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COMPETITIVENESS AND GROWTH IN BRAZIL
Juan Blyde, Armando Castelar Pinheiro, Christian Daude, Eduardo Fernández-Arias,
Peter Montiel, Mauricio Moreira Mesquita
Second Draft
Washington, September 20, 2007
Real GDP growth 1950-2005 (in per cent)
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
19
48
19
51
19
54
19
57
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
Annual change 10-year MA
Decomposition of growth in GDP per worker
(average annual change in variables)
VariablesVariables 1947-601947-60 1961-801961-80 1981-941981-94 1995-20061995-2006
GDP/workerGDP/worker4.5%4.5% 4.0%4.0% -0.2%-0.2%
0.5%0.5%
Capital/workerCapital/worker 7.4%7.4% 5.0%5.0% 0.7%0.7%-0.7%-0.7%
TFPTFP 1.0%1.0% 1.7%1.7% -0.5%-0.5%0.9%0.9%
Potential constraints tested
Low return to economic activity
• Inadequate infrastructure• Low human capital• Gov failures
– Inadequate business environment
– Taxes– Informality– High price of investment
• Market failures– Innovation shortfalls– Low self discovery and
structural transformation
High cost of finance• Low domestic savings and
lack of access to international finance
• Poor financial intermediation
Testing hypotheses
• Is Brazil different?– Cross-country comparisons controlling for
income level.• Has the constraint changed in a way
consistent with growth deceleration?• What do firms say?
– Investment climate survey• Do prices or other variables signal excess
demand?• Is constraint consistent with growth patterns?
Rank of constraints (tentative)Rank of constraints (tentative)
Severe
Potentially Strong
Moderate
Small
- Taxes- Human Capital
- Infrastructure- Bad Intermediation / low savings
- Bad International Finance- Price of Investment- Inadequate Business Environment- Informality
- Lack of Innovation - Low Structural Transformation
Low Human CapitalLow Human Capital Brazil has historically invested little in human capitalBrazil has historically invested little in human capital
Poor education indicators compared to other middle-Poor education indicators compared to other middle-income countriesincome countries
High return to education indicates human capital is a High return to education indicates human capital is a binding constraintbinding constraint
Municipalities with less educated population showed Municipalities with less educated population showed lower subsequent GDP growth lower subsequent GDP growth
Things improved when growth deceleratedThings improved when growth decelerated
But not in relative terms, so that the gap remains But not in relative terms, so that the gap remains widewide
Poor education indicatorsPoor education indicators
0
5
10
15
20
25
30
35
40
Secondary Level Completed, 2000 (% of pop)Secondary Level Completed, 2000 (% of pop)
Poor education indicators IIPoor education indicators IISecondary Education and DevelopmentSecondary Education and Development
Brazil
High returns indicate binding High returns indicate binding constraintconstraint
Returns to Education and DevelopmentReturns to Education and Development
Brazil
Firms rank it middle of the wayFirms rank it middle of the wayObstacles to Firm GrowthObstacles to Firm Growth
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Skills and education of workers
Source: ICS, World Bank.
Municipal GDP growth 1996-2004
AVGMUNG = 0.048 – 0.160* ln(per capita GDP 1996) –0.095*pop (15.21) (-65.57) (-8.09)
+0.009*pop2 + 0.015*years_educ_1991 (7.52) (9.95)
R2 = 0.80
Things are improving IThings are improving IAverage Years of Schooling Total Population Aged 25 and OverAverage Years of Schooling Total Population Aged 25 and Over
0
1
2
3
4
5
6
7
1960
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1992
1993
1995
1996
1997
1998
1999
2001
2002
2003
2004
2005
Source: IPEADATA and Barro and Lee dataset.
