POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JUNE JUN 2013 FEBRUARY 010• • 2011 • Numbe105 Number Number 60 18 The Brazilian Competitiveness Cliff 75182 Complementary HowCanuto, Otaviano Are Prudential Matheus Cavallari, and José Guilherme Reis Regulation and Monetary Policy? Brazilian exports of goods and services have grown sharply in recent years, with sales nearly three times higher in 2010 2000. However, Brazil faces considerable competitiveness challenges: its export performance depends mostly on than in Canuto Otaviano favorable geographical and sector composition effects. Such challenges increased after the recent global economic crisis. A Could either monetary policy or financial prudential regulation be relied on individually to mitigate asset price cycles or recent slowdown in industrial exports, production, and investments seems related to supply-side difficulties stemming their effects? If both ways are effective, monetary policy and prudential regulation could then be considered “substitutes,� in from a wide range of inefficiencies and rising costs, rather than insufficient demand. Although a stronger currency is one the sense that the individual use of either instrument leads to a reduction in the volatility of both corresponding targets. This of the factors behind the lower competitiveness of Brazil’s manufacturing exports, sluggish productivity performance, note, however, argues in favor of complementarity—rather than substitution—in the use of monetary and macroprudential lack of dynamism at the firm level, and a real wage uptrend seem to explain a significant part of the overall loss of policies: the combined (articulate) use of both monetary and macroprudential policies and rules tends to be more effective competitiveness. This diagnostic reinforces the urgency of resuming the agenda of microeconomic reforms, increasing the than a standalone implementation of either. investment-to–gross domestic product (GDP) ratio, and advancing toward better-skilled human capital. Monetary Policy , Asset Prices, and Finan- “Great Moderation� in developed economies, with relatively It is widely recognized that the Brazilian economy is facing Export Performance: 1998–2011 cial Stability low inflation rates and small output fluctuations from the mid- considerable competitiveness challenges.1 After several years The aggregate 1980s onward, performance of Brazilian seems to vindicate foreign trade has been this path. of strong Asset price cycles had the expansion, been recent slowdown a concern for manyseems related prior to years As is now favorable known, in the this world last decade. of presumed In the stableglobal wake of strong monetaryeco- supply-side difficulties stemming from a wide range the recent global financial crisis, but were seen as a separate of ineffi- is- and nomicfinancial growth, conditions expansion wasofseverely shaken international by the trade recent and glob- favorable ciencies and rising costs, rather than insufficient sue that was not a monetary policy concern. Even when the aggregate al financial crisis. commodity prices,With the benefit Brazilian of hindsight, exports of goods and easy to it is services demand. of assetand Such inefficiencies frequent appearance costs price have increasingly bubbles started to be bur- ac- grew lessons. draw 262 percentAsset price booms between 2000 and andbusts 2010,were acknowledged almost twice the dened economic activity and have shown signs knowledged, the belief was—“the Greenspan-Bernanke ap- of worsening to be both global pervasive average. and harmful: However, real estate this performance isand lessstock stellar market when in recent proach� 1 years. —that attempts to detect and prick them at an early booms contributed to excess U.S. household debt compared with other emerging countries. In fact, Brazilian and to fragile This stage would notebe examines impossible Brazilian export performance and potentially over harmful. If neces- asset export liability structures, expansion the interconnectedness was significantly below the 439 of financial percent the last 15 years, focusing not only on growth and sary, mopping up after the bubble burst would be safer, using composi- firms’ balance sheets, and the danger of too-big-to-fail growth in the other BRICS countries (Brazil, the Russian institu- Fed- tion, but interest also rate onto cuts different performance help economic dimensions, recovery. 