The Brazilian Silicon Valley – A Case Study

In the middle of the Amazon Rainforests of Brazil, South America, we find an industrial hub, home to a plethora of production units of MNCs and sky-high corporate towers, the “Paris of the Tropics” or the “Brazilian Silicon Valley”. This makes one wonder because, amidst this huge expanse of never-ending flora, we find the city of Manaus, also known as the “Heart of Amazon”. Manaus is home to over 15 MNCs, including Nokia, Pepsico, Philips, Samsung, Sony, Fujifilm, Kodak, Gillette, Bic, Essilor, etc. Certain areas in the city have an Human Development Index (HDI) of 0.941[1], which is equivalent to the table-toppers on the HDI country-wise ranks. The rapid infrastructural and economic development was not a product of mere chance. The Special Economic Zone (SEZ) of Manaus or the Manaus Free Trade Zone or the Zona Franca de Manaus (ZFM) was a conscious effort of the then dictatorial government of Brazil in 1967. The objectives behind establishing the ZFM were the same as those behind any SEZ - to boost the economic development in the region and the country as a whole by giving incentives to the manufacturing sector to substitute imports. A secondary objective was to populate the Amazon region. Before 1967, the entire region in and around Manaus was engaged in rubber production, but the sales declined as a result of Sri Lanka and Malaya (now a part of Malaysia) producing rubber at lower costs. The economy saw a huge downfall, and this led to the emergence of the ZFM.

The Brazilian Government understood that an economy which relied exclusively on forestry and lumbering would never sustain in the long run and established the Decree-law No. 288 of February 28, 1967, officially converting the region within 10 kilometres radius from the centre of Manaus into the ZFM. The benefits prescribed in the decree included an 88% waiver on import tax related to inputs/raw materials for the manufacture of goods, a complete waiver on Industrialised Products Tax for goods that will be produced in ZFM and to be sold in other Brazilian Regions and a 75% reduction in income tax applicable to legal persons. Further, the state of Amazonas has provisions to extend credit from 55% to 100% on Tax on Circulation of Goods and Services if the company in question undertakes a project that effectively contributes to the social and economic well-being of the state of Amazonas. The Superintendent of the Manaus Free Trade Zone (SUFRAMA) is a government agency responsible for the implementation of the incentive schemes. The FZM is probably the most subsidized SEZ in the world, and for this reason, its effectiveness is highly debated among economists. We will now analyse the economic implications of the FMZ.

At the onset, it is important to understand that the FZM differs from most SEZs in one fundamental sense - the FZM imports a large chunk of its raw materials and the sales are made within the Brazilian territory, as opposed to most SEZs focusing on increasing exports and manufacturing raw materials domestically. In the 2000-2010 period, more than 50% of the raw materials were imported and 90% of the sales were made within Brazil[2], which has led to balance of trade deficits in Brazil. Understanding that as a drawback, we must also take into account the rise in employment in the state of Amazonas, where it doubled in the last decade, with the formal industry workers rising from 59,586 to 116503[3] (the rise in growth of employment surpassed the national average). Economists have asked a fundamental question at this juncture, which is whether the increase in employment rate means an increase in the employability or an overall rise in the employees skill-set. Understanding that the non-labour income has contributed way less to the economy of Manaus than its counterpart, the question of whether a mere inflow of FDI can be the foundation of a strong economy is raised. The spirit of entrepreneurship is not given enough importance and this can act as a detriment to the expected economic growth as a direct result of Manaus’ contribution to the Brazilian economy. However, economists note that regardless of all its drawbacks, it can be affirmed that the situation would’ve been worse had it not been for the FMZ. The poverty rate has fallen in the region, more rapidly than the other parts of the state of Amazonas, and the residents of Brazil can purchase products from top brands at significantly lesser prices. The rise in industrial development in Manaus has reduced significantly the number of people employed in occupations responsible for the destruction of the Amazon Rainforests. It has, in a way, helped in the preservation of the environment and the ecosystem of Amazonas. Nonetheless, like every highly problematic and controversial capitalistic economy, the FMZ harbours the starkest economic and social inequalities. While certain regions reach the HDI corresponding to the most developed nations (as mentioned above), there are places where the HDI is as low as 0.660. There is lack of basic sanitation facilities, access to clean drinking water, and the “subnormal agglomerations”, a fancy name for slums that Brazil is famous for, house 15% of the Manaus populace. All evidence points to a temporary system of uplifting the economy that is bound to become ineffective soon if proper structural changes are not made, given that the fiscal incentives granted under FZM have been extended till 2073. Nonetheless, it is to be seen whether the FZM survives the test of time or not.

References:

1. https://theconversation.com/welcome-to-manaus-a-factory-city-in-the-heart-of-the-jungle-27750

2. “Poverty and Inequality Dynamics in Manaus: Legacy of a Free Trade Zone?” - Marta Castilho, Marta Menendez, Aude Sztulman (2015)

3. https://www.ibge.gov.br

Further Readings:

1. “Free Trade Zone of Manaus: An Impact Evaluation using the Synthetic Control Method”: Vitor Possebom (2017)

2. “A Special Economic Zone in Brazil: The Manaus Free Trade Zone”: Guilherme V. Castilhos

-Soumil Agarwal

soumilagarwal@gmail.com