.88

NOTE: The sum of Classes 8.0-8.9 is 2,025.8 in 1964 and not 1,965.2 as official statistics denounce.

Table 8: BRAZIL's EXPORTS OF MANUFACTURED PRODUCTS* TO DIFFERENT REGIONS,1967-70

(Percentage Distribution)

Region or Country 1967 1968 1969 1970

of Destination % of Total % of Region % of Total % of Region % of Total % of Region % of Total % of Region

LAFTA 33.0 100.0 36.2 100.0 38.4 100.0 34.3 100.0Argentina 18.8 56.6 20.7 57.1 23.3 60.7 18.0 52.14Bolivia 1.7 5.2 1.2 3.3 1.2 3.0 1.2 3.5Chile 3.1 9.4 2.7 7.5 2.2 5.8 2.3 6.6Colombia 0.3 1.1 0.8 2.1 0.7 1.7 1.2 3.5Ebuador 0.2 0.7 0.1 0.4 0.1 0.3 0.2 0.5Mexico 2.5 7.6 4.2 11.6 4.0 10.4 3.7 10.8Paraguay 1.5 4.5 2.4 6.7 2.2 5.8 2.3 6.8Peru 1.1 3.3 0.7 2.0 0.9 2.3 1.2 3.4UrLuguay 2.7 8.2 1.8 5.0 2.6 6.7 2.7 7.9Venezuela 1.2 3.5 1.5 4.3 1.3 3.3 1.6 4.6

USA 36.0 - 34.9 - 27.7 - 20.0

EEC 12.0 100.0 14.3 100.0 19.2 100.0 19.9 100.0Belgium-Lux. 1.1 8.8 0.8 5.4 8.1 11.0 1.7 8.14France 2.4 19.7 2.7 19.1 2.1 11.7 1.9 9.8Italy 1.0 8.5 0.8 5.6 2.2 13.4 2.4 12.3Netherlands 2.9 24.0 4.4 30.5 2.6 21.3 6.0 30.1West Genmany 4.7 39.0 5.6 39.3 4.1 42.5 7.8 39.4

EFTA 4.4 - 5.9 - 5.9 - 6.6

COMhCON 2.4 - 0.8 o o.6 - 2.0Japan 7 - 11 - 1.2 2 -

Canada 1.1 - 2.2 - 2.0 - 2.8

Other countries 5.9 - 4.3 5.0 - 11.9

* Broad definition (NBM Classes 5, 6, 7 and 8, and manufactured products of Classes 2, 4 and 9).

Table 9: THE EXPORTS OF MANUFACTURED PRODUCTS BY REGIONS OF DESTINATION 1967(% of Total)

.B.M. Classes 2 4 2 & 4 5 6 7 8 5 -8 2,p,5-8,9Region of (narrow (broad

Destination definitior.) definition)

LAFTA 25.2 0.8 6.8 15.3 56.9 52.1 53.9 h6.0 33.3

USA 37.6 61.5 55.6 37.8 16.9 28.6 16.3 26.5 36.0

EEC 22.9 17.5 18.8 15.5 16.7 1.4 4.7 9.0 12.0

EFTA 9.6 6.9 7.6 9.3 1.6 0.7 8.5 3.0 1LI

COMECON 1.9 8.0 6.5 2.9 0.0 0.0 0.0 0.6 2.L

Japan 0.o 0.2 0.3 0.5 0.0 15.0 0.7 7.1 4.9

Canada 0.7 2.5 2.0 0.1 0.1 1.1 4.2 0.7 1.0

Other Countries 1.7 2.6 2.4 18.6 7.8 1.1 11.7 7.1 5.9

World (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

World (Value in Mio USt) 16.1 49.2 65.3 28.9 43.6 65.7 4.5 1L2.7 209.2

Source: CACEX.

Table 10: HIE EXPORTS OF MANUFACTURED PRODUCTS BY REGIONS OF DESTINATION,1970(% of total)

.B.M. Classes 2 4 2 & 4 5 6 7 8 5 - 8 2, , 5,-8,9Region OI (narrow (broadDestination .d_ efinition) dn tion)_

LAFTA 1L.3 2.) 6.9 22.5 65.1 45.L 27.8 Ii7.5 3).3

USA 12.0 40.9 29.9 21.0 7.3 13.1 47.3 15.] 20.0

EEC 37.5 22.9 28.L 25.7 17.9 13.t . 5.5 15.8 19.9

EFTA 8.5 16.7 13.6 7.7 0.8 3.0 7-1 3.2 6.6

CONECON 7.6 3.3 5.0 3.8 0.0 0.2 0.2 0.6 2.0

Japan 1.3 0.3 0.7 1.9 0.0 6.5 0.6 3.11 2.5

Canada 3.0 9.5 7.0 0.1! 0.2 0.7 LI.3 0.8 2.8

Other Countries 15.8 1.0 8.5 14.0 8.7 17.7 6.9 13.6 11.9

World ) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

World (Value in vliio. US$) 56.1 91.3 1)47.7 38.7 97.1 1L8.9 22.2 306.9 l)55.

