Wilson Center – How to Improve Brazil’s Industrial Growth and Export Performance

Low industrial productivity growth and disappointing export performances are the center of an economic policy debate raging in Brazil. It was sparked by the sharp decline of GDP rate of expansion from 7.5% in 2010 to 2.7% in 2011 and 0.9% last year. Despite the drop, unemployment in Brazil has remained stable around a comfortable 5% rate.  On February 12, the Brazil Institute in partnership with the Program on America and the Global Economy convened a seminar to examine the causes of the negative growth trend and what needs to be done to reverse it. The stated objective of the government of President Dilma Rousseff is to return to the average 4% annual growth the Lula years (2003-2010), while improving the productivity and competitiveness the economy. The discussion on “How to Improve Brazil’s Industrial Growth and Export Performance” was moderated by the Brazil Institute director Paulo Sotero. World Bank economists José Guilherme Reis and Otaviano Canuto presented the main finds of a policy research –  Brazilian exports: climbing down a competitiveness cliff – they co-authored with Matheus Cavallari.  Kent Hughes, the director of the Program on America and the Global Economy at the Woodrow Wilson International Center for Scholars, offered his views on the current Brazilian economic challenges highlighted Reis and Canuto and made some parallels with the competitiveness problems facing the United States.

José Guilherme Reis, Lead Trade Economist at the World Bank, started the debate by providing an outlook of Brazilian export performance. From 2000 to 2010, Brazilian exports expanded 262%, almost twice the global average, but still only half of the BRICS average. When analyzing amount and diversity of exports, Brazil should definitely be considered a global trader. Brazilian exports are diversified in both markets and products, though they can still be described as natural resources based, with China and the United States being the main consumers of these goods. China over the last three years has been the lead trading partner, and the United States, although enjoying a stable partnership, has been overshadowed by China’s tremendous growth.  Mr. Reis highlighted that high-technology products lost ground – representing only 36% during 2000-2010 – and average sophistication of exports decreased. These results illustrate the fact that Brazilian exports have benefited from strong geographical and sector effects, once Brazil`s pure “competitiveness effect” is lower than the BRICS and MIST (Mexico, Indonesia, Turkey and South Korea) countries. The limited openness of Brazilian economy was also mentioned as a major concern. Both trade openness and the entry-rate of firms are among the lowest. As a result, firms in Brazil present a high survival rate for the wrong reasons, which undermines competitiveness and innovation. Mr. Reis finished his presentation by presenting data underlying that Brazil trade-to-GDP ratio should be 53.7% instead of the present 23.6%.  OECD numbers confirm Brazil`s lack of integration in global value chains. As a matter of fact, under-trade can be considered a regional trend since almost all Latin American countries currently under-trade.

Otaviano Canuto, Vice President and Head for Poverty Reduction and Economic Management Network at the World Bank, presented elements in the Brazilian economy potentially associated with its low levels of competitiveness. Brazil is currently facing an economic puzzle:  it is in a near-full employment situation, but there is no significant reaction as far as the country investment ratio, stuck at a low 18%.. Furthermore labor productivity has decreased especially in industry and manufacturing sectors. When put together with the higher real wages of Brazilian workers, the result is a substantial raise in unit labor costs in the past two years. Exchange rate appreciation, often blame by businessmen as a source of the problem, seems to be just one more element adding to the competitiveness issue. Regarding the service sectors, favorable terms of trade fuel employment and income and, by consequence, domestic demand. This benefits these sectors since they may actually accommodate larger cost pressures. However, trade costs are still high and Brazilian logistics still performs poorly both in terms of price and efficiency. Mr. Canuto then presented the conclusion of the recent paper published by the World Bank as well as some recommendations. It seems clear that the Brazilian economy possesses the necessary diversification and potential to expand trade openness. Brazil cannot depend only on its favorable geography to achieve success in the international market. Therefore, policies aiming at higher productivity are crucial and should replace short-term stimulus and policies adopted by the government favoring some very specific export sectors. The agenda of microeconomic reforms should be resumed, the investment-to-GDP ratio increased, and Brazil should advance towards a better-skilled human capital base. To accelerate growth, the basic principle is to promote and reward productivity gains in a competitive economy, including the service sector – which remains fairly closed and uncompetitive.

Kent Hughes drew some comparisons between the Brazilian and the American economies. First, Brazil shares America`s preoccupation – and to a larger extent a global preoccupation – in increasing its exports. Second, Brazil and the United States are both facing a lack of human capital for qualified positions. In both cases, the formation of human capital seems to not have followed the dynamics of the markets. Mr. Hughes pointed out that Brazil should tackle its lack of infrastructure and develop its service sectors so as to make it easier to export manufactured products.

Drafted by Michael Dantas, Staff Intern, Brazil Institute

Edited by Paulo Sotero