EMPLOYMENT AND CHOICE OF TECHNIQUE IN MANUFACTURING: A CASE STUDY OF THE NORTHEAST REGION OF BRAZIL

This dissertation is a case study of employment and choice of technique in the manufacturing sector of the Northeast of Brazil, a region containing 30 percent of Brazil's population and one plagued by chronic unemployment and low per-capita incomes compared to the more developed region of Brazil, the South. In the late 1950s an attempt was made to attract investment into Northeast manufacturing through a program of investment incentives known as 34/18. This program was criticized on the grounds that 34/18 was subsidy to capital and as such, would encourage firms to choose more capital-intensive techniques and would encourage the faster growth of more capital-intensive industries, both detrimental to employment growth. The purpose of this dissertation is to test the validity of this critique and in so doing, study the choice of technique in a low wage region. The study consists of five chapters. The first chapter discusses the development problems of the Northeast and the incentives program known as 34/18. The second gives a theoretical treatment to choice of technique and changes in the product mix within an interregional context. The third chapter draws on data from the industrial and demographic censuses to compare employment and capital intensity between the Northeast and the South, two regions with different capital costs. In the fourth chapter we discuss the results of a survey made among twenty-nine manufacturing firms which used the 34/18 incentives program to open new manufacturing facilities in the Northeast. The last chapter concludes the study and points to some promising avenues for future research. The findings of the study do not support the criticisms of 34/18. Employment growth in Northeast manufacturing did lag behind that of the South after the initiation of 34/18, but this was apparently due to excess capacity in three key industries and not to a faster growth in capital intensity. The incentives program was instrumental in introducing new investment and modern industry into Northeast manufacturing and this alone was the greatest inducement to growth in employment for it allowed Northeast industries to expand out of traditional low income markets in the Northeast into high income markets abroad and in the South. The findings of the study also point to a surprising degree of insensitivity of changes in capital intensity to changing factor prices. Firms in the Northeast did prefer more mechanized techniques but this was due not to the availability of inexpensive capital, but to a lack of supervisory labor and working capital, both crucial to labor-intensive techniques of production. It was found that labor-intensive industries grew faster in the Northeast after the institution of 34/18. This phenomenon may have been the result of price movements favoring greater profitability in these industries, a factor more important than changes in the cost of production.