Source: CACaX.

Table 11: THE EXPORTS OF MANUFACTURED PRODUCTS BY REGIONS OF DESTINATION, 1969

7 - Machinery and Transport 6+8 - Other Manufactured 5-8 - Total ManufaoturedSITC - - Chemicals Rqu3,pment Products ProductsClasses % of Brazilian %o of Brazilian %O of Brazilian % of Brazilian

Regions of % of Exports Products in % of Exports Products in %f of Exports Products in % of ExPorts Products inDistribution of Brazil Region's Imrports of Brazil Region's Imports of Brazil Region's Imports of Brazil Region's Imports

LAFTA 22.0 0°4 63.5 1.8 64.9 0.7 56.7 1.0

USA 28.8 0.8 18.5 0.1 10.4 0.1 17.6 0.1

EEC 22.6 0.1 9.1 0.0 16.2 0.1 13.8 0.1

EFTA 7.8 0.1 3.0 0.0 1.6 0.0 3.4 0.0

COMECON 2.7 0.1 0.1 0.0 0.0 0.0 0.5 0.0

Japan 2.4 0.1 1.8 0.1 0.0 0.0 1.3 0.1

Canada 0.4 0.0 1.2 0.0 0.1 0.0 0.7 0.0

Other Countries 13.3 0.1 2.8 0.0 6.8 0.0 6.0 0.0

World 100.0 0.2 100.0 0.1 100.0 0.1 100.0 0.1

Source: Ministe'rio de Fazenda, Secretaria da Receita Federal, Foreign Trade of Brazil, 1969, according to the Standard International Trade Classification -SITC; United Nations, Monthly Bulletin of Statistics, March 1971.

Table 12: EXPORTS AS A PERCENTAGE OF THE DCMESTIC PRODUCTION,1958, 1966 AND 1969

Sector 1958 1966 1969

1. Textiles 0.0 0.9 0.9

2. Clothing and footwear n.a. 0.1 0.5

3. Be-verages n.a. 0.1 0.2

4. Tobacco manufactures n.a. 0.5 o.6

5. Printing and publishing 0..0 0.3

6. Furniture and fixtures nWa. 0.1 0.2

7. Non-metallic mineral manufactures 0. 0.6 1.7

8. Metal industries 0.0 1. 2.7

9. Wood and products 19.5 22.5 24.4

10. Paper and products n.a. o.8 0.7

11. Rubber and products n.a. 0.5 0.3

12. Leather and products 1.2 6.2 8.6

13. Chemicals 0,8 0.9 2.8

14. Non-electrical machinery andequipnient 0,1 4.1 4.7

15. Electrical machinery andequipment 0.0 0.7 0.8

16. Transport equipment 0.2 0.3 0.4

17. Other manufactures 0.5 1.2 2.0

Source: a) 1958 and 1966: IBaD, Current Economic Position and Prospectsof Brazil, Volume III, December 19, 1969, Annex 3, Tables14 and 15.

b) 1969: Table 16 of the forthcoming report.

Tables 13: NUMBER OF FIRMS EXPORTING PRODUCTS OF NBM CLASSES 5-8,1967 ADf 1970

Table 13a: NUMBER OF FIRMS WITH EXPORT LICENCES RBGISTEPRED IN RIO DE JANEIfl,SAO PAULO, BELO HORIZONTE, CAMPINAS AND PORTO ALGRE, 1967

Value of Exports Percentage Share WUmb:: of Average Export inN.B.M. Class in 1000 US $ fob of Total ExDorts .egi.stared 1000 US $ fob

in the Class Firms (2):(4)(1 ) (2) (3) (4) (5)

5 26950.9 93.1 160 168.46 32970.9 75.6 420 78.57 57487.3 87.6 322 178.58 4151.5 92.5 245 16.9

TOTAL '21560.6 85.2 1147 106.0

Source: Fernando Fajnzylber, Estudio de A',gunos Aspectos Basicos para la Formulacionde una Estrategia de Exportacion de Productos Ianufacturados en Brasil. VersionPreliminar, September 1969 (Mimeographed), p.51.

Table 13b: EsfTfIATION OF TO'TAL NYMIBERi OF EXPORT-FIRIMS, 1967

Total Value of Assumption 2 ?

Exports in the Number of Average Number of AverageN.B.M. Class Class Firms Export Firms Export

5 28935.3 172 168.4 A18 157.36 43629.2 556 78.5 692 63.37 65650.3 368 178.5 414 158.68 4488.4 265 16.9 285 16.3

TOTAL 142703.2 1365 106.0 1575 90.6

a) It is assuimed that the exports in each class not covered in column (2) of table 13a areexported by other firms than those listed. It is further assumed that the average exportof these firns is the same in each class as the average export of the listed companies.

b) It is assumed that the exports in each class not covered in column (2) of table 13a areexported by other firms and that the average export of these firms is only 50 percent ofthe average export of the listed companies (the large firms are located in the industrial

centres).

