Brazil’s Productivity Gap

28 Dec

“Doing more with less.” As world population heads towards 8 billion, countries and companies across the world aim to use technology, organizational techniques, and training to do more with less: increase productivity and conserve resources while sustaining a decent quality of life.

One of the key concepts here is productivity. I recently participated in a forum[1] where I had the privilege of seeing a presentation by Dr. Carlos Pio of the University of Brasília, an examination of Brazil’s economic prospects through the prism of productivity. I was struck by the importance of this metric; productivity is one of the more neglected economic indicators, a gauge for how well countries use the factors of production – land, labor and capital. Productivity is a far more accurate indicator of a country’s potential for sustained wealth-creation than GDP or even per capita income.

Brazil’s Productivity Gap

My readers will probably find it unsurprising that Brazil does relatively poorly on productivity indicators. A 2006 report by McKinsey Global Institute found that between 1995 and 2005 Brazil’s productivity grew only 0.3 percent per year, in contrast to 2.8 percent in the U.S. and 8.4 percent in China. McKinsey assigns about one third of this sluggishness to Brazil’s development curve. The remaining two-thirds has to do with “macro-economic factors” (a rather ‘catch-all’ variable), the fact that labor is cheap relative to capital, a large informal sector, complex regulation, and a weak infrastructure. But much of Brazil’s productivity gap also has to do with the country’s tariff and educational policies, and politicians would do well to pay greater heed to these factors.

High Tariffs Limit Productivity

High tariffs provide Brazilian companies with protection from international competitors, giving them weak incentives to boost productivity. High tariff barriers increase the price of imports, allowing domestic firms to make up for low productivity by raising prices to meet or just beat the inflated price of imports. Imports in the most critical sectors tend to be about double the U.S. price-tag: a car in the U.S. that sells for US$30,000 costs about US$60,000 in Brazil, or more. I am constantly amazed that consumers are willing to get plowed with these kinds of tax-takes. Unsurprisingly, it is rare that you will find most Brazilian-made consumer durables, such as electronics, being sold outside of Brazil – they simply cannot compete.

Some will say that Brazilian consumer durables, much less other sectors, cannot compete because of the inflated value of the currency. But as South Korea, Japan and other countries have shown, productivity and research and development can partly overcome the negative industrial effects of a strong currency.

Another way of looking at the protected markets of Brazil is like this: the mostly poor population of Brazil gets to buy lower quality goods at higher prices because of the country’s tariffs. Although protecting domestic industry creates employment, it effectively transfers wealth from the poor –who could be buying better quality goods for cheaper – to elites. Because the effect is to re-circulate money within the domestic economy, there is no net gain in Brazil’s wealth, merely a redistribution. We should be reminded of one of the first maxims of the Wealth of Nations: countries grow wealthy by selling things to other countries. Brazil has traditionally sold mostly primary goods to other countries, and sustained high tariff barriers appear to ensure continuity here.

Why? Because you can’t win in the manufacturing export markets if your productivity stinks. And your productivity is not going to improve unless there is revolutionary investment in research and development (R&D) and education, among other areas.

 Investment in Research and Development: a Key Indicator

In most other significant economies, such as China, Canada, the U.S. and even Spain, the private sector tends to invest more in R&D than government. Indeed, this chart on R&D prepared by Brazil’s BNDES (a poor scan, I know) illustrates that it is only Russia and Brazil who share the distinction of securing less private sector investment in R&D than public sector investment. So in terms of R&D, Brazil is out of the game in most sectors, agriculture being one of the few exceptions.

The Education Conundrum

The easy way out is to blame low productivity on education, which is what Brazil’s private sector has tended to do. In 1946, the country’s electorate was more than half illiterate, so Brazil has come a long way to have achieved an average of seven years of schooling. Nevertheless, other countries have done much better. I’ve written about the education conundrum before, so I will not idly repeat old arguments, facts and numbers. Suffice it to say that an unequal redistribution is afoot here too. The country’s federal universities are understandably dominated by Brazil’s middle and upper classes, those who are privately schooled or tutored and are thus able to get into these tuition-free cradles of the elite, universities that consume nearly a quarter of the country’s educational budget but educate less than two percent of the country’s population.