Barro&Lee
IPEA
Things are improving IIThings are improving IIReturns and Years of SchoolingReturns and Years of Schooling
And is widening in certain dimensionsAnd is widening in certain dimensionsDifferences b/w Brazil and benchmark in secondary level completedDifferences b/w Brazil and benchmark in secondary level completed
Bad InfrastructureBad Infrastructure Investment in infrastructure has declined Investment in infrastructure has declined substantiallysubstantially
Significant slowdown in capacity expansionSignificant slowdown in capacity expansion
Brazil still has indicators comparable to LAC Brazil still has indicators comparable to LAC and consistent with its income leveland consistent with its income level
Firms do not see infrastructure as a major Firms do not see infrastructure as a major constraint to their growthconstraint to their growth
Substantial decline in investmentSubstantial decline in investmentInvestment breakdown (as percent of GDP, in constant 1980 prices)Investment breakdown (as percent of GDP, in constant 1980 prices)
Year Total Infrastructure Electricity Telecom Transport Sanitation
1971-80 23.5 5.42 2.13 0.8 2.03 0.46
1981-89 18 3.62 1.47 0.43 1.48 0.24
1990-94 14.9 2.16 0.85 0.5 0.69 0.07
1995-96 17 1.79 0.52 0.66 0.48 0.13
1997-98 16.4 2.77 0.79 0.98 0.68 0.32
1999 16.1 2.7 0.77 1.17 0.56 0.2
2000 16.5 2.58 0.67 1.07 0.63 0.21
Source: Bielschowsky (2002: 25-29). Note: 1/ Does not take into account 2007 revision in national accounts. 2/ Public Sector = non-financial public sector, excludes transport.
Capacity has expanded slowly in Capacity has expanded slowly in recent decadesrecent decades
Average annual rates of expansion (%)Average annual rates of expansion (%)
Extension of road
network (km)
Total Paved Roads
Electricity (Generation
capacity, MW)
Telecom (Number of
phone lines) 3
1931-1950¹ 4.6 5.1 4.5 9.0
1951-19602 5.7 21.6 6.3 7.0
1961-1980 5.4 9.3 10.2 9.6
1981-1994 0.8 4.5 4.0 7.3
1995-2004 0.6 3.0 4.6 20.6 Source: Pinheiro, Gill, Severn and Thomas (2005), ANATEL and Gvconsult (2004), apud Afonso, Biasoto and Freire (2007). 1/ For number of lines, growth rates refer to 1937-50; 2/ In the case of telecom, growth rates refer to 1951-59; 3/ Fixed plus mobile, in service.
And to countries with similar incomeAnd to countries with similar incomeDifferences from trend lineDifferences from trend line
Variable Coefficient t-Statistic
Fixed line density 55.5 5.6
Mobile line density -35.5 -1.8
Per capita electricity consumption -373.0 -1.4
Transmission and distribution losses 2.7 3.6
Access to water 1.2 0.7
Access to sanitation -2.1 -0.8
Road / (sq km*million inhab) -116.7 -3.9
Proportion paved roads -47.0 -14.5
Air freight / GNI (PPP) 0.0 -2.2
Air passenger / million inhab -96.2 -1.8 Source: Regressions using WDI indicators. a/ Coefficient of dummy variable for Brazil in regression of variable in first column as a function of per capita gross national income (in PPP) and per capita GNI squared.
Firms don’t see poor infrastructure Firms don’t see poor infrastructure as a major constraintas a major constraint
Obstacles to Firm GrowthObstacles to Firm Growth
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Source: ICS, World Bank.
Tel
eco
m
Tra
nsp
ort
atio
n
Ele
ctri
city
Selected indicators of savings constrained growth
Indicator 1998 2002 2006
Net foreign debt / Exports (eop) 3.2 2.7 0.4
Current account deficit (% of GDP) 4 1.5 -1.3
Net FDI ($ bn) 28.6 10.1 18.8
Net Brazilian direct invest abroad ($ bn) 2.9 2.5 27.3
EMBI+ (avg December, bp) 1197 1525 207
Real overnight (Selic) rate (%) 26.7 5.9 11.6
Real interest rate on loans to business (%) 37.7 7.7 13.6
Credit to private sector (% of GDP) 27.7 23.4 33.4
Terms of trade (1996=100) 104.4 91.9 96.6
In sum
• GDM offers a structured means to make a comprehensive analysis of growth constraints.
• It is difficult to obtain “smoking gun” evidence on whether a constraint is binding or not.
• Constraints can change significantly over short periods of time.
• So far, our findings suggest that a number of constraints influence growth, some more intensely than others.
• Expand methodology to consider direct effect on growth of TFP, public investment and human capital.
