Tag Archives: tariffs

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.

#5 Credit: Brazilians Debtor despondency rises by 3.9% Over A Year Ago

14 Aug

Use your coconut to think about that one.

CREDIT CRAZY——The current upswing in consumer debt despondency has much to do with government policy.

First, a buoyant economy has permitted the Brazilian Central Bank to lavish  favorable terms for commercial lenders, who issue credit with some of the highest interest rates in the world. Because profits and legislation permit greater risk, Brazilian banks have been putting credit cards and loans in the hands of the emerging lower-middle class. Unexperienced with credit, many are clueless about how to manage their affairs.

What makes the situation even trickier is the way Brazilians pay for things. One can buy clothing, gifts, even prescriptions, and pay in parcels over several months by credit card or check (e.g. 12 X $47R). Similar to financing, this method ensures that consumers account balances don’t suffer big one-time dents, but at the same time it creates the illusion that more money is available for  purchases, which generate greater obligations and greater potential for despondency.

MUITO CARO—-The second issue is the cost of living. Last entry I spoke about the cost of consumer durables. But as any tourist will agree, virtually everything is expensive. How do we explain all-round expensiveness? Perhaps it’s the explanation I provided about copy-cat pricing: imports are expensive so domestic producers follow suit. Perhaps it’s just a collective greed that has set in during high economic times; the economy is doing well and everyone is demanding more money for everything… I am not exactly sure how to explain the disordinate cost of living here in Brazil. The latter is my “collusion” explanation. As we will see in future entries, Brazil has a long and inglorious tradition of collusive politics. But that story is for another time.

#4 Import taxes (i.e. tariffs)

13 Aug

The price of consumer durables in Brazil is more expensive than in any other large market in the world–hands down.  This does not seem to jive with the plight of the median Brazilian, who earns somewhere around $1000R ($600US) a month (minimum wage is about $550R a month. If anything, purchases of goods that can abet social and economic advancement, such as computers, should be subsidized. Yet Brazil’s tariffs average close to 30 percent on a number of items, items which are even exempted from the regional Mercosur tariff-reducing agreements. Brazilians pay a premium for imports of footwear, motorized vehicles and electronics.

These money-grabbing import tariffs à la 1920s were originally designed to protect nascent domestic industries, which by now should be plenty mature and ought to be left to stand on their own. At the very least, one would assume that goods produced domestically should offer a bargain. But because the price of imported computers is so high, Brazilian companies have opted to maximize profits by undercutting imports only marginally. This effectively means that in Brazil you pay double what you would for a laptop in the US or Canada. If Brazil wants to address inequality, it should start by eliminating regressive taxes, i.e. outdated import tariffs, on educational goods such as computers.