Productivity is Only Path to Economic Growth, Economists Say

RIO DE JANEIRO, BRAZIL – With the end of the demographic dividend in Brazil, the only means of generating economic growth will be through productivity gains, said Silvia Matos, a researcher at the Getulio Vargas Foundation’s (Ibre/FGV) Brazilian Institute of Economics, on Monday, December 14th, while taking part in the online seminar “Productivity and Reforms”, organized by the institution in partnership with O Estado de S. Paulo newspaper.

“In a country with a young population, we achieve greater growth, because there are many people working”, said Silvia.

Economic growth with a large proportion of young people in the general population occurs within a “demographic dividend” context. The dividend occurs when the working-age population (WAP) grows at a faster rate than population growth as a whole, said Silvia.

But since 2018, data from the Brazilian Institute of Statistics and Geography (IBGE) point to the end of the demographic dividend, recalled the Ibre/FGV researcher. With the WAP growing at a rate below overall population growth, the country began to experience a “demographic burden”.

“The dividend has been converted into a demographic burden. The only way to generate growth will be through productivity gains,” said Silvia.

However, the problem is that statistics “show that we are very far from the productivity border, which is the United States,” added the researcher.

“The productivity problem in Brazil is widespread among the sectors. Even in agriculture, there is a great gap between the United States,” said Silvia.

As O Estado de S. Paulo newspaper reported on Sunday, despite the disruption in the economy caused by Covid-19, productivity grew by 3.6% in the third quarter, following the 3.4% rise in the second quarter, compared to 2019, according to Ibre/FGV estimates. However, this increase is due to the peculiarities of the pandemic. Between 1981 and 2019, the average year-on-year productivity growth was only 0.4%, according to the official records compiled by the Régis Bonelli Productivity Observatory of Ibre/FGV.

The participants of this Monday’s online seminar, like Fernando Veloso, also a researcher at Ibre/FGV, raised questions as to whether the recent productivity increase can be sustained. Without reforms, the trend is for the Brazilian economy to return to the low productivity growth pattern, hindering a more rapid economic growth.

For Marcos Mendes, an associate researcher with Insper and also a participant in the debate, the complex tax system and the precariousness of the national infrastructure contribute to the Brazilian economy having low productivity gains in recent decades. Hence, pursuing the reform agenda is vital, added the researcher, who was part of the Michel Temer government’s economic team.

According to Mendes, the tax system interferes with productivity at several levels. Because of tax collection, companies often choose supplies or decide to produce supplies internally that could be outsourced not because of efficiency, but rather because of the decrease in the amount of taxes paid.

The current tax entanglement also prompts companies to make decisions on the location of production plants due to tax incentives rather than efficient logistics. Lastly, Brazil has “the largest tax litigation in the world,” said Mendes, which raises companies’ management costs, including spending on large legal and accounting departments.

The precarious infrastructure impacts the economy as a whole. Mendes believes that to improve infrastructure quality, a tax reform would be necessary to “free up resources for public investments”.

Improvements to the regulatory environment would also be required, so that private investors invest more on infrastructure.Finally, in several infrastructure sectors, such as electricity, there is much participation by state companies, which often face high degrees of “regulatory capture” and are generally inefficient.

Mendes also includes two dimensions of productivity reforms. One is the low quality of education. According to Mendes, to increase productivity, “human capital” must be increased, and the bottleneck here is more linked to governance rather than availability of resources.

“The other reform is economic openness. Without it, we don’t have access to quality supplies and machines. Neither do we have the process of creative destruction, a result of competition with external companies,” said Mendes.