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BNR reporter Karen Eshuis is in Brazil, where she learns how to sell a yacht to rich Brazilians. Listen to the interview with Robert Vreugdenhil here: The interview with Robert Vreugdenhil will start halfway.
Brazil’s economy - The 50-year snooze

Brazilian workers are gloriously unproductive. For the economy to grow, they must snap out of their stupor


PECKISH revellers at Lollapalooza, a big music festival in São Paulo earlier this month, were in for a treat. In contrast to past years’ menus of reheated hamburgers, they could plump for pulled pork, barbecue ribs or corn on the cob, courtesy of BOS BBQ, a Texan eatery in the city. More surprising than the fare, however, was the pace at which BOS’s two tents dished it out. Over the course of two days the booths, each manned by six people, served 12,000 portions, or more than one every 15 seconds, boasts Blake Watkins, who runs the restaurant. Such efficiency is as welcome as it is uncommon. Neighbouring stands needed two to three minutes to serve each customer, leading to lengthy lines and rumbling stomachs.

“The moment you land in Brazil you start wasting time,” laments Mr Watkins, who moved to the country three years ago after selling a fast-food business in New York. To be sure of having at least ten temporary workers at Lollapalooza, he hired 20 (sure enough, only half of them turned up). Lu Bonometti, who opened a cookie shop 18 months ago in a posh neighbourhood of São Paulo, has commissioned four different firms to fix her shop sign. None has come. Few cultures offer a better recipe for enjoying life. But the notion of opportunity cost seems lost on most Brazilians.

Queues, traffic jams, missed deadlines and other delays have been so ubiquitous for so long that “Brazilians have become anaesthetised to them”, says Regis Bonelli of Fundação Getulio Vargas, a business school. When on April 12th the boss of the state-owned operator suggested that large chunks of the airport in Belo Horizonte that will not be refurbished in time for the football World Cup in June should simply be “veiled”, his remark elicited no more than a shrug of resignation.

time to wake up

Apart from a brief spurt in the 1960s and 1970s, output per worker has either slipped or stagnated over the past half century, in contrast to most other big emerging economies (see chart). Total-factor productivity, which gauges the efficiency with which both capital and labour are used, is lower now than it was in 1960. Labour productivity accounted for 40% of Brazil’s GDP growth between 1990 and 2012, compared with 91% in China and 67% in India, according to McKinsey, a consultancy. The remainder came from an expansion of the workforce as a result of favourable demography, formalisation and low unemployment. This will slow to 1% a year in the next decade, says Mr Bonelli. If the economy is to grow any faster than its current pace of 2% or so a year, Brazilians will need to become more productive.

Economists trot out familiar reasons for the performance. Brazil invests just 2.2% of its GDP in infrastructure, well below the developing-world average of 5.1%. Of the 278,000 patents granted last year by the United States patent office, just 254 went to inventors from Brazil, which accounts for 3% of the world’s output and people. Brazil’s spending on education as a share of GDP has risen to rich-world levels, but quality has not, with pupils among the worst-performing in standardised tests. Mr Watkins complains that his 18-year-old barbecuers have the skills of 14-year-old Americans.

Less obviously, many Brazilian companies are unproductive because they are badly managed. John van Reenen of the London School of Economics found that although its best firms are just as well run as top-notch American and European ones, Brazil (like China and India) has a long, fat tail of highly inefficient ones.

Preferential tax treatment for firms with turnovers of no more than 3.6m reais ($1.6m) has reeled many irregular enterprises into the formal economy. But it discourages companies from growing. And as big fish in areas like retail make efficiency gains they need fewer workers, who instead swell the shoals of less productive minnows. Many hire trusted kith or kin rather than a better-qualified stranger, to limit the risk of being robbed or sued by employees for flouting notoriously worker-friendly labour laws. The upshot is even more inefficiency.

Instead of collapsing, feeble firms plod on thanks to various forms of state protection, which shields them from competition. Protectionism weighs on productivity in other ways, too. Punitively high tariffs on imported technology—such as the whopping 80% cumulative tax slapped on foreign smartphones—make many productivity-enhancing gizmos prohibitively expensive, says José Scheinkman of Columbia University. Rather than buy cheaper and better products from abroad, firms have to pay over the odds for lower-quality local ones.

Historical evidence points to a solution, thinks Marcos Lisboa of Insper university. The period of catch-up in productivity growth began in the 1960s, following a bout of liberal reforms engendered by years of near-autarkic industrial policy. A smaller uptick in the early 2000s also followed liberalising measures, enacted a decade before to stave off hyperinflation. Success notwithstanding, both the military dictatorship of 1964-85 and the leftist Workers’ Party, which has held the presidency since 2003, soon reverted to interventionist type. Recently this has meant local-content requirements, subsidised fuel and electricity, and overweening regulation. Productivity has duly sputtered.

Mr Lisboa highlights two salutary examples from recent years. Agriculture was deregulated in 1990, allowed to consolidate and gain access to foreign machines, fertiliser and pesticides. A few years later, financial services enjoyed far-reaching institutional reforms to boost the supply of credit and bolster capital markets. Both were left in peace—and became roughly 4% more efficient each year in the decade that followed. Brazilian soyabean producers are now the envy of the world. Mr Watkins, the restaurateur, praises the banking system as something that works more quickly in Brazil than it does in the United States.

