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Brazilian Lessons for Industrial Policy

Few economic ideas are more lauded and reviled than that of industrial policy. As industrial policy undergoes a renaissance worldwide, Brazil’s experience in promoting renewable fuels, beginning in the 1970’s, is directly relevant to the debate over its merits, and suggests that the key to success is the timely withdrawal of subsidies and protective measures.

SAO PAULO – Few economic ideas are more lauded and reviled than that of industrial policy. Proponents, such as those who studied the rise of the East Asian economies, swear by it. Opponents see red at its very mention. The former point to economic development; the latter maintain that tens, even hundreds, of billions of dollars have been squandered.

One recent theatre of (dis)content is that of renewable fuels. Worldwide, $184 billion is being allocated in public stimulus investments to promote clean energy, led by the United States ($67 billion) and China ($47 billion). Of course, there is some progress – wind power meets 20% of the electricity demand in Denmark and about 15% in Spain and Portugal, for example – but the recipe for success remains elusive.

In this vein, Brazil’s experience at promoting renewable fuels, beginning in the 1970’s, is directly relevant to today’s polarized views of industrial policy. A 10-year industrial policy program called Pro-álcool was crucial in the development of the industry. Today, Brazil is the world’s most competitive producer of renewable fuels, based primarily on bioethanol. Ethanol accounts for more than 50% of current light-vehicle fuel demand in the country, and Petrobras – Brazil’s energy giant and one of the largest companies in Latin America – expects this share to increase to more than 80% by 2020.

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