Governance in the Post-Import Substitution Era: Perspectives for New Approaches to Create Systemic Competitiveness in Brazil

Jörg Meyer-Stamer

For Publication as IDS Discussion Paper

January 1995


1 INTRODUCTION

Over the last years many developing countries have, after decades of inward-oriented industrialization efforts, opened their markets to foreign competition. In such countries industrial firms are facing a difficult time. This paper is mainly based on the Brazilian experience, but it addresses an issue that is relevant for firms in such seemingly diverse countries as Argentina and Zimbabwe, Mexico and India, or indeed Bulgaria and Uzbekistan. Firstly, firms have to face the challenge of Japanese management techniques. Japanese firms (and firms in other countries that intelligently adapted the principles of Japanese production organisation) have achieved, compared to traditional 'Taylorist' firms, a superior performance in terms of efficiency and quality, while at the same time maintaining a high level of flexibility and responsiveness. This has redefined the rules of global competition. Firms have to reorganize (if not 'reinvent') themselves in order to maintain their competitive position [1].

Secondly, whereas firms in Western industrialized countries are familiar with the phenomenon of competition from abroad, this is a new experience for firms in many developing countries. After a long period of protection (that often lasted half a century or more) they have to face the cold wind of international competition for the first time. For them, adjustment often does not mean improvement on an already good performance, but rather implies the alternative of performance leaps versus the prospect of extinction.

To make a considerable challenge even more difficult, these firms have to manage the adjustment process largely on their own. This has to do with the political features of macroeconomic adjustment. More often than not, the State resorts to opening the domestic market only when it seems to be the sole alternative. Often, this will only be after a prolonged crisis that has weakened the political actors who had benefited from the market protection. The latter include not only business associations but often trade unions as well. In such a situation of deep economic crisis, attempts to manage the adjustment process, i.e. industrial policy to support firms, are likely to fail due to the exhaustion of traditional modes of governance, the erosion of the state's governance and administrative capacity, and generalized mutual distrust among political actors.

This does not mean that the State does not have a role to play in the new environment. On the contrary: Successful industrialization typically rests on various types of State support and intelligent regulation [2]. However, the rationale of State activity is different today. Until the 1970s, industrialization policies had to follow the principle of infant-industry protection, trying to stimulate private firms to enter into industrial sectors that had not existed locally so far, or setting up state firms in these sectors. Today, such industries are far beyond the infancy stage, having gone through learning efforts and developed a certain level of managerial competence and technological capability. In more recent times, the concept of infant industry protection applied to those emerging industries where windows of opportunity opened over the 1980s. However, these industries, like microcomputers or microelectronics, are rapidly maturing now so that the windows of opportunity have closed again, and barriers to entry are on the rise.

Contrary to the practice in the early days of latecomer industrialization, policy may today no longer exclusively follow the logic of economies of scale, building up one-firm-industries and establishing high barriers to entry (and often to exit as well) instead of stimulating competition. Rather, the State must manage at the same time to secure competition and to support the emergence of competitiveness at the firm- and inter-firm-level. This is no easy task. Many traditional policy instruments like licensing of manufacturing capacity are hardly viable today. Moreover, the prospective recipients of State support are often not at all enthusiastic about it. Their memory of past State interventions (in terms of industrial policy, but more importantly in terms of macroeconomic policies that caused turbulence) is still alive; and often these have hindered rather than stimulated their development. Furthermore, they often perceive their achievement as a personal success, that is as a result of individual entrepreneurship vis-à-vis hostile framework conditions, or to put it differently: as a victory over State activities that discriminated against them [3]. Their confidence (let alone their trust) regarding the seriousness of the state's promotional activities is correspondingly low.

The first question is therefore not which instruments the State should use to support the emergence of competitiveness, but rather how the State can establish a policy dialogue with societal actors. In other words: before anything else, State and societal actors must establish new governance structures. This applies to necessary changes internal to each actor (for instance, business associations and trade unions) as well as to networking between them. The state has to re-establish the technical capacity to govern, to cut the clientelistic links between individual agencies and private actors, and to cut its overly detailed interventions into economic and social processes. Societal actors have to establish a certain degree of internal cohesion. This is particularly difficult in traditional corporatist circumstances where associations received their mandate from the state rather than from their members. Only then will policy networks emerge that aim at problem-solving rather than at rent- distribution.

In this paper, I will address both of the questions mentioned above. My argument is mainly based on the Brazilian case, but occasionally it draws on experiences from other countries also. I will first analyse the political consequences of the crisis of the traditional inward-oriented development model. I will then develop a view on how a new kind of relationship between State and society may emerge and what new governance structures may look like. Finally, I will address the question of what kind of policies might be formulated by the actors involved.

2 BRAZIL: THE END OF IMPORT SUBSTITUTION AND THE EROSION OF GOVERNANCE CAPABILITY

In the import substitution era, the State played a key role in industrial development. It sometimes formulated strategic plans for industrial development. It stimulated the emergence of private firms by providing them with cheap credit and sheltering them from foreign competition. It started its own firms in those sectors where private entrepreneurs were not willing or able to invest. It tried to shape the environment for industrial development by creating technology and training institutes and financial institutions.

These activities often relied on the initiative of State bureaucrats. Although there had been a certain amount of 'spontaneous' industrialization before and after the world economic crisis of 1929/32, this was limited to comparatively simple industrial activities. Local firms hesitated to involve themselves in basic, capital goods and consumer durables industries. In fact, it often took the bureaucrats a lot of persuasion and arm-twisting to make local firms move into these sectors, and they also had to overcome resistance from important actors in the domestic political arena who did not see any sense at all in building up these industries rather than importing the respective products. It was only in the 1950s that the support for this kind of policy grew in the major Latin American countries. Apparently, the theoretical work of CEPAL that provided the proponents of national industrialization projects with a conceptual framework has played a major role in this process (Bielschowsky 1991).

The pursuit of an inward-oriented industrialization strategy had important political implications. At the outset, there existed only a small and politically unimportant industrial bourgeoisie. In the initial stages of the industrialization process it remained heavily reliant on State support, and it was only after the industrialization process had gained momentum that the emerging industrial bourgeoisie started to articulate itself. Its ability to do so, however, was circumscribed by several factors. Firstly, State bureaucrats wanted to maintain their guiding role in the industrialization process and therefore tended to resist attempts of the private sector to gain autonomy. This was particularly true in the 1970s when industry became increasingly critical of the growing weight of state firms (Lamounier 1991).

