43978 KnowledgeandInnovation forCompetitiveness in Brazil AlbertoRodríguez with CarlDahlmanandJamilSalmi WBI Development Studies Knowledge and Innovation for Competitiveness in Brazil WBIDevelopmentStudies Knowledge and Innovation for Competitiveness in Brazil AlbertoRodríguez with CarlDahlmanandJamilSalmi Washington, DC © 2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Develop- ment / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the govern- ments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN: 978-0-8213-7438-2 eISBN: 978-0-8213-7439-9 DOI: 10.1596/978-0-8213-7438-2 Cover design: Bill Pragluski, Critical Stages Library of Congress Cataloging-in-Publication Data Knowledge and innovation for competitiveness in Brazil / edited by Alberto Rodriguez, Carl Dahlman, Jamil Salmi. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-7438-2--ISBN 978-0-8213-7439-9 (electronic) 1. Technological innovations--Brazil. 2. Labor supply--Effect of technological innovations on--Brazil. 3. Human capital--Brazil. 4. Brazil--Economic policy. I. Rodriguez, Alberto, 1965­ II. Dahlman, Carl J., 1950­ III. Salmi, Jamil. HC190. T4K66 2008 338'.0640981--dc22 2008011416 Contents Foreword xi Acknowledgments xiii Abbreviations xv Executive Summary 1 WhereGrowthComesFrom 1 MethodologyandOrganizationoftheReport 12 1. Brazil's Growth and Performance in a Global Context 15 Brazil'sGrowthinComparativePerspective 15 Brazil'sCompetitivenessinanIncreasinglyKnowledge-Driven GlobalEnvironment 18 TheStructureoftheEconomyandtheStructureofExports 23 Conclusion 27 2. Behind Brazil's Slow Growth 29 ConceptualizingGrowthandDerivingaRevisedModel 29 InnovationandEconomicGrowth 32 TheRelationshipofPhysicalandHumanCapitalwithEconomicGrowth 34 AGrowthDecompositionExercise 36 InvestmentClimate--TheEnablingEnvironmentforGrowth 39 TradeOrientation,theExportSector,andGrowth 43 DoesthePublicSectorConstrainorCatalyzeGrowth? 44 Conclusion:GettingtheFundamentalsRightWasNecessarybutInsufficient 46 3. Defining Innovation 49 WhatIsInnovation? 49 TheCreationandCommercializationofKnowledge 50 AcquiringForeignKnowledge 53 vi Contents DisseminatingandUsingKnowledge 54 Brazil'sNationalInnovationSystem:Instruments,Institutions,and HumanCapabilities 55 4. Assessing Innovation at the National Level 59 ComparativeAssessmentofR&D--InputsandOutputs 60 HowBrazilandRussiaFaceInnovationandPerformanceChallenges 63 AcquisitionofForeignKnowledge 67 TheDisseminationandUseofKnowledge 68 TheNationalSystemofInnovationasConceivedbyGovernment 70 Conclusion 75 5. Firm-Level Innovation 77 InnovationinBrazil:Firm-LevelPerspective 78 RelationshipamongInnovation,Productivity,andGrowth 83 AnalysisofInputsandOutputsRelatedtoInnovationbyKeyVariables 88 HumanCapital,Innovation,andProductivity 93 ConclusionsandPolicyImplications 95 6. Human Capital for Innovation and Growth 99 HumanCapital:TheMissingLinkbetweenInnovation andProductivity 100 ChangingDemandforSkillsinBrazil'sJobMarket 103 TheFormationofHumanCapitalinPerspective:BrazilandItsCompetitors 106 Brazil'sEducationSystemandItsReadinesstoProduceHuman CapitalforGrowth 110 Conclusions:SchoolingandBeyond 125 7. How Brazil Can Foster Innovation 127 DevelopinganEnablingEnvironmentforPrivateSectorInvestment 128 CreatingandCommercializingKnowledgeandTechnology 129 AcquiringForeignKnowledge 133 LeveragingExistingTechnologies 135 ImproveBasicEducationandSkills 138 ExpandTertiaryEducationandAdvancedSkillsTraining 142 8. From Analysis to Action 145 WhoNeedstoBeInvolved? 145 NextStep--RaisingAwareness 153 ApplyingtheFrameworkinSubnationalEntities 156 Appendix A: Findings from the PINTEC Database 159 Appendix B: Econometric Analysis of the Relationship among R&D, Innovation, and Productivity Using ICS Data for Firm-Level Analysis 161 Appendix C: Assessing Partial Effects of Firm Size Associated with Partial Effects in Explanatory Variables 167 Contents vii Appendix D: The Primary and Secondary Education Systems 171 Appendix E: The Tertiary Education System and Advanced Out-of-School Training 195 Appendix F: The Demographic Window of Opportunity 221 Notes 225 References 231 Index 239 Boxes Box2.1 Brazil'sTradeRegimeComparedwithOtherCountries 41 Box4.1 TheStatuteofMicroenterprisesandSmallEnterprises 68 Box4.2 Embrapa 71 Box4.3 TheSectorFundsProgram 74 Box4.4 TheInnovationLaw 76 Box8.1 TheVisionKoreaProject--ABottom-UpInitiative thatLedtoGovernmentAction 154 Box8.2 ExportProcessingZonesandTradeReforminChina 155 Figures FigureES.1 Brazil'sPerCapitaIncomeRelativetotheOECDArea(inPPP) 2 FigureES.2 AConceptualModelfortheComponentsofGrowth 3 Figure1.1 InflationRates,1980­2007 16 Figure1.2 AnnualGDPGrowth:Percentand10-YearMovingAverage,1964­2005 17 Figure1.3 Brazil'sPerCapitaIncomeRelativetotheOECDArea(inPPP) 19 Figure1.4 Brazil'sRankingsontheGlobalCompetitivenessIndex,2006 21 Figure1.5 KnowledgeasaFactorinIncomeDifferencesbetween BrazilandtheRepublicofKorea,1956­90 23 Figure2.1 AConceptualModelfortheComponentsofGrowth 31 Figure2.2 GrowthandTFP--LatinAmericaComparedwithOtherRegions 35 Figure2.3 GovernmentConsumptionasaPercentageofGDPinFourCountries 45 Figure3.1 R&DEffortforBraziland11Comparators 50 Figure3.2a ScientificandTechnicalJournalArticlesper100,000 Inhabitants(OtherCountries) 51 Figure3.2b ScientificandTechnicalJournalArticlesper100,000 Inhabitants(LatinAmericaandtheCaribbean) 51 Figure3.3 PatentsGrantedbytheU.S.PatentandTrademarkOfficeto BrazilandRegionalComparators 52 Figure4.1 GDPPerCapitaversusR&DExpenditureasaShareofGDP forLACandSelectCountries,2004 61 Figure4.2 R&DExpendituresasaShareofGDPversusResearchersin R&DperMillionPeopleinLACandSelectCountries,2004 62 viii Contents Figure4.3 BrazilandtheRussianFederationInnovationAssetsin ComparativePerspective 66 Figure4.4 TotalImportsversusImportsofCapitalGoodsinLAC andSelectCountries,2004 68 Figure4.5 Brazil'sNationalInnovationSystem 73 Figure5.1 InnovationInputs(R&D,Licensing,JointVentures, andISO)byFirmSize 89 Figure5.2 InnovationOutputs (Training,ImprovedLine, andNewProduct)byFirmSize 89 Figure5.3 InnovationInputs(R&D,Licensing,JointVentures, andISO)bySector 90 Figure5.4 InnovationOutputs(Training,ImprovedLine,and NewProduct)bySector 90 Figure5.5 InnovationInputs(R&D,Licensing,JointVentures, andISO)byRegion 91 Figure5.6 InnovationOutputs(Training,ImprovedLine, andNewProduct)byRegion 91 Figure6.1 ChangesinJobTask-SkillDemandsintheUnitedStates,1960­98 104 FigureD.1 AverageYearsofSchoolingforBrazilians15andOlder inComparisonwithOtherSelectedCountries,1960and2000 174 FigureD.2 NetEnrollmentRateforPrimaryEducation,1990and2002 174 FigureD.3 NetEnrollmentRateforSecondaryEducation,1990and2002 175 FigureD.4 TertiaryEnrollmentsforBrazilvs.OECDComparators:NERs,1991­2003 175 FigureD.5 ComparativePublicSpendingonEducationasa PercentageofGDP,1990and2002 179 FigureD.6 QualityofEducationinTermsofLearningOutcomesfromPISA,2003 185 FigureD.7 PercentageofStudentsatEachLevelofProficiency onPISAReadingScale,2003 185 FigureD.8 PISAMath/SpaceandShapeScale,2003 186 FigureE.1 DistributionofStudentsbyIncomeGroup 197 FigureE.2 ProportionofStudentsEnrolledinScienceandEngineering ProgramsinSelectedLatinAmericanCountries 208 FigureE.3 ProportionofGraduateStudentsinSelectedLatinAmerican Countries,2003 210 FigureE.4 UnitCostsinSelectedLatinAmericanCountries 215 FigureF.1 DependentPopulationandtheLaborForceinBrazil,1980­2005 222 FigureF.2 PopulationTrendsbyAgeGroupinBrazil,1981­2005 222 FigureF.3 PopulationandLaborSupplyinBrazil,1981­2005 223 Tables Table1.1 AverageandVolatilityofGDPGrowthRates,1964­2005 17 Table1.2 AnnualRealGDPGrowthRateforBrazilandSelectCountries 18 Table1.3 TheChangingStructureofWorldExports,1985and2004 20 Table1.4 ChangingStructureofOutputbetween1980and2005,SelectedCountries 24 Table1.5 ChangingStructureofMerchandiseExportsbetween1980and2005 25 Table1.6 ExportsbyTechnologyIntensity,2004 25 Contents ix Table1.7 Brazil'sRevealedComparativeAdvantage(RCA),1995vs.2005 26 Table2.1 AverageGrowthofOutputandInputs 34 Table2.2 GrowthofGDP,CapitalStock,andEmployment,1964­2005 37 Table2.3 ContributiontoGDPGrowth,1964­2005 37 Table2.4 RelativeTFPofBrazilandLatinAmericanComparators 38 Table2.5 "DoingBusiness"inComparativePerspective 39 Table3.1 TheNationalInnovationSystemofBrazil:Instruments, Institutions,andHumanCapabilities 56 Table4.1 R&DExpendituresandEfficiencyinBrazilandSelectCountries,2003 62 Table4.2 R&DInputsandOutputsfortheBRICKMCountryGroup 64 Table4.3 BasicComparisonsbetweenBrazilandRussia 65 Table4.4 ComparativeDataonAcquiringForeignKnowledge(BRICKMs) 67 Table4.5 ProductivityDispersionwithinBrazil'sIndustrialSectors 69 Table4.6 BrazilianR&DTaxIncentives,2000­2006 75 Table5.1 TypeandRateofInnovationamongBrazilianFirms, 1998­2000and2001­03 78 Table5.2 BasicCharacteristicsofBrazilianFirmsGroupedby CompetitiveStrategy 79 Table5.3 TypeofInnovationbyCompetitiveStrategyofInnovatingFirms 80 Table5.4 InnovationSourcesforBrazilianFirms,1998­2003 81 Table5.5 MainSourceofInnovationInformationforInnovatingFirmsby TypeofCompetitiveStrategy 82 Table5.6 ObstaclestoInnovationforBrazilianFirms,1998­2003 82 Table5.7 AverageCoefficients(Semi-Elasticities)forSelectedInvestment ClimateVariablesEstimatedfromTFPRegressionsforBrazil 86 Table5.8 MarginalEffectsofEducationonInnovationInputsandOutputsinBrazil 92 Table5.9 AverageWages,Schooling,andWorkerTenureinBrazilianFirms byCompetitivenessGroupTypein2000 93 Table5.10 ProbitModelofProbabilityFactorsforAbsorbingTechnology byBrazilianFirms 94 Table6.1 Salaries,Schooling,andTenureinBrazilianIndustrialFirms 102 Table6.2 AverageMonthlySalarybyEducationalAttainment 103 Table6.3 ThePrimarySchoolSystem:ReadinessforInnovation-LedGrowth 111 Table6.4 TheSecondarySchoolSystem:ReadinessforInnovation-LedGrowth 113 Table6.5 FeaturesRelatedtoSchoolPerformanceandGovernance 116 Table6.6 TeachersandTeachinginthePrimaryandSecondarySchools 118 Table6.7 AdvancedSkillsTrainingOutsidetheSchoolingSystem 120 Table6.8 TertiaryEducationandReadinessforInnovation-LedGrowth 122 Table8.1 WhoNeedstoDoWhat 146 TableA.1 ImpactofInnovationandExportsonManufacturingFirmProductivity inBrazilMeasuredbyLogofPVAperWorker,2001 159 TableB.1 EstimationsforR&D,Innovation(Dummy),andProductivity 162 TableB.2 EstimationsforR&D,Innovation(Intensity),andProductivity 164 TableC.1 MarginalEffectsonInnovationInputsandOutputsinBrazil 168 TableC.2 MarginalEffectsonInnovationInputsandOutputsinBrazil 168 TableC.3 MarginalEffectsonInnovationInputsandOutputsinBrazil 169 x Contents TableD.1 StructureofBrazil'sBasicEducationSystem 172 TableD.2 Coverage,Access,andEfficiency,1990­2003 173 TableD.3 ComparativeperStudentSpendingbyEducationLevel 178 TableD.4 BreakdownofBasicandSecondaryEducation SpendingbyBrazilandFourComparators 180 TableD.5 RepetitionRatesinBrazilandComparatorCountries 183 TableD.6 OverviewofPISAPerformanceinBraziland FourOtherCountries,2003 184 TableD.7 SchoolResources,PISA2003 186 TableD.8 TeachingandLearningEnvironment,PISA2003 188 TableE.1 Brazil'sTertiaryEducationSystem,2005 195 TableE.2 TertiaryEducationCoverageinLatinAmerica,1980­2004 196 TableE.3 ShareofLaborForcewithTertiaryEducation,2004 197 TableE.4 SocioeconomicCharacteristicsofUndergraduateStudentsat UNICAMPComparedwiththeStateandNation 198 TableE.5 WorldUniversityRankingsbytheTimesHigher EducationSupplement,2006 207 TableE.6 ResearchUniversitieswithatLeastTwoProgramsHighly RankedInternationally 211 TableE.7 ResourceDiversificationMatrixforPublicTertiaryEducation InstitutionsbyCategoryandSourceofIncome 217 TableE.8 RecentResearch"Excellence"Initiatives 219 Foreword Knowledge and innovation have always been important drivers of human and economic development, and they have taken on a larger role in recent decades with the acceleration of technological change and globalized communication and trade. It is in this context that Brazil has begun to ask itself an increasingly urgent question: Why is it not growing at the rates of other middle-income countries such as China, India, and the Russian Federation? The government has pursued successful policies to halt decades of hyperinflation and pay down external debts. Private sector companies have honed their competitive edge, and some have ridden the longest commodity boom in decades to positions of global dominance. And yet, despite these remarkable achievements, Brazil remains mainly an exporter of raw materials whose economic growth has aver- aged only 2.5 percent per year over the last 10 years--less than half the pace of China, India and Russia. This study provides a broad, cross-sectoral analysis of Brazil's capacity for producing knowledge and innovation.As such, it moves beyond the traditional recommendations--that is, build a stable macroeconomic environment and business-friendly physical and policy infrastructure--and instead seeks a more comprehensive approach. The fact is that Brazil has delivered some impor- tant successes with efforts to develop innovation in agriculture, aerospace and energy. But like other middle-income nations, it is discovering that it must re-evaluate its education system, its information technology infrastructure, and its policy framework for encouraging innovation to ensure that its economy as a whole is growing fast enough to keep up with the global competition while also guaranteeing progress in its fight against poverty. The process of conceptualizing this study began with a benchmark- ing exercise using an analytical framework, developed by the World Bank Institute, for evaluating countries' readiness to successfully integrate into the global knowledge economy. The four pillars of that framework are (1) an educated and skilled population, (2) an effective incentive and institutional xii Foreword regime, (3) an efficient innovation system, and (4) a dynamic information infrastructure. Good performance in all areas is generally required for a coun- try to take advantage of new opportunities. In the analysis of Brazil that followed, three main issues emerged. First, Brazil trails its counterparts, particularly in Asia, in providing a quality edu- cation to all citizens. Second, Brazil has consistently aimed for the kind of elite, capital-intensive innovation that produces world-class technological breakthroughs while overlooking the kind of day-to-day innovations in pro- duction processes that tend to deliver the greatest economic returns. Third, Brazil has relied too heavily on government leadership to foster innovation, while overlooking the more cost-effective approach of using incentives to encourage private sector innovation, which tends to spread more quickly through the broader economy. In addition, trade barriers have not been eliminated fast enough to open the private sector to the kind of global competition that is necessary to foster innovation. This study was developed in close consultation with Brazilian government and civil society leaders, who are deeply engaged with the question of how to foster innovation and greater economic competitiveness. Indeed, the breadth of the support for this study is a testament to Brazil's pragmatism and per- severance in pursuing more robust growth. It is also a welcome reflection of its continually evolving relationship with the World Bank. Today, Brazil has emerged as a leader of efforts to build South-South cooperation. In this role, it can set an important example for other middle-income nations and act as a bridge between the northern and southern hemispheres. Developing a policy framework to foster innovation is no easy task, but experience shows that countries such as South Korea and Ireland have made great leaps forward in just a decade. The most successful innovation pro- grams are based on a well-articulated vision, societal agreement around the program, and efforts to address all four pillars of the knowledge economy through a combination of bottom-up initiatives and top-down reforms. We hope that this volume will contribute to Brazil's efforts to analyze its strengths and weaknesses and chart an effective way forward, for itself and for other middle-income nations. In taking on this challenge, Brazil leads the way for many countries that might also benefit from a close examination of their capacity to innovate and compete. Rakesh Nangia John Briscoe Acting Vice President Country Director for Brazil World Bank Institute The World Bank Acknowledgments This study is the result of the collaborative efforts of a team ofWorld Bank staff and consultants inside and outside Brazil.Alberto Rodríguez, Lead Education Specialist in the Human Development Department for the Latin America and the Caribbean Region (LAC), was the lead author and manager of the work. Co-authors Carl Dahlman of Georgetown University and Jamil Salmi of the World Bank's Human Development Network provided major contribu- tions without which this study would not have been possible. The authors wish to thank the many World Bank staff members who contributed their expertise and dedication to this project. Core team mem- bers included José Guilherme Reis, Senior Private Development Specialist; Anuja Utz, Senior Operations Officer, World Bank Institute; Julio Revilla, Senior Economist; and Junior Professional Associates Mariam Dayoub and Domenec Devesa. Special thanks go to the World Bank Institute's Knowledge for Devel- opment (K4D) Program, which provided the benchmarking analysis of Brazil's transition to the knowledge economy. This analysis formed the basis for early consultations and debate on education and competitiveness with key Brazilian stakeholders. The K4D team also provided input for several chapters of the book. The authors are grateful to have received the generous support and guid- ance of John Briscoe, theWorld Bank's Country Director in Brazil. Significant contributions were also made by World Bank staff members Andreas Blom, Education Economist; Paulo Correa, Senior Economist; José Luis Guasch, Senior Advisor; Keiko Inoue, Operations Officer; Jenny Litvack, Lead Econo- mist for Human Development in LAC; Eduardo Vélez, Education Sector Manager for LAC; Ethan Weisman, Lead Economist for Brazil; Zeze Weiss, Senior Civil Society Specialist; and Alexey Volynets, Operations Analyst, International Finance Corporation; and by consultants Jefferey Marshall, Horacio Hastenreiter, Janssen Teixeira, Chloe Fevre, Jason Hobbs, Andrea Welsh, and Antonio Magalhães. xiv Acknowledgments Several reviewers offered invaluable feedback and advice throughout the conceptualization and writing stages. These included Kathy Lindert, Chris- topher Thomas, Alfred Watkins, Robin Horn, and William Maloney. Sheldon Annis contributed his editorial expertise to the project, and the World Bank Office of the Publisher produced the English-language book. Brazil's National Confederation of Industry, the CNI, translated the volume and produced the Portuguese-language version for distribution in Brazil. Finally, the authors wish to thank all the Brazilian authorities at the federal and state levels who supported this study, as well as the many private sector, civil society, and education sector representatives who contributed ideas, information and feedback throughout the research and writing process. Abbreviations ADBI Brazilian Agency of Industrial Development ANPEI Associação Nacional de P,D&E das Empresas Inovadoras (National Association of Research, Development, and Engi- neering in Innovative Firms) BNDES National Bank for Economic and Social Development BRIC Brazil, Russia, India, and China BRICKM Brazil, Russia, India, China, Korea (Rep. of), and Mexico CAPES CoordenaçãodeAperfeiçoamentodePessoaldeNívelSuperior (Coordination for the Improvement of Higher Education Staff) CBPF Centro Brasileiro de Pesquisas Físicas (Brazilian Center for Research on Physics) CCT National Council on Science and Technology CCTs conditional cash transfers CEB Censo do Capital Estrangeiro no Brasil (Central Bank's Foreign Capital Census) CEF Caixa Economica Federal (Federal Savings Bank) CEPEC Center for Research in Education Culture and Community Action CGEE Center for Management and Strategic Studies CNA Confederation of Agriculture and Livestock CNC National Confederation of Business CNDI National Council of Industrial Development CNI National Confederation of Industry CNPq Conselho Nacional de Desenvolvimento Científico e Tec- nológico (National Council for Scientific and Technological Development) EFA Education for All EJA Educação de Jovens e Adultos (Education for Youth and Adults) xvi Abbreviations Embrapa Empresa Brasileira de Pesquisa Agropecuária (Brazilian Agricultural Research Corporation) ENADE Exame Nacional de Desempenho de Estudantes ENCEJA Exame Nacional de Certificação de Jovens e Adultos ENEM Exame Nacional do Ensino Médio EU European Union FAPESP Fundação de Amparo à Pesquisa do Estado de São Paulo (São Paulo State Research Foundation) FDI foreign direct investment FIES Fundo de Financiamento ao Estudante do Ensino Superior FIESP Federation of Industries of the State of São Paulo FINEP Financiadora de Estudos e Projetos (Financier of Studies and Projects) FNDCT Fundo Nacional de Desenvolvimento Científico e Tecnoló- gico (National Fund for Scientific and Technological Deve- lopment) FPR Rural Professional Training FUNDEB Fund for the Development of Basic Education FUNDEF Fund for the Development of Fundamental Education & Valorization of Teachers, also known as FVM GCI Global Competitiveness Index GDP gross domestic product GNI gross national income IBGE Brazilian Institute of Geography and Statistics IC investment climate ICS Investment Climate Survey ICT information and communications technology IDB Inter-American Development Bank IIT Indian Institutes of Technology IMPA Instituto Nacional de Matemática Pura e Aplicada (National Institute of Basic and Applied Mathematics) INEP National Institute for Education Research and Study Inmetro Instituto Nacional de Metrologia (National Institute for Metrology) INPI Instituto Nacional de Propriedade Intelectual (National Institute of Intellectual Property) IPEA Institute of Applied Economic Research IPI Imposto sobre Produtos Industrializados IPR intellectual property rights IPT Instituto de Pesquisas Tecnológicas do Estado de São Paulo (São Paulo State Institute for Technological Research) ISO International Standards Organization K4D Knowledge for Development KAM Knowledge Assessment Methodology (World Bank) LAC Latin America and the Caribbean region LDB Lei de Diretrizes Básicas (National Education Law) Abbreviations xvii MCT Ministry of Science and Technology MDIC Ministry of Development, Industry, and Trade MEC Brazilian Ministry of Education and Sports MIT Massachusetts Institute of Technology MLE medium and large enterprise MSE micro- and small enterprise MSTQ metrology, standards, testing, and quality control NGO nongovernmental organization NRI Network Readiness Index OECD Organisation for Economic Co-operation and Development PACTI Programa de Apoio à Capacitação Tecnológica da Indústria (Support Program for Technological Industrial Training) PADCT Programa de Apoio ao Desenvolvimento Científico e Tecnoló- gico (Support Program for Scientific and Technological Deve- lopment) PAM Mobile Activities Program PBQP Programa Brasileiro da Qualidade e Produtividade (National Program for Quality and Productivity) PDDE Projeto Dinheiro Direito na Escola PDE Plano de Desenvolvimento da Educação (Plan for Educational Development PDTI/PDTA Programas de Desenvolvimento Tecnológico Industrial e Agropecuário (Programs for the Development of Industrial and Agricultural Technology) PIA Pesquisa Industrial Anual (IBGE's Annual Industrial Survey) PINTEC Pesquisa Industrial­Inovação Tecnológica (IBGE's Industrial Survey­Technological Innovation) PISA OECD Programme for International Student Assessment PME Monthly Employment Survey PNAD Pesquisa Nacional por Amostra de Domicílios (National Household Survey) PNC National Curriculum Parameters PPP purchasing power parity PPV Standard-of-Living Survey PROEP Program for the Reform and Enhancement of Professional Education PROME Program for the Enhancement and Expansion of Secondary Education ProUni Programa Universidade para Todos PS Social Promotion PVA potential value added R&D research and development RAIS Relação Anual de Informações Sociais (Ministry of Labor and Employment's Annual Listing of Social Information) RCA revealed comparative advantage S&T science and technology xviii Abbreviations SAEB National System for Basic Education Evaluation SE small enterprise SEBRAE Serviço Brasileiro de Apoio às Micro e Pequenas Empresas (Brazilian Service for Assistance to Small Business) Secex Secretaria de Comércio Exterior (International Trade Secretariat) SENAC National Service for Commercial Apprenticeship SENAI Serviço Nacional de Aprendizagem Industrial (National Ser- vice for Industrial Apprenticeship) SENAR National Service for Agriculture Apprenticeship SENAT National Transport Apprenticeship Service SES socioeconomic status SESC Social Service for Commerce SESCOOP National Apprenticeship Service in Cooperative Activities SESI Social Service for Industry SEST Social Service for Transport Industries SESU Ministry of Education's Secretary for Higher Education SINAES Sistema Nacional de Avaliação da Educação Superior SMEs small and medium enterprises STI scientific and technological institutions TFP total factor productivity THES Times Higher Education Supplement (United Kingdom) TIMSS Trends in International Mathematics and Science Study TVET technical and vocational education and training VET vocational education and training UNDIM National Association of Municipal Education UNDP United Nations Development Programme UNESCO United Nations Educational, Scientific, and Cultural Organization UNESP Universidade Estadual Paulista Júlio de Mesquita Filho UNICAMP Universidade Estadual de Campinas USP Universidade de São Paulo WDI World Development Indicators WEF World Economic Forum WIPO World Intellectual Property Organization Currency Equivalents (Exchange Rate Effective: June 19, 2007) Currency Unit = Real R$1.00 = US$0.53 Executive Summary Brazil has made considerable progress toward macroeconomic stability since reform measures began to take hold in the early 1990s, and its economy has produced stronger growth as a result--an average of 2.5 percent annually over the past decade. Nevertheless, from an international perspective, Brazil's level of economic growth is still a matter of significant concern. Compared with Organisation for Economic Co-operation and Development (OECD) countries or with competitors such as China or India, Brazil not only is grow- ing slowly, it is falling farther behind. Indeed, as shown in figure ES.1, the income gap between Brazil and OECD countries has substantially widened. In 1980, Brazil's per capita purchasing power parity was about 42 percent of that of OECD countries. Twenty-five years later, it had fallen to under 29 percent of OECD countries. Where Growth Comes From Economic growth is widely understood as the interaction between physical and human capital. Investment in either generally increases growth; moreover, when physical and human capital interact more efficiently, growth occurs more rapidly. Economists generally attribute this incremental efficiency-based growth to total factor productivity (TFP).During the exceptional high-growth era of the "Brazilian Miracle" (1960­80),TFP was critical to growth; however, since then,TFP has declined dramatically. Growth-accounting exercises show that the ratio of Brazil'sTFP compared with that of the United States dropped from 1.07 in 1975 to 1.02 in 1980, to 0.80 in 1995, and to 0.73 in 2000. The macroeconomic shocks of the 1970s and the debt crisis of the 1980s are important factors in explaining the slowdown in Brazil's growth. However, this report argues that the decline inTFP was a similarly important cause.Why did it happen? Brazil's low rate of investment is one part of the answer. 2 Knowledge and Innovation for Competitiveness in Brazil Figure ES.1. Brazil's Per Capita Income Relative to the OECD Area (in PPP) 43 41 39 37 35 33 percent 31 29 27 25 1975 1980 1985 1990 1995 2000 2005 year Source:BasedondatafromtheOECDWebsite(http://www.oecd.org). Low productivity is another. The main factor, however, is that a new global "knowledge economy" has been emerging; and Brazil, despite its relatively successful implementation of adjustment policies in the mid-1990s, was not prepared to compete. In the new paradigm for middle-income countries,knowledge--not natural resources or cheap labor--increasingly constitutes the core of a country's comparative advantage.As well illustrated by dramatic success stories such as that of Bangalore, the capital of the Indian software industry, technical innova- tion and knowledge can work hand-in-hand to lead a country from suffocating poverty to strong productivity and competitiveness. Indeed, the proportion of goods in international trade with a medium-high or high technology content rose from 33 percent in 1976, to 54 percent in 1996, and to 64 percent in 2003 (World Bank 1999). This period was the same one during which Brazil muddled through slow trade liberalization and weak labor reforms and paid little attention to its lagging basic education system. Had more radical reforms been undertaken, Brazil would have been much better able to take advantage of domestic and international opportunities to spur growth, as did competi- tors such as China. Brazil can no longer ignore the knowledge economy--and it is not. An ongoing national dialogue is taking place on reforms to sustain strong macro- economic performance, further open trade, improve the physical infrastruc- ture,strengthen the judicial system and legal environment,and deal with weak and inequitable education systems that are not producing the kind of human capital required by today's global competition. This report emphasizes that Brazil has indeed made significant progress; yet the hard reality is that Brazil's competitors have too--only faster. The question has become not only how Brazil can make further progress but also how it can catch up. The analysis in this report is based on the conceptual framework shown schematically in figure ES.2. Following from the conceptual framework, the report discusses three main areas for enhancing competitiveness and Executive Summary 3 Figure ES.2. A Conceptual Model for the Components of Growth Growth TFP (Innovation) · Acquiring global knowledge · Creating knowledge through own efforts (without R&D or through R&D) · Disseminating and using existing in-country knowledge Physical capital Human capital Adjusted for Labor adjusted for · Capacity utilization · Education · Vintage of capital · Skills · Training Investment climate (the enabling environment) · Macroeconomic conditions · Rule of law · Competition policy · Governance Capital market · Security Labor market Source:Authors. accelerating growth. First, Brazil needs to build upon its stable macro- economic environment to extend reforms that will improve the investment climate. Second, higher productivity will require a focused effort to expand TFP through innovation-based growth.Third, a series of "micro" reforms are needed, of which two are urgent--strengthening incentives for firms to inno- vate, and upgrading the education system to improve the skills of workers entering the labor force. We present a set of specific recommendations that stem from this analysis. We also discuss possible roles for Brazilian agencies in implementing these recommendations, as well as the need to raise aware- ness on the urgency of this agenda. The main messages of this report cover four topics--consolidating the macroeconomic environment, boosting innovation, improving skills across the labor force, and moving from analysis to action. ConsolidatingtheMacroeconomicEnvironment The report summarizes key conclusions from previous World Bank policy papers on the macroeconomic fundamentals behind Brazil's current stability and progress. It discusses improvements in the enabling environment that would serve to drive accelerated growth. 4 Knowledge and Innovation for Competitiveness in Brazil The Brazilian economy has remained stable as a result of prudent macro- economic management--including fiscal and monetary policy, as well as debt management. Improved macroeconomic fundamentals have reinforced the benefit of favorable external demand for Brazil's primary commodities, rais- ing international reserves to unprecedented levels. Fiscal restraint, which has included a cap on public investment, has translated into yearly primary sur- pluses and macroeconomic stability. However, the country's infrastructure now needs upgrading in order to increase productivity and avoid jeopar- dizing growth. The challenge facing Brazil is to continue reducing public debt and improving the quality of the fiscal adjustment (that is, ensuring adequate re- sources for key public investments and poverty alleviation programs) while also improving the efficiency of public expenditures to create the fiscal space necessary for pro-growth investments. The ability of the government to adjust the composition of public expenditures is constrained, however, by its current high level of spending (most notably on pensions) and by an ongoing debt burden that ultimately limits the government's borrowing and spending capacity. In addition, the continuous growth in the size of govern- ment during the past decade--financed through increased taxes--has con- strained domestic savings. High interest rates have acted as a disincentive to private sector investment. In short, a stable macroeconomic environment has helped to reverse the bitter declines of the so-called "lost decade" of crisis and stagnation in the 1980s, and this has led to moderate growth in the past few years. However, a stable macro environment has not been sufficient to spark fast growth. More- over, given inadequate public investment in infrastructure and the sluggish- ness of reforms to facilitate the investment climate, prospects for significantly higher growth remain slim. While productivity improved during the past decade, as shown by historical evidence in this report, it is nonetheless lower than in previous periods when investment grew faster. BoostingInnovation Brazil's growth depends strongly on the export of manufactures and com- modities, a dependence that is likely to continue. Yet with few exceptions, Brazil's manufacturing base lags with respect to innovation--especially when Brazil is compared with China or India, countries that have taken giant steps in growth-enhancing innovation. If recent trends continue, Brazil would con- tinue to be mainly a supplier of primary commodities in world markets and an exporter of manufactured products to Mercosur and other Latin American countries. In other words, Brazil risks missing the opportunity to become a serious, diversified, global competitor, which would require it to emphasize higher value added in products in the sectors in which it already has some comparative advantages, and to engage in higher-value, more-income-elastic manufactures and services. Brazil needs not only to diversify and add value to its commodities,but also to improve its competitiveness in manufacturing and service exports as well. Executive Summary 5 Until the 1990s,the productive sectors in Brazil operated within a relatively protected economy. The government provided few incentives for private sector investment in innovation; yet that mattered less because protection from competition made private sector investment in innovation relatively less necessary. We argue in this report that two factors--a bias toward overly "theoretical" research in publicly funded universities and significant underin- vestment by a shielded private sector that is spared the need to compete--lie at the heart of Brazil's current relative underperformance in innovation. The private sector needs to invest more in R&D. Recent initiatives to encourage firms to invest in innovation--for example, the Innovation Law and the Sector Funds--are welcome steps. However, as argued throughout this report, the government now needs to take these measures further by creating a broader enabling environment in which private firms are will- ing to invest in innovation, take risks, and expand their productive activi- ties into new, "less-safe" areas. In addition to increasing its overall investment rate, Brazil needs to further liberalize the economy, in part, to force firms to become more competitive. Public investment in R&D needs to be made more effective, not just by producing more knowledge and technology but also by providing the infra- structure to commercialize and disseminate new knowledge (for example, technology parks, technology transfer offices, business incubators, and venture capital operations). Spain provides a notable example of how such efforts can work. Moreover, as we argue below, Brazil also must invest more in human capital through quality basic education and advanced skills training. China, Ireland, the Republic of Korea, and Singapore are just a few of many examples where this has been done massively and successfully. This report proposes a broad new definition of innovation.As used here,the term refers not just to new products and processes but also to new business processes and new ways of carrying out productive activities. We emphasize that innovation to improve TFP should not be understood simply as invention or the first use globally of a new technology but also as the first application of a product or process in a specific setting. Because developing countries are behind the technological curve in most sectors, they need to think less about invention and more about doing things differently with available knowledge and technology that they can acquire. The report proposes a three-stranded typology of innovation: (a) creation and commercialization of new knowledge and technology, (b) acquisition of knowledge and technology from abroad for local use and adaptation, and (c) the dissemination and effective application of knowledge and technology (whether domestically created or acquired from abroad) that is already available in-country though not broadly utilized. The significance of these distinctions is discussed below. Creating and Commercializing New Knowledge and Technology. In Brazil, investment in technological innovation comes mainly from the public sector--about 55 percent of the total, compared with about 30 percent in the United States. A research culture that is heavily and reliably financed by 6 Knowledge and Innovation for Competitiveness in Brazil the public sector has excelled in the production of conceptual knowledge-- for example, Brazil accounts for nearly 2 percent of articles published in internationally recognized research journals (roughly on par with Brazil's 2 percent of world gross domestic product [GDP]).On the other hand,substan- tial public expenditure has been far less successful at energizing technological innovation--for example, patents that can be commercialized. According to the World Intellectual Property Organization (WIPO), Brazil accounted for about 0.18 percent of patents in 2000. This compares with 3.4 percent of patents attributable to Sweden--that is, nearly 19 times more patents than Brazil despite a much smaller population. Similarly, Korea accounted for 1.7 percent of patents, more than nine times the rate for Brazil. Ironically, Brazil invested in R&D infrastructure far earlier than most other developing countries. Yet this report finds that an intellectual and practical disconnect has now emerged in Brazil that is not always found elsewhere. The public universities and labs where most government-funded research is conducted primarily pursue "pure" conceptual knowledge. Links between the private sector and these universities and labs are not well developed, unlike in other countries where entrepreneurial scientists and engineers typically have a foot in both worlds. Moreover, the private sector's own research capacity has been diminished by underinvestment from companies protected by trade barriers from foreign competition. The net result is that Brazil needs to pay far greater attention to what is produced through public investment, what happens to new knowledge once it is created, and how the private sector can be mobilized as an active partner. Strengthening the institutions and norms that protect intellectual property and supporting business incubators would help immediately. A nation's capacity to create new knowledge and technology is closely associated with advanced technical skills and a tertiary education system that is particularly strong in science, engineering, and technology application. Brazil has emphasized the humanities and social sciences at the expense of science and engineering. Despite slow but steady growth in the latter dis- ciplines, Brazil's tertiary education system still has far too little capacity to train advanced innovators who can work at the frontier of global knowledge creation. In China, the government has tapped and supported both public and private universities to increase enrollment rapidly and to leverage respective comparative advantage. As Brazil wrestles with the coverage, relevance, and resource needs of its higher education system, the Chinese examples could be instructive. Acquiring and Adapting Global Knowledge and Technology. For countries not already on the cutting edge, it is generally more practical to acquire rather than invent new knowledge and technology. Transfer of technology can be accomplished through several means--direct foreign investment; licensing; technical assistance; technology embodied in capital goods, components, or products; copying and reverse engineering; foreign study; published techni- cal information, especially on the Internet; twinning; cooperative training Executive Summary 7 partnerships; distance learning; and more. Trade--specifically, importing the latest versions of hardware, machinery, and software--is probably the most direct and critical means of acquiring knowledge and technology. Brazil is still struggling to reconcile the relative comforts of protectionism with the inevitable need to compete in global markets. In this respect, Brazilian firms are just awakening to the full benefits that acquired foreign technology can bring. Not surprisingly, the firm-level analysis of innovation undertaken for this report found large firms (and especially multinational firms) to be far ahead in innovation and productivity. The capacity of firms to put acquired technologies to productive use points again to the challenges of human capital formation. Technology stands little chance of being adopted and adapted successfully if workers lack basic reading and math skills; or at a higher level, the ability to reason conceptually, think outside the box, and apply the scientific method.Workers with these skills are no less critical than higher-level managers who can quickly adjust to comput- erization or imaginatively redesign a production strategy. If firms cannot trust in the adaptability of their employees, they necessarily become risk averse, opting for the low road to economic survival--that is, heavier exploitation of cheap, unqualified labor (as we found occurring in the northeast of Brazil). In essence, both basic and advanced skills are needed for a firm to maximize the rewards of acquired innovation. Disseminating and Using Knowledge and Technology That Is Already Available In-Country. Firms' inputs, processes, and outputs were disaggre- gated, broken down by sector, size, and region. Data from the World Bank Investment Climate Survey (ICS) and the Brazilian National Innovation Sur- vey of the Brazilian Industrial Sector (PINTEC) were used for this analysis, and the results are presented in this report.Microanalysis allowed a closer look at the characteristics of firms within and between sectors, as well as compari- sons with firms in other countries. Some Brazilian firms were clearly found to be innovators, mainly large enterprises with many employees and strong outputs. In general, however, Brazilian firms were found to innovate less than those of other countries.There is relatively little demand for innovation in the unsophisticated internal market. Protection continues to undercut the need for innovation and creative risk taking.Firm productivity is low,and dispersion of productivity is enormous. In fact, the report found that the dispersion in firm productivity in Brazil was much greater than in most other countries for which data were available, including China and India. This report argues that using the knowledge already in Brazil provides the quickest and most promising route for increasing productivity and com- petitiveness to spur growth. Through this third type of innovation--which is arguably the least expensive and most accessible--Brazil could increase productivity across all sectors.The report underscores the critical importance of firms being able to identify productive practices within the country and then having the inputs to replicate, enhance, and increase their own pro- ductivity. This third kind of innovation requires relatively greater effort 8 Knowledge and Innovation for Competitiveness in Brazil to disseminate knowledge through channels such as industrial and service extension programs, technical information centers, and cluster-based tech- nology improvement programs. Some innovation requires newer machinery and better physical inputs, as well as better management and organization. Equipment is not a magic bullet, however.What matters is what happens on the shop floor. Can workers observe new practices first-hand, and is there an environment that rewards increased efficiency and productivity? Indeed, can workers accomplish the same things through better use of the equipment and inputs that they already have? The fact that job tenure in Brazil is generally low--and lower still for less- skilled workers--might be expected to increase the flow of good practices between firms. In reality, however, this does not appear to be happening. We suggest that the lack of basic skills among workers is probably the single most significant obstacle to the use of new technology and equipment or the free flow of innovative practices across firms. Indeed, unskilled workers are likely to be risk averse and more comfortable with the simple routine of procedures that do not demand additional formal training. Moreover, high job turnover may discourage effective firm-level training. Our study found that Brazilian firms do invest significant time and resources training their employees; however, in most cases this training focuses on basic skills deficits that should have been addressed by the formal education system, not on the introduction of innovation to improve productivity on the shop floor. One notable exception is the production chains that have been developed by small and medium enterprises that act as suppliers to large innovative firms such as Embraer, Petrobrás, Gerdau, Ford, and others.These smaller firms fre- quently are able to enhance their productivity by using technologies adapted from the larger innovative companies. Cases such as these tend to occur in specific geographic clusters. The local qualifications of human resources-- both advanced and basic--are crucial to these processes, as the experience of Embraer demonstrates. ImprovingSkillsAcrosstheLaborForce Brazil's unemployment rates worsened for all workers during the 1990s-- ranging from those with no education through those with primary, secondary, and tertiary education. The proportion of unemployed university graduates rose to 16.4 percent, compared with an unemployment rate of 9.3 percent for the population at large. This is highly suggestive of a mismatch between the skills of formal education system graduates and the needs of the labor market, rather than a sign that the labor market does not require advanced skills. The extremely high rate of secondary school dropout similarly reflects weakness in the school-to-work transition. Older secondary students, in particular, drop out because they know that staying in school will not necessarily provide additional opportunities for jobs or for meaningful job-oriented training. In addition, there are insufficient graduates from nonuniversity institutions and short-duration professional programs, such as those typically offered Executive Summary 9 by community colleges in the United States and postsecondary technical institutes in Europe. Strengthening Tertiary Education. It is well accepted that more and better education improves employability and earnings. However, average educa- tional attainment for the Brazilian population age 15 and older is still only 4.3 years. With only a quarter of the university-age population attending a tertiary institution, Brazil has the next-to-lowest gross enrollment rate among the larger Latin American countries, well below the continental average of 30.3 percent. The low enrollment rate in universities is mirrored by the very small proportion of the labor force with tertiary-level educational qualifica- tions: 8 percent. Despite many top-quality enclaves at the tertiary level, the overall lack of consistent high quality (especially in the absence of performance standards) is critical. Brazil is the world's eighth-most-populous country, yet no Brazilian university is to be found among the 100 top-ranked universities worldwide. Research production is concentrated in a very small group of elite public or state universities. A second tier of public and private universities has many pockets of excellence, but beyond that point on the spectrum--that is, in the vast majority of small underfunded private universities--quality is worse than uneven and serious research is neither financed nor rewarded. At the federal universities, 83 percent of instructors are full-time academics, in contrast to about a third of instructors in the municipal universities and a fifth in the private institutions. In private universities, most instructors are part-time em- ployees. Basically, they earn an hourly wage and they are paid according to the number of classes that they teach. The proportion of academics with a doctoral degree rose from 15 percent in 1994 to 21 percent in 2004. At the federal