Brazil's bright economy clouded by low productivity

“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 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 US 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 US price-tag: A car in the US 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.

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