Secondly, corporatist structures had been introduced where industrial firms were organized according to trade, but not necessarily according to common interests. Therefore, even if firms wanted to assume a political role it was often difficult for them to develop a common position within the corporatist organization. This was particularly the case in industries with a small number of big firms that enjoyed preferential treatment from the State (like subsidized credit), whereas the majority of small- to medium-sized firms had to struggle with different problems, like for instance getting access to any credit at all (Frischtak and Atiyas 1990). The result often was that individual firms or small groups of firms built up a special relationship with a particular State agency in order to circumvent the problems of joint interest formulation inside the corporatist entity. This, however, raised all kinds of problems which are typical for personalized instead of formalized relationships, intransparency, unclear rules, arbitrary decision-making, and so forth.

Thirdly, the industrial sector typically was not in a position to gain a hegemonic position inside the society even if the industrial development itself was fairly dynamic. Rapid growth of industrial output usually did not overcome one of the major bottlenecks that such countries tended to experience, that is the shortage of foreign exchange. This shortage was one of the major reasons for import-substitution policies. The goal of these policies was not to become internationally competitive as soon as possible but rather to build a local industry as soon as possible in order to save precious foreign exchange. This approach did little to stimulate domestic competition; on the contrary, tolerating a proliferation of entrants would often have collided with the goal to come anywhere close to minimum efficient scale since the local market supported hardly more than one efficiently sized firm in many industries (Fritsch and Franco 1989). More often than not, these firms attained neither the size nor did they feel much pressure to become efficient. The result was an industrial sector that remained dependent on imports (of capital goods and certain inputs) but was, due to its insufficient competitiveness, hardly able to generate foreign exchange [4]. Traditional sectors like mining or agriculture, but also non-traditional agriculture continued to be the major exporters. This implied that rural oligarchies – due to their obvious economic weight – continued to play an important role in domestic policies.

What emerged under the conditions of import substitution was a very peculiar political system that did not fit neatly into analytical concepts that had been developed against the background of the experience of the industrialized world. The missing transition in political hegemony from 'traditional' to 'modern' elites was only one feature that distinguished these countries from advanced industrialized countries. What on the surface appeared to be a democratic system was in fact a camouflaged version of oligarchic rule, and reappeared as such after the end of military rule in 1985 (O'Donnell 1988). What appeared to be authoritarian military rule was based on a delicate balance between different factions within military and between military and traditional oligarchies (Skidmore 1988). In terms of interest representation, elements of clientelism, corporatism and sometimes pluralism coexisted. The State was both an instrument of the élite to enrich itself and the promotor of industrial development.

In any case, it was a structure that was characterized by a high level of State intervention into economic and other societal spheres. This structure has been described as a State-centred matrix where all kinds of demands were addressed to the State. Newly emerging political actors 'made increasing demands which were appended, in successive waves, to the pre-existing ones. These sequential and often antagonistic demands, and the conflicts they generated, tended to be negotiated within isolated arenas; that is, each actor, or cluster of actors, was linked to the State through exclusive channels' (Cavarozzi 1992: 674). What emerged was 'a pattern of accumulation of multi-dimensional conflicts and oppositions that can be characterized as one of conflict sedimentation. Successive and multiple layers of conflict were erected one on top of the other without developing mechanisms for settling disputes in a negotiated and orderly fashion. This is not to say that conflicts were never resolved; in fact, sometimes they were. The pattern of resolution, however, was overly dependent on arbitrary State decisions' (Cavarozzi 1992: 675). In such an environment, 'pockets of efficiency' (Evans 1989: 577) could exist, and certain state agencies could act in a very competent and effective manner. This has been shown with regard to the build- up of the car industry in the 1950s (Shapiro 1994) and the petrochemical industry in the 1960s and 1970s (Mathieu 1991). Other examples can be found easily [5]. However, neither did these 'pockets' link up to a network of effective agencies, nor did their experience set an example for the less effective parts of the public service. Indeed, their effectiveness was often a temporary phenomenon as it was dependent on the support and protection of the president or other high-ranking state executives.

Moreover, this conflict sedimentation structure had an immediate and a long-term negative effect. The immediate effect was that, since there was no way of finding a way to distribute the costs of development, in particular of industrial development, the State had to print money in order to cover its expenses, thus creating a high and occasionally exploding level of inflation. The long-term effect was that since the ability of government to cope with any kind of radical change or new challenges or opportunities was highly restricted, the society did not react adequately to external pressures and did not use emerging opportunities, e.g. seizing a slice of the rapidly growing world market for industrial products. In the mid-1960s, attempts to shift to a more open trade regime soon got stuck. The surge in manufactured exports that started in the early 1970s was stimulated with hefty subsidies and reflected the possibility to appropriate substantial rents; the basic model of inward-orientation remained unchanged.

The inability to change course became even more obvious in the 1980s which was a period of crisis in economic and in political and strategic terms. The government reacted to the second oil price shock in much the same way as it had done six years before, that is trying to grow out of the crisis by trying to deepen import substitution, based mainly on external financing. This strategy collapsed firstly because there was little left to be substituted and secondly because from 1982 onwards foreign creditors were not willing to throw good money after bad (Batista 1992, Moreira 1993). Yet even in this situation that in political terms was marked by the smooth transition from military to civilian rule it was evident that no serious discussion on the true roots of the crisis started. The striking feature of the civilian government that took office in 1985 was not that it was not able to maintain fiscal discipline; after years of crisis and oppression no newly elected government would have been able to resist demands from those parts of society that had been neglected under authoritarian rule. Rather, it was the total absence of any discussion about medium- to long-term development options that seriously would have taken into account the changed international conditions and the limitations of the inward-oriented development model. The roots of the crisis were often sought in the conspiracy of the industrialized countries that were not willing to relieve the debt burden; and the way out of the crisis seemed to lie in redistributional policies that would raise the purchasing power of the poor majority of the people (Furtado 1984).