High Cost of FinanceHigh Cost of Finance
Access to international finance Access to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation
High Real Lending RatesHigh Real Lending Rates
ARG
BLZBOL
BRA
CHL
COL CRI
DOM
ECUGTM
GUYHNDHTI
JAM
MEX
NIC
PAN
PER
PRY
TTO
URY
VEN
01
02
03
04
05
0E
x-p
ost R
ea
l Le
nd
ing R
ate
(%
)
7.5 8 8.5 9 9.5GDP per capita (log)
Ex-Post Real Lending Rates in LAC 2005Ex-Post Real Lending Rates in LAC 2005
……declining but still very highdeclining but still very high
Real Ex Ante Interest Rates (annual %) Real Ex Ante Interest Rates (annual %)
0.00
10.00
20.00
30.00
40.00
50.00
60.00Average Lending Rate (Individuals & Firms)Average Lending Rate FirmsTBF (Deposit Rate)Spread Firms
Co-movement in interest rates Co-movement in interest rates and investmentand investment
Real Lending Rates and Gross Fixed InvestmentReal Lending Rates and Gross Fixed Investment
2001
2002
2003
2004
2005
2006
32
33
34
35
36
37
Re
al E
x A
nte
Le
nd
ing
Ra
te -
Fir
ms
.15 .155 .16 .165 .17Gross Fixed Capital Investment / GDP
High Cost of FinanceHigh Cost of Finance
Access to international finance Access to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation
High Cost of FinanceHigh Cost of Finance
Access to international financeAccess to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation
Spreads are significantly lower…Spreads are significantly lower…
Comparison of Sovereign SpreadsComparison of Sovereign Spreads
0
500
1000
1500
2000
2500
Bas
is p
oin
ts EMBINon LatinBrazilMexico
Source: JP Morgan
… … also for the private sectoralso for the private sector
Comparison of Sovereign SpreadsComparison of Sovereign Spreads
0
500
1000
1500
2000
2500
3000
EMBI Spread Corporate Spread
Source: Own calculations based on Cavallo and Valenzuela (2007)
Brazil is a low-savings countryBrazil is a low-savings countrySavings/GDP Average 1995 – 2005 vs. GDP per capita
ARG
ATG
BGR
BLR
BLZ
BRA
BWA
CHL
COL
CPVCRI
CZE
DMA
DOM
DZA
ECUEGY
ESPEST
FIN
FJI
GAB
GRCGRD
GTMGUY
HRVHUN
IDN
IRL
IRN
ISR
JAMJOR
KAZ KNA
KOR
LCA
LTU
LVA
MAR
MEX
MKD
MUS
MYS
NAM
NZL
PANPER
PHL
POLPRT
PRY ROM
RUS
SAU
SGP
SLV
SUR
SVK SVN
SWZSYCSYR
THATKM
TON
TTOTUN
TUR
UKR
URYVCT
VEN
VUT
ZAF
10
20
30
40
50
Sa
vin
gs/G
DP
(%
) A
vg
. 19
95
- 2
005
8 8.5 9 9.5 10GDP per capita in 1995 (log)
Returns on savings are high…Returns on savings are high…Ex-Post Real Deposit Rates in LAC 2005
ARG
BLZ
BOL
BRA
CHLCOL
CRI
DOM
ECU
GTMGUY
HND
HTI
JAM
MEX
NIC
PAN
PER
PRY TTO
URY
VEN
-10
-50
51
0E
x-p
ost
Rea
l D
epo
sit R
ate
(%
)
7.5 8 8.5 9 9.5GDP per capita (log)
……but in recent years savings but in recent years savings increased significantly,increased significantly,
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
Savings Rate Fixed Investment/GDP current prices
Fixed Investment/GDP constant prices Investment/GDP current prices
……driven by an increase in driven by an increase in private savingsprivate savings
1947-1967
1968-1978
1979-1986
1987-1989
1990-1994
1995-2002
2003-2006
Domestic savings 15.4 19.3 18.0 25.2 19.8 13.8 17.4
Public savings 2.0 4.9 0.3 -1.1 3.6 -0.3 -0.3
Private savings 13.4 14.4 17.7 26.3 16.2 14.1 17.7
Foreign savings -0.4 1.5 3.4 -0.4 -0.4 3.5 -1.0
……substituting foreign financingsubstituting foreign financing
1947-1967
1968-1978
1979-1986
1987-1989
1990-1994
1995-2002
2003-2006
Domestic savings 15.4 19.3 18.0 25.2 19.8 13.8 17.4
Public savings 2.0 4.9 0.3 -1.1 3.6 -0.3 -0.3
Private savings 13.4 14.4 17.7 26.3 16.2 14.1 17.7
Foreign savings -0.4 1.5 3.4 -0.4 -0.4 3.5 -1.0
Brazil is currently a net exporter Brazil is currently a net exporter of savingsof savings