Table 13c: NUMBER OF EXPORT FIRMS, 1970

Value of Exports in Average Export inClass of N.B.M. 1000 US $ fob Number of Firms 1000 US $ fob

5 3865a.84 561 68.9

6 97098.6 .1195 84.5

7 1488914.1 1404 lo6.o

8 22244.4 1133 19.6

TOTAL 306895.4 4293 71.5

Source: CACEX.

Table 14: BRAZIL'S FLOATING PEG

Percentage Change of ConsumerPrice Index since the month of

Number of Days the last DevaluationDate of De- since last De- Rate of De- Brazil Brazilvaluation Buying Rate Selling Rate valuation valuation USA _ Ind. Countries/7

8-27-68 3.630 3.650 170 13-35 +11.4 +12.59-24-68 3.675 3.700 27 1.36 + 0.3 + 0.8

11-19-68 3.745 3.770 55 1.89 + 3.4 + 3.612- 9-68 3.805 3.830 57 2.61 + 1.4 + 1.02- 4-69 3.905 3.930 57 2.61 + 2.8 + 2.63-19-69 3.975 4.000 43 1.78 + 0.9 + 1.35-13-69 4.025 4.050 55 1.65 + 3.6 + 3.67- 7-69 4.075 4.100 55 1.23 + 0.9 + 1.08-27-69 4.125 4.150 51 1.23 + 0.7 + 2.110- 3-69 4.185 4.210 37 1.23 + 2.8 + 2.711-13-69 4.265 4.290 41 1.91 + 2.3 + 0.912-17-69 4.325 4.350 34 1.30 + 0.9 + 1.32- 4-70 4.380 4.410 40 1.37 + 1.9 + 1.53-30-70 4.460 4.480 56 1.81 - 0.5 - 0.35-18-70 4.530 4.560 49 1.55 + 3.1 + 2.47-10-70 4-590 4.620 + 52 1.32 + 3.4 + 3-57-24-70 4.620 4.650 14 0.659-18-70 4.690 4.720 56 1.50 + 3.7 + 3.8

11- 4-70 4.780 4.810 A 8 1.90 + 1.3. + 1.212-22-70 4.920 4.950 33 1.86 + 0.3 + 0.42- 9-71 5.000 5.030 49 1.633-19-71 5.o80 5.110 38 1.605- 3-71 5.160 5.195 45 1.60

/a Belgium, Canada, France, Germany-West, Italy, Japan, Netherlands, Sweden, United Kingdom, United States of America;weighted average; percentages shares of Brazil's exports to these countries in 1967 are used as weights. 73.2% ofBrazil's exports are destined to these countnies.

Source: Conjuntura Economia, "uma publicacao da Fundaoao Getulio Vargas," several volumes; United Nations, MonthlyBulletin of Statistics, several volumes.

Table 15: EXPORTS FINAECED BY CACEX, 1965-70

(Value in 000 of US$)

Value of Exports, FOB Value Financel (CIF-Basis) Number of OperationsCountry of Distribution 1965 1966 1967 1968 1969 1970 1965 1966 1967 1968 1969 1970 1965 1966 1967 1968 1969 1970

Angola - - 43 105 189 61 - - 35 75 135 49 - - 1 3 4 4Argentina 923 3,436 3,507 1,087 6,971 12,458 824 2,584 3,662 974 6,686 12,044 15 39 50 50 129 169Bolivia 40 65 118 287 150 465 28 52 102 220 124 380 1 3 3 10 10 19Chile - 456 181 55 92 50 - 326 143 52 93 43 - 20 4 1 1 1Colombia 2 56 298 43 97 27 2 42 69 32 76 20 1 4 7 7 6 5Costa Rica - 9 - 2 - - - 8 - 1 - - _ 1 _ 1 - _Ecuador - - 8 10 42 279 - - 7 8 33 216 - - 1 1 3 7Germany - East - - 14 - - - _ - 14 - - - _ _ 1 - - -Germany - West - - 54 - - 870 - - 54 - - 807 - - 3 - - 3Greece - - - 40 13 _ - - 29 9 - _ _ - 1 1 -Guatemala - 96 - - 3 35 - 72 - - 2 22 - 2 - _ 1 1Honduras - 33 46 - - 12 - 26 45 - - 11 - 1 1 - - 1Mexico - 206 399 280 414 953 - 138 312 227 321 652 - 7 27 24 28 50Mozambique - - - - 6 - - - - - 2 - - _ _ _ 1 _Netherlands - - 19 - - _ - - 14 - - _ _ _ 1 - _ _Nigeria - 11 8 8 - - - 9 8 8 - - - 1 1 1 - -Panama - - - - - 134 - - - - - 140Paraguay - 127 16 96 228 186 - 101 16 92 197 154 - 5 3 8 11 10Peru 46 28 71 153 135 468 43 20 65 95 102 376 7 2 10 12 14 34Portugal - - - 37 - - - - - 39 - - - - - 1 - -San Salvador - 20 75 - 9 - - 17 66 - 7 - - 1 2 - 2 -South Africa - - - - - 275 - - - - - 268 - - - - - 3Uruguay - - 470 48 136 2,489 - - 444 38 114 2,287 - - 4 2 11 66U.S.A. - - - 9 20 4 - - - 9 20 4 - - - 1 1 1Venezuela - 64 - 21 X 541 - 5 - 12 278 529 - 1 - 2 E _a

TOTAL 1.011 4.607 5327 21281 8.780 19.307 8 97 1,451 5.056 1,911 89 18.002 24 87 119 125 238 410

Source: CACEX.