universities, the rate doubled from about 21 percent to 42 percent.The vast majority of academics not only have not been trained in research through doctoral training, they have virtu- ally no opportunity to participate in publicly funded basic R&D. That does not mean, however, that they are more likely to engage in "practical" research or that they engage in outside-the-university research with private sector counterparts. To the contrary, the university and private sector realms remain consistently separate across the board. Unlike the Silicon Valley or Route 128 models in the United States--where well-trained innovators may constantly shift from university to private sector and back throughout their careers, or may simply maintain a permanent presence in both--their Brazilian counter- parts remain remarkably segregated.To an astonishing extent, the two worlds do not intersect, much less cross-fertilize. Similarly, only a relatively small minority of Brazilian faculty study abroad. In 2005, only 2,075 students were officially sponsored for graduate studies outside Brazil. Only 1,246 foreign students attended Brazilian universities. Other postsecondary training is offered by private providers and, in par- ticular, by the institutions that form the "S-system." These nine institu- tions constitute the largest consolidated professional training system in Latin 10 Knowledge and Innovation for Competitiveness in Brazil America, created by the National Confederation of Industry (CNI) and the state federations of industry. The system is financed through a compulsory 2.5 percent payroll tax.Present in about 60 percent of Brazilian municipalities, the S-system offers an estimated 2,300 courses per year and enrolls about 15.4 million trainees annually. While the effectiveness of its training (and the cost-efficiency of the system itself) has been hard to assess, the S-system plays a crucial role in providing specific training for workers and could serve as the cornerstone for a lifelong learning framework in Brazil. Accesstotertiaryeducation--especiallyatthemostprestigiousuniversities-- is skewed heavily toward upper-income families.While approximately 69 per- cent of the population is classified as low income in Brazil,about 90 percent of students at UNICAMP (generally regarded as one of the top two universities) are not low income.This unequal distribution at UNICAMP is hardly unique; it reflects a continuing pattern of unequal opportunity across the system more broadly. At the secondary level, for example, about 90 percent of children from the highest income decile complete school, compared with only about 4 percent of children from the lowest decile of families. Improving Basic Education. If a weak and relatively small tertiary education system presents a challenge for Brazil's innovation system, basic education is also at the heart of the country's low productivity and lack of competitiveness. Besides too few educational opportunities in the absolute sense (and setting aside the social inequities of who benefits), the Brazilian education system is significantly deficient in the quality of education that it offers. As shown in this report, schools at the primary and secondary levels are failing to provide the minimum literacy and numeracy skills necessary for active citizenship, let alone productive participation in a technology-based labor market.According to the international PISA tests, approximately half of Brazilian 15-year-olds have difficulty reading or cannot read at all, and about three-fourths cannot manage basic mathematical operations. It is therefore unsurprising that this report found that, while Brazilian firms invest significant resources in worker training, these efforts are mostly geared toward filling the basic skill gaps left by the formal education system. Companies should be building upon basic skills, not having to provide them. As discussed in the report, there are many reasons for the unsatisfac- tory performance of the nation's schools, including the management and incentives of the teaching profession. Relatively speaking, Brazil's 1.5 million teachers are reasonably well paid.They earn 56 percent more than the average national salary overall. (By contrast, teachers in OECD countries on average earn about 15 percent less than the average salary in their respective coun- tries.) The pay gradient for Brazilian teachers is tightly defined by seniority. With few exceptions, neither penalties nor rewards are available as incentives for teacher performance, much less student learning. Unsurprisingly, given the pace of enrollment expansion in recent years, funding for math, science, and technology enrichment has lagged far behind school construction and teacher hiring as a budget priority. Nearly a third of those who teach Brazil's Executive Summary 11 45 million students have not completed university training, and only about 20 percent hold master's degrees. For the most part, the training of those who are university-educated tends to be very strong in pedagogical theory but very weak in the applied art of teaching. Over the past 20 years, the number of places in primary and secondary schools has increased dramatically, and access to primary education is now virtually universal. It is less certain, however, that the quality of education has increased. This is related less to absolute lack of financial resources (public educational expenditure rose from 3.9 percent of GDP in 1995 to 4.3 percent of GDP in 2005) than to management factors.For example,it is estimated that about 60 percent of school principals obtained their jobs based on political criteria. Computers in the schools (approximately 2 per 100 students com- pared with 28 per 100 in Korea) tend to be used by teachers and administra- tors, not by students, which is all the more significant for future technological innovation in a country where the vast majority of families do not have a personal computer at home. The report also discusses the pedagogical and curricular factors that contribute to low quality in basic education. Classroom teaching at the primary level (especially in rural areas) is still conducted very much as it was a generation ago.That means students passively copy what the teacher writes on the board and are expected to learn by rote memorization, an approach that is the diametrical opposite of the kind of active learning that rewards flexible thinking, conceptual reasoning, and problem-solving skills--in other words, the very traits that adult workers need for competitiveness in a knowl- edge economy. In summary, the low level and skewed distribution of education among Bra- zilians explains more than the oft-studied cycle of poverty and inequality.Here, we argue that basic and advanced skills are critical inputs for the nation to harness innovation, increase productivity, enhance competitiveness, and accel- erate economic growth--and that these needs presently are not being met. FromAnalysistoAction:WhoNeedstoDoWhat? The report proposes concrete actions in six key areas--the enabling envi- ronment, knowledge creation and commercialization, acquisition of foreign knowledge, leveraging and dissemination of technology use, basic education and skills, and tertiary education (advanced skills). Taken together, these recommendations represent a first step toward a comprehensive national plan for innovation. Continued analysis, increased public awareness, and a vigor- ous national debate can translate these recommendations into an integrated national strategy to foster innovation-led growth. Leveraging innovation for economic growth necessarily encompasses a broad spectrum of issues and actors. This ranges from the overarching frame- work of the economic and institutional regime to highly technical, specialized applications relating to R&D, foreign investment, and technology transfer; information technology; standards and quality control; finance and venture 12 Knowledge and Innovation for Competitiveness in Brazil capital; education; and so forth. The final chapter recasts the broad array of recommendations from the perspective of which actors need to take what actions. The chapter addresses the many entities of government, the private sector, and civil society that will have to implement recommendations if ideas are to be translated first into action and then into reality. Not all of the recommendations are of equal weight and priority; and for technical or political reasons, some will be far more difficult to implement than others. Some actions would require new laws through Congress. Some would require significant changes in policies or the regulatory environment, while others could be achieved by exerting a reasonable amount of political will. Some could be carried out with existing resources. Others would require significant mobilization of public and private funds. Some actions could be done rapidly. Others will require years of sustained efforts. Some actions will be difficult because they affect the interests of groups who benefit from the system the way it is. Our work does not go so far as to prioritize or suggest details for a par- ticular plan. That is necessary--including all the hard choices and tradeoffs that concrete action implies--though it is beyond the scope of the present report. What is clear is that Brazil needs to undertake a broad, systemic reform process in order to increase the competitiveness of its economy and to accelerate growth. There is a danger that the recently improved trade perfor- mance--driven by the current boom cycle in commodity prices--will improve economic performance enough to temporarily justify complacency. Given the fundamental changes that are taking place globally,that short-sighted approach would be costly. Neither the government nor Brazilian society as a whole appears to be fully cognizant of the international trends or the opportunity costs of failure to respond. Most governments and citizens ofAsia do understand these trends, and they are responding, and that is an important reason why Asia is rising as the new base of economic power.For Brazil,the next step is to mobilize a mass campaign to raise public awareness. Brazil needs to see its performance in the broader global context, to analyze the new global challenges that it faces, and to discuss in a transparent way what must be done.The process of stocktaking and building stakeholder awareness is inherently a domestic political process. It needs to be locally driven and locally owned. It is hoped that this report will provide useful input into launching such a process. Methodology and Organization of the Report This report was carried out by a multidisciplinary team of World Bank staff, consultants, and Brazilian counterparts. The core team and contributors analyzed existing data, developed conceptual and econometric models, and consulted extensively with federal and subnational governments,business lead- ers, and academics.The research was conducted primarily between November 2006 and April 2007. Executive Summary 13 The authors relied on secondary data analyses by Brazilian researchers, international colleagues working in other countries on similar topics, and work by the core team itself. For the growth analysis and decomposition, the main source of data was Brazil's Geography and Statistics Institute, the IBGE, including the modified growth calculations from March 2007. For national-level analyses on innovation, the team used readily available information and databases from the Ministry of Science and Technology, the World Bank (such as the World Development Indicators and the World Bank's KAM interactive database), the Ministry of Finance (such as SIAFI, the Integrated Financial Administration System), and other agencies (including the U.S. Patent and Trademark Office). For firm-level analyses, the authors relied on the World Bank Investment Climate Survey, the IBGE's PINTEC Technological Innovation Survey, and a data set developed by the Institute for Applied Economic Research, IPEA, which combines firm-level data with workforce data from the Ministry of Labor. For analyses of human capi- tal, sources included student assessment data sets and the National School Census from the Institute for Educational Research (INEP), a unit of the Ministry of Education; the IBGE's PIA Annual Industry Survey database; OECD's PISA database; and the RAIS (Annual Social Information), a data- base managed by the Ministry of Labor. In some cases, the authors performed original econometric work to assess relationships and confirm the conceptual framework. In others, the study reports on econometric work designed and performed elsewhere. Recent research by IPEA, which uses a newly assembled database combining firms' and workers' information, was found to be particularly useful. The findings of this report are organized into eight chapters, followed by several appendixes. The first chapter looks at the central problem--why Brazil has grown so slowly despite relative success in improving its fiscal and macroeconomic performance. The second chapter presents the four- factor conceptual model used to analyze economic growth, highlighting the importance of innovation and TFP. Each element of the conceptual model is analyzed separately in subsequent chapters. The third chapter defines the concept of innovation as elaborated in the study. Three kinds of innovation are distinguished--first, creation of new knowledge and technology; second, acquisition of new knowledge and technology (often from elsewhere); and third, wholesale adoption, adaptation, and dissemination of new knowledge and technology within the national economy. Applying these distinctions, the fourth chapter assesses Brazil's performance in innovation at the national level. The fifth chapter provides a similar kind of analysis at the micro level of the firm. The chapter elaborates on the relationships among innovation, productivity, and growth--and more specifically, it points to evident weak- ness in human capital formation. The sixth chapter looks more closely at the multi-tiered education systems primarily responsible for human capital formation.Although Brazil has a very large, nominally literate population, its workforce at every level is nevertheless poorly prepared for innovation. The chapter explains this through summary profiles of the primary education 14 Knowledge and Innovation for Competitiveness in Brazil system, the secondary education system, out-of-school advanced training, and the tertiary education system. It also explores features related to school performance and governance and issues related to teachers and teaching. The primary, secondary, tertiary, and out-of-school systems are described in greater detail in accompanying appendixes at the end of the report. The seventh chapter looks broadly at what Brazil can do to foster innovation. With an eye toward developing an integrated national strategy, it proposes concrete actions in six key areas--the enabling environment, creation and commercialization of knowledge, acquisition of foreign knowledge, lever- aging and dissemination of technology use, basic education and skills, and tertiary education. The final chapter reframes these recommendations from the pragmatic viewpoint of who needs to do what. CHAPTER 1 Brazil's Growth and Performance in a Global Context Brazil has achieved relative economic stability and a growth rate of about 2.5 percent over the past decade. However, Brazil has not recovered the rapid growth rates it once achieved, nor the current rapid growth rates of its main global competitors. In fact, from a global perspective, Brazil not only is failing to catch up, it is falling relatively farther behind. This chapter assesses Brazil's recent growth compared with other countries in Latin America and with several middle-income economies of approximately similar size. It then considers Brazil's rankings in a highly competitive global environment that is increasingly driven by knowledge and innovation. These international comparisons provide context for framing the issues of central concern for this report.This chapter also examines the structure of the Brazilian economy and its exports. Chapter 2 presents a conceptual framework within which to interpret Brazil's experience, placing this study within a growing body of work on inno- vation, competitiveness, and economic growth. Chapter 3 looks more closely at the nature and origins of innovation. The remaining chapters focus on the specific innovation and human capital limitations that are constraining Brazil's current growth and competitiveness. Brazil's Growth in Comparative Perspective Between 1930 and 1980--approximately half a century--the Brazilian economy grew at an average rate of 7 percent per year. Indeed, during the latter years of that period, 1964 to 1980--often referred to as "the Brazilian miracle"--growth averaged a remarkable 7.8 percent.For about a decade dur- ing this period (1968­76, following the moderately successful stabilization Julio Revilla and Carl Dahlman were key contributors to this chapter. 16 Knowledge and Innovation for Competitiveness in Brazil Figure 1.1. Inflation Rates, 1980­2007 16 2,600 2477 14 13 2,400 12 2,200 1973 2,000 10 8.9 9.3 7.7 7.6 1,800 8 1621 1,600 6 5.7 6 5.2 tional 1,400 4.5 4 1,200 1119 3.1 inf 980 1.7 1,000 916 2 800 0 7 2 3 5 6 600 473 199 1998 199920002001200 200 2004 200 200 2007 400 363 215 242 200 99 96 105 164 80 22 9.6 5.2 1.7 8.9 6 7.7 13 9.3 7.6 5.7 3.1 4.5 0 2 3 7 9 2 3 7 2 3 4 19801981198 198 1984 1985 1986 198 1988 198 1990 1991199 199 1994 1995 1996 199 1998 19992000 2001200 200 200 200520062007 year Source:IBGE(BrazilianInstituteofGeographyandStatistics),www.ibge.gov.br. program that was undertaken in 1964), growth actually averaged about 10 percent annually. Although growth was rapid during this period, the economy was not with- out problems.Volatility was moderate throughout and was strongly related to a series of external shocks and sharp policy reversals in economic policy.1 As illustrated in figure 1.1, inflation was also high and was especially harsh in its impact upon the poor. In the 1980s, GDP growth collapsed after the half century of sustained economic gain, and Brazil's economy may have experienced a long-term structural change.As shown in table 1.1, between 1981 and 1993 growth fell sharply--down to an average of 1.7 percent following the second oil shock of 1979 and Brazil's first debt crisis in 1981­82. This second period of recent economic history was marked by crisis and stagnation. It began with a steep output contraction and was marked by large macroeconomic imbalances and crisis-level output volatility--that is, very low growth accompanied by very large macroeconomic imbalances, high inflation, an external debt crisis, and repeated failures in stabilization efforts. Brazil's most recent era, from about 1994 to today, was a period of limited recovery. It followed a stabilization program that was implemented under the Real Plan in 1994. As the stabilization program took hold and deepened, growth inched upward, achieving a positive but lackluster average rate of 2.8 percent between 1994 and 2005. The overall picture of recent growth is captured in figure 1.2. The figure shows annual GDP growth as a percentage and as a 10-year moving average for 1964­2005. Although growth averaged nearly 10 percent in the 1960s and 1970s, it averaged only about 2.3 percent annually in the quarter century from 1981 to 2005. Brazil's Growth and Performance in a Global Context 17 Table 1.1. Average and Volatility of GDP Growth Rates, 1964­2005 Average (%) Standard deviation "Brazilian Miracle," 1964­80 7.8 3.32 Crisis and stagnation, 1981­93 1.7 4.10 Limited recovery, 1994­2005 2.8 1.96 Sources: Based on the World Development Indicators (WDI) Database and data from the IPEA (Institute of Applied Economic Research), www.ipeadata.gov.br, and IBGE, www.ibge.gov.br, Web sites. Figure 1.2. Annual GDP Growth: Percent and 10-Year Moving Average, 1964­2005 15 10 10-year moving avg. 5 percent 0 ­5 1964 1974 1984 1994 2004 year Source: Based on the WDI Database and data from the IPEA, www.ipeadata.gov.br, and IBGE, www.ibge.gov.br, Web sites. Putting this picture in context, it is striking to note that both the high and low periods of growth (as well as the high volatility that accompanied the second and third periods) were almost completely out of sync with Brazil's regional neighbors as well as with other countries at similar levels of per capita income. As shown in table 1.2, Brazil's growth was significantly higher than the rest of Latin America during the 1960s and 1970s, but the situation was reversed in the 1990s, when Brazil's growth was lower than the rest of Latin America.This switch occurred even though the other economies were subject to essentially the same external environment; and ironically, many of them were highly dependent on Brazil. The degree of relative underperformance is even more striking when the projected effects of macroeconomic stabilization and related policies are taken into account.In the early 1990s,most of Brazil's regional peers managed to bounce back from the so-called "lost decade." Brazil recovered gradually, but it hardly bounced back. Some of this failure might be explained by the 2001 Argentine contagion or by the 2002 Lula effect on higher interest rates. There was an apparently strong recovery in 2004; yet even so, it proved to be 18 Knowledge and Innovation for Competitiveness in Brazil Table 1.2. Annual Real GDP Growth Rate for Brazil and Select Countries percent 1960s 1970s 1980s 1990s 2000­05 Latin America 5.3 5.6 1.7 3.0 2.6 Argentina 4.1 2.9 ­0.7 4.5 1.8 Brazil 5.9 8.5 3.0 1.7 3.0 Chile 4.4 2.5 4.4 6.4 4.4 Mexico 6.8 6.4 2.3 3.4 2.6 Asia China 3.0 7.4 9.7 10.0 9.3 India 4.0 2.9 5.9 5.7 6.4 Indonesia 3.7 7.8 6.4 4.8 4.7 Korea, Rep. of 8.3 8.3 7.7 6.3 5.2 East Asia 3.8 7.2 7.7 8.2 8.1 High-Income OECD 5.4 3.7 2.9 2.5 2.3 Sources: Based on the WDI Database and data from the IPEA, www.ipeadata.gov.br, and IBGE, www.ibge.gov.br, Web sites. surprisingly short-lived. In 2005 and 2006, growth rose to about 3 percent, only slightly above the average for the previous decade. The weakness in growth becomes even more apparent when Brazil's performance is compared with current fast-growth economies such as China, India, or Indonesia. As shown in table 1.2, during the 1960s these economies grew much more slowly than Brazil.Yet while Brazil fell flat during the 1980s, these economies managed to jump-start their growth.The Republic of Korea, Malaysia, andThailand not only have sustained high growth for longer periods than Brazil but also have experienced prolonged periods of rapid expansion following periods of low growth. The relative consequences of this low growth are illustrated in figure 1.3. As shown, Brazil's income gap relative to the Organisation for Economic Co-operation and Development (OECD) countries has steadily widened. Since the 1990s, Brazil has not only failed to catch up, it has fallen farther behind--from about 42 percent of OECD per capita income in 1980 to less than 29 percent in 2005. Brazil's Competitiveness in an Increasingly Knowledge-Driven Global Environment The generation of knowledge has significantly accelerated with the rapid advance of science and new communications technologies. Reductions in transportation costs, such as containerized shipping, are leading to the globalization of manufactured products, parts, and components, and the Brazil's Growth and Performance in a Global Context 19 Figure 1.3. Brazil's Per Capita Income Relative to the OECD Area (in PPP) 43 41 39 37 35 percent33 31 29 27 25 1975 1980 1985 1990 1995 2000 2005 year Sources:CalculatedbasedonOECDdata. supply of inputs and raw materials from all around the world. The Inter- net, in particular, is making it possible to manage production facilities and trade globally in previously unimaginable ways. In addition, information and communications technologies (ICT) are permitting a growing trade in services; virtually any labor service that can be digitized is increas- ingly being outsourced and off-shored. Enhanced by trade liberalization, the decline in transportation and communication costs is leading to an increasingly globalized world. In the 15 years between 1990 and 2005, the share of imports and exports in global GDP increased from 38 percent to 55 percent. In this new paradigm, it is knowledge--not natural resources or exports based on cheap labor--that constitutes the core of comparative advantage. As many cases have illustrated--including Bangalore, the capital of the Indian software industry--technical innovation and the competitive use of knowl- edge go hand-in-hand to produce high growth. Indeed, the proportion of goods in international trade with a medium-high or high technology content rose from 33 percent in 1976 to 54 percent by 1996 (World Bank 1999). Brazil was slow in adopting critical reforms that would have helped it ride the wave of this global shift to a knowledge economy. China, India, Korea, and most of the OECD countries advanced in making these critical reforms; and that is the main reason they outpaced Brazil. As Porter (1990) and many subsequent authors have noted, comparative advantage among nations increasingly comes from technical innovation and the competitive use of knowledge--or from a combination of the two.Indeed, the real growth of value added in knowledge-based industries in many OECD member countries consistently outstripped overall growth rates during the past two decades. Growth of value added for the 1986­94 period was 3 percent for knowledge industries compared with 2.3 percent for the busi- ness sector as a whole (OECD 2000: 220, table 2).2 Between 1985 and 1997, 20 Knowledge and Innovation for Competitiveness in Brazil the share of knowledge-based industries in total value added rose from 51 to 59 percent in Germany, from 45 to 51 percent in the United Kingdom, and from 34 to 42 percent in Finland (OECD 2001). One way to see the increased importance of knowledge is to examine the changing structure of global trade in even the short period between 1985 and 2004 (table 1.3).3 The share of primary products decreased from 23.2 per- cent in 1985 to 14.7 percent in 2004, while that of manufactured products increased from 76.8 percent to 85.3 percent. This is largely because manu- factured products are more income-elastic than primary products, because a greater number of new and increasingly differentiated products are produced through advances in knowledge. Moreover, the share of resource-based manu- factured products fell from 19.4 percent to 15.6 percent. Low- and medium- technology manufactured products increased their share of global output by about 1 percent each. However, it was high-technology products--including electronics and airplanes--that made up for the decline in the share of primary and resource-based products. They increased their share from 11.6 percent to 22.4 percent. Thus, international competitiveness is now based much more on technological capability and innovation than on natural resources or basic production factors. Reflecting the increasing importance of technology and innovation for com- petitiveness, the World Economic Forum (WEF) has devised a new Global Competitiveness Index (GCI) for 117 countries.The GCI separates countries into three stages of competitiveness development--factor-driven, efficiency- driven, and innovation-driven. Figure 1.4 shows Brazil's rankings for a range of findings. Overall, Brazil ranks 57th out of 117 countries (the lower the ranking, the better the per- formance).On the basic requirements subindex (which characterizes factor- driven economies), Brazil ranks 77th. For component indexes, it ranks 79th for institutions, 70th for infrastructure, 91st for macroeconomy, and 52nd for health and basic education. On the efficiency enhancers sub- index,4 it ranks 51st for the component indexes, 50th on higher education Table 1.3. The Changing Structure of World Exports, 1985 and 2004 1985 2004 Annual (US$ (US$ growth 1985 2004 Products billions) billions) rate (%) (%) (%) All products 1,689 7,350 7.6 100.0 100.0 Primary products 391 1,018 4.9 23.2 14.7 Manufactured products 1,244 6,063 8.2 76.8 85.3 Resource based 327 1,148 6.5 19.4 15.6 Low technology 239 1,962 7.9 14.2 15.0 Medium technology 480 2,169 7.8 28.5 29.5 High technology 196 1,643 11.2 11.6 22.4 Source:CEPAL-TRADECAN2005. Brazil's Growth and Performance in a Global Context 21 Figure 1.4. Brazil's Rankings on the Global Competitiveness Index, 2006 100 91 90 79 80 77 70 70 60 57 55 52 51 50 51 50 rank 39 40 36 33 30 20 10 0 y g rs GCI nce trainin factors tication vation education ha & efficiency readiness institutions en inno requirements infrastructureacroeconomary ket gical sophis m ar prim m basic & education innovation efficiency her technolo business health hig index Source:WorldEconomicForum2006. and training, 55th on market efficiency, and 51st on technological readi- ness. Brazil ranks 36th on the innovation and sophistication factor sub- index (which characterizes innovation-driven economies); it ranks 33rd on the business sophistication subcomponent and 39th on the innovation subcomponent. The GCI scores suggest that Brazil will face a triple challenge if it wishes to make the transition from positive economic growth to rapid economic growth. First, it must improve upon the basic enabling conditions for growth--a sound macroeconomic environment, capable institutions, modern infrastructure,and higher-quality basic education and health services.Improv- ing the basic enabling environment is probably the key priority because this is the area where Brazilian performance is the worst, particularly with regard to the macroeconomy.As shown in chapter 2, Brazil faces considerable obstacles in this area--largely as a result of low rates of investment--which negatively affect its ability to grow. Second, Brazil must improve domestic competition and market efficiency, education and training, and its ability to use existing technology effectively. Improving efficiency is the second key priority as it is the second-worst performance area;chapter 2 examines some of the problems with market efficiency in greater detail.Third, Brazil must improve its capac- ity to undertake innovation through business sophistication and the ability to develop, adopt, and disseminate new products and processes. The rank- ings show that Brazil does relatively better in this area than in the other two. However, looking to the future, this is an increasingly important area because of the importance of knowledge and innovation for competitiveness. 22 Knowledge and Innovation for Competitiveness in Brazil Finland provides a good example of how knowledge can be a force to drive economic growth and transformation. During the 1990s, Finland became the economy most specialized in ICT in the world, completing its transition from an economy based on natural resource exploitation to one driven by knowledge and innovation.Export diversification has been integral to Finland's improved economic performance. This diversification was attributable largely to continuous emphasis on tertiary education, linkages and spillovers among industries, and new knowledge-based enterprises. Since 1980, invest- ment in research and development (R&D)--primarily by the private sector, with the government as an important secondary partner--has more than doubled. R&D investment reached the equivalent of 3.5 percent of GDP in 2004, far above the European Union (EU) average of less than 2 percent. The Finnish innovation system also has succeeded in converting its R&D investments and educational capacity into industrial and export strengths in the high-technology sectors (Dahlman et al. 2005). A new type of enterprise--producer-services companies providing special- ized information in support of manufacturing firms--has recently begun to emerge.These companies are a principal source of created comparative advantage and value added among the highly industrialized economies (Gibbons 1998). In the knowledge economy, advances in microelectronics, multimedia, and telecommunications give rise to important productivity gains in many sectors. They are also the key to a multitude of new products in a wide range of new industrial and service activities. On the down side, the ever-faster creation and dissemination of knowledge means that the life span of technologies is becom- ing progressively shorter. Obsolescence sets in ever more quickly. Developing economies are often affected by these transformations without experiencing the benefits. The capacity to harness knowledge for sustainable development and higher living standards is not equally shared. In 1996, it was estimated that OECD countries accounted for 85 percent of total investment in R&D; Brazil, China, India, and the newly industrialized countries of East Asia accounted for 11 percent--and the rest of the world,only 4 percent.One reason agriculture is so much more productive in industrial countries than it is in developing countries is that the former spend up to five times more on agriculture-related R&D than do the latter.In other words,industrial countries possess the combined infrastructure, expertise, organizational arrangements, and incentive structures to allow their R&D investments to become produc- tive. The exclusive group of advanced economies enjoys a virtuous circle in which the benefits of research help to produce the wealth and public sup- port that perpetuate their ability to continue investigation on the scientific frontier (Romer 1990). Figure 1.5 compares the economic evolution of Brazil and Korea from 1958 to 1990. The figure well illustrates the dramatically different outcomes for two countries, both of which started with roughly similar GDP per capita-- but one of which adopted a knowledge-based development strategy. The graph is based on the standard Solow method of accounting for economic growth. It represents a stylized attempt to estimate the relative contribution of tangible factors--such as the accumulation of physical capital and additional Brazil's Growth and Performance in a Global Context 23 Figure 1.5. Knowledge as a Factor in Income Differences between Brazil and the Republic of Korea, 1956­90 Korea 12,000 US$) 10,000 (2,000 difference in 8,000 output as a capita result of TFP per growth or 6,000 knowledge GDP accumulation in Korea real 4,000 Brazil difference in output as a 2,000 result of growth in labor and capital in Korea 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 year Source: Calculations based on World Bank internal data. Knowledge for Development (K4D) Program, World Bank Institute. years of schooling in the labor force--and factors linked to the use of knowl- edge, such as the quality of education, the strength of institutions, the ease of communicating and disseminating technical information, and the level of management and organizational skills (Solow 2001). In this model, techni- cal progress raises the potential output from a given set of inputs. Empirical measures are then applied to assess the extent to which growth is attribut- able to increased inputs (more labor and capital) or to the use of inputs in a more productive way.The latter measure,commonly referred to as total factor productivity (TFP), is closely linked to how knowledge is used in production. Because TFP measures output per units of input, raising it may lead to higher standards of living. The differing growth trajectories illustrated in the figure reflect a broadly observed pattern, not just circumstantial differences unique to Brazil and Korea. Easterly and Levine (2000) analyzed several similar cross-country growth studies, and they also concluded that differences in TFP growth are the main explanation for differences in economic growth. Accordingly, they argue for a shift in policy emphasis to focus on TFP rather than simple capi- tal accumulation. The Structure of the Economy and the Structure of Exports Two structural elements of the Brazilian economy that affect the country's growth and competitiveness are worth highlighting.The first is that Brazil--like 24 Knowledge and Innovation for Competitiveness in Brazil other LatinAmerican economies but in contrast to rapidly growing economies like China and India--has experienced relatively little structural change in the composition of economic activity over the past 25 years. By 1985, Brazil and the other key Latin American economies had already made the major transi- tion from agriculture to industry.This occurred in the past 25 years for China and India, which transitioned from agriculture into industry and services.The shift from low-productivity agriculture to higher-productivity industry (or services) helps to increase overall growth; and it is one of the reasons for the faster growth of China and India. The service sector can be a very important source of growth. As seen in table 1.4, India's recent growth rates of over 8 percent have been led by knowledge-intensive services. While the share of services in GDP expanded slightly in Brazil, it is 6 percentage points below the average of 60 percent for middle-income economies and the average of 65 percent for high-income economies.This is due to neglect of the service sector in Brazil's development strategy, even though services account for more than half of GDP.The growth potential of the service sector is especially significant because it is rapidly becoming the largest knowledge-intensive sector of economic activity.5 For OECD countries, the share of medium- and high-technology manufacturing value added in total economic activity averages only 7.5 percent; however, the average share of knowledge-intensive market services is 20 percent.6 Thus, Brazil needs to do much more to realize the potential of its service sector;and, as is argued below, doing so depends on improvements not only in the busi- ness environment but also in educational attainment and quality. The changing structure of exports over the past 25 years is also revealing when comparing Brazil with other countries. As shown in table 1.5, Argenti- na is still primarily an exporter of food and fuels, although there has been an increase in the latter at the expense of the former, and manufactured exports have increased from a quarter to a third. Chile is still primarily an exporter of ores (particularly copper) and food, and manufactures have only increased 5 percentage points to 14 percent. In Brazil, there has been a reduction Table 1.4. Changing Structure of Output between 1980 and 2005, Selected Countries GDP (US$ Agriculture Industry Manufacturing Services billions) (%) (%) (%) (%) 1980 2005 1980 2005 1980 2005 1980 2005 1980 2005 Argentina 77 183 6 9 41 36 29 23 52 55 Brazil 235 796 11 8 44 38 33 -- 45 54 Chile 28 115 7 6 37 47 21 18 55 48 Mexico 195 768 8 4 33 26 22 18 59 70 China 202 2234 30 13 49 48 41 34 21 40 India 172 805 38 18 26 27 18 16 36 54 Sources:WDI1998and2007. Note:--=notavailable. Brazil's Growth and Performance in a Global Context 25 Table 1.5. Changing Structure of Merchandise Exports between 1980 and 2005 percent Agricultural Ore and Food raw materials Fuels metals Manufactures 1980 2005 1980 2005 1980 2005 1980 2005 1980 2005 Argentina 65 47 6 1 3 16 2 3 23 31 Brazil 46 26 4 4 2 6 9 10 37 54 Chile 15 19 10 7 1 2 64 56 9 14 Mexico 12 5 2 1 67 15 6 2 12 77 China -- 3 -- 1 -- 2 -- 2 -- 92 India 28 9 5 2 0 11 7 7 59 70 Source:WDIDatabase. Note:--=notavailable. Table 1.6. Exports by Technology Intensity, 2004 percent distribution Argentina Brazil Chile Mexico China India Natural resources 51.4 32.6 41.5 14.6 3.2 15.6 Resource-based manufactures 24.5 21.9 49.2 6.4 6.9 29.8 Low-technology manufactures 7.4 11.0 2.1 13.5 39.2 35.5 Medium-technology manufactures 14.1 24.9 5.5 37.5 19.0 12.8 High-technology manufactures 1.7 7.9 0.5 24.2 30.5 5.4 Other 0.9 1.7 1.2 3.8 1.1 0.9 Total 100 100 100 100 100 100 Source:CEPAL-TRADECAN2005. of 20 percentage points in the share of food. Most of that decrease has been made up by an increase in the share of manufactures from 37 percent to 54 percent.However, the share of manufactures in Brazil's total merchandise exports appears relatively small when compared with 70 percent for India, 77 percent for Mexico (where the share of fuels plummeted from 67 percent to 15 percent as the difference was more than taken up by manufactures), and 92 percent for China. Table 1.6,which uses the same classification as that used in table 1.3,shows that Brazil is still relatively specialized in exports of natural resources and natural-resource-based manufactures (55 percent of the total), and very weak on high-technology manufactures (7.9 percent, compared with 24.2 percent for Mexico and 30.5 percent for China). The world's average for exports of high-technology manufactures against all exports is 29 percent. 26 Knowledge and Innovation for Competitiveness in Brazil Table 1.7 shows that Brazil has a revealed comparative advantage only in natural resources and natural-resource-based manufactures and some simple labor-intensive manufactures (food and beverages)--all the items above the line. In addition, Brazil has lost comparative advantage in most manufactured products except machinery and transport equipment, wood and cork, non- metallic minerals, and oils and lubricants. The improvement in machinery and transport equipment (where, nonetheless, Brazil still does not show a real comparative advantage) is due to its exports of truck chasses and airplanes. Overall, what is happening on the export side is that Brazil is continuing to specialize in natural resources and natural-resource-dependent manufac- tures. This is part of a broader global picture. China's entry into the global trading system in a major way appears to be having three major impacts on the world--and on Brazil. First, China's tremendous competitiveness in manufactured goods (China is already the world's third-largest exporter of merchandise exports) is helping to drive down the cost of manufactured products. Second, because of its voracious appetite for natural resources Table 1.7. Brazil's Revealed Comparative Advantage (RCA), 1995 vs. 2005 % of BR exports Revealed CA Product 2005 1995 2005 Crude materials, inedible 16.04 3.35 5.49 Leather manufactures 1.39 3.04 4.33 Food and live animals 18.82 3.03 3.85 Animal and vegetable oils and fats 1.29 4.97 3.59 Wood and cork manufactures 1.41 1.89 2.73 Iron and steel 7.81 3.11 2.51 Beverages and tobacco 1.53 2.42 1.72 Manufactured goods classified chiefly by 18.90 1.53 1.34 material Rubber manufactures, nes 0.94 1.52 1.27 Non-ferrous metals 2.33 2.03 1.24 Paper, paperboard, and manufactures 1.29 1.40 0.89 Non-metallic mineral manufactures 1.47 0.73 0.73 Machinery and transport equipment 26.39 0.49 0.67 Mineral fuels, lubricants 6.11 0.15 0.61 Chemicals 6.83 0.69 0.60 Textile yarn, fabrics, made-up articles 1.14 0.66 0.55 Manufactures of metal, nes 1.12 0.67 0.55 Miscellaneous manufactured articles 4.09 0.47 0.34 Commodities & transactions 0.00 0.49 0.00 not classified, accumulated Source:CalculatedfromWorldIntegratedTradeSolutions/UNTRANS. Note: Revealed comparative advantage is share of sector in Brazilian exports/share of sector in world exports. Bold represents products showing an increase in RCA; gray represents products showing a decrease in RCA over the decade. Brazil's Growth and Performance in a Global Context 27 and commodities, China is driving up its prices on the global market. In fact, China has reversed the famous negative terms of trade against natural resources made famous by Raul Prebisch. Third, the decrease in the cost of manufactured products represents a windfall for global consumers,Brazilians included (except for the still relative- ly high tariff and nontariff barriers to imports). The lower consumer prices are caused partially by China's rapid expansion of low-cost manufactures, and partially by rapid global advances in technology and innovation. The increased demand for natural resources and commodities represents a boon for natural resource and commodity exporters.This has benefited Argentina, Brazil, and Chile. Producers in these sectors are making record profits. As with other natural-resource- and commodity-exporting countries, Brazil's increased export revenues, as well as foreign direct investment (FDI) inflows to these sectors, are leading to an appreciation of the currency, which is in turn causing so-called Dutch disease. While these two impacts are positive for Brazil, the third impact is nega- tive. The increased competitive pressure from Chinese manufactured prod- ucts is causing many producers of manufactured products--in Brazil and other developing countries, such as Mexico--to close. Some Brazilian producers in the shoe and textile sectors are closing down their production facilities in Brazil and are contracting production in China. Conclusion In summary, Brazil is benefiting from the global boom in demand for natu- ral resources and commodities; and it should continue to do so. Brazil has been successful in applying knowledge to leverage its agricultural resources by investing in agricultural R&D (which has raised productivity in wheat and soy, which has helped to boost exports); and it has developed its ethanol program to substitute for high petroleum prices. Brazil should continue to invest in knowledge to leverage the return from its natural and agricultural resources. In the short run, it has to improve the broader enabling environment, particu- larly to reduce the very high cost of capital and the cost of doing business. It will also have to address the growing overvaluation of its exchange rate as a result of this commodity boom. It is also clear from this preliminary analysis that Brazil is not making suffi- cient use of knowledge that already exists abroad, or even in the country.This is in part a result of a poor enabling environment--in particular, a restrictive trade policy that denies Brazilian firms access to better inputs (especially capi- tal goods at world prices).This point is elaborated on in chapter 4. In addition, the low investment rate impedes the upgrading of production through the introduction of technology embodied in more advanced capital goods. Thus, trade policy issues must also be addressed in the short run. In the medium and longer run, care must be taken to avoid overspecializa- tion in natural and agricultural resources. Booms in commodity prices come 28 Knowledge and Innovation for Competitiveness in Brazil and go. The current boom is likely to continue so long as China continues its rapid growth; however, like other booms, this one will eventually bust. Brazil must maintain its competitiveness in many manufacturing sectors by improv- ing its technological and innovation capability across the board. Besides making more effective use of existing knowledge (the shorter-term agenda identified above),Brazil must do better at investing in new knowledge- intensive sectors that may have greater future growth potential. Currently, Brazil is not receiving economic returns commensurate with its investment in R&D. Improving the efficiency of these investments will require better allocation and management of existing resources, as well as more investment by both the public and the private sector in the medium and longer term. As is argued later in this report, Brazil's capacity to effectively assimilate and use existing knowledge--no less than its capacity to create knowledge or invent new technologies on the frontier--depends on the breadth of edu- cational attainment and the acquisition of basic skills within the workforce. Addressing the highly unsatisfactory state of basic education needs to be carried out in parallel with addressing the higher-level technological requirements for global innovation. The short-term issues have to do with better allocation of existing resources. The longer-term issues have to do with sustained educa- tional investments that will improve the quality of education from primary through postgraduate levels. Chapter 2 continues the analysis of Brazil's low growth and places innovation and education in this broader context. CHAPTER 2 Behind Brazil's Slow Growth This chapter lays out the broad conceptual framework for this report.It begins with the traditional neoclassical growth conceptualization in which output is understood as a function of capital, labor, and technical change. The pres- ent research builds upon this traditional growth accounting model with the explicit addition of innovation and enabling environment, thereby creating a four-factor schema--enabling environment (used here as synonymous with investment climate), physical capital, human capital, and TFP (used here as synonymous with innovation). The chapter briefly explains how each of these four factors is related to growth and, more specifically, Brazil's underperformance in growth in recent decades. The conceptual framework provides a broader context for our later focus: innovation and education (referring here to a process of human capital formation). Chapter 3 expands upon the concept of innovation. Subsequent chapters address these components of innovation at the macro (national) and micro (firm) levels and then discuss human capital formation as it affects innovation and competitiveness in Brazil. Conceptualizing Growth and Deriving a Revised Model In the conventional neoclassical model, growth generally is understood to be a function of capital and labor, with technology treated largely as a given. In endogenous growth theory, change is treated as something that happens within the model itself--in other words, technology is factored in. In the first conceptualizations of growth-accounting models, any part of the growth out- put that could not be attributed to capital and labor was attributed to techno- logical change (equated with innovation).That is to say, Julio Revilla and Carl Dahlman were key contributors to this chapter. 