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FGV study reveals pockets of excellence for business all over Brazil

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FGV Projects has conducted a new study about the Brazilian competitiveness profile, reproduced in the Financial Times, special section of 26/03/2015. The Financial Times is distributed to more than 1 million people worldwide.

Visit the FGV Projetos website: http://fgvprojetos.fgv.br/en/

Publicada em: Economia e finanças
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FGV study reveals pockets of excellence for business all over Brazil

  1. 1. FT SPECIAL REPORT Brazil Competitive Profile www.ft.com/reports | @ftreportsThursday March 26 2015 Inside School results poor despite spending Poverty is not the only reason Brazil is lagging behind regional peers Page 2 Infrastructure blight Corruption worries and red tape have left logistics in a tangle Page 2 Corporate scandal Petrobras revelations reflect bureaucracy out of control Page 3 Setting the agenda Our panel of experts give their prescriptions for the country as the commodity boom ends Page 4 S ão José dos Campos is one of thosecitiesthatcanleadafor- eign visitor to wonder why Brazil,LatinAmerica’slargest economy, is classified as a developingcountry. The 90km drive from the interna- tional airport in São Paulo to São José dos Campos via the modern Ayrton Senna freeway, named after the Brazil- ian Formula One driver, takes just an hour. There,thevisitortoSãoJosédosCam- pos will find a sophisticated environ- ment for doing business, as did officials fromThalesAleniaSpace,theEuropean space telecommunications company, whothismonthinauguratedacentrein the city’s technology park to develop applicationsforsatellites. “SãoJosédosCamposcontainsnearly 100 per cent of Brazilian space-related activities,”saysCarlosRondinaMateus, aerospace cluster co-ordinator at Cecompi, an industrial promotion agency. The city is also home to Embraer,theworld’sthird-largestcom- mercial aircraft manufacturer after BoeingandAirbus. But those expecting to see such investment across the rest of Brazil might be disappointed. The city is ranked as one of Brazil’s 10 most com- petitive “micro-regions” for doing business in a study by the FT and FGV Projetos, the consultancy arm of Brazil’s Getúlio Vargas Foundation, an academic institution. Strikingly, five of these10micro-regionsareinthegreater São Paulo metropolitan area or within an hour’s drive of the metropolis. The restarealsointhesouthorsoutheast. ThestudybreaksBrazildowninto558 micro-regions consisting of clusters of municipalities.Brazilhas5,569munici- palities and 26 states plus the federal districtofBrasília.Therearefivemacro- regions — the north, consisting mostly of the Amazon; the northeast, domi- nated by states such as Bahia; the centre-west,thesoyabeangrowingbelt; Investors urged to spread net Study reveals pockets of excellence for business all over the country, reports Joe Leahy the southeast, dominated by the indus- trialpowerhousestatesofSãoPauloand Rio de Janeiro; and the south, which contains more developed areas with strongEuropeanimmigration. The further one travels north or north-east of São Paulo, the fewer islands of competitiveness one will see. They do exist, but in a continent-sized countrysuchasBrazil,thechallengefor business and government is to identify these more isolated pockets of excel- lenceandtotrytoexploitthembetterin the case of investors and to replicate theminthecaseofpolicymakers. “There is a strong polarisation of micro-regionsthatareverycompetitive and of those that are least competitive, while only a small number are in between,” says the report, Brazil’s Competitiveness Profile, by the GetúlioVargasFoundation. Competitiveness has become one of Brazil’s most fundamental challenges. In the first decade of this century, the country rode a commodity supercycle in which seemingly endless Chinese demandforsteelandagriculturalprod- uctspusheduppricesofLatinAmerican exports. In turn, stable macroeconomic management allowed ordinary Brazil- ianstobegintoborrowforthefirsttime. Moreoftheworkforcealsomovedfrom informal jobs to formal jobs with regis- teredcompanies,liftingproductivity. Today, however, most of these tail- winds have weakened. Commodity prices have softened, households have maxedouttheircreditcardsandfinally, unemployment has fallen to record lows. Meanwhile, the investment that is needed to lay the groundwork for greater competitiveness is lacking. “We Continuedonpage3 Comment Richard Lapper on how chronic institutional weakness is holding the nation back Page 6 On the road to growth: São José dos Campos
  2. 2. 2 ★ FINANCIAL TIMES Thursday 26 March 2015 Brazil Competitive Profile On January 26, Brazil’s state-controlled oil company Petrobras announced that its biodiesel unit planned to triple pro- ductionoftallow,aformofprocessedfat fromcattle,to158,000tonsayear,help- ing establish the country as one of the leaders in the production of fuels from animalfats. However, the announcement was overshadowed by the corruption scan- dalthathasengulfedthecountry’smost important company over the past few months. The following day, the oil pro- ducerdroppedabombshelloninvestors by admitting it could not calculate the billions of dollars stolen from the com- panyinanallegedbriberyandkickback scheme involving Petrobras executives, itssuppliersandtoppoliticians. Thecompany’ssharesplungedonthe announcement and any excitement overbeeftallowwasquicklyforgotten. Analysts say that Petrobras, which is widely respected in the oil and gas industryfortheadvancesithasmadein deepwater drilling technologies, is the perfect example of Brazil’s innovation problem. It has the capacity to become a world leader in several industries, but long- running problems such as corruption, excessivebureaucracy,weakinfrastruc- ture, short-termism and misguided public policy mean this potential is rarelyfulfilled. While Brazil last year improved its ranking by three places in the Global InnovationIndex,itwasstillplaced61st worldwide, behind Russia, China