It was only in the late 1980s that Brazilian scholars began to perceive the underlying reasons for the East Asian development success and that important institutions like the National Development Bank (BNDES) started to formulate concepts that would have introduced fundamental changes into the trade and development regime (BNDES 1988). At the same time, however, the congress enacted constitutional rules that excluded foreign firms from areas like mineral exploration, continuing the nationalist, inward-oriented and xenophobic [6] orientation; and the government proved to be unable to implement anything, let alone radical changes in the industrialization regime. Due to the economic crisis, its financial situation became increasingly critical, and therefore it was no longer able to satisfy the demands from the societal groups, thus seeing its legitimacy and support and its governance capacity vanish. The political constellation changed from muddling through to getting stuck.

The situation did not improve substantially when a new government took office in 1990 even though it made a crucial move: it started to phase out tariff and non-tariff trade barriers, adopting a step-by-step approach in exposing domestic firms to external competitors, thus enforcing a fundamental change of course in the framework for industrialization. It was able to do so for two reasons. First, it could change the rules governing foreign trade at will, without having to involve the congress. Second, business associations were internally divided over this issue and therefore not able to establish firm resistance against the move (Weyland 1993). Apart from this move, however, the governability of the country was constantly decreasing as the erosion of traditional lines of communication between the State and social groups added to the stalemate between the executive branch of government and the legislature; the capacity of the latter to contribute to policy formulation was severely circumscribed by the proliferation of parties and low party discipline, thus making it virtually impossible to establish a sustainable coalition in congress, and by the prevailing clientelist mode of securing legitimacy (Mainwearing 1992). The government was, at least until early 1994, neither able to stabilise the economy, nor did it succeed in establishing policies to support the private firms that were under severe pressure to adjust due to the change in the trade regime.

3 NEW GOVERNANCE STRUCTURES TO FOSTER INDUSTRIAL COMPETITIVENESS – GENERAL CONSIDERATIONS

These are serious shortcomings in a world where competitive pressure is rising, and where some societies succeed in creating governance patterns that are capable of shaping an environment that stimulates and supports the firms' quest for competitiveness. We refer to this pattern as one of systemic competitiveness (Esser et al. 1993). By using the term systemic we want to point out several factors. First, a firm will generally not become competitive on its own, that is without a supporting environment of suppliers and production-oriented services as well as the competitive pressure of local competitors. Secondly, an environment that sustains competitiveness is rooted in the way a society is organizing itself, i.e. in its general and specific institutions. Thus, systemic refers to externalities that often are deliberately created within specific governance structures. Third, we maintain that the State has an important role to play in industrial development and restructuring. However, we start out from the experience that autocratic, hierarchical modes of governance are becoming obsolete. New forms of governance are emerging that are based on a new kind of interaction between State and societal actors, typically in horizontal networks. Fourth, there are strong interrelationships between four different levels, that is the micro-, meso-, macro-, and meta-level. Meso- level means the space between the micro-level of the firm and the macro-level of the economy as a whole, that is organizations, institutions and policies that are specific to and necessary for certain segments of industry. The introduction of the meta level refers to issues like the the basic governance structure of a society and its ability to build a basic consensus and to formulate strategies.

We add thus two levels that were largely neglected in the the framework of structural adjustment which has dominated policy making since the 1980s where macroeconomic reforms were perceived as not only a necessary but indeed a sufficient condition to stimulate microlevel restructuring, thus enhancing industrial competitiveness. Neoliberal theories of allocation and foreign trade emphasize the importance properly functioning international markets for capital, technology, and products, and the optimal character of decentrally organized decision-making processes. They reject active, anticipatory and/or accompanying industrial and technology policies. It was only during the course of ill-fated adjustment programmes that the political dimension of structural adjustment received more attention (Haggard and Webb 1993). But again, emphasis was placed on the prospects of implementation and sequencing of macro-level reforms rather than on meso-level policies.

In fact, a number of developing countries succeeded within the framework of structural adjustment programmes to stabilize economic framework conditions, thus revealing the pivotal role played by the once neglected field of macroeconomic policy for the development of sustained competitiveness. But the expected reactivation of their economies often failed to materialise. The reason is that the support structures that distinguish competitive industrial sites have not been shaped and, to make things worse, in some cases important locational factors were further weakened (e.g. education and R&D) by the adjustment measures targeted on budget consolidation (Klitgaard 1991). Thus, instead of stimulating industrial development, the conditions necessary for sustained competitiveness were further undermined.

Industrial competitiveness calls for a lasting improvement of locational factors, and this in turn calls for the active shaping of structures between the macro- and the micro-levels, that is the meso-level. Developed countries and NICs improved their position in the international economic hierarchy if they succeeded in structuring the institutional setting of industry specific services situated between macroeconomic conditions and micro-actors. Their experience has shown that a State which acts competently can correct market failures and shape the supply side of industry on the basis of:

Mesopolicies, in particular the development of a material and non-material industrial infrastructure (the development of an industry cluster-related infrastructure to optimize the external economies of companies; cluster-related technology policies etc) should focus on a number of main areas (concentration of existing resources) to speed up the process of world market-oriented specialisation. Michael Porter (1990: 78) comments on the significance of developing specialization advantages as follows:

'Contrary to conventional wisdom, simply having a general work force that is high school or even college educated represents no competitive advantage in modern international competition. To support competitive advantage, a factor must be highly specialized to an industry's particular needs – a scientific institute specialized in optics, a pool of venture capital to fund software companies. These factors are more scarce, more difficult for foreign competitors to imitate – and they require sustained investment to create.'

Therefore, apart from and beyond general innovation-friendly framework conditions, the development of dynamic competitive advantages requires specific, selective mesopolicies. Going beyond 'generic' policies, selectivity in the mesodimension instead of the widespread pork-barrel approach to promotion aims at strengthening the strong with an eye to building, as rapidly as possible, dynamic industrial centers and efficient industrial sites, even though this may imply a certain degree of negligence of less developed areas.

Under the current conditions in adjusting economies it is possible to distinguish three variants to define priority sectors for targeting:

3.1 RISING DEMANDS ON GOVERNANCE ON THE MESO- LEVEL

The competitiveness of firms rests on the effectiveness and efficiency of industrial sites, or, in economic terms, on the density of externalities, i.e. the intensity of interaction between firms and with universities, training institutions, R&D facilities, technology information systems, private consultancies, trading companies, financing institutions, and the like (Porter 1990). The demands on the local, regional and national level to create and support the business environment tend to grow; this applies to demands on business associations and other non- governmental actors as well as to demands on the State on all these levels.