30 Knowledge and Innovation for Competitiveness in Brazil Output = Function of Capital + Labor; and Change in Output = Function of change in Capital + change in Labor + Technological change residual The technological change residual often has been referred to as"the residual of our ignorance"--the problem-solving "mystery variable" that would explain why economies such as Brazil's and Korea's, which had roughly similar endowments of capital and labor 30 years ago, subsequently grew at such dif- ferent rates (see figure 1.5 in chapter 1). As research has deepened into this process, the variable has solidified and taken shape as TFP growth.TFP can be understood as the factors beyond capital and labor that enable an economy to increase production output. While the classic factors of capital and labor remain critical in any explanatory conceptualization of output growth, TFP increasingly is seen to be the real driver within economies. Indeed some stud- ies suggest that TFP accounts for as much as 60 percent of economic growth within some countries. Moreover, as this chapter shows, Brazil's slow growth in the past decade is attributed partly to stagnant productivity, whose levels are influenced heavily by TFP. Identifying the factors that compose TFP is difficult. Many elements-- ranging from better intermediate inputs to improved organization and man- agement, as well as large-scale, new, or improved technology--can increase TFP. This report focuses primarily on the innovation component of TFP, including the creation and use of knowledge that is new, the acquisition of existing (foreign) knowledge, and the use of existing (in Brazil) knowledge in new or more efficient ways. These aspects of innovation are developed more fully in chapter 3. A substantial literature has developed around the new approach to growth factors that is taken here. Many models adjust for input quality. Capital, for example, is typically refined and measured in terms of capacity utilization, or sometimes in terms of equipment vintage. Labor has been refined and measured through education, skills, and experience. The more that capital and labor are adjusted to account for knowledge components, the lower the residual of technical change.Empirical estimates of the contribution of knowl- edge or innovation to growth therefore depend on how much the components have been adjusted for knowledge-related factors. Some recent models have also begun explicit consideration of innovation-related variables such as R&D, patents, foreign investment, and technology licensing. In addition,some models have begun to incorporate the investment climate. While investment climate might be correctly thought of as a subcategory of "enabling environment," the constellation of macroeconomic, regulatory, and governance regimes--the structures and forces that shape investment decisions--is used here as largely synonymous with the broader term. In the conceptual model that guides this report, TFP (that is, innovation) is an explicit, endogenous factor. Our conceptual model is represented sche- matically in figure 2.1 as a four-box framework. As shown by one-way and reciprocal arrows, growth is the interactive result of physical capital, TFP (innovation), and human capital, with interaction strongly defined by an overarching enabling environment that can either enhance or obstruct it. Behind Brazil's Slow Growth 31 Figure 2.1. A Conceptual Model for the Components of Growth Growth TFP (Innovation) · Acquiring global knowledge · Creating knowledge through own efforts (without R&D or through R&D) · Disseminating and using existing in-country knowledge Physical capital Human capital Adjusted for Labor adjusted for · capacity utilization · education · vintage of capital · skills · training Investment climate (the enabling environment) · Macroeconomic conditions · Rule of law · Competition policy · Governance Capital market · Security Labor market Source:Authors. In the schematic representation, notice that physical capital is made operational and measurable as capacity utilization and capital vintage (specifi- cally plants and equipment). Similarly, human capital is made operational and measurable as the education, skills, and training that are added to labor. Finally, within innovation, the model distinguishes between knowledge creation through autonomous innovative effort (either through R&D or without R&D), acquisition of foreign knowledge and technology,and wider dissemination and application within a country of knowledge and technology already possessed by that country (see chapter 3). Clearly, strong interactive effects link all the variables, which can make it particularly hard to isolate the contribution of any single factor. Given that practical difficulty, econometric analysis rarely takes the interactions of all factors fully into account. Figure 2.1 should be understood as a broad schematic representing the aggregate level of a country. Because the complexity of a complete econo- metric analysis was beyond the immediate purposes of this report, advanced analytic work at the macro level was not undertaken. Instead, we briefly sum- marize other work and use the findings in subsequent sections of this report to sketch out what occurs within each of the four factors. However, to deepen the analysis, econometric work at the firm level was conducted. This was based on the 2003 Investment Climate Assessment of Brazil and draws upon 32 Knowledge and Innovation for Competitiveness in Brazil significant recent work by Brazilian researchers. These findings are presented more fully in chapter 5. The next sections of this chapter look at the relationship between the elements of the four-box framework and growth. The first section discusses the relationship between innovation and economic growth. Subsequent sections explore relationships between physical capital and economic growth, and between human capital and economic growth. Innovation and Economic Growth The literature was surveyed initially to assess the linkage between innovation indicators and economic performance. Surprisingly, this topic has received scant attention. Therefore, our focus shifted toward factors that determine innovation. The problem, in short, was not the lack of analysis on innovation but that innovation has typically been analyzed as a determinant of productiv- ity growth rather than of overall economic growth (for example, see Grilliches 1990; or Jaffe and Trajtenberg 2002).Therefore our analysis gravitated toward Lederman and Saenz (2005), one of the few studies that examines the effect of innovation on long-term development. Lederman and Saenz employ input measures that include patent activity, R&D expenditures, participation of engineers and scientists in R&D activity, and the public-private makeup of R&D.Their analysis then links these variables with level of development (GDP per capita), an increasingly popular depen- dent variable in the literature concerned with growth rates. The study finds evidence that innovation's effect on development is as large (or larger) than the associated effect of the "rule of law," another variable that has received much recent attention. Empirically, the innovation environment is shown to exert an apparently strong and direct effect on development.This result is robust to different specifications, including instrumental variable specification. In translating their econometric evidence to actual country performance, Lederman and Saenz take particular note of China and India. Both of these rapid-growth economies have invested heavily in R&D, with India relying more on publicly financed R&D and China relying more on acquiring tech- nology developed elsewhere. By contrast, Latin America and the Caribbean clearly lag behind, and the investment gaps caused by this lag are important in explaining the relative differences in economic growth. In reviewing the literature,a problem in robustness of analysis became clear. In general, too much was expected of formal R&D and patenting in develop- ing countries. Because developing countries are behind the global frontier, we decided to use a broader definition of innovation that does not narrowly focus on R&D, patenting, and the creation of new products. We also considered knowledge that may be new to the country, or even the firm. To better understand the dynamics of the process, supporting evidence was sought linking firm-level innovation with economic growth. The liter- ature indeed contained factors that influence innovation at the micro level Behind Brazil's Slow Growth 33 (for example, Souitaris 2002). Our own econometric analysis, presented in chapter 5, discusses some of these factors in greater depth. This perspective is important because, as a practical matter, it sheds light on the kinds of environments that foster innovative behavior, especially on the role of the national innovation system and the role of skills and education. The chap- ter 5 firm-level evidence demonstrates intriguing links between certain forms of innovation and economic growth--for example, between discoveries and new products. How does innovation improve productivity that leads to economic growth? Total factor productivity provides useful clues. As previously noted, TFP attempts to explain why one economy would perform better than another given similar capital and labor inputs from traditional growth accounting (see, for example, Solow 1956). Rather than changes in factors (such as total investment or population growth), TFP focuses on changes in productivity related to improvements in education, training, and technology, among others. Because this focus on processes departs from the neoclassical assumption of exogenously determined technological change,TFP is a derivative of so-called new growth theory. A simple way to conceptualize TFP empirically is as the "Solow residual," that is, the part of the economic growth production function that is otherwise unexplainable. This is a common way to operationalize TFP. For example, Country A's endowment of investment and labor might be expected to produce a certain level of growth. However, when actual growth departs from the expected path, the difference (that is, the residual) is commonly attrib- uted to unobserved factors related to productivity--in other words,TFP. The most obvious problem with this formulation is that it emphasizes pre- cisely that part of the growth accounting model that cannot be explained directly.A related problem is the disentanglement of productivity effects from factor effects.One way to handle these issues,albeit imperfectly,is to compute the TFP contribution to growth and then regress this parameter onto other variables in a multivariate regression. Significant linkages are thus established between TFP and viable explanatory variables. This helps to tighten the analysis of the mechanisms that explain TFP and also helps to reinforce the validity of the concept. Take for example the analysis of TFP in Sub-Saharan Africa by Akinlo (2005). Among other things, this study finds that secondary education enrollments are associated positively with TFP, while factors such as external debt are negative predictors. Compared with other countries, how does Brazil fare in the strength of TFP or in the factors that can strengthen it? The most obvious comparison is with East Asia. An interesting debate pits those who are skeptical that TFP is behind the East Asian Miracle (most notably, Paul Krugman 1994) and those who argue that hidden productivity factors played a significant role (Singh and Trieu 1996). Using case studies, Singh and Trieu find evidence that as much as half the growth from 1965 to 1990 in Korea, Japan, and Taiwan was due to TFP. They make several comparisons with Latin America and conclude that TFP is a significant factor in the East Asian Tigers' much better performance. 34 Knowledge and Innovation for Competitiveness in Brazil Two key points stand out from the TFP literature. First,TFP is a conceptu- ally important tool for understanding how innovation stimulates productivity and thereby economic growth. At the very least, the notion of TFP provides a plausible starting point for explaining why some countries grow faster than others. This has significant policy implications because it underscores that a country's endowment does not rigidly determine its growth, and that choices matter. Second, the conceptual nature of TFP is consistent with the causal chain laid out in figure 2.1--namely, that the broader enabling environment affects not just the rate of investment or human capital accumulation, but also the efficiency with which all factors are used. The Relationship of Physical and Human Capital with Economic Growth For several theoretical growth models--in which the initial values of human capital and per capita GDP matter for subsequent growth rates--physical capital accumulation is viewed as one source of economic growth. The main insights about the effect of capital accumulation on growth stem from Solow, the founder of the neoclassical growth model. In this model, the rate of technological progress is assumed to be constant, and the growth process is entirely accumulation-driven (Helpman 2004).In endogenous growth models, per capita growth and the investment-to-GDP ratio tend to show a positive relationship.1 In other models that include human capital, an increase in the initial stock of human capital tends to raise the ratio of physical investment to GDP.2 Empirical evidence largely supports the relationship between physical capital and economic growth. Baier et al. (2006) examined the relative impor- tance of the growth of physical and human capital and the growth of TFP. They used data on 145 countries that varied in the starting year but all ended in 2000.3 The authors found that, over long periods of time, the growth of output per worker is associated with the accumulation of physical and human capital as well as with technological change. For all countries, weighted aver- age results showed that output per worker grew 1.61 percent per year while physical capital, human capital, and TFP per worker increased 2.33, 0.92, and 0.22 percent per year, respectively. Results are similar for Latin America, and for Brazil in particular, as shown in table 2.1. Overall, the authors conclude that TFP growth is a somewhat important part of average output growth per Table 2.1. Average Growth of Output and Inputs weighted average Growth rate per worker TFP growth relative Region/country Output Physical capital Human capital TFP to output growth All countries 1.61 2.33 0.92 0.22 0.14 Latin America 1.59 2.27 0.86 0.26 0.17 Brazil 1.67 2.18 0.67 0.50 29.97 Source:Baieretal.2006. Behind Brazil's Slow Growth 35 worker, but the largest share of change can be attributed to growth of aggre- gate input per worker. This conclusion is similar to that of Jones (2002), who used a model of idea growth to explain economic growth. Jones found that for the United States, the deepening of physical capital, the increase in educa- tional attainment, and the rise in R&D intensity accounted for 81 percent of U.S. economic growth from 1950 to 1993. In general, Latin America experienced much lower growth rates over the past 25 years than did East Asian countries. Keeping in mind that Brazil, on average, grew more slowly than the rest of Latin America, it may therefore be instructive to compare Latin America4 with East Asia, South Asia, and com- parators such as Eastern Europe and Sub-Saharan Africa (figure 2.2). The lower growth in Latin America in figure 2.2 can be explained by three factors. First, the lower rates of capital growth are associated with much lower levels of savings and investment.These in turn are related to poorer macroeco- nomic management and to generally poorer investment climates, particularly where the productive sectors are subject to international competition and higher costs of capital. Second, TFP growth has been significantly lower in Latin America than in East Asia. Essentially, this TFP gap reflects weaker innovation systems. The consequence of this gap was a shackling of growth potential in Latin America, and in Brazil in particular. Third, the contribu- tion of human capital (which in this exercise was treated separately from the labor input) was lower. As shown in the figure, the contribution of human capital was lower in Latin America not only compared with East Asia, but also compared with South Asia and Sub-Saharan Africa. Another growth exercise was performed using data for Latin America and developed countries. The data covered 30 countries from 1950­92. Results, to be interpreted as systematic time effects corresponding to the extension of the lag of each variable on GDP per capita, showed that annual increments of 1 percent in physical capital in the short term of five years would increase Figure 2.2. Growth and TFP--Latin America Compared with Other Regions 6 % GDP capital labor human capital TFP 5 4 3 entc per 2 1 0 ­1 Latin America East Asia South Asia Eastern Europe Sub-Saharan and the Caribbean Africa region Source:IDB2006. 36 Knowledge and Innovation for Competitiveness in Brazil GDP per capita by 2.96 percent in developed countries,0.94 percent in Brazil, 0.76 percent in Central America and in the group of Andean countries, and 0.66 percent in the group composed of Argentina, Chile, Colombia, Mexico, and the República Bolivariana de Venezuela. For developed economies, physi- cal capital, technology, and government size have a significant effect on GDP per capita. There is also strong evidence that human capital has a greater impact on physical capital (Arraes and Teles 2003). There is certainly evidence,based on cross-country regressions,that having a more educated workforce leads to higher growth (Barro 1996). But these con- clusions have come under attack both on methodological (Levine and Renelt 1992) and substantive (Pritchett 1996) grounds. However, new research that focuses cross-country analysis on quality rather than quantity of education is resuscitating confidence in the macroeconomic relationship between human capital and economic growth (Hanushek and Wößmann 2007). In addition, evidence suggests that R&D spending and the stock of scientists in a particular society co-vary with economic performance (Meyer et al. 2000). Finally, there are also the enabling institutional conditions for productivity-enhancing inno- vation, such as the rule of law and intellectual property right protection. Looking at the link between training and productivity and growth, some empirical studies have shown both a positive interaction between education and training (Blundell et al. 1999) and positive returns of training to the indi- vidual,thefirm,andoveralleconomicgrowth(Blundelletal.1999;Bartel2000). In interesting work with cross-country OECD data, Coulombe,Tremblay, and Marchard (2004) showed that differences in average literacy skill level explain 55 percent of the differences in the long-term per capita GDP growth in 14 OECDcountries.Evenmoreinteresting,basedondatafromthepast45years,a 1 percent incremental increase in the average literacy of a given nation would return a 1.5 percent permanent increase in GDP per capita and a 2.5 percent increase in productivity. A disaggregation of this OECD data provides useful conclusions that could well apply to Brazil in the future: the percentage of individuals with high skills appears to have little positive impact on long-term growth in OECD economies. In contrast, the percentage of individuals with very low literacy skills exerts a strong negative effect on growth. In sum, basic skills for the entire population appear as important to growth as the develop- ment of sophisticated, high-level skills within a country. A Growth Decomposition Exercise In the early 1990s, Brazil adopted an orthodox macroeconomic policy frame- work that encompassed fiscal discipline, a floating exchange rate, and inflation targeting. According to most observers, these were the right things to do. Yet even though they may have been right,they do not appear to have been enough. Although Brazil recovered stability, it did not achieve rapid growth. For that, something was missing.To understand what, it is helpful to look comparatively at the three recent economic periods from the perspective of the conceptual model discussed above. Behind Brazil's Slow Growth 37 The slowdown during the 1980s was significantly associated with drastic declines in capital formation and productivity. Employment growth played a much less important role. As shown in table 2.2, gross capital formation fell from its near 10 percent average during the first period,1964 to 1980,into rela- tive stagnation during the second period, 1981 to 1993.This decline mirrored the pattern of GDP growth. During the limited recovery period from 1994 to 2005, capital accumulation, and especially productivity, bounced back some- what. Gross capital formation rose at an annual average rate of 2.6 percent, while employment growth declined.This suggests that the growth of the past 25 years strongly reflects declining capital accumulation and an associated decline in productivity. A simple growth decomposition exercise for the three recent periods (table 2.3) confirms and extends this picture. Obviously, the results of growth decomposition depend on the parameters chosen; however, for a common range of values, after accounting for capital (column A) and employment (column B), decomposing the contribution to GDP growth shows that the residual--TFP, which we have loosely equated with technological change-- emerges as a highly important factor in accounting for Brazil's performance decline (column C). Using a capital elasticity of 0.5 (the most common figure found in cross-country studies),TFP growth declined from 1.32 percent during the first period to 0.16 percent during the second period, before inching up to 0.50 percent during the third period.With an elasticity of 0.3,the basic picture remains the same: capital growth explains most of the change in growth rates throughout the three periods. Table 2.2. Growth of GDP, Capital Stock, and Employment, 1964­2005 percent per year GDP Gross capital formation Employment "Brazilian Miracle," 1964­80 7.8 9.9 3.11 Crisis and stagnation, 1981­93 1.7 ­0.3 3.39 Limited recovery, 1994­2005 2.8 2.6 2.06 Sources: Based on the World Development Indicators (WDI) Database and data from the IPEA, www.ipeadata.gov.br, and IBGE, www.ibge.gov.br, Web sites. Note:Grossfixedcapitalformationforcapital,economicallyactivepopulationforemployment.Estimatesfor2005. Table 2.3. Contribution to GDP Growth, 1964­2005 Gross capital formation (A) Employment (B) TFP (C) "Brazilian Miracle," 1964­80 4.96 1.55 1.32 Crisis and stagnation, 1981­93 ­0.14 1.70 0.16 Limited recovery, 1994­2005 1.30 1.03 0.50 Sources: Based on the WDI Database and data from the IPEA, www.ipeadata.gov.br, and IBGE, www.ibge.gov.br, Web sites. Note: Gross fixed capital formation for capital, economically active population for employment. Estimates for elasticity of capital ( ) = 0.5. 38 Knowledge and Innovation for Competitiveness in Brazil These findings are consistent with other estimates of TFP calculations for Brazil. Pioneer studies include those of Elias (1992) and De Gregorio (1992). Fajnzylber and Lederman (1999) and Loayza et al. (2004) have pro- vided extensive reviews on Latin America. Detailed analysis of the Brazilian experience has been provided by Gomes et al. (2003), Pinheiro et al. (2004), and the World Bank (2005a).5 In a recent study, Ferreira et al. (2006) show that Brazil, among other Latin American economies, had periods in the 1960s and 1970s in which itsTFP was even higher thanTFP estimates for the United States. Yet as shown in table 2.4, Brazil's TFP relative to that of the United States dropped from 1.07 in 1975 and 1.02 in 1980 to 0.8 in 1995 and 0.73 in 2000. The lower growth rate in Brazil for the crisis and stagnation period (1981­ 93) compared with the "miracle" period (1964­80) was caused by nega- tive growth in gross capital formation (table 2.2), as well as nearly flat TFP (table 2.3). The direct contribution of labor to growth did not change greatly (except for a small decline in the limited recovery period from 1995 to 2005). As discussed below, a low rate of gross capital formation is a reflection of the overall investment climate (the "enabling environment" for growth), which is similarly affected by macroeconomic instability, high interest rates, a weak regulatory regime (leading, for example, to labor-market problems), and poor rule of law. In terms of our conceptual framework, a correspondingly low rate of TFP has several related causes--low investment (because much technical change is embodied in new equipment), a poor investment climate, and un- derinvestment in education and skills. TheTFP estimates in table 2.3 and table 2.4 suggest that past improvements in productivity apparently took place during periods of capital expansion in Brazil, which is to say that technological progress was achieved through the acquisition of new capital. However, this characterization leaves important questionsunansweredfromapolicyperspective.Aftertheseeminglysuccessful macroeconomic stabilization and structural reforms that started in 1994, why did Brazil not return to the high growth levels of the 1970s? If the post-Real stabilization plan was indeed successful, why isn't Brazil growing faster? Does the relatively modest 2.5 percent average between 1996 and 2006 actually represent a new ceiling for Brazil? Table 2.4. Relative TFP of Brazil and Latin American Comparators U.S. = 100 1960 1965 1970 1975 1980 1985 1990 1995 2000 Brazil 83 80 88 107 102 86 75 80 73 Argentina 99 93 93 98 93 75 58 74 69 Chile 68 64 73 64 76 65 72 87 80 Colombia 81 80 90 91 96 87 90 77 64 Mexico 109 111 110 118 113 99 79 74 77 Latin America 87 86 89 93 88 75 68 69 62 Source:Ferreiraetal.2006. Behind Brazil's Slow Growth 39 Several recent econometric exercises have suggested what Brazil's output growth could be, at least in principle. But these estimates basically confirm that something is happening that is preventing current growth from again reaching the high levels of the 1960s and 1970s. Investment Climate--The Enabling Environment for Growth As noted in the conceptual framework presented in figure 2.1, the invest- ment climate has a major effect on growth, as it does on the three other components--physical capital, human capital, and TFP. What are the key elements of the investment climate that are negatively affecting growth in Brazil? HighTaxes,LargeGovernment,andPoorExpenditureQuality Government spending exceeds 40 percent of GDP, and tax revenue rose to 38.8 percent of GDP in 2006.The high tax burden discourages private invest- ment, formal sector employment, and economic growth. The Brazilian tax system is among the most burdensome in the world, because of both its high rates and its administrative complexity. On average, the tax burden represents nearly 150 percent of gross profits, compared with an average of 53 percent in Latin America as a whole. Growth is also constrained by the composition of public spending, currently characterized by low investment rates and high government consumption (mostly in salaries and social security pensions). The relatively large public sector debt (and interest payments) is reinforced by rising primary spending, low investment, and budget rigidities. In addition, the quality of government spending in Brazil suffers from weak public sector management and institutional arrangements (World Bank 2007a). Table 2.5 shows the tax that a medium-size company must pay (or with- hold) in a given year, as well as indices of the administrative burden in paying taxes. These measures include the number of payments entrepreneurs must make; the number of hours spent preparing, filing, and paying; and the per- centage of profits they must pay in taxes. Table 2.5. "Doing Business" in Comparative Perspective Indicators Brazil Latin America OECD Payments (number) 23.0 41.3 15.3 Time (hours) 2,600 431.0 203 Profit tax (%) 22.4 22.8 20.7 Labor tax and contributions (%) 42.1 14.5 23.7 Other taxes (%) 7.2 11.8 3.5 Total tax rate (% profit) 71.7 49.1 47.8 Source:WorldBank2006b. 40 Knowledge and Innovation for Competitiveness in Brazil HighInterestRates Average lending rates remain high in Brazil--around 50 percent in real terms in 2005, among the world's highest rates--despite significant financial system reforms during the 1990s. Barriers to more efficient financial intermediation include the large size of governmental borrowing,directed credit schemes that account for about a third of total bank lending, and less-than-efficient public banks. High interest rates and financial intermediation spreads--around 38 percent in real terms in 2005--are explained by the high levels of public debt and by issues of jurisdictional uncertainty that weaken creditor rights. Insuf- ficient creditor protection because of flaws in the legal system and juridical practice also contribute to costly financial intermediation and high spreads (World Bank 2004b, 2004d, and 2006a). LackofInfrastructureInvestment6 A significant share of fiscal adjustment has involved cuts to public infrastruc- ture investment, which have had significant negative impacts on investment and growth at the firm level.Total public investment fell from about 5 percent of GDP in the 1980s to about 2 percent of GDP in 2002­05. Fiscal adjust- ment has relied on cutting infrastructure investment in part because of rigidi- ties in current spending. Private sector investments in infrastructure have not compensated for the reduced public investment.Indeed,private infrastructure investment has fallen, except for sales of government shares and concession rights in the privatization of telecommunications, electricity, transport, and (to a lesser extent) water and sanitation during 1992­2001. Despite recent changes to the regulatory environment, private infrastructure development has been hindered by the lack of a stable and credible regulatory environ- ment and the lack of improving cost recovery by investors. Provision of infra- structure services is an important aspect of logistics costs (the so-called Custo Brasil), which is estimated at about 20 percent of GDP.These services include transport, warehousing, inventory, and customs--all of which are affected negatively not only by inadequate infrastructure but also by interest rates and red tape (World Bank 2004d; and World Bank 2006). InadequateLaborInstitutionsandLegislation The Brazilian labor market is affected significantly by relatively inflexible labor legislation. Labor institutions and the labor law are in continuous interplay through a forest of regulations that often lead to low labor productivity and low growth in formal sector employment. Labor legislation in Brazil is heavily geared toward job security, resulting in low formal sector employment and productivity growth and higher growth in the informal labor market. Para- doxically, the Brazilian labor market shows a very high turnover because large severance payments mandated by law induce worker dismissals before senior- ity triggers take effect.This results not only in litigation but in low-productivity jobs, because firms have less incentive to train workers. Consequently, labor productivity has been affected negatively. Labor markets, institutions, and Behind Brazil's Slow Growth 41 regulations in Brazil reinforce income inequalities because greater informality, fewer incentives for job training, and high payroll taxes all encourage labor- market informality (World Bank 2002a; and World Bank 2005a). ImprovingbutLimitedTradeOpenness In the 1990s, trade policy was significantly reformed. Compared with the 1970s and 1980s, tariffs on imports were substantially reduced. Nevertheless, Brazil remains a relatively closed economy--international trade accounted for about 30 percent of GDP in 2005.Although exports have grown strongly as a share of GDP (from 10.7 percent in 2000 to 16.8 percent in 2005), this pro- cess has been driven largely by higher international commodity prices. Some industrial sectors indeed have become more competitive. Not surprisingly, evidence suggests that some low-productivity industrial sectors are precisely those that face the least foreign competition. Tariffs, nontariff trade barriers, and administrative barriers to investment remain as significant comparative drags.Although trade has opened in Brazil, other countries have opened at an even faster pace.This reluctance to open trade has limited the positive effects of increased competition at a global scale.The limited effect of Brazil's greater openness in trade also seems related to the faltering of two other complemen- tary policies: investment in human capital and labor-market reform (World Bank 2002a and b; and World Bank 2004e). Box 2.1 below presents Brazil's trade regime, compared with other countries. Box 2.1. Brazil's Trade Regime Compared with Other Countries Two indicators of trade barriers show that Brazil, in spite of some liberalization over the last 10 years, continues to have a relatively protected trade regime. The table below is based on an index developed by the Heritage Founda- tion, which includes not only average tariffs but also nontariff barriers such as quotas, quantitative restrictions, labeling, and licensing requirements. It shows no progress on trade liberalization since 1995 (the first year for which the index was calculated). In addition, the table shows that (with the exception of India) Brazil continues to have a more restrictive trade regime than the average Latin American country, China, or the United States. Index of Tariff and Nontariff Barriers United Western Brazil Argentina Chile Mexico LAC China India States Europe 1995 3.50 4.00 4.00 2.50 3.95 5.00 5.00 2.50 2.50 2006 3.50 3.00 1.50 2.50 3.00 3.00 5.00 2.00 2.03 Source: KnowledgeAssessmentMethodology(KAM)2007. Note:Ascoreisassignedtoeachcountrybasedontheanalysisofitstariffandnontariffbarrierstotrade, suchasimportbansandquotas,aswellasstrictlabelingandlicensingrequirements.BasedontheHeritage Foundation'sTradePolicyIndex,thescoretakesonvaluesfrom0(mostfavorable)to5(leastfavorable). (continued) 42 Knowledge and Innovation for Competitiveness in Brazil Box 2.1. (continued) The second table shows that, except for India, Brazil's mean and weighted meantariffsarehigherthanforChina,theUnitedStates,andtheOECD,andare higher than the average for low- and middle-income developing countries, or even for Latin America. Disaggregation for primary versus manufacturing products, however, shows that Brazil's tariffs on manufactured products con- tinue to be higher than for the other countries except India; and the aver- age U.S. and OECD tariffs continue to be lower overall. Brazil's mean and weighted mean tariffs on primary products are lower than those of China and India, and are lower than the average for low- and middle-income develop- ing countries and Latin America. Thus, Brazil is still quite protectionist in its manufacturing sector. Tariff Barriers percent Low & United middle Brazil Chinaa India Statesb OECD income LAC Mean tariff 1990 31.8 42.9 81.8 6.3 -- -- -- 2005 12.3 9.2 17.0 3.2 3.1 9.4 9.6 Mean weighted 1990 33.0 40.6 83.0 4.4 -- -- -- 2005 7.1 4.9 14.5 1.6 2.0 6.1 5.3 Primary products mean tariff 1990 25.7 36.2 74.1 4.5 -- -- -- 2005 7.9 8.8 24.4 2.8 3.7 12.3 11.9 Primary products mean weighted 1990 13.1 22.3 49.5 2.4 -- -- -- 2005 1.5 3.4 16.5 0.8 2.1 5.9 3.9 Manufactured products mean tariff 1990 33.2 44.9 84.1 6.7 -- -- -- 2005 12.6 9.2 15.9 3.3 3.0 9.0 9.3 Manufactured products weighted tariff 1990 39.4 46.5 93.6 4.8 -- -- -- 2005 9.2 5.3 12.8 1.8 1.9 6.1 5.6 Source:WDIDatabase. Note:Themeantariffisgenerallyconsideredabettergeneralindicatorofprotectionthantheweighted mean. The latter often biases the rates downward because higher tariffs may discourage imports and reduce the weights applied to these tariffs. However, sometimes imports of commodities with higher tariffs are still made and the weighted mean may be higher. Therefore, both mean and weighted mean tariff rates are presented. a. Data for China are for 1992 and 2005. b. Data for the United States are for 1989 and 2005. Behind Brazil's Slow Growth 43 JudicialSystemInefficiency The judicial system in Brazil has an unenviable track record for slowness, unpredictability, and inefficiency. The complexity of the system, the time required to reach decisions, and the overall costs of contract enforcement greatly undermine contract efficiency. Arbitration procedures exist but are rarely used at the outset. Instead, courts are typically used by one party to force the other into arbitration. Trials are lengthy, and multiple appeals are common.7 As a result, the judicial system is unusually overloaded. The Brazilian Supreme Court, for example, handles more than 100,000 cases a year, compared with about 200 cases handled each year by the U.S. Supreme Court.Although courts play an integral part in the aforementioned problems, the judicial system also includes the property registries, government lawyers, and the Public Ministry or Attorney General's Office (World Bank 2004d). RedTape The size and cumbersome structure of Brazil's three levels of government-- federal, state, and municipal--clearly impose burdens on business operations. On average, starting a business, registering property, and paying taxes in Brazil require substantially more time and are more expensive than elsewhere in Latin America, and are far more burdensome than in other regions. Some Bra- zilian states have started to simplify procedures for registering businesses, for example, through the creation of one-stop shops. By and large, however, the overall process remains costly and slow, with the most time required in São Paulo, where a remarkable 152 days is required to register a business. Across states, registering a property takes, on average, 61 days, placing Brazil 17thout of 22 countries in Latin America. Complex entry and property registration procedures, as well as high taxes, have another downside. The large number of time-consuming, costly procedures not only hinders business entry, but also lays the foundation for and encourages corruption (World Bank 2006). Table 2.5, above, presents some of this evidence. Trade Orientation, the Export Sector, and Growth Many studies of growth have found an important relationship between trade orientation (which is part of the broader incentive regime in the enabling environment) and exports.The acceleration of growth is often linked to export expansion, especially from the industrial sector. Bonelli (1992) studied the relationship among TFP, output growth, and trade orientation for the 1975­ 85 period preceding trade liberalization. Sectoral data for manufacturing and extractive industries and a comparison between the two quinquennia permit an interesting analysis of macroeconomic performance in light of correspond- ing policies. As might be expected, Bonelli finds a positive association be- tween export expansion and rates of productivity change as estimated by TFP growth. Export expansion followed a program of trade liberalization that was 44 Knowledge and Innovation for Competitiveness in Brazil launched in 1979. Despite the larger crisis that then enveloped the economy, the short-lived program of export expansion contributed substantially to the growth of nearly all industries from 1980 to 1985. Periods of increased TFP (and corresponding growth) can also be linked to lower import tariffs that effectively reduced protection for domestic indus- tries but coincided with productivity gains for the sector overall. Ferreira and Rossi (2003) provide empirical analysis on how trade liberalization that began in the 1980s affected industrial sector productivity growth. By analyzing the periods before and after trade liberalization, they show that TFP grows faster at lower rates of protection.The findings are less conclusive for countries such as Argentina, Chile, and Mexico. But for Brazil at least, a strong case can be made that trade liberalization had a positive impact on TFP and growth. Moreira (2004) examined the relationship between trade liberalization and increased productivity, and also concluded that liberalization leads to stronger growth. His estimates suggest that the productivity increases follow- ing Brazil's trade liberalization in 1988­90 were actually larger than those in Mexico following the North American Free Trade Agreement. He attributes subsequent slow growth to the lack of an aggressive trade policy. The result was a disproportionate distribution of benefits. The positive effects of liberal- ization on productivity were concentrated in the relatively small export sector rather than distributed across the economy more broadly.This underlines the need for institutional reforms and consolidation of macroeconomic stability in order to expand the export sector. Does the Public Sector Constrain or Catalyze Growth? Many observers over the past two decades have pointed to the large size of Brazil's public sector as a growth constraint, particularly as it affects both the cost of capital and high taxes. From 1950 to 1980--a period of high growth and boom--the public sector was the main agent for investment and the chief catalyst for growth in Brazil. However, with the fiscal weakening and debt crisis of 1982, the government's capacity to invest was reduced substantially. At the same time, the private sector investment was unable to fill the gap, in part because it was held back by high interest rates and high taxes, related in turn to the large size of the government sector. Explanations differ as to why the Brazilian economy slowed so dramati- cally in the 1980s and failed to recover its previous dynamism.8 Yet there is a growing consensus that the size of the government has been--and continues to be--an important factor. Using consolidated tax revenues as a simple proxy for size of government, Brazil has the largest government (relative to GDP) among large middle-income economies (including Argentina, China, India, Mexico, and Russia), and it has a larger government than economies that have entered the high-income category. Why does this matter? The significant increase in government consump- tion and the corresponding contraction in public and private investment are at Behind Brazil's Slow Growth 45 the core of both the TFP and growth problems. The exceedingly large public sector results in high taxes, high interest rates, and lower infrastructure invest- ment, all of which impede efficient resource allocation (especially in the use of technology) and, hence, growth. To analyze comparable figures of government size, we look at the relative size of government consumption (to eliminate investment) in figure 2.3. The first column shows that since the 1988 constitution (when government spending began to rise substantially), Brazil nearly doubled government con- sumption as a percentage of GDP. In contrast, government consumption rose modestly in comparator countries such as China, India, and Korea. Three reasons have frequently been cited to explain the dramatic slowdown in growth after 1980--the large surge in government consumption (figure 2.3), sharp increases in the relative price of investment (Bacha and Bonelli 2004), and high vulnerability to international liquidity (Barbosa 2001). It can be argued that all three are related to the size of the public sector. The large share of government consumption contributes to a low level of savings and, hence, investment. The increase over time of the relative price of investment (capital goods) in Brazil has also been linked to greater government inter- vention through higher distortions. Vulnerability to international liquidity (or external conditions) emerged as a major issue in the financial crisis that affected emerging markets from the 1980s to early 2000. In the case of Brazil, this was mostly due to a sizeable increase in external liabilities, mostly by the public sector. Adrogué et al. (2006) demonstrate empirically that the steady rise in gov- ernment consumption since the mid-1980s has negatively affected per capita growth. Loayza et al. (2004) and Bacha and Bonelli (2004), among other researchers, have demonstrated the same. Most empirical models show that macroeconomic stability efforts normally correlate with improved growth-- including stabilization of the debt-to-GDP ratio,a successful inflation targeting Figure 2.3. Government Consumption as a Percentage of GDP in Four Countries 20 1970­1989 19.3 1990­2004 15 11.2 11.7 12.2 11.6 10.5 10.5 10.9 10 percent 5 0 Brazil China India Korea country Sources: Based on the WDI Database and data from the IPEA, www.ipeadata.gov.br, and IBGE, www.ibge.gov.br, Web sites. 46 Knowledge and Innovation for Competitiveness in Brazil regime,flexible exchange rate,and most other structural reforms implemented in the 1990s. Despite its successes in these areas, Brazil's growth performance was disappointing, particularly when compared with previous periods or with international competitors. Despite efforts on the fiscal front, public debt remains large, and more significantly, real interest rates remain high (at about 10 percent in real terms for the central bank policy rate). Although large, Brazil's public debt--at about 45 percent of GDP in net terms and about 66 percent of GDP in gross terms--is not significantly differ- ent from that of middle-income countries, such as India, the Philippines, and Turkey. And if the total public debt is below other middle-income countries that have faster growth rates, why are interest rates so high in Brazil? Hypothesesincludethefollowing:marketuncertaintyovertruepublicsector liabilities (for example, remaining skeletons from indexation, ballooning social security commitments); judicial and property-rights-related uncertainty; and lack of competition or poor regulation within the financial sector. High pub- lic sector consumption (the Brazilian government has become a net spender since the 1980s) is a leading factor in the relatively low level of savings and investment. This helps to explain why the intertemporal price of consump- tion, namely the real interest rate, is so high.A large government burden from high consumption (and low savings and investment) is interrelated with high taxes and high interest rates. Large government consumption also negatively affects government invest- ment in infrastructure. Gomes et al. (2003) and Adrogué et al. (2006) show empirically that despite all the efforts on the macroeconomic front, the sharp reduction in government investment during the 1990s and after 2000 has been a major factor in disappointing growth rates.Weak telecommunications, poor roads, inefficient ports, unreliable air transportation, questions on energy sus- tainability, and unequal access to water are all obvious obstacles to strong trade, commerce, and business. Conclusion: Getting the Fundamentals Right Was Necessary but Insufficient Following nearly a decade of economic turmoil in the 1980s, Brazil adopted an orthodox macroeconomic policy framework that encompassed fiscal dis- cipline, a floating exchange rate, and inflation-targeting. Subsequently, Brazil successfully stabilized inflation and its exchange rate, and it is starting to reduce its public debt-to-GDP ratio. The fruits of tight policy were positive growth, but not rapid growth. Fiscal policy in the aftermath of the Real Plan helped Brazil to reduce its public debt-to-GDP ratio and to increase the sustainability of public debt (mostly though increased tax revenues). Monetary policy based on an inflation-targeting framework and a flexible exchange-rate regime reduced inflationfrom12.5percentin2002to3.1percentin2006whilecuttingforeign- exchange risks.Greatly improved debt management helped to drastically slash Behind Brazil's Slow Growth 47 the external public debt. Good fiscal policy was helped by a highly favorable external environment in which strong export growth has generated current account surpluses since 2003. Getting the macroeconomic economic fundamentals right (even if they still fall far short of being "perfectly right")--was enough to achieve moderate positive growth in the range of about 3 percent a year. Yet this level did not keep Brazil from falling increasingly behind its global competitors much less allow it to catch up and overtake them. The current Brazilian government has announced plans to increase govern- ment infrastructure spending to increase productivity and growth. In doing so, the government is constrained by its high current spending and the ongoing debt burden that limits borrowing and, therefore, spending capacity.The con- tinuous growth in government size during the past decade--with rising tax burden for the private sector and constrained domestic savings--does little to encourage the private sector to take up the slack in investment. As the his- torical evidence in this chapter indicates, even though productivity in Brazil improved during the past decade, it remains less than that of earlier periods when investment grew faster. With our conceptual model of growth now defined and linked to the exist- ing literature, it is time to apply it to various aspects of the Brazilian experi- ence. Chapter 3 takes a closer look at a key element--innovation. Chapter 4 assesses the macro outcomes and the institutional and legal framework of innovation in Brazil, including all its forms--creation, acquisition, adoption, dissemination, and use of knowledge and technology. The same broad defini- tion of innovation is then applied at the firm level (chapter 5). Chapter 6 assesses and analyzes the contribution of human capital in Brazil, covering basic education and basic skills development as well as tertiary education and advanced skills development. CHAPTER 3 Defining Innovation What Is Innovation? This and the two chapters that follow develop the concept of the national innovation system in Brazil and look more closely at the relationship between innovation and growth at the national (chapter 4) and firm (chapter 5) levels. Webeginwithafundamentalquestion--whatisinnovation?Innovation--defined broadly to include products, processes, and new business or organizational models--is not just advancement upon the frontier of global knowledge but also the first use and adaptation of global technology in new contexts. There- fore, this study examines both the role of R&D in creating new knowledge and also the process through which this new knowledge is "commercialized" and translated into more rapid economic growth at the national or firm level. Because much new technological knowledge is acquired from abroad, this study looks at the various means through which foreign knowledge can be captured and adapted to the local context. Finally, it suggests that the wider dissemination and more creative use of existing in-country knowledge can be a critical step in increasing productivity in Brazil. This chapter looks at the three sources of innovation--creating, acquiring, and using new knowledge. In our conceptual framework (chapter 2), we emphasized that innovation alone--like enabling conditions or physical cap- ital alone--is insufficient to generate rapid economic growth. Technology by itself provides no magic. For new knowledge to translate into TFP-driven growth, something more is needed. Productive workers are the missing link--not only highly trained scientists who can be called upon to invent something new, but shop-floor workers who can be called upon to do some- thing new. For this reason, Brazil as a nation will be called upon to "inno- vate" in how it educates the 45 million young people who are enrolled in Carl Dahlman was a key contributor to this chapter. 