and SouthAfrica. The index, which is prepared by Cor- nell University, Insead business school andaUNagency,pointedoutthatBrazil was largely let down by its institutions anditsgeneralbusinessenvironment. Cynthia Serva, co-ordinator of the Centre of Entrepreneurship and Inno- vation at São Paulo’s business school Insper, says that innovation in Brazil is oftenheldbackbyeconomicinstability, poor educational performance and a lackofgovernmentincentives. While consistent economic growth over much of the past decade has allowed for a greater focus on innova- tion, these advances are now at risk, because of the country’s current politi- calandeconomicproblems,shesays. After growing as much as 7.5 per cent in 2010, the economy is facing a techni- cal recession this year for the second yearinarow.Meanwhile,thePetrobras scandal threatens to engulf the govern- ment of President Dilma Rousseff and herPTpartyandhasevenledtocallsfor herimpeachment. Prof Serva says: “Our fear is that the recent movement [towards greater innovation] ends up being para- lysed . . . The government has much more complex problems to solve right now, so once again we have a scenario of instability that makes com- paniesfocusontheshort-term.” Brazil’suniversitiesarealsonotinthe position to provide enough academic talent to foster innovation in the country’sindustries,sheadds. “Theyproducemanyresearchpapers and studies but these are often not directed towards problems in the real world . . . federal-fundedinstitutionsin particular have little contact with the market and they just operate within theirownwalls.” Academics blame low salaries for forcing them to opt for consultancy workratherthanindependentresearch — one reason the country’s universities arenothighlyrankedinternationally. According to Marco Antonio Zago, presidentoftheUniversityofSãoPaulo, the region of Latin America and the Caribbean accounts for less than 3 per cent of global investment in research and development, while the US and Europe account for 34 and 25 per cent respectively. Greatergovernmentincentiveswould also help encourage innovation in Brazil, says Prof Serva. “It seems that fosteringinnovationisnotreallypartof thegovernment’sagenda,”shesays. One example of government barriers to innovation is the ethanol industry. The country has developed one of the most advanced biofuel industries in the world, producing vast amounts of ethanolfromsugarcane.Almostallcars sold in Brazil today can now run on any combinationofethanolorpetrol. However, government petrol subsi- dies introduced to curb inflation over thepastfewyearshavemadeitverydif- ficultforethanolproducerstocompete, prompting a wave of bankruptcies across what should be one of Brazil’s most innovative and successful indus- tries. There are exceptions to the dismal scenario, says Prof Serva. “Technology industriesinBrazilhavemorespacefor innovation, because it is a sector that changes so quickly. This means compa- nies have to create products and adapt quicklyortheywon’tsurvive,”shesays. Much of the innovation in Brazilian industry has arisen through necessity. The challenge now, analysts say, is to provide the conditions so that compa- nies innovate, not out of necessity, but outofopportunity. Innovations promise much, yet fail to reach their potential Industry Economic and political problems threaten to reverse a decade of advances, says Samantha Pearson Sugarcane: harvesting for ethanol Brazil’s infrastructure lags behind that ofmanyofitsneighbours,aswellasthat of global peers. In the World Economic Forum’s 2014-15 Global Competitive- ness Report, it was ranked 120th out of 144 countries for the state of its infra- structure. That compares with 50th for Chile,64thforChinaand74thforRussia These poor standards are in spite of concerted attempts by the government of President Dilma Rousseff to reverse thehistoricallevelsofunderinvestment inthesectorviaamixtureoflarge-scale public spending and subsidised credit for private sector concessionaires. But theimpacthasbeenlimited. Investmentinlogisticsincreasedonly slightlyfromanaverageof2.24percent of GDP during 2007-2011 to 2.39 per cent in 2012 and 2.47 per cent in 2013, and actually fell in 2014 according to Inter.B, a Rio de Janeiro-based consul- tancy (Note: investment figures are expectedtobealteredslightlyinaccord- ance with new offical methodology). At its recent peak in 2013, it was far below the3percentconsideredtobethemini- mum level necessary to replace the depreciationoffixedcapital. José Virgílio Lopes Enei, an infra- structure specialist and partner at Machado Meyer Sendacz Opice, a law firm, believes one reason for the slow rate of progress on this front has been theexcessivelevelofredtape. Ms Rousseff’s government made some moves to speed things up on key projects.Theseincludedinvestmentsin publictransportforWorldCuphostcit- ies. Inspiteofthis,afifthfewertransport projects were developed for the event than planned, according to FT LatAm Confidential, a research and anal- ysis service, as a result of poor localtechnicalcapacityaswellas frequent interventions by audi- tors. Mr Enei argues that other government initiatives have actually increasedbureaucracy. “It’struethatbureaucracyisahistori- cal legacy in Brazil,” he says, but he thinks the governments of president LuizInácioLuladaSilvaandhissucces- sor Ms Rousseff re-established a statist agenda, averse to privatisation and defensive of the state machinery. He cites the reduction in the autonomy of regulatory agencies and the creation of state-ownedcompanies. One example is the central role Ms Rousseff’s government gave to Valec, the state-owned railway engineering company,inasetoffreightrailwaycon- cessions launched in August 2012. The programme was intended to see 10,000km of freight railways improved or built by 2018, with an investment of R$91bn($28bn)overa25-yearperiod. But almost three years later, not one project has gone to market. Regulatory risk, particularly that associated with Valec, has been cited as one of the rea- sonsforthelackofprogress. Another problem has been the tariff policy adopted by the