Brazil appears to be at increasing risk of being left behind as global markets grow ever more interconnected. Its slowdown has been exacerbated by the country’s long history of insulating itself from the rest of the global economy through a complex system of trade barriers, industry subsidies, and high taxes. Brazil needs a new catalyst for growth if it hopes to score a comeback—and that catalyst could be found beyond its own borders, write Heinz-Peter Elstrodt and Jaana Remes in Forbes.
Back in 2007, when Brazil was first named as host of the World Cup, the news was greeted with elation. Brazilians envisioned a triumphant coming-out party that would cement the country’s growing status as an economic powerhouse.
Today the national mood has soured. The aspiring middle class is frustrated by modest income growth, exorbitant prices for consumer goods, and sky-high interest rates on household debt. A new report from the McKinsey Global Institute (MGI) cautions that Brazil’s current rate of productivity growth will lead to weak 1.2 percent annual growth in per capita income through 2030, which will do little to boost their living standards.
Brazil appears to be at increasing risk of being left behind as global markets grow ever more interconnected. Its slowdown has been exacerbated by the country’s long history of insulating itself from the rest of the global economy through a complex system of trade barriers, industry subsidies, and high taxes. These measures have not only worsened high prices—they have also sealed Brazil off from the dynamic effects of global competition and prevented it from playing a greater role in the production networks of multinational companies. Brazil’s exports are equivalent to only 13 percent of GDP, far below the level in India (24 percent) or Mexico (33 percent).
MGI finds that Brazil could boost its average GDP growth by up to 1.25 percentage points annually by deepening its global connections. In addition to pursuing new overseas markets, it can accelerate productivity growth by embracing the performance pressures of international competition, which effectively challenges local companies to up their game. Global exposure also expands the supply chain options that are available to companies and positions them to absorb more of the world’s rapidly expanding flows of technology, research, and ideas.
Brazil’s own history shows that greater openness and exposure to global competition has been more effective for spurring productivity and innovation. In the heavily protected automotive industry, for example, high import tariffs have encouraged foreign automakers to build cars within Brazil. But the country exports only a small share of the vehicles it produces, and Mexican auto plants now turn out twice as many vehicles per worker as Brazilian plants. Due to high taxes, inefficiencies, and import restrictions, the sticker price for a Toyota Corolla is 150% higher in Brazil than in the United States, even though it is assembled in Brazil. This stands in sharp contrast to Brazil’s success in building innovative and globally competitive aerospace and agriculture sectors. One critical difference was an emphasis on developing R&D muscle before reducing the government’s direct role in these sectors.
Building deeper global connections is not only about the trade of goods. It is also about benefitting from global flows of finance, services, people, and data. Although Brazil attracts strong inflows of foreign direct investment from companies eager to sell to its large domestic market, it can do more to attract venture capital from overseas to support innovative start-ups. Brazil captures very little of the world’s trade in services, but a greater focus on building foreign language proficiency would enable Brazilians to conduct more business abroad. Since 1999, the country has lost 30 percent of its share of world tourism, but it can reverse that decline if it builds on the once-in-a-lifetime boost in global media coverage that the World Cup and the Olympics are about to provide.
The migration of workers and the exchange of international students directly translate into new ideas, innovation, and business deals. Today only 0.5 percent of Brazil’s workforce is foreign-born—but making it easier to obtain work permits would allow companies to recruit foreign talent with cutting-edge skills.
In order to connect with the rest of the world, Brazil will have to dismantle some homemade barriers to growth—starting with its maze of bureaucracy and tax codes. It will also need to prioritize building a real 21st-century transportation network that can speed the movement of goods and people, as well as greater digital connectivity for the entire population.
The optimism surrounding Brazil’s rise back in 2007 was more than just hype. The country is blessed with diverse and abundant natural resource endowments. It has a sophisticated business sector with a strong track record for innovation in fields ranging from clean energy to electronic payment systems. Its large and growing consumer market can fuel the growth of start-ups in a wide variety of industries.
Brazil needs a new catalyst for growth if it hopes to score a comeback—and that catalyst could be found beyond its own borders.
This article originally ran in Forbes.com.