50 KnowledgeandInnovationforCompetitivenessinBrazil its school system. Chapter 6 explores the formation of human capital--at the primary, secondary, and tertiary levels--in terms of the three sources of innovation discussed here. At the end of this chapter, a table displays the three sources of innovation as a typology that provides an integrated view of the policies, instruments, and institutions of the national innovation system in Brazil.This lays a foundation for the recommendations to be presented in chapters 7 and 8. The Creation and Commercialization of Knowledge The creation of knowledge is usually associated with inventive activity, espe- cially the creation of new technology. Innovation in this sense (especially in Brazil) typically brings to mind scientists working in universities and engineers working in R&D labs. Figure 3.1 shows global R&D efforts for Brazil and other comparator countries in purchasing power parity (PPP) terms. Innovation is by no means limited to formal R&D efforts--not all R&D results in invention and not all invention comes from formal R&D. On the contrary, invention and knowledge creation may be produced by constantly trying to improve hands-on production--or for that matter, through accident, serendipity, trial and error, and sometimes sheer luck. The process of invention is frequently so idiosyncratic and nonlinear that investment in creating new technological knowledge is particularly difficult and risky. No one knows in advance what level of national investment is likely to produce what level of innovation, much less at what point in the process something commercially useful is likely to emerge. Invention is just the first step in innovation. Theoretical discoveries in basic knowledge are often first Figure 3.1. R&D Effort for Brazil and 11 Comparators 4,000 3,500 RussianFederation 3,000 people) Korea,Rep.of OECD 2,500 million 2,000 (per 1,500 R&D in 1,000 Venezuela,Argentina 500 R.B.de Chile China Colombia Brazil researchers 0 Mexico India ­500 0.0 0.5 1.0 1.5 2.0 2.5 R&Dexpenditure(%ofGDP) Source:KnowledgeforDevelopment(K4D)program,http://go.worldbank.org/AW9KZWJB10. Note:Thesizeofthecirclerepresentseachcountry'stotalR&Dexpenditurefor2003(PPP,currentinternationaldollars). DefiningInnovation 51 published in scientific and technical journals. Figure 3.2 compares Brazil's output of scientific and technical journal articles compared with the outputs of advanced and neighboring countries. If an idea or insight is sufficiently unique, it may be patented--at which point it might spawn an entire new industry or, more likely, never be used at Figure 3.2a. Scientific and Technical Journal Articles per 100,000 Inhabitants (Other Countries) 2001 1995 90 75 articles 60 journal 45 of 30 number 15 0 of FinlandStatesOECD Japan IrelandSpainRep. China United Korea, country Source:IDB2006. Note:Thescaleforfigure3.2adiffersfromthescaleforfigure3.2b. Figure 3.2b. Scientific and Technical Journal Articles per 100,000 Inhabitants (Latin America and the Caribbean) 9 8 2001 1995 7 articles 6 5 journal 4 of 3 2 number 1 0 Chile LAC Rica de B. Peru UruguayBrazilMexico R. Argentina Costa Colombia Venezuela, country Source:IDB2006. Note:Thescaleforfigure3.2adiffersfromthescaleforfigure3.2b. 52 KnowledgeandInnovationforCompetitivenessinBrazil Figure 3.3. Patents Granted by the U.S. Patent and Trademark Office to Brazil and Regional Comparators 135 120 105 90 patents 75 of 60 45 number 30 15 0 de Brazil B. Chile RicaPeru Mexico R. Panama Jamaica Argentina ColombiaBahamasCosta UruguaySalvador EI Venezuela, country 2003 1995 Source:IDB2006. all (see figure 3.3). New knowledge also may be kept as a trade secret once patented. Almost always, further development and engineering work (and costly investment, extending through much iteration) is required to convert the discovery into a practical application. Finding a concrete marketable appli- cation often costs far more than the original invention, and in many cases the process exceeds the capacity or interest of the patent holder. For this reason, innovation tends to show up on economists' screens only when it reaches the point of commercial application. The first ever application of an innovation can be thought of as a global innovation. The first use of knowledge where it has not been used previ- ously is considered to be an innovation over prevailing local practice. Because developing countries are well behind the global technological frontier, they generally obtain far greater economic benefit from using knowledge that already exists than from trying to create new knowledge. This is not to say that developing countries should not try to create new knowledge, which may have many indirect positive externalities in addition to the direct economic benefits described here; but from an economic viewpoint, it is generally more efficient for developing countries to acquire and use new knowledge than it is to create new knowledge. In Brazil, public R&D labs, universities, and some productive enterprises are the main incubators of "created knowledge" and thus constitute a funda- mental part of the national innovation system. Although government and university research labs are typically the main actors, productive enterprises are the most important segment because they are the main appliers of new knowledge. At the global level, multinational corporations typically drive the creation and dissemination of applied knowledge. It is estimated that DefiningInnovation 53 transnational companies carry out more than half of all global R&D. Indeed, R&D budgets of many large multinationals frequently dwarf the total R&D expenditures of all but the largest developing countries. In 2002, for example, the U.S. car manufacturer General Motors spent US$5.4 billion on R&D, almost $1 billion more than Brazil's total R&D spending that year. (See UNCTAD 2005.) If benefits are to accrue from new knowledge in the national innovation system, public laboratories, universities, and private firms must interact and cross-fertilize each other. As emphasized in chapter 7 (recommendations), this interaction must be fostered by instruments and mechanisms tailored for that purpose. For example, government grants can require research participa- tion by more than one kind of actor in an R&D process. Similarly, subsidies can be provided that facilitate the exchange of personnel between labs, uni- versities, and firms. If new knowledge is to be used economically, attention must be paid to the process and prospects for commercialization. It is not ignoble or venal to think about patents and commercialization as basic research is conceptualized and undertaken--especially in a country such as Brazil, where the creation of new technical knowledge is financed primarily through public expenditure.In terms of public policy, this translates into mechanisms ranging from tax incentives to science parks. "Incubators" are needed to encourage interaction between pub- licly funded scientists and the private sector, and to ensure that this interaction benefits society at large. Where scientists lack experience or business acumen, mechanisms are needed that provide social benefits by translating ideas into viable enterprises. Publicly funded incubators can play a wide range of roles, from matching scientists with businesspeople who can help develop business plans, get permits, find employees, and obtain financing for start-up operations. Support of this sort would not in itself be entirely "innovative." Many of Brazil's key competitors in the global marketplace--countries that once lagged far behind but are steadily forging far ahead--already are doing precisely that. Acquiring Foreign Knowledge Creating new knowledge is far riskier and requires more technological capa- bility than acquiring new technology. A country (or firm) needs to know not only what is relevant, but what is worth negotiating for and at what cost over the long run. Acquiring foreign knowledge also requires significant techno- logical capacity, including research infrastructure. Universal primary educa- tion has nearly been achieved, and universal access to secondary education is imaginable on the horizon, so Brazil has a large and potentially productive population base with which to build an innovation economy. The problem is that the educational system has not yet oriented itself toward meeting the challenge. Improving educational quality and human capital formation across the board (not just for a few elite scientists) represents, of course, an enormous human challenge, but it is also Brazil's most significant economic opportunity for recapturing the high economic growth rate it once enjoyed. 54 KnowledgeandInnovationforCompetitivenessinBrazil There are many means to hasten the acquisition of necessary technol- ogy: direct foreign investment; licensing; technical assistance; technology embodied in capital goods, components, or products; copying and reverse engineering; foreign study; technical information in printed or electronic form (including what can be accessed through the Internet); twinning; training arrangements; and others. Much relevant technology is already in the public domain or is owned by governments that potentially can place it in the public domain. In the case of proprietary technology, which by definition must be sold or transferred on a contractual basis, gaining access can be more com- plex. The fact is, legitimately or not, proprietary technology almost always "leaks," depending on the capability of users and on the intellectual property rights (IPR) regime governing a contractual transfer. And while intellectual property rights are fundamental to the creation of new knowledge and tech- nology, IPR regimes do change, and public policy has considerable sway over the "rules of the game."Therefore, countries that contract and use proprietary technology should be fully prepared to capitalize on legitimate opportunities for knowledge transfer when they arise. In short, for both public and pro- prietary technology, there are ample opportunities for the transfer of usable knowledge to an innovation-ready population interested and intellectually equipped to put it to productive use. Disseminating and Using Knowledge Once new technology is acquired, it is disseminated primarily through com- mercial activity--through sale and transfer, as well as through imitation and replication by "copycat" consumers, enterprises, and organizations. Like the process through which knowledge is selectively acquired (see above), technol- ogy is disseminated primarily through commerce. As such, the dissemination and use of knowledge is highly sensitive to cost, marketing, and access; yet it may be even more sensitive to less tangible traits of values and culture--human capital in the broadest sense. Too often, when institutions serve as agents of technology transfer, they focus only on the actual product, process, or service innovation being installed. Does it work when applied? How much does it cost? What problems might it solve? What training is required to use it? Demand questions are harder to assess, though arguably they are even more fundamental. Will people want to use it? Does the population possess high "tinkering skills" as well as the more easily measured skills of literacy and numeracy? Are there potential first adapters at the innovation threshold who will be willing (and able) to stretch to do something new? Indeed, do the innovations create a gleam in the eye that will help to shape the career track of young people, encourage produc- tive trial and error on the shop floor, and inspire weekend R&D at the most informal household level? Like the creation of new knowledge, the costs of innovation adoption at the base of the population go far beyond the cost of new innovations. In the agricultural sector, a great deal is at stake when a farmer is asked to abandon DefiningInnovation 55 proven methods that have been used for generations. That is why demonstra- tion projects are necessary. To put new technology to use, local research and experimentation must be adapted to microclimates, soils, water conditions, and pests. That has more to do with the adaptive skills of farmers than the technical training of agricultural extension agents. In Brazil today, basic lit- eracy and numeracy are widespread in all but the most remote rural areas thanks to decades of effort to provide primary schooling. However, schools have been less successful in universalizing critical reasoning, flexible thinking, and day-to-day application of scientific method. In this regard, despite its high level of functional literacy, Brazil's capacity for local R&D may still be at a significant disadvantage. The same principles apply to industrial technologies. They too must be adapted to local conditions, including the availability of raw materials, unique characteristics of the productive environment, and idiosyncrasies in sources of energy, climate, and the labor force. In some countries, such as Japan, local prefectures often set up their own R&D labs to help firms adapt industrial technology to local conditions. In other countries similar functions are carried out by productivity centers, university technology outreach cen- ters, and private engineering and consulting firms. Most important, workers are expected not only to understand the new technologies, but to be part of the process. In services, technology is generally disseminated through direct interaction with users. The use of new technology usually requires basic literacy as a pre- requisite to specialized training. Beyond literacy and specific skills, prospective users may then require access to complementary inputs and supporting indus- tries that are not otherwise available. Technology is typically embedded in something that is sold--whether as new equipment, inputs, or training--and financing is often required to pur- chase it. At the firm level, this may mean financing to buy a license, build a plant, or expand an enterprise. The government can help to do that in the way that it shapes the nation's investment climate (its enabling environ- ment). Government policy can also encourage broader-scale use and adoption of innovation--for example, policies to encourage Internet and computer applications at the school, small business, and even household levels. Brazil's National Innovation System: Instruments, Institutions, and Human Capabilities Table 3.1 provides a schematic snapshot of Brazil's innovation system, tying together what has been discussed thus far and providing a blueprint for the analysis to follow. Each element will be taken up and discussed more fully in succeeding chapters, and cross-references are indicated in each cell in italics. 56 Table 3.1. The National Innovation System of Brazil: Instruments, Institutions, and Human Capabilities Typesofinnovation Policiesandinstruments Institutions Humancapabilities Creatingandcommercializing · PublicspendingonR&D,includingnational · PublicR&Dingovernmentlabsand · High-levelproductivecapacityamong knowledge missionprograms,competitiveR&Dgrants, universities scientists,engineers,andtechnicians andpeerreview · PrivateR&Dinprivatelabs,firms,and · Capacitytoeducatenewgenerationsin · PublicpoliciesforR&D,includingmatching privateuniversities cutting-edgeresearch R&Dgrants,taxincentivesforR&D,andthe · Informalinnovationinprivatefirms · Businessleadersandmanagerswho IPRregime · Specializedgovernmentagencies understandhigh-levelscienceand · Publicpoliciesforthecommercializationof supportingcreationandcommercialization technology publiclyfinancedknowledge,includingnew ofknowledge(e.g.,CNPq,FINEP,BNDES) · Acultureoftechno-entrepreneurship innovationlawandpartnershipswiththe · SpecializedNGOinnovationinstitutions Discussedinchapter6 privatesectorasaconditionofresearch (e.g.,FAPESP) grants · Intellectualpropertyinstitutions(e.g.,INPI) · Nationalresearcheducationnetworks · TechnologytransferofficersinpublicR&D Discussedinchapter4 labsanduniversities · Scientific/industrialparks · Businessincubators · Earlystagefinanceandventurecapital Discussedinchapters4,5,and6 Acquiringforeignknowledgeand · Opennesstooutside,includingtrade, · Firmswillingtopurchaseembedded · Knowing"whattolookfor,"including: technology foreigndirectinvestment,andtechnology technology · Globalscanning importpolicy · Universityexchangesandforeign · Technologyassessment · Foreignacquisitionthrougheducation, collaboration · Technologynegotiation businesstravel,tradeshows,publications · Federal,state,andmunicipalsponsorship, · Adaptationtodomesticconditions anddatabases,andInternetaccess purchase,adoption · Cost-benefitanalysisoftechnology · Incentivestobringthe"BrazilianDiaspora" · InternationalNGOstransferringtechnology acquisition home tocivilsociety Discussedinchapter6 · SettingupR&Dantennaeabroad · Individualconsumerspurchasingtechnology Discussedinchapter4 · Internet-basedtechnologyacquisition Discussedinchapters4and5 Diffusingandusingknowledge · Publicpolicessettinguptechnological · Technicalinformationservices · Basicliteracyandnumeracy thatexistswithin-country informationandtechnologyextension · Extensionservicesinagriculture,industry, · Computerliteracy services andservices · Communicationskills · Policiesonstandards · Productivityorganizations · Updatedvocationalskills · Policiesonintellectualpropertyrights · Technologysupportinstitutionsand · A"cultureofcuriosity";respectfor · StrategiestobroadenInternetaccess programssuchasSEBRAE "outside-the-box"thinking Discussedinchapter4 · Metrology,standards,andquality-control · Pervasiveunderstandingofthescientific systems method · Industrialclusters Discussedinchapter6 Discussedinchapters4and5 Enablingenvironment · Competitionandtradepolicy · Efficientfinancialsystem · Capabilitiestoensuremacroeconomic (i.e.,theinvestmentclimate) · Effectiveregulatorypolicy · Flexiblelabormarkets stability,ruleoflaw,security,andefficient · Supportforentrepreneurship · Faircourtsandjusticesystem capitalandlabormarkets · Goodruleoflaw · Effectivegovernance · Basiccitizenshipskills · Goodmacrostability · Effectiveformaleducationinstitutions · Education and skills required to compete in Discussedinchapter2,thoughallchapters andlifelonglearningsystem anincreasinglydemandingglobaleconomy arerelevant Allchaptersasrelevant Discussedinchapter6 Source:Authors. Note:BNDES=NationalBankforEconomicandSocialDevelopment;CNPq=ConselhoNacionaldeDesenvolvimentoCientíficoeTecnológico;FAPESP=FundaçãodeAmparoàPesquisadoEstadodeSãoPaulo(São PauloStateResearchFoundation);FINEP=FinanciadoradeEstudoseProjetos(FinancierofStudiesandProjects);INPI=NationalInstituteofIntellectualProperty;NGO=nongovernmentalorganization;SEBRAE=Brazilian ServiceforAssistancetoSmallBusiness. 57 CHAPTER 4 Assessing Innovation at the National Level At the macro level, how well is Brazil doing with the three kinds of innovation activities? Creating new conceptual knowledge through research and devel- opment in Brazil has been relatively brisk--as measured, for example, by publications in refereed scientific journals. However, R&D has been much less successful in energizing production of technological innovations--for example, patents that can be commercialized. This chapter looks at Brazil's national innovation system from the perspec- tive of the three types of innovation,beginning with a macro-level comparison of Brazil's efforts to create and commercialize knowledge with efforts by the BRICs (Brazil, the Russian Federation, India, and China)1 and the BRICKMs (Brazil, Russia, India, China, the Republic of Korea, and Mexico). A closer look is then taken at how Brazil and Russia have responded to the challenges of enhancing national innovation capacity. In assessing the acquisition of for- eign technology, Brazil is compared with the other members of the BRICKM grouping. Some macro evidence is then provided on dissemination and use of technology in the manufacturing sector, as revealed by sectoral and firm productivity data. The chapter concludes with a broad overview of Brazil's national system of innovation, primarily as conceived by government policy makers, including its history and intellectual roots. Brazil started an innovation system earlier than most other then-developing countries, yet its conception of innovation was (and still is) rooted quite narrowly--with a heavy emphasis on creating new knowledge rather than acquiring and adapting what already existed. Despite its notable islands of R&D excellence, Brazil is generally underperforming in innovation. Trade policies that protected domestic producers from foreign competition have exacerbated the deficit,undercutting the need for the private sector to invest in R&D or its commercial applications. These two weaknesses lie at the heart of Brazil's lackluster economic growth in recent years. Carl Dahlman was a key contributor to this chapter. 60 KnowledgeandInnovationforCompetitivenessinBrazil Comparative Assessment of R&D--Inputs and Outputs In recent years,Brazil has experienced considerable scientific and technological success. The number of full-time researchers increased more than sevenfold from 21,500 in 1993 to 158,000 in 2004.2 Brazil's share of global scientific publications nearly tripled from 0.64 percent in 1990 to 1.73 percent in 2004, with particularly impressive accomplishments in the agricultural sciences (3.08 percent), physics (2.48 percent), pharmacology (2.41 percent), micro- biology (2.33 percent), and aeronautics and space sciences (2.11 percent).3 Illustrating the broad diversity of accomplishment, Brazilian contributions have ranged from cracking the genetic code of the Xylella fastidiosa (a bacte- rium that attacks orange trees and vines) to world-class technology programs in aeronautics (Embraer), satellites (China-Brazil Earth Resources Satellite Program), biotechnology (Genoma), agriculture (Embrapa), and deepwater oil exploration. Petrobrás, to take an example, held 160 patents in the United States in 2005,4 and in 1996 Embrapa accounted for half of all agricultural research spending in Latin America (Beintema et al. 2001).5 Brazil's technological performance stands out in Latin America, but its per- formance is poor compared with OECD economies.6 Using worldwide mea- sures of technology performance, Brazil is in an intermediate position. On the Networked Readiness Index (NRI), which measures a nation's readiness to participate in and benefit from information and communication technology developments, Brazil ranked 46th among 104 countries in 2004­05--ahead of Indonesia (51st) and Mexico (60th) but behind Singapore (1st), Korea (24th), Chile (35th), India (39th), and China (41st) (Dutta and Lopez-Claros 2005). Brazil's performance appears to be related less to input shortage and more to the character of its R&D expenditure. As figure 4.1 shows, R&D invest- ment as a share of GDP in 2004 was relatively high for Brazil's development level--greater than Italy's, Spain's, or Portugal's. However, despite the rela- tively high total, the distribution of investors was heavily weighted toward the public sector--55 percent, compared with 30 percent in the United States. Although Brazil's expenditure on R&D as a share of GDP is above the average for its level of per capita income, it is low compared with China and India, two of the most important BRIC comparators and countries with much lower per capita incomes. In India, the share of R&D to GDP has increased from 0.8 percent of GDP to 1.1 percent since 2005.This is due to a significant increase in private investment, led primarily by a dramatic rise in R&D centers of multinational corporations. The jump in investment is not confined to foreign companies, however. Indian firms gradually have increased their R&D-to-sales ratios since liberalization of the country's trade regime in the early 1990s. In the past two years, they have sharply increased R&D expenditures, having witnessed the benefits multinational companies have reaped from R&D in the face of stiff competition. This has been particularly true for Indian pharmaceutical companies since India extended protection to product patents (see World Bank 2007). AssessingInnovationattheNationalLevel 61 Figure 4.1. GDP Per Capita versus R&D Expenditure as a Share of GDP for LAC and Select Countries, 2004 2 Finland Switzerland 1 Korea,Rep.of France GDP Belgium Netherlands % Canada as Australia Ukraine RussianFederation Croatia CzechRepublic Luxembourg China Brazil Italy 0 Hungary Spain Belarus Turkey Poland Portugal expenditures Malaysia Chile HongKong,China Bulgaria Argentina R&D ­1 Romania ln Venezuela,R.B.de Colombia ­2 TrinidadandTobago ­2 ­1 0 1 2 ln GDP per capita Source:BasedondatafromtheWorldDevelopmentIndicators(WDI)Database. China increased its share of R&D spending from 0.8 percent of GDP in 1995 to 1.1 percent in 2002. Spending was ramped up further in 2003, and by the end of 2006, it had reached 1.6 percent of GDP. In terms of PPP, China is the world's second largest investor in R&D, trailing only the United States. Although China's R&D spending is still inefficient, 65 percent is already being carried out by enterprises, and a major effort has been launched to improve efficiency. According to China's 15-year science and technology plan, R&D will climb to 2 percent of GDP by 2010 and will reach 2.5 percent, the average level of advanced countries, by 2020. If it hopes to keep up, Brazil must increase both public and private invest- ment in R&D. Efficiency of public spending needs to be improved at the same time, especially in the production of practical technological innovations. Brazil has a large number of researchers, partly because it has a large popu- lation. However, as shown in figure 4.2, the number is also large in a relative sense; so it is important to understand how well researchers are being used. One measure of research effectiveness is the ratio between R&D expen- diture and patents obtained in the United States. In this area, too, Brazil is lagging (table 4.1). Brazil's modest R&D performance may be partly explained by the relatively large share of R&D that occurs within universities. International evidence suggests an inverse relationship between the level and effectiveness of R&D when R&D is not linked to strong incentive regimes.This applies to both uni- versities and public institutes.In Brazil,the incentive regime for research is mis- aligned.First,expenditure is not geared toward cost-effective,output-oriented 62 KnowledgeandInnovationforCompetitivenessinBrazil Figure 4.2. R&D Expenditures as a Share of GDP versus Researchers in R&D per Million People in LAC and Select Countries, 2004 2 e Finland Korea,Rep.of France Switzerland peopl 1 Netherlands Belgium Canada Singapore Croatia Luxembourg million CzechRepublic Ukraine Australia Italy Ireland per Brazil China RussianFederation Spain 0 Hungary Portugal R&D Turkey Poland Belarus in Chile HongKong,China Malaysia Argentina Bulgaria chers are ­1 Venezuela,R.B.de Romania esr ln Georgia Colombia ­2 TrinidadandTobago ­3 ­2 ­1 0 1 2 ln R&D expenditures as % GDP Source:BasedondatafromtheWDIDatabase. Table 4.1. R&D Expenditures and Efficiency in Brazil and Select Countries, 2003 R&D expenditures R&D effectiveness Per researcher Patents per million (US$) of Country % GDP (constant 2000 US$) R&D expenditure Brazil 0.98 76,967 0.51 Canada 2.06 246,184 0.26 Chile 0.70 133,068 -- China 1.22 4,508 2.30 India 0.85 -- -- Korea,Rep.of 2.53 69,431 5.32 Mexico 0.40 37,039 0.23 Singapore 2.15 133,515 0.26 Spain 1.03 33,577 0.43 UnitedStates 2.65 297,211 0.68 Source:BasedondatafromtheWDIDatabase. Note:--=notavailable. AssessingInnovationattheNationalLevel 63 research.Second,there is little expectation that publicly generated knowledge will be transferred for commercial application to realize productivity gains. Because most research budgets are funded through earmarked government resources,universities and public research centers have few incentives to orient themselves toward private sector needs. It is no accident that Embrapa-- a notable exception in the high effectiveness of its R&D--also obtains a signi- ficant share of its research budget through competitive bidding.7 Conditions governing intellectual property rights law remain inadequate despite recent improvements, especially in the licensing of processes (which hasbeensimplifiedsince1993).TheNationalInstituteforIntellectualProperty (Instituto Nacional de Propriedade Intelectual, INPI) still lacks appropriate human and financial resources. This deficiency leads to lengthy licensing processes, thereby reducing the ability of private entities to appropriate investment. Tax breaks and incentives for R&D are similar to those of devel- oped countries--for example, accelerated R&D depreciation allowances and carry-forward provisions. However, innovation policy works in the opposite direction. Considering the typical public-goods problem associated with the inability of private investors to appropriate R&D expenditures, the lack of a properly designed innovation policy helps to explain the discrepancy between social returns on R&D and low private expenditures.8 Table 4.2 compares key R&D input and output indicators in the BRICKM group of countries. Brazil compares favorably with Mexico but trails far behind other countries on most indicators (except those scaled by population, such as China and India). Brazil does better than China or Korea or Mexico in amount spent per scientific and technical journal article, but it lags behind all countries except China and Russia in the amount spent per patent granted in the United States. R&D in Brazil has been effective in generating conceptual knowledge but relatively ineffective in generating technological innovations, as measured by the number of patents granted annually.This gap highlights a general disconnect between universities and firms. How Brazil and Russia Face Innovation and Performance Challenges9 Brazil suffers from innovation and performance challenges similar to Russia's, but to a lesser degree. Reviewing the Russian experience, therefore, has rel- evant policy implications for Brazil given the similarities between the two countries (see table 4.3). The Soviet Union was, of course, a superpower, based primarily on its military applications of the country's strong scientific and technological capability. However, the inability to compete economically with the United States became a fundamental reason for its break-up after 1991. The transi- tion since 1991 has been extremely painful. Russia's GDP fell significantly between 1990 and 1996. A recovery began in 1997 but a crash followed in 1998 in the aftermath of the 1997 Asian financial crisis. In 1998 the govern- ment defaulted on its debt and devalued the currency. 64 KnowledgeandInnovationforCompetitivenessinBrazil Table 4.2. R&D Inputs and Outputs for the BRICKM Country Group Indicator Brazil Russia India China Korea Mexico ResearchersinR&D,2003 59,838 477,647 117,528 926,252 151,254 26,800 R&Dresearcherspermillion population,2004 344 3.319 119 708 3,187 268 SpendingonR&D(US$billions),2004 5.9 6.8 5.9 27.8 17.9 2.7 SpendingonR&D(%ofGDP),2004 0.98 1.17 0.85 1.44 2.65 0.43 Scientificandtechnicaljournalarticles,2003 8,684 15,782 12,774 29,186 13,746 3,747 R&Dspending(US$thousands) perscientificandtechnicalarticlea 682 431 460 953 1,332 722 Scientificandtechnicaljournal articlespermillionpopulation,2003 47.9 109.1 12.0 22.7 287.5 37.1 PatentsgrantedbyU.S.Patent Office,2004 161 173 376 597 4,671 102 R&Dspending(US$millions) perpatentgranteda 36.6 39.3 15.6 46.6 3.8 26.9 Patentapplicationsgrantedby U.S.PatentOfficepermillion population,2004 0.90 1.21 0.35 0.46 97.03 0.98 Source:CompiledfromdatainKAM(2006)andWorldBank(2006d). a.CalculatedbydividingestimatedR&Dspendingin2004bythenumberofarticlesorpatents. With the weak ruble complemented by rising commodity exports, the economy began to grow in 1999 and has continued to do so. The average growth rate in 1999­2007 was 6.7 percent, led primarily by the rapidly expanding petroleum sector. Oil, natural gas, metals, and timber account for over 80 percent of Russian exports. The major noncommodity exports are chemicals and military equipment. Thanks to its strong commodity-based exports, the country has been running a large trade surplus. Russia created a stabilization fund in January 2004 to reduce the rapid appreciation of the ruble and has been paying off its foreign debt from this fund. Nevertheless the strong trade surplus from persistently high oil prices continues to push the currency upward. In 1990, before the breakup of the Soviet Union, what is now the Russian Federation spent 2.03 percent of GDP on R&D and had 1.9 million scientists and engineers. With the recession following the transition after 1991, R&D spending plunged by over 80 percent in real terms to 1.06 percent of a much smaller GDP in 1999. The number of scientists and engineers in R&D fell to 872,000 by 1998. Spending on R&D has since increased as a percentage of GDP; total outlays are now slightly higher than Brazil's. The Russian R&D system before the breakup of the Soviet Union was state centric--R&D was carried out in universities, public research centers, and labs AssessingInnovationattheNationalLevel 65 Table 4.3. Basic Comparisons between Brazil and Russia Brazil Russia Population(million) 180 143 Grossnationalincome(billion) 662.0 638.1 GNI/capita 3,550 4,460 GNIPPP(billion) 1,534.1 1,522.7 GNIPPP/capita 8,230 10,640 Merchandiseexports 118,308 243,569 Manufacturedexports(%) 54 19 Manufacturedexports(billion) 63,886 43,278 Tertiaryenrollmentcoverage(%) 22 68 R&D/GDP 0.98 1.17 ResearchersinR&D/millionpopulation 344 3,319 Scientificandtechnicalpapersin2003 8,684 15,782 PatentsgrantedinU.S./millionpopulation 0.75 1.34 High-technologyexports/manufacturedexports 13 8 WEFGlobalCompetitivenessIndex 66 62 Basicrequirements 87 66 Efficiencyenhancers 57 60 Innovationfactors 38 71 Sources:BasedondatafromtheWEFGlobalCompetitivenesReport,WDIDatabase,andWorldBankinternaldata. Note:Figuresarefor2005unlessotherwisenoted.MonetaryamountsareinU.S.dollars. in industrial ministries. University research focused on basic science. Public research centers and ministry labs were oriented toward military applications and were isolated from commerce. Much of this effort was carried out in over 50 science cities walled off from the country's daily life. Since the transition, some effort has been made to reorient research toward commercial needs, but in 1999 the government was still funding more than 55 percent of R&D (as does Brazil currently), little of which targeted the needs of the productive sector. Firms needing technology purchased it from abroad. The public R&D sector found more demand from foreigners than from local companies. The Russian industrial plant, except in a few sectors (particularly oil and gas) is outmoded if not obsolete. Few manufactured products are globally competitive except for military items (although their pricing is probably not on full commercial terms). Increasing revenues from natural resources and the continued appreciation of the ruble have allowed Russia to import much of the food and manufactured products it needs. In effect, the Russian economy is rapidly deindustrializing (if the oil and gas sectors are excluded from indus- try) and becoming increasingly dependent on natural resource and arms sales. While this situation is more extreme than in Brazil, the similarities (substitute agricultural commodity exports for oil and gas exports, and Embraer airplane 66 KnowledgeandInnovationforCompetitivenessinBrazil sales for MIG fighter and other armament sales) carry an important lesson for Brazil about the underlying risk of its current commodity export boom. The main lesson Brazil should draw is that public R&D must be bet- ter managed and oriented toward broader economic ends. Russia's tremen- dous scientific and technological capability and high human capital did not serve it well because these resources were not oriented toward productive needs. Combined with a poor economic and institutional regime, this led to the collapse of the Soviet Union. Even today there is a major disconnect between a much smaller R&D base and the economic requirements of the Russian Federation. The government is trying to reorient its R&D capability toward global economic competitiveness, and it is installing support infra- structure to commercialize the knowledge that is produced. This includes science and technology parks, business incubators, venture capital for high- tech start-ups, and stronger intellectual property and licensing procedures. However, despite the great progress in improving the macroeconomic situa- tion, Russia still suffers from a poor business environment and porous rule of law. As a result, the capacity of the domestic science and technology system to create wealth has not been harnessed, and Russia earns poorer marks on innovation capability than Brazil in World Economic Forum (WEF) rankings (see table 4.3).10 The risk Russia illustrates for Brazil is that a continued agricultural com- modity boom may divert attention away from retooling the manufacturing and service sectors for greater competitiveness, resulting in an overspecialization in natural resources. This has implications for Brazil's exchange rate strategy and highlights the need for improvement in its overall business environment and innovation capability. Figure 4.3 provides a comparative perspective of Brazilian innovation assets compared with Russian innovation assets. Figure 4.3. Brazil and the Russian Federation Innovation Assets in Comparative Perspective Brazil, Russian Federation AnnualGDPgrowth(%) Internetusersper1,000people 10 Humandevelopmentindex Computersper1,000people Tariff&nontariffbarriers 5 Totaltelephonesper1,000people Regulatoryquality 0 Grosstertiaryenrollment Ruleoflaw Grosssecondaryenrollment ResearchersinR&D/mil.people Adultliteracyrate(%age15andabove) Scientificandtechnicaljournalarticles/mil.people PatentsgrantedbyUSPTO/mil.people Brazil Russia Source:CalculatedusingtheworldBank'sonlineKAMtool. AssessingInnovationattheNationalLevel 67 Acquisition of Foreign Knowledge Table 4.4 shows data on how foreign knowledge is acquired by the BRICKMs. Along with India, Brazil stands out as making the least use of foreign knowledge through means other than FDI. The most striking element concerns trade. Brazil is among the most closed of the major economies, both in the low share of the economy that is traded and the high degree of protectionism. The combination of low investment in GDP compounded by low capital goods imports is among the most significant constraints to acquiring global knowledge. Brazil acquires less foreign innovation through capital goods than do its peers (figure 4.4), so technological change is less absorbed by manufac- turing firms. Increased integration could potentially lead to higher imports of these goods, helping to both develop innovations at the firm level and increase productivity. The government has undertaken licensing-agreement and capital-good- acquisition initiatives to expand technology absorption. The process of deregulating technology transfer started in 1991, with further steps taken in 1993. INPI registration time for contracts was shortened, and several admin- istrative procedures were waived. This partly explains the boom in royalty payments in the late 1990s, which increased from 1 percent of GDP in 1990 to 8 percent in 1995 to 24 percent in 1999, before retreating to 18 percent in 2005 (World Bank 2006). Unnecessary requirements still stymie the process, and further simplification is needed.11 Import tariffs and the tax on manufac- turing goods (IPI),which applied to capital goods imported by exporters,were reduced after 2000 and eliminated in June 2005 (Decree No. 5,468). Limited Table 4.4. Comparative Data on Acquiring Foreign Knowledge (BRICKMs) Brazil Russia India China Korea Mexico TradeasshareofGDP(2004) 31.40 57.30 41.60 65.30 83.80 62.00 Tariffandnontariffbarriers(2006) 3.50 3.50 5.00 3.00 3.50 2.50 Grossforeigninvestmentasshare 3.72 1.36 0.68 3.89 1.04 2.80 ofGDP(avg.2000­04) Royaltyandlicense-fee 1,196.9 1,095.4 420.8 3,548.1 4,450.3 805.0 payments(US$millions,2004) Royaltyandlicense-feepayments/ 6.70 7.66 0.40 2.75 92.52 7.76 millionpop.(2004) Manufacturetradeasshare 16.38 17.85 15.29 50.35 55.30 47.54 ofGDP(2004) High-technologyexportsasshare ofmanufacturetrade(2003) 11.96 18.86 4.75 27.10 32.15 21.34 Source:WDI2006andKAM2006. 68 KnowledgeandInnovationforCompetitivenessinBrazil Figure 4.4. Total Imports versus Imports of Capital Goods in LAC and Select Countries, 2004 20 Philippines Korea,Rep.of GDP) (% 10 services Chile 0 and China goods of ­10 India imports Brazil Argentina ­20 ­5 0 5 10 imports of capital goods (% GDP) Source:BasedondatafromtheWDIDatabase. Box 4.1. The Statute of Microenterprises and Small Enterprises Microenterprises and small enterprises account for about 90 percent of firms in Brazil. Reflecting their important role, the Statute of MSEs (Complementary Law No. 123) was approved in December 2006, following a long period of discussions between the public and private sectors. A key provision in the law mandates that all levels of government, their respective funding agencies, and the centers for innovation develop programs targeted to assist MSEs. These programs should receive at least 20 percent of agency funding for innovation, which must be docu- mented in each institution's annual report. In addition, taxes on capital-goods pur- chases by MSEs were eliminated to spur technology absorption within the sector. access to credit, especially for micro- and small enterprises (MSEs), constrains the import of capital goods through differential tax treatment of capital-goods purchases. An initiative that should help, the Statute of Microenterprises and Small Enterprises (box 4.1), was approved at the end of 2006. The Dissemination and Use of Knowledge It is difficult to make a cross-country macrocomparison of knowledge dissemi- nation and use. However, some patterns appear when looking at firm-level data recently compiled through the World Bank Investment Climate Survey. AssessingInnovationattheNationalLevel 69 Table 4.5. Productivity Dispersion within Brazil's Industrial Sectors value added per worker Sector Max/Min Adj Max as % of Max Adj Max/Mean Food&Beverage 12,900.07 57.22 9.42 Textile 1,169.01 67.31 5.99 Apparel 79,103.56 31.60 9.14 Leather&Footwear 65,897.30 73.33 4.81 Chemicals 9,879.34 61.91 7.83 Machinery&Equipment 315,929.99 37.98 33.83 Electronics 6,658.67 52.03 10.00 AutoParts 689.60 64.88 4.17 Furniture 26,916.31 35.06 7.88 Average 57,682.65 53.48 10.34 Source:ComputedfromICS. Note:Thetopandbottom1percentforthesamplewerediscardedtoeliminatefalsereadingsfromdataerrors. Table 4.5 shows the high dispersion of value added per worker across nine representative industrial sectors in Brazil. Particularly striking is how large the difference is between the most- and least-efficient firms, with the great- est disparity--300,000 times more value added per worker--occurring in the machinery and equipment sector.The average for all nine sectors is an amazing 57,000 times more value added per worker.To obtain a conservative measure less influenced by outliers, the maximum was adjusted by taking as the maxi- mum the value of the dense part of the distribution. The adjusted maximum averaged 53 percent of the distance to the recorded maximum. Even with these conservative adjustments,it appears that if average productivity could be raised to the adjusted maximum level, it would increase by a factor of 10.12 This analysis suggests just how much national output could be raised--at least in principle--if all Brazilian firms adopted existing technology. Obvi- ously, moving to higher-productivity technologies is not costless. Firms that currently use such technologies are likely to be much larger, use other modern equipment,employ more up-to-date management practices,use better inputs, and have better educated and more skilled workers compared with firms that do not use them. The latter, more typical firms are operating far behind their more efficient counterparts. Far more must and can be done to disseminate and effectively employ existing knowledge across the board. Data from the Investment Climate Survey (ICS) make it possible to analyze the dispersion of labor productivity across industrial sectors in other countries. It is surprising that the productivity dispersions are on average, twice as large in Brazil as in India, considering that dispersions in the latter already exceed those in most of the countries to which it has been compared.13 If average productivity could be raised to the maximum level in India, using a similar methodology, it would rise only by a factor of 5 compared to a factor of 10 for Brazil. Countries develop specialized mechanisms and institutions to disseminate knowledge and help firms use it effectively. Brazil has been successful in creat- ing and disseminating agricultural technology thorough Embrapa and various 70 KnowledgeandInnovationforCompetitivenessinBrazil specialized, state-level agricultural extension institutions. Brazil also has some specialized institutions that seek to disseminate technology information and training in industry, such as Serviço Nacional de Aprendizagem Industrial (SENAI) and other industry associations. It is unclear why Brazil's producti- vity differentials are so high, and this issue needs more detailed examination. The recently passed Statute of Microenterprises and Small Enterprises should help MSEs purchase capital goods and target R&D efforts to make knowledge more widely available and usable. However, it is too early to tell how well the initiative is working. The National System of Innovation as Conceived by Government Brazil--morethanmostmiddle-incomecountries--hasalongtraditionofback- ing R&D.14 The effort began in the 1950s with limited resources and through indirect means such as investments in public infrastructure (research centers, provision of technical assistance, and metrology services), human resources formation, and other externalities. Significant resources were directed to these areas in the 1970s and early 1980s, led by the military government's desire to achieve some domestic technological capability. By the mid- to late 1980s, a relatively well-structured science and technology (S&T) base was in place, and the results--in terms of more graduate programs, research groups, and scientific publications--began to appear. The 1980s witnessed the first significant attempts to support company- based R&D. A number of direct instruments were added, including fiscal incentives, credit channeled to firms by the Financier of Studies and Projects (Financiadora de Estudos e Projetos, FINEP), and the procurement of targeted goods and services by government-controlled enterprises such as state oil com- pany Petrobrás. Responding to the limited impact these measures achieved in spurring companies' R&D, the government enacted comprehensive legislation to promote market-oriented innovation. The Programas de Desenvolvimento Tecnológico Industrial and Agropecuário--PDTI/PDTA (Law 8661/93) pro- vided tax breaks and other incentives for competitive industrial and agri- cultural research by public and private firms; applications for firm-specific multiyear plans for technology development were filtered through the Min- istry of Science and Technology (MCT). The fiscal crisis in the latter 1990s and the need to build a primary budget surplus led the government to cut support for R&D (Law No. 9532/1997), mostly by reducing public infra- structure investment and paring already meager fiscal incentives.15 MCT and the National Council on Science and Technology (CCT) have defined S&T strategies and coordinating intergovernmental initiatives since 1995.16Twostrongfederalinstitutions--theNationalCouncilforScientificand Technological Development (Conselho Nacional de Desenvolvimento Científico e Tecnológico, CNPq) and FINEP--were established to promote basic research. They offer graduate and postgraduate programs and finance technological investments by the private sector.17 CNPq directly manages several research institutes, including the well-regarded Brazilian Center for Physics Research AssessingInnovationattheNationalLevel 71 (Centro Brasileiro de Pesquisas Físicas, CBPF) and the National Institute of Basic and Applied Mathematics (Instituto Nacional de Matemática Pura e Aplicada, IMPA). Successful research centers are attached to other ministries as well--for example, the Brazilian Agricultural Research Corporation (Empresa Brasileira de Pesquisa Agropecuária, Embrapa, box 4.2) and the National Institute for Metrology (Instituto Nacional de Metrologia, Inmetro) are maintained by the Ministry of Agriculture and Livestock and the Ministry of Development, Industry, and Trade, respectively.18 State-owned enterprises also run their own research centers--for example, Petrobrás's Cenpes--while public-private institutions such as SENAI support technology centers. In a decentralized federation such as Brazil, individual states play an important role in financing R&D, and they have full autonomy in setting their S&T policies. Several have their own support agencies, as well as higher edu- cation and research institutions. Estimates from MCT show that the states accounted for 30 percent of government spending on S&T in 2004. São Paulo State has the largest state-level R&D support system, and it is also the largest recipient of federal funds.About two-thirds of R&D public funding in São Paulo state--around 1.1 percent of the state's GDP--comes from state sources, including funding for three state universities, 19 research institutions, and FAPESP, the state's S&T support agency (FAPESP 2004).The strong sup- port by the state government makes São Paulo the second-largest investor in R&D in Latin America, ahead of Mexico and Argentina. Other states active in this area include Rio de Janeiro, Minas Gerais, and Rio Grande do Sul, albeit with much smaller budgets (Cruz and de Mello 2006).19 Because of the importance of states in Brazil's innovation system, the next step is to apply the conceptual framework used in this study to the analysis of knowledge and innovation for competitiveness at the state level. Box 4.2. Embrapa Embrapa was created in 1973 to "develop solutions for sustainable development in Brazil's rural areas, focusing on agribusiness through the creation, adaptation, andtransferofknowledgeandtechnologiestobenefitsociety."Ithas37research centers and 2,221 researchers (53 percent holding PhDs). Most research centers carry out commodity-specific research, while others are involved in thematic research (the environment, genetics, and biotechnology) or regional issues. The corporation also has two laboratories operating overseas (one in France and one in the United States). Embrapa coordinates the National System of Agricultural R&D, including federal and subnational R&D institutions, universities, and busi- nesses.AlongwithsubnationalagriculturalR&Dinstitutions,Embrapahashelped Brazil become one of the world's largest agricultural producers and a competi- tive, low-cost exporter of agricultural commodities. Source:BasedonCruzanddeMello(2006). 