2 includ- tions. The rapid global transmission eration, India, China, and South Africa). of an asset price bust diversification, ingLow, sophistication, and firm dynamics. stable inflation is a necessary and sufficient condition This pushed world economy the openness Trade to the in Brazil, the level of(Ca- edge of quasi-collapse considering per analysis for stable (Reis growthandwith Farole 2012) uses moderate international unemployment. compari- This condi- nuto 2009). sons to better situate the Brazilian performance and explores capita income, is among the lowest in the world. Larger econ- tion could be pursued, among other ways, through an inflation But was it lax monetary policy that led to the creation of different databases, including firm-level data recently pub- omies do tend to be more dependent on their domestic mar- targeting framework, using interest rates and clear communica- these bubbles and then to financial instability? Some, such as lished by the World Bank. The objective is to generate hypoth- kets, and thus it should not be a surprise to see Brazil below tion rules to achieve a predefined inflation objective, as the sin- Svensson (2010), say no. For them, the financial crisis was eses to identify factors that have been inhibiting exports and the predicted level in figure 1. Still, when compared to other gle focus for monetary authorities. Stable inflation would also caused by factors other than monetary policy; monetary policy industrial production expansion. BRICS, the level of trade integration remains below the ex- result in low-risk premia, which combined with competition in and financial stability policy are distinct–it was the latter that financial markets would help achieve financial stability. The failed.3 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Figure 1. Trade to GDP (%) Figure 2. Products and Markets (2008–10) 250 5,000 CHN IND trade to GDP (%), 2008–10 KOR THA MEX BRA IDN 200 4,000 ARG number of products COL VNM PHL PERCHL 150 3,000 URY 100 2,000 ZAF CHL 50 CHN RUS 1,000 PER IND COL ARG BRA 0 0 6 7 8 9 10 11 0 50 100 150 number of countries log of GDP per capita (PPP, average 2008–10) Source: World Integrated Trade Solution. Source: World Bank World Development Indicators. pected line, with no recent signs of improvement. Over the growth, since the initial fixed costs to start new markets have past decade, trade flow (exports plus imports) to GDP in Bra- been largely overcome (Melitz 2003). zil rose from 20.2 percent in 2000 to 22.8 percent in 2010, Canuto, Cavallari, and Reis (2013) calculated the Her- after peaking in 2005 at 29 percent. findahl Index for a group of countries—the lower the index, The economic benefits of greater engagement in interna- the less concentrated the export basket, the greater the level tional trade have a long-established theoretical basis—gains to of diversification. In terms of markets, the index showed a re- trade are as much derived from imports as from exports. In- duction in the degree of concentration. Most of the included creased exports bring both static efficiency gains derived from countries were able to increase diversification to access differ- the exploitation of comparative advantages and dynamic ent markets. China’s performance stands out because of the gains in the export sector, given productivity gains generated significant number of new destinations. by increased competition, economies of scale, better capacity In terms of products, the picture is not so favorable. As in utilization, knowledge dissemination, and uptake of techno- many countries, Brazilian exports showed increased concen- logical progress. Therefore, pursuing greater global integra- tration for products in recent years; commodity products tion of the Brazilian economy remains a challenge that, if gained significant relevance. Other commodity exporters, overcome, should provide significant benefits in the medium such as Chile and Russia, performed similarly, with nonnegli- and long terms. gible increases in the degree of concentration. China experi- Diversification of Exports enced a slight deterioration, but from a low level of concentra- tion. Nevertheless, as shown in figure 3, despite some The recent global economic crisis has highlighted the impor- worsening in recent years, Brazil still shows low levels of con- tance of diversification (products, markets, and firms) in re- centration when considering the level of GDP per capita. ducing risks associated with growth volatility. On the other hand, recently intensified globalization has contributed to a Figure 3. Herfindahl Index and GDP per Capita (2008–10) resurgence of specialization in diverse economies. Although predicted by trade theory, the degree of vertical specializa- .3 tion, which emerged from increasing fragmentation of trade in global supply chains, has surprised many with its intensity. Her�ndahl Index Consequently, economic diversification is now a high priority .2 RUS on the policy agenda for most developing countries. Brazil is a global trader, endowed with a wide range of CH L natural resources along with a well-diversified industrial .1 EO PC RL structure. This translates into an impressive level of export IN D UR Y RE AM GX diversification, not only in terms of number of destinations, J OR KOR 0 C H NB R A but also of products. When compared with other countries 0 10,000 20,000 30,000 40,000 (figure 2), the Brazilian economy has been able to sell a large GDP per capita (PPP, average) number of products in many markets. This suggests there is considerable potential to be realized in terms of export Source: World Development Indicators. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Given the recent trend toward more concentration, a key predicted exports with Russia is shrinking over time, the gap question concerns how Brazil is dealing with international with China seems to have increased lately. On the other hand, competition. Canuto, Cavallari, and Reis (2013) showed that Brazil trades less than what the model predicts with the Unit- of the top 20 products exported between 2006 and 2011, ed States, with actual exports lagging predicted exports by Brazil is losing international market share in only 2 of them about 5 percent over most of this period. (oil exclusive crude and automobiles)—a very positive result, Sophistication and Technological Content which reflects the strong competitiveness of Brazil’s com- of Exports modity products. In parallel, Brazil increased its participation in 11 major A widely discussed issue in recent literature is whether what markets, representing 58.7 percent of the total, with excep- a country produces and exports has relevance for economic tion of the United States, Chile, and Argentina. Thus, it can development. Rodrik (2007) and Hausman, Hwang, and Ro- be argued that Brazil gained presence in most markets, as well drik (2007) are among those who argue that certain sectors as in more relevant products. Interestingly, Brazil’s export generate greater opportunities for growth due to increased growth to China more than doubled that of other countries’ potential for vertical upgrade within the sector/product and expansion in the recent period 2006–11. This performance from benefits associated with knowledge spillovers. has a direct connection with the increasing Chinese demand Using Lall classification to assess the technological con- for commodities. tent of the Brazilian exports, there is a clear reduction in the A cross-country gravity model can be used to evaluate share of high-technology products in recent years. At the Brazil’s pairwise export relationships with its trading part- same time, primary and resources-based products gained sig- ners. The model uses bilateral export values between 2005 nificant importance between 2000 and 2010. The share of and 2010.2 Based on a theory-grounded model, this exercise the latter increased from 45.7 percent in 2000 to 62.9 per- allows pairwise comparison of export relationships with the cent 10 years later. On the other hand, the share of high-tech- predicted value from the gravity equation. Figure 4 shows all nology products decreased from 10.4 to 5 percent in the same bilateral trade relationships in the data set of 181 countries period. Low-technology product exports also declined in (light grey dots). Brazil’s bilateral exports are colored in blue, shares, moving from 13.4 to 9.9 percent between 2000 and and key trading partners are labeled according to their three- 2010. digit ISO (International Organization for Standardization) The decrease in the share of high-technology product ex- code in red. ports could be the result of the excellent performance of com- If an observation is above (below) the 45 degree line, the modity products in Brazil. However, this does not seem to be observed export relationship in the period is more (less) than the case: when focusing only on the performance of high- what the gravity model predicts and the exporter is said to be technology international sales, there is only very modest overtrading (undertrading) with its trading partner. Control- growth. Between 2000 and 2010, Brazilian high-technology ling for size of trading partners, trade frictions, sample selec- product exports expanded by 36 percent, a much lower tion and firm heterogeneity, this analysis suggests that the growth rate than one of the groups linked to natural capital country is trading above the predicted level with China and endowments. If this performance is compared with other Russia. Interestingly, although the gap between actual and BRICS, Brazil is among the weakest, along with Russia. In the same 10 years, China and India increased exports of those Figure 4. Gravity Model: Actual versus Predicted Exports, 2010 products by 873 and 389 percent, respectively. 20 The EXPY index (Hausman, Hwang, and Rodrik 2007) can also be used to evaluate the export sophistication. This measure considers the income level of the countries that pro- log of actual exports 15 duce any particular good to estimate the sophistication of that specific product. Brazil showed no gains in sophistication in recent past, as seen in figure 5. The same behavior can be observed in other Latin American countries. 10 Firm-Level Dynamics of Exports 5 The recent public availability of World Bank microdata—from the Exporter Dynamics Database—allows an evaluation of ad- 5 10 15 20 25 ditional dimensions of export performance, that is, the entry, log of predicted exports exit, and survival dynamics of firms in global markets. Source: Authors’ calculation. 