Evaluating the effect of exchange rate and labor productivity on import penetration of Brazilian manufacturing sectors

In recent years, several economists have argued that the sharp loss of competitiveness of the Brazilian industry was caused by a strong exchange rate appreciation. However, other economists have attributed this loss of competitiveness to the dismal growth of labor productivity in the Brazilian industrial sector. The present paper proposes to estimate the differential impacts of variations in exchange rate and labor productivity on the Brazilian market share of imports measured by the coefficient of import penetration of total demand for manufacturing goods. We start by developing a simple theoretical model to investigate under what conditions the impacts of an exchange rate depreciation and an increase in labor productivity would differ. We test the theoretical implications of the model by means of a GMM panel data analysis focusing on 17 manufacturing sectors in the period between 1996 and 2011. Our results suggest that both variables matter to explain the coefficient of import penetration. Nevertheless, labor productivity has the strongest negative impact on the market share of imported goods, even after controlling for sector fixed-effects.