I resume the discussion on a fundamental issue for the growth of the Brazilian economy, that of labor costs and its productivity, which continues to be a crucial node for interpreting the chronic limited economic growth of Brazil.
I am inspired by an article recently published by the economist Andrè Lara Resende, who in the article “The crisis of macroeconomics” questions classical paradigms, first of all the direct correlation between money issuance and inflation. Simplifying his theory, Lara Resende affirms that inflation is the result of the expectations generated between economic operators and that therefore the State has no financial restrictions on the issue of money. In the Brazilian case, given that unemployment is currently high, the use of production capacity very far from 100% and that expectations regarding inflation are permanently “anchored”, fiscal policy and the implementation of reforms should be oriented to ensure the growth of investments and productivity.
According to Lara Resende, therefore, an expansionist policy is needed today, with a reduction in interest rates and with a fiscal policy that does not aim to balance public accounts. According to Lara Resende, what matters is the quality (and not the quantity) of public spending that matters, given that a deficit does not necessarily have inflationary effects.
However, one of the controversial points of Lara Resende‘s thesis is precisely the question of productivity. According to the economist, “to guarantee the efficiency of investments and the increase in productivity, a planned commercial opening should be promoted to definitively integrate the Brazilian economy into the global one. The transition period should be announced and not exceed an interval of 5 years“.
The whole theory of Lara Resende is questionable, but the simplification of the Brazilian productivity problem to a mere question of closing / opening up the economy has raised a lively discussion.
In fact, the causes of low Brazilian productivity are to be found in various factors / phenomena, first of all – probably – the poor quality of the educational system.
“The more we know, the easier it is to discover”
As defended by the 2018 Nobel Prize in Economics, Paul Romer, a country’s economic growth is driven by its more organic strength: its people.
That of the human capital of a people is an aspect of the productivity equation that many economists of the past, and even some contemporary scholars, neglect to take into consideration, perhaps because it is much easier to count things like physical capital and labor than invaluable contributions of human minds to global progress.
Through the “theory of endogenous growth”, proposed by Romer, people can receive more incentives to “reorganize” the world and discover new ideas, instead of struggling in factories or in front of computers, repeating the same movements over and over again. It is certainly a revolutionary vision that identifies the educational system as the main engine of a country’s productivity and welfare growth.
Romer’s “theory of endogenous growth” only widens the causes and consequences of what has always been considered the vicious circle that holds back Brazil’s growth: a low-quality educational system that forms low-skilled workers, who in turn produce little and that in return they receive a low salary, which does not allow them to access consumption, which therefore does not grow and does not generate the taxes necessary to sustain a quality educational system.
Increase productivity, the real challenge for Bolsonaro and the successive governments of Brazil
To better understand how important it is to resolve the issue of productivity in Brazil, it is enough to read an extract from the report of the World Bank of 2018, which summarizes its conclusions as follows: “… Brazil must drastically improve its productivity performance, so that the country can increase income on a lasting basis and can offer better jobs to its citizens”.
The problems of Brazil obviously cannot be summed up to this, but – as proven by many analyzes – one of the great knots is precisely the low productivity.
The graph below describes the trend of productivity of factories from 1997 to 2016, in negative ground already from 2011. According to data from the Trading Economics website (https://tradingeconomics.com/brazil/productivity), in 2017 there was an improvement , which however was not confirmed in 2018.
In the industrial sector, the labor productivity situation is even more worrying. As can be seen from the graph below, while in the period 2002-2016 the productivity index has fallen, that of real wages has increased by 36%.
Although in relative terms (ie, if compared with that of the main industrial countries) labor costs in Brazil are still low, the loss of competitiveness of the Brazilian industrial system is evident.
The graph below measures the average annual labor productivity in US $, in various countries (2013 data):
As can be seen, the average productivity of labor in Brazil corresponds to less than 1/5 of that in the United States, to 1/4 of that in Germany and half in Russia.
