Brazil: Confronting the Productivity Challenge

Brazil: Confronting the Productivity Challenge

          
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Brazil: Confronting the Productivity Challenge

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  • A Virtuous Economic Cycle

    During the past decade, Brazil experienced a virtuous economic cycle: growth led to higher employment, which in turn led to increased domestic consumption and more growth. (See Exhibit 1.) The country surpassed the $10,000 GDP per capita mark and became the world’s sixth-largest economy. This cycle was driven primarily by the following three factors:

    • Favorable Macroeconomics. Brazil’s public debt as a share of GDP fell from 60 percent in 2002 to 36 percent in 2011. The country’s budget deficit declined from 5.2 percent of GDP in 2003 to 2.6 percent in 2011. Meanwhile, inflation has been in the single digits since 2005. This macroeconomic stability paved the way to lower nominal interest rates, which fell from 19 percent in 2001 to 11 percent in 2011 and 8 percent by mid-2012. Together, these factors formed the foundation for more investment, which grew from $275 billion in 2001 to $458 billion in 2011.

    • Domestic Market Expansion. The wider availability of consumer credit (credit grew fivefold from 2001 through 2011) and the increase in consumer purchasing power (with the help of lower inflation, higher minimum wages, and distributive social policies such as Bolsa Família) fostered the growth of Brazil’s internal market. Another factor that contributed to Brazilian market growth was the country’s demographic bonus: the working-age population became larger than the dependent (young and old) population. (See Exhibit 2.) This expansion of domestic consumption made Brazil an important market for many global industries. For example, ten years ago, Brazil was the tenth-largest automotive market in the world, the eighth-largest PC market, and the third-largest mass market for cosmetics. Today, Brazil is in fifth, fourth, and first place, respectively.

    • Demand for Commodities. Global economic growth driven by emerging markets spurred demand for Brazil’s commodities. From 2001 through 2011, exports of key commodities grew significantly. Iron ore exports increased at a 30 percent compound annual growth rate, reaching $42 billion; soy exports grew at a CAGR of 16 percent, reaching $24 billion.

    exhibit
    exhibit

    This virtuous economic cycle laid the foundations for companies in Brazil to experience significant growth and value creation in the past decade. The Brazilian population also benefited greatly from this positive cycle. In a recent study, The Boston Consulting Group found that during the past five years, Brazil did a better job than all other countries analyzed of translating economic development into sustainable improvements in the well-being of its population. (See From Wealth to Well-Being: Introducing the BCG Sustainable Economic Development Assessment, BCG report, November 2012.)