Why is Brazil not competitive?

Brazil’s economy – competitiveness

The World Bank recently looked at Brazil’s competitiveness, in particular the business environment and logistics costs structure. In a report titled “The Brazilian Competitiveness Cliff”, published in February 2013, Otaviano Canuto, Matheus Cavallari, and José Guilherme Reis  conclude “there are significant cost pressures and competitiveness issues affecting the industrial sector, not only with respect to foreign trade, but also domestically. The findings here support the hypothesis that the challenges to a better export performance are more linked to the supply-side agenda, rather than to export-promotion types of policy.”

The authors go on: “Considering the elements of declining competitiveness are essential to develop policies that will increase productivity and help Brazil to better compete globally and domestically. To strengthen industry productivity, broad measures to improve the efficiency of service sectors are critical. Thus, a wide effort on the supply side will be necessary, rather than just a short-term stimulus or focused policies favoring some export sectors.  The combination of rising real average earnings and stagnant (or falling) labor productivity has harmed Brazil’s export competitiveness, particularly the industrial sector’s capacity to compete with imports. The sharp increase in unit labor costs partially explains that weakness, although only for recent quarters.

The appreciation of the real effective exchange rate was certainly not negligible in the last decade. Although a stronger currency is one of the elements behind the lower competitiveness in Brazilian exports, sluggish productivity performance and a real wage uptrend explain a significant part of the current overall loss of competitiveness.”

“Trade openness in Brazil is among the lowest in the world, considering the level of income per capita, Brazil still shows trade flow levels that are well below the predicted value. The business environment has not helped Brazil contend with stronger competition in global markets. The logistics infrastructure, which is widely recognized as inefficient and costly to Brazilian exports, as well as many other factors such as a very complex and costly tax system, have taken a toll on Brazilian firms. This diagnostic reinforces the importance of resuming the agenda of microeconomic reforms, increasing the investment-to-GDP ratio, and advancing toward a better-skilled human capital base. Promoting and rewarding productivity gains in a competitive economy, including the service sector, are the only options to accelerate growth and overcome possible middle-income growth traps.”

This report comes at  time when the government seems intent on furthering its policy to pressure business into local procurement and local sourcing via new regulations imposed 'in synch' with tax reductions on products manufactured locally. The most recent change has been in relation to television, broadband and mobile internet businesses, all delivering goods to consumers. This affects not only television but also the emerging 4G market and Brazil's mobile handset manufacturers. Brazil imposes high tariffs on imports across diverse sectors, including automobiles, automotive parts, information technology and electronics, chemicals, plastics, industrial machinery, and textiles and apparel. By agreement, Brazil maintains higher tariffs than it's MERCOSUR partners on many tech/hi-tech items.

Eric Winton

Director, New Millennium Business

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