Regulation is always hard to unwind, Mr Lisboa concedes. But if Brazil is to grow beyond 2020, when the working-age population will begin to decline as a share of the total, it will have to tackle its productivity problem. Until it does so, it risks falling into an ever deeper slumber.

BNDES study shows Brazil will receive R$ 4 trillion in investments between 2014-2017

A paper produced by the Bank’s Economic Research Division indicates a slight raise compared to October and an annual expansion rate of 5.1%


A study concluded by the Brazilian Development Bank (BNDES) shows that the investments in the Brazilian economy should total R$ 4.07 trillion in the 2014-2017 period. The amount is expected to surpass the R$ 3.98 trillion assessed for the same period in the previous survey, disclosed in October 2013.

The result is part of an update of the study Investment Perspectives for the 2014-2017 period, elaborated by the BNDES’ Economic Research Division. This map includes company projects and strategic plans, not only those supported by the Bank.

The most significant changes were to oil and gas, with a R$ 30 billion increase in investments related to previous numbers, and a total forecast of R$ 488 billion between 2014 and 2017; electric power, amounting to R$ 16 billion (R$ 192 billion in total investments forecast); as well as pulp and paper, with an increase of R$ 7 billion (total amount of R$ 26 billion).

Investments in urban mobility were incorporated into the newly-revised version. Along with sanitation projects already being accompanied by the Bank, they are part of the social infrastructure sector.

By including the urban mobility segment, it is possible to envisage the perspectives of an area with importance to the country’s social and economic development. Investment perspectives for the sector total R$ 89 billion, up 83% in comparison to the R$ 49 billion effectively carried out in the previous four-year period (2009/2012).

Real growth – Real growth of 28% is expected in investments for 2014-2017 period (an annual rate of 5.1%) in relation to the 2009-2012 period, when R$ 3.17 trillion was invested.

Of the total R$ 4.07 trillion planned for 2014-2017, industry accounts for R$ 1.15 trillion in investment perspectives, which will accumulate a 31% increase (up 5.5% on the year), especially due to the oil and gas sector.

The aeronautics sector, projecting investments of R$ 14 billion in the period, is also highlighted in terms of growth, with projects in the commercial and defense areas.

Infrastructure accounts for R$ 575 billion, with a 35% increase, driven primarily by two sectors related to logistics: ports and railways. Among the planned investments are those made through concessions and public-private partnerships, within the Logistics Investment Program (PIL).

Electric power – Investment perspectives for the Brazilian electric sector in 2014-17 is R$ 191.7 billion, mostly in hydroelectric generation, with R$ 54.5 billion. Wind parks are the second highlight with estimated investments of R$ 43 billion. Electric power transmission comes in third, with investment estimates of R$ 37.6 billion.

Railways – In the railways sector, investment perspectives are for R$ 57 billion in 2014-2017, highlighting: network expansion, foreseen in the PIL; Valec’s direct investments; projects to modernize and increase the capacity of the permanent railway track; and expanding the rolling stock fleet. The PIL foresees investments in 12 sections, a part in new projects (greenfield), and a part in modernizing the existing network (brownfield).

Urban mobility – Investment perspectives in urban mobility for 2014-2017 are at R$ 54 billion, with an average annual growth rate of 30%. Of this total, some 58% is earmarked for subway projects, 16% for monorail projects, 13% for Rapid Bus Transit (BRTs) projects, 7% for train projects and 6% for Light Rail Vehicles (VLTs).

These investments will have the support of a return to investment capacity of states, due partly to the recent rounds of discontingency carried out by the federal government and to applying federal funds in urban mobility projects through PAC – Mobility – Large and Medium-Sized Cities. Another important element is the expanding private investments in the sector through PPPs.

Stan Huygens Journaal - Networking in Shanghai

"Against the backdrop of the Ritz Carlton businesswoman Merlin Melles opened Founders Carbon Network Asia with her co-founder in Shanghai in the presence of Consul General Peter Potman. He called fCN Asia's most influential network in the world where everyone is happy to connect. The Dutch Consul in China Guy Wittich was present. As well as a large number of members from the Netherlands who have close relations with particularly influential Chinese as Sisi Lu, owner of a club with 600 richest Shanghainese, and Rupert Hoogewerf, owner of Hurun Magazine which is the equivalent of the Quote 500, but then China 1000."

Netwerken in Shanghai
Why is Brazilian productivity so low?

For decades low productivity has been responsible for the poor performance of Brazil’s gross domestic product (GDP). Today, FGV-IBRE’s The Brazilian Economy reports, increasing productivity -which rebounded slightly last year but is still far from stellar – is more urgent if the country wants to achieve more robust economic growth without pressure on wages and inflation, because the labor force is expected to decline as the population ages.