Table 16: PERIODS OF EXPORT FINANCING, 1965 - 1970

Vrlue financed 1000 US$ fob Number of Operations

Period of Finang 196 5 1966 1967 1968 1969 1970 1965 1966 1967' 1968 1969 1970

1 year 101 1231 2111 399 5110 6558 4 46 53 147 8L4 14L1

1.5 years 26 k2 1526 75 255 139 6 2 9 10 18 17

2 years 1L6 709 762 782 1236 1L12 9 28 147 UE 81 89

2.5 years - - - 75 103 126 _ - - 2 5 5

3 years 624 U116 151 475 8314 21410 5 10 5 15 39 90

3.5 yeArs - - 70 - 371 831 - - 2 - 9 15

4 years _ 53 60 10 197 2557 - 1 1 1 1 21

L.5 years - - - - - - - - -

5 years - - 376 95 - 1216 - _ 2 2 _ 16

more than 5 years - - - - 93 27148 _- - 1 13

TOTAL 897 3451 5056 1911 8199 18002 21, 87 119 125 2 1410

Source: CACEX.

Table 17: REFINANCING OF BRAZIL'S EXPORT FINANCING BY THEINTER-AMERICAN DEVELOPMENT BANK, 1970

Value in Mio US $ Number of OperationsPeriod Financing Refinancing (b) . 100 Financed Refinanced d . 100

(a) (b) -r7(c) (d) Y

1 Year 6.558 3.805 58.02 144 80 55.56

1.5 Years 0.139 0.069 49.64 17 13 76.47

2 Years 1.412 0.969 68.63 89 76 85.39

2.5 Years 0.128 0.086 67.19 5 4 80.00

3 Years 2.410 1.622 67.30 90 77 85-56

3.5 Years 0.834 0.682 81.77 15 15 100.00

4 Years 2.557 1.174 45.91 21 15 71-43

4.5 Years - - - -

5 Years 1.216 0.706 58.06 16 15 93.31

More Than5 Years 2.748 1.841 66.99 13 12 92.31

TOTAL 18.002 10.954 60.85 410 307 74.88

Tables 18: PARTICIPATION OF THE 10 LARGEST FIRMS IN THE EXPORTS OF NBM CLASSES 5-8, 1967, 1969 AND 1970

Table l8a: THE PARTICPATION OF THE 10 LARGEST FIRMS IN THE EXPORTS OF FIRMS WITH EXPORT LICENCESREGISTERED IN RIO DE JANEIRO, SAO PAULO, BELO HORIZONTE, CAMPINAS AND PORTO ALEGRE, 1967

Exports of Total Regis-the 10 Largest tered Total ExportsFirms in Exports in in Class in

NBM Class 1000 US$ fob 1000 US$ fob 1000 US$ fob (2) : (3) (2) : (4)(1) (2) (3) (4) (5) (6)

5 19089.1 26950.9 28935.3 70.8 66.06 24767.2 32970.9 43629.2 75.0 56.87 43851.8 57487.3 65650.3 76.4 66.88 2126.8 4151.5 4488.4 51.4 44.1

Source: Fernando Fajnzylber, Estudio de Algunos Aspectos Basicos ... op.,cit., p. 51.

Table 18b: THE PARTICIPATION OF THE 10 LARGEST FIRMS IN THE EXPORTS OF NBM CLASSES 5-8, 1969

Exports of 10 Total ExportsNPM Class - Largest Firms in Class (2) : (3)

(1) (2) (3) (4)

5 25744.7 31466.8 81.86 36105.3 60150.5 60.07 44183.7 80375.0 55.08 3486.3 9645.3 36.1

Source: CACEX.

Table 18c: THE PARTICIPATION OF THE 10 LARGEST FIRMS IN THE EXPORTS OF NBM CLASSES 5-8, 1970

Exports of 10 Total ExportsNBM Class Largest Firms in Class (2) : (3)

(1) (2) (3) (4)

5 21408.8 38658.4 55.46 47276.3 97098.6 48.77 68772.8 148894.1 46.28 6997.3 22244.4 31.5

Source: CACEX.

