Brazil: Confronting the Productivity Challenge

Brazil: Confronting the Productivity Challenge

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Brazil: Confronting the Productivity Challenge

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    The Productivity Challenge Ahead

    When we look at evolving economic conditions, productivity emerges as the key challenge for both individual companies and Brazil’s economy as a whole.

    To grow its economy in the past decade, Brazil relied to a great extent on the expansion of its employed population (which we define as the economically active population minus unemployed workers). Our analysis showed that the increase in the number of people employed explains approximately 74 percent of Brazil’s average 3.7 percent annual GDP growth. Only about 26 percent was attributable to productivity increases (which we define as value added per employee). This contrasts starkly with the growth patterns of other rapidly developing economies in this period. For example, productivity accounted for more than 90 percent of China’s 10.6 percent annual growth and more than 70 percent of South Korea’s 4.2 percent annual growth. (See Exhibit 5.)


    Productivity has stagnated. Brazil has emerging-market productivity levels but developed-market productivity growth. (See Exhibit 6.) Our analysis of Brazil’s approximately 1 percent average productivity gain per year in the past decade showed that sectors linked to natural resources—such as mining, oil extraction, and agriculture—accounted for about half of productivity growth. This raises concerns about the country’s readiness to improve and sustain productivity growth for the overall economy.


    We identified four key factors contributing to the stagnation of productivity in Brazil: a talent shortage, infrastructure limitations, low investment, and an underdeveloped institutional framework.

    Talent Shortage

    Labor in Brazil is becoming scarcer and more expensive. The unemployment level has fallen steadily from 12.3 percent in 2003 to 6 percent in 2011. It’s not surprising, then, that salaries have been growing fast. For example, from 2005 through 2009, average annual salary gains in real terms exceeded the Índice Nacional de Preços ao Consumidor Amplo inflation rate by 6 percent in construction, 4.5 percent in manufacturing, and 9.2 percent in mining. Driven by public policies, minimum salaries went up 66 percent from 2002 through 2012.

    Higher costs, however, are not the only talent challenges companies operating in Brazil face. In many cases, it is very difficult to find and retain the right talent at any salary. In a 2010 Manpower survey of labor availability in 36 countries, Brazil ranked second behind Japan in the percentage of companies that had difficulty finding talent. The labor shortage in Brazil is affecting all types of jobs, from operating and maintenance technicians and administrative assistants to engineers and sales representatives.

    This shortage is due partly to Brazil’s deficiencies in education. Although the number of people in Brazil who have a basic education and those who pursue postsecondary education continues to grow, there are still significant quality issues at all levels.

    In basic education, the percentage of children aged 6 to 14 who are in school rose from 80.9 percent in 1980 to 96.7 percent in 2011. However, quality is still subpar. Brazil ranks fifty-fourth among the 65 countries in the Program for International Student Assessment’s analysis of quality of basic education. (Still, Brazil did show the highest level of improvement since 2006.)

    The number of students enrolled in higher education rose from 2.4 million in 1999 to 5.1 million in 2009, according to the National Institute of Educational Studies and Research. However, a recent study by Instituto Paulo Montenegro, an education-focused nonprofit organization linked to the Brazilian Institute of Public Opinion and Statistics, showed that the percentage of students in higher education who are fully proficient in reading (the nível pleno that students are expected to reach before high school) dropped from 76 percent to 62 percent over the past ten years. This suggests that about half of the growth in higher education is associated with people whose reading ability is below high-school level. It is very hard to maintain quality in higher education when the number of places for students is growing quickly and incoming students are poorly prepared.

    Infrastructure Limitations

    Economic growth and underinvestment in infrastructure have led to significant bottlenecks in Brazil’s ports, roads, airports, and telecommunications networks. This adds costs and reduces the efficiency of supply chains. Anyone who has disembarked at the Galeão airport in Rio de Janeiro, been stuck in São Paulo’s traffic jams, or tried to move cargo through a Brazilian port understands the magnitude of Brazil’s infrastructure limitations.

    Brazil’s infrastructure limitations impose large obstacles even in industries in which the country has natural advantages. It is, for example, 10 percent less expensive for the U.S. than for Brazil to grow and ship soybeans to Germany, even though soybean production costs are roughly 20 percent lower in Mato Grosso than in Iowa. Most of Brazil’s higher shipping costs are incurred moving the crop from farm to ship.

    There is, however, a glass-half-full view of Brazil’s infrastructure gaps: although they mean higher costs and complexity for companies trying to export and serve the internal market, the gaps also represent a growth opportunity for investors and companies in the infrastructure sector.

    Low Investment

    Although Brazil’s investment level grew from 17 percent of GDP in 2001 to 19 percent in 2011, Brazil, during the past decade, has consistently invested less as a percentage of GDP than most other emerging economies. For example, in 2011, China, India, and South Korea invested 47 percent, 30 percent, and 27 percent of GDP, respectively. Investment is key to growing productivity: equipment and information technology provide leverage to workers and increase efficiency.

    Brazil’s relatively low level of investment coupled with the growth of the employed population has led to a stagnant level of stock of capital per employee. This means that over the years, investment has been sufficient only to mitigate the depreciation of earlier investment and grow the stock of capital to accommodate new workers. This is very different from the situation in China and South Korea, where the stock of capital per employee is growing at 7 percent and 3 percent per year, respectively. (See Exhibit 7.)

