Brazil's bright economy clouded by low productivity

Brazil performs poorly on productivity measures in part because of high tariffs.

“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.

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 US, 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 (see can at original post) 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.

 --- Greg Michener, based in Rio de Janeiro, writes the blog, Observing Brazil. He is currently writing a book on Freedom of Information in Latin America for Cambridge University Press.

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