Table 19: Concentration in Manufacturing Industry and International Firms, 1968

(Percent)

Subsectors in which 3 Subsectors in which 1 Subsectors in which the 4or 4 of the 4 largest or 2 of the 4 largest largest firms are nationalfirms are international firms are international firms

Number of firms fi n=s

Sector Subsectors a b a b a b

Non metallic minerals 31 2 73 61 50 37 45

Metallurgy 23 20 73 60 51 20 42

Machinery 12 35 42 63 44 2 44

Electrical & Communication Equipment 15 71 58 25 35 4 59

Transportation Equipment 18 84 62 15 59 1 73

Lumber and Wood Products 17 - - 21 20 79 15

Furniture 7 - - 23 36 77 15

Paper and allied products 12 - - 45 55 55 40

Rubber 13 62 90 16 85 22 45

Leather 7 - - 82 26 18 47

Chemicals 24 11 49 51 41 38 73

Drugs 2 100 19 - - - -

Perfumes, Soaps and Allied Products 3 98 48 - _ 2 72

Plastics 4 - - - - 100 25

Textiles 36 16 30 71 26 13 53

Apparel and Shoes 16 - - 65 23 35 24

Food and Kindred Products 35 4 56 59 25 37 23

Beverages 9 - - 45 44 5543

Tobacco 3 98 53 - - 2 95

Printing and Publishing 9 - - 11 20 89 36

Miscellaneous 32 20 65 29 65 51 56

TOTAL 328 26 54 46 37 28 39

a= Production of subsectors divided by production of sector times 100. b= Production of 4 largest firms divided by total

production of subsectors times 100.Source: Fernando Fajnzlber, Sistema Industrial..., op. cit., p. 103

I I I

ANNEX IIPage 1

CALCULATION OF FISCAL INCENTIVES EFFECT

1. The following calculations are designed to answer the question:What price (in Cr$) Y can yield the same net profit as a price Ym (in-

cluding all taxes) on the domestic market if all fiscal incentives aretaken into account? The variables included in the calculation are thefollowing:

PEx = net profit in case of export

P = net profit in case of domestic saleDo

p = factory price of product if exported (in Cr$)factory price (before IPI & ICM) of product

F if sold domesticallyYM = price in the domestic market (including taxes)

YM ' Y+ t1YF + t V Y F t +

t = rate of IPI tax on production-value (in factory prices)

tl = rate of IPI tax credit

t * average rate of IPI tax on inputs

t2 = rate of ICM tax

t3 = rate of other indirect taxes

t = rate of income tax (corporate tax)

d = average duty on imported inputs

q1 = value of domestically produced industrial inputsdivided by value of production (in yF - prices)

q2 = value of all domestically produced inputs dividedby value of production (in yF - prices)

q3 = value of inputs on which indirect taxes other thanIPI and ICM are incident divided by value of produc-tion (in yF - prices)

= value of imported inputs (duties included) dividedby value of production (in y - prices)

v = value added divided by value of production(in yF - prices)

G gross profit divided by value of production(in YF - prices)

ANNEX IIPage 2

C = other costs

X = volume exported or sold in the domestic market

2. The net profit in case of export is:

+ value of production (in p - prices)+ credits against IPI and ICM (see paragraphs 23c and 24c) 1/+ credit for the IPI paid on previous stage of production

(23b)+ credit for the ICM paid on the purchases of raw materials

(24b)- value of duty-free imported inputs (27)- other costs

PEx = x + T2t, p .j+ tlq X l+jvtj L 2 x

L

YM 1 ;4 * 4M * 1+d * C 1+t +vt2 1+t +vt2

+v2 1 2

3. The net profit in case of domestic sale is:

+ value of production (in yM - prices)

- IPI tax on production value+ credit for the IPI paid on previous stage of production

(23)- ICM tax on value added- other indirect taxes- value of imported inputs (duties included)- rest of costs- income tax

Do = YMX1 } X . x l+t 2J 2 .

1/ In this calculation it is assumed that the basis for the credit isthe FOB value. In case of the ICM this means a slight overestimationbecause the imported parts and raw materials are subtracted from theInvoice value

ANIEX IIPage 3

YM Y ~M lYM

1+tv2J :*q3 . x . +-t1 +t2 - 4*x *l+tl+Vt2j C-

YM

t4jg * x * i+tljvt27

4. Because only the relative export price is to be calculated, y can be taken as unity. Then, in case of P PDo, p is

EX D

_1- +tb1-t b-(v+q 2) T+tv2 - q3 Y+<+t - C4 R * 1+l+t_ +vt2

1 + 2t1

This is the basic formula to estimate the effects of the incentives. Becauseof the exemptions and credits p is lower than 1. If, for example, p = 0.6,an export price, which is 40 percent lower than the price (Y m) of the same

product on the domestic market, will yield the same net profit as the saleof the same volume on the domestic market. The lower the value of p thehigher is the effect of the incentives. Note, however, that p is a hypo-thetical price. The actual price (in relative terms) can be higher or lower.If it is higher, then the profit margin on exports exceeds the profit marginon domestic sales. If, on the contrary, the actual export price (in relativeterms) is lower than -, then the profit is higher in case of domestic salesthan in case of export. Thus, the knowledge of the phyothetical price isuseful when comparisons of export--and domestic--prices are made.