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Figure 5. Brazil and Latin America (2004–10): EXPY Index it reflects a small and decreasing entry rate of firms into foreign trade. The entry rate of export- 9.4 2006 ers was already low in Brazil, and dropped further 2004 2008 2010 to 22 percent, much lower than the values ​​ ob- 2006 2010 served in countries chosen for comparison 2008 2006 2004 2008 (around 35 percent).3 9.2 log EXPY 2004 2010 Several studies, such as Clerides, Lach, and 2004 Tybout (1998) for Colombia, Mexico and Mo- 2008 rocco, or Bernard and Jensen (1999) for the Unit- 9.0 ed States, present convincing evidence that new 2010 2006 2004 exporters are on average more efficient than non- 2008 exporters. Low and decreasing entry rates can be 2010 8.8 2006 associated with low productivity at the firm level and/or high costs to export. In any case, this is a 8.6 8.8 9.0 9.2 9.4 9.6 point that requires more detailed diagnosis to log GDP per capita, PPP (constant 2005 international US$) guide policy actions. Peru Argentina Brazil Lack of integration into global value chains Chile Colombia may explain the low levels of dynamism in the ex- Source: Authors’ calculation. Note: The choice of countries in this case is limited by availability of information in the World Bank port sector. The emergence of global production database. networks has changed the world trade landscape, and this has been a driving force behind emergent Export survival sustainability—first addressed by the trade powerhouses, many of them located in Asia. seminal work of Besedes and Prusa (2006)—is a key dimen- Results of Comparative Analysis of sion to understanding export performance, and has become Brazilian Exports an important factor for policy makers to consider when de- signing policy to promote exports. Composition effects on export growth The survival rate of exporters in Brazil stood at very high To argue that a country is more competitive in foreign trade levels during 2003–9 (figure 6), only lower than levels ob- than other countries just because of their better export per- served in Turkey. While this result can be considered positive, formance is obviously too simplistic. Even using relative per- Figure 6. Exporter Survival Rate (one year, 2003–9) 70 60 2003 50 2004 40 2005 2006 30 2007 20 2008 10 2009 0 u il le o ey az a r ca ic nd i Pe Ch di rk ex Br Ri bo la Tu M a ta m Ze s Ca Co ew N Source: Export Dynamics Database; authors’ calculation. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise formance in terms of market participation can lead to misin- Export and import penetration terpretations. First, export growth can be associated with the Leading up to the global financial crisis, the export share of existence of composition effects (pull) and also performance Brazilian industrial production was on an upward trend. In effects (push). Two countries may have equally competitive 2000, the export coefficient marked 12.3 percent, reaching a exporters, but export performances can be different in the peak in 2006 at 20.4 percent, and dropping to 17.5 percent short and medium terms due to different composition of ex- in 2010. ports in terms of geographical and sector composition of ex- A first possible explanation for this performance could port baskets. be that Brazil lost international competitiveness in recent To better analyze this issue, export growth was decom- years, a result of a supply-side inability to deliver. A second posed using a methodology developed by the International possible reason is the impact of the lack of dynamism in the Trade Department of the World Bank (Gaulier, Taglioni, and global economy, which could have reduced demand for Bra- Zignago 2012). Canuto, Cavallari, and Reis (2013) compared zilian products. The gains from diversification into new mar- the results from Brazil with the other BRICS, the MIST group kets could have been a reflection of lower growth in developed (Mexico, Indonesia, the Republic of Korea, and Turkey), and countries. But, since the model estimated off the composition with the United States, the European Union, and Japan for effects, “pure competitive� growth disappointed. Third, the period 2005–11, as well as for the postcrisis subperiod, strong internal demand could have been absorbing part of the 2009–11. production exported in the past. However, the share of appar- The main findings of the analysis were: ent consumption had been progressively met by imports, (i) Between 2005 and 2011, the average annual growth of while industrial production showed poor performance. In Brazilian exports reached almost 15 percent, with its fact, the penetration coefficient (share of imports on apparent world market share rising by 5.6 percentage points. This consumption) rose significantly, from 13.4 to 20.3 percent increase in market share is the second highest among the between 2000 and 2010. countries selected for comparison, equivalent to India and below only the performance of China. Elements Potentially Associated with Low (ii) The composition effect is important to explain Brazilian Competitiveness export performance between 2005 and 2011. The sum Low productivity gains of geographical and sector effects in Brazil (3.3 