Brazil Desperately Needs a New Growth Model

Brazil, indisputably, is going through one of the worst economic crisis in its history. The crisis has more immediate causes associated to the political crisis and exhaustion of the recent growth spurt based on consumption and public spending, but also much deeper causes associated with low productivity and competitiveness.

Between 1950 and 2014, labor productivity in Brazil grew a modest 197%, whereas in South Korea and China it grew 1605% and 2176% respectively. In 2005, the productivity of Brazilian workers stood at just 16% of that for Americans workers, but the average prices (measured in dollar) in Brazil were 61% of the average prices in the US.

Therefore, while productivity in Brazil is relatively low, prices are relatively high. No wonder, Brazil ranks last in a competitiveness indicator developed for 42 advanced and emerging economies.

Why are productivity and competitiveness so poor in Brazil?

Of course, there are many causes, but the most crucial one is associated with the inward-oriented, highly protected, autarkic (based on self-sufficiency) economic model that was erected after the World War II and that would give rise to low allocative efficiency, dysfunctional markets, and high production costs.

Incidentally, autarky was an objective that Hitler and Stalin also shared.

That model discouraged competition, human capital formation, innovation, internationalization of companies, and long-term private investment, and made the government budget and protection rights the ultimate guarantees of profit formation.

On top of that uncompetitive economy, the 1988 Constitution in Brazil introduced many social benefits without the corresponding budget resources. The combination of very low efficiency of public spending, substantial increase in benefits, and rapid population aging would require a much more productive and competitive economy to account for the increase in expenses without compromising economic growth.

The model began to show its limits as Brazil started to integrate more into the world economy from the early 1990s onwards. This was to reveal its low international competitiveness.

Second, the tax burden was reaching high levels unmatched by the quality of public services and provision of infrastructure. Eventually, this model would show fatigue.

The 2008 economic crisis and the misguided policies of past and current governments were to precipitate the end of that development model. In fact, the fatigue already manifests itself in critical indicators, including deep fiscal crises, very high real interest rates, decline of the country’s share in world exports, re-primarization of exports, modest participation in global value chains and chronic inflationary pressures.

Because of the structural nature of the crisis, it is unlikely that fiscal adjustment will be able, by itself, to allow for the long run survival of this model.

To realize its growth potential, Brazil needs to recognize that policies dictated by “more of the same” are losing effectiveness and will therefore have to introduce policies dictated by “more with the same.” In other words, productivity and competitiveness will have to be at the center of the growth model.

In this new development model, the State will have to be smaller, but more efficient and strategic, develop pro-growth institutions, improve governance and transparency, promote an environment of trust to encourage investment and intervene smartly in areas such as social policy, education, health, science, technology and infrastructure.

Increased productivity and competitiveness will also require reforms to ensure well-defined regulatory frameworks, promote competition, strengthen markets, enhance manufacturing value added, encourage reallocation of resources from lower to higher productivity activities, promote economic diversification and encourage savings.

Although necessary, these reforms will not be sufficient for growth to resume.

In an increasingly interdependent and complex global economy, new technologies of production and new forms of organizing production have shown that systemic productivity and specific characteristics of the markets are becoming key determinants of global investments, while arbitration of costs of production is losing relevance. In this environment, knowledge is becoming vital for value creation and therefore, it should be at the heart of the strategy to promote productivity and competitiveness.

A new development model is long overdue and the more Brazil procrastinates to recognize it, the greater will the challenges be to ensure a competitive economy in the 21^st century.

The shift to the new model will require, inevitably, many sacrifices and hard choices. Vision, boldness, public spirit, political leadership, transparency, dialogue, and communication will be crucial for Brazil to alleviate the costs of the transition and to shorten the path to growth.