Sources

5. On the basis of the formula shown above the imnact of the incen-tives was estimated for 43 sectors. A short description of the statisticalsources is necessary to make clear the confidence level merited by the esti-mates.

6. Since IPI tax-rates vary from product, it was necessary to esti-mate an average rate for each sector. This has been done as follows:

(a) Joel Bergsman analyzed "Foreign Trade Policy in Brazil" ina study, which was finished in February 1971 but has notbeen published. For this study Bergsman produced workingsheets for each sector giving output values for a largesample of products originating therein, and was kind enoughto make them available to the Mission. The Bergsman produc-tion values were derived from "Produgqo Industrial 1967",

ANNEX IIPage 4

IBGE, Rio de Janeiro, Table IX. To adjust for incompletecoverage the values were increased by 25 percent. In somecases this source did not adequately cover the output of asector and further data on production were taken fromAnuario Estatistico do Brasil.

(b) The IPI tax rates under force in May 1971 were taken from"Consolidagca do Imposto sobre Produtos IndustrializadosIPI, Regulamento e Legislacao Complementar", Volume I, la.Edicao, Biblioteca Mapa Fiscal, 1970. The changes sincethe publication of this volume were listed by CACEX.

(c) A weighted average for each sector was estimated from thesetax rates using the production data as weights. The result,therefore, is an average of 1971 tax rates using 1967 pro-duction data as the basis for calculation of weights. Inorder to estimate the credit another average was calculatedby taking all rates which are higher than 0.15 as 0.15. Thetax credit rate for iron and steel was taken as 0.10. 1/

7. The following tax rates were used:

- for the ICM 0.17- for the corporate income tax 0.30

8. Tariff rates prevailing in July 1970 2/, were also taken from theabove cited study of Bergsman which used as its basic source Correa et al,Tarifa das Alfandegas, Rio de Janeiro, but made a number of adjustments topublished rates with the cooperation of the staff of the Conselho dePolitica Aduaneira (CPA).

9. The estimation of the parameters ql, q2, q4, v, and g was based

on the input-output coefficients compiled by Bela Balassa and used forthe World Bank study on protection in developing countries. Bergsman madea few modifications to the coefficients in order to harmonize them withhis sectoral breakdown. He made this modified input-output matrix avail-able for the mission.

1/ Decree No. 68044 of January 12, 1971, transfers the responsibility offixing the values of IPI tax credits to the Minister of Finance. TheMinister fixed a credit rate of 10 percent for iron and steel productsthough the average IPI tax rate on iron and steel is only 5.5 percent(Portaria No. GB 175 of May 12, 1971).

2/ The duties in May 1971 did not differ from those under force in July1970, except for few cases. The new tariff of duties implemented onApril 30, 1971 (based on a Law Decree of March 1, 1971) has only ad-justed the Brazilian nomenclature (TAB -- Tarifa Aduaneira do Brasil)to the Brussels nomenclature.

AJ4,Ji;IX i L

10. After interviewing 32 entrepreneurs in Brazil the term q3 . t 3

was estimated to be uniform 0.005.

Estimates

Estimates incentive impacts listed in Table 5 can be summarizedas follows:

(a) The tax credits (subsidies) against the IPI and ICM amounton the average to 14.7 percent of the fob value of exports(of the cif value if using Brazilian ships for transporta-tion); however, the variance between the 43 sectors is large.On account of these credits, and exDort price of 0.87 CR$would yield the same net profit as a domestic market priceof 1.00 CR$.

(b) Exemption from taxes on export products and on inputs inexport production (drawback included), on average, permitreduction of the export price to 76 percent of the domesticmarket price (84 percent if no rebate of the ICMI paid onprevious stages of production) with net profit left unchanged.Components of the 24 percent differential are: IPI exemp-tion - 8 nercent; ICM exemption - 7 percent; rebate of ICMon previous production - 8 percent; drawback - 0.6 percent;and, exemption from other indirect taxes - 0.4 percent.

(c) On average over both sectors and time exemption from thecorporate income tax amounts to a subsidy of 3.3 percentof the domestic market price (3.9 percent of the factoryprice).

(d) The combined incentives, on average, permit the export priceto be reduced to 64 percent of the domestic market pricewithout reducing net profits. Again, the differences betweenthe 43 sectors are large.

12. The above-mentioned input-output matrix used in making these esti-mates was comniled for research work on a number of less developed countriesand is not necessarily appropriate for the Brazilian case. Nevertheless,the reliability of the production cost distributions contained therein issupported by data from the following sources:

(a) "Produqgo Industrial 1969", IBGE, Rio de Janeiro. Thissource shows value of production, (gross) value added,salaries paid, costs for raw materials and diverse costsfor those manufacturers providing production data to theIBGE. 80-90 nercent of all Brazilian industrial firms arecomprehended;

ANNEX IIPage 6

(b) A study by William G. Tyler on "Export Diversificationand the Promotion of Manufactured Exports in Brazil",mimeographed, Rio de Janeiro, August 1969; and

(c) A study by Afranio Alves de Andrade on "Incentivos asExportag6es: Uma Quantificaqoes Setoriais e a Efigaciado Esquema", Escola de Pos-Graduaq&o em Economia doInstituto Brasileiro de Economia da Funda;ao Getulio Vargas,Copia Datilografada 1970.

