Brazil has recently overtaken the UK as the 6th largest economy in the world. But, according to Greg Michener at Observing Brazil, productivity (how well the countries use land, labor and capital) is a far more accurate indicator of a country’s potential for sustained wealth-creation than GDP or even per capita income.
As per Michener’s words:
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…. this sluggishness has to do with macro-economic factors, country tariffs (protectionism) and educational policies.
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.
Some will say that Brazilian consumer durables 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.
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.
Countries grow wealthy by selling things to other countries .… you can’t win in the manufacturing export markets if your productivity stinks.
… in terms of R&D;, Brazil is out of the game in most sectors, agriculture being one of the few exceptions.
The easy way out is to blame low productivity on education, which is what Brazil’s private sector has tended to do. The country’s federal universities are understandably dominated by Brazil’s middle and upper classes … universities that consume nearly a quarter of the country’s educational budget but educate less than two percent of the country’s population.
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.
Solution is … to increase productivity by ratcheting down the tariffs on manufactured goods to increase incentives for greater competitiveness, productivity, and better value for Brazilian consumers.