percent) Low productivity gains in recent years have become a central is the second highest, lower only than the impact ob- issue for the low trade competitiveness of the Brazilian econo- served in Russia, where a sector composition effect (pe- my. Contrary to the pattern observed in the past, labor pro- troleum) is extremely high. ductivity in the industrial sector lagged behind overall eco- (iii) For the same period, the geographical composition effect nomic productivity in recent years (figure 7). Additionally, predominated in the Brazilian case, which has to do with overall labor productivity recently showed signs of stabiliza- the fast growth of the Chinese economy—and explains tion, generating serious concerns. Improvements in the effi- why only Korea has a geographical effect more intense ciency of service sectors are vital to improving the productiv- than Brazil’s. ity of all other economic sectors. (iv) Excluding the composition effects, the growth in the share of Brazilian exports associated more directly with Terms of trade and employment level competitiveness is reduced to 1.8 percent on average per Wealth effects resulting from favorable terms of trade are year—still significant, but less than China, India, Mexico, among the main driving factors of Brazil’s recent economic and Turkey. growth. The gain in terms of trade has been approximately 40 (v) Finally, excluding the composition effects, the growth of percent since 2004 and helps explain the strong dynamism in Brazilian exports after the global financial crisis that can domestic consumption, along with the demographic bonus be linked to competitiveness was only 1.1 percent, the and the emergence of a new middle class stimulated by social lowest among developing countries, including Turkey, inclusion policies. which faced strong negative composition effects in that The terms-of-trade impacts differ between tradable and period. nontradable sectors. Foreign competition restricts the ability of local industry to pass through increasing costs, even in an These results suggest that, despite the recent aggregate environment of strong internal demand. Conversely, because good performance, Brazilian exports were mostly benefiting service sectors can set prices much more easily, its power to from geographical and sector composition effects. Excluding dispute production factors internally is higher. This issue is these favorable environment effects, the “pure� export perfor- especially important as the economy approaches full employ- mance is still positive, but of much lower intensity, and small- ment (Corden and Neary 1982). er than some of its major emerging market competitors. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Figure 7. Industry and GDP: Evolution of Labor Productivity The same kind of dynamic was noted on the side of in- dustry, although a much less significant one. Because some 110.0 companies are linked to commodity sectors, such as the min- 107.5 ing industry, a few benefited from better terms of trade. How- 105.0 ever, international competition through increased imports 102.5 constrained the overall industry from benefitting in the same 100.0 way from wealth effects. Thus, cost pressures coming from 97.5 the dispute for production factors, although spreading on all 95.0 sectors, revealed to be much more intense in non-commodity- 92.5 related industrial sectors. 90.0 Unit labor costs 03 04 05 06 07 08 09 10 11 12 Increases in average real wages, concurrent to stagnant or fall- 20 20 20 20 20 20 20 20 20 20 productivity—GDP sa mm3 productivity—IND sa mm3 ing labor productivity, have negatively affected Brazil’s export Source: National Industry Confederation; Central Bank of Brazil; authors’ competitiveness. Pastore, Gazzano, and Pinotti (2012) ar- calculation. gued that, since 2010, higher unit labor costs represent a ma- jor source of momentum loss in industry growth. As present- One way to examine these effects is through the lens of ed earlier, both trends have been observed in Brazil after its different wage gains by consumers and producers. Accord- fast recovery from the most recent global crisis. ingly, the analysis deflated nominal wages not only by the in- However, this effect was not observed before 2010, ex- dex of consumer prices (IPCA), but also by the GDP deflator cluding the recessionary period, and can be characterized as for the specific sector (figure 8). On one hand, gains realized an additional negative shock to export performance in recent by consumers can be gauged by deflating wages by the IPCA. years (figure 9). As noted earlier, higher real wages from an Clearly, the latter benefited from higher terms of trade. On industrial perspective were milder than those shown in figure the other hand, producers may take partial advantage of bet- 8, given improving terms of trade. Nonetheless, although bet- ter prices and pay higher wages, alleviating some of cost pres- ter terms of trade mitigated the impact of higher unit labor sures. Demand for labor can still be argued as greater than in costs, analysis