Although the dogma which stipulates that government is obliged to assume a strictly subsidiary role vis- à-vis market processes is inadequate, the neo-liberal critique of the traditional ways of government intervention is basically correct. The idea that government alone, as a kind of central control centre of a society, can selectively direct technological and economic processes presupposes that government bureaucrats are more capable and better informed than other actors in society, including firms. This has been the case in some latecomer countries, most impressively in East Asia (Cumings 1984). However, as societies get ever more differentiated, and firms as well as other actors undergo learning processes, it becomes the other way around - in OECD countries as well as industrially advanced developing countries. Moreover, top-down approaches are unsuitable in the sphere of industrial location policy and the development of mesopolicies because the action potentials, the know-how requisite to formulate long-term policies, and the implementation capacities are distributed across a variety of governmental, private, and intermediary agencies. In the era of Fordism and highly standardized patterns of production, it was possible to successfully build vertically integrated major corporations on the basis of centralist, government-controlled industrial planning. However, one-dimensional, etatist and centralist patterns of governance are doomed to failure when the development and support of complex entrepreneurial networks and specialized institutional landscapes are called for (Best 1990).

Still, the conclusion that the State has no role to play at all is not well founded since this proposition ignores the undisputable fact that new forms of governance have emerged, initially in a number of OECD countries where government policy no longer follows the pattern of a traditional interventionist State. Rather, government acts as a coordinator, moderator and communicator in policy networks with firms and their associations, science, intermediary institutions, and trade unions. It aims at collecting and disseminating relevant information and working out joint medium- and long-term visions that can serve as points of reference for government mesopolicies as well as private initiatives (Scharpf 1991, Mayntz 1991, Héritier 1993, Atkinson and Coleman 1989). These new location policy strategies, which have emerged in a number of European (Cooke and Morgan 1993) as well as U.S. regions (Sabel 1993), differ fundamentally from the top-down approaches of traditional industrial policy, industrial planning, or investment guidance.

This is also true for late industrializers like Japan where MITI had to redefine its role after the completion of industrial catch-up (Vestal 1993), or like South Korea where the role of the State and the type of interaction between the State bureaucracy and the private sector is undergoing profound changes. During the phase of catch-up industrialization the state clearly played a guiding role, often ruling into the firms even when it came to day-to-day decisions (Hillebrand 1991). This was based on the bureaucrats' superior planning and evaluation capacity. Over time, however, private firms (especially the big conglomerates) have increasingly developed a capability for strategic planning. A painful process started recently where bureaucrats resist giving private actors more autonomy in their decision making, let alone a bigger role in strategy formulation. Fierce struggles between private firms and the bureaucracy emerged [7].

The development of a much less hierarchical pattern of social organization and techniques of intervention and regulation that leave the autonomy of societal actors intact in the mesodimension facilitate the governance and shaping of market processes and compensate for the weaknesses of pure market mechanism and statist planning (Scharpf 1991). These mechanisms make it possible to relieve the government's burden by shifting decision- making processes into intermediary arenas, to ensure a higher degree of information availability, to heighten the legitimacy of government decisions, and to mobilize the creativity available among societal actors by involving strategically them and their respective problem-solving capacities. They do, however, presuppose on the part of societal actors a capacity to compromise, to perform and learn, and to accept transformation. The conditions to establish this new form of governance for an effective mesopolicy are difficult in many countries. More often than not, polarization between societal actors is very pronounced, and there is no experience in communication and interaction between private and public actors; and corporatist structures with a rent-seeking orientation block any attempt of joint problem solving, that is policies that go beyond the smallest common denominator.

3.2 GOVERNANCE FOR INDUSTRIAL COMPETITIVENESS: DEMANDS ON THE META-LEVEL

The control and governance capacity of government and collective problem-solving arrangements, that is well-developed structures on the meta-level (Esser et al 1993), are a crucial precondition to optimise performance potentials at the micro-, macro-, and meso-level. Once this is present, it will be possible to mobilise social creativity. Until recently, however, most developing (as well as, of course, socialist) countries were characterized by centralized political decision-making processes and a bureaucratic, inefficient government apparatus with a low level of governance capacity. Often, this was even overlaid with rentist-corporatist structures which allowed privileged groups to effectively realise their particularist interests (Kaufman 1990, Cavarozzi 1992). These power structures corresponded with forms of social disintegration and fragmentation which were characterized by the exclusion of broad segments of the population as well as by political and social polarisation. Economic modernisation and the development of systemic competitiveness cannot succeed in the context of such social structures.

The structural adjustment programmes of the 1980s did not take into account that developing countries are by definition characterized by weak markets and weak firms, an omnipresent and at the same time weak government, and weak societal actors. The tendencies toward social disintegration are further exacerbated if macroeconomic reforms fail to establish regulatory and governance capacities (government reform, formation of complex linkages between strategic actors) and the requisite social structures. Systemic competitiveness cannot emerge without social integration. Building systemic competitiveness is thus a social transformation venture that goes far beyond correcting macroeconomic framework conditions.

Against this background, a basic social consensus on the direction of the changes aimed at is crucial to a reorientation. However, societies cannot choose directions randomly; the key actors have to accept the world market as a framework of reference. This does not necessarily imply a high export ratio; it rather implies that firms should aim to get close to international quality and efficiency standards. Moreover, medium-term orientations and visions are important to assert future interests against current interests and generate stable expectations. If the effort to develop them fails, the required structural change will be deferred, as was the case in many Latin American countries in the 1980s, thereby prolonging the process of social disintegration; and weak societal actors who are unable to articulate their interests adequately will pay the bill. To overcome obstructive social structures, durable patterns of social organization and values which the societal actors share in terms of concerted action and cooperative approaches to problem-solving are needed in the medium term.