    Underdeveloped Institutional Framework

    The limitations and burdens of Brazil’s institutional framework also affect the country’s productivity. Doing business in Brazil is excessively complex and costly. Companies there need to deal with complex legislation (for example, labor laws), a slow judicial system, and inefficient regulatory processes (for example, to obtain environmental licenses).

    According to a recent study by Federação das Indústrias do Estado de São Paulo, the state’s industry association, executives see taxes as the main barrier to growth. This perception is due to both the high level of taxation and the complexity of the tax system. According to the World Bank’s assessment of 182 countries, Brazil has the sixteenth-highest ratio of tax revenues to commercial profits (67 percent compared with a world average of 45 percent). The tax system’s complexity is particularly challenging for foreign companies looking to start operations in Brazil or trying to assess the potential tax liabilities of acquisition targets.

    Brazil cannot meet its aspiration of more than 4 percent GDP growth per year without significant improvement in its productivity. The number of people employed is expected to increase more slowly as the growth rate of the economically active population declines (from 2.1 percent in the past decade to 1.6 percent in the next ten years). The unemployment rate is now at historically low levels. Whereas the increase in the number of people employed contributed 2.7 percent of the 3.7 percent average economic growth in the past decade, it is expected to contribute only an average 1.6 percent to economic growth in the next ten years. (See Exhibit 8.) Going beyond this will require sustained productivity growth.


    Companies operating in Brazil are already feeling the impact of these trends. Lower unemployment is driving up labor costs. As these costs increase faster than employee productivity, companies’ margins suffer.

    Our analysis showed that companies in seven out of eight manufacturing sectors currently get less value for each Brazilian real invested in labor than they did ten years ago; the primary-metals industry was the only exception. (See “Government and Policymakers Can Address Structural Barriers to Productivity” for a discussion of how the public sector can help address Brazil’s productivity challenge.)

    Government and Policymakers Can Address Structural Barriers to Productivity

    Here are 15 ways that Brazil’s government and policymakers can address structural barriers to increasing productivity. These fall into four categories: talent, infrastructure, investment, and institutional framework.


    • Establish a human capital strategy that supports growth aspirations. Rigorously assess supply and demand to identify and mitigate gaps. In Malaysia, the government developed such a strategy as a foundation for its Vision 2020 national goals, and Japan has increased funding to science and engineering students to raise enrollment.

    • Improve the management and governance of education by encouraging collaboration among federal entities and establishing rules that govern the responsibilities of municipalities, states, and the federal union.

    • Assign a higher priority to investments in basic education than to other levels of education. If the quality of basic education is not high, the return on investment at other educational levels will be disappointing. In OECD countries, the mix of investment in education is starkly different from that in Brazil: in Brazil, the ratio of spending per student in primary versus postsecondary education is 1 to 5.9 compared with an OECD average of 1 to 1.3.

    • Promote teaching careers, revising their value proposition through, for example, attractive career-development plans, consistent and high-quality training and development programs, and promotional campaigns that raise the profile of teachers. Singapore recruits teachers from the top 5 percent of college graduates. By contrast, only 5 percent of Brazil’s teachers rank among the top 20 percent of graduates. Teach for America taps high-achieving college graduates for two years of teaching in low-income communities across the U.S.

    • Promote technical education and careers by implementing clear standards for technical degrees and actively directing students to vocational education. Germany’s three-tiered school system directs students early in secondary school to college-preparatory education, vocational training, or on-the-job apprenticeships.

    • Facilitate access to international talent pools by designing immigration programs that will attract the needed talent, accelerating the granting of work visas, and simplifying the foreign-degree validation process.


    • Develop a master plan for improving the nation’s infrastructure. Such a plan should identify the development needs and potential of each region, create detailed development scenarios and definitions of economic sectors, and establish concrete action plans for industries.

    • Strengthen regulatory agencies by expanding agency independence and investing in the further development of the technical expertise of agency professionals.

    • Continue to partner with the private sector to accelerate infrastructure investments through public-private partnerships (PPPs). Indonesia has developed an infrastructure and PPP development plan founded on three pillars: careful project prioritization, a balance of private and public interests, and adaptable contracts that are designed to cope with uncertainty.


    • Continue to promote an environment favorable to low interest rates.

    • Provide greater visibility and predictability of industrial policies by identifying high-priority industries for Brazil and making clear the level of protection from imports specific industries can expect—and for how long. When Chile identified high-potential industry clusters and developed a long-term plan to promote them, investors were assured of clear visibility on industrial policy.

    • Promote an environment favorable to entrepreneurship and R&D by encouraging  business-university collaboration through science parks and business incubators. China’s more than 100 science parks nationwide support the country’s manufacturing transition up the value chain.

    Institutional Framework

    • Develop an end-to-end public-sector talent-management strategy to attract, assess, develop, and motivate public-sector employees. Singapore’s public-service system recruits top graduates, offers competitive compensation, rigorously assesses employees’ performance, and fast-tracks top talent.

    • Improve the overall efficiency of public services to raise quality, and do more with existing resources by adopting lean-process techniques, strengthening measurement and monitoring systems, and encouraging the adoption of e-government programs. South Korea’s government e-portal offers more than 400 public services and, by requiring information sharing among government agencies, minimizes the need for repeated document submission.

    • Simplify the legal and fiscal systems by streamlining the tax structure and labor regulations and expediting regulatory processes.