72 KnowledgeandInnovationforCompetitivenessinBrazil The structure of the Brazilian National Innovation System is complex, involving the Ministries of Science and Technology, Education, Health, Agriculture, Development and Foreign Trade, Defense, and others (figure 4.5). At the federal level, CCT an advisory body to the presidency, has a policy coordination role. MCT is the executive body, with assistance from FINEP, CNPq, and the Center for Management and Strategic Studies (CGEE). Industrial policy is formulated by the Ministry of Development, Industry, and Trade (MDIC) through the National Council of Industrial Development (CNDI) and the Brazilian Agency of Industrial Develop- ment (ADBI). Coordination between science and technology and industry and commerce is promoted by MCT and MDIC representation in both CCT and CNDI. However, the coordination is not very strong. Moreover, the National Bank for Economic and Social Development (BNDES)--the main financier for development--acts independently. Finally, as this struc- ture makes evident, the Brazilian concept of a national innovation system devotes little explicit attention to acquiring foreign knowledge or to dis- seminating knowledge, the other two components of the innovation system framework. In fact, it is quite telling that the initial source of funding for the National Fund for Scientific and Technological Development (Fundo Nacional de Desenvolvimento Científico e Tecnológico, FNDCT) was a tax on technology imports. FINEP's creation of 16 S&T sector funds (box 4.3) since 1999 has been the most important attempt to provide a stable, complementary source of public funding for R&D.This was done in the context of increasing fiscal constraints and current expenditures crowding out public investments. FINEP disburses funds through several mechanisms, mainly grants aimed at various economic agents and with multiple objectives. Time periods vary for grants, and the amount disbursed per project is strictly limited.20 Sector funds are financed by sector-specific contributions and by earmarking royalties and other public revenues.21 While this has provided a steady source of funding for R&D, ear- marking funds to specific sectors works against allocating resources efficiently. Only two of the sector funds, the Fundo Verde Amarelo and the Fundo de Infra-Estructura, are cross-sectoral. Most funds are used primarily to support universities and research institutes, with little support going to enterprises or to collaborative research with the private sector. The most complex,controversial,and frequently revised policy instruments are related to private sector tax incentives. Two programs were set up in the early 1990s (though lacking appropriate stimulus mechanisms) to boost tech- nology absorption and diffusion in the manufacturing sector--the Support Program for Technological Industrial Training (Programa de Apoio à Capaci- tação Tecnológica da Indústria, PACTI) and the National Program for Quality and Productivity (Programa Brasileiro da Qualidade e Produtividade, PBQP). By the mid-1990s, tax incentives for R&D activities were reinstated for the agricultural sector (PDTA) and the industrial sector (PDTI), and measures to build research infrastructure and train scientific personnel also were pro- moted. Several technology-oriented measures were put in place with World Figure 4.5. Brazil's National Innovation System FEDERAL GOVERNMENT FederalPolicy,FundingResearch, SupportingServices CNE CCT CNDI COMASSE CNS NationalEducation NationalScience& NationalIndustrial AdvisoryCommissionfor NationalHealthCouncil Council TechnologyCouncil DevelopmentCouncil S&TforNationalDefense MCT MDIC MEC MS MAPA MD Other MinistryofScience& MinistryofDevelopment, MinistryofEducation MinistryofHealth MinistryofAgriculture Ministries Technology Industry&ForeignTrade MinistryofDefense CAPES FIOCRUZ EMBRAPA CNPq INPI CTA Post-graduate OswaldoCruz AgriculturalResearch NationalS&T NationalInstituteof AirspaceTechnical DevelopmentAgency Foundation Corporation DevelopmentCouncil IntellectualProperty Centre INCA INMET FINEP INMETRO CETEX Federal NationalCancer NationalMetrology Studies&Projects NationalInstituteof ArmyTechnological universities Institute Institute FinancingAgency Metrology&Quality Centre Federal ANVISA CGEE Centrefor ABDI IPqM Technological NationalHealth Managementand BrazilianIndustrial NavyResearch Institutes SurveillanceAgency StrategicStudies DevelopmentAgency Institute Institutes Other BNDES Otherinstitutions Otheragencies Economic&Social institutions andagencies DevelopmentBank NationalCouncils: .StateS&Tsecretariats PRIVATE SECTOR .StateR&Dsupportingagencies .MunicipalS&Tsecretariats Enterprises Enterprises associations Industry Privateinvesting STATE GOVERNMENTS confederations agencies/banks State policy, funding, research, and support agencies PrivateR&Dinstitutes R&Dassociations Statetechnical StateTechnological StateResearch Stateuniversities Privateuniversities Scientificassociations faculties Institutes Supporting Source:MinistryofScienceandTechnology. 73 74 KnowledgeandInnovationforCompetitivenessinBrazil Box 4.3. The Sector Funds Program The Sector Funds Program consists of 14 thematic naturalresources.Forinstance,thePetroleumFund,the funds (such as petroleum and natural gas, biotechnol- firsttoberegulatedin1999,usestaxrevenuesfromthe ogy, energy, agribusiness, aeronautics, and information oil and natural gas industry to finance R&D activities in technology).Eachfundhasitsownresearchobjectives, the industry. Twenty percent of each fund's allocation rangingfrombasicresearchtocommercialinnovations. is pooled in the Infrastructure Fund. All tax revenues Two funds--the University-Industry Collaborations are channeled into the MCT's National Fund for S&T Fund and the Infrastructure Fund--are not related to Development (Fundo Nacional de Desenvolvimento any particular industrial sector. The latter is designed da Ciência e Tecnologia, FNDCT), which has been to improve research facilities, laboratories, and equip- active since the 1970s. ment at public research institutions. Sector funds are Operations of the sector funds are administered based on the premise that thematic investment will by FINEP. Independent management committees in supply industry's demands for innovation-oriented charge of fund strategies represent the scientific com- research. Thirty percent of the funds' resources must munity,theprivatesector,andthegovernment.In2001 be directed to proposals from the North and North- a nonprofit organization, the Center for Management east regions, which have traditionally relied on federal and Strategic Studies (CGEE), was hired by the MCT assistance to establish and sustain research institu- to administer the management committees and pro- tions. The rules governing sector fund finance deter- vide policy advice. Currently, an umbrella committee, minethatnonprofituniversitiesandresearchinstitutes formed by the heads of the management commit- mustperformtheR&D,whilefor-profituniversitiesare tees, fills that role. Conceptually, sector funds occupy excluded, and participating businesses must collabo- an important niche in R&D sponsorship and industrial rate with a lead nonprofit research institution. development, but other public agencies also support The thematic funds draw their capital from taxa- innovation through investment in R&D. tiononbusinessprofits,royalties,andtheuseofBrazil's Source:BasedonSá(2005). Bank support through the Support Program for Scientific and Technological Development (Programa de Apoio ao Desenvolvimento Científico e Tecnológico, PADCT), which invested US$470 million in almost 4,500 projects. In 2006, the revenue foregone through tax incentives for R&D in Brazil was estimated at R$1.6 billion (or 0.1 percent of GDP). Federal laws pro- vide some tax breaks for R&D activities (table 4.6), with most of these incentives targeting the information and communications technology (ICT) industry (Law No. 8,248/1991, altered by Law No. 10,176/2001). Support was subsequently extended to non-ICT firms (Law No. 8,661/1993, amended by Law No. 9,532/1997 and now revoked). Tax breaks are also granted (Law Nos. 8,010/1990 and 8,032/1990) to universities and for purchasing research materials. The national tax code was modified by Law No. 11,196/2005 (MP do Bem), which simplified procedures for firms to claim tax breaks. This measure was welcomed by the private sector, though it is too soon to assess its impact on innovation intensity.As described by Cruz and de Mello (2006), tax benefits include (a) exemption from federal indirect taxes on sales of selected products and purchases of capital goods and intermediate inputs, AssessingInnovationattheNationalLevel 75 Table 4.6. Brazilian R&D Tax Incentives, 2000­06 current R$ million Law No. 2000 2001 2002 2003 2004 2005* 2006* Scope 8,010/1990 60.3 118.4 111.9 152.0 155.9 117.8 149.9 Research materialsfor universities 8,032/1990 10.5 6.3 6.5 8.2 11.4 8.2 11.0 Research materialsfor universities 8,248/1991and 1,203.7 -- 732.9 961.7 934.6 1,369.1 1,515.1 R&DinICT 10,176/2001 companies 8,661/1993and 22.3 22.4 15.2 19.7 37.1 46.1 124.6 R&Dinnon- 9.532/1997 ICTcompanies 8,387/1991 13.4 62.4 77.6 98.1 89.5 96.5 111.0 R&DinICT companiesin ManausFree TradeZone Total 1,310.2 209.5 944.1 1,239.7 1,228.5 1,637.7 1,911.6 Source: SIAFI, Sistema Integrado de Administração Financeira do Governo Federal (Integrated Federal System for FinancialAdministration). Note:*=estimates,--=notavailable. (b) corporate income tax deductibility for spending on R&D and for payments of royalties for the use of trademarks/patents and technical/scientific assis- tance, and (c) accelerated depreciation and amortization provisions. However, only a small fraction of the total public support for R&D through either grants or tax incentives supports work carried out by the productive sectors. To promote commercialization of knowledge produced by public research institutes and universities, and to encourage greater collaboration between firms, public research centers, and universities, the government passed the Innovation Law in 2004 (box 4.4). While it is a step in the right direction, administrative rules to implement it have not been issued. It has had virtually no impact because firms are reluctant to act, leery of how its provisions will be interpreted by tax authorities. Conclusion Although Brazil started to develop a national innovation system quite early, it was narrowly focused on domestic R&D and had a somewhat autarkic focus. Brazil is not getting as much for its R&D efforts as it should, partly because, until recently, the innovation system focused on public R&D labs and uni- versities. With limited exceptions, such as health, agriculture, petroleum, and aeronautics, there were few explicit instructions to the R&D infrastructure to develop practical knowledge, and there were no incentives for the public R&D infrastructure to commercialize the knowledge produced. In addition, the productive sector, operating in a relatively protected economy until the 1990s, had little incentive to undertake R&D to improve its competitiveness 76 KnowledgeandInnovationforCompetitivenessinBrazil Box 4.4. The Innovation Law In December 2004, the Brazilian Congress approved the Innovation Law (Law No. 10,973). Although modest in scope and depth, it improves the incentive regime for greater results-oriented public research and more active transfers for the private sector. It was organized around three premises: (a) the develop- mentofanenvironmentconducivetostrategicpartnershipsamonguniversities, technology institutes, and the private sector; (b) incentives for S&T institutes to participate in the innovation process; and (c) incentives for innovation within firms. The law authorizes incentives to foster collaboration between public scientific and technological institutions (STIs) and the private sector. It gives STIs more flexibility to negotiate technology licensing agreements and to strike deals with private enterprises for use of public labs. Public researchers will be free to work for other STIs and continue to receive their regular salaries while carrying out joint projects. They also can request special unpaid leave and join a start-up company to further develop their technologies. The law took effect in mid-2005, but administrative regulations have yet to be passed to provide the legal framework to improve the country's capacity to generate and commercial- ize technology. and did not receive much support from government to do so.That is changing, but Brazil still has far to go. Policy makers need to think of the innovation sys- tem more broadly to include acquiring foreign knowledge and disseminating and using knowledge.The microevidence presented in the next chapter on the importance of these two additional parts of the innovation system should help raise awareness of their need for explicit attention. CHAPTER 5 Firm-Level Innovation This chapter examines innovation at the firm level in Brazil using evidence from two databases--first, the PINTEC database developed by the Brazilian Institute of Geography and Statistics (IBGE), and second, the World Bank Investment Climate Survey (ICS) database.1 The first section compares Brazil's innovation performance with OECD countries. It shows, as expected, that innovation activity is lower in Brazil; but in addition, it shows that the focus of innovation is different, as would be anticipated from the conceptual framework developed in chapter 2. The second section examines the sources of innovation for Brazilian firms. It finds that the most important source is not R&D but purchases of capital goods, and moreover, that competitive firms and buyers are the most impor- tant sources of information about innovation for Brazilian firms. Based on this microdata, the third section analyzes the relationship among firm-level innovation, productivity, and growth in Brazil. We find that more innovative firms have higher productivity and grow faster than less innovative enterprises. A more formal exploration of the relationship among innovation inputs, outputs, and productivity is done through a three-equation recursive model (presented more fully in appendix A). In brief, we find that innovation (in either of the two ways in which we specify it) positively affects the firm's value added per worker. Both analyses validate the importance of fostering greater innovative effort to improve Brazil's growth. The fourth section examines firm-level innovation inputs (such as R&D, technology licensing, joint ventures, and worker's training) and outputs (such as new products and new product lines) in Brazil in terms of firm size, sector, and regional distribution. In descriptive analyses, R&D, innovation, and pro- ductivity are typically found to increase with the firm's size.The findings show José Guilherme Reis, Mariam Dayoub, Carl Dahlman, and Paulo Correa were key contributors to this chapter. 78 KnowledgeandInnovationforCompetitivenessinBrazil that firm size is indeed an important determinant of R&D and innovation for Brazilian manufacturing firms; however, the results for productivity depend on how innovation is defined. The fifth section summarizes the findings regarding the relationship between various measures of human capital and productivity and various innovation inputs and outputs. This draws attention to the critical role played by educa- tion both in acquiring and using existing knowledge, as well as in creating new knowledge. Finally, some conclusions are drawn about firm-level performance insofar as they address the main questions of this report. Innovation in Brazil: Firm-Level Perspective In Brazil, firm-level studies recently have been developed, benefiting from the availability of new databases. Indeed, firm-level studies became possible only after 2002, when IBGE released a survey on technological innovation at the firm level (PINTEC), which follows the methodology suggested by the "Oslo Manual," an OECD document establishing guidelines for collecting and inter- preting data on industrial innovation. Table 5.1 summarizes the results for data collected in 1998­2000 and 2001­03. The 1998­2000 data is based on 72,000 firms. Only 6.3 percent of firms solely undertook product innovation, 13.9 percent undertook process innovation alone, and 11.3 percent under- took both product and process innovation. Overall, 31.5 percent of firms undertook any of the innovation types cited above.As expected, smaller firms (10­49 workers) undertook fewer product or process innovations than larger firms.The overall percentages did not change much in 2001­03, although the Table 5.1. Type and Rate of Innovation among Brazilian Firms, 1998­2000 and 2001­03 percent of firms with at least 10 employees 1998­2000 2001­03 Innovation rate Product 6.3 6.4 Process 13.9 12.9 Productandprocess 11.3 14.0 Anyofabovetypeofinnovation 31.5 33.3 Innovation rate by size of firms Productinnovationrate Smallfirms(10­49employees) 14.1 19.3 Largefirms(>500employees) 59.4 54.3 Processinnovationrate Smallfirms(10­49employees) 21.0 24.8 Largefirms(>500employees) 68.0 64.4 Source:CruzandDeMello2006,basedonIBGE'sInnovationSurvey,PINTEC. Firm-LevelInnovation 79 percentage of small firms undertaking product or process innovations increased slightly, while that of firms with more than 500 employees decreased slightly. How do Brazilian firms compare with OECD firms in rate and type of innovation? Based on comparisons with the European Innovation Surveys, Brazil's overall innovation rate is similar to that of Spain but lower than the European average. For example, the innovation rate is 49 percent in Denmark, 51 percent in Holland, 59 percent in Belgium, and 60 percent in Germany.2 In addition, most Brazilian innovations involve process, not product, innova- tions; and most of what is reported as innovation in the surveys is actually in- novative in terms of being new to the firm rather than new to the market. As noted in chapter 3, this was expected because firms in developing countries like Brazil still stand to benefit very much by tapping preexisting knowledge in the country and abroad. More detail can be obtained from the database for 1998­2000. The Insti- tute of Applied Economic Research classified firms into three categories to perform a relevant analysis on the data (table 5.2).3 The categorization sorted firms by their competitive strategy: · Group A firms were those that innovate and differentiate products. These companies carried out innovation new to the market and obtained a price premium equivalent to 30 percent in exported goods when compared to other Brazilian exporters of the same product. R&D, marketing, quality, and brand management were primary emphases. · Group B firms specialized in standard products and adopted a competi- tive strategy based on cost cutting rather than the value added creation of Group A firms. Group B contains exporting firms not included in Group A and nonexporting firms that are as or more efficient than the exporters. Group B firms seek lower costs and focus on operational manufacturing, management, and control and logistics. Table 5.2. Basic Characteristics of Brazilian Firms Grouped by Competitive Strategy Number Share of Average Average and percent Share of employment number of sales of firms sales (%) (%) employees (R$ millions) A.Innovativeandproduct- 1,199 25.9 13.2 545.9 135.5 differentiatingfirms (1.7) B.Standardproductfirms 15,311 62.6 48.7 158.1 25.7 (21.3) C.Lowerproductivity 55,495 11.5 28.2 34.2 1.3 firms (77.1) Allfirms 72,005 100 100 (100) Source:IPEA2005. Note:Cellshavebeenleftblankwheredataarenotrelevanttotheanalysis. 80 KnowledgeandInnovationforCompetitivenessinBrazil · Group C firms do not differentiate, have lower productivity, and include enterprises that do not fit into Groups A and B.This group comprises non- exporters that are able to perform in less dynamic markets by means of low prices or low salaries. The innovative and product-differentiating firms compose the smallest groupinthePINTECsurvey(just1.7percent)butaccountforaquarterofsales and 13.2 percent of employment, making them the largest in average work- force and sales. Firms with standard products are the second most numerous (21.3 percent) but account for 63 percent of sales and 49 percent of jobs and are midrange in average size. Low-productivity firms are the most numerous (77.1 percent) but account for only 28 percent of jobs and 11.5 percent of sales and are the smallest in terms of average employment and sales. Overall, only 4.1 percent of firms carried out product innovations new to the market, and only 2.8 percent carried out process innovations new to the market (table 5.3). Other innovations were new to the firm but not to the market--in other words, they represented diffusion of technology already available in Brazil. For Group A firms, all product innovations were new to the market. However, it is interesting that 70 percent of them also undertook process innovations, accounting for the highest percentage of process inno- vations new to the market (37.5 percent). This suggests that many product innovations probably required new processes, too. It is also interesting that firms specializing in standard products were associated more frequently with process than product innovations, suggesting that probably they were using existing technology to upgrade their production process to reduce costs. As noted in chapter 3, much technology is embodied in capital goods. Thus, it is unsurprising that capital goods are the most frequently cited source of innovation by Brazilian firms (table 5. 4). The second most cited source is labor training or the hiring of persons who have the required skills.The third is R&D. Similar results were found by the ICS when around 1,600 firms were asked to identify the most important ways to acquire new technology. Table 5.3. Type of Innovation by Competitive Strategy of Innovating Firms percent Competitive strategy Product innovation Process innovation Innovative New for New for New for New for firms Subtotal market firm Subtotal market firm Group:A:Innovative anddifferentiating 100.0 100.0 100.0 28.4 70.6 37.5 48.5 GroupB:Standard product 44.5 26.3 4.5 23.1 35.6 5.7 31.6 GroupC:Less productive 26.4 13.4 1.9 11.7 21.4 1.3 20.4 All 31.5 17.6 4.1 14.4 25.2 2.8 23.3 Source:IPEA2005. Firm-LevelInnovation 81 Table 5.4. Innovation Sources for Brazilian Firms, 1998­2003 percent of firms with at least 10 employees Source of innovation 1998­2000 2001­03 Acquisitionofmachineryandequipment 76.6 80.3 Labortraining 59.1 54.2 In-houseR&D 34.1 20.7 Source:CruzandDeMello2006,basedonPINTEC. Of 13 options, the top three selected were (a) acquisition of machinery and equipment (66.4 percent of the firms), (b) in-house development (62.6 per- cent of the firms), and (c) the hiring of key personnel (45 percent of the firms). Therefore it is important to note that R&D is not the most important source of innovation. This is true even for the most innovative firms in Brazil. The importance of capital goods as a source of innovation at the micro level reinforces the significance of two macro findings reported in chapter 4.These were, first, that low innovation in Brazil is tied to the low investment rate and, second, that Brazil has very low imports of capital goods. The net effect is to deny Brazilian firms access to one of the most important sources of innovation and competitiveness. Table 5.5 presents the most important source of information for innovating firms according to their type of competitive strategy. It is noteworthy that the most important source of information for all groups of firms is not the in-house research department, but clients and consumers (50 percent of innovating and differentiating firms) or other internal sources such as engineering and main- tenance (40­45 percent for the other two groups). The other key sources are suppliers (particularly equipment suppliers for standardized-product and less productive firms) and fairs and expositions (which are rated as being at least as important as, if not more important than, internal R&D for all three categories--especially for standardized-product and less productive firms). The relatively small role played by universities and research institutes is con- sistent with the findings of the macro assessment made in chapter 4. All of this highlights the importance of promoting competition and technological diffusion to make Brazilian firms more innovative, rather than simply increas- ing R&D. It is therefore no surprise that Group A firms use information from all the various sources much better than do the other two firm groups. A final policy-relevant insight from the microanalysis of innovation in Brazil is presented in table 5.6, which lists the main obstacles to innovation as reported by firms. As expected, the most important obstacles are costs, risks, and scarcity of financing. However, it is noteworthy that shortage of skilled workers was reported by almost 50 percent of firms, and that lack of information and difficulty in adopting international standards was reported by a quarter to a third of firms, with the latter reason rising in importance. This highlights the fact that financial constraints are not the sole bottleneck, and policies to foster greater innovation in Brazil must also focus on access to skilled human capital and technological information to be successful. 82 KnowledgeandInnovationforCompetitivenessinBrazil Table 5.5. Main Source of Innovation Information for Innovating Firms by Type of Competitive Strategy percent Type A (innovating Type B (specializing and product in standard Type C differentiating) products) (less productive) Internal to firm OwnR&D 33 13 5 Otherinternalsources(e.g., engineeringormaintenance) 41 45 40 Otherfirmingroup 28 9 1 The market Clientsorconsumers 50 38 34 Competitors 19 21 22 Technologymarketinputs Suppliers(equipment) 30 40 34 Acquisitionoflicenses,patents, andknow-how 8 4 2 Consultingfirms 10 8 3 Specialized technology support infrastructure Universitiesandresearchlabs 8 7 4 Professionaltraining& technicalassistancecenters 8 7 5 Metrologyandtesting& accreditationcenters 12 8 5 Sources of technological information Conferencesandpublications 17 14 15 Fairsandexpositions 33 37 33 Informationnetworks 24 17 13 Source:BasedondatafromKoellerandBaesa,"InovaçãotecnológicanaindústriaBrasileira,"inIPEA(2005). Table 5.6. Obstacles to Innovation for Brazilian Firms, 1998­2003 percent of firms with at least 10 employees Main obstacles to innovation 1998­2000 2001­03 Costs 82.8 79.7 Economicrisk 76.4 74.5 Scarcityoffinancing 62.1 56.6 Shortageofskilledlabor 45.6 47.5 Lackofinformation 36.6 35.8 Difficultyadoptingstandards 25.1 32.9 Source:CruzandDeMello2006,basedonPINTEC. Firm-LevelInnovation 83 Relationship among Innovation, Productivity, and Growth For decades, analyzing and quantifying the effects of innovative activities on productivity has been a challenging and controversial task in empirical economics (Janz et al. 2003). In the 1990s research on this topic was enriched by new theoretical underpinnings from endogenous growth theory showing that economic output should be positively related to the flow of innovations.4 In the case of Brazil, firm-level studies recently have been developed, based on data from the PINTEC survey.The ICS data, collected by the World Bank, permits further exploration of these topics. Findings from these analyses are summarized below. FindingsfromthePINTECDatabase To explore the relationship between innovation and exports and the perfor- mance of manufacturing firms in Brazil, we used Arbache (2005). The initial and final periods of this cross-section analysis are 1997 and 2001, respectively. The econometric models divided firms into the three categories already noted in the Institute of Applied Economic Research (IPEA) data. One productivity measure used in the analysis was the log of potential value added per worker (log PVA per worker), measured as the log of value added (total net sales less operational costs minus total wages divided by the number of workers). Results of this exercise are presented more fully in appendix B. In brief, the appendix B results show that innovation through new prod- uct development boosts firm productivity: a company that introduces new technological products to the market has productivity 23 percent higher than a company that does not innovate. Regarding R&D intensity (that is, R&D expenditures as a share of total sales), increasing returns to scale were found, which probably were associated with the initial development stage of firms' R&D investments in Brazil. In addition, a 1 percent increase in R&D intensity would be associated with an increase of 0.2 percent in the firm's pro- ductivity--and almost 0.5 percent for firms specializing in standard products. Exporting also was found to be associated with higher productivity: exporters have productivity 161 percent higher than nonexporters.In addition, a 1 percent rise in exports as a share of total sales would be associated with a 13 percent jump in productivity. For firms specializing in standard products, this elasticity was only 7 percent, while the productivity of firms that innovate and differentiate their products does not change when exports increase as a share of total sales.5 The education of the labor force also was related positively with pro- ductivity. A 1 percent increase in the average education of the labor force would be associated with an increase of 0.63 percent in productivity. This elasticity was 1.29 percent for firms specializing in standard products, which implies that investments in human capital present increasing returns to scale. Finally, multinational firms would have higher productivity than purely domestic enterprises. 84 KnowledgeandInnovationforCompetitivenessinBrazil At the firm level, evidence is strong on the positive relationship between R&D, innovation, and productivity. However, causality cannot necessarily be inferred because these are cross-section data. In order to assess the causality between innovation and a firm's performance (after auto-selection treatment), a counterfactual exercise was developed. For example, results for cluster one (eight clusters were created) showed that the growth rate of firms that inno- vated in both 1997 and 2001 was 6.28 percent, while it was only 0.46 percent for firms that innovated in 1997 but did not in 1998­2000, resulting in a dif- ference of 5.82 percent. This suggests that the employment rate of firms that stopped innovating after 1997 grew more slowly than that of their counter- parts who kept on innovating. Considering all eight clusters (appendix B, table B.2), results for Brazil show that innovation causes increased firm size in terms of higher employment and improved productivity. FindingsfromtheInvestmentClimateSurvey(ICS)Database With more than 1,600 firms included in the sample for Brazil, the ICS data- base also allows for investigating the relationship between productivity and investment climate (IC) variables related to technology and innovation. Two exercises were undertaken to explore this relationship. First, Escribano et al. (forthcoming) did a cross-country comparison to determine how a set of IC variables affect manufacturing sector productiv- ity in seven countries through a change in TFP and two other competi- tiveness indicators: the probability of a firm exporting and its probability of receiving FDI resources. The dataset was composed of the ICS data for Brazil, Ecuador, El Salvador, Guatemala, Honduras, and Nicaragua, as well as one Asian benchmark, Indonesia. Data were pooled from 4,679 firms, representing nine manufacturing sectors. Using an econometric model based on Escribano and Guasch (2004), a two-step estimation was developed: (a) estimating the parameters of a panel data regression model by pooling observations from several countries to get a large sample size for consistent and asymptotically efficient estimators, and (b) evaluating the impact of each IC variable in the sample means by using two- stage least squares to compute the impact on "average productivities."6 What followed was a country-by-country evaluation of the impacts of IC variables on competitiveness indicators.7 Hence, comparisons across countries are not as robust in their specification as, for example, in the estimation described above. Highlighted findings for the technological variables include the following: · Effects on productivity for the pooled multicountry data--International Stan- dards Organization (ISO) certification and worker training have a statisti- cally positive impact on the probability that a firm exports and has shares of foreign ownership. These results were robust for both TFP measures (that is, restricted and unrestricted by industry cases).8In addition, computer use (measured as the share of workers using computers) and Web use by the firm (dummy) have a statistically positive impact on both TFP measures. Firm-LevelInnovation 85 · Effects on productivity at the country level--among the six Latin American countries, greater computer use by workers and company Internet access would have the largest impacts on TFP. · Effects of improving certain IC variables by aligning them with top performers-- for Brazil, three IC variables would have the greatest positive impact on productivity.They are (a) the average time to clear customs (13.6 percent), (b) lost sales from transport interruptions (4.9 percent), and (c) the share of workers using computers (1.3 percent). Another exercise for the IC assessment was carried out with Brazilian data only (table 5.7). The econometric analysis of the determinants of TFP shows that IC variables related to innovation and technology adoption are statistically significant.9 To highlight the differences of IC effects on enterprises of different sizes, the analysis of the whole sample was repeated for two subsamples--micro and small enterprises (MSEs) and medium and large enterprises (MLEs). Results show that innovation, skills, and quality standards are important determinants ofTFP.The use of computers by work- ers, the acquisition of an International Standards Organization (ISO) certifi- cate, the manager's education level, and the provision of external training to workers are significant factors behind higher TFP. For example, the average TFP differential for plants in which the general manager does (versus does not) have some college education is around 20 percent. The provision of external training is especially important for smaller firms, resulting in an 11.5 percent increase in TFP if everything else is held constant. For larger firms, the acquisition of an ISO certificate is associated with a 17.4 percent increase in TFP. Finally, if the share of workers using computers increases by 1 percent, the increase in TFP would be 0.5 percent for MSEs and 1 percent among MLEs.10 Firm-LevelAnalysisoftheRelationshipamongR&D, Innovation,andProductivity11 A more complete exercise using the ICS data was carried out by Correa et al. (forthcoming), who simultaneously modeled the determinants of R&D, innovation, and productivity to understand the channels linking investment in knowledge and innovation to productivity growth at the firm level. This kind of analysis addresses several questions: Does the level of engineers affect R&D, innovation, and productivity? Does firm size matter? How does innovation compare with technology adoption in affecting productivity?12 In this exercise, two analytic models were combined: (a) one developed by Crepon, Duguet, and Mairesse (1998) for R&D, innovation, and product- ivity that explicitly models, in a simultaneous equation framework, the path by which investment in research generates knowledge and the forms by which such knowledge is transformed into outputs; and (b) the methodology developed by Escribano and Guasch (2004) for estimating productivity by incorporating IC variables. 86 KnowledgeandInnovationforCompetitivenessinBrazil Table 5.7. Average Coefficients (Semi-Elasticities) for Selected Investment Climate Variables Estimated from TFP Regressions for Brazil Dependent variable in the production function: Sample log (value added) All MLE MSE Red tape, corruption, and crime Lossduetotheft(%sales)a ­3.3 ­5.1 ­3.0 Delaysofimportsincustoms(averagedays)a ­0.7 ­0.3 ­1.3 Seniormanagement'stimespentonregulation(%)a ­0.3 ­0.5 0.0 Infrastructure Powerinterruptions(index)b ­12.9 ­14.9 ­11.8 Communicationsinterruptions(index)b 0.0 ­17.0 0.0 Transportationinterruptions(index)b ­12.8 ­31.4 0.0 Innovation, quality, and skills Staffusingcomputers(%)a 0.9 0.5 1.0 ISOcertificate(vs.noISOcertificate)c 9.2 0.0 17.4 Generalmanagerwithatleastsomecollege education(vs.not)c 21.2 20.8 21.8 Externaltrainingoffered(vs.not)c 11.5 3.4 11.5 Labor regulation Informalworkersamongfull-timeemployees(%)a ­0.3 0.0 ­0.3 Financeandcorporategovernance Neededbankloan,butdidnotapply (vs.appliedandfailed)c 15.9 0.0 15.7 Applyexternalaudit(vs.not)c 2.2 3.3 11.7 Other Inputsimported(%)a 0.2 0.0 0.3 Source:WorldBank2005a. Note: All the coefficients have been premultiplied by a factor of 100 to reflect the impact on TFP in percentage terms. a.ThecoefficientforthisvariablecanbeinterpretedasthechangeinTFP(%)correspondingtoaonepercentagepoint (oroneday)increaseinthevalueofthevariable. b. The coefficient for this index can be interpreted as the change in TFP (%) corresponding to a one point increase in thevalueoftheindex(theindexrangesfrom0[best]to4[worst]). c. The coefficient for this (dummy) variable can be interpreted as the average TFP gap (%) between the plants in the categoryversustheplantsthatbelongtothegroupidentifiedinthebrackets. The econometric model comprises three sets of equations that are esti- mated together and reported in appendix B (table B.1 and table B.2). R&D Determinants. The firm's decision on whether or not to engage in R&D was determined primarily by firm size, credit access,13 and the avail- ability of qualified personnel. Once the firm decided to invest in R&D activi- ties, the determinants of R&D expenditures per worker were firm size and market share. After controlling for market share, the well-documented posi- tive relationship between size and R&D expenditures per worker does not Firm-LevelInnovation 87 hold; in fact, the intensity of R&D activities decreases with firm size. The coefficient of size in the model is the size elasticity of R&D expenditures per worker (­0.3), which means that if the size of the company doubles, R&D expenditures per worker decrease by 30 percent.14 These findings also are observed in other countries and confirm the Schum- peterian hypothesis that R&D is undertaken mostly by large monopolistic firms (Schumpeter 1942). This implies that market dominance is necessary to undertake the risks and uncertainties associated with R&D. Furthermore, studies have found that market power is more important than the absolute firm size for reaping the benefits of innovative activities (Cohen et al. 1987); hence, only enterprises that are large enough to secure at least temporary market power will innovate. Innovation Determinants. Slightly different results were found in the two versions of the innovation equation. After controlling for industry and region, the availability of qualified personnel was found to be the only significant determinant of a firm becoming an innovator.On the other hand,R&D expen- ditures per worker and firm size are positively related to innovation intensity. For instance, a 10 percent increase in R&D expenditures per worker would be associated with an approximate increase of 4 percent in the enterprise's portfolio of new products. Increases in firm size induce effects in opposite directions--a direct positive effect on innovation intensity and an indirect negative effect on reducing R&D expenditures per worker. The overall net effect is negative: a 10 percent increase in employment with no adjustments in R&D expenditures per worker would be associated with a 1.3 percent decrease in innovation intensity. In sum,these results point to two distinct channels for becoming established in the market as an innovative firm. One channel is through more sophisti- cated inventive activities--that is, R&D in the conventional sense. This kind of activity may or may not translate into salable products, but once it does, a firm is well positioned to widen its portfolio of products in the marketplace. The second channel is through high-skilled workers who are able to transform existing technologies into new products. This channel does not necessarily require technological sophistication. Productivity Determinants. The results of the joint estimation show that innovation (in both specifications) positively affects a firm's productivity (measured as value added per worker). In the case of innovation intensity, a 10 percent increase in a firm's portfolio of new products would be associ- ated with a 5 percent increase in value added per worker. Coefficients associ- ated with computer use and quality certification also are related positively and significantly with productivity. These two variables can be interpreted as proxies for technology adoption by the firm and managerial capabilities, respectively. For instance, a 10 percent increase in the share of workers using computers (in absolute terms) is associated with a 12 percent increase in productivity (in relative terms). In addition, firms holding an ISO certificate are 30 percent more productive than those without it. 88 KnowledgeandInnovationforCompetitivenessinBrazil Large productivity gains were also seen in publicly listed firms: their value added per worker would be 48 percent higher than the productivity of firms presenting a different legal status. Capital stock and capital use are also rel- evant determinants of productivity. For example, a 10 percent increase in the firm's capital stock would be related with a 3 percent increase in value added per employee. Although the signs for most of the IC coefficients generally turn out to be positive as expected in the joint estimation, the relationships do not all turn out to be statistically significant.A positive relationship between size and R&D, innovation, and productivity is typical. By including size in the three equations, it was possible to test whether size would have a significant direct effect in each equation--in other words, whether its effect would disappear once R&D is controlled for in the innovation equation or in the productivity equation. In both specifications, the findings show that firm size is an impor- tant determinant of R&D and innovation for Brazilian manufacturing firms. However, results for productivity differ depending on whether innovation is measured as a dummy variable or as innovation intensity. In the first case, size still plays a role in explaining value added per worker; but when innovation output is measured by innovation intensity, the size effect disappears. Analysis of Inputs and Outputs Related to Innovation by Key Variables This section presents evidence from the Brazilian ICS on firms' inputs and outputs related to innovation.The analysis is broken down by firm size, sector, location, ownership, and exporting status. Key findings are briefly reported. Fuller analysis is provided in World Bank (2005a). First, innovation inputs and outputs in Brazil are positively related with firm size (figures 5.1 and 5.2). Significant variation, however, occurs across industrial sector and region. For instance, among large firms (more than 500 workers), 74 percent report R&D spending. This compares with 39 percent among microenterprises, 48 percent among small firms, and 60 percent among medium firms. Similar differences were found for other innovation inputs (technology licensing, joint ventures, and worker training) as well as for innovation outputs (new products and improved product lines). Second, when industrial sectors are considered (figures 5.3 and 5.4), the largest percentage of firms investing in innovation inputs is found to be in electronics, machinery, and auto parts (the sectors, not surprisingly, with the highest average of foreign ownership). By contrast, leather and footwear, and apparel are the two sectors with the lowest percentage of firms investing in innovation inputs (particularly in ISO certification, joint ventures, and technology licenses). However while auto parts had the highest rate of new products, it was followed closely by footwear, furniture, and food--all of which had higher rates of product innovation than did electronics or machinery. This again highlights the point that R&D is not necessarily the key to product innovation. Firm-LevelInnovation 89 Figure 5.1. Innovation Inputs (R&D, Licensing, Joint Ventures, and ISO) by Firm Size 100 80 60 entc per 40 20 0 micro small medium large firm size R&Dspending tech.licensing jointventure ISO Source:BrazilInvestmentClimateAssessment2005. Figure 5.2. Innovation Outputs (Training, Improved Line, and New Product) by Firm Size 100 80 60 entc per 40 20 0 micro small medium large firm size workertraining improvedline newproduct Source:BrazilInvestmentClimateAssessment2005. Third, when disaggregating by region (figures 5.5 and 5.6), the largest per- centage of firms investing in innovation inputs and outputs is found in the south of Brazil, with the exception of joint venture agreements (the largest percentage of firms holding these agreements, 5 percent, is in the southeast). The lowest percentage of firms investing in innovation inputs and outputs is in the northeast (with the exception of ISO certificates, for which the center and west show the lowest shares). 