13. The total IPI tax collected by the government in 1969 divided byvalue of production of the manufacturing industry as published yields apercentage of 8.24. This figure must be the maximum of the average effec-tive IPI-tax rate because of the incomplete coverage. If the Droductionvalue is adjusted by multiplying with 1.25 resp. 1.11, the percentage ofthe IPI tax rate is 6.69 resp. 7.42. Therefore, it can be assumed thatthe average rate in 1969 is at least 6.7 percent at most 8.2 percent andprobably around 7.4 percent. This figure is somewhat lower than theaverage rate in May 1971 shown in Table 5 of this study. Tyler estimatedthe average IPI tax rate to be 12.34 percent (excluding tobacco productsin 1969. This percentage seems to be too high. Andrade, finally, quotedan average rate of 7.57 percent l/ in 1969. To summarize: the estimatedIPI rates seem to be reliable. If at all they are rather slightly on thehigh side.

14. The ICM is a tax on value added. If it is intended to estimatethe corresponding rate on production value (in factory prices) the taxrate of 0.17 has to be multiplied by the percentage of the value addedin the value of production. Table 5 of this study implies an average per-centage share of value added in production value of 45.0. Correspondingly,the average rate of ICM tax on production value (in factory prices) is8.33 percent. According to the IBGE table in "Producao Industrial 1969"the value added share is 49.4 percent and the tax rate 8.40 percent.Thus, the estimate made in this study seems reliable.

15. There are two estimates of the effect of the exemption of incometax to exporters. Tyler, basing his calculation on a business income taxrate of 0.28, estimated this effect to be 4.2 percent of the nroductionvalue, and Andrade's estimate is 4.66 percent. In the face of these figuresthe average effect implied by Table 5 of this study (3.9 percent of pro-duction value in factory prices) seems reliable.

_/ Andrade quoted an average of 14.77 percent. However, he received thisfigure by dividIng the IPI tax receipts of the government by the(-ross) value added cf the manufacturing indas try. The fi uro corre-

Rd.

* AINEX 11Page 7

16. It is assumed in Table 5 without any preceding statistical cal-culations that the effect of the exemttions of indirect taxes other thanICM and IPI amounts to 0.5 percent of the value of production (in factoryprices). Tyler as well as Andrade estimated this effect to be 1.0 percent.The lower estimate, however, seems to be more reasonable since some costsin question (export credit and transportation insurance, etc.) and thetaxes on these costs do not occur if entrepreneurs sell on the domesticmarket. So far, the exemptions of thest taxes avoid an increase in costsfor the exporters but do not lower the present level of their costs. Theydo not effect therefore, a larger difference between the domestic marketprice and the export price.

17. The input-output matric plays the most crucial role in the cal-culation of the cost effect involved with the drawback. The doubts in theresults are, therefore, the largest in this part of the study. Does theexemption of the duties on imported raw materials and intermediary goodsfor the production of export goods really effect an export price reductionof only 0.6 percent on the average? Does this effect really amount to morethan 2 percent only in the sectors 8 (thread and yarn), 24 (chemicals), 25(chemical products) and 30 (non-ferrous metals)? Unfortunately, there areno statistical data to measure the magnitude of the drawback in terms ofcost reduction in a different way. There is also no possibility of com-paring the results with those of other authors. However, the realiabilityof the estimates can be indicated by the results of interviews with 32Brazilian exporters and of 20 questionnaires 1/ which were answered byexporters. Except for few cases exporting firms have deemed the drawbackas the least important or even negligible incentive. Moreover, consideringthe interviews and questionnaires, the quoted effect (0.6 percent) seemstoo large. The calculation is based on two assumptions: that (a) everyentrepreneur applies for the drawback, and (b) the application for thedrawback does not incur administrative costs reducing or eroding the benefitof the drawback. The assumptions are not always true. The application forthe drawback requires a great deal of complicated paperwork 2/ in two ways.First, some exporters are wary of the bureaucracy and assert that they weresuspected by the snirit of the forms of being deceivers and that the draw-back was granted only if the use of imported inputs for export productioncould be Droved without any doubts. Secondly, the larger part of the en-trepreneurs reacted more rationally comparing the benefit of the drawbackwith the administrative costs involved or with the opportunity costs ofthe entrepreneurial effort. In some cases the costs exceeded the benefit,in other cases the net benefit was small. One exporter stressed that fouremployees in his firm were engaged only in applying for the drawback, andhe considered the drawback not worth it all.

1/ From 150 questionnaires mailed only 20 were returned.

2/ According to the interviews and questionnaires, the firms reacted uponthis paperwork.

.NNE X IIPage 8

18. However, the government has tried to improve the functioning ofthe drawback system in the last two years since exporters have increas-ingly claimed drawbacks as can be demonstrated by comparing the figuresof the following table with some findings of Tyler.