-10
-8
-6
-4
-2
0
2
4
6
8
10
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
CAB/GDP Cycle HP-component
High Cost of FinanceHigh Cost of Finance
Access to international finance Access to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation
High Cost of FinanceHigh Cost of Finance
Access to international finance Access to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation
High Intermediation spreadsHigh Intermediation spreads
ARG
BLZ
BOL
BRA
CHL
COL
CRI
DOM
ECU
GTM
GUY
HND
HTI
JAM
MEXNIC
PAN
PER
PRY
TTO
URY
VEN
01
02
03
04
0E
x-p
ost R
ea
l S
pre
ad
(%
)
7.5 8 8.5 9 9.5GDP per capita (log)
Ex-Post Real Intermediation Spread (annual %) Ex-Post Real Intermediation Spread (annual %)
… … are correlated with funding rateare correlated with funding rate
22
23
24
25
26
2 4 6 8 10 12 14 16 18
Real Ex-ante SELIC (%)
Rea
l Ex-an
te S
prea
d (%
)
Monthly Real Ex-Ante Rates November 2001 – May 2007 Monthly Real Ex-Ante Rates November 2001 – May 2007
but high funding rate is only a but high funding rate is only a small fraction of the storysmall fraction of the story
Real_spread = 22.70 + 0.14 Real_SELIC
(0.46) (0.03)
R-squared = 0.14
Micro factors matterMicro factors matter
Net Interest Margins are high Net Interest Margins are high despite low concentrationdespite low concentration
LUX
RUS
USA
ITAIND
JPN
PAN
COL
LBN MYS
BGR
BGD
PHL
NGA
POL
PRYGTM
VEN
UKR
BRA
ARG
KORTUN
ECU
GBRPAK THA
BOL
TUR
LVA
IRL
HND
CAN
ROM
EGY
HRV
MDA
NPL
URY
FRASAU
IDNCHL
CRIKEN
HUNKAZKHM
CHN
TZA
MEX
CZE
LKA
ARM
UGA
NLD
ZMB
AUS
ESPKWTDEUGRC
SEN
HKG
GEO
CMR
GHA
SVN
AUT
DOM
PERNIC
BFA
MAR
SVK
MKD
MACLTU
ZAF
NZL
BWA
SLV
BLR
ISR
DNK
BHR
VNM
AZE
CIV
BEL
JAM
MLT
MUS
MNG
COG
TTO
CHE
JORETH
IRN
PRT
MOZ
CPV
FIN
SDN
SYR
RWA
GUY
ESTUZB
SWE
YEM
SGP
MLI
SLE
NERNAM
NOR
GMB
SWZLSO
MDG
BEN
KGZ
0.0
5.1
.15
Ne
t In
tere
st M
arg
in / In
tere
st B
ea
ring
Assets
6 7 8 9 10 11GDP per capita (logs)
Operating costs are also high, Operating costs are also high, pointing towards low efficiencypointing towards low efficiency
LUX
RUSUSA
ITA
INDJPN
PAN
COL
LBN MYS
BGR
BGD
PHL
NGA
POL
PRY
GTM
VEN
UKR
BRA ARG
KOR
TUN
ECU
GBR
PAK THA
BOLTUR
LVA
IRL
HNDCAN
ROM
EGY
HRV
MDA
NPL
URY
FRA
SAU
IDNCHL
CRIKENHUN
KAZKHM
CHN
TZAMEX
CZELKA
ARM
UGA
NLD
ZMB
AUSESP
KWT
DEU
GRC
SEN
HKG
GEO
CMR
GHA
SVN
AUT
DOM
PER
NIC
BFA
MARSVK
MKD
MAC
LTU
ZAF
NZL
BWASLV
BLR
ISR
DNK
BHRVNM
AZE
CIV
BEL
JAM
MLTMUS
MNG
COG
TTO
CHE
JOR
ETH
IRN PRT
MOZ
CPVGAB
FIN
MWI
SDN
RWA
GUYEST
UZB
SWEYEM
SGP
MLI
SLENER
NAM
NOR
GMB
SWZ
LSO
MDG
BEN
KGZ
0.0
5.1
.15
.2
Overh
ea
d C
osts
/ T
ota
l A
ssets
6 7 8 9 10 11GDP per capita (logs)
Decomposition of SpreadsDecomposition of Spreads
Total Private Banks
Public Banks
Deposit Insurance (FGC) cost 0.2 0.3 0.3 Overhead Adm. Costs 28.3 22.5 38.3 Reserve requirement cost 8.3 9.8 7.2 Taxes 12.3 12.8 11.8 Losses due to default 27.3 25.4 30.4 Net Interest margin 23.5 29.4 12.0 Total 100.0 100.0 100.0
Source: Costa and Nakane (2004)
Effective Creditor Rights are lowEffective Creditor Rights are low
… … and so are recovery ratesand so are recovery rates
High Cost of FinanceHigh Cost of Finance
Access to international finance Access to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation?
Is the cost of financing Is the cost of financing really that high?really that high?
•Directed and subsidized creditDirected and subsidized credit
•Other source of financingOther source of financing
Earmarked funds are still 30% of Earmarked funds are still 30% of bank creditbank credit
0
10
20
30
40
50
60
70
80
90
100
%
