Investing in Brazil - The Limiting Factor in Brazil's Economic Potential

When first approaching a developing market, many begin with the following questions: 

• "How big is the market?" 
• "Is the industry growing?" and 
• "What are the short- and long-run prospects for a given project/acquisition/initiative in this country?" 

These questions are often dismissed with an appeal to "everyone knows," a reference to the acronym "BRIC," perhaps a mentioning of natural resources or oil reserves, and no mention of the underpinnings of that economy or post-2008 growth rates. Speaking from personal experience, the experience of colleagues, and exposure to a few key data sets, I would like to focus on just one key facet of the Brazilian economy—education—and how it should be an integral part of strategic decision-making in Brazil.

An economy is inextricably linked to the underlying productivity of its labor force. One primary factor driving labor force productivity is the underlying education of the population. Education improves literacy, work ethic, communication, problem-solving, critical thinking, and innovation. These in turn increase the productivity of labor, which then drives the economy. With this in mind, consider below the three graphs depicting Brazil’s education and related wage levels for different segments of its population. The figures below are from the OECD’s Education at a Glance 2011: OECD Indicators.¹

1)      Secondary Education:

Brazil is behind the majority of its OECD peers in terms of secondary education. Although the education level has improved for younger people, the younger generation is still significantly behind the older generation of Brazil’s OECD peers.

2)      Tertiary Education

Brazil’s improvements in secondary education have not coincided with improvements in tertiary education, which is at one of the lowest levels in the OECD. Additionally, both the younger and older generations remain at about the same low level. Poor educational performance and lack of improvement are two of the greatest long-term impediments to the Brazilian economy.

3)      Education and Wages

Because of the small pool of educated labor, the premium for tertiary education and the discount for sub-secondary education are the greatest in the OECD pool. This one statistic helps illustrate the difficulty of attracting and retaining talent in Brazil. Supply is dear and the bidders are many.

The bottom line:

Short term: Top-notch skill within Brazil is both expensive and scarce. Additionally, effective and efficient local monitoring and controls may be ineffective due to the lack of experience and education of those governing the control environment. Global corporations should be aware of these limitations before committing to greenfield or acquire, and they should also seek out methods to mitigate these risks. In this type of environment, risk mitigation can be best approached through global IT systems with external monitoring, frequent auditing, and realistic strategic cost-benefit analyses.

Long term: Not only have Brazil’s rates of secondary and tertiary education completion been historically low for previous generations, but Brazil has also demonstrated only modest improvements in secondary education attendance for younger people and has not demonstrated any improvement in tertiary education attendance.

These problems in Brazil's education levels both intensify wage inequality and limit the productivity of labor, placing an upper bound on the economy. This can be overcome in the near term for resource economies (e.g., Venezuela and UAE), but high-value, easy-to-extract resources will eventually diminish, and world prices can change. Additionally, limited workforce education confines the majority of Brazil’s manufacturing sector to low-skill, low-productivity, and low-wage workers.

Brazil has always had plentiful natural resources, and the somewhat recent discovery of vast oil reserves off its coast represents a tremendous opportunity.  These resources, combined with institutions that allow private capital to grow and invest, have aided Brazil in achieving an above-average per capita GDP compared to its South American neighbors. However, long-term economic growth will ultimately depend on Brazil’s ability to improve the underlying education—and therefore productivity—of its workforce, which Brazil has not credibly demonstrated, as shown in the OECD figures. Consequently, industry growth projections should be realistic, given both the opportunities and limitations of the Brazilian economy.

¹ http://www.oecd.org/dataoecd/61/2/48631582.pdf Definitions are found on page 26. The graph concerning tertiary education is found on page 30, the graph concerning secondary education is found on page 32, and the graph concerning relative wages is found on page 138.