90 KnowledgeandInnovationforCompetitivenessinBrazil Figure 5.3. Innovation Inputs (R&D, Licensing, Joint Ventures, and ISO) by Sector 80 60 entc 40 per 20 0 es el ar ts e food als textil onics appar footwe chinery opar chemic furnitur ma electr aut sector R&Dspending tech.licensing jointventure ISO Source:BrazilInvestmentClimateAssessment2005. Figure 5.4. Innovation Outputs (Training, Improved Line, and New Product) by Sector 100 75 entc 50 per 25 0 es el ar ts e food als textil onics appar footwe chinery opar chemic furnitur ma electr aut sector workertraining improvedline newproduct Source:BrazilInvestmentClimateAssessment2005. Appendix C uses Probit estimation to examine these relationships in greater depth. Appendix tables report marginal effects; so it is possible to assess the magnitude of the partial effects associated with changes in the explanatory variable for each dependent variable. In brief, we find that the effects of firm size persist when controlled simultaneously in a regression framework. This holds true even when controlling for sector and location. It is also interesting to note that exporting firms and those supplying foreign-owned companies also generally reveal a greater incidence of innovation activities. For instance, Firm-LevelInnovation 91 Figure 5.5. Innovation Inputs (R&D, Licensing, Joint Ventures, and ISO) by Region 70 60 50 40 percent 30 20 10 0 centerwest northeast south southeast region R&Dspending tech.license jointventure ISO Source:BrazilInvestmentClimateAssessment2005. Figure 5.6. Innovation Outputs (Training, Improved Line, and New Product) by Region 100 80 entc 60 per 40 20 0 centerwest northeast south southeast region workertraining improvedline newproduct Source:BrazilInvestmentClimateAssessment2005. a 1 percent increase in sales to foreign firms as a share of total sales would increase the firm's probability of investing in R&D by 0.1 percent, holding an ISO certificate by 0.1 percent, providing worker training by 1.2 percent, and developing new products by 0.05 percent. Similarly,innovation inputs and outputs also are more likely to occur among firms that employ more educated workers (table 5.8).Firms with a higher share 92 KnowledgeandInnovationforCompetitivenessinBrazil Table 5.8. Marginal Effects of Education on Innovation Inputs and Outputs in Brazil Independent Worker Joint Tech. New Improved variables R&D ISO training venture licenses product line Employeeswith 0.001** 0.001** 0.002*** ­0.001* 0.001* 0.002** 0.001*** highschool(%) [1.96] [2.17] [4.11] [1.70] [1.64] [2.52] [3.18] Employeeswith 0.008*** 0.004*** 0.006*** ­0.001 0.001 0.004*** 0.001** somecollege(%) [5.13] [4.14] [4.14] [0.18] [0.73] [2.68] [1.99] Observations 1,631 1,554 1,630 1,631 1,631 1,631 1,631 LR (d.f. 21) 2 161.83 566.68 462.60 117.13 207.69 91.06 63.80 PseudoR2 0.072 0.375 0.221 0.210 0.240 0.044 0.092 Source:BrazilInvestmentClimateAssessment2005. Note:Z-valueisinbrackets.Forbrevity,variablesforsector,region,size,exportstatus,foreignownership,shareofsales toexporters,andshareofsalestoforeign-ownedfirmswerenotincluded.Woodandfurnitureistheomittedcategory forsector.Southeastistheomittedcategoryforregion.Microistheomittedvariableforsize. *Significantatthe10percentlevel. **Significantatthe5percentlevel. ***Significantatthe1percentlevel. of employees who have completed secondary and some college education are more likely to invest in R&D, hold an ISO certificate, provide worker training, develop new products, and improve new lines of production. For example, if a firm increases its share of high-school-graduate employees by 10 percent, its probability of investing in R&D increases by 0.01 percent, everything else held constant; the probability increases by 0.08 percent if the share of employees with some college education is increased by 10 percent. Moreover, the larger the share of employees who are high school graduates, the more likely the firm is to acquire technology licenses, provide worker training, develop new products, and improve its line of production (the opposite impact was found on joint venture agreements). In summary, we can draw four conclusions on the general relationships between the characteristics of Brazilian manufacturing firms and their likeli- hood of being innovators. These have important implications for the broader questions posed in chapters 1 and 2, and for forward-looking strategies discussed in the final chapter. First,size matters for innovation.Using discrete size categories,results show that small, medium, and large firms have higher (and increasing) probabilities of investing in innovation inputs and developing outputs than do microenter- prises. These findings confirm the consensus that R&D activities and innova- tion increase as the size of the firm increases.15 Capital market imperfections as a source of competitive advantage for large firms are confirmed as a main argument for sustaining the relationship between firm size and innovation. Second, exporting is also a determinant of innovation for Brazilian manu- facturing firms. Exporters have higher likelihoods of investing in innovation inputs/outputs than nonexporters. It can be argued that exporters can often access diverse knowledge inputs unavailable in the domestic market, that this knowledge can spill back to the local firm, and that such learning can foster innovation. Firm-LevelInnovation 93 Third, foreign ownership matters for innovation. Brazilian manufacturers with some degree of foreign ownership are more likely to innovate than purely domestically owned firms. Foreign ownership has a positive effect on innova- tion because of the resources (finance, technology, knowledge, and managerial expertise, for example) that foreign parties are able to tap for their Brazilian holdings, which cannot necessarily be reproduced by smaller Brazilian-owned firms. The foreign-ownership effect captures the manner and the extent to which an overseas shareholder is able to add value to the domestic firm and reduce barriers to the local development of innovative activities. Fourth, human capital is also found to be a significant correlate of innova- tion among Brazilian manufacturing firms. This confirms the hypothesis that human capital is complementary to innovation and technological change.16 Human Capital, Innovation, and Productivity As noted in the marginal analysis reported in table 5.8, human capital is a significant correlate of innovation among Brazilian manufacturing firms. This positive relationship between human capital and innovation inputs as well as outputs also has been found in many parts of the analysis noted above. Because this relationship is a primary focus of this report, we provide addi- tional evidence.The first piece is in table 5.9, which shows the average years of schooling for the different firm groups in the PINTEC data. In firms character- ized by competitive strategies based on innovation and product differentiation, average schooling is almost two years higher than for firms characterized as specializing in standardized products. The average for years of schooling by workers in the second category, in turn, is almost one more year than the average for workers in firms that do not differentiate their products and have lower productivity. The average job tenure also is correlated strongly with years of schooling, suggesting that the more innovative firms also probably invest more in worker training and retrain longer. Table 5.9. Average Wages, Schooling, and Worker Tenure in Brazilian Firms by Competitiveness Group Type in 2000 Average Average wages Average years month Wage (R$/month) of schooling on the job premium (%) GroupA:Innovativeand product-differentiatingfirms 1,254 9.13 54.09 23 GroupB:Firmsspecializingin standardproducts 749 7.64 43.90 11 GroupC:Firmsthatdonot differentiateproductsandare lessproductive 431 6.89 35.41 0 Source:BahiaandArbache,"DiferenciaçãosalarialsegundocritériosdedesempenhodasfirmasindustriaisBrasileiras," inIPEA(2005). 94 KnowledgeandInnovationforCompetitivenessinBrazil A second and more compelling piece of evidence comes from recent econo- metric work on worker characteristics and technology absorption in Brazilian industrial firms by F. de Negri (2006). That work explicitly used the PINTEC database to analyze the probability of innovation by Brazilian firms and the extent to which external sources of information were used to innovate. Find- ings were robust to various specifications, including a multinomial Probit model. The study found that both the technological effort of firms and the level of worker schooling were statistically significant determinants of innova- tiveness by Brazilian firms. With regard to the relationship between workers' characteristics and the absorptive capability of the firm, table 5.10 shows that by far the most significant determinant of a firm's absorptive capability was the percentage of its workers with higher education, followed by whether it had a formal R&D department (continuous R&D effort). The number of workers in the firm and the broadness of training also were related positively Table 5.10. Probit Model of Probability Factors for Absorbing Technology by Brazilian Firms Explicatory variables Est. coefficient Standard deviation Marginal probability Intercept 0.616 0.293** 0.234 Occupiedemployees (naturallog) 0.058 0.009*** 0.220 Dummyforfirm w/continuousR&D 0.189 0.028*** 0.072 R&Dexpendituresasproportion ofsales 0.002 0.000*** 0.001 Dummyforfirmw/staff training(1999) ­0.150 0.040*** ­0.057 Averageemploymenttime in1997 ­0.005 0.001*** ­0.002 Averageemploymenttime infirmsw/stafftraining 0.004 0.001*** 0.002 Staffw/highereducation in1997(%) 0.671 0.132*** 0.255 Herfindahl-Hirschman Index(1997) ­0.173 0.040*** ­0.065 Averageworkexperience offirms'employees 0.005 0.002** 0.002 No.ofcasesinsample 5,042 L0 ­16,435 No.offirmsw/absorptive capacity(population) 7,755 L1 ­14,108 No.offirmsw/oabsorptive capacity(population) 15.006 PseudoR2 0.14 Sources:DeNegri(2006),withProbitmodelestimatedfromPINTEC(2000)databaseandRAIS(1997)database. **Significantatthe5percentlevel. ***Significantatthe1percentlevel. Firm-LevelInnovation 95 to innovation (the opposite of the Herfindahl-Hirschman Index, a common- ly accepted measure of market concentration, which had a negative sign). Somewhat surprising was that the length of worker tenure and a dummy for worker training had negative signs. However, the length of worker training in firms that did provide training had a positive impact.The author suggests that on-the-job experience without training may not contribute to absorption and that training may have no impact if there is high labor turnover.The study also found that greater education was necessary to utilize academic information sources rather than industry information sources. This implies that increasing the workforce educational level, particularly the percentage of workers with tertiary education, is an important factor in boosting firms' absorptive capa- bility. This would be relevant for absorbing technology from universities and research institutes as well as from multinationals, other firms, and suppliers. Conclusions and Policy Implications This chapter explored data from PINTEC and the ICS database. Several find- ings emerged: · Innovation is less intense in Brazil than in OECD countries. In addition, innovation in Brazil is more prevalent in processes than in new products. · Innovation was found to be important for productivity and for growth. Therefore, much more needs to be done to stimulate innovation in the Brazilian economy. · Innovation is not confined to R&D and often occurs without any. R&D, however, can play an easily overlooked role in acquiring and using technol- ogy, whether domestically or from abroad. Understanding that the most important source of innovation is equipment and machinery is particularly important in Brazil, given the country's low private investment rate com- pared with its competitors. That handicap is compounded by the finding that Brazil imports relatively few capital goods, even compared with com- petitors with equally or more developed capital goods sectors. Brazil not only must increase its investment rate; it needs to further liberalize tariff and nontariff restrictions on capital goods imports. · Brazilian firms also were found to be less likely than their competitors to take advantage of establishing joint ventures and licensing foreign technol- ogy.Among the various modes of technology adoption, Brazilian firms rely surprisingly little on international technology transfer. This is at odds with the increased importance of the international trade of goods and services in facilitating knowledge absorption. Indeed, foreign sources of technology account for 90 percent of technology transfer in most countries, while the bulk of R&D--an indication of new knowledge creation--is concentrated in a few countries (Keller 2004). Imports of intermediate inputs, machin- ery, and equipment are critical channels of technology transfer. One factor 96 KnowledgeandInnovationforCompetitivenessinBrazil behind Brazil's relative lack of success in acquiring technology, therefore, may be its relatively poor integration into the global trading system. In fact, Brazil's trade volume is low even when compared with large countries such as China and India. However, even when the volume of trade is controlled for, Brazilian capital goods imports are below the international average. But low imports of capital goods also may be related to relatively higher sector- specific tariff barriers and to the availability of financing for the acquisition of local equipment. Or there may be structural barriers, ranging from the lack of appropriate logistical services to the poor education level of the labor force. · In Brazil, firm size, exporting status, foreign ownership, and human capi- tal matter for innovation, even when controlling for region and industrial sector. Findings were robust and stable. Results show that small, medium, and large firms have higher (and increasing) probabilities of investing in innovation inputs and developing outputs than do microenterprises. Exporters and firms with some degree of foreign ownership have higher likelihoods of investing in innovation inputs/outputs than nonexporters and domestically owned enterprises. Finally, human capital also is found to be a significant correlate of innovation inputs and outputs. · The econometric evidence therefore reinforces the point that technology adoption and R&D do matter, but the contribution of R&D to productivity seems smaller than the contributions from technology adoption and other aspects of the investment climate. Both innovation measured as a dummy and innovation intensity depend on R&D expenditures and the supply of skilled labor. However, these are relatively expensive activities and may be limited by other investment climate variables. · This does not mean that R&D is not relevant for long-term growth or that Brazil should not pursue an R&D policy. However, data suggest that, given Brazil's development level, some emphasis on technology adoption (inter- national transfer and local diffusion) may be more cost-effective than R&D at the firm level. The impact of technology adoption on labor productivity is particularly evident from the results obtained for the capital stock and computer-use variables in the productivity equations. · Technology adoption varies with firm size and industry,which contrasts with the Brazilian S&T policy emphasis on R&D support to capital-intensive industries and, most likely, large firms. A broader set of measures to sup- port technology adoption for SMEs in labor-intensive industries is still missing. This also may help accelerate the process of technology diffu- sion. Recent steps were taken in this direction (Law No. 11,196/2005 and the Statute of SMEs), yet still more needs to be done. Based on these findings at the firm level, more also must be done to promote technology diffusion, including implementation of technological information systems, technology extension, and demonstration projects and the upgrading of worker skills. Firm-LevelInnovation 97 · Other investment climate issues--including infrastructure, competition, and business regulation--also affect technology adoption. Econometric analysis suggests that investment climate variables, such as infrastructure, limit the impact of technology adoption and innovation on productivity. Rather than increasing public R&D expenditures, it would be more fruitful to understand why the private sector has been less active in this area and to remove the bottlenecks to greater private R&D investments or efforts to innovate.Addressing the broader investment climate constraints like access to capital, labor market rigidities, and property rights could be a more effective approach and is likely to be the most successful way of enhancing the incentives for firms to innovate, create jobs, and grow. · Finally, ample empirical evidence underlined the importance of education and skills in absorbing existing technology,whether obtained locally or from abroad, and in creating knowledge. Brazil is weak in this kind of human capital compared with its competitors. The next chapter will analyze why Brazil is falling short and what it can do to catch up. CHAPTER 6 Human Capital for Innovation and Growth A firm that utilizes advanced technologies tends to employ better-qualified workers who understand and can operate the technologies. At the same time, qualified workers are able to improve the technological performance and competitiveness of the firm, thus contributing to its creative potential. --De Negri et al. 2006, p. 374 (author's translation) Previous chapters showed how Brazil's manufacturing output and productivity might be increased if more firms adopted innovation-enhancing technolo- gies already present in the country. This chapter explores how weakness in the education system has been one of the key shortcomings preventing this from occurring. Brazil has made important strides in education in recent years--particularly in relation to school access and equity. However, other countries have, too.And in comparison with these countries, Brazil appears to be underperforming at every level, from preschool to postdoctoral research training. From the point of view of a highly competitive global economy, Brazil's education systems are failing to create an innovation-ready workforce. This chapter examines the nature of human capital--the missing link between innovation and productivity--compares the formation of human capital in Brazil with that of its competitors, and assesses the changing demand for skills in Brazil's job market. It then provides summary tables that profile Brazil's education system at every level, including advanced skills training outside the formal education system.Two detailed appendixes--the Primary Education System (appendix D) and the Tertiary Education System and Advanced Out-of-School Training (appendix E)--are included at the end of this report. These appendixes explore specific educational issues in greater detail and provide a fuller portrait of the various educational compo- nents summarized in this chapter. Jamil Salmi and Domenec Devesa were key contributors to this chapter. 100 KnowledgeandInnovationforCompetitivenessinBrazil Human Capital: The Missing Link between Innovation and Productivity With the transition from the industrial economy of the 20th century to the knowledge economy of the 21st century, the global marketplace increasingly has rewarded flexible, efficient economies that are able to rapidly adapt to new circumstances--in a word, those that can "innovate." Countries that have been successful most recently are those that have mechanisms in place for expanding trade, producing knowledge, and putting technology to efficient use. Increasingly, these countries participate in the global chain through eco- nomic conversion toward higher value-added activities. As discussed in previous chapters of this report, despite its successes, Brazil is not yet fully prepared to compete in this new global environment. Its economy is still based heavily on primary commodities and exploitation of natural resources. Its trade policies remain protectionist.Too often its labor laws hold back formal employment. Bureaucratic red tape, high taxes, and high interest rates discourage firms from investing.Taken together, these char- acteristics create an investment climate that hinders rather than enables man- ufacturing firms' ability to "plug in" and find new niches for higher growth. As argued in our conceptual framework (chapter 2), higher productiv- ity can be achieved along three pathways--through increases in physical capital, human capital, or TFP (that is, gains through greater efficiency in how physical and human capital interact--basically what we are call- ing "innovation"). Chapter 3 argues that there are three broad types of innovation--advances that arise from creating new knowledge and tech- nology, those that come from acquiring and adapting new knowledge and technology from abroad, and finally those that come from absorbing and using existing in-country knowledge to improve processes and products. In general, improvements in the effectiveness of public R&D stimulate creation of new knowledge, while expanding private sector investment stimulates acquisition and absorption of new knowledge. Yet investment in either sort of innovation does not automatically lead to greater produc- tivity. Something else is needed--innovation-ready human resources--to "add the value" made possible through either kind of investment. If this link is missing, nothing else happens. HumanCapitalandtheThreeCategoriesofInnovativeActivity Important evidence shows how human capital affects innovation activity-- and in particular, the degree to which public education shapes the supply and capacity of workers to innovate. It is now widely agreed that technological change is linked to the supply of highly educated workers (World Bank Insti- tute 2006). Moreover, while other paths to forming human capital exist, such as on-the-job-training, the evidence presented in chapter 5 shows that firm- level innovation is highly dependent on the education received by employees in a primarily public education system. HumanCapitalforInnovationandGrowth 101 So what do we know about the contribution of human capital to innova- tion in Brazil? As discussed above, our broad definition of innovation includes creating new knowledge as well as acquiring and adapting knowledge from abroad and absorbing and using in-country existing knowledge. Each must be understood as a different, but important, process of innovation. Creating New Knowledge and Technologies. The first kind of innovation results from the creation of new knowledge and technologies, either for the domestic or sometimes the international market. Creation of these new technologies and knowledge (usually packaged as "new products") requires a whole host of antecedent activities, ranging from R&D and mar- ket research to engineering the necessary production facilities (De Negri et al. 2006). Because of the complex process involved, this innovation type predictably requires workers with higher levels of schooling and extensive job training. Acquiring and Adapting Foreign Technologies. Acquiring knowledge and technologies from abroad most commonly involves importing new technolo- gies (typically machinery), which may require significant upgrades of worker capacities. Thus, a critical factor in such innovation is workers' ability to learn to operate new machines through reading and understanding product manuals and learning to provide routine maintenance through basic training. Equally important is the ability of process planners and supervisors to resolve problems in adapting equipment to its new setting and revising processes and procedures to take full advantage of the potential it offers. Obviously, for this type of innovation, both basic skills for operators and advanced skills for supervisors and planners are critical. Using, Adapting, and Disseminating Existing Technology. The third kind of innovation involves the absorption and use of knowledge and technologies already in the country, which implies diffusion of a technology or process already being used by harnessing it elsewhere. These less obvious forms of innovation also require the upgrading of existing human capital stocks through on-the-job learning. Basic skills in reading, communication, and mathematics are critical because they are the springboard for further learning that ulti- mately culminates in process and product improvements. LevelsofWorkerCapacityRelativetoCategoriesof InnovativeActivity Whichever type of innovation is involved, human capital and worker skills are clearly a critical input for fueling innovation, productivity, and competitive- ness.An argument for the payoffs to be earned from raising worker capacities can be made by observing the spread of educational levels among firms divided into different innovation categories. Table 6.1, for instance, shows Brazilian industrial firms with innovative product lines have workforces that average 102 KnowledgeandInnovationforCompetitivenessinBrazil Table 6.1. Salaries, Schooling, and Tenure in Brazilian Industrial Firms Average schooling Wageaverage ofworkforce Averagetenure Competitivestrategyclassification (R$/month) (years) (months) 1.Firmscompetingthroughproduct innovationanddifferentiation 1,255 9.1 54.1 2.Firmscompetingthrough cost-cuttingstrategies 749 7.6 44.0 3.Firmswithdifficultycompeting becauseoflowproductivity 431 6.9 35.4 Source: Arbix (forthcoming); based on data from IBGE's 2000 Technological Innovation Survey (PINTEC, Pesquisa de InovaçãoTecnológica). 9.1 years of education, compared with only 6.9 for workforces in firms that are described as non-innovative (Arbix, forthcoming). Moreover, employees in the first category earn more and have greater job stability. Confirming the above-mentioned relationship, econometric analysis based on the firm-level 2005 Investment Climate Survey shows a negative correla- tion between innovation and the proportion of workers with only primary education (World Bank 2007b).Another dichotomy exists between exporting and non-exporting firms. The differences in workforce educational levels are noticeable, as exporting firm employees have 9.9 years of schooling versus 8.5 for non-exporter employees (De Negri et al. 2006). Interestingly, robust econometric evidence shows a strong negative correlation between innovation and in-house firm training in Brazil (World Bank 2007b).This probably stems from the training's focus on compensating for the basic skill deficiencies of the workforce. In other words, training is used to level the playing field rather than to expand the productivity and efficiency horizon of workers. Obviously, a stronger educational system providing solid fundamental skills would allow firms to refocus their resources and training on upgrading specific technical skills that could drive greater innovation in the workplace. In summary, there is clearly a link between human capital and innovation, but once again, this relationship needs to be broken down into more specific components to translate findings into public policies. Having more engineers with better qualifications argues for expanding access to higher education and emphasizing certain kinds of careers. But links between innovation and average worker education on the shop floor emphasize the importance of basic education. Keeping these factors in mind, the discussion now turns to Brazil's perfor- mance in developing skills among its populace. To contextualize the issues, we begin by describing the changes in requisite employment skills that have occurred, and then we compare and contrast the Brazilian experience of human capital development with that of key competitors in the global HumanCapitalforInnovationandGrowth 103 market. Finally, the Brazilian education system is given close scrutiny as we examine its progress and shortcomings, and appraise the challenge it faces in providing the basic and advanced skills needed by future generations of knowledge workers. Changing Demand for Skills in Brazil's Job Market In an earlier section we reviewed evidence suggesting that Brazil, to enhance its innovation practices, needs to invest more in education and training and create a more dynamic workforce--and workplace. But acting on these needs is another matter. For example, what kinds of skills do workers really need? We review some evidence about this below. Moreover, we have already made the functional case that more innovative firms in Brazil have higher levels of worker human capital based on comparisons of education levels among different firms. Indeed, does the labor market reward education level? Some of these issues are addressed by De Ferranti and Perry (2003), who examine education and technology in the Latin American and Caribbean region.Their evidence is consistent with a global pattern in which the highest wage pre- miums are associated with higher education credentials and, presumably, are rewards for individuals who are able to help firms harness the kinds of rapid technological change that are necessary to compete. Table 6.2 presents the average salaries paid in Brazil (in 2004) according to the level of education of the employee. Clearly, these salary differentials are not only due to skills but are also determined by other factors such as the relative supply of workers, the growth rates of these supplies, the industry, and other enabling conditions. But even with the uncertainties generated by rapidly changing enabling conditions, the job market clearly is rewarding those with higher levels of education. The likely reason is that those with higher levels of education are able to learn and adapt quickly to changing situations. And as we next discuss, the knowledge Table 6.2. Average Monthly Salary by Educational Attainment EducationalAttainment Average monthly salary (R$) Completetertiary 2,661 Incompletetertiary 1,451 Completeuppersecondary 925 Incompleteuppersecondary 676 Completelowersecondary 689 Incompletelowersecondary 627 Completeprimary 622 Incompleteprimary 553 Illiterate 419 Source:RelaçãoAnualdeInformaçõesSociais(RAIS)2004,http://www.mte.gov.br/. 104 KnowledgeandInnovationforCompetitivenessinBrazil economy has indeed exacerbated the velocity of change and posed new chal- lenges to workers and firms. With the surfacing in the 1960s and 1970s of a new economy--the knowl- edge economy--in which economic growth is as much a process of knowledge accumulation as of capital accumulation, the characteristics of and demands for employment shifted rapidly. A quickly globalized market in which trade became a key for economic growth also affected the nature of jobs. In countries that were inserting themselves into this economy, the skills demanded for jobs changed speedily. Moreover, a premium was placed on employees who had adaptable skills, could learn quickly, could communicate well, and could work in teams. Figure 6.1 highlights how these skill sets were swiftly changing in the United States between the late 1960s and the late 1990s. The changes are evident, with nonroutine, systemic, and analytical tasks growing at the expense of manual, routine tasks. This rapid change in the nature of work in productive firms poses the ques- tion of how the education and training system is responding to this market reality. Are graduates and trainees exposed to a curriculum that adequately prepares them to meet the challenges posed by the work environment? Is the education sector responding accurately to the skill needs of the job market? Once again, the experiences of other countries are informative. Research done in the Arab Republic of Egypt some years ago demonstrated that Egyptian schools were good at teaching rote knowledge, facts, and rules, and very weak at teaching critical and independent thinking. A simple analysis suggests that the education system needed to be reformed to teach more critical think- ing. However, further analysis determined that the public sector--which, like Brazil's, had better benefits, wages, and job security than the private sector--in fact demanded the rote knowledge. The education system was teaching the Figure 6.1. Changes in Job Task-Skill Demands in the United States, 1960­98 16 14 expertthinking 12 10 8 complex 6 communication change 4 2 routinemanual 0 percentile ­2 routinecognitive ­4 ­6 non-routinemanual ­8 ­10 1969 1974 1979 1984 1989 1994 1998 year Source:Autoretal.2003. HumanCapitalforInnovationandGrowth 105 very skills that were best rewarded in the labor market.While this could pose an interesting question about what skills should be taught in Brazil given its job market, this chapter later presents evidence indicating that most Brazilian students are in an education system that teaches them neither rote knowledge nor critical thinking skills. The political economy of industrial behavior further complicates the relationship between the education system and the job market. Consider the evidence of industrial behavior in Brazil documented by Tendler (2002). When a firm or production entity's competitiveness is founded on low-wage labor carrying out basic tasks, the external demand on public entities for more or better education may be limited. In fact, government policy may be subject to "local capture" by forces whose interest lies in limiting the expan- sion of education and the taxes associated with public finance of educational programs. Training programs inside the firm that are geared toward specific production processes may be favored instead of general skills. The result is, potentially, a deepening of the low-wage, low-skills, low-productivity trap that is aided rather than relieved by political forces. This kind of explicitly structural analysis is frequently absent from policy discussions about the paths that countries like Brazil need to take. On this issue, a recent IPEA (2006) report states that international competitiveness cannot be founded simply on low wages. Innovative behavior requires a human capital compo- nent, especially if the country is to avoid the trap of competitiveness driv- en by low wages that generates few linkages with other productive sectors of the economy or fails to stimulate the use of new technologies. In other words, a sustainable development strategy does not rely only on minimal technological adaptation using low-skilled (and low-wage) workers in man- ufacturing. Dynamic innovation that creates new forms of production--and new products--is also critical. There is a general recognition that more and better education is necessary to improve employability and earnings but is not sufficient by itself to do so. In particular, Brazil's employment rates worsened for all workers during the 1990s, from those with no education to those with primary, secondary, and tertiary education (Berg, Ernst, and Auer 2006), suggesting, among other explanations, a mismatch of skills.This is precisely why improving and adapt- ing workforce skills is crucial in a competitive global economy. In the Latin American region, Brazil lags considerably behind other countries such as Argentina and Mexico in the percentage of its population with more than six years of education, while a substantial percentage of Brazilian students have low reading skills (Berg, Ernst, and Auer 2006). TheDemographicWindow:HeightenedUrgencyforImprovedSkills A final consideration is the importance of dealing promptly with the challenge posed by insufficient skills. Brazil is experiencing a temporary "demographic window" that must be rapidly exploited to promote rapid growth. Our analysis shows that Brazil is entering a 20-year period in which the economically active population is at its peak, with a decrease in the 106 KnowledgeandInnovationforCompetitivenessinBrazil younger-than-15 dependent population (due to lower population growth), and with a still comparatively small population over 64. This suggests that generating labor income to sustain social policies and old-age pensions is within reach if employment creation is sufficient. Because of the large stock, productivity can peak during this window, provided that the work- ing population is adequately skilled to perform at work. (The analysis for this can be found in appendix F.) After this window closes, an increasing population over 64 and a shrinking labor force intensify the pressure, but this can be negotiated, as countries such as Finland and Norway have shown, through a highly skilled and productive economically active population. The Formation of Human Capital in Perspective: Brazil and Its Competitors When faced with the new realities that the knowledge economy was impos- ing on the workforce, countries reacted differently. The Republic of Korea and Singapore, followed by China a bit later, decided to invest heavily in basic education. These countries innovated mostly through the acquisition and adaptation of foreign knowledge and technology, in which basic skills-- as discussed earlier--play a critical role. Other countries, like India, invested heavily in tertiary education to energize the creation and commercialization of knowledge, focusing particularly on information and communication tech- nology development. When the millennium bug emerged, India was able to capitalize on the advanced skills that part of its workforce had developed, and it became a leader in ICT development. How did these countries improve their education systems to respond to the new realities? TheRepublicofKorea Korea took a sequential approach to expanding educational access. In the 1950s, access to elementary education was expanded, with a focus on produc- ing a labor force that met the needs of an economy based on labor-intensive products and light manufacturing. Gradual provision of free compulsory edu- cation ensued, with an emphasis on cost efficiency. Such measures included double-shifts for classrooms, use of private schools to accommodate more stu- dents, and increases in classroom size. Heavy investments in basic education promoted quality and guaranteed access to all. The 1960s brought a new focus on secondary education and technical and vocational education and training (TVET), which enabled the country to shift to capital-intensive and heavy-chemical industry. To accommodate the grow- ing number of secondary pupils, private schools were used to absorb the new students, and classroom size was increased from 60 to 70. The shift to emphasis on tertiary education since the 1980s then produced an economy based on electronics, high-tech, and knowledge innovations. The effort was initiated by the July 30 Educational Reform (1980), which HumanCapitalforInnovationandGrowth 107 broadened access to tertiary education by expanding the admission quota of colleges and universities and replacing university-administered entrance tests with a national-level examination. This effort was complemented by imple- mentation of the Brain Korea 21 (BK21) policy in 1999, targeting what the Korean government considers to be the seven most important fields in science and technology for enhancing competitiveness in the global economy. The policy has several purposes: to develop world-class research universities, foster the creation of human resources through graduate schools, nurture quality regional universities, strengthen industry-university ties, and reform higher education in general. To accomplish this agenda, the government invested approximately US$1.2 billion into higher education over seven years.To date, increases have occurred in publications per participating professor in science and technology as well as in the humanities, in international patents and mer- chandising research, and in international exchange and collaboration. Singapore Singapore's experience was not much different. Singapore chose to use educa- tion as a major vehicle for overcoming its daunting post-independence chal- lenges. Forging a close link between education and economic development was strongly emphasized in the nation-building process of this small city-state. In particular, developing a Singaporean identity through an integrated national education system was seen as key for economic survival. The Five-Year Plan for 1961­65 was the first step toward boosting the edu- cational standards of Singaporeans and uniting a disjointed educational system that included Chinese, Malay, Tamil, and English schools. The priority was to provide every child with at least six years of schooling. The plan consisted of six main educational reforms: · Equal treatment for the four streams of education: Malay, Chinese, Tamil, and English · Provision of a common syllabus for all school subjects in the four languages · Compulsory bilingualism in all schools · A common national examination system for the primary schools · Universal free primary education · Emphasis on the study of mathematics, science, and technical subjects. By the late 1970s, social and economic indicators pointed to an increas- ingly rich and progressive Singapore amidst a cohort of developing countries still struggling to address national poverty. At the same time, Singapore's comparative advantage in labor-intensive manufactured goods clearly was being eroded as other Southeast Asian countries entered the global market. Singapore responded by attempting to transition to a more capital-intensive economy through a "Second Industrial Revolution." The Singaporean government also decided to focus on improving educa- tional quality after the enrollment surge of the 1970s. The New Education System was introduced in 1979 and academic improvements were evident by the late 1980s. Indeed, Singapore seems to have transitioned successfully 108 KnowledgeandInnovationforCompetitivenessinBrazil to a knowledge-based economy focused on innovation and creativity, with an education system that performs exceptionally well as measured by results of standardized international mathematics and science tests such as the TIMSS (Trends in International Mathematics and Science Study) of 1995 and 1999. In 1997, Singapore took its education reform a step further by introducing the vision of "Thinking Schools, Learning Nation," launched by then Prime Minister Goh Chok Tong. The vision hinges on the premise that, devoid of natural resources, Singapore's future viability and wealth depends on the capacity of its people to learn and to go on learning throughout their lives (Bon and Gopinathan 2006). Singaporeans were encouraged to continually acquire new knowledge; learn new skills; gain higher levels of technological literacy; and develop a spirit of innovation, enterprise, and risk-taking with- out losing their moral bearings or their commitment to the community and nation (Gopinathan 1999). China China reacted a bit later than Korea and Singapore. Indeed, China's recent accomplishments are in sharp contrast with the state of its education sys- tem prior to the reforms that began in the late 1970s. For three decades after 1949, total national resources devoted to education were relatively low and were heavily dependent on government allocation. The education infrastructure was weak, teachers were poorly paid, and large numbers of school-age children had no access to education (Tsang 1996). Two policy reforms played a particularly important role in transforming China's educa- tion system: decentralization of education financing and a curricular focus on science and technology. Since the early 1980s, the financing of primary and secondary education has undergone a fundamental structural change. The official government policy for financial reform of basic education promulgated by the Chinese Communist Party in 1985 has two major components: decentralization in educational administration and financing, and diversification in the mobiliza- tion of educational resources. Further legislation passed in 1986 required gov- ernments at all levels to increase total expenditures for the basic cycles--and at rates higher than overall revenue growth--and to boost per pupil spend- ing. More reforms followed in 1993, making the nine-year basic education cycle compulsory and encouraging private citizens and groups to participate in school development. More recently, technology has also played a critical role in expanding access to education and raising its quality. For example, a pilot distance education program that started with 78 higher education institutions and the Central Radio and TV University now has over 2,000 off-campus learning centers around China, offering 140 majors in 10 disciplines, with a total enrollment of approximately 1.4 million students (Ministry of Education 2005). HumanCapitalforInnovationandGrowth 109 In addition, TVET was identified as one of China's strategic educational priorities by the State Council in November 2005. Substantial efforts have been made to scale up and modernize the system in the past decade. Major rules and regulations governing organization of the TVET system were introduced in the Labor Law of 1994, the Education Law of 1995, and the Vocational Education Law of 1996. Reform elements have included the fol- lowing:increased focus on access and equity;decentralization of control from the center to local governments; diversification of learning opportunities by opening up to nonstate providers; diversification of financing, including user fees; modernization of curricula and teaching methods; and promotion of a more integrated training system. India Soon after becoming independent,India placed tertiary education and science and technology high on its agenda for economic development. To meet the needs of industrial development, the first Indian Institute of Technology (IIT) was established in 1951 at Kharagpur (West Bengal). Support was received from the United Nations Educational, Scientific, and Cultural Organization (UNESCO), based on the MIT model. With the Soviet Union's assistance through UNESCO, a second IIT was established at Bombay (now Mumbai) in 1958. IIT Madras (now Chennai) was established with assistance from Germany the following year, and IIT Kanpur with help from a consortium of U.S. universities. British industry and the government of the United Kingdom supported the establishment of IIT Delhi in 1961. In 1994, IIT Guwahati was established entirely through indigenous efforts. In 2001, the University of Roorkee (first established as a college in 1847) became the seventh institution to enter the IIT family. While taking advantage of experience and best practices in industrial countries, India ensured that the "institutions represented India's urges and India's future in the making" as Prime Minister Nehru said in 1956.The Indi- an Parliament designated them as "Institutes of National Importance"--pub- licly funded learning centers enjoying maximum academic and managerial freedom.The institutes offer relevant, high-quality programs in engineering, technology, applied sciences, and management at the undergraduate, mas- ters, and doctoral level. Each offers its own degrees. To keep their Indian character, with equal opportunities for all, the IITs were designed to be fully residential for all students and most faculty members. This has permitted extensive student-faculty interaction beyond the classroom and optimal use of facilities. Most faculty and postgraduate students are involved in research and extension services. Admission is strictly according to merit through a highly competitive common entrance test. Today, the IITs attract the best students interested in engineering and applied-science careers. IIT alumnae are well represented at the highest levels of responsibility in education, research, business, and innovation around the 110 KnowledgeandInnovationforCompetitivenessinBrazil world. In 2005, the Times Higher Education Supplement ranked the IITs as the third-best engineering school globally after MIT and the University of California, Berkeley. The key strength of the IITs has been their success in turning the best students into "creative engineers" and "engineering entrepreneurs." Initially, the IITs were criticized for contributing to the brain drain because some 40 percent of their graduates emigrated. However, the opening and fast growth of the Indian economy has transformed this weakness into a major strength for international cooperation and investment. Much of the success of Bangalore, for instance, is attributable to the phenomenon of reverse brain drain. Obviously, the education systems of these countries still face numerous issues of equity and relevance. However, concerted government efforts in education clearly have been at the forefront of these Asian countries' success in the knowledge economy. While these reforms were occurring in the East, Brazil was slow to make educational progress. It was only in the 1990s that Brazil strove to make primary schooling universal--a very late start! Even today, Brazil is struggling to enhance quality in primary education and to make secondary educational enrollment universal. The next sections present a general overview of the challenges facing Brazil's education system. Brazil's Education System and Its Readiness to Produce Human Capital for Growth Clearly from the international experiences discussed in the previous section, nations focused on succeeding in the knowledge economy have undertaken broad and coordinated reforms of their education sectors as a key policy. Of course, as this study has emphasized throughout, enhancing the development of basic and advanced skills among the population is insufficient and must be complemented by policies that encourage investment by private firms in inno- vation and policies that maintain a sound enabling environment for business. This section focuses on the specific issue of human capital, which appears to be a critical bottleneck to Brazil's entry into the knowledge economy. A set of six tables (tables 6.3 through 6.8) summarizes the key issues that define Brazil's readiness to produce human capital for innovation and growth. The tables provide a snapshot of Brazil's primary, secondary, and tertiary education systems, as well as out-of-school opportunities for advanced training. To con- textualize the challenges facing Brazil, international comparisons are shown throughout in italics. Each of the following tables is followed by key messages related to innovation readiness. More detailed information on the individual components of Brazil's national education system is provided in appendix D (The Primary and Second Educa- tion System) and appendix E (The Tertiary Education System and Advanced Out-of-School Training). Table 6.3. The Primary School System: Readiness for Innovation-Led Growth Suggestiveindictors Characteristics (internationalcomparisonsinitalics) Implicationsforinnovation-ledgrowth Accessandcoverage Primaryenrollmentis"nearuniversal"(98%in2007),following15yearsof Theprimarysystemisstillorientedtowardexpansionofcoverage.Itnow sustainedeffort. needstorefocusonqualityeducationfortheemergingknowledge (BrazilexceedstheLatinAmericanaverageof95%.) economy. Ratesofgraderepetitionand First-graderepetitionrateis28%(amongthehighestintheworld). Brazil'sinordinatelyhighgraderepetitionratesareunderstandablylinked dropout Argentina'sis10%;Chile's,1%;India's,4%;Mozambique's,26%;andthe totherecentexpansionofprimarycoverage;however,highrepetition Philippines',5%. leadstoage-distortedlearningenvironments,whichgenerallyleadto earlydropouts. Costofgraderepetition AnnualcostofgraderepetitioninBrazil'sprimaryandmiddleschool Excessivegraderepetitionnotonlyconsumessignificantresources,itleads budgetsisUS$600million. toage/gradedistortionsthatunderminesecondary-schoolquality. The"typical"primarylearning Ingeneral,primaryclassroomsemphasizerotememorization,group Currentclassroompedagogylacksthedynamic,interactivequalitythat environment recitation,and"correct"answers,ratherthanconceptualunderstanding goesbeyondreadingandarithmetictopreparechildrenwithanalytical andsolution-orientedreasoning(Carnoy,Gove,Marshall2007). skillsandthecapacityforinnovativethinkinglaterinlife. Scienceandmathachievement In2003,Brazilrankedlastinmathandsecondtolastinscienceoutof40 Brazil'sexceptionallyweakscienceandmathachievementprobablydoes participatingcountries. notaffectaneliteminorityofprivatelyeducatedfuturescientistswho Brazil,40th(math),39th(science);Korea,3rd,4th;Mexico,37th,37th; willbeeducationallypreparedtocreatenewknowledge;however,it RussianFederation,29th,24th;UnitedStates,28th,22nd. greatlyaffectstheoverallnationalcapacitytouse,adopt,andbenefit fromacquiredtechnology. Assessingeducationalquality In2005,theMinistryofEducationadministeredtheProvaBrasil,aUS$25 TheProvaBrasilprovidesagoodbasisforbroadeningandbuildingupona andstudentperformance millionlearningassessmentof3.3millionbasiceducationstudentsin performance-basedculture. over42,000schools. Standards Standardsarelackinginbothlearningperformanceandschooloperations. Schoolsandmunicipalsecretariatsareadriftingoalsetting,lacking Manyschools(especiallyinruralareasofthepoorestregions)stilllack standardstorationalizeperformanceexpectationsandbudgetary suitableclassrooms,basicfurniture,andteachingmaterials. allocation. (continued) 111 112 Table 6.3. (continued) Suggestiveindictors Characteristics (internationalcomparisonsinitalics) Implicationsforinnovation-ledgrowth Computersintheclassroom Computersarerelativelyrareorunderutilizedinprimaryinstruction. Computersareessentialforpreparingtechnologicallyliterategraduates. Existingcomputerstendtobeusedbyteachersandadministrators. Introductionintheclassroomisevenmoreimportantbecausemedium- Brazilhas2schoolcomputersper100students. andlow-incomefamiliescannototherwiseaffordpersonalcomputersin Koreahas28schoolcomputersper100students. theirhomes. Preschoolingleadingtothe Lackofpreschoolingexacerbatestheequitygapbeforeyoungpeople Investmentinearlychildhoodeducationisneedednotonlytobetter primarygrades evenreachschools.Enteringfirstgradersfrompoorfamiliesare preparepreschoolersforsuccess,buttoensurethatdisparitiesinsocial estimatedtogenerallyknowabout400words,comparedwithabout equityarenotreinforcedfromtheoutset. 