In 2013, unemployment averaged 5.4%, according to the Monthly Employment Survey (PME) of the Brazilian Institute of Geography and Statistics (IBGE). This is the lowest annual result ever. But a recent study by Fernando de Holanda Barbosa Filho , researcher, Brazilian Institute of Economics (IBRE), based on IBGE data for 2002 through 2013 shows that growth in total factor productivity ? the measure of the efficiency of all inputs, labor and capital, to GDP ? fell to 0.4% for 2011–13 after averaging 1.7% for 2003–10. Growth of labor productivity alone was a milder version of the same pattern, averaging 1.8% in 2011–13, down from 2.2% in 2003–10. “With the same factors of production as before, we are producing fewer goods and services than before,” says Barbosa Filho. “Last year, the weak recovery in total factor productivity of 0.8% was not sufficient to make up for the loss of 0.9% in 2012.” Alcides Leite, professor of economics at Trevisan Business School, explains that “Brazil has grown in the past decade because there were a large number of unoccupied workers. When these workers were put to work, total production grew. In order to sustain long-term growth, Brazil now needs to make a quantum leap in productivity.”

To do so, in addition to fostering innovation, increasing investment, and improving workers’ skills, there is a need to reduce the weight of less efficient sectors like services and commerce in GDP and boost the productivity of industry and agribusiness ? sectors seriously affected by infrastructure and logistics deficiencies. Barbosa Filho warns that resources are being allocated to precisely the least productive sectors: “When the services sector expands, the result is to reduce total productivity.”

David Kupfer, a member of the Group of Industries and Competitiveness of the Institute of Economics of the Federal University of Rio de Janeiro (UFRJ), has a different view. He believes that economic growth raises productivity rather than the contrary, because the labor market is less elastic than production. “If GDP grows 3%, for example, employment does not grow to the same extent, increasing productivity. In contrast, when the economy shrinks, businesses do not lay off workers immediately, and productivity falls,” he explains. “It is natural that entrepreneurs are more willing to invest when the economy is doing well, which raises productivity,” adds Julio de Almeida Gomes , former Secretary of Economic Policy of the Ministry of Finance and now professor of economics at the University of Campinas (Unicamp).

Kupfer also points out that labor productivity is being affected by high turnover of workers, who have little incentive to stay in a job when the booming labor market presents plenty of job opportunities. He says, “The high turnover of workers is a plague . . . workers quit their jobs more easily because they receive other offers. So companies have no reason to invest in training to improve worker skills and productivity.”

In order not to lose workers, the Brazilian company TOTVS, developer of integrated management systems, trains its professionals regularly. The company believes that investing in people and innovation must be done by any company that intends to be competitive enough to establish itself in the international market. “Obviously we have structural problems that the government needs to address, but if we sit around waiting for them to be solved, we get nowhere. We also have an obligation to invest in our businesses. If I want to differentiate myself, being competitive I need to invest. Nothing is free,” says Alexandre Mafra, TOTVS financial executive vice president. The company now has 26,000 customers and affiliates in Argentina and Mexico in addition to a research lab in Silicon Valley. Mafra explains that especially for information technology, productivity as a result of innovation is essential to business success because software systems become obsolete quickly.

Unicamp’s Gomes believes the most effective way to increase productivity and competitiveness is to expand company operations in overseas markets as TOTVS has done. “Our companies need to be more aggressive regarding exports and internationalization so that they acquire the innovation DNA from their experiences abroad, where competition is fierce,” he emphasizes.

Confidence down Unfortunately, industry does not have the drive to invest today. With manufacturing nearly stagnant since 2010, business confidence is at its lowest, according to surveys of the Brazilian Institute of Economics (IBRE) and the National Confederation of Industry (CNI). “In addition to low business confidence, the inability of industry to invest is also coming from competition between our domestic products and those imported, which does not allow industry to raise prices to cover their increased costs,” notes Renato Fonseca, CNI research manager.

Moreover, industry must also compete for workers with the service sector. “Because of the strong growth of the services sector, we are being forced to hire professionals who are poorly educated, and to keep them on the job it is also necessary to provide wage increases and other benefits. All these costs ends up exceeding productivity gains,” Fonseca says. A CNI survey shows that increases in wages have outpaced growth in manufacturing productivity. From 2001 to 2012, productivity grew by only 1.1%, while the average pay in dollars for industrial workers rose 169%, which undermines industry’s external competitiveness.

productivity 1

How to increase productivity? IBRE researchers Regis Bonelli and Julia Fontes call the problem of productivity in Brazil “the long-run challenge.” According to their estimates for 2012–22, the Brazilian economy will be able to grow 4.4% a year only if productivity increases by 3.4% annually. Sustaining such high productivity growth will require a tremendous effort in terms of research and development of products, investment in education, and improvement of infrastructure.

Here Barbosa Filho points out that government policy may be suppressing productivity growth. Granting tax exemption to companies that are not in good shape economically only postpones their demise. “Policies that support noncompetitive companies do not provide incentives for these companies to make the changes necessary to improve their productivity. In general, recessions eliminate unproductive companies. But if you save them all, you can slow down the economic recovery,” he says.

BNR Radio - Merlin Melles is main guest November 15th 2013 13.30 hours
Listen to the interview (in Dutch) with Merlin Melles (Founder of fCN) here.


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