Ready or not, Brazil is rolling out the welcome mat for sports fans from around the world. As soon as the clock winds down on the final FIFA World Cup final next month, the country is to resume preparations to host the 2016 Summer Olympics.
However, even as Brazil steps into the international spotlight, it maintains considerable barriers to the global economy, damaging its prospects for future growth and prosperity.
In a world that is constantly becoming more interconnected, Brazil risks being left behind.
Illustration: Mountain People
Brazil has risen to become the world’s seventh-largest economy, propelled by a commodities boom, a demographic dividend and rising consumption, yet it ranks 95th in per capita GDP.
This disparity can be at least partly explained by its 43rd-place ranking for “connectedness” in terms of flows of goods, services, finance, people, and data and communications.
Sealing itself off from the bracing effects of global competition is sapping Brazil of much-needed momentum, with serious consequences for households — most of which have experienced only modest income growth in recent years.
While Brazil has halved its official poverty rate since 2003, prohibitively high consumer-goods prices and astronomical credit-card interest rates (averaging 145 percent) have prevented many of those who have escaped poverty from attaining middle-class lifestyles.
In order to lift half of the still-vulnerable population into the middle class, Brazil would need 4.2 percent annual GDP growth, on average, through 2030 — a target that can be met by tripling productivity growth.
That may be an ambitious goal, but it is achievable, especially if the nation becomes more deeply integrated into global markets and multinational production networks.
In fact, an assessment of how global connections affect economic growth suggests that, by pursuing deeper engagement with the world, Brazil could boost its average annual rate of GDP growth by up to 1.25 percentage points. That would propel the economy about a third of the way toward higher incomes and better living standards.
With global connectivity undergoing a profound transformation, now is the time to establish key partnerships and claim market shares. In so doing, Brazil would gain access to innumerable opportunities for growth. It would also reap the benefits of global competition, which would compel local firms to seek greater efficiency by implementing leaner processes, investing in research and development or adopting the latest technologies. Global exposure makes supply chains more dynamic and enables companies to absorb more of the innovations, technologies and ideas that are constantly emerging worldwide.
For decades, Brazil’s economic policy has drawn on the strength of its huge domestic market, protecting local industries through a complex system of subsidies, taxes and tariffs, but exports are equivalent to just 13 percent of GDP, far below the level in India (24 percent) or Mexico (33 percent). Furthermore, the sharp appreciation of the real’s exchange rate — driven by high global commodities prices — has diminished export competitiveness. As a result, from 2005 to 2012, Brazil’s US$20 billion trade surplus in manufactured goods swung to a US$45 billion deficit.
To boost exports, the nation would have to develop distinctive skills and capabilities, particularly in industries adjacent to commodities.
Despite efforts to liberalize trade, reform has been uneven. In the heavily protected automotive industry, high import tariffs have encouraged foreign automakers to establish local factories, but productivity remains low — auto plants in Mexico, for example, produce twice as many vehicles per worker and Brazil exports a small share of the vehicles that it produces.
This contrasts sharply with Brazil’s success in developing innovative and globally competitive aerospace and agricultural sectors. One critical difference was the authorities’ emphasis on boosting research and development in these sectors, before reducing the government’s direct role.
Brazil’s trade in goods also suffers from inadequate transportation and communications networks. The rail system is limited and just 14 percent of roads are paved, which is not surprising given that investment in infrastructure averaged just 2.2 percent of GDP between 2000 and 2011 — well below the global average. This record can be improved with profits from offshore oil fields in development.
As for trade in services — an area where performance has been lackluster, at best — Brazil would benefit considerably from increased foreign-language proficiency, which would enable more Brazilians to conduct business abroad. Tourism also offers significant growth potential, particularly if the nation can build on the rare opportunities presented by hosting the World Cup and the Olympics.
Brazil’s “connectedness agenda” must also include efforts to attract more foreign talent. Skilled migrants have been essential to the growth of some of the world’s leading hubs of technology and innovation — from Silicon Valley to Taiwan, Ireland and India. Today, only 0.5 percent of Brazil’s workforce is foreign-born, compared to more than 5 percent in the early 1900s.
Brazil also lags in terms of data and communication flows, partly because a large share of the population lacks Internet access. With improved digital links, Brazil would gain new opportunities to improve productivity and innovation.
What better place than Brazil, with its large and growing consumer market, to incubate the next Facebook? If that sounds far-fetched, consider this; Instagram co-founder Mike Krieger is a Brazilian who left home to find his fortune in San Francisco.
This month, the World Cup is bringing the world to Brazil. It is up to Brazil to invite it to stay.
Matt Slaughter, a research associate at the National Bureau of Economic Research, is a professor of management at the Tuck School of Business in Dartmouth, where he directs the Center for Global Business and Government. Jaana Remes is a partner at the McKinsey Global Institute.
Copyright: Project Syndicate
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