Non-Earmarked Funds/Total Credit Lending by Private Institutions/Total Lending
Source: BCB
… … and at subsidized rates and at subsidized rates slightly above the TJLPslightly above the TJLP
0
10
20
30
40
50
60
70
80
90
TJLP
SELIC
Non-earmarked funds do not Non-earmarked funds do not finance much investmentfinance much investment
Nominal Spread (%) Share in total credit (%) Avg. Duration
(Days) Credit Line 2005 2006 May 2007 2005 2006 May 2007 2006
Hot Money 34.2 37.4 36.6 0.3 0.2 0.3 12.5 Discount of trade bills 23.8 23.7 21.5 6.1 5.7 5.4 32.2 Discount of promissory bills 34.0 36.0 33.6 0.1 0.1 0.1 38.4 Working capital 19.9 19.2 19.2 27.7 29.7 32.1 350.2 Guarantied Overdraft 51.5 53.2 52.0 17.2 16.8 15.7 21.8 Vendor 5.1 5.4 4.5 5.7 5.3 4.3 92.64 Acquisition of goods/real estate 11.8 12.1 7.8 6.1 6.9 7.0 283.3 Others/1 - - - 36.7 35.4 35.2 - Total 25.0 25.4 23.8 100.0 100.0 100.0 221.8
/1 includes mainly anticipation of exchange related to exports and foreign on-lending
Other ways of financing are Other ways of financing are quite developedquite developed
High Cost of FinanceHigh Cost of Finance
Access to international finance Access to international finance Bad domestic financeBad domestic finance
Low domestic savingLow domestic saving Bad intermediationBad intermediation
Low InvestmentLow Investment
Low Returns to InvestmentLow Returns to Investment High Cost of FinanceHigh Cost of Finance
Low Returns to InvestmentLow Returns to Investment
Low Social Returns Low Social Returns Low AppropriabilityLow Appropriability
BadBad
InfrastructureInfrastructure
Low Human Low Human CapitalCapital
Low Returns to InvestmentLow Returns to Investment
Low Social Returns Low Social Returns Low AppropriabilityLow Appropriability
BadBad
InfrastructureInfrastructure
Low Human Low Human CapitalCapital
Low Returns to InvestmentLow Returns to Investment
Low Social Returns Low Social Returns Low AppropriabilityLow Appropriability
BadBad
InfrastructureInfrastructure
Low Human Low Human CapitalCapital
Low Returns to InvestmentLow Returns to Investment
Low Social Returns Low Social Returns Low AppropriabilityLow Appropriability
Government Government FailuresFailures
Market Market FailuresFailures
Low AppropriabilityLow Appropriability
Government Failures Government Failures Market FailuresMarket Failures
High Price of InvestmentHigh Price of Investment
Business EnvironmentBusiness Environment
InformalityInformality
TaxesTaxes
Lack of InnovationLack of Innovation
Low self-discovery and Low self-discovery and structural transformationstructural transformation
High Price of InvestmentHigh Price of Investment
Increase in relative price of investment Increase in relative price of investment reduced the “purchasing power” of savingsreduced the “purchasing power” of savings
But national accounts revision showed this But national accounts revision showed this rise was less substantial than earlier estimatedrise was less substantial than earlier estimated
Indicators for Brazil compare well with those Indicators for Brazil compare well with those of countries with similar income levelof countries with similar income level
Substantial rise in relative price of Substantial rise in relative price of investmentinvestment
Ratio of fixed investment to GDP deflators (1980 = 100)Ratio of fixed investment to GDP deflators (1980 = 100)
30
40
50
60
70
80
90
100
110
120
130
140
150
160
170
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
IBGE PWT
But a similar process took place in But a similar process took place in other countriesother countriesRatio of investment to GDP pricesRatio of investment to GDP prices
