Unlocking Brazil’s Long-Term Growth Potential
By: Ashley
Kindergan
Published: February 8, 2016
Brazil has certainly had its share of trials and tribulations lately:
The economy is in recession, inflation is on the rise, budget deficits are
widening, its sovereign debt rating has been downgraded, and the political
environment is challenging. Yet, the country still has a lot going for it. It
remains the largest economy in Latin America, and one that is rich in resources
ranging from agricultural products to industrial metals. Home to some of the
continent’s strongest political institutions, Brazil has also made significant
strides in improving the economic well-being of its citizens over the past
decade: The proportion of the population living in poverty has fallen from 17.3
percent in 2006 to 7.4 percent in 2014, according to the World Bank. What can Brazil do to leverage its strengths,
re-ignite its economy, and regain its position as one of the world’s most
exciting growth stories?
Experts gathered at Credit Suisse’s 2016 Latin America Investment
Conference (LAIC) in January in Sao Paulo said that righting the
fiscal ship is Brazil’s most pressing concern. But they also
said that fixing two long-term structural issues—a closed economy and low
productivity—is the key to building a strong foundation for solid long-term
growth.
Opening to the World
Brazil could have benefitted more from a rapid
expansion in global trade over the last few decades if its economy were more
open, said former Mexican President Felipe Calderón, a keynote speaker at the
LAIC.
Calderón contrasted the experiences of economies in
the Mercosur trade alliance (Argentina, Brazil, Paraguay, Uruguay, and
Venezuela) and those in the Pacific Alliance (Chile, Colombia, Mexico, and
Peru). Pacific Alliance countries have relatively open economies and export mostly
manufactured products, while Mercosur countries are relatively closed and rely
much more on commodities exports, which left them particularly vulnerable to a
commodities rout led by slowing demand in China. Commodities account for 67
percent Brazilian exports, and steep declines in the price of oil and iron ore,
of which Brazil is the world’s third-largest producer, have hit the country
hard. The economy shrank 3.7 percent in 2015, and Credit Suisse’s Brazil
economists expect drops of 3.5 percent this year and 0.5 percent next – the
first three-year contraction since 1901.
When it comes
to the openness of its economy, while Brazil can claim significant growth in
trade over the last half century-plus, it nevertheless lags other countries in
that regard. The difference in the trade openness coefficient (the sum of
exports and imports as a share of GDP) between Brazil and the rest of the world
increased from 10.5 percentage points in 1960 (about 14 percent in Brazil and
24.5 percent worldwide) to nearly 33 in 2014 (some 26 percent in Brazil to some
59 percent worldwide), according to Credit Suisse.
Among the reasons: Brazil has the highest customs
tariffs in the world on consumer goods and intermediate products, and the
second-highest tariffs on capital goods. The country also imposes heavy
non-tariff barriers, including state and federal taxes, and it has not signed
as many free-trade agreements as other countries. In 2014, the country had just
five trade agreements, compared to 20 in the United States, 40 in Colombia, 44
in the Eurozone, 45 in Mexico, and 54 in Chile.
And the fact of the matter is that closed economies
have a harder time staying competitive than open ones. Trade barriers protect
domestic industries, but keeping out foreign competitors also removes
incentives for them to become more efficient. For example, said Calderón,
Mexico’s remarkable post-crisis recovery stemmed partly from new trade
agreements and removing tariff barriers throughout the economy. “The more
tariff reductions you apply to a sector, the more competitive that sector
becomes,” the former president said. “The big lesson is: open your market.”
Low and Slow Productivity
Professor Ricardo Paes de Barros, Instituto Ayrton
Senna Chair at the Brazilian university Insper, put Brazil’s slipping labor
productivity in striking terms at the LAIC. In 1980, a Brazilian worker
produced about the same amount, in value-added terms, as a South Korean worker;
today, it would take three Brazilians to keep up with a Korean. Similarly, in the
80s, a Brazilian worker was 10 times as productive as a Chinese worker, whereas
today the two are roughly equivalent.
In recent
years, more Brazilian workers have moved out of agriculture and into service
professions. Low-productivity, labor-intensive sectors, such as health care,
education, and retail sales have grown fastest, with the share of workers in
this segment of the market rising from 51 percent in 1996 to 59 percent in
2015. While Brazil’s overall productivity grew 13.4 percent over the past two
decades, workers in industries that are inherently less productive grew 3.7
percent less productive.
Credit Suisse attributes these productivity declines
to the concentration of government workers, who earn higher salaries than
private-sector workers in similar jobs in fields such as health and education.
The relentless growth of Brazil’s public sector limits potential productivity
growth, the bank’s economists say. The higher the public sector’s share of the
Brazilian economy, the lower the odds that it can grow even a modest 2 percent
over the next three years.
Credit Suisse’s analysis suggests that Brazil could
spend 43 percent less on all public services, 51 percent less on education, and
70 percent less on health care and still get the same results. The shortcomings
of Brazil’s education system only contribute further to its sluggish
productivity growth, Paes de Barros says. The professor thinks Brazil may need
to bring in international consultants to help reform its education system, but
that it also must do better at gathering and publicizing performance data from
its many school districts to learn what works and what doesn’t. Brazil is still
a young nation, with the share of working-age people set to expand for another
six years. Investing more wisely in its youth is critical to the country’s
future growth prospects.
- See more at:
https://www.thefinancialist.com/unlocking-brazils-long-term-growth-potential/#sthash.agSwJrbb.dpuf
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