Back to Basics

Brazil continues to get a lot of hype, being one of the BRIC countries and having enjoyed an unprecedented spate of good years in the commodity markets. Agricultural productivity has gone up, and is undoubtedly the sector that has seen the most significant gains. Agriculture remains Brazil’s comparative advantage in the world markets, and rightly so; the country is blessed with millions of square kilometers of productive land. Brazil might do well to face up to facts and focus on this comparative advantage, continuing to increase productivity in this sector and, in turn, ratcheting down the tariffs on manufactured goods to increase incentives for greater competitiveness, productivity, and better value for Brazilian consumers.

 



[1]The Inter-American Dialogue, hosted by the Fundação Getúlio Vargas, 17-19 December, 2011.

8 Responses to “Brazil’s Productivity Gap”

  1. Steve Blanton December 28, 2011 at 4:41 pm #

    Thanks for another well written post. I realize that it has been some time since I’ve read your work and I realized that it may because my company has blocked Facebook in an attempt to increase productivity. :-)
    Among other things leadership takes willingness and hard work and I’d say productivity is created by leadership just as innovation is. Without a willingness to lead, innovate and take risk, the easier short term solutions will continue to win out. I’d say one of the factors that contributes to this lack of leadership is that industry is often lead by the public sector rather that the private sector, those R&D numbers support this also. The tax system here is crazy and not likely to change. Did you see that article showing that it is still cheaper to fly to NYC for the weekend and buy an iPhone there than it is to by one made and sold here in Brazil? I’m not to hopeful that they will reduce tariffs, the likelihood of a Government giving up power/tariffs/taxes is almost nil.
    I’d say the lack of productivity growth is not an indicator that Brazilians don’t work hard, clearly many do. My undocumented opinion is that much of the elite is risk adverse, perhaps shaped by so many years/decades on the economic roller coaster. Clearly Brazil and Russia haven’t found the combination of leadership, risk, innovation and regulation that may facilitate sustainable growth in productivity.

    Thanks again.

    • Greg Michener December 29, 2011 at 5:30 pm #

      Thanks for the comment Steve. So what you’re saying is that risk aversion creates a lack of investment in productivity, such as training, R&D, and investment in higher technology. Definitely a plausible argument, and under-developed capital markets support the inference– money is typically from family, not from lending, which is riskier and more expensive. Abrazo.G

    • Philippe January 3, 2012 at 1:31 pm #

      Being a Brazilian entrepreneur myself, I’d like share my thoughts about your point on our attitude towards risk. Though I’d not rule out completely cultural factors, the fact is any business in Brazil must deal with too many regulations and taxes, consuming resources that could otherwise be directed to R&D. Not surprisingly, in many instances is much cheaper to simply acquire /license foreign tech than develop it. In some cases, we see even companies that decided to move their HQs or at least their R&D departments abroad.

      • Greg Michener January 3, 2012 at 2:28 pm #

        Good point, Philippe. The incentives are not really there…

  2. Rachel December 28, 2011 at 5:15 pm #

    Hi Greg, great post as always. This really puts into perspective the conundrum of high prices for consumer goods. I’m planning on writing about the iPhone/iPad production rumors at some point, but it seems unlikely the government will change its tariff policy anytime soon.

    • Greg Michener December 29, 2011 at 5:28 pm #

      Thanks Rachel,
      Yes, we all need help understanding why this country is so expensive and at once so unequal. I simply don’t know how the Lower Classes do it. At least high tariffs encourage foreign manufacturers to set up shop in Brazil, as evinced by the Foxconn Tablet manufacturing facility that is ostensibly being built within the next year or so. Abrazo.

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