1970-73 2000-03 Argentina 1.30 1.26 Brazil 0.75 1.40 Chile 0.83 1.06 China 1.11 1.49 Korea 1.14 0.87 Malaysia 1.15 1.28 Mexico 1.12 1.12 Peru 1.10 1.22 Philippines 1.64 1.44 South Africa 1.93 2.08 Thailand 0.88 1.14 Turkey 1.78 1.29 "World" median1 1.53 1.74 LAC Avg 1.65 1.62
Source: PWT
And investment prices do not seem And investment prices do not seem to be out of lineto be out of line
Investment pricesInvestment prices
1970-73 2000-03 Argentina 102.3 55.6 Brazil 70.4 55.1 Chile 49.8 40.2 China 84.4 35.3 Korea 44.7 58.5 Malaysia 54.7 44.4 Mexico 63.8 82.1 Peru 39.0 56.4 Philippines 40.0 34.6 South Africa 94.3 72.1 Thailand 30.7 32.5 Turkey 103.3 63.5 "World" median1 67.1 72.1 LAC Avg 74.1 85.9
Source: PWT
Nor the relative price of investmentNor the relative price of investmentRatio of investment to GDP prices in 2000-03Ratio of investment to GDP prices in 2000-03
S
-0.5
0
0.5
1
1.5
2
6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11
ln(income)
ln(r
atio
of
defla
tors
)
Brazil
Source: PWT
Business EnvironmentBusiness Environment
Brazil LAC OECD
Procedures (number) 17 10.2 6.2
Duration (days) 152 73.3 16.6 Starting a Business
Cost (% of GNI per capita) 9.9
48.1
5.3
Time to complete procedure (years) 4 2.6 1.4
Cost of bankruptcy proceedings (% of estate) 12 13.6 7.1 Closing a Business
Recovery rate (cents on the dollar) 12.1 25.7 74
Difficulty of hiring a new worker index 67 34 27
Job security index (Botero et al, 2004) 0.69 0.5 0.33
Employing workers
Firing costs (weeks of wages) 37 59 31
Cost of doing businessCost of doing business
Brazil
Quality of RegulationQuality of Regulation
Brazil
Rule of LawRule of Law
Brazil
0
10
20
30
40
50
60
70
80
90
Entrepreneurs’ perceptionsEntrepreneurs’ perceptions
InformalityInformality
•Informal firms invest little, have low productivityInformal firms invest little, have low productivity
•Disrupt incentives in the formal economyDisrupt incentives in the formal economy
Some Basic Facts About Informal Firms in Brazil % Size Percentage of informal firms with only one worker 80
Sector Percentage of informal firms in manufacturing 16
Percentage of informal firms in services 84
of which:
Construction 21
Retail sales and repair 40
Other 39
Education Percentage of workers in informal firms with elementary school not completed 44
Percentage of workers in informal firms with high school not completed 69
Percentage of workers in informal firms with college completed 7
Reasons to start Percentage of firms declaring "could not find a job" 31
an informal firm Percentage of firms declaring "complement household income" 17
Percentage of firms declaring "experience in the area" 8
Main difficulties Percentage of firms declaring "lack of clients" 49
encountered in Percentage of firms declaring "large competition" 44
previous year Percentage of firms declaring "lack of credit" 13
Percentage of firms declaring "lack of appropriate infrastructure" 8
Tax BurdenTax Burden
0
5
10
15
20
25
30
35
40
Tax BurdenTax Burden
Tax rates are high…Tax rates are high…
Brazil
Percentage of firms indicating tax rates as a major problemPercentage of firms indicating tax rates as a major problem
…….paying taxes is cumbersome.paying taxes is cumbersomeTime (hours) paying taxesTime (hours) paying taxes
Evidence from sector’s dataEvidence from sector’s dataSector performance and tax burdenSector performance and tax burden
Evidence from firm’s dataEvidence from firm’s dataAverage growth rate of salesAverage growth rate of sales
Low AppropriabilityLow Appropriability