On the other hand, labor costs do not reflect the same proportions of productivity, as shown in the graph below (in US $, 2012 data):
The cost of labor in Brazil is 1/3 of that in the United States, whose productivity is however almost six times higher: hence the enormous US competitive advantage. The case of the Euro Zone is different, with respect to which the low cost of labor offsets low productivity (but the recent devaluation of the euro has increased productivity and reduced labor costs in Europe).
Brazil is also at a disadvantage vis-à-vis the economies of developing countries, due to the disproportion between labor costs and productivity.
What are the causes of low productivity in Brazil?
The causes of low Brazilian productivity compared to other countries can be traced to various reasons:
– Use of obsolete or less advanced production technologies compared to other countries
– Less investment in research and development of new processes and new products
– Inefficient work organization
– Less qualified labor
– Relatively lower sales prices due to lower product quality or lower marketing capacity (hence less value added)
– Outdated and obsolete infrastructure
We do not consider the exchange rate variable here, which is not structural even if it significantly influences the competitiveness of Brazilian products, changing their price in foreign currency.
Brazil must therefore face three major challenges in order to reduce the competitive disadvantage compared to the main economies:
– Increase capital investment
– Increase investment in research and development
– Investing in education and training of one’s workforce, while improving work organization
– Improve their infrastructure (railways, highways, ports, etc.)
Regarding the investments of companies in capital goods, in 2014-2018 there was – unfortunately – a declining trend of the FBCF – Gross capital formation, which measures how much companies have increased their capital assets, or those assets that are used to produce other goods ( machinery, instrumentation and construction materials, in summary).
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| FBCF (% of GDP) | 20,2% | 20,5% | 19,7% | 18,2% | 16,4% | 15,6% | 15,8% |
In recent years there have been no signs of recovery of this important indicator, which also suffers from a decrease in foreign direct investment: to make Brazil’s economic growth consistent it is important that the government’s economic policy pushes in this direction, rather that on the side of family consumption (which has “saved” the 2018 GDP, together with the growth of the services sector).
Regarding research and development, Brazil invests just over 1% of GDP against an OECD average of 2.3%. In recent years it has strengthened investments and increased research programs, also in partnership with advanced countries, but the effort of the government and the private sector must be expanded. Current technological excellences (aerospace, mining / oil and agriculture) must be extended to other strategic sectors for Brazil.
It is clear that, in order to gain competitiveness, Brazil must invest heavily in the quality of education (at all levels, from elementary schools to universities), on prolonging the stay of young people at school (early school leaving is still very high) and on vocational training.
The percentage of GDP invested in education is among the highest in the world (around 6%, which places Brazil in 15th place worldwide), but despite this the quality of teaching is very low (Brazil is at 53rd place in the PISA ranking, which measures the level of student learning). It is a problem of absolute and non-percentage values, given that the average annual expenditure per pupil is US $ 3,000.00 compared to the 8,200.00 spent on average by the OECD countries, and highlights the urgency of a wide reform of the Brazilian education system .
Labor costs and workers’ rights
In terms of labor costs, the “mini-reform” of 2016 has partially modified the CLT (Consolidação das Leis do Trabalho) dated 1943. It is a legislation that, according to the entrepreneurs, still creates considerable difficulties in the moment of bargaining / resignation of workers and is responsible for the relatively high labor costs in Brazil. Suffice it to say that, once the gross annual remuneration value is 100, the cost to the company can go up to 283, or almost three times what the worker actually pocketed.
In the direction of greater flexibility it is necessary to point out the approval in 2017 of a law (Lei da terceirização) which has extended the possibility of outsourcing more activities by companies. If before you could outsource services such as cleaning, supervision, accounting, from today you can also give external management those considered activities related to the core business of the company.
The changes from the “mini-reform” and from the new law on outsourcing have given more flexibility to the labor market but risk weakening the rights of workers, already little protected in Brazil and who have seen the consequences of the economic crisis of 2015-2016.
Given the ultra-liberal positions of the economic team of the Bolsonaro government, to improve productivity risk being passed laws that affect the weakest and can create an explosive social malaise.
Update Brazil 