shows that it alleviated this uptrend only by the absence of this external shock, as the economy moves to- about one-fourth after 2010. Putting it differently, a signifi- ward full employment. cant increase in unit labor costs does indeed partially explain For example, service sectors benefit from stronger do- the loss in industrial competitiveness, but only for the more mestic demand and can accommodate larger wage increases. recent period. From 2004 to 2011, real wage gains perceived by consumers Exchange rates were about four times stronger than as perceived by service Many economists have highlighted exchange rate apprecia- sector suppliers. Thus, this sector could expand its employ- tion as a major factor explaining the recently disappointing ment above what would have been the case in the absence of export and industrial performances in Brazil. The general the wealth shock, which helps to explain the strong momen- trend of appreciation is evident, considering the levels tum in employment generation and in domestic demand. Figure 9. Unit Labor Cost in Industry Sector Figure 8. Real Average Wages 116 130 consumer—IPCA 112 industry—GDP deflator 120 services—GDP deflator 108 104 110 100 100 96 92 90 05 06 07 08 09 10 11 12 11 04 05 6 07 08 09 10 20 20 20 20 20 20 20 20 0 20 20 20 20 20 20 20 20 Source: Instituto Brasileiro de Geografia and Estatística (IBGE); authors’ ULC Ind sa ULC Ind sa 3ma calculation. Source: National Industry Confederation; authors’ calculation. 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise achieved earlier in the decade. Actually, given the significant border control agencies, resulting in a mediocre overall rank- gain in terms of trade, strengthening of the real exchange rate ing for customs (78th). should be expected. Conclusions In fact, the real effective exchange rate index apprecia- tion is certainly not negligible. Taking the average of the Brazilian exports of goods and services have grown sharply in 2000/2001 biennium as the base, the average level through- recent years, with sales nearly three times higher in 2010 than out 2010 reached 70. Similarly, the dollar-denominated unit in 2000. When compared to other countries, the Brazilian labor cost level reached 202 in 2010. Thus, although ex- economy shows remarkable diversification, as it is able to put change rate appreciation seems to be one of the elements of many different products into several markets. This suggests the low competitiveness of Brazilian exports, sluggish indus- considerable potential to expand foreign sales, because sunk trial sector productivity performance and higher real wages costs to reach these markets have been paid. seem to be more responsible for the current situation (Bonelli Despite such a recent positive performance, there are ma- and Pinheiro 2012). jor concerns with Brazil’s foreign trade, as revealed by some of Business environment and logistics costs the indicators presented in this note and summarized here: The economic environment has not helped Brazil face stron- • The survival rate for exporters was at fairly high levels in ger competition in global markets. The World Bank Doing 2003–9, but the reality is that this indicator reflects a Business survey evaluates various countries across diverse cat- low and decreasing entry of firms into export markets. egories. Among the 183 countries assessed, Brazil is in the The entry rate was already low in Brazil, compared to se- bottom half in the overall ranking. Among the 10 categories lected peers, and recently dropped even more. analyzed by this survey, Brazil fares relatively better in only 2 • Brazilian exports benefited significantly from geographi- categories: obtaining electricity (51st) and protecting inves- cal and sector composition effects. Once these effects are tors (79th). Among BRICS, the major highlight is South Af- excluded, the pure export performance is still positive, rica, which features in the top half in 8 out of 10 categories, but much less intense and lower than in some of the ma- including first in obtaining credit and 10th in protecting in- jor emerging countries. vestors. • The assessment of Brazilian exports in terms of sophisti- The World Bank also compiles the Logistics Performance cation suggested a clear decline in the share of products Index (LPI) to help policy makers and the private sector joint- with higher technological content. Primary and resourc- ly identify the main challenges to entering into the global sup- es-based products have gained significant weight between ply chain. The LPI measures on-the-ground trade logistics, 2000 and 2010. The fallen share of high-technology factoring in: (i) border control efficiency; (ii) quality of trade products reflects its poor absolute performance, and not and transport infrastructure; (iii) international shipment just the success of commodity-related exports. competitiveness; (iv) quality of logistics services and ability to This assessment confirms that there are significant cost track consignments; and (v) timeliness of deliveries. Each