government on certain schemes. In conjunction with the freight railways, the govern- ment launched a R$42bn package of motorway concessions to be auctioned withinayear. However,itsdecisiontoimposearela- tively low upper limit on toll charges, resulting in a rate of return of 5.5 per cent, meant it failed to attract any bid- ders.Thegovernmenteventuallyraised the limit and some auctions were car- riedout,butwithconsiderabledelays. “Therewasalackofunderstandingas tohowtheprivatesectoroperates,”says ClaudioFrischtak,theheadofInter.B. Hesaysthatthegovernmenthasbeen focusing on affordable tariffs but, for a countrythatinvestssolittle,improving infrastructureshouldbeitspriority. Atthebeginningofthisyear,MsRous- seff said she intended to auction a fur- ther 2,625km of motorways in 2015. However,withlesspublicmoneyavaila- ble as a result of a fiscal adjustment process, much of the funding will have tocomefromcommercialsources. Mr Frischtak believes that they may notmakeuptheshortfall. Another aggravating factor is the investigation, dubbed Lava-Jato or Car Wash by the police, into a multibillion- dollar corruption scandal involving the state-owned oil company Petrobras, which has embroiled some of Brazil’s biggest construction companies. There are signs that many of these businesses are having difficulties accessing new funding and if they are found to have beeninvolvedinwrongdoingtheycould bebannedfromgovernmentwork. Andre Loes, chief economist at HSBC bank for Latin America, believes that, ultimately, the success of concessions depends upon the rates of return offered. “The perception of Brazil risk has deteriorated. You have part of the businesses which may be paralysed in the short term by the Lava-Jato investi- gations.But[themostimportantthing] ishavinggoodratesofreturn. “The government has already made changes and raised the rates of return. Tenders have already improved. The return has to be realistic for the [cur- rent] situation of the country. If they are, [the returns] there will be bid- ders for the auctions the govern- mentintendstoresume.” Excessive red tape hampers progress and leaves logistics in a tangle Infrastructure The government has tried to increase spending, but with limited effect, reports Luke McLeod-Roberts José Virgílio Lopes Enei: there is too much bureaucracy ‘Fosteringinnovation isnotreallypartofthe government’sagenda’ C onditions at Visconde de Itaboraíhaveimprovedrad- ically in recent years. The state primary school, located in a semi-rural part of Nova Iguaçú, a low-income munici- palityintheRiodeJaneiroconurbation, has installed new water tanks, thus improvingbasichygieneforits200orso pupils aged 3-11 and staff. It has also acquiredtelevisionsandcomputersand moved from part-time lessons to a full seven-hourschoolday. “Things have changed a lot,” says Luciene Pereira, the school’s headmis- tress. “Before, all our funding came fromthemunicipality,whichhadaone- size-fits-all approach. Now, with addi- tional money from the federal govern- ment going directly to the school, we havegreaterautonomyonhowtospend it.” The rise in funding reflects the emphasis that has been placed on the education sector in Brazil under Presi- dent Dilma Rousseff and her predeces- sorLuizInácioLuladaSilva,bothofthe left-of-centre Workers’ party (PT). Overall, education spending increased from 3.8 per cent of GDP in 2002 to 5.8 per cent in 2010, a level that is above most countries in South America and on par with many developednations. As well as investments in equipment and new buildings, one of the biggest changes has been the expansion of stu- dent numbers across of the spectrum, whether it is through the likes of the Bolsa Família programme, which pro- videsamonthlystipendtofamiliesthat ensure their children go to primary school, or FIES, a student finance fund, which provides cheap student loans for thosewishingtogotouniversity. “Never before has so much been in- vested,” says Dilvo Ristoff, director of undergraduate programmes and poli- cies at the ministry of education, who believesthatthegovernmentisontrack to meet its goal of more than doubling the proportion of 18- to-24-year-olds in higher education, in spite of increased fiscalpressures. But even with the phenomenal injec- tion of resources of the past few years, attainment levels remain below that of manycountriesthatinvestalotless.For example, while Brazilian secondary school students have made gains in performance in recent years in the Programme for International Student Assessment(Pisa)test,aninternational student measure, they still fall short of regional peers in Chile and Mexico and are far below those in Russia, all of which spend smaller shares of public moneyoneducation. “Brazil has progressed very slowly in terms of quality,” says Denis Mizne, executivedirectoroftheLemannFoun- dation, a non-governmental organisa- tion. “The historical reason is that we started very late, but results could be a lotbetter.” In the case of Visconde de Itaboraí, results actually appear to have deterio- ratedatthesametimeasresourceshave increased.Inthefinal-yearclass,sixout of 30 pupils, do not know how to read and write says Ms Pereira. In 2013 the school scored just 3.7 out of 10 on the Basic Education Development Index (IDEB), a national assessment reported everytwoyears—notonlyfarbelowthe nationalaverageof5.2thatyearbutalso 0.8 percentage points lower than the school’sownresultin2011. Ms Pereira says part of the problem relates to specific social factors. “There are students that need services the school can’t provide. I have 19 pupils with a speech impediment; there are studentsthathaveseriouslearningdiffi- culties — it hasn’t been medically diag- nosed because the parents have no interestinpursuingit.” But Mr Mizne believes that socio- economic factors are only part of the explanation. “There’s no doubt that there’s a correlation between lower socio-economic levels and greater edu- cational challenges. But what we [have found] is that poverty is not the deter- miningfactorinstudentperformance.” Instead, Mr Mizne believes a clear curriculum, better levels of