DRAWBACK OPERATIONS 1970 AND JANUARY-APRIL 1971

Number of ExDorts Imports %Period Operations (1.000 US$, FOB) (1.000 US$, FOB)

Jan-Dec. 1970 627 197,772 42,839 21.66Jan-April 1970 158 45,948 6,375 13.87Jan-April 1971 289 51,585 9,920 19.23

Source: CACEX

He computed (p.136) the imports made under the drawback provisions at 1.6Mio uS$ in 1964, 3.0 Mio in 1965 and 1.3 Mio in 1966. Only 66 importoperations involving the drawback are reported for the period from theinitial implementation of the drawback policy in 1961 and its reformula-tion in June 1964.

ANNEX IIIPage 1

CALCULATION OF FREE EXCHANGE RATE

1. One of the conclusions drawn from the preceding argumentationhas been that the fiscal incentives on the whole cannot be accused as adumping-policy. This conclusion can be proved by comparing the effectiveremuneration to exporters of manufactured products with the free exchangerate. The effective remuneration R to exporters is equal to the amount inCr$ an exporter earns when exporting products of value US$1 and can be foundby adding the tax credits to the effective exchange rate r - r (l+cX/.The tax credit rate c is shown by Table 5.

2. The free exchange rate is defined as that rate which would main-tain the balance of trade unchanged in the absence of protection, export-taxes, subsidies, etc. If protection and tax-credits were removed, importswould increase and exports decrease. To establish a new equilibrium inthe balance of payments, the cruzeiro would have to be devalued in such away that:

(1) A Ex = AlTn (Ex = value of exports in cruzeiro, coffee exports ex-cluded, 1/ Im - value of imports in cruzeiro). The starting pointfor the estimation of ZL Ex is the definition of the elasticitytEx of the export-value (in cruzeiro) with respect to the price Pxof export goods (in cruzeiro).

(2) fEx E X Correspondingly, the value of A Imis estimated on the basis of:

M - i\ 3m iaPm (3) - with (ITm as elasticity of the import-

value (in cruzeiro) with respect to the price Pm of the importproducts (in cruzeiro). The problem, then, is to estimateApX v /r, and the elasticities £ and~--- , IP

3. The estimation of Trj , to start with, can be based uponthe assumption that the supply of imported products (supply of foreignfirms) is infinitely elastic because of the very small share of Brazil's

1/ All export variables do not include coffee, because its value is fixedby the Government in compliance with the International Coffee Council.

ANNEX IIIPage 2

imports in world trade. Then, the import-supply curve can be drawn as aparallel to the abscissa of the following graph:

Price of imported products (cruzeiro)

PO \ I import supply curve (exchange rate r,l \ duty t)

Pi \ III import supply curve (exchange rate r',

no duty)

P2 \ II import supply curve (exchange rate r,no duty)

Brazil's import demand curve

Volume of imported products

At the beginning the exchange rate is r and the duty is t. Thus, the importsupply curve is I cutting the demand curve at a price p0. If the tariffwould be abolished but the exchange rate not altered, the curve would be IIand the price P2. After a devaluation from r to r' the curve would be III

and the price P1. Now: I

() APZf _i --P~pl)Y(?, -ps ) = L- p; (!t) t r C- F)

7_ - ( l.C tt)t - (it:

i-f-t t 0 ft

4. Correspondingly:

A PA- _ 't - -r (/t O-)(5) p x -,- C( I t c ) when the elasticity of the world demand

for Brazil's export products is infinite. This assumption seems tobe realistic because of the small share of Brazil's contribution toworld (export) trade. However, there are some products for whichBrazil's share is considerably higher, for example, menthol crystalsand hardboard.

ANNEX IIIPage 3

5. The elasticity x is equal to the better known elasticity ofexport volume with respect to the export price plus unity. 1/

(6) EX _t X 1 t

The elasticity 'x can be estimated to be around unity, as Joel Bergsmanhas shown in his study on "Brazil, Industrialization and Trade Policies"(Oxford University Press, 1970, p. 250f). Then, EEx equals +2.

6. Correspondingly, the elasticity 9 equals the elasticity <en

of import volume with respect to the import price. Bergsman (loc. cit.,p. 259f) estimated this elasticity to be -2. Then,)LT -1. Fromformulas (1) - (5) it follows that:

(7) 1 _ I-

From Table 5 it follows that c = 0.147. An estimation of t in 1970 isgiven by IPEA in a working paper (0.38) and by Bergsman in his unpublishedstudy on "Foreign Trade Policy in Brazil" (0.36). The calculation of (7)for 1970, then, results in r'= 1.23. Thus, the free exchange rate wouldbe 23 percent higher than r the effective exchange rate is. This percent-age exceeds the percentage of the tax-credits showing that despite allincentives there is still a small implicit export-taxation.

1/ dEx_ Px dx + X.From (a) Ex = X.px it follows that dpx dpx

xThe,x . dEx = x (dx. Px + 1) and X p =x + 1.X Px dpx dPx x