4,000wordsbyfirstgradersfromthetopeconomicquintile. Source:Author'scompilation. Key messages on primary education · Educationalpolicymakershave(rightfully)focusedonextensionofprimarycoverage,literacy,andeducationalequityforthepast15years. · Brazil'sprimaryschoolsaredeficientinteachingthebasicreading,math,computer,andscienceskillsthatarethefoundationforbroadsocialparticipationintheknowledgeeconomy. · Brazil's primary schools are highly deficient in laying foundations for conceptual reasoning, solution-oriented thinking, and the scientific method--"ways of thinking" that lead to a flexible, competitive,andproductivenationalworkforce. · The federal government needs to spearhead reform to energize the national curriculum, establish minimum operational standards for schools, and encourage accountability based on performance.TherecentPlanforEducationalDevelopment(PDE)containspreciselytherulesofthegameforthisnewoutput-basedincentiveprogramforstatesandmunicipalities. · Workerswithsoundbasicskillswhocanuseandadapttonewtechnologiesareneededontheshopfloor;andeconomicallyatleast,theseworkersarenolessessentialthantheengineersand managerswhointroducenewtechnologiesandsetthepaceforproductivitygrowth,northepublicandprivatesectorresearcherswhoseR&Dmayleadtonewdiscoveries andapplications. Table 6.4. The Secondary School System: Readiness for Innovation-Led Growth Suggestiveindictors Characteristics (internationalcomparisoninitalics) Implicationsforinnovation-ledgrowth Accessandcoverage Grosssecondaryenrollmenthasimproveddramatically--from15%in Withplateausinsightforenrollment,Brazilisinastrongpositionto 1990to76%in2004. expandhumancapitalbyreorientingitspoorlyperformingsecondary OECDaverageis92%,Chileisat80%,Finlandat97%,and Koreaisat89%. systemtowardinnovationandcompetitiveness. Educationalattainmentfor Averageeducationalattainmentforpopulation15yearsandolderisstill Despitethesignificantadvancesinsecondaryenrollment,muchwork populationofpostsecondary only4.3years. remainsonraisingcompletionratesandprovidingthemostbasiclevels age Argentinais8.8years,Chinais6.2years, Koreais10.5years,Mexicois ofliteracyandnumeracytraining. 7.2years. Secondarydropoutandcomple- Secondaryschooldropoutratesremainunusuallyhigh,andsecondary Thekeytosuccessatthesecondarylevelistoimprovequality.Efficiency tionrates schoolcompletionratesremainunusuallylow.Thisreflectseducational gainsattheprimarylevel(inpartthroughareducedretentionrate, supplydeficiencies,especiallyinruralareas. whichcostsanestimatedUS$600millionannually)couldsignificantly helptoimprovesecondary-schoolquality.Inthelongerterm,improved completionwouldmorethanpayforitselfthroughamoreproductive laborforce. Impactofhighretention Becauseofthehighretentionratesinprimarygrades,secondaryschools Highprimaryretentioncomplicatessecondaryschoolingthroughage/ containmanyolderstudentswithextremelyweakskills.Theirsituation gradedistortion.Theoldereveningstudentscouldbeplacedonan isworsenedbyastandardizedcurriculumsociallygearedtoward acceleratedbasic-skillscurriculumsimilartoEJA(EducaçãodeJovense youngerchildren.Schooldropouttendstobedeferredtosecondary Adultos),inwhichallstudentsalsoreceiveinstructioninworkplaceskills educationratherthanavoided. suchascommunications,computeruse,andnegotiation. Readingandlanguage AbouthalfofBrazilian15-year-oldshavedifficultyreadingorcannotread Aweaklyliterateworkforceimposescostsandforegoesbenefitsatevery achievement (internationalPISA[OECDProgrammeforInternationalStudent leveloftheeconomy'sproductiveprocesses. Assessment]test) Only9%of8thgradersareperformingatasatisfactorylevelin Portuguese(SAEB). Only6%ofKorean15-year-oldshavedifficultiesreadingorcannotread (PISAinternationaltest). (continued) 113 114 Table 6.4. (continued) Suggestiveindictors Characteristics (internationalcomparisoninitalics) Implicationsforinnovation-ledgrowth Mathandsciencepreparedness Morethanthree-fourthsofBrazilian15-year-oldscannotperformbasic Math,science,andtechnologicalliteracyareessential--notonlyto mathorhavesignificantdifficultiesdoingso(PISA);only7%of11th producescientistsandengineersbuttocreateaworkforceabletouse, gradersperformatasatisfactorylevelinmath(SAEB) adapt,anddisseminatenewideasandtechnology.Foreconomicsuccess, MathscoresarebelowMexico'sandIndonesia's,andfarbelow"high Brazilwillneedtomakemajorcompensatoryinvestmentstoimprove scorers"suchasKorea. mathandscienceperformanceatthesecondary-schoollevel. (Relatively,Brazil'ssciencescoresaresimilarlylow.) Instructionalhoursperweek Averagehoursintheclassroomperweekare19.1. Thenumberofinstructionalhoursforacademiccoursesandvocational InMexico,itis25hours;inKoreaitis30.3. trainingneedstobeincreased,especiallyifnonacademiccurriculasuch ascivictraining,sexeducation,drugpreventionprograms,andsoforth aretobemaintained. Socialequityinsecondary Thepooraresignificantlylesslikelytocompletesecondaryeducation. Effortsareneededtokeeppoorchildreninschoollonger--forexample, education Thecompletionrateforchildrenfromfamiliesinthehighestdecileof conditionalcashtransfers(CCTs)asincentivestosecondaryattendance socioeconomicstatus(SES)isover90%.Thecompletionratefor andsavingsaccountstoattractstudentsandkeeptheminschool. childrenfromthelowestdecileofSESis4%. Completionrateswillincreaseifpoorfamiliesperceivethatsecondary educationproducesmarketablejobskillsaswellasentrytohigher education. "Nonacademic"secondary Thesecondarycurriculumishighlyorientedtowardpreparationfor Avalidationexamthatcanbeusedasanequivalentsecondarycredential tracks universityentry.Nonacademicstudentstendtobesegregatedasnight existsbutisnotwidelyused.Thevalidationexamshouldbereadily students;however,theircurriculumisuniversityorientedandtrainingis available,preferablyonline,andgearedtowardprovidingtechnological scantintechnologicalfields.Intellectuallycapablestudentsolderthan trainingopportunitiesforpersonsolderthan20. 20whodonotpossessdiplomashavefewopportunitiestoreceive advancedskillstraining. Academicandworkforce Virtuallyallstudentsareonanacademictrackwithapre-university Secondaryschoolsneedtoprovideoptionsforstudentstopursue tracking curriculumeventhoughthevastmajoritywillnotattenduniversity. nonacademicaswellasacademictraining. (55%attendeveningschool.) Vocationaltraining Vocationaltraininginsecondaryschoolsisrarelyoffered.Indeed,Brazilian Secondaryschoolsneedtoprovidenonacademicstudents(especially legislationmovedvocationaltrainingtopostsecondaryeducation.For oldernightstudents)withagreaterrangeoftrainingchoices,including nonacademicstudentswhohaveachievedmasteryofbasicskills, channelingthemtoshort,focusedpostsecondarycoursesortotraining vocationaltrainingopportunitiescouldbeofferedandwelcomed. andeducationofferedthroughabroadsupportnetworkforindustrial workersknownastheS-system. Retentionanddropout Schoolscontainmanyolderstudentswhohavebeenretainedinlower Theoldereveningstudentscouldbeplacedonanacceleratedbasic-skills gradesbecauseofweakperformance;however,thecurriculumisgeared curriculumsimilartoEJA,inwhichallstudentsalsoreceiveinstructionin towardyoungerchildren,tendingtodeferratherthansolvethe workplaceskillssuchascommunications,computeruse,andnegotiation. problemofdroppingout. Source:Author'scompilation. Key messages on secondary education · Progressinsecondaryeducationdependsonmorethanadditionalfinancingtoexpandthenumberofsecondary-ageyoungpeopleinschool. · Functionalreadingabilities,mathskills,andtechnologicalliteracyneedtobeimprovedacrosstheboardatthesecondarylevel. · Newacademictracksareneededtopreparesecondarystudentsfornewjobsintheknowledgeeconomythatdonotnecessarilyrequireuniversityeducation. · Farmoreattentionmustbepaidtoschool-to-worktransitions. · Primary-educationqualityisthekeytoqualityinsecondaryeducation;justassecondary-educationqualityisthekeytoqualityintertiaryeducation. 115 116 Table 6.5. Features Related to School Performance and Governance Generalfeaturesrelatedto performanceand Suggestiveindictors governance (internationalcomparisoninitalics) Implicationsforinnovation-ledgrowth Sizeandscaleoftheeducational Primary(1st­8thgrades)enrollmentis45.1millionstudents.Upper- Thevastsizeofthepubliceducationsystemandrecentachievementof system secondaryenrollmentis9millionstudents. highcoverageprovidesanunprecedentedopportunitytoshapethe InChinathefiguresare188.5and31.2million;India,185and35million; nation'sfuturethrougheducationforinnovation. Mexico,21.7and3.4million;UnitedKingdom,7and3.3million;andthe UnitedStates,37.6and11million. Roleoffederalgovernment Thefederalgovernmentsetspolicyandprovidesbudgetfunds.Itdoes Throughitspolicysettingandbudgetallocationroles,thefederal notdeliverservices. governmenthasvastscopetosetperformancestandards,reshape curriculumcontent,financepilotinitiatives,andbroadlyencourage innovation. Comparativeadvantageof Municipalitiesemployabout48%ofallteachers;statesemploy39%; Municipalities,states,andprivateschoolsmustbeprovidedwith municipalities,states,and privatesectoremploys12%.Thesearetheimplementerswhoconvert resourcesandsupporttoreshapetheformationofhumancapitalforan privatesector(versusthe "reform"intoreality. innovation-basedeconomy. federalgovernment) Expenditureoneducation Nationalpublicspendingoneducationincreasedfrom3.9%ofGDPin While"more"expenditurewouldhelp,themoredifficultquestions 1995to4.3%ofGDPin2005. involvetheprioritiesandexpectationsforandthedistributionand ThisisaboutaverageforLatinAmericaandtheCaribbean.TheOECD efficiencyofeducationalexpenditure. averageis5.5%;Chinais2.1%,Koreais4.2%,Japanis3.6%,Mexicois 0.2%,theUnitedStatesis5.5%(datafrom2002). Schoolprincipals Morethan60%ofBrazilianprincipalsobtaintheirjobsbasedonpolitical Aprofessionalizedcertificationprocessisneededtoensurethatevery criteria. principalunderstandsthelearningprocessandisadministratively competenttomanageaschool. Communityparticipation Brazilhasalonghistoryofcommunityparticipationinschools. Workforce-orientededucationcouldbeenergizedbybringinginmore Brazilenjoysanadvantageinthisareathatmanyothercountries speakersfromthecommunity,organizingopenschoolevents, mightenvy. emphasizinginternshipsandapprenticeshipsinlocalenterprises,and fosteringbetterunderstandingofchanginglabormarketsbyforming school-to-workpartnershipswithlocalindustriesandfirms. Accountabilitybasedon Budgetaryallocationisbasedonstandardizedformulaewithfew Theincipient"cultureofevaluation"mustbepreservedanddeepened measurableperformance incentivestorecognizeorrewardhighperformance. whileatthesametimeavoidingtoomuchtestingandredundanttesting standards bymultiplelevelsofgovernment. Source:Author'scompilation. Key messages on school performance and governance · Alllevelsoftheeducationsystemneedtobefunctionallyaccountableforeducationalperformance. · Students'capacitytoinnovateisnottheonlycriteriaagainstwhicheducationalperformanceshouldbeassessed;however,itneedstomeasurableandassessed. · Higherstandardsandaccountabilityforeducationalperformanceneedtobeinstitutionalizedatalllevelsofthepubliceducationalsystem. 117 118 Table 6.6. Teachers and Teaching in the Primary and Secondary Schools Suggestiveindictors Characteristics (internationalcomparisonsinitalics) Implicationsforinnovation-ledgrowth Thenumberofteachersandpupil-to- Brazilemploysapproximately1.5millionteachers. Brazilhasstruggledtoexpandenrollmentwithoutdramatically teacherratios Thestudent-teacherratiois22.4intheprimarysystemand17.5inthe increasingthepupil-to-teacherratio.Majoreffortshavebeenmade secondarysystem. totrainandhireteachersandtoreduceregionalandsocial Argentina'sratiosare19.1and19.8,respectively;Chile's,33.9and 32.7; inequalities.Toensurequalityeducationwithagreatershareof China's,21.9and18.8;India's,40.2and32.5;theUnitedStates',15.5 math,science,andtechnicalcontent,issuesofteacherqualityand and15.5;andtheOECDaveragesare16.5and13.6. pupil-to-teacherratioswillneedtobeexamined. Salaries Brazil'shighlyunionizedteacherscurrentlyearn56%morethanthe Teachersalariesmaybetoohighingeneralandtoolowforhigh- nationalaveragesalary. performersandthosewithspecializedskills.Higherentrysalaries InOECDcountries,teachersearn15%lessthanthenationalaverage. maybeneededtoattractqualifiedteachers,withfewerautomatic payraisesforseniority. Higher-educationgrantsmaybeneededto equipteacherswithknowledge-economyskills. Teachersalariesasshareoftotal Teachersalariescurrentlyabsorb75%oftotalnationaleducational Highfixedsalarycostswillleadtointensenationaldebateasreforms educationalbudget expenditure. forhigherqualityseektoexpandothercategoriesofexpenditure. Theratioofteachersalaries(primary+secondary)tototal expendituresisamongthehighestintheworldandthreetimesthe OECDaverage. Howteachersteach InpeggingBrazil's"typical"teachingenvironmenttointernational Brazilianteacherstendtobetrainedinthephilosophyratherthanthe standards,arecentqualitativeassessmentof3rd-grademathclasses implementationofteaching.Theiremphasisonrotememorization reportedasfollows:"...Moretimecopyinglessonsandinstructions andrecitationneedstobereplacedwithpedagogybasedonactive fromchalkboard...heavyrelianceonwhole-classrecitation... learning,thescientificmethod,andcapacitytothinkoutsidethe individualratherthangroup-orientedwork...highdegreeoftalking, box. horseplay,andinattentioninclassrooms...teacherscheckthat students`dothework'ratherthanassesscompetence...teachers askfewquestionswhileteaching,almostnonerequiringconceptual oranalyticresponses." Teachertraining Some34%ofteachershavereceivednouniversityeducation Certificationofunlicensedteachers--forexample,throughdistance (disproportionatelyinpoorcommunitiesandruralareas).Only2l%of learning--needstobeextended.Teachersneedtobetrainedand teachersholdmaster'sdegrees.Asinmostoftheworld,mathand retrainedinteachingmethodsthataremoreactiveandlearner scienceteachersareinnoticeablyshortsupply. oriented. ZeropercentofKoreanteachershavereceivednouniversity education,and93%ofKoreanteachersholdmaster'sdegrees. Shorttrainingcourses Shorttrainingcoursesareavailable,buttheyseldomfocusonstudent Promotionsandcareeradvancementshouldbelinkedtoperformance learning.Attendanceinthesecoursesisgenerallyapoorpredictorof ratherthantoattendanceattrainingcoursesorseniority.Short improvedclassroominstruction. coursesneedtoproducebetterteachers.Teachercapacitiesinmath, science,andtechnologyneedtobeupgraded. Absenteeism Highteacherabsenteeismisendemic,especiallyinruralareasandthe Continuousteacherabsenteeismiscostlyinbothfinancialresources poorestschools. andeducationalquality.Rewardsforbetterperformancecanbe allocatedindividuallytoteachersorcollectivelytoschools. Source:Author'scompilation. Key messages on teachers and teaching in the primary and secondary schools · Teachersneedmoretraininginmath,science,andtechnology. · Teachersneedmoretraininginstudent-orientedteachingmethodsthatpreparechildrentothinkconceptually,exercisecreativity,andaskquestions. · Teachingsalariesshouldbehigh;butthesalarycostscannotbeallowedtocrowdoutotheroptionsforeducationalimprovement. · Goodteachingneedstoberewardedwithtangibleincentives. 119 120 Table 6.7. Advanced Skills Training Outside the Schooling System Characteristics Currentstatus Implicationsforinnovation-ledgrowth Coverage Anextensivenetworkoffers2,300vocationalcoursesperyear. Trainingandretrainingopportunitiesforyoungandmatureadults Theannualenrollmentofroughly15.4millionstudentsisthe areneededtoimproveorupgradetheirindustrialand largestsysteminLatinAmerica. commercialskills. Linkagesbetweentrainingandprivatefirms TheS-system,developedover50years,comprises9trainingand Closelinkagesincreaseprobabilitythattrainingofferedis technicalassistancenetworks,operatinginpartnershipwith relevanttofirmneeds. employers. Contentandcompetencies Muchtrainingisstillbasedonthetraditionalapproachof Currenttrainingcontentandcompetenciesmayberelevantfor "Taylorism."Programsarenotcompetencybased.Mostarenot manytraditionalfirms,butnotforadoptionofinnovationina up-to-date. knowledge-driveneconomy. Financialsustainability Thetrainingsystemis85%financedthroughacompulsory2.5% Thefinancialsustainabilityofthesystemneedstobeanalyzed payrolltaxonprivatecompanies,withtheother15%coming andensuredoverthelongterm. throughcontractswiththepublicsector. Advancedon-the-jobtraining Onlythemostinnovativefirmsprovideadvancedon-the-job Avirtuouscircleexistsamongfirmsthatarealreadyinnovative training. becausetheytendtoinvestmoreincontinuallyupdatingthe skillsoftheiremployees. On-the-jobtrainingforlower-skilledemployees Firmsreportsignificanton-the-jobtraining, primarilytoprovide Iftheschoolingsystemwouldindeedprovideallgraduateswith workerswithbasicskillsnotprovidedbyschoolsbutnotto basicandadvancedskills,firmtrainingcontentcouldbebetter providehigher-productivityskills. focusedonskillsorientedtomoreefficientandeffective operationsand,thus,higherproductivity. Distancelearning Employersurveysindicateunsatisfieddemandfordistance Apotentiallysignificantresourceisnotbeingwellutilized. learningusableforin-firmtraining(professionalskillsand employeeattitudes). Unemployedyouth Arecentsurveyoftheunemployedindicatessignificantlackof Thereisastrongunmetneedforoutreachandtrainingprograms accesstoS-systemcourses. gearedtowardyouth. Olderworkers Older,out-of-schoolworkershavefewopportunitiestogain Validationexamsshouldbereadilyavailable,preferablyonline. newhigh-techskills,receiveasecondarydiplomaaftertheage Theyshouldbegearedtowardpersonsbeyondnormalschool of20,orvalidateon-the-joblearningthroughacareer- agewhowishtoobtainasecondarydiplomaordemonstrate enhancingcredential. competenciesandknowledge. LinkagesbetweeninformalVET(vocational ContrarytotheEducationLaw,thenationalsystemdoesnot Furthertrainingopportunitiesareneededforolder,outof- educationandtraining)programsandformal formallyvalidateskillsandcompetenciesacquiredoutsidethe schoolworkersaswellasincreasedformalvalidationtoactas education formaleducationsysteminVETcourses. incentivesforacquisitionofout-of-schoolskillsandcompeten- ciesinVET. Source:Author'scompilation. Key messages on advanced skills training outside the schooling system · A2.5percentpayrolltaxprovidesasustainablefinancialbasisuponwhichtooperate,modernize,andexpandBrazil'sextensiveS-systemforvocationtraining. · Existing vocational education programs are mostly geared to the needs of traditional firms. They need to be made relevant and productive in serving the needs of innovation-ready companies. · OutsidetheregularS-system,fewtrainingopportunitiesarecurrentlyavailableforunemployedyouths,therebyfurthermarginalizingthispopulationandlosingtheirpotentialproductive contributions. · Internet-basedlearningforadvancedskillstrainingissignificantlyunderutilizedasaresourceforout-of-schooltechnicaltraining. · Many Brazilian firms are forced to provide basic-skills training that should have been provided by the national school system. This represents a waste of both resources and opportunity. Schoolsmustprovidegraduateswhoarereadytolearnandinnovatewhentheyentertheworkforce. · Strong linkages should be built between secondary schools serving older students and employers, technical and vocational service providers, and the S-system. However, technical and vocationaltrainingshouldbelefttopostsecondaryeducation,whereitshouldbeprovidedprimarilythroughshort,flexible,narrowlyfocusedcourses. · AvalidationexamalreadyexistsinBrazil;however,itisnotwidelyused.Thevalidationexamshouldbegearedtowardadults,underscoringtheideathatlearningisnotconfinedtoschools butisalifelongenterprisethatproceedsthroughsuccessivephasesoftraining. 121 122 Table 6.8. Tertiary Education and Readiness for Innovation-Led Growth Suggestiveindicators Characteristics (internationalcomparisonsinitalics) Implicationsforinnovation-ledgrowth Accessandcoverage Onlyaboutaquarterofyoungadultsages18to24areenrolledintertiary Thisresultsinasmallproportionofthelaborforcewiththehigh-order educationinstitutions. skillsneededtounderstand,adapt,improveupon,anddisseminatenew Argentinaenrolls64%andChileenrolls47%.TheaverageforLatinAmeri- knowledgeandinnovation. caandtheCaribbeanis30%. Equity Averylowproportionofstudentscomefromlow-incomefamilies.At Thereislossoftalent(youngpeoplewhocouldhavecontributedto UNICAMP(UniversidadeEstadualdeCampinas),10%arelow-income applicationorgenerationofinnovations). studentscomparedtotheir69%proportionoftheoverallcohortin Brazil. Overallquality Thesystemisveryheterogeneous,withsome"islandsofexcellence"(i.e.,a Inmostcases,graduatesdonothavethehigh-orderskillsneededbythe fewverygoodpublicandprivateuniversities)surroundedbymanypoor- knowledgeeconomy. to-average-qualityinstitutions. World-classuniversities NoBrazilianuniversityconsistentlyranksamongtheworld'stop100 MostBrazilianuniversitiesareunabletoproducethegraduatesand universities. researchneededtofuelinnovationintheeconomy. ThebestuniversitiesinChina,India,andRussiarankhigherthanthebest universitiesinBrazil. Accesstotopuniversities Accesstotopuniversitiesishighlycompetitive.Ratioofapplicantsto Graduatesfromeliteuniversitiesarelikelytobemorecompetitiveinthe placeshasgrownintopuniversities,e.g.,16to1inUNICAMP. labormarket. Assessmentofsecondary- IntroductionoftheENEM(ExameNacionaldoEnsinoMédio)aptitude TheENEMislikelytoenlargethepoolofgraduatesfromlow-income schoolgraduates testattheendofsecondaryeducationhasleveledtheplayingfieldin backgrounds. admissionofstudentsfromless-privilegedbackgrounds.Proportionof highschoolgraduatesparticipatingintheexamrosefrom7%to82% withinsevenyears. Privatetertiaryeducation Manyprivatetertiaryeducationinstitutionsdonotscreenapplicants. Graduatesfromlow-qualityprivateinstitutionsareunlikelytocontribute institutions Ratioofcandidateswentdownfrom3.4to1in1980to1.4to1onaverage positivelytotheknowledgeeconomy. in2004.Proportionoffull-timeinstructorsisonly20%vs.83%infederal universities. Facultyqualificationsand Despitesignificantprogress,academicqualificationsarestillinsufficient. Professorsandresearchersarestillinsufficientlyqualified,andthereare productivity Proportionofacademicswithadoctoraldegreeroseoverallfrom15%in fewincentivestoevaluateandrewardteachingandresearch 1994to21%in2004(anddoubledfrom21%to42%atfederaluniversities). productivity. Teachingstaffarecivilservants;tenureisaright,basedonseniority ratherthanperformance. Assessmentandperformance Thegovernmenthasinstitutedacomprehensivequalityassurancesystem, Universitiescanonlytrainstudentstothequalityoftheirownstandards. standardsforuniversities SINAES(SistemaNacionaldeAvaliaçãodaEducaçãoSuperior),including assessmentoflearningoutcomesENADE(ExameNacionaldeDesem- penhodosEstudantes),institutionalself-assessments,andexternal evaluations.Resultsindicategradualimprovementonaverage,though extremeunevennessandnopenaltiesforlowquality. Internationalization Thereisverylittleinternationalmobilityofstudentsandfaculty.In2005, TheoutlookofgraduatesisinternaltoBrazil,makingitdifficultforthem only2,075studentswereofficiallysponsoredforgraduatestudies tocompeteinaglobaleconomy. outsideBrazil(2%oftotalpostgraduatestudentpopulation). Only1,246foreignstudentsareenrolledinBrazilianuniversities. Productionofspecialized Adisproportionateshareofstudentscomesoutofthesocialsciencesand Thereisalackofgraduateswithappropriateprofessionalskillsfor technicalskillsforthelabor humanities.Only19%ofstudentsmajorinscienceandengineering. innovation-orientedfirms. market InChile,33%ofstudentsareenrolledinscienceandengineering;inChina, itis53%. Productionofmiddle-level Only2%ofthestudentpopulationisinnonuniversityinstitutionsor Thereisadeficitofqualifiedtechniciansandmiddle-levelprofessionals. professionalsandtechnicians short-durationprofessionalprograms. Lifelonglearningopportunities ThereislackofarticulationamongtheS-system,nonuniversityprofes- Thereisalackofopportunitiesforskillsupgrading,whichishighlyneeded sionalprograms,anduniversityprograms.Toofewpathways(mutual insectorsandfirmsundergoinginnovation-inducedproductivity recognitionofequivalences)facilitatestudentmobilityamongdifferent changes. typesofinstitutions. Employmentratesofuniversity Unemploymentisrisingamonggraduates.Theproportionofunemployed Universitiesarenottrainingstudentswithskillsactuallyinhighdemand. graduates universitygraduatesis16.4%,comparedwiththeoverallnational unemploymentrateof9.3%. University-industrylinkages Acultureofcollaborationwithindustryislacking. Mostuniversitiesareunlikelytosupportlocalfirmsorcontributeto 123 regionaldevelopment. (continued) 124 Table 6.8. (continued) Suggestiveindicators Characteristics (internationalcomparisonsinitalics) Implicationsforinnovation-ledgrowth Governanceandautonomy Universitygovernancesuffersfromexcessivecentralcontrol. Universitiesareunlikelytobecomemoreinnovativeandresponsive. Resourceallocation Performance-linkedbudgetallocationmechanismsareabsent. Universitieshavenoincentivestobecomemoreinnovativeand responsive. Resourceutilization Federaluniversitieshaveexcessiveunitcosts. Resourcesaredivertedfromsupportingexpansionandquality- improvementgoals. Source:Author'scompilation. Key messages on tertiary education · With only one-quarter of the relevant population group attending a tertiary education institution, Brazil has the next-to-lowest gross enrollment rate among the largest Latin American countries.Only8percentofthelaborforceholdstertiary-levelqualifications. · Accesstotertiaryeducation,especiallythemostprestigiousuniversities,isheavilyskewedagainststudentsfromlow-incomefamilies. · UnlikeChina,India,andRussia,Brazilhasnouniversityrankedamongthetop100intheworld. · Researchisconcentratedinaverysmallgroupofelitepublicuniversities.Thesecondtierofuniversities(publicandprivate)hassomepocketsofresearchstrength;however,mostuniversities conductlittle,no,orverylow-qualityresearch(usuallyinnonscientific,nontechnologicalfields). · Fewuniversitiescollaboratemeaningfullywiththeproductivesectors. · Therearetoofewstudentsinscienceandengineeringprograms,aswellasinnonuniversitytechnicalinstitutionsandshort-durationprofessionalprograms. · Overall, the quality of research and teaching has been gradually improving. Brazil has pioneered assessment tests to measure student learning in conjunction with external institutional evaluations. · There is a gap between skills taught and labor force demands: Graduate unemployment has been rising faster than overall unemployment, while employers indicate that they cannot always findqualifiedpersonnel. · Thepresentcentralizedgovernancesystemsignificantlyconstrainsuniversityperformance. · Withlimiteduseofperformance-basedbudgeting,publicuniversitieshavefewmanagerialorfinancialincentivestouseresourcesefficientlyorrespondtolabormarketandsocialneeds.In particular,costsatfederaluniversitiesareexcessivelyhigh. HumanCapitalforInnovationandGrowth 125 Conclusions: Schooling and Beyond This chapter has focused on issues of educational attainment and quality inso- far as they are keys to generating human capital that can support innovation- led growth.We conclude this review with a discussion of how learned skills are used, or in other words, the overall relevance of the educational experience. It bears restating the guiding theme of this study: There are concerns that Brazil is inadequately prepared to compete in an increasingly globalized world and that, despite advances in addressing serious deficiencies in recent decades, the education system remains a weak link. We have already raised questions about the relevance of education in Brazil based on internal efficiency measures such as repetition rates and SAEB scores. A large segment of the student population is clearly not performing to stan- dards that meet the current requirements, much less the future requirements, of a competitive global economy. This problem has serious consequences for equity, which is discussed below, as well as for efforts to reduce poverty. But perceptions about the relevance of the educational experience in Brazil may also be affecting a more immediate outcome: school dropouts. Ioschpe (2004) estimates that roughly 7 percent of primary school stu- dents drop out annually, while almost 8 percent drop out in middle school. Most discussions of school dropouts focus on socioeconomic factors, but there is a growing body of evidence linking features of schools--including learning--with the decision to remain enrolled (Hanushek and Lavy 1994; Bedi and Marshall 2002; Marshall 2003; Lloyd et al. 2003). In the Brazilian case, low-income students frequently fail grades and may feel increasingly uncomfortable in the classroom with younger students. Furthermore, if they are not learning anything, or view the curriculum as irrelevant to their lives, then perceptions of the importance of schooling are likely to be reduced-- and dropout will occur. Relevance is also an issue in school-to-work transitions. First, the failure to generate basic skills in the early grades has consequences for global competi- tiveness.The De Negri et al. 2006 sector study on work in Brazil addresses this point and situates deficiencies in Brazilian education more concretely within the context of skills deficiencies. Hanushek's recent (2007) review of school quality and development is another reminder that school quality is not necessary just to make better citizens or help workers earn a living wage--the education of the average worker has far-reaching consequences for all sectors of society. In Brazil the current competitiveness profile is marked by poles of excel- lence in specific areas (Petrobrás, Embraer, Embrapa, and others). These are large enterprises that use internationally competitive technology and highly educated managers and technicians. But for a more microdevelopment strat- egy that harnesses innovation at the small and mid-size firm level, a steady supply of quality workers is required. This is the foundation for sustain- able, broad-based economic growth that is critical for creating good jobs and fostering human development. Unfortunately, in an era of global competi- tion, the current state of education in Brazil means it is likely to fall behind 126 KnowledgeandInnovationforCompetitivenessinBrazil other developing economies in the search for new investment and economic growth opportunities. As a result, the overall size of the pie to be divided among its citizens will not be large enough to keep them on a sustainable, development-oriented growth path. Finally there are school-to-school transitions that are also affected by quali- ty and perceived relevance. Based solely on the quantity of education, it is easy to be optimistic about the equalizing potential of education, especially given the rapid increase in basic education completion rates and secondary school enrollments. For example, multivariate analyses of earnings show that primary school (grade 8) graduates earn 50 percent more than analfabetos (workers lacking literacy skills), while high school graduates (Segundo grau) earn almost another 50 percent more than primary graduates (data from the Labor Mini- stry's 2004 RAIS, Relação Anual de Informações Sociais). But these kinds of returns are not guaranteed in the future because more and more young people are obtaining these credentials, not just in Brazil but in other countries as well.This in turn highlights the school-quality premium and the ongoing chal- lenges in Brazilian education to provide equal opportunities. The expansion of schooling in Brazil in recent decades represents an important step in the process of building a more just society and competitive economy. But when we see the gap between actual learning and the skills that children need to be successful in later school-to-school and school-to- work transitions, the potential long-term dangers facing Brazil are very real. Other countries are also expanding access, but if they are doing a better job of improving basic skills--let alone more-advanced cognitive skills--then Brazil actually may be falling farther behind rather than catching up. CHAPTER 7 How Brazil Can Foster Innovation How to capture innovation for accelerated growth? This chapter addresses that question across the six critical areas discussed in the preceding chapters-- developing an enabling environment for investment,creating and commercial- izing knowledge, acquiring foreign knowledge, leveraging and disseminating the use of technologies, improving basic education and skills, and expanding tertiary education.Taken together, the recommendations made in this chapter constitute the beginnings of a comprehensive national plan. In the six sections that follow, our primary recommendations are under- lined. Many of the recommendations here were discussed at the 2007 "Global Forum on Building STI Capacity for Sustainable Development and Poverty Reduction."1 Lessons were highlighted, and many case studies were presented at the forum. However, for ideas such as these to be translated into action, a far more inclusive national process will be needed in Brazil. That process requires greatly increased public awareness of what's wrong, includ- ing the costs now and into the future of continued sluggishness in responding to the challenge. Ongoing analysis and a vigorous national debate can lead to a workable integrated national strategy. The first section, below, focuses on the development of an enabling envi- ronment for private sector investment. Most of the items in this section are not new recommendations coming out of our analysis, but are dimensions of reform that already have been identified in previous World Bank work. How- ever they are crucial to the implementation of the other recommendations made in our report and deserve, therefore, to be repeated in this context.The subsequent five sections focus more directly on the policy reforms and mea- sures linked to our analysis of the determinants of innovation in Brazil. 128 KnowledgeandInnovationforCompetitivenessinBrazil Developing an Enabling Environment for Private Sector Investment Stay the course in continuing to improve the basic macroeconomic environment Over the past decade, Brazil made substantial inroads in one area of the enabling environment in particular--macroeconomic stability. Fiscal policy contributed to a reduced public-debt-to-GDP ratio and to increased sustain- ability of the public debt (mostly through increased tax revenues). Monetary policy based on an inflation-targeting framework and a flexible exchange- rate regime reduced inflation from 12.5 percent in 2002 to 3.1 percent in 2006, as well as reduced foreign-exchange risks. In addition, debt manage- ment has drastically reduced public external debt. Facilitate firm-level investment Despite a good mix of economic policies and a highly favorable external environment, economic growth has nevertheless remained under 3 percent. The rapid growth that has transformed countries elsewhere has continued to elude Brazil. Why? One significant obstacle discussed throughout this report (in particu- lar, in chapter 5) is that the overall environment continues to pose significant obstacles for firm-level investment. Firms' correspondingly low rates of invest- ment in R&D are central to their difficulties in increasing productivity through innovation. The analyses undertaken for this study along with consultations with the business sectors highlight the kinds of obstacles to R&D investment that remain. Recommendations for overcoming these obstacles are as follows: · Reduce the tax disincentives to R&D investment. Overall taxes as a share of GDP were 37 percent in 2005, which is unusually high by international standards. · Lower the cost of capital. According to the World Development Indicators (World Bank 2006d),Brazil's interest-rate spreads were 38 percent in 2005, which is highly unfavorable compared with competitors such as Russia (7 percent), Mexico (6 percent), China (3 percent), and Korea (2 percent). · Continue to open the economy to foreign competition. Despite relative progress, the Brazilian economy remains fairly closed by international and regional standards.Trade amounted to just 37 percent of GDP, well below the aver- age of 44 percent for the Latin American and Caribbean region. · Challenge the rigidity of Brazil's labor markets. All in all, it is simply too dif- ficult to hire and fire workers. A recent survey shows that the rigidity-of- employment index in Brazil is at 42.0, above the regional average of 37.1. · Reform the social security system. A generous and inequitable social security system represents the lion's share of public social expenditures in Brazil. Recent attempts at reform have yielded minimal results and have not solved the major deficit behind this system. HowBrazilCanFosterInnovation 129 · Address infrastructural deficiencies that increase the costs of production and of doing business. Logistical costs as a share of GDP, for example, are much higher in Brazil (24 percent) compared with Chile (16 percent) or Mexico (18.5 percent). Other elements of the institutional setting are similarly unfavorable and need to be reformed, namely excessive bureaucracy, cor- ruption, and an inability to control violent crime. The costs and delays in contract enforcement are especially damaging for businesses. Improving the investment climate so that the private sector can reach its investment potential is the single most important action the government could take in strengthening private investment in innovation. The most politically complicated areas for reform touch on labor, pensions, taxation, and trade. Previous World Bank reports have discussed policy options in these areas in detail.2 Significant action is particularly needed in three areas: Improve the efficiency and intermediation of the banking system Brazil's banking system is highly sophisticated, but its efficiency can be improved to reduce costs and pass savings along to consumers. Increase the use of public-private partnerships to amplify leveraged investments in infrastructure The Public-Private Partnership Law was approved but has had little practical impact. Its implementation is critical. Other opportunities for public-private collaboration can be further strengthened, such as the OSCIPs (Organização da Sociedade Civil de Interesse Público). Improve governance Several actions are required. These include (a) simplification of procedures for doing business in Brazil,3 (b) more effective auditing and anticorruption mechanisms to reduce "leakage," (c) government streamlining to reduce size and administrative expenses, and (d) improvement of justice system effective- ness to prevent crime and violence and to improve the system's capacity to enforce contractual relationships. A detailed analysis of the significant bottle- necks in Brazil's judicial system can be found in a recent World Bank report (Hammergren 2004). Creating and Commercializing Knowledge and Technology As a share of GDP, Brazil's R&D expenditure is somewhat above average for its level of per capita income; however, when compared with the levels of expenditure in China and India--two of its most important BRIC com- parators, both of which have much lower per capita incomes--its level of R&D expenditure is too low. Given that technological innovation is becoming increasingly crucial to international competitiveness--and that Brazil's main comparators are dramatically increasing their own R&D efforts--Brazil needs 130 KnowledgeandInnovationforCompetitivenessinBrazil to significantly improve its effort to create and commercialize knowledge.The following key actions are required: Increase private R&D Brazil spends 1.1 percent of GDP on R&D, but mostly through government expenditure. The private sector accounts for only 30 percent of total R&D investment. Based on the experience of OECD countries, as well as firm-level studies in Brazil itself, this private R&D investment rate is far too low.Actions to improve the enabling environment--recommendations to further liberal- ize the trade regime and improve domestic competition policy, as described above--will offer strong incentives for firms to increase their R&D effort. A strengthened export orientation that places firms more squarely in the com- petitive international market will also serve to increase their R&D efforts. However, as discussed in chapter 5, R&D effort and export orientation are correlated with firm size. Larger firms are more able and likely to respond effectively to the increased competitive pressure.Therefore, government pol- icy should focus on improving R&D effort by small and medium-size firms. Some of the possible actions include the following: · Expand the mix of public financial instruments that foster private R&D to include more risk-sharing, matching grants, equity instruments, and loans. Cur- rently, government support for R&D is primarily given through grants (pri- marily to university research) or as tax incentives to large firms that often would have undertaken the research anyway.Tax incentives are of little use to new start-ups with no profits to offset. Carefully designed instruments that provide risk-sharing mechanisms, matching grants, equity instruments, and loans may provide far greater benefit for small and medium-size firms. · Improve monitoring of how well different instruments and mechanisms work. Currently, there is very little evaluation of the effectiveness of government mechanisms to encourage R&D by private firms. Evaluation results should be used to improve the programs and instruments,redeploying resources to those that are working well and closing down those that are not. · Improve cost effectiveness of fiscal incentives for R&D. To date, fiscal incen- tives for private R&D have mostly benefited larger firms, many of which would have undertaken research with or without incentives.Thus, an effort should be made to improve the design of incentives so that they result in additional research and to include provisions that make incentives more relevant and attractive to new and smaller firms (for example, loss carry- overs and simple procedures). · Improve operation of the sectoral science and technology (S&T) funds to provide greater flexibility across sectors and to increase interaction among academia, research institutes, and the private sector. The sectoral funds represent a solid advance in greater investment resources for R&D. However, their opera- tions are overly restrictive in focusing primarily on support for university research along disciplinary lines. Strictly earmarked compartmentalization of the funds by sector should be avoided. HowBrazilCanFosterInnovation 131 · Improve interaction among public labs, universities, and the productive sector. Government support mechanisms should encourage cross-fertilization among academia, research institutes, and the private sector. This could be accomplished by making some government support contingent upon the participation of more than one key actor--as is done, for example, by many research-support programs in the European Community and the United States. Improve public R&D · Increase public R&D resources. As a share of GDP, Brazil spends far less on R&D than key lower-income competitors such as China and India, and far less still than the OECD average. Brazil needs to increase its public R&D effort--not only for universities and firms, but by the public sector itself. · Strengthen public R&D in key strategic areas, such as natural resources, renew- able energy, biotechnology, and nanotechnology. Currently, most public R&D is undertaken by sectoral ministries such as defense, agriculture, industry, health, and the environment. While this is appropriate, new areas related to natural resources, renewable energy, biotechnology, and nanotechnology hold significant future potential. Mechanisms are needed to allocate funds appropriately and coordinate new initiatives. · Increase support for R&D in universities. Universities have become ever more important R&D agents worldwide. While many of Brazil's programs do support university research, the volume is still small by global standards. More resources should be channeled through competitive projects with built-in monitoring and evaluation. University research should be aimed not just at advancing the frontiers of science, but at knowledge that is rel- evant to Brazil's social and economic needs. Based on merit, funds should be available to researchers at private as well as public universities. · Improve monitoring and evaluation of public research, with the results used to reallocate funds according to performance. There is very little systematic monitoring and evaluation of R&D undertaken by public research labs and universities. More effort needs to be undertaken to clarify the objectives of research in public institutions. Most important, the results of monitoring and evaluation should be used to channel resources to programs that pro- duce results and to terminate programs that do not. Strengthen the commercialization of knowledge · Improve the National Institute for Intellectual Property (INPI) by reducing the backlog of patent and trademark applications and by providing more assis- tance to Brazilian innovators. Although patenting activity has increased in recent years, INPI needs to eliminate the growing backlog of applications. In addition, the enforcement of intellectual property rights needs to be strengthened so that firms will expend the effort needed to develop new knowledge. 