teacher engagement, and training that is more appropriatetoclassroomneeds,arejust asimportant. ArecentstudyfromtheOECDclubof rich nations revealed that Brazilian teachers spend just 67 per cent of classroom time actually teaching, the lowest rate among any of the countries surveyed. The rest is spent mainly try- ing to impose order. “Teachers aren’t prepared to deal with discipline issues. Their training is very academic,” says Mr Mizne. “They are evaluated on the basis of a test that is 100 per cent theo- retical,notontheirabilitytoteach.” It does not help that teacher salaries are low by international standards, in spiteofrecentrises.Itisnotuncommon for teachers to moonlight in other jobs to earn extra cash or to go on long-term sickleave. Allthisfiltersthroughtothe learning environment and many pupils endupdroppingout. Thenumberofstudentsfinishingsec- ondary school fell 1 per cent, from 1.88m in 2012 to 1.86m in 2013, accord- ingtodatafromFTLatAmConfidential, aresearchandanalysisservice.Inevita- bly,thishasstartedtohaveanimpacton highereducation,withthetotalnumber of higher education freshers falling by aboutthesameamountovertheperiod. This was during a time when there was unprecedented access to funds. Nowthatstudentfinanceisexpectedto be cut, the goal of further increasing universityenrolments seemsremote. Education lags behind regional peers despite investment Low marks Poverty is not the determining factor in student performance, says Luke McLeod-Roberts Lagging behind: the Bolsa Família programme has failed to bring attainment up to the levels of Brazil’s rivals Houston Chronicle/ Marcelo Salinas ‘Teachers aren’t preparedto dealwith discipline issues.Their training isvery academic’ ‘Therewasalackof understandingastohow theprivatesectoroperates’
  3. 3. Thursday 26 March 2015 ★ FINANCIAL TIMES 3 Brazil Competitive Profile T here could hardly be a bet- ter symbol of a bloated bureaucracy gone haywire than Petrobras, the govern- ment-controlled but pub- liclytradedoilcompanycurrentlyatthe centreofthebiggestcorruptionscandal inBrazil’shistory. In a scheme said to have cost Petro- bras$10bn,seniorexecutivesandpoliti- cians allegedly colluded to take bribes from construction and engineering companies contracted by the oil com- pany. Even in a country inured to endemic corruption, the scandal has sickenedmanyBraziliansbylayingbare thegreed,arroganceandsenseofimpu- nity apparently permeating the highest levelsofthepublicsector. But,likethemensalãobribes-for-votes scandal that rocked Brazilian politics a decade ago, the Petrobras scandal has also highlighted the growing power and self-assurance of another branch of the publicsector,thejudicialsystem. In the mensalão scandal, the Supreme Court earned the respect of Brazilians by putting senior politicians behind bars — a first in Brazil. As the Petrobras scandal has unfolded, public prosecu- tors have earned public admiration by pursuing senior figures in business and government and for their success in securing plea-bargaining deals with vitalwitnesses. It’sadichotomyseenatmanylevelsof Brazilian public life. On the one hand, an ossified, insular behemoth; on the other, an agile, reformist, modernising technocracy. As the FGV Projetos study, Brazil’s CompetitivenessProfile,notes,publicsec- tor management is critical for ensuring trust in the business environment and determining competitiveness. The authors write: “It crucially influences investment decisions and the organisa- tion of production and plays a key role inthewaysinwhichsocietiesdistribute thebenefitsandbearthecostsofdevel- opmentstrategiesandpolicies.” In assessing public sector perform- ance, the study uses nine indicators to measure regional standards in the managementofpublicfinances,theper- formance of the judicial system and conditions of public safety. Perhaps unsurprisingly, the more prosperous states of the country’s south score best by these criteria, with the less devel- oped northeast and extreme north doing worst. But there are pockets of high performance in unexpected areas such as the frontier, if not to say wild- west,statesofAcreandRondônia. The report notes Brazil’s poor institutional performance in compari- son with other countries, citing the lat- est World Bank Doing Business report, which ranks it 120th out of 189 coun- tries. It takes 102.5 days to open a com- panyinSãoPaulo,theWorldbanksays, compared with an OECD average of 9.2 days, and 2,600 hours to pay corporate taxes,against175.4intheOECD. Dealing with such stultifying bureaucracy is a daily fact of life. In a recentstudyonbureaucracyintermedi- aries, corruption and red tape, Anders Fredriksson, a researcher in economics attheUniversityofSãoPaulo,examines the phenomenon of the despachante, an intermediary hired by companies and individuals who would rather pay a fee than go through the multiple instances of queueing and form-filling needed to secureeverydaydocuments. Typically, despachantes make use of their familiarity with and contacts within the bureaucracy to speed such processes, often sharing their fees with the bureaucrats. One of Mr Fredriks- son’s conclusions is that, while the despachante system makes life easier on a case-by-case basis, it probably entrenchesanobstructivebureaucracy. On a more optimistic note, Mr Fre- driksson cites the example of the poupatempo (“timesaver”), a one-stop- shop where citizens can obtain an iden- tity card or vehicle registration, for example,withmuchgreatereasethanis normal. Since they were introduced in 1997, poupatempos have sprung up around Brazil. The system has been observedandcopiedbyothercountries. AsMarianaMotaPradooftheUniver- sity of Toronto and Ana Carolina da Matta Chasin of the University of São Paulonotedina2011study,alikelyrea- son for the system’s success is that it bypassesratherthanreplacestheexist- ing bureaucracy: citizens still have the option to go the old route, and the old bureaucratsarestillattheirdesks. In some cases, the new system has been so popular that the old one has ceased to exist; in others, it has driven reformoftheoldbureaucracy.Butwhile lauding the success of the poupatempos, the authors are unable to conclude that it has been of net benefit to Brazil because of its duplication of cost and effort. Andwhilethesystemhasbeenavote- winner for the politicians who promote it, efforts to replicate its success for small and medium-sized businesses — the drivers of economic growth — have sofarfailedtotakeoff. Scandal mars efforts to tame bureaucracy Corruption The revelations of the Petrobras case have shocked the country, says Jonathan Wheatley Unrest: the Petrobras revelations have sparked protest — EFE/Sebastiao Moreira haveaninvestmentratiothatisthelow- est of any emerging country and the lowest among the Brics,” says Carlos Langoni,formercentralbankpresident and director of FGV’s Global Economy Centre,referringtothegroupofemerg- ing markets that also includes Russia, India,ChinaandSouthAfrica. “We have had an average investment rate of 17 per cent for many years now and it doesn’t go up. It is a paradox becausetheopportunitiesarethere,but maybe we don’t have the right frame- work for the private sector to lead the investment,”hesays. The FT-FGV study gives a broad pic- ture with which most Brazilians are familiar. Brazil’s south and southeast regions tend to lead on most indicators, fromqualityofinstitutionstoqualityof life. The north and northeast, mean- while, fall down on most indicators. While the northeast has traditionally beenthepoorerpartofthecountry,the north is home to the Amazon, which remainssparselypopulatedandheavily forested.Thestudydoesshow,however, that there are pockets of competitive- nessinmoststates. Thestudyshowsthatforbasiceduca- tion — measuring primary and second- ary schooling — the southeastern state of Minas Gerais accounts for 40 of the top 100 municipalities in terms of schoolquality. As an example, the municipality of TocosdoMojiinMinasis3,784thforper capita income in Brazil but 13th in schoolquality. Literacylevelsarehigherinthesouth and southeast of the country, but there are strong regions in Mato Grosso, a soyabeanbeltstate;Rondônia,anAma- zonianstate;andManaus,thecapitalof Amazonasstate,deepintheAmazonian rainforest. Cocal dos Alves, in the poor stateofPiauí,rankssecond-lastinliter- acybutsixthinaveragemathsscores. Households with personal computer and internet access tend to be distrib- uted throughout the country, but Man- aus and Roraima, another Amazonian state, have particularly high rankings for domestic information technology access. They also come higher for uni- Continuedfrompage1 versity completion rates and quality of housing. Extremepovertyisworseinthecoun- try’snorth.Butthemostunequalcityis the capital Brasília, where average income for the top 20 per cent is 22 timeshigherthanforthebottom20per cent. Life expectancy is very poor in much of the north and northeast, while thetopfivecitiesforthisrankingareall inthesouthernstateofSantaCatarina. Logisticsandinfrastructurearebetter inthesouth,althoughtherearepockets of excellence along the coast in the northeast and in parts of the Amazon. Roadqualityismostlyappallingoutside thesouthandsoutheastwiththeexcep- tionofsomepartsofthenortheast. In findings that might be interesting to investors looking to build new mar- kets in Brazil, the study found micro- regions that ranked highly for business sophistication were sprinkled among someofthepoorerstates,suchasAma- zonas and Ceará. The same was true of regions with high numbers of employ- ees with information technology skills — Roraima, in the Amazon, scored sur- prisinglystrongly. Almost every state included pockets with significant markets for goods and services, from Manaus and Pará in the Amazon to every state of the northeast. This means investors should consider Brazilasaseriesofmarkets,notjustone nationalmarket. “This reflects the substantial popula- tionsoflargeandmidsizedcitiesinBra- zil’s poorest regions, as well as the sub- stantial driving power of agribusiness andminingtomakesomeregionspromi- nentinpopulationandeconomicimpor- tance,”thestudysaid. Overall, the study showed that while mostinvestorsarenaturallyattractedto Brazil’s developed regions, such as São José dos Campos, the more intrepid might want to explore less advanced regions. While they might not have the industrialmightofBrazil’ssoutheastand south,moststatesinBrazilofferislands of relative competitiveness accompa- niedbylarge,oftenuntapped,markets. Investors urged to spread net ‘[Publicsector management] . . . cruciallyinfluences investmentdecisions’ Contributors Joe Leahy Brazil bureau chief Samantha Pearson Brazil correspondent Jonathan Wheatley Deputy emerging markets editor Richard Lapper Principal, FT confidential & LatAm Confidential Luke McLeod-Roberts Senior researcher, FT LatAm Confidential Emma Boyde Commissioning editor Steven Bird Designer Chris Lawson Picture editor For commercial opportunities in print, digital and events, please contact John Moncure john.moncure@ft.com or Ximena Martinez ximena.martinez@ft.com All editorial content in this report is produced by the FT. Our advertisers have no influence over or prior sight of the articles. All FT reports are available on ft.com/reports 22x How much richer Brasília’s richest 20% are than its poorest 20% 40% Minas Gerais’s share of top 100 municipalities for school quality