The process of social structural change involves safeguarding the autonomy of social institutions and organizations from encroachments on the part of government. The de-linking between State and trade unions, industrial associations, the scientific community and other societal actors pending in many countries can give rise to self-responsibility. This is an important prerequisite to unfold creativity potentials. The autonomous societal actors and the intermediary institutions proceed along the lines of three complementary logics. First, they optimize their institutions or firms (inward-looking orientation) on their own responsibility. Second, they represent their interests vis-à-vis government or other societal actors (competition). Third, they shape their own environments through cooperation and networking with public or private institutions (cooperative competition). Increasing social self-organizational competence on the one hand, and clustering and channeling creativity potentials on the other are complementary tasks.

Major groups in society must learn that safeguarding government from influential, privileged groups may establish a positive-sum game. Only a relatively autonomous government is able to orient its activities toward overall social and economic interests. Transparency and accountability are crucial. Autonomous functional subsystems are based on a clear-cut separation of government, industry, and societal actors. They may then be further developed by intrinsic learning processes, flexibility and responsiveness, and by dialogue and efforts to search cooperatively for all optimal solutions involving government and societal actors. This may occur on the national as well as on the regional and local level. In fact, traditional governance structures often implied a high level of centralization of political decision-making. Redefining the role of state may include a revision of the division of responsibilities between central, regional and local governments, and re-distributing tasks and funds to the latter. Systemic competitiveness requires fundamental changes in the national environment, especially in fields like trade policy and exchange rate policy which are crucial in determining the incentives that economic actors face. Yet, it will often be created on the local level where the actors involved find it easier to identify common interests and to devise measures to improve both firm competitiveness and social welfare.

3.3 NEW FORMS OF GOVERNANCE

Aside from the forms of governance already prevalent in societies organized along the lines of market economies – hierarchic coordination and steering in firms and public institutions, market-like coordination among firms, and hierarchic governance of society by government -, network-like forms of organization are emerging (Powell 1990), in particular at the meso-level, which are characterized neither by simple market allocation (competition and price) nor by centralist governance mechanisms (hierarchic control and State interventionism).

The predominant discussion in the 1980s of market vs government overlooked these innovative forms that were involved in the shaping of social structures. They are based on a combination of market, government and a variety of forms of self-coordination in the shadow of the market, the shadow of hierarchies, and in self- organizing networks (Scharpf 1991). This view of increasingly differentiated forms of social organization and governance surmounts the classical dichotomies of market versus government and of total autonomy of decentral actors (liberalism) versus totally integrated society (socialism).

Social processes of searching and learning should not be limited to strengthening the market and paring down the scope of government. Rather, they should try to involve important societal actors. The emergence of policy networks is due to:

Successful policy networks are based on the following core elements (Mayntz 1991: 16):

Policy networks differ from traditional corporatism in that the role of the State has changed: rather than organizing private interest and arbiting between corporatist groups which hardly interact among each other, representatives of associations interact among each other and with State bureaucrats on an equal basis. Policy networks are also different from the 1970s brand of European neo-corporatism which basically involved the central State government and the peak organizations of capital and labour. Yet it is difficult to find a profound difference between 'meso-corporatism' and policy networks: both terms describe arrangements that used to have a certain level of institutional (albeit often informal) stability and a set of (albeit often tacit) rules that govern the interaction process.

Policy networks tend to be organized on a sectoral basis, dealing with fields like science policy, technology policy, or health policy; and they tend to be embedded in political structures where there is some higher level that may intervene in case a policy network runs astray. The State can, for instance, stimulate the build-up of local or regional policy networks that set out to formulate an industrial strategy. It can make sense to support such efforts financially as long as this support is linked to performance criteria. On other levels, for instance a policy network for technology policy on the national level, the threat that the state might unilaterally devise measures that run counter to the interests of the parties involved is an important stimulus for the proper functioning of policy networks.

To sum up, building systemic competitiveness is based on four interrelated elements:

Structural change towards competitiveness based on a new model of governance can only take place stage by stage. Experience shows that, in the long term, more complex forms of interaction and intervention at meso-level are successful only if radical change on the basis of sound macropolicies has already been introduced. Social frustration can only be avoided if key actors explain the complex nature of the change to society, something that was not done in Latin America until the late 1980s. On the other hand, various experiences show that overcoming minimalism is the basic prerequisite for sustained competitiveness and the improvement of the welfare of the population.

4 SYSTEMIC COMPETITIVENESS: A REALISTIC PERSPECTIVE FOR BRAZIL?

At present, the governance capability appears severely limited in Brazil. Therefore, it would be out of place to formulate a broad set of policy measures that would have to be implemented to support the industry in its struggle for more competitiveness. It is even more dramatic is that, at first sight, a total lack of systemic competitiveness seems to mark the situation in Brazil. It appears that not just a few factors are missing but rather a number of factors interact in inhibiting the emergence of systemic competitiveness:

Whereas the first three factors reflect severe problems on the meta-level, the last three point at negative interactions between meta- and meso-level. Nevertheless, there are, at second sight, also some indicators of profound change - a higher-than-expected level of responsiveness to new challenges inside firms as well as the emergence of new governance patterns in some spots.

4.1 THE DISARTICULATION BETWEEN THE EXECUTIVE AND THE LEGISLATIVE BRANCH OF CENTRAL GOVERNMENT

The president appears to be the central figure in Brazil's political system. He is popularly elected, and presidential elections do not necessarily coincide with parliamentary elections. Lamounier (1993) has described the system as a plebiscitarian presidency where the president receives a mandate to pursue (and is often expected by the electorate to actually implement rapidly) fundamental political changes, and the electorate expects him to implement them without delay. However, the Brazilian political system has accumulated various mechanisms of checks and balances that curtail the president's capacity to govern autonomously. In the 'Old Republic' (before 1930), the leaders of some federal states (São Paulo, Minas Gerais, Rio Grande do Sul) were powerful enough to challenge the president, and the situation has changed only partially since then. After the end of Getulio Vargas' dictatorship in 1945, the congress rapidly dismantled certain institutions that had contributed to strengthen the executive power (Skidmore 1967: 34 f). The military had always played an important role in politics, even in the democratic phase from 1945 to 1964, and it did not really come as a surprise that it toppled the civilian president in 1964. But even the military presidents saw their governing autonomy circumscribed by the necessity to mediate between conflicting factions of the military and to get political support from regional oligarchies (Skidmore 1988). After the smooth transition to civilian rule in 1985, the congress again succeeded in extending its responsibilities. Therefore, the president has to strike bargains with the congress, the governors of federal states and the military in order to get his policies implemented.

