This book explores the economic and political conditions under which state intervention can be both warranted and effective. It focuses on the successful example of state-sectoral planning provided by Brazil's effort to produce motor vehicles. In 1956, the Brazilian government banned all car imports and gave foreign automobile companies an ultimatum: Either they abandon the lucrative Brazilian market or manufacture vehicles with 90-95 percent Brazilian-made content within five years.

Production and domestic content targets were largely achieved. By 1975, Brazil's industry was the largest in the periphery with annual production approaching one million vehicles. Moreover, in contrast to many contemporary Latin American experiences that better fit a rent-seeking paradigm, the initial subsidies did not lead to ongoing resource transfers to the sector.

Brazil's policy was successful in generating the production externalities of the industry and in increasing the capacity of the state to capture rents accruing to firms, benefits the country would have sacrificed had it continued to import from the oligopolized industry.

The book shows how neither neoclassical, market-oriented explanations of economic development nor state-centered approaches would predict that this type of import-substitution program would succeed in the context of Brazil's political economy. The book integrates the general insights of these currently contending approaches into a detailed, context-sensitive analysis of postwar Brazil, the international auto industry, and the bargaining process between the Brazilian state and the foreign auto companies.

It broadens the standard bargaining framework to incorporate the strategic objectives of both the state and the firms, and looks at the government institutions and policies that made the threat of market closure credible and made it costly for firms not to participate on schedule. It also presents archival material that shows that the transnational automotive firms would not have invested in manufacturing capacity in the absence of government demands.

1. The Brazilian case suggests that the polarized debate over state intervention must become more nuanced, as the effectiveness of state policy can vary greatly across sectors and over time depending upon demand conditions, technological change, firm strategy, and the domestic and international macro-economic environment.