  4. 4. 4 ★ FINANCIAL TIMES Thursday 26 March 2015 Brazil Competitive Profile B razil’seconomyhasslowed sharply.Thebrakeswere appliedbytheendofthe commoditysupercyclethat occurredinthefirstdecadeof the21stcenturycombinedwithrapid creditgrowth. ThedebateinBrazilhasreturnedto thevexedquestionofhowtomakeone oftheworld’smostinward-looking economiesmorecompetitive. Theanswerliesinimproving education,streamliningtaxation, simplifyingbureaucracyingeneral,and fixinginfrastructure.Butbeneaththese conceptsarecomplexquestionsthat runasdeepasBrazilianpoliticsand cultureitself. TheFTandFGVProjetosexplored theseissuesataround-tablediscussion attheconsultancy’sheadquartersin PraiadeBotafogo,againstthebackdrop ofRiodeJaneiro’sSugarloafMountain. ThedebatewaschairedbytheFT’s JoeLeahyandincludedCarlosLangoni, formercentralbankpresidentand directorofFGV’sGlobalEconomy Centre,CesarCunhaCampos,director ofFGVProjetos,FernandoNaves Blumenschein,co-ordinatorofprojects atFGVProjetos,andJoséAugusto CoelhoFernandes,policyandstrategy directoratBrazil’sNational ConfederationofIndustry(CNI). Belowareeditedextractsofthe conversation. Ifyouwerepresidentwhatwouldyou wouldchangefirsttomakeBrazilmore competitive? Theanswersrangedfromfixing educationandinfrastructureto formulatingacohesivestrategyonthe roleofthestate. LangoniThefirstareaIwould improveishumancapitalandeducation becausetheyarehighlycorrelatedwith productivityandinnovation.Brazilhas succeededininvestingineducation,but thereisachallengeintermsofquality— therearewidedisparities,especiallyat theregionallevel.Thesecond dimension,whichisalsoextremely importantforacountrythesizeof Brazil,islogisticsandinfrastructure. FernandesIwouldreformthe nationalbudgetaryprocessandthetax system.[FTcomment:undertheBrazilian constitution,largechunksofthebudgetare earmarkedformandatoryexpenditurein areassuchaseducationandhealth,leaving onlyabout15percentofspendingtothe discretionofthegovernmentfor investmentinareassuchasinfrastructure.] Thewayweformulatethebudgetisone explanationofourlowinvestmentrates. Everycountryhassomeareasinwhich budgetaryexpensesarepredefined,but inBraziltheyaretoohigh. CunhaBrazilhastoreducethe importanceofthegovernmentinthe economy.[FTcomment:theBrazilian governmentaccountsfornearly40percent ofgrossdomesticproduct,approaching developed-countrylevelsofpublic expenditurewithoutthecorresponding qualityofservices.]InregionssuchasSão Paulo[Brazil’sindustrialcentre],the governmentislessimportantinthe economythaninotherareas,suchas Brasíliaandthenorthandnortheastern states[Brazil’spoorerregionswherea higherproportionofpeoplereceivesocial benefits].Butitisstillagovernment- dominatedeconomy.Wehavetoopen moretothemarket. BlumenscheinIwouldformulatea strategyonhowmygovernmentwould dealwithcompetitiveness.Youhaveto haveastrategyformacroeconomic policy,fiscalpolicy,environmentand educationpolicy.Thegovernmenthas neverhadacoherentplan. LangoniThereisahighcorrelation betweencompetitivenessandopenness oftheeconomyandareducedroleofthe state.Forexample,themostcompetitive sectorinBrazilthatisachieving sustainablegrowthisagriculture,which is100percentprivate,withminimal stateintervention,nopricecontrolsand veryfewbarriersforimportsand exportsandsoon.Whynotreplicate thatmodelinothersectors? CanBrazil’sconvolutedtaxsystembe fixed? Brazil’staxsystemissocomplexthat thereareonaveragetwochangesevery hourtolawsandproceduresrelatingto tax.Therearetaxesthataccumulate throughouttheproductionchainanda complicatedsystemofvalueaddedtax creditsandrebatesbetweenthe differentstates.Brazil’staxsystem imposessuchaburdenthatdomestic businessesoftenuseitasanexcuseto demandprotectionfromimports.Their argumentistheycannotpayBrazilian taxesandcompetewithforeignproducts atthesametime.Theroundtable identifiedthisasakeyareaforchange. FernandesThetaxsystemisso inefficientthatitisagoodexcusefor companiestoargueagainstintegrating Brazilwiththeglobaleconomy. Oneillustrationisthecostof investment.InBrazil,forinstance,the taxburdenoninvestmentinasteel plantis10percent,intheUK0.6per cent,inAustralia1.6percentandin Mexico1.8percent.Soyoustartthe investmentgamealreadywithabig negativedifferential. Thereisabillreadyonfederaltax reformthatthefinanceministermaybe abletopresenttoCongress.Butitwill requirepoliticalleadership.Becauseof vestedinterests,somesectorsmight reactnegativelytotaxreform,even thoughthiswouldbegoodforthe economyasawhole. Thethinking[amongsomelarge corporations]isthat“agoodtaxation systemistheexistingonebecausethat’s theoneIunderstand”. Manaus—theAmazon’s“not-so-free tradezone” Thepanelsingledoutthejunglecity ofManausasoneofthebest illustrationsofhowBrazil’staxsystem andprotectionistmodelof developmentstymiescompetitiveness. Thiscity,intheheartoftheAmazon, hasalmostnoroadlinkswiththerestof thecountrybuthasbecomeoneofthe Brazil’smostimportantmanufacturing bases.Tohelppopulatetheregion,the governmentcreatedafree-tradezone thereforindustries,rangingfrom electronicstomotorcycle manufacturing,bygivingtaxbreakson importedcomponents.Thefinal productshavetobeassembledin Manaus.Tomaketheseproductsviable, giventhehugetransportcostsofgetting goodstoandfromthemiddleofthe jungle,thegovernmenttaxesthesame itemsheavilyelsewhereinBrazil. Fernandes[Holdingupapencil]One ofthemostimportantreasonsBrazilis oneoftheworld’smostprotected economiesistheexistenceofManaus. If,forinstance,Iwanttoinvestina planttomakethispencilinManaus, firstofall,Ihavetoseeifpencilsareon thelistofitemsthatcanbeproduced there.Sothereisabureaucrat somewherewhomakesthislist.Then forthispenciltobeviable,becauseof thehugetransportcost,mycompetitor outsideManausmustbetaxed.Soitisa verygovernment-orientedprocess. BlumenscheinJusttoplaydevil’s advocate,Manaus,evenwithits distortions,atleastshowsonething:it wasabletogrowasaproductivecentre becauseofdiminishedimportbarriers. Lessgovernmentintervention,atleast intermsofimportrestrictions,allowed thattohappen. Thefinancialsystem—anareaof partialsuccess PartsofBrazil’sfinancialsystemare islandsofexcellence,withlargeprivate sectorbankssuchasItaúUnibancoand Bradescoconsideredregionalleaders. Yetstateparticipationinthesector remainsveryhigh,withthegovernment developmentbank,BNDES,providing mostlonger-termlendingfor companies.Theroundtableconcluded Brazilneedstopushaheadwith financialsectordevelopmenttoremain competitive. LangoniBrazilhasbyfarthebest financialsystemoftheBrics[theother largeemergingeconomiesbeingRussia, India,ChinaandSouthAfrica]. ComparedwithChina,whereshadow banksaccountfor50percentofthe system,orwithRussiaandIndia,Brazil isperformingquitewell. BlumenscheinIfyoucompareBrazil 15yearsagowithothercountriesatthe time,financialdeepening[the penetrationofthefinancialsectorinthe economy]wasquitelow.Thishas changed.CredittoGDPhasgrownfrom amarginalamountto60percent.But westillhavearepressedandcontrolled creditsysteminsomeareas.The governmentistheonlyproviderof manylinesofcredit[suchasloans longerthanfivetosevenyears].I’mnot sayingitisbad,butitissomethingwe shouldstarttodiscussagain. IsBraziliansocietyreadytobegin votingforcompetitiveness? Brazil’scentre-leftpresidentDilma Rousseff,achampionofbig government,wasre-electedbyanarrow marginlastOctober.Thevotewassplit betweenthemorepro-businesssouth andsoutheastofthecountry,which votedgenerallyforthemoremarket- friendlyoppositionPSDBparty candidate,AécioNeves,andthepoorer, morewelfare-dependentnorthand northeast,whichvotedforMsRousseff. Thepanelconcludedthatordinary Braziliansarebecomingmoreconscious oftheneedforamoreefficientstate. CunhaLastyear’selectionshowsthe voteforamorepro-businessplatform versusbiggovernmentisnowabouthalf andhalf. LangoniOneofthemainstructural transformationsinBrazilhasbeenthe formalisationofthelabourmarket [employeesworkingforformally registeredcompanies].Onceyouhave amoreformaleconomy,thereisa greaterunderstandingamongpeopleof theweightofthestateintheirday-to- daylives. Peoplewhohaveformalemployment orformalsmallbusinessesbecome moreliberalandstarttocriticisethe governmentbecausetheyseelotsof inefficiency.Thedeclineofinformality willleadtoamoreliberalbiasamong voters,withimplicationsforelections. An agenda for an outward-looking economy Round Table A panel of business observers met to discuss the areas Brazil’s leaders must focus on now that the commodity boom has come to an end Summit meeting: individual pictures (clockwise from top left) Cesar Cunha Campos; Carlos Langoni; Fernando Naves Blumenschein; and José Augusto Coelho Fernandes. Main picture: Langoni, left, and Cunha Question time: the FT’s Joe Leahy ‘Brazilhassucceededin investingineducation, butthereisachallenge intermsofquality’ ‘Thedeclineofinformality inthelabourmarket willleadtoamoreliberal biasamongvoters’ ‘Lessgovernment interventionallowed Manaustogrowasa productioncentre’
  5. 5. Thursday 26 March 2015 ★ FINANCIAL TIMES 5 Brazil Competitive Profile 1st 2nd 3rd 4th 5th Road quality Literacy How the regions rank 1st 2nd 3rd 4th 5th Quintile Road quality Source: FGV Projetos FT graphic. Photos: Dreamstime; iStock; Getty Images *Measured as the percentage of the population older than five able to read and write. Fifth quintile has the highest standards of literacy Key: Fifth quintile has the best roads Literacy* Quintile São Paulo Rio de Janeiro 1st 2nd 3rd 4th 5th Quintile Overall rating Primaveira do Leste Manaus Rio Branco Santarém Belém Sao Luís Imperatriz Teresina Fortaleza Natal Macapá Joao Pessoa Recife Maceió Aracaju Salvador Ilhéus Vitória Rio deRio de JaneiroJaneiro Rio de Janeiro BrasíliaBrasíliaBrasília P A C I F I C O C E A N AT L A N T I C O C E A N Boa Vista Mouths of the Amazon ALAGOAS AMAZONAS RORAIMA AMAPA PARA TOCANTINS GOIÁS BAHIA ACRE MARANHAO RONDÔNIA PIAUI CEARA PERNAMBUCO SERGIPE RIO GRANDE DO NORTE PARAIBA ESPIRITO SANTO RIO GRANDE DO SUL SANTA CATARINA 500 km MATO GROSSO MATO GROSSO DO SUL BRAZIL São PauloSão PauloSão Paulo SAO PAULO MINAS GERAIS RIO DE JANEIRO NatalThe Amazon River Key: Fifth quintile is the most competitive. Overall rating is derived from 224 indicators that cover areas such as education, infrastructure, markets, resources, innovation and business Overall rating
  6. 6. 6 ★ FINANCIAL TIMES Thursday 26 March 2015 Brazil Competitive Profile B razilsometimesthinksitisin thefirstrankofnationsbut, aseconomicproductivityand competitivenessgo,itisstill strugglingtoemergefromthe lowerleagues. Thepicturethatemergesfroma glanceattablesdrawnupbytheWorld BankortheWorldEconomicForumis ofacountryhamperedbyweak infrastructure,complexbureaucracy andanirresponsiblepoliticalelite. IntheWorldBank’slatestDoing Businesssurvey,Brazilwasranked 120thof189economies,sandwiched betweenNicaraguaandStKittsand Nevis.Thecountryisbetterplacedin theGeneva-basedWEF’sresearchon competitiveness.Butitowesits57th place(aheadofCyprusbutbehind SouthAfrica)inthemostrecentsurvey largelytothestrengthand sophisticationofitsprivatesectorand thesheersizeofitsmarket.Brazil’s institutionsarerankedonly94th strongestintheworldbytheWEF,and insubcategoriesthatmeasuresuch thingsas“publictrustinpoliticians”or the“wastefulnessofgovernment spending”,itisamongtheworst internationallaggards. Thedepressingthingisthatinmany respectsthesituationhasbeengrowing worse.Effortstoincreasespendingon transportandenergyprojectshave deliveredlessthanpromised. PresidentDilmaRousseffmadesome progressinprivatisinghalfadozenbig airportsaheadofthe2014WorldCup, butplanstodeveloptherailwayshave beenbotched.Legalandbureaucratic complexities—oftenlinkedtothe activitiesofpublicaccountsbodiesand environmentalregulators—leadto endlessdelays,contributinginthe energysector,forexample,toshortages andapotentialrationingcrisis. Worse,theinfrastructureeffortnow runstheriskoffallingvictimto economicausterity,asJoaquimLevy, thenewfinanceminister,seeksto restoreordertofiscalaccountsafter severalyearsofmismanagement. Thecorruptionscandalsurrounding theallegedpaymentofbribestoofficers inthestate-controlledoilcompany, Petrobras,anditspoliticalallieshas shatteredcredibilityinthepolitical elite.Accordingtooneopinionpoll,84 percentofBraziliansthinkMsRousseff knewaboutthewrongdoing. Butthereisapositivesidetothestory. Macroeconomicmanagementis markedlybetterthanitwaswhenBrazil haditslastroundofhyperinflation23 yearsago.Unlikesomeemerging markets,Brazilisbeginningtodealwith thecorruption,withdoggedpolice investigationsbringingthemalpractice atPetrobrasoutintotheopen.The privatesectorisgenerallywellmanaged andhasbeengoodatadaptingand developingtechnologies.Brazilian agribusinessisefficientandinnovative. AsurveybytheGetúlioVargas Foundation(FGV),auniversity,andthe FinancialTimespointstowide variationsinproductivitynotonlyin Brazil,butinitsregions.Forexample, althougheducationalstandardsare generallylowerinthepoorernorthand northeastthaninthesoutheast,some northeasternstatesareoutperforming —Cearáisthebestexample. Manycitiesandurbanregions, especiallyinthesouthandcentre-west, aredoingwell,withlocal administrationsworkingconstructively withbusinesscolleagues. Thatdifferentiationandprivate sectorstrengthhelpsexplainwhyBrazil stillattractssignificantquantitiesof foreigndirectinvestment.Fund managersmaybedisillusionedwithits underperformingequitymarketsbut, eyeinglonger-termprospects,global consumer,logisticsandresourcegroups continuetocommitfunds. Lastyear,FDIamountedto$62.5bn, onlyafractionlessthanin2013,making Brazilthefifthmostpopulardestination forFDI,accordingtotheUN. Eveninthevexedareaofbusiness rules—thefocusfortheWorldBank’s assessment—therehasbeensome progress.In2014,Brazil’sratings improved,partlybecausethetime takentoopenabusinessfell.Itstilltakes morethan100daysinSãoPaulo, however,soforhard-pressedsmall businessestheimprovementcanseem imperceptible. Perhapsthisslowanduneven advanceisnotsurprising.Thishas generallybeenthehistoricpatternin Brazil.Inthe19thcenturythecountry movedtoindependencebyimportinga monarchyfromPortugal,itscolonial power,andabandonedslaverymany yearsafterabolitionelsewhereinthe west.Eveninthelate20thcentury Brazillivedwithhighinflationfor longerthanmanyofitsregional neighbours.Brazilwilleventuallytackle itsinstitutionaldifficultiesbutifthe pastisaguide,changewilltakedecades ratherthanyearstoputintoeffect. RichardLapperisprincipalofFT Confidential,theFT’sgrowthmarket investmentresearchservice Chronicinstitutionalweaknessholdsnationback OPINION Richard Lapper Trying to restore order: Dilma Rousseff and Joaquim Levy— AP Theprivatesectoriswell managedandhasbeen goodatadaptingand developingtechnologies TherearesomeindustriesinwhichBra- zil is so naturally competitive it almost seems unfair to foreign rivals. One such sector is pulp and paper, which took off after the introduction of non-native eucalyptustrees.ThesethriveinBrazil’s tropicalandsubtropicalclimate. WhereasahectareofforestinEurope producesbetween7and10cubicmetres of wood a year, and 18 cu m in Chile, in Brazil the same area can yield 50 cu m, according to Ibá, the Brazilian tree industryassociation. “No country in the world can deliver wood for various uses, no matter whether it is for pulp and paper, panels or flooring, as fast as Brazil can,” says ElizabethdeCarvalhaes,Ibápresident. Brazil’s competitiveness in pulp and paper is a combination of nature’s bounty and strong investment. Produc- tion of pulp, the key ingredient for paper, rose 8.8 per cent last year com- paredwith2013. Theindustryhasalsoinvestedheavily ininnovationandresearchanddevelop- ment,adaptingtheintroducedeucalyp- tus to Brazilian conditions and building state-of-the-artprocessingplantsinever biggersizestocreateeconomiesofscale. Thesectorisanislandofpromisethat could point the way for Brazil’s wider industrial base as it struggles to com- pete in a world with ever more inte- gratedsupplychains. Brazilian industries that compete in global markets, such as pulp and paper, have one thing in common: they are subjecttolessgovernmentintervention and fewer controls than other sectors, suchastelecommunications,oilandgas andmining. Although the government has invested heavily in pulp and paper through its development bank, BNDES, the main companies are listed on the stock market and operate in an open market. They have been affected by the weaker commod- ity cycle and declining eco- nomic growth inChina,but are benefit- ing from a sharp fall in Brazil’s cur- rency, the real, againstthedollar. Ilan Goldfajn, chief economist at Itaú Uni- banco,thebank,saysthefallinthereal, which is at near 11-year lows of more than R$3 against the dollar, makes it a good time for the government and industry to begin trying to reduce trade barriersandprotectioninBrazil. With a depreciated real, he notes, domestic industries have a competitive advantage. The weaker currency gives them room to breathe while they improve efficiency. Such a process should result in a more competitive industrial base and cheaper goods and servicesforBrazilianconsumers,helping curbinflation,headds. “This is the moment when we should startopeningtheeconomyanddisman- tlingthelastlegsoftariffprotectionand reducing local content measures,” Mr Goldfajn says. “The weaker currency givesusroomtodoitwithlesstrauma.” Such a move should be accompanied byapushtoconcludemoretradeagree- ments with other countries, he says. Brazilistryingtoreachsuchadealwith theEU,butthishasbeenheldbackbyits partners in South America’s regional tradebloc,Mercosur. Mr Goldfajn says a more open econ- omywillnaturallyadaptbettertoglobal business cycles. Losses in productivity will be offset by declines in the value of the currency. “The problem of the past 15yearswaswehadboomingcommodi- ties and a boom in capital inflows, meaning industry could not get a break fromthestrongexchangerate,”hesays. “It looks like this is over and capital flows will continue but not in the same wayasinthepast.” Mr Goldfajn says the country’s com- plex taxation system needs to be fixed. Companies say that in Brazil they employ more lawyers than elsewhere just to cope with tax compliance. Envi- ronmental licensing procedures also needtobespeededupandsimplified,he adds. “The issue is not to lower stand- ards but to be able to produce a simple ‘yes’or‘no’[toprojects]muchfaster.” Asignofhowthefreemarketfavours thebraveisthatpulpandpapercompa- niesareattractingattentionagain,even though times are difficult for Brazil in capitalmarkets. After a period in which the industry has faced high costs in the form of soar- ing wages and land prices, as well as overcapacity, analysts are starting to back the sector again. Credit Suisse is upgrading its rating on pulp and paper companies,citingtheirrisingcashflows andthebenefitsoftheweakerreal. “The real has depreciated signifi- cantly and should continue to do so; and . . . commodities prices have fallen sharply, reducing exporters’ margins,” the investmentbanksaidina note. “Few sectors will benefit from this tough scenario, [but] pulp andpaperis definitely oneofthem.” Falling currency clears path for efficiency gains Pulp and paper Industry and government urged to use opportunity to remove trade barriers and boost productivity, reports Joe Leahy Pulp and paper: grabbing market share ‘Nocountryintheworld candeliverwood . . . asfastasBrazilcan’

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