pressures and competitiveness issues affecting the industrial score was averaged to compose one index, which was used to sector, not only with respect to foreign trade, but also domes- rank 155 countries in 2007, 2010, and 2012. tically. The findings here support the hypothesis that the chal- Regarding the LPI, Brazil climbed 20 positions to 41st lenges to a better export performance are more linked to the from 2007 to 2010, but lost ground to 45th in 2012. Im- supply-side agenda, rather than to export-promotion types of provements came from all pillars in the 2007–12 period, but policy. mainly from better tracking and trace capacity. In the last two Considering the elements of declining competitiveness years, Brazil’s position deteriorated significantly in timeliness are essential to develop policies that will increase productivity of shipments and logistics services, and slightly in quality of and help Brazil to better compete globally and domestically. trade and transport-related infrastructure. Among the To strengthen industry productivity, broad measures to im- BRICS, Brazil is behind South Africa (23rd) and China prove the efficiency of service sectors are critical. Thus, a wide (26th) in all categories, just ahead of India (46th), but clearly effort on the supply side will be necessary, rather than just a in front of Russia (95th). Brazil holds the fourth position in short-term stimulus or focused policies favoring some export BRICS in three pillars: customs, logistics competencies, and sectors. timeliness. Moreover, Brazil is 9th in the top 10 upper-mid- Favorable terms of trade can be cited as a key economic dle-income countries, moving three positions down com- driver through their wealth effects. The impact of this shock pared to 2010. The LPI results highlight that the weakest link helps explain the higher economic dynamism based on do- to participation in the global supply chain for Brazil comes mestic consumption. Service sectors, as the largest beneficia- from low speed, lack of simplicity and low predictability of ries, could accommodate larger wage increases, given their 7 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise ability to mark up prices, while maintaining/creating jobs but Trade Economist at the World Bank Group’s International Trade “exporting� cost pressures to the other sectors of the economy. Department. The combination of rising real average earnings and stag- Notes nant (or falling) labor productivity has harmed Brazil’s export competitiveness, particularly the industrial sector’s capacity 1. There is controversy over how to define competitiveness. to compete with imports. The sharp increase in unit labor Following Krugman (1996), this note identifies competitive- costs partially explains that weakness, although only for re- ness as stemming mainly from total factor productivity of the cent quarters. economy. The appreciation of the real effective exchange rate was 2. For more details about the model, see Canuto, Cavallari, certainly not negligible in the last decade. Although a stronger and Reis (2013). currency is one of the elements behind the lower competitive- 3. Cebeci and others (2012) argued that Brazil presents the ness in Brazilian exports, sluggish productivity performance lowest entry rate among the 44 countries in the Exporter Dy- and a real wage uptrend explain a significant part of the cur- namics Database. rent overall loss of competitiveness. The fact that trade openness in Brazil is among the lowest References in the world, considering the level of income per capita, de- Agenor, P.-R., and O. Canuto. 2012. “Middle-Income Traps.� World Bank serves more attention. Larger economies are usually more de- Policy Research Working Paper 6210, Washington, DC. Bernard, A. B., and J. B. 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Hausman, R., J. Hwang, and D. Rodrik. 2007. “What You Export Matters.� warding productivity gains in a competitive economy, in- Journal of Economic Growth 12: 1–25. cluding the service sector, are the only options to accelerate Krugman, P. 1996. “Making Sense of the Competitiveness Debate.� Oxford growth and overcome possible middle-income growth traps Review of Economic Policy 12: 17–25. (Agenor and Canuto 2012). Melitz, M. J. 2003. “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.� Econometrica 71 (6): 1695– About the Authors 1725. Pastore, C., M. Gazzano, and M. Pinotti. 2012. “Por Que a Produção Indus- Otaviano Canuto is Vice President and Head of the Poverty Re- trial Não Cresce Desde 2010?� Mimeo. Reis, J., and T. Farole. 2012. “Trade Competitiveness Diagnostic Toolkit.� duction and Economic Management (PREM) Network at the World Bank, Washington, DC. World Bank Group. Matheus Cavallari is a consultant for Rodrik, D. 2007. Industrial Development: Stylized Facts and Policies; Industrial PREM at the World Bank Group. José Guilherme Reis is Lead Development for the 21st Century. New York: UN. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 8 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise