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From a long-run perspective, we can identify four phases in the evolution of Brazil’s modern manufacturing: its origins as an extension of the booming export economy dating back to the nineteenth century and going through the first decades of the twentieth century; the rapid growth and diversification from the end of World War II to 1980; the stagnation of the 1980s when it was severely hit by the macroeconomic imbalances; and the period since 1990 when growth has remained slow and uneven, despite macroeconomic stabilization and major institutional changes. In a recent paper, we examine this history of ups and downs of Brazil’s industrial growth and structural change (Aldrighi and Colistete, 2013).
For most of the twentieth century Brazil’s import substitution industrialization was reasonably successful in diversifying its production and export structures, with high growth and learning and incremental innovation. True, very high trade protection held back the diffusion of best practices to the whole industry and allowed obsolete methods of production and firms to survive, reinforcing distortions and inefficiencies. The result was that the import substitution era produced a heterogeneous industrial structure with respect to productivity, technological development, and quality production. Yet distortions did not prevent several firms to increase productivity and become more efficient.
Evidence of increasing efficiency in the industrial sector is the fast growth in labor productivity. As shown in Figure 1, it averaged 4.5 percent per annum between 1945 and 1990 – or 5.8 percent when the “lost decade” of the 1980s is excluded. Gains were particularly significant between 1945 and 1960 as well as between 1970 to 1980. From an international perspective, these outcomes were remarkable. In 1973 the labor productivity level in Brazil’s manufacturing reached 56 percent of that of the US, which was higher than the productivity level of other newly industrializing countries such as Mexico and Korea. Convergence lost pace at the end of the 1970s and Brazil’s manufacturing labor productivity relative to the US declined to 42.5 percent in 1987, while Korea continued to catch up with the United States.
Figure 1 - Average growth of labor productivity in the manufacturing industry, Brazil, 1945-1990 (percent)
Source: IBGE, Industrial Surveys and Censuses.
We found evidence that aggregate labor productivity growth in Brazil’s manufacturing between 1945 and 1990 resulted essentially from within-industry productivity gains, while the net effect of shifts in industries’ labor shares (structural change) was negative. Structural change was relatively significant only in periods of slower industrial growth. Textiles and then the new industries of chemicals, metal products, electrical materials, and transport equipment accounted for most of the total labor productivity growth in Brazil’s manufacturing at the time.
In the 1990s, major institutional reforms as well as economic changes took place in Brazil. Price stabilization from 1994 was a turning point, redefining incentives and payoffs to economic and political actors. Also in 1994, under the Brady Plan, Brazil concluded the debt renegotiation with its main creditors, which together with price stabilization led to a new wave of foreign capital inflows. After a currency crisis that culminated with the devaluation of the Real in 1999, a new macroeconomic regime was established based on floating exchange rate, inflation targeting and commitment to primary fiscal surpluses. Also in the 1990s, important structural reforms were adopted, such as trade liberalization, privatization and deregulation.
How has been the performance of manufacturing in Brazil since these macroeconomic and institutional changes? Manufacturing’s share in GDP declined from 1995 to 2009, as its growth fell behind all other sectors. The share of services, which was already high in 1995, reached nearly 70 percent in 2009. Manufacturing maintained its share in total employment (12-13 percent), contrary to agriculture, which underwent a fall to 17 percent. Services in turn gained ground and increased its participation in total employment to more than 60 percent in 2009.
Our calculations of labor productivity in Brazil between 1995 and 2009 show huge variations among sectors, both in levels and growth rates. The fastest-growing labor productivity activities were agriculture, mineral extraction, automotive, cellulose and paper, finance, and real estate renting. As Table 1 shows, the very poor performance of Brazil’s aggregate labor productivity over the period was primarily due to the stagnation in services (0.1 percent) as well as to the negative average growth in manufacturing (-0.5 percent) and civil construction (-1.2 percent). Labor productivity in agriculture and the extractive industry grew in turn at 4.5 percent and 4.0 percent, respectively.
Table 1 - Labor productivity growth by sectors, Brazil, 1995-2009 (percent)
Source: IBGE, National Accounts (Revised).
Notes: Value added deflated by sectoral deflators at 2000 prices. National accounts data comprise economic units from both formal and informal sectors.
Services had by far the largest influence on the modest overall productivity growth in the period, followed in importance by agriculture and livestock, while manufacturing’s contribution was negative – only during the early 2000s was its impact positive, even though negligible. Although higher than in agriculture and construction, the level of productivity in services remained around 80 percent of that in manufacturing and below the level for the whole economy.
Within-industry labor productivity gains accounted for less than half of the productivity growth in the Brazilian economy between 1995 and 2009, with structural change contributing the largest amount to the meager (0.8 percent) aggregate productivity growth in the period. These results for Brazil are at odds with those obtained for a sample of Latin American countries by McMillan and Rodrik (2011), who found that the structural change effect on productivity growth from 1990 to 2005 was negative or, when the decomposition of productivity growth for the region is calculated with weighted averages, positive but very small.
To grasp how labor cost competitiveness in Brazil has recently evolved, we estimate unit labor costs for the main macro-sectors from 1995 to 2009. After a sharp decline between 1999 and 2004, mostly due to currency devaluation, ULC in all sectors witnessed a rapid growth, increasing by more than 100 percent in manufacturing and the economy as a whole. This upward trend in all sectors was closely related to currency appreciation, which to a great extent resulted from the boom in commodities. Manufacturing’s labor compensation deflated by an index of effective exchange rate grew rapidly between 2004 and 2009, whereas labor compensation deflated by a domestic producer price index increased only by a modest rate. This coupled with the stagnant labor productivity growth in Brazil’s manufacturing resulted in escalating ULC in the period. Figure 2 shows the evolution of ULC and its components in manufacturing.
Figure 2 - ULC Components in Manufacturing, Brazil, 1995 - 2009
Overall, our story shows that Brazil’s manufacturing, after its relative success in learning and technological advance over most of the twentieth century, lost strength in the last three decades as a major source of productivity growth. The low and stagnated labor productivity in manufacturing combined with currency appreciation since the mid-2000s have pushed up unit labor costs measured in foreign currency. Manufacturing competitiveness would not be so harmed, however, were the costs of inputs and services other than labor lower or declining. Neither does this seem to be the case now, nor prospects appear to be bright in Brazil. There are several factors that conspire to keep efficiency and productivity growth at low levels – such as a very burdensome tax system, poor and unreliable infrastructure, high protection against competition, weak incentives for innovation, high and unstable real interest rates and a relatively low-skilled workforce.
McMillan, Margaret, and Dani Rodrik (2011). “Globalization, Structural Change, and Productivity Growth.” NBER Working Papers. February, n. 17143.
Aldrighi, Dante and Renato P. Colistete. “Industrial growth and structural change: Brazil in a long-run perspective.” Department of Economics Working Paper Series, Universidade de São Paulo, no. 2013-10.