CEO Policy Recommendations for Emerging Economy Nations
Brazil

The Americas’ Emerging Powerhouse 

Brazil’s manufacturing competitiveness is expected to strengthen over the next several years. Driven by ongoing investment in infrastructure in preparation for the 2014 World Cup and 2016 Olympic Games, relevant changes in the energy sector and other recent policy reforms, Brazil appears to be favourably positioned for the future regarding manufacturing competitiveness. 

From a policy perspective, the country’s recently announced Brasil Maior (Bigger Brazil) industrial plan is expected to create favourable tax advantages for Brazilian manufacturers, as well as reduce lending and energy costs. Under the plan, the Brazilian government hopes to address a set of fiscal, legal, financial and infrastructure obstacles, commonly referred to as the “Brazil Cost”, that have undermined the competitiveness of Brazilian companies within the domestic market as well as the ability of importers and exporters to deal with international competition.¹²

The World Cup and Olympics are expected to accelerate the planned infrastructure improvements and bring in foreign investment, which will likely have a positive influence on improving the country’s manufacturing industry and competitive position.¹³ Brazil is one of the few countries with a sufficiently large natural resource base coupled with a relatively advanced research infrastructure. This places the country in a unique position to capture more profitable stages of the value chain through the use of alternative energies that are ecologically sustainable – something noted as critical by the executives participating in the interviews.

Many executives said the current administration in Brazil is headed in the right direction, noting specifically how policies are now creating an aura of competitiveness, improving the quality of basic infrastructure and working to face the high cost issue. This sequence, many said, generates a positive growth potential to enter into the global economy. They also mentioned that Brazil could not “walk alone” on this journey and needed to work closely with other nations, noting the potential negative impact on Brazil resulting from the crisis in the Eurozone and slower growth in China. 

Costs, however, were frequently cited by executives as a concern. Specifically, many executives said that labour costs pose a significant competitive disadvantage. Despite the tax improvements outlined in the Brasil Maior industrial plan, many also said that Brazil’s high corporate tax rate hampers the competitiveness of Brazilian companies and the country’s attractiveness for foreign investment coming from North America, China and South Korea.

From a monetary perspective, executives noted cost concerns with continued appreciation of the Brazilian real, which is making imports cheaper and exports more expensive. Executives mentioned capital goods, automotive, textiles and footwear as specific sectors that have already been negatively impacted by appreciation. 

Executives further explained that the unfavourable exchange rate and the high cost of production in Brazil, coupled with global economic uncertainty and overall cooling of long-term outlooks, have resulted in a change in the entire production chain in Brazil and caused frequent substitutions of domestic products with imports. As a result, part of the local consumption has been captured by imported products and the level of national production has remained stagnant.

Finally, when it comes to talent, the executives were consistently disappointed with the education system in Brazil and considered the lack of skilled talent as the most important factor limiting Brazil’s future competitiveness.

Executives almost unanimously said that policy-makers are a key to overcoming these challenges and to driving Brazil’s growth. They consistently noted the importance of public policy and its connectivity in the “manufacturing ecosystem” with respect to setting the rules on trade, flow of capital, regulatory rules and barriers, floating exchange rates, taxes, educational policies, and research and development incentives. 

At the same time, they were concerned with what is described as two levels of public policies – one focused on national measures that seek to relieve payroll pressures, reduce the price of electricity and reduce taxes, and another focused on the “policies of protectionism”, which many believed are harmful to all sectors and do little to drive innovation or improve Brazil’s place in the global manufacturing economy. 

To address these challenges, executives outlined the following recommendations.

Recommendations

Focus on talent development, innovation and education with special emphasis on elementary education and science and technology disciplines

Executives almost unanimously agreed that talent training is a key issue for Brazil. Many expressed strong support for the competitive advantages talented workforces can provide for countries and companies, and said that Brazil today is at a significant disadvantage when compared to countries such as the United States, Germany and China. These countries have their own self-described education challenges, but have created programmes that foster strong STEM (science, technology, engineering and mathematics) education at the elementary level, have created world-class universities, and/or have established programmes that create partnerships and collaboration between the public and private sectors (thereby fostering the “manufacturing ecosystem” that drives research and development and resulting innovations).

In outlining recommendations for improving education in Brazil, executives consistently described a number of challenges that begin at the lowest levels of public education and progress through the university level. They also noted concern with limited connections in Brazil between educational institutions and corporations, and the resulting limited ability to drive innovation. In addressing these challenges, executives broadly described two main areas that they believe require focus:

• Policies and investments in talent and human capital development
• Policies and investments in science, technology and innovation

Policies and investments in talent and human capital development

First and foremost, executives consistently and passionately believed there are significant problems in the elementary school system that need to be addressed, and specifically noted Brazil’s poor rankings internationally with respect to its education system. 

Executives also outlined several concerns at the technical school and university level. For instance, executives said that Brazil has capacity constraints in its ability to build a robust pipeline of talent with degrees or advanced technical certifications. Many also voiced long-term concerns relative to a skills shortage for engineers, noting increased interest from students in non-science courses versus pursuing technical careers that are in high demand in Brazil and around the world. 

Finally, some executives said that universities in Brazil today do not offer curriculums in fields that the market demands. Executives described a “huge gap” in this area, noting that there is more demand in sciences but the supply is growing faster in the humanities. Moreover, there is a decrease in the quality of existing curriculums because of reduced time requirements for earning engineering degrees and teaching models that are outdated and, according to some, going backwards.

In Brazil, where the costs of labour associated with low productivity are factors that erode competitiveness, it is essential to maintain high quality, technical knowledge not only at the level of engineering, but also in occupations critical to the country such as machine operators, welders and construction professionals.

– Executive interview

In outlining an action plan for the development of education in Brazil, executives described concerns regarding labour at all levels of an organization, and how the lack of a clear educational agenda negatively impacts Brazil’s future.

To address these challenges, executives offered the following recommendations:

• Develop long-term talent and human capital development policies and investments that clearly define how policy-makers will improve education in Brazil. 
• Create programmes that identify deficiencies in specific skills in demand by employers and deemed strategic to Brazil’s competitiveness, and provide incentive for educational institutions and students to fill any skills gaps. 

Policies and investments in science, technology and innovation

Some executives said that the academic world in Brazil is disconnected from the real world, and also from an environment where academics, policy-makers and business leaders are working collaboratively to develop and drive Brazil’s science, technology and innovation future. 

Many of those participating in the discussions highlighted Brazil’s abundant supply of natural resources and healthy mix of many cultures and ethnicities, and outlined a point of view that positions education and knowledge as the necessary link between people and natural resources to generate innovation. 

To take advantage of the opportunities that result from such strong links and in response to an inadequate educational system, many companies have taken on the burden of training to develop the next generation of innovative thinkers. Many executives described the expensive education programmes that their companies have created to train and empower employees.

Executives overwhelmingly said that even employees from good universities required some initial training to transition and operate effectively in the “real world”. 

From a company perspective, executives consistently said that people make the difference in a company’s ability to drive innovation. As a result, many intend to continue and expand their training programmes, as they believe these investments will bring future innovative processes and products. Executives also called for policy-maker support in advancing Brazil’s innovative potential through the following actions.

• Enact long-term science, technology and innovation policies and investments that evaluate the quality of the education that is being taught in the classroom today and improve technical schools and centres of excellence.
• Move away from being a “commodity country” and improve the promotion of strong links between education and natural resources as a driver of value-added manufacturing. 
• Develop formal programmes designed to bring companies together with universities (both in Brazil and abroad) to seek innovative technologies for products and processes.

Invest in infrastructure projects that improve logistics and transportation, and therefore overall competitiveness

Lack of quality infrastructure and the absence of policies that outline a strategic approach to infrastructure improvement were cited by many executives as negatively impacting Brazil’s overall competitiveness.

Executives broadly believed that logistics is a central theme uniquely important to Brazil because of the country’s position as an important hub for the rest of the continent. While the World Cup and Olympics are helping to improve the state of infrastructure in Brazil, many executives said the current structure of ports, airports and railways is not adequate for the needs of the country and must be updated more quickly. 

In fact, some executives said they have seen a slowdown in infrastructure improvement, and that the pace at which companies seek to develop markets is today much faster than the speed of infrastructure projects. Some of this slowdown, according to executives, is the result of an unclear “mapping” of the infrastructure projects that Brazil actually needs, as well as few public-private partnerships that encourage the private sector to step in where the government may need assistance. 

To address these challenges, executives outlined the following recommendations:

• Develop plans and policies that provide an ability to consistently execute infrastructure initiatives at a pace that is in line with industrial development and trade.
• Perform a mapping of the real needs of infrastructure projects in Brazil and set a schedule for these undertakings.
• Develop programmes that increase the involvement of the private sector in infrastructure development within a safe and legal environment.

Invest in energy availability, reliability and efficiency

With respect to energy, executives said Brazil’s abundance of natural resources positions the country well for long-term competitiveness and recognizes the positive impact from past investments that resulted in Brazil becoming a self-producer of energy. Executives specifically highlighted the oil and gas sector and its “local content” policy, which some described as a fundamental instrument of industrial policy that serves as a tool for strengthening competitiveness and sustainability of the domestic industry throughout the supply chain of oil and natural gas. They considered this a worthwhile incentive for Brazil’s continued journey towards advanced manufacturing and more sophisticated products within Brazil.

Still, executives expressed concern because Brazil’s policies have seemed to move away from an approach that encourages continued investment in clean, reliable and efficient alternative sources of energy. 

Many executives called for initiatives that result in energy policies that not only leverage Brazil’s supply of oil and gas in the most competitive manner, but also set long-term objectives for research and development of more sustainable energy. Advancements in the use of paper and pulp as energy sources were specifically noted. 

In fact, many executives said Brazil could take a global leadership role in the research and development of alternative energy sources, as well as set the standard for efficient and effective use of natural resources. For example, the country could establish incentives that promote the exchange of equipment to newer models that consume less energy. 

Executives consistently said the government needs to take a central role in outlining how to better use today’s energy sources, as well as support the development of renewable energy alternatives. Some executives noted that today, energy policy in Brazil is largely focused on oil, gas and derivatives. 

They further expressed concern that Brazil has no strategy for “back-up” sources of energy (and that the government may need to explore other natural resources), highlighting specifically the devastating impact of the natural disasters in Japan.

Executives hoped success similar to Brazil becoming a self-producer of energy could be achieved in developing new energy policies, and offered the following recommendations in working towards those objectives: 

• Develop government measures to encourage the creation of methods to improve Brazil’s energy network through targets to increase the use of clean energy. 
• Create government programmes that encourage a technological upgrade when changing old machines and equipment to new machines with lower power consumption. 
• Increase investment in and prioritize infrastructure efforts that result in the efficient generation and distribution of renewable energy. 

Simplify the tax system and reduce the tax burden on corporations

Executives participating in the discussions almost unanimously expressed concern with the tax system in Brazil and the negative impact that both its complexity and costs have on competitiveness. While all applauded policy improvements over the past three years, many still considered the tax system as a critical area that needs additional focus. 

Executives broadly discussed challenges of interpreting and complying with Brazil’s complex tax structure. They also expressed concern with current labour policies that place a high tax burden on employers. Although many applauded the recent improvements in tax-related labour policies that provided an exoneration of payroll tax (and said the initiative was a step in the right direction), almost all believed that in the long term, current “archaic” legislation would also need to be addressed. Many executives said the ripple effect of current labour policies is perhaps the most negative consequence impacting competitiveness. Specifically, executives cited labour laws that require hiring and the resulting tax burden placed on employers in their efforts to comply with those labour policies. 

Executives outlined a number of recommendations they believe would improve Brazil’s tax system and lower the country’s high tax burden – thereby improving Brazil’s overall global competitiveness. 

• Enact tax policies aimed at reducing Brazil’s high taxation rates. Place specific focus on import taxes, interest rates, electricity tariffs and labour laws that impact tax rates. 
• Overhaul the entire tax system to remove bureaucracy and create a more simple tax code, which will also result in reduced compliance costs that companies bear.
• Consistently enforce legal consequences for violations, thereby creating certainty regarding tax policies and proactively addressing frequent occurrences of fraud and tax evasion.
• Provide tax incentives that promote and encourage research and development initiatives that focus on sustainable, alternative energy. 
• Reduce the tax burden on domestic industries and sectors deemed strategic to Brazil’s long-term growth, thereby also attracting more foreign investments in those sectors. 

Establish political, legal and regulatory stability

Executives consistently called for the establishment of a business environment that is well organized and appropriately regulated, and respects legal contracts between private enterprises and government. Doing so, according to many participants, is critical to removing uncertainty associated with doing business in Brazil and offering a sense of security for foreign investors. 

Executives also said Brazil needs adequate public policies and measures that encourage domestic production, not protectionism. 

Some executives expressed concern with a slow legislative process in Brazil. Executives were cognizant that certain policy areas, such as labour policy, are highly complex and require careful action, but they also want to see such issues addressed with pragmatism and agility. 

In the context of agility, bureaucracy was noted as putting the country at a disadvantage. Many cited a lack of dynamism in terms of policy adjustments and creation to protect long-term trading (within WTO rules), plus some difficulties regarding the compliance of existing rules which undermines the competitiveness of companies – and further inhibits them from making more investments.

Overall, from a domestic and global perspective, executives said it is essential for people interested in investing in Brazil to have security in the legal and regulatory framework. Many said Brazil needs to focus on this area to attract opportunities and investments.

Develop initiatives focused on moving Brazil from a commodities export nation to value-added manufacturing economy

Today, the Brazilian economy is highly dependent on commodities exportation, and executives expressed concern with the lack of measures directly linked to industry that works to adjust this fundamental structure and focus on a path to value-added manufacturing. 

Executives recognized recent efforts by the government to promote Brazil’s industrial sector, and said they were starting to see positive results stemming from those efforts. They applauded recent efforts focused on reducing energy costs to drive competitiveness, and said that programmes like Reintegra Brasil Maior, which provides tax incentives for entities that export goods that are manufactured in Brazil, also helped in creating manufacturing competitiveness.

And while they recognized the strategic and competitive advantages offered through its abundant access to natural resources, executives also said continued focus on these sectors would only support commodity exports and not help to accelerate movement of the manufacturing sector towards the production of more complex goods. 

Almost all of those participating in the discussions called for manufacturing to leave the area of commodities and focus on driving business innovation. They expressed that natural resources need to be a basis for value, but are not essential for industrial growth. 

Many executives said that focusing on value-added manufacturing would also lead to economic prosperity of Brazilian citizens, who would then have the purchasing power and demand for more complex goods, which would result in increased foreign investment and growth of Brazil’s domestic manufacturing industry. Not surprisingly, many cited China as a market where this process is currently underway.

Executives broadly said that taking this opportunity to move Brazil up the manufacturing ladder requires a set of policies that addresses the cost, talent, infrastructure, energy and regulatory challenges previously discussed. Overall, executives believed that Brazil has strengths and opportunities to grow, but that the challenges that persist are complex and require significant effort to improve the country’s overall competitiveness.