Government Failures Government Failures Market FailuresMarket Failures
High Price of InvestmentHigh Price of Investment
Business EnvironmentBusiness Environment
InformalityInformality
TaxesTaxes
Lack of InnovationLack of Innovation
Low self-discovery and Low self-discovery and structural transformationstructural transformation
Lack of InnovationLack of Innovation
Selected Innovation Variables
Brazil Latin
America Western Europe
Total Expenditure for R&D as % of GDP 0.9 0.3 1.9
Science Enrolment Ratio (%) 8.4 8.5 11.0
Patents Granted by USPTO / Mil. People 0.85 0.8 77.6
Scientific and Technical Journal Articles / Mil. People 47.9 22.8 628.5
Royalty and License Fees Payments (US$/pop.) 6.5 7.5 452.1
Lack of InnovationLack of InnovationR&D / GDPR&D / GDP
Lack of InnovationLack of InnovationR&D / GDP: deviations from the medianR&D / GDP: deviations from the median
Finland
Korea
Brazil Greece
Mexico
Lack of InnovationLack of InnovationObstacles to innovation (% of firms responding)Obstacles to innovation (% of firms responding)
0
10
20
30
40
50
60
70
80
90
Lack of InnovationLack of Innovation
Structural TransformationStructural Transformation
•There is a positive relationship b/w the level of sophistication There is a positive relationship b/w the level of sophistication of exports and subsequent growth (what you export matters!)of exports and subsequent growth (what you export matters!)
•Many countries have seen negative per capita growth for a Many countries have seen negative per capita growth for a very long timevery long time
•There have been growth collapses that have lasted long There have been growth collapses that have lasted long periods of timeperiods of time
•Most growth collapses coincide with export collapsesMost growth collapses coincide with export collapses
Structural TransformationStructural Transformation
Brazil
EXPY vs GDP per capitaEXPY vs GDP per capita
Structural TransformationStructural Transformation
Brazil
Export sophistication and subsequent growthExport sophistication and subsequent growth
What determines the evolution of the What determines the evolution of the sophistication of exports?sophistication of exports?
•Every product requires a unique set of capabilities: labor Every product requires a unique set of capabilities: labor skills, infrastructure, property rights, physical assetsskills, infrastructure, property rights, physical assets
•Producing new goods require adapting existing capabilities, Producing new goods require adapting existing capabilities, which are imperfect substitute for the new capabilitieswhich are imperfect substitute for the new capabilities
•So future structural transformation depends on what is So future structural transformation depends on what is ‘close’ to your current production‘close’ to your current production
Brazil 1975
Brazil 1980
Brazil 1985
Brazil 1990
Brazil 1995
Brazil 2000
Ecuador 1995
Structural TransformationStructural Transformation
Open Forest, Comparative
0
200000
400000600000
800000
1000000
1200000
14000001600000
1800000
2000000
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
Argentina
Brazil
Colombia
Mexico
South Africa
Malaysia
Low AppropriabilityLow Appropriability
Government Failures Government Failures Market FailuresMarket Failures
High Price of InvestmentHigh Price of Investment
Business EnvironmentBusiness Environment
InformalityInformality
TaxesTaxes
Lack of InnovationLack of Innovation
Low self-discovery and Low self-discovery and structural transformationstructural transformation
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