Over the recent years this has proved to be particularly difficult with regard to the congress. In fact, a system that was meant to establish checks and balances has largely led to a blockade of the political process. This is due to the distorted representative structure of the congress, the large number of parties and low party discipline, and the prevalence of clientelistic behaviour, all of which make it difficult for the executive to organize a reliable political base in the legislative. In the congress, the Northeastern and Northern states are clearly overrepresented. This is most obvious in the Senate where each State is represented by three senators – be it the State of São Paulo with half the industrial product and a fifth of the population, or Amapa with hardly any economic importance and population. But it is also true for the Chamber of Deputies (Rosenblatt and Novaes 1993). The political behaviour of congressmen from the Northeast and the North is largely shaped by their efforts to channel government funds to their local constituencies, whereas congressmen from the Southeast and South may take an interest in industrial and technological development. Yet, their legitimacy is also based on successful pork-barrelling. This has to do with the structure of the electoral system: There are open, State-wide lists, and the citizens can elect whichever candidate they find appropriate (Mainwearing 1992). Typically, this means that a candidate will campaign within a certain region inside of a given State in order to raise the necessary votes there. Therefore he is dependent on satisfying the local clientele. This has two implications. Firstly, party coherence is low as the parties do not have to set up ranked lists, and since most parties have a limited capacity to support their candidate. In fact, politicians frequently change parties or set up new ones. Consequently, there is no ex-ante-reason why congressmen should follow any fraction discipline. Secondly, the executive finds it difficult to build a reliable base in Congress. Even trying to build an ad hoc coalition between fractions to support a given policy initiative is often no viable option. Rather, the executive (or its 'leader' in Congress) has to find support from a sufficient number of groups of congressmen which are typically led by one of the leading political figures in Congress.

The mutual blockade between the executive and the legislative branch of government has been a crucial factor in delaying [8] the macroeconomic stabilization of the Brazilian economy which is a key prerequisite for successful mesopolicies. The government literally had to buy support in congress, and the congressmen had to channel funds to their constituencies. Both factors contributed to the rising public deficit that became the single most important reason for the explosion of the inflation in the second half of the 1980s and the early 1990s.

4.2 THE PERSISTENCE OF TRADITIONAL CORPORATIST STRUCTURES

The internal reorganization of interest groups which is an important pre-condition to enable their representatives to take commitment in policy networks has only started. So far, the relationship between the State and major societal groups is largely organized in a way that makes it difficult for the State to forge alliances and build networks. In this respect, sorting political actors along lines like left versus right does not help much. The opening, deregulation and destatization of the economy faced resistance on the left and on the right, and probably even more on the left than on the right. This has to do with the fact that the largest federation of trade unions, CUT, which may represent as much as 70 per cent of formal sector employees, is particularly strong in sectors that represent the core of the traditional etatist development model, like Petrobrás and the petrochemical industry, and in sectors that gained from the crisis of the 1980s, that is the public service and the banking sector which both expanded enormously [9]. Therefore, despite its leftist rhetoric CUT actually is part of those forces that at least want to slow down opening and liberalization and also have a somewhat ambiguous position regarding economic stabilization. Also, CUT is in a difficult position regarding the structure of the system of representation itself. On the one hand, it would like to see the corporatist system where 'Labour Courts' settle wage disputes dismantled. On the other hand, CUT's member unions gladly accept the money they receive through the compulsory contribution of the workers (imposto sindical).

On the antagonistic side, industry has also found it difficult to develop clear political positions. This has to do with the fact that interests diverge vastly. Many firms hope to benefit from an opening of the market (especially in terms of cheaper and better quality inputs). Others oppose it fiercely. Since the corporatist system which was introduced in the 1930s is still in place in this sphere as well, both types of firms are members of one and the same business association which makes it correspondingly difficult to define a political standpoint on any given issue (Mathieu 1991). So far, there have been only few attempts to establish new business associations according to common interests. This is due to the fact that the costs are high since their members have to pay both the compulsory contribution to the corporatist association and the fees of the new association, whereas benefits are uncertain and the temptation to free-ride is big. This situation makes it difficult for the government to build reliable relationships with the business community.

4.3 MISTRUST BETWEEN FIRMS AND GOVERNMENT

Government-business relationships suffer from a high level of mistrust on the side of the latter. This is due to various experiences:

Therefore, industry has been increasingly sceptical regarding any kind of government intervention, even towards those interventions that were meant to support the firms' adjustment. This was one reason why policy initiatives that were meant to add the carrot to the stick by and large had a limited impact:

These programmes appear to suffer from having been formulated in an isolated way and based on the experiences of advanced industrial countries. Their formulation was not based on a broad consultation process with the prospective recipients of incentives; rather, it replicated the traditional top-down approach to industrial policy.

4.4 THE HIGH LEVEL OF DISORGANIZATION IN THE PUBLIC BUREAUCRACY

The Brazilian public service has always been very heterogeneous in terms of effectiveness, efficiency, and accountability. The absence of transparent recruitment procedures, predictable career paths and personnel stability and the political mechanism of patronage reinforced each other, thus minimizing the longer-term orientation and the personal commitment of the employees (Evans 1989). Certain sectoral agencies and institutions like the National Development Bank (BNDES) were the exception from the rule.

Things have become worse after 1990 (Holanda 1993). The Collor administration tried to implement a public sector reform that amounted to little more than arbitrarily closing down some State agencies and firing employees. In fact, the government failed to achieve the latter since the constitution had established a job-for-life guarantee for all public servants employed for more than five years. What the government actually achieved was to cut the real wages, undermine the morale of the employees and stimulate many of the more capable among them to look for better paid, more stable jobs elsewhere (for instance, as professional staff of the Congress). Therefore, the technical capability of the public service to formulate, let alone implement, policies has decreased. This is particularly true at the middle level of the public service.

4.5 THE ABSENCE OF A NATIONAL SYSTEM OF INNOVATION

In the past, the prevailing incentive structure did not stimulate innovative behaviour, at least not in the way it is normally understood in industrialized countries. This is not to say that Brazil was a stationary economy with no technical change at all; the contrary has been documented. However, the larger part of technical change followed the typical pattern of latecomer industrialization where firms try to master technologies that have been developed elsewhere, try to adapt them to their needs and possibly try to improve them so that they fit better into the local environment. 'Typical R&D efforts would be determined by the need to use different raw materials, scale- down (to smaller) plant size, diversify the product mix, change the product design, use simpler, more universal, less automated and lower capacity machinery, stretch out the capacity of existing equipment, etc.' (Teitel 1987: 109). This kind of activity does not mainly require intra-company R&D but rather process engineering activities.

In the closed market environment, firms felt little pressure to extend their technological effort beyond this kind of activity (Dahlman and Frischtak 1993). With the degree of competition being low, they had little incentive to introduce truly innovative products or to look systematically for radical improvements in the production process. There were only few exceptions, like the aircraft industry where the Brazilian firm tried to compete at the leading edge of one segment of the world market for commuter planes, or in oil exploration where the internationally available know-how on deep water exploration apparently was limited, or in the production of alcohol fuel, which simply did not exist anywhere else. In these cases, firms have set up a systematic R&D effort and have also cooperated with universities and research institutes. In most other industries, however, firms did not have R&D departments. They are an important feature in the organization of R&D cooperation with external agents since they form the major recipient structure for the internalisation of research results from external sources. In fact, as a rule firms did not confront problems, challenges and opportunities that would have made it necessary or advisable to look for research results or external research support.

Thus, researchers in universities and research institutes had to have the impression that there was little potential demand for their results in industry. Yet, this was only one reason for the clear separation between research and industry. Other reasons were (Castro 1989)

4.6 DEFICIENCIES IN POLICY-MAKING ON THE LOCAL AND STATE LEVEL

Industry tends to be clustered in Brazil, that is at a reasonable level of disaggregation in terms of industry classification a substantial number of companies of a particular industrial branch appear to be located in a restricted geographic area, mostly within a part of a federal State. For instance, the production of women's shoes is concentrated in the Sinos valley in Rio Grande do Sul, the production of men's and children's shoes in the interior of the State of São Paulo (around Franca and Birigüi, respectively), the production of ceramic tiles in the south of Santa Catarina, the processing of chicken meat in the west of Santa Catarina – not to mention the concentration of the automotive and the capital goods industry around the city of São Paulo (or, for specific political reasons, the consumer electronics industry in Manaus and, for technical as well as political reasons, the petrochemical industry in Cubatão, Camaçari, and Triunfo). As has been shown in the case of the shoe industry in the Sinos Valley, the characteristic feature of clustering is not only the geographic concentration of firms but especially the emergence of a network of specialized suppliers, capital goods firms, and services, as well as a certain level of political organization (Schmitz 1993). Therefore, in terms of meso policies industry does not necessarily rely on the central government, and the disorganization on the federal level may even stimulate joint action and policy initiatives on the local or regional level. Thus, systemic competitiveness may emerge on the local or regional level long before any such development of the national level.

However, regional initiatives are facing two serious problems. First, policy approaches that seriously aim at problem-solving do not form part of the traditional role definition of politicians and bureaucrats on the local and regional level. This is not only true for the less-developed Northeastern and Northern regions, but especially for the Southeast and the South. Local politics are strongly based on clientelism. Rivalry between competing local oligarchies is strong, and mutual trust tends to be low. Policy initiatives that are being launched by one key figure often face fierce resistance on the grounds that his rivals presume that the main goal of any given initiative is to underline political ambitions. This logic is one element which explains the extreme orientation towards approaches that produce immediately visible results. Any other approach that would require a certain degree of consultation between different political actors simply is not viable.

Second, as long as the division of responsibilities between central, regional, and local government is not clearly defined, policy initiatives on the the regional or local level are under the permanent threat of being thwarted by central government interventions – be it that the central government changes its mind and starts to pursue a competing initiative on its own, be it that the central government launches some other kind of policies that undermine the regional or local policy formulation potential, e.g. by abruptly changing the rules of the game in foreign trade. Since political actors on the regional and local level know about these possibilities, it is probable that they are going to anticipate this in their activities, and that means that their initiatives are going to be very limited in their ambitions, in the profile they keep, and in terms of the financial resources involved.

4.7 WHY SYSTEMIC COMPETITIVENESS MAY EMERGE NEVERTHELESS

It seems that the prospects for systemic competitiveness to emerge in Brazil, at least anytime soon, are bleak. However, there are also a few examples that may indicate that profound changes are actually underway. First of all, there was the voluntarist shock of the Collor government that pushed through an opening of the market against various political actors in 1990, thus changing profoundly the incentive structure for firms. Today, Brazilian industrial firms by and large operate under totally different conditions than in the six decades of import substitution before, having to increase their competitiveness rapidly – and, surprisingly, many have so far proved to be reasonably adaptive (IE/Unicamp et al. 1993). More precisely: they have started to adapt after a certain period of hope that they might be able to revert the political decision.

Second, there is a new type of approach to industrial policy in the so-called sectoral chambers. In the Sarney era (1985-89), sectoral chambers existed as a forum for bargaining to control prices. The early Collor government tried to set up Executive Groups for Sectoral Policy (GEPS), but this attempt to articulate policy initiatives with private industry bore little fruit due to mutual distrust. In spring 1991, sectoral chambers (câmaras setoriais) were set up, initially with the aim of containing inflation in a period of phasing-out the general price and wage freeze (Salgado 1993). The chamber for the car industry, however, turned later into a fully fledged attempt not only to restructure the industry but also to revitalise the whole economy and, indeed, was successful. It was made up by State representatives, the associations of the car and car parts industry as well as the dealers, and the peak organizations of the trade unions. The deal they struck aimed at dynamizing the sector, mainly by reducing the price of cars (by tax reductions, rationalization, and smaller profit margins) and stabilizing industrial relations. Although this does not exactly qualify for an advanced version of a policy network (because the distribution of costs and benefits was uneven since it appeared as doubtful that industry and dealers would actually forego profits), it comes close to such an experience. This has certainly been facilitated by the fact that the sector is highly concentrated (in terms of companies as well as geography) so that the number of actors involved was limited, and the effects of certain measures were predictable, that is the actual outcomes came close to the intended ones. It is therefore not really surprising that other sectoral chambers which deal with more differentiated and dispersed industries have not been that successful. Nevertheless, given the past experience of mutual mistrust between all actors involved, it was not necessarily to be expected that the venture would succeed in the car industry. If followed the pattern macroeconomic turnaround (opening of the market) which enforced microlevel adjustment, which in turn contributed to developing a basic consensus at metalevel, thus creating a crucial precondition for joint problem-solving at mesolevel.

Third, some federal states and city governments have recently shown a substantial capability of stabilizing the local economic environment and stimulating local production activities, thus contradicting the traditional logic of action outlined above. This has been most prominent in the Northeastern State of Ceará where the State government (after having fired a lot of redudant employees who had got their jobs due to the patronage system rather than personal qualification and after having rehabilitated public finance) started public purchasing programmes to simulate local industry (Amorim 1994). Another example has been the city of Curitiba where a well- developed local infrastructure and a solid financial position serve as a base for local initiatives to stimulate new industrial activity, inter alia in fields like the software business.

Fourth, there is some evidence (albeit so far undocumented) that business associations are changing in profile, venturing to offer services for their member firms. In the State of Santa Catarina, for instance, the Federation of Industries has started to organize the participation of local firms in international fairs. It also engages in awareness building and information dissemination, for example on things such as new manufacturing practices or ecological product requirements in the export market [10].

All these factors and experiences indicate that changes are underway in Brazil. Societal actors are experimenting with new kinds of governance, and the results seem to be encouraging. Nevertheless, it will take quite some time, not only for structures to change, especially to reshape the relationship between the executive and the legislative branch of government and to strengthen the technical capacity of the public service, but also for actors on different levels to learn how to actually use the space that opens for policy initiatives. It will also take some time, and a lot of effort and goodwill, to overcome the mutual mistrust among actors. It may happen that different trends reinforce each other in this regard: Changes in the electoral system may stimulate a greater coherence of political parties; this may make recruitment processes more transparent and predictable, thus reducing the suspicion among actors regarding their respective political ambitions. Changes in the political parties again should facilitate the construction of a reliable base of the executive in the Congress, thus making it easier to get beyond ad hoc deal striking to the formulation of medium-term projects. A changing role definition of business associations and trade unions may facilitate the shift from clientelism and traditional corporatism to pluralist lobbying efforts and the set-up of policy networks.

But the prospects for a comprehensive, Korean-style industrial policy that tackles various problems in various industries at the same time remain dim. The single most important policy instrument over the past four years has been foreign trade policy. Whenever the government felt that a certain industry did not make a sufficient effort in restructuring it reduced the respective customs tariffs in order to put more pressure on firms. Future initiatives to also support industrial restructuring will have to depart from the traditional top-down approach; they will have to be based on new role definitions of the actors involved. They will have to be more specific; and they should be based on the thorough separation of roles and tasks between different levels, that is the local, regional and national level.

The transition from hierarchical to network-based governance is a difficult task, and it certainly is the opposite of a quick-fix to solve the shortcomings of a weak government. Shifting responsiblity for policy-making into the society can only work if the government is sufficiently strong to prevent policy networks from running amok, that is introducing discriminations, abolishing competition in the market, or redesigning clientelist links. If this can be avoided, policy networks on the meso level can help to overcome the problem of persistent overburdening of the government. Efforts to reform government may then focus on establishing a capacity to perform context control, that is supervising the functioning of policy networks, rather than trying to re-establish a capacity to guide other societal actors. These are demanding tasks, and it would be a big step forward if the Brazilian state could fulfil them.

FOOTNOTES

1 For an overview of the issues see, for instance, the contributions in World Development, No.1/1995.

2 See, among many others, Hillebrand (1991). For a critique of the World Bank view on the East Asian miracle that basically claims the opposite see, inter alia, Killick (1994) and the contributions in the Special Section of World Development, No. 4/1994.

3 This has been described particularly for the case of Chile; see Messner (1993).

4 To counter this argument, it is often pointed out that Brazilian industry had a fairly strong export performance since the 1970s, and achieved remarkably high export surpluses after 1983. Three arguments may qualify these undeniable facts. (a) The export performance has to be seen in the light of the availability of high export incentives which allowed the appropriation of rents for some sectors, especially cars (Pinheiro et al 1993). (b) The export ratio always remained low. The export performance was due to the effort of a limited number of firms and sectors, some of them foreign owned (where the export was a function of the global strategy of the respective firm); areas like the shoe industry in Rio Grande do Sul, where the export performance was undoubtedly due to entrepreneurship (Schmitz 1993), were the exception rather than the rule. (c) The period of high export surpluses were also a period of lost opportunities since in the second half of the 1980s the Brazilian market share actually dropped in the majority of industrial branches (Batista and Fritsch 1993).

5 Further examples include the agricultural research and extension service in the 1970s (Goldin 1990), or the National Development Bank (BNDES) that maintained a fairly good reputation, especially compared to development banks in other developing countries, or indeed the Special Secretariat for Informatics that - contrary to the obvious incentives - at least succeeded in maintaining a reputation of not being corrupt.

6 This xenophobia used to co-exist peacefully with a regulatory framework that was fairly open to foreign direct investment, especially in those areas where national firms were not able or willing to operate.

7 In the case of South Korea this took the shape of Chung Ju Yung, founder of Hyundai, one of the four leading conglomerates, candidating for presidency in 1992. The State reacted to this by arbitrarily excluding Hyundai firms from incentives, subjecting Hyundai firms to unusually strict tax examinations and arresting Hyundai executives for practices that used to be tolerated (Nam 1994).

8 To say 'delaying' rather than 'inhibiting' implies that the 'Plano Real', the stabilisation programme that was launched in December 1993 and gradually introduced until July 1994, is going to succeed in reducing inflation. This appeared to be a reasonable proposition at the time this paper was completed (January 1995).

9 Over the 1980s, the number of central government employees grew 'by abut 150 000 or roughly one third of its level at the beginning of the decade' (World Bank 1991: 123). The share of the banking sector in GDP grew from five percent in 1970 'to an average of 13 percent by the end of the 1980s' (World Bank 1994: xiv).

10 Verbal communication in interviews with business association executives in Florianσpolis and Blumenau, May 1993 and March 1994.

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