132 KnowledgeandInnovationforCompetitivenessinBrazil · Implement the Innovation Law. As can be seen through its strong production of scientific and technical papers, Brazil does better in producing basic knowledge than in applying knowledge. Even knowledge that is patented is often not exploited for productive purposes. Part of the problem is that most of the research is done in government labs and universities, which have few incentives to exploit knowledge through commerce.The Innova- tion Law passed in 2005 goes some way toward allowing research insti- tutes to commercialize knowledge that has been developed with public resources. The regulations to implement the Innovation Law have not yet been passed, so the law's full effects have yet to be felt. Some requirements, such as demanding competitive bidding for the sale of licenses, may be too onerous.The law needs to be modified to give greater stimulus to the com- mercialization of knowledge. · Support technology transfer offices in public universities and R&D institutes, as well as a patent management corporation. This would send a powerful sig- nal to the productive sector about the importance of adapting research for applied purposes.Exchanging experiences through an association of technol- ogy commercialization centers could help to generate economies of scale. · Promote greater mobility between public research personnel and the produc- tive sector. At present, the bulk of scientific and technical talent in Brazil resides in the university sector. Scientists and engineers are unlikely to move between the academic sector and industry, or even between the academic sector and government research labs. International experi- ence shows that mobility serves to cross-fertilize research settings and to increase productivity. To stimulate such interaction, special programs should be funded to help subsidize the cost of personnel exchanges. · Expand technology parks and incubators. The most successful of Brazil's relatively rare technology parks and business incubators are in the states of São Paulo and Rio de Janeiro. More should be set up. It will be impor- tant to avoid the common mistake of focusing too narrowly on real estate and equipment at the expense of the "soft elements" for such centers. The needs are for training in entrepreneurship for scientists and engineers (for example, pairing them with business experts), assistance to develop business and marketing plans, access to early-stage innovation finance and venture capital, assistance in protecting intellectual property, and general help in setting up and "growing" businesses. Improve financial support for early stages of technology development · Improve finance and procedures for evaluating projects, and speed up approvals. Brazil has a long history of financing early-stage technology development through institutions such as FINEP (Financiadora de Estudos e Projetos). However, the procedures for evaluating and approving projects need to be made more efficient and faster. · Improve monitoring and evaluation of ongoing projects. More effort also has to be put into monitoring and evaluating ongoing projects to spot some HowBrazilCanFosterInnovation 133 of the pitfalls to be avoided, identify timely assistance to be provided, and improve future project selection and funding. Deepen early-stage venture capital The early-stage venture capital industry in Brazil is small and incipient. Several actions need to be taken: · Strengthen the supply of technology commercialization projects. International experience shows that the initial constraint to developing a venture capital industry is the limited number of good projects. Creating a critical mass of viable "deals" requires entrepreneurial training of scientists and engineers as well as a commercially oriented approach to research. · Strengthen techno-entrepreneurship training in universities. It is important to provide techno-entrepreneurial training within engineering and business schools. This type of training is poorly developed in Brazil. It needs to be strengthened. · Introduce regulations that facilitate the growth of venture capital. International experience has taught that the attractiveness of venture capital investments often depends on how gains and losses will be taxed.Brazil has made recent progress in this area; however, more can be done to increase the attractive- ness of providing risk capital for new start-ups. Acquiring Foreign Knowledge Both the country-level analysis in chapter 4 and the firm-level analysis in chap- ter 5 showed that Brazil is taking less advantage of global knowledge than its main economic competitors. At the macro level, this is revealed most clearly in the low share of trade in GDP and, in particular, the low level of capital goods imports. It also is seen in the relatively lower payments for technology licensing as a share of GDP. At the micro level, the relative underutilization of foreign knowledge is reflected by Brazilian firms' low level of technology licensing. Our micro-level data confirms that new machinery and equipment are generally the firms' primary source for new technology. Low import of capital goods and low use of foreign technology reinforce each other. The firm-level microanalysis confirmed that exporting firms are more likely to invest in R&D and to innovate than nonexporting firms. Here, causality tends to run in both directions. Innovative firms that do R&D are more likely to be competitive, and hence more likely to export. But involve- ment in export means that firms have to be more innovative because keep- ing up with foreign competitors means keeping up with their advances. In addition, the effect of foreign knowledge seems to be indirect. Domestic firms with relatively more foreign participation (either through ownership shares or product purchases) tend to benefit from a positive externality-- they are more likely to become involved in R&D, they innovate, and they are focused more consistently on quality improvement.These features have 134 KnowledgeandInnovationforCompetitivenessinBrazil important implications that help to shape the following recommendations about acquiring foreign knowledge: Use trade to improve access to foreign knowledge · Expand openness to trade and to FDI flows. The first and arguably most important recommendation is for Brazil to continue opening its trade regime to foreign competition. Despite the reforms of the early 1990s, Brazil ranks among the world's most protectionist countries in tariff and nontariff barriers; and both are particularly high for capital goods, com- pounding Brazil's already limited access to embodied technology. Fur- thermore, although Brazil has received much FDI, most of it has been oriented toward the protected domestic market rather than (like China) toward building an export platform to the world. Because of the less- demanding domestic competitive environment, foreign firms also may not be required to bring their most advanced technologies to Brazil. In China, they do--precisely because foreign firms' competition for the Chinese domestic market is more domestic.Thus, by liberalizing its trade regime, Brazil will receive triple advantage--first, lower cost for technol- ogy embodied in capital goods and components; second, more foreign products and services available for copying, reverse engineering, and tech- nology upgrading; and third, FDI serving as an entry vehicle for advanced technology with the possibility of positive spillovers. · Continue to ease technology transfers. INPI needs to reduce remaining res- trictions on technology licensing; and Brazilian firms need flexibility to structure the best deals that they can get. Smaller firms can be assisted in contract negotiations rather than having to navigate rules and regulations entirely by themselves. Support explicit acquisition of knowledge abroad Inadditiontofurtheropeningitstraderegimetobringinmoreforeignknowledge, Brazil should launch programs that proactively seek out and acquire foreign knowledge, as its Asian competitors do. It should take the following actions: · Set up a program to foster international research collaborations for the private and public sectors. At present, there is scant research cooperation between foreign and domestic institutions (either public or private). Government programs should explicitly encourage such cooperation. For example, the Bird program in Israel and India is a government-supported fund to foster international research cooperation between firms to develop and commer- cialize new technologies. · Purchase foreign companies. Japanese, Korean,Taiwanese, and more recently, Chinese and Indian firms are aggressively accessing knowledge by buying up foreign high-technology firms. The Brazilian government and private sector should emulate this strategy. · Purchase foreign R&D labs abroad. Brazil's developing-country competitors also are buying foreign research institutes. Even when they do not purchase HowBrazilCanFosterInnovation 135 research institutes (or cannot purchase universities), they actively acquire technology through contracts and joint research endeavors. Brazil should do the same. · Send more Brazilian students to study abroad. Brazil sends relatively few stu- dents for education abroad--far different from China, India, Korea,Taiwan, Malaysia, and many other countries. Foreign training provides people at the beginning of their careers with direct access to the cutting-edge of technical knowledge; and when advanced training is combined with hands-on work experience in firms, research institutes, and universities, it is an excellent way to "nationalize" commercially relevant skills. Brazil should expand programs to send students, particularly postgraduates, for education and training abroad. · Promote interactions and faculty exchanges with foreign universities. Brazil's East Asian competitors continuously arrange university and faculty exchanges with the best foreign universities. The three main Chinese universities-- Beijing University, Tsinghai University, and Fusan University--sponsor several hundred programs each with foreign universities. In addition, they constantly arrange programs with advanced foreign firms for training and pilot programs that test new technologies. By contrast, Brazilian universi- ties sponsor many fewer formal programs and faculty exchanges.A change may require greater emphasis on the use of English among students,profes- sors, and researchers. · Tap talent from the "Brazilian Diaspora." Besides sending many more of their students abroad, Brazil's competitors also have developed programs to bring their trained students home. Programs of this sort include recruit- ment missions, generous repatriation incentives, and even special high- technology industrial parks that are aimed specifically at capitalizing on knowledge gained abroad. Leveraging Existing Technologies In addition to ramping up its capacity to create and acquire new technolo- gies,Brazil needs to more productively use existing technologies.This may well be the most fruitful means to accelerate Brazil's future growth. The Korean and Chinese experiences demonstrate the importance of adopting, adapting, and effectively using existing knowledge, especially when it can be leveraged through a workforce with abundant basic skills. Companies that understand the importance of new technologies--and that have workers who can learn quickly and put these technologies to use--are in a strong position to expand their capital (in the sense of TFP) through dramatic expansion in productivity. Although healthy mature economies typically do all three--create new technology, acquire technology from elsewhere, and make better use of the technology they already have--the "low-hanging fruit" for Brazil is in better use of existing technology.As shown with an econometric model in chapter 5, 136 KnowledgeandInnovationforCompetitivenessinBrazil companies within the same sector could increase their output by orders of magnitude if they were to emulate best local practice. In other words, Brazil- ian firms not only are not producing optimally at international standards, they are not producing optimally at national standards. More effort has to be put into upgrading technology across the economy as a whole, but in particular among the small and medium-size enterprises that compose the majority of Brazilian firms. Important initial steps have already been taken with the recent tax reform measure known as "Lei do Bem" and the General Law regulating micro and small enterprises, Lei Geral da Micro e Pequena Empresa. However, further interventions are needed as well: Promote diffusion of technical information · Improve technology information services. With the proliferation of Internet databases and advisory services, access to technical information is easier than ever. Larger firms are typically proficient at accessing and using infor- mation, but small and medium-size firms will need assistance. Strengthen- ing their access means enhanced efforts to package information together with well-targeted advisory services. Efforts along these lines have been launched through SEBRAE (Brazilian Service for Assistance to Small Business, Serviço Brasileiro de Apoio às Micro e Pequenas Empresas) and industry associations; however, much more needs to be done. · Strengthen technology extension in agriculture, industry, and the service sectors. It is often necessary to take information and make it meaningful by devel- oping concrete demonstration projects--in other words, showing what has to be done, how, and to what benefit. Concrete demonstration projects are critical to attracting early adopters whose success can lead to diffusion and replication throughout the economy. Brazil has had success in agricultural extension through Embrapa, as well as state-level research and extension services. However, it has done less well with parallel efforts in industry and the services sector. There is great potential for action through government support in these areas. Improve the diffusion and absorption of metrology, standards, testing, and quality-control (MSTQ) services Quality is as essential as price for competitiveness in today's global econo- my. This means a good physical MSTQ infrastructure, as well as a culture of quality. · Create a world-class, demand-responsive MSTQ infrastructure. Brazil currently has a large public infrastructure for basic measurement.Yet,Brazil's domestic norms and standards need to be assessed against international norms and stan- dards,especially where international accreditation eventually may be at issue. This complex subject matter requires considerable technical analysis that is beyond the scope of this report. However, a more detailed study should be undertaken to identify links that may be missing within the system.Eliminat- ing deficiencies and seeking international accreditation will be important to correcting and enhancing Brazil's international competitiveness. HowBrazilCanFosterInnovation 137 · Promote quality control in firms, encouraging them to set up labs and to seek quality certification. Beyond the physical and regulatory infrastructure, it is necessary to create a culture of quality in the economy. The micro- evidence presented in chapter 5 of this report showed clear positive associations among quality certification, R&D innovation, and exports. This implies the need to disseminate information about the importance of quality for innovation and competitiveness. In addition, firms require help in setting up the physical infrastructure and implementing the proce- dures for internationally recognized quality certification. One of the special technology funds focuses on university-based research infrastructure. This support could be expanded for testing and quality control in firms. Sources of support should be explored. Strengthen finance and training for technology absorption by small and medium enterprises (SMEs) As discussed, a strong link has been found between firm size and innovation inputs (such as R&D efforts, skilled workers, use of computers, and purchase of technology), innovation outputs (such as product and process innovations), and outcomes (such as productivity and growth). In addition, the very large dispersion of productivity within virtually any industrial sector in Brazil con- firms the very wide range of technological capability in the country. Because larger firms are likely to already be efficient, public actions are primarily needed to support the needs of SMEs, helping them to make efficient use of both acquired and existing technologies. · Develop support mechanisms for industrial clusters, focusing on design as well as on technological and marketing capabilities. Work with industrial clusters is a key mechanism for improving the productivity of sectors.There is great value in sharing knowledge about the key constraints and opportunities faced by firms in specific clusters.Collective action to share information and experience in specific regional clusters is useful in identifying firms' shared constraints, threats, and opportunities. Many of these go beyond individual companies; potential solutions may need to be addressed by the group. For example, firms may band together to improve designs or to receive process consultancy assistance. Similarly, they may band together to get technical input from specialized suppliers. The group may need assistance such as a common processing facility, a quality-testing center, a market study, or a distribution system whose scale exceeds the capacity of a single firm. · Provide greater support for cluster diagnosis and identification of ways to improve performance. This can often be accomplished as individual cluster members become accustomed to working as a club. Some initial govern- ment incentive--for example, subsidizing the cost of the initial diagnosis or initial purchase of expertise--may be necessary to catalyze group infor- mation sharing and joint action. In addition, changes in state or local actions--such as specialized training institutions, better transportation, communications infrastructure, or finance--may be necessary to the solu- tion; so state involvement may be required. 138 KnowledgeandInnovationforCompetitivenessinBrazil · Strengthen finance for technology absorption by SMEs. The availability of finance is typically the most important constraint for SMEs. This is par- ticularly important in Brazil where the cost of capital is very high.Thus, it is important to focus not only on how to improve technical information, but also on how to invest in better equipment and inputs. With costly financing, it obviously makes sense to first focus on improvements in product, process, and quality (which require less new investment). However, other kinds of improvements--for example, buying better equipment or upgrading worker skills--may still make sense, the high cost of capital notwithstanding. Improve Basic Education and Skills Brazilian firms frequently are required to train their employees in basic math and reading, crowding out technical job training that could more directly increase productivity.The country's educational system,not employers,should be responsible for basic education.TheWorld Bank has produced many studies on policy options to address shortcomings in the basic and tertiary education systems.4 Here, we group recommendations in four main areas--governance, quality, access to secondary education, and school-to-work transitions. Governance Introduce a performance-based culture Clear division of responsibility is particularly important in a federal political system. While distribution of responsibilities is defined in Brazil's education sector, overlap, role conflicts, and inefficiencies are common.The Ministry of Education is supposed to avoid intervention as a primary deliverer of educa- tional services. That is the job of the states and municipalities. A ministry's role is to set performance goals and provide incentives to help the states and municipalities meet them. As reiterated in the Lula administration's recently launched Education Development Plan (Plano de Desenvolvimento da Edu- cação, PDE), financial incentives are supposed to transition from rewarding higher enrollments to rewarding stronger performance. States and munici- palities are expected to operationalize performance goals--in particular, by holding principals and their staffs accountable for achievement.The necessary school autonomy can be strengthened in several ways. Strengthen assessment systems that measure progress and that value monitoring and evaluation Over the past 15 years, Brazil has gained considerable experience with testing in basic education (SAEB), secondary education (ENEM), adult education (ENCEJA), and tertiary education (ENADE). At each educa- tional level, testing tools have been developed to provide snapshots and analyze trends in student learning. These federally implemented tests are sample-based, so some states have developed their own universal testing HowBrazilCanFosterInnovation 139 systems. In 2005, the Ministry of Education administered the Prova Brasil, a US$25 million learning assessment of 3.3 million basic education students in over 42,000 schools. The incipient "culture of evaluation" must be pre- served and deepened, at the same time avoiding redundant testing at the multiple levels of governance. Quality Low educational quality is associated with high repetition and dropout rates. It is easy to see how underfunding and poor use of resources reinforce a vicious cycle of low quality and high repetition. The following paragraphs present some of the policy options to help break this cycle. Establish minimum operational standards for schools and municipal secretariats Brazil is well aware of what municipal secretariats and classrooms need to effectively manage schools and improve student learning.Yet many schools-- especially those in rural areas of the poorest regions--still lack suitable physi- cal classrooms, basic furniture, and teaching materials. The past decade has seen enormous progress in institutionalizing minimum operational standards, yet much of this task still remains to be done. Retrain teachers and reward performance Most Brazilian teachers receive their degrees from small private universities of highly uneven quality. In general, they arrive in the classroom trained in philosophical aspects of pedagogy rather than with practical strategies on how to teach.They typically come with very few tools and even less experience in managing classrooms. Incentives and opportunities for retraining teachers and rewarding performance are badly needed across the system. · Reward good teaching with tangible incentives and punish the absenteeism that is particularly flagrant in many rural schools. High-performing teachers (and teachers who improve) should be publicly recognized by the Ministry of Education and the corresponding state or municipal secretariat. Rewards can be allocated individually or collectively to a school. At the same time, studies have confirmed the pervasiveness and high cost of continuous teacher absence in many municipalities. Patterns of abuse need to be detec- ted and punished. · Revise the professional advancement structure. Promotions and career advance- ment should be linked to performance rather than to seniority or attendance at training courses. Recent research by Universidade de São Paulo professor Naercio Menezes Filho confirms that the current training courses generally are not focused on student learning, and attendance is not a good predictor of improved classroom performance. Recruit the best candidates into teaching Offer grants to prospective teachers that will support them through their ter- tiary studies. Make the teaching profession attractive to more candidates and 140 KnowledgeandInnovationforCompetitivenessinBrazil thus more competitive and selective.Set entry salaries higher and decrease the salary gradient over a professional career. If the right candidates are attracted to the classroom, those with a true vocation will remain through retirement. Select competent, certified school principals Virtually all research confirms the critical importance of school principals in shaping the success of schools. Today, some researchers estimate that more than 60 percent of Brazilian principals obtain their jobs based on political criteria. They need to be selected based on competence instead, preferably following a certification process that ensures their pedagogical competence and administrative skills to manage a school. Build upon the existing school councils, strengthen the relationships between schools and communities Brazil has a long history of community participation in schools.It is important to energize schools by building upon that foundation--bringing in speakers from the community, organizing school events open to the community, and creating internship opportunities for graduating students in local industries and firms. Invest in early childhood education International research shows that entering first graders from poor families generally know about 400 words, compared with the 4,000 words or so known by first graders from the top economic quintile. Even the highest- performing schools will struggle to overcome an initial disadvantage of this sort. A strong preprimary experience strengthens students' readiness. Preprimary education in Brazil is generally the responsibility of munici- palities. The approval of FUNDEB, which includes funding for preprimary education, offers a promising opportunity that requires strong oversight and support from the federal and state governments. AccesstoSecondaryEducation Europe and the United States provide the two major models for secondary education. In Europe, schools offer distinct educational modalities, each serving a particular student profile--some mostly academic, others techni- cal/professional, others purely vocational. The American model offers just one type of school, with students usually able to select vocational courses to complement a core academic track. Currently, Brazil's schools more closely resemble the American model, though with even fewer vocational courses to choose from. Basically, all students are placed on an academic track, with 55 percent of enrollees attending evening shifts. Because primary-education quality is frequently so poor, many students acquire their basic skills func- tionally while attending at the secondary level. Brazil's model may have to adjust over time, but it is probably appropriate to the reality and needs of its students in the meantime. Improve secondary schools by improving primary schools The expansion of secondary education depends not just on additional financing (for which FUNDEB will be critical) but on stabilizing the flow of students HowBrazilCanFosterInnovation 141 arriving from primary schools. Recent budgetary increases for secondary educa- tion mean that expansion of coverage is likely to accelerate.That,however,is not enough: Students must complete the cycle. Overwhelmingly, those who drop out are also those who repeated early years (additionally complicating school- ing through age/grade distortion). For this reason, the key to success at the sec- ondary level is to improve quality and decrease repetition in the lower grades. Efficiencygainsattheprimarylevelcanalsohelptofinancesecondaryexpansion. With the cost of repetition estimated at US$600 million, it is imaginable that significant savings could be transferred. The shift in resource allocation would likely occur at the state level, which would need to be monitored in order to avoid harmful reductions in per pupil expenditures at the primary level. Use conditional cash transfers (CCTs) and savings accounts to help attract secondary students to school and to help keep them there until graduation The expansion of Bolsa Família benefits to cover secondary-school attendance is under discussion; and new ideas are on the table, such as student savings accounts that could be accessed upon secondary-school completion.These are good ideas; however, demand-side interventions should not crowd out funds from school budgets that are otherwise urgently needed to achieve minimum operational standards for the schools that these students will attend. FacilitationoftheSchool-to-WorkTransition The school-to-work transition takes place for many students at the end of the secondary cycle, either in its regular format or in the adult education format (Educação de Jovens e Adultos, EJA). Very high youth unemployment suggests a need to strengthen the transition for students entering the workforce.The fol- lowing paragraphs highlight several policy options to facilitate this transition. Within secondary education, track students more realistically by age to better target school-to-work interventions for those who will face the job market soonest By placing older students in the evening shift and younger students in the day shift, classes would be more homogenous, and age-appropriate curricular dif- ferentiation could be introduced.The older evening students could be placed on an accelerated basic skills curriculum similar to EJA, in which all students also receive instruction in workplace skills such as communications, computer use, and negotiation. For the younger day students, "skills for work" training can complement the academically oriented track that is otherwise geared to- ward preparation for the tertiary system. Strong linkages should be built among secondary schools serving older students and employers, technical and vocational service providers, and the S-system Technical and vocational training should be left to postsecondary education, where it should be provided primarily through short,flexible,narrowly focused courses.However,recruitment for these courses should begin early for students in the evening secondary schools. 142 KnowledgeandInnovationforCompetitivenessinBrazil Encourage validation exams as a means to obtaining secondary-school diplomas for older students who have learned and acquired experience through alternative methods such as employment A validation exam already exists in Brazil; however, it is not widely used, and its application is time-bounded. The validation exam should be readily avail- able, preferably online. It should be geared toward adults (persons older than 20) who wish to obtain a secondary-education degree after demonstrating that they have successfully mastered the competencies and knowledge that otherwise might have been learned in schools. Expand Tertiary Education and Advanced Skills Training The Brazilian government's ambitious plan to increase tertiary education cov- erage, achieve greater equity, enhance quality, and improve relevance cannot be achieved narrowly through the traditional approach of publicly funding new public universities. The next paragraphs present the policy options for improving tertiary education. The discussion is divided into policy options on governance and financing, quality and relevance, and the need to develop world-class universities. GovernanceandFinancingofTertiaryEducation Promote greater autonomy for institutions while simultaneously putting adequate accountability mechanisms in place Greater autonomy and accountability will allow public universities to strength- en their performance and become more innovative.The government can help to achieve this through shared planning and setting of quantitative and qualita- tive goals.The Ministry of Education and the productive sectors need to jointly develop a rigorous system of results-oriented evaluation. Indicators should be clear and measurable, laying out specific institutional, academic, and financial outcomes to which all actors can be held accountable. Make rules on resource utilization more flexible To promote greater efficiency in the use of public resources, the government should consider a combination of complementary mechanisms for allocating funding to tertiary institutions based upon measurable performance. Ensure adequate coverage and long-term sustainability of support, especially for low-income students The government of Brazil needs to increase funding for low-income students while ensuring high levels of repayment.The government may wish to explore the feasibility of creating an income-contingent student loan system that, in principle, would be more efficient and equitable than the present mortgage- type scheme. The government might also consider international loans to finance an educational credit program. In this case, the funds would be chan- neled through an association of private schools--as was done in Mexico, for HowBrazilCanFosterInnovation 143 example, through a World Bank loan. In any event, mechanisms to finance students should be defined with criteria and priorities that build upon exter- nal evaluation results. A labor-market observatory needs to be established to monitor what happens to tertiary graduates Findings on careers and pathways should be widely disseminated. This is critical not just for informing job-seeking students, but for helping decision makers keep tertiary education and labor market policies in optimal sync. QualityandRelevanceofTertiaryEducation Focus on quality Institutions need to raise the qualifications of their academic staff, improve pedagogical practices, integrate research into the undergraduate curriculum, upgrade their infrastructure, and provide stimulating learning environments. Close linkages must be forged with the productive sectors, especially for pro- fessional tracks and programs related to science and technology. Focus on education first, not on research Even in those countries with the highest degree of scientific production, nearly all universities insist on quality of education first, not research. Rela- tively few institutions have the vocation or resources to conduct research in every department (in the United States, for example, only 3 percent to 5 per- cent of universities are classified as "research universities"). In Brazil, teaching centers--whether or not they are legally defined as universities--could and should support research centers. Research is not their primary mission; yet learning the scientific method--surely a cornerstone of what is meant when someone is called "well educated"--requires that all students conduct and apply research to some extent. Universities differ from pure R&D labs in that their objectives, at least for beginners, are primarily didactic. Less directly, this process also leads to scientific and specialized publishing, and to the capacity for productive innovation at the national level. Place more emphasis on educating locally responsible global citizens Tertiary education institutions in Brazil need to view their mission as prep- aration of globally minded, locally responsible, internationally competitive citizens. Brazil needs to improve foreign language training for both academic staff and graduates. The country would benefit from a two-way street of exchanges: facilitating international mobility for Brazilian students, profes- sors, and researchers while also welcoming foreign professors and students to study and collaborate in Brazil. Resources should be made available to support these initiatives. Encourage more students to enter science and engineering A major push will be needed to train more and better scientists and engineers. At the same time, attractive nonuniversity alternatives should be developed to train middle-level professionals and technicians. Because a large percentage 144 KnowledgeandInnovationforCompetitivenessinBrazil of lower-income students are enrolled in these courses,scholarships,education credits, and ProUni (Programa Universidade para Todos) should be encour- aged for this field of study. In addition, the Ministry of Education should con- trol the quality of courses through periodic randomized technical visits. This would complement targeted visits to courses for which there are no clear indicators of program quality. Build strong links between top research universities and the productive sectors A major push is also needed to promote the commercialization of knowl- edge and innovation already being developed by top research universities. Exchange programs between universities and the productive sectors should be supported, and links between universities and business incubators should be strengthened. Brazil should also promote the development of proof-of- concept centers, a new type of in-house business incubator offering seed funding and other services specifically targeted to university researchers.The Ewing Marion Kauffman Foundation recently published an insightful study of two U.S. proof-of-concept centers that emerged just a few years ago to accelerate the transfer of academic innovations into commercial applications in the United States (see www.kauffman.org). World-ClassUniversities The government of Brazil should decide how many world-class universities the country needs and can afford What are the criteria for selecting and funding world-class universities in Brazil--and at what opportunity cost to the rest of the education system? If decisions are made to compete in this rarefied arena, explicit policies and substantial investment should be made to build upon the foundation provided by current centers of excellence. Increase funding for the top research leaders The budgets of the 10 leading research universities should reflect their pro- ductivity. In parallel, the best graduate studies programs--in both public and private universities--also should have their budgets increased. As a fraction of overall education budgets, incremental expenditures of this sort would be virtually negligible.Their signaling and productive benefits would be incalculable. CHAPTER 8 From Analysis to Action Innovation and economic growth are broad topics, so this report has ranged across a broad spectrum of issues--from the overarching economic and institutional regime (macroeconomic parameters, government regulation, trade and competition policy, security, and the rule of law) to specific areas (public and private R&D;foreign investment and technology transfer;technical information; metrology, standards, and quality control; education and skills; and innovation finance and venture capital). Based on this analysis, we have suggested a set of actions (chapter 7) to help Brazil become a more aggressive and successful player in the global economy. This chapter looks at the many entities of government, the private sector, and civil society that will have to implement these recommendations if ideas are to be translated into action and then into reality (table 8.1). Who Needs to Be Involved? Not all of the recommendations in chapter 7 (summarized in table 8.1) are of equal weight and priority; and for technical and political reasons, some will be more difficult to implement than others.Moreover,collaborative action among actors will be needed, so the key agencies outlined in table 8.1 are meant to indicate those that could lead in coordinating actions rather than those solely responsible for carrying out actions. Some recommendations would require new laws through Congress; some imply policy actions embodying significant changes in regulations; and others could be done with the mere stroke of a pen (and a great deal of political will).Some could be carried out with existing resources; others would require significant mobilization of public and private funds. Some actions are stand-alone, while others must be coordinated and sequenced with related steps. Some will require years of sustained efforts; others could be done rapidly. But overall, this report signals that a coordinated and sustained effort by the government of Brazil is urgent. 146 Knowledge and Innovation for Competitiveness in Brazil Table 8.1. Who Needs to Do What Recommendationsinwhichtheyneedtobeactivelyinvolved Federal government as a whole · Improve governance and decrease red tape. Ministry of Finance · Stay the course in continuing to improve the basic macroeco- nomic environment. · Facilitate firm-level investment by lowering the cost of capital. ·Increase private R&D by (a) expanding the mix of public finance instruments that foster private R&D to include more risk sharing, matching grants, equity instruments, and loans and (b) improving the cost-effectiveness of fiscal incentives for R&D. ·ImprovepublicR&Dbyincreasingpublicresourcesforitandby improving the monitoring and evaluation of public research, using the results to reallocate funds by performance. ·Deepen early stage venture capital by introducing regulations that facilitate the growth of venture capital. Central Bank ·Stay the course in continuing to improve the basic macroeco- nomic environment. ·Facilitate firm-level investment by lowering the cost of capital. ·Improve the efficiency and intermediation of the banking system. Ministry of Trade, Industry, · Facilitate firm-level investment by continuing to open the and Commerce economy to foreign competition. · Strengthen the commercialization of knowledge by (a) improv- ing the National Institute for Intellectual Property (INPI) by reducingthebacklogofpatentandtrademarkapplicationsand providing more assistance to Brazilian innovators; (b) imple- mentingtheInnovationLaw;(c)supportingtechnologytransfer offices in public universities and R&D institutes, as well as a patent management corporation; (d) promoting greater mobil- ity between public research personnel and the productive sector; and (e) expanding technology parks and incubators. · Use trade to improve access to foreign knowledge by expand- ing openness to trade and to FDI flows and continuing to ease technology transfers. · ImprovethediffusionandabsorptionofMSTQservicesbycre- ating a world-class, demand-responsive MSTQ infrastructure andbypromotingqualitycontrolinfirms,encouragingthemto set up labs and to seek quality certification. · Strengthen finance and training for technology absorption by SMEs by (a) developing support mechanisms for industrial clusters, focusing on design as well as on technological and marketing capabilities; (b) providing greater support for cluster diagnosis and identification of ways to improve performance; and (c) strengthening finance for SME technology absorption. (continued) From Analysis to Action 147 Recommendationsinwhichtheyneedtobeactivelyinvolved Ministry of Education ·Support explicit acquisition of knowledge abroad by (a) sending moreBrazilianstudentstostudyabroad,(b)promotinginterac- tions and faculty exchanges with foreign universities, and (c) tapping talent from the "Brazilian Diaspora." ·Improve governance of the basic education system by intro- ducing a performance-based culture; expand the use of tests that evaluate student learning. ·Improve the quality of basic education by (a) encouraging the introduction of minimum operational standards in all schools, (b) strengthening the teaching force, (c) upgrading the skills of school principals, (d) increasing investment in early childhood education,(e)buildinguponexistingschoolcouncilstoincrease collaboration among schools and their surrounding communi- ties, and (f) discouraging repetition. ·Expand access to secondary schooling by improving the stu- dent flow in primary education, and utilizing conditional cash transfers in secondary school to discourage dropouts ·Enhance the school-to-work transition by (a) tracking students more realistically by age within secondary education to better target school-to-work interventions for those who will face the jobmarketsoonest;(b)buildingstronglinkagesamongsecondary schools serving older students and employers, technical and vo- cational service providers, and the S-system; and (c) encouraging validation exams as a means of obtaining secondary-school diplomas for older students who have learned and acquired experience through alternative methods such as employment. ·Promote greater autonomy for institutions while simultaneously putting adequate accountability mechanisms in place by (a) mak- ing rules on resource utilization more flexible; (b) ensuring ade- quatecoverageandlong-termsustainabilityofsupport,especially for low-income students; and (c) establishing a labor market observatorytomonitorwhathappenstotertiarygraduates. ·Increase the quality and relevance of tertiary education by focusing on education first, not research. ·Place more emphasis on educating locally responsible global citizens, on encouraging more students to enter science and engineering, and on building strong links between top research universities and the productive sectors. ·Develop world-class universities. The Brazilian government should decide how many world-class universities the country needs and can afford. Ministry of Science and ·Increase private R&D by (a) expanding the mix of public Technology and FINEP finance instruments that foster private R&D to include more (continued) 148 Knowledge and Innovation for Competitiveness in Brazil Table 8.1. (continued) Recommendationsinwhichtheyneedtobeactivelyinvolved risk sharing, matching grants, equity instruments, and loans; (b) improvingthemonitoringofhowwelldifferentinstruments and mechanisms work; (c) making R&D fiscal incentives more cost effective; (d) improving operation of the sectoral science and technology funds to provide greater flexibility across sectors and to increase interaction among academia, research institutes, and private firms. · Improve public R&D by (a) increasing public R&D resources; (b) strengthening public R&D in key strategic areas, such as natural resources, renewable energy, biotechnology, and nano- technology; (c) increasing support for R&D in universities; and (d) improving monitoring and evaluation of public research, using the results to reallocate funds by performance. · Strengthen the commercialization of knowledge by (a) imple- mentingtheInnovationLaw;(b)supportingtechnologytransfer offices in public universities and R&D institutes, as well as a patent management corporation; (c) promoting greater mobil- ity between public research personnel and the productive sector; and (d) expanding technology parks and incubators. · Improve financial support for early stage technology develop- ment by (a) improving finance and procedures for evaluating projectsandspeedingupapprovalsand(b)improvingmonitor- ing and evaluation of ongoing projects. ·Support explicit acquisition of knowledge abroad by (a) setting upaprogramtofosterinternationalresearchcollaborationsfor the private and public sectors, (b) purchasing foreign R&D labs abroad, and (c) tapping talent from the "Brazilian Diaspora." ·Improve the diffusion and absorption of MSTQ services by (a) creatingaworld-class,demand-responsiveMSTQinfrastruc- ture; and (b) promoting quality control in firms, encouraging them to set up labs and to seek quality certification. · Strengthen finance and training for technology absorption by SMEsby(a)developingsupportmechanismsforindustrialclus- ters, focusing on design as well as technological and marketing capabilities; (b) providing greater support for cluster diagnosis and identification of ways to improve performance; and (c) strengthening finance for SME technology absorption. FAPESP and other R&D · Improve public R&D by (a) strengthening public R&D in key state-level agencies strategic areas, such as natural resources, renewable energy, biotechnology, and nanotechnology, and (b) improving moni- toring and evaluation of public research, using the results to reallocate funds by performance. · Strengthen the commercialization of knowledge by (a) sup- porting technology transfer offices in public universities and (continued) From Analysis to Action 149 Recommendationsinwhichtheyneedtobeactivelyinvolved R&D institutes, as well as a patent management corporation; (b) promoting greater mobility between public research personnel and the productive sector; and (c) expanding technology parks and incubators. ·Improve financial support for early stage technology develop- ment by (a) improving finance and procedures for evaluating projectsandspeedingupapprovalsand(b)improvingmonitor- ing and evaluation of ongoing projects. ·Strengthen finance and training for technology absorption by SMEsby(a)developingsupportmechanismsforindustrialclus- ters, focusing on design as well as technological and marketing capabilities; (b) providing greater support for cluster diagnosis and identification of ways to improve performance; and (c) strengthening finance for SME technology absorption. BNDES ·IncreaseprivateR&Dbyexpandingthemixofapplicablepublic financial instruments to include more risk sharing, matching grants, equity instruments, and loans. ·Improve public R&D by (a) increasing public R&D resources; (b) strengtheningpublicR&Dinkeystrategicareas,suchasnatu- ral resources, renewable energy, biotechnology, and nanotech- nology; and (c) improving monitoring and evaluation of public research, using the results to reallocate funds by performance. ·Strengthen the commercialization of knowledge by expanding technology parks and incubators. ·Improve financial support for early stage technology develop- ment by (a) improving finance and procedures for evaluating projectsandspeedingupapprovalsand(b)improvingmonitor- ing and evaluation of ongoing projects. CAPES ·Support explicit acquisition of knowledge abroad by (a) send- ing more Brazilian students to study abroad, (b) promoting interactions and faculty exchanges with foreign universities, and (c) tapping talent from the "Brazilian Diaspora." Ministry of Justice ·Modernize intellectual property laws and strengthen their enforcement. States ·Facilitate firm-level investment by addressing infrastructural deficienciesthatincreasethecostsofproductionandofdoing business. ·Increase the use of public-private partnerships to amplify leverage investments in infrastructure. ·Improve governance and decrease red tape. ·IncreaseprivateR&Dby(a)expandingthemixofapplicablepublic financeinstrumentstoincludemorerisksharing,matchinggrants, equityinstruments,andloansand(b)improvingthemonitoringof howwellthedifferentinstrumentsandmechanismswork. (continued) 150 Knowledge and Innovation for Competitiveness in Brazil Table 8.1. (continued) Recommendationsinwhichtheyneedtobeactivelyinvolved · Improve public R&D by (a) increasing public R&D resources; (b) strengthening public R&D in key strategic areas, such as natural resources, renewable energy, biotechnology, and nano- technology; (c) increasing support for R&D in universities; and (d) improving monitoring and evaluation of public research, using results to reallocate funds by performance. · Strengthen the commercialization of knowledge by (a) pro- moting greater mobility between public research personnel and the productive sector and (b) expanding technology parks and incubators. · Strengthen finance and training for technology absorption by SMEsby(a)developingsupportmechanismsforindustrialclus- ters, focusing on design as well as technological and marketing capabilities; (b) providing greater support for cluster diagnosis and identification of ways to improve performance; and (c) strengthening finance for SME technology absorption. · Improvegovernanceofthebasiceducationsystemby(a)intro- ducing a performance-based culture and (b) expanding use of tests that evaluate student learning. · Improve the quality of basic education by (a) introducing mini- mum operational standards in all schools, (b) strengthening the teacher force, (c) upgrading the skills of school principals, (d) building upon existing school councils to increase collabo- ration among schools and their surrounding communities, and (e) discouraging repetition. · Expand access to secondary schooling by (a) improving the student flow in primary education and (b) utilizing conditional cash transfers in secondary school to discourage dropouts. · Enhance the school-to-work transition by (a) tracking students within secondary education more realistically by age to better target school-to-work interventions for those who will face the jobmarketsoonest;(b)buildingstronglinkagesamongsecondary schoolsservingolderstudentsandemployers,technicalandvo- cational service providers, and the S-system; (c) encouraging validation exams as a means of obtaining secondary-school diplomas for older students who have learned and acquired experience through alternative methods such as employment. Municipalities · Facilitate firm-level investment by addressing infrastructural deficienciesthatincreasethecostsofproductionandofdoing business. · Increase the use of public-private partnerships to amplify leveraged investments in infrastructure. · Improve governance and decrease red tape. (continued) From Analysis to Action 151 Recommendationsinwhichtheyneedtobeactivelyinvolved ·Improve governance of the basic education system by intro- ducing a performance-based culture and by expanding use of tests that evaluate student learning. ·Improve the quality of basic education by (a) introducing minimumoperationalstandardsinallschools,(b)strengthening the teaching force, (c) upgrading school principals' skills, (d) raising investment in early childhood education, (e) building upon existing school councils to increase collaboration between schools and their surrounding communities, and (f) discouraging repetition. ·Expand access to secondary schooling by improving the student flow in primary education. Private firms ·Increase private R&D by improving interaction among public labs, universities, and the productive sector. ·Strengthen the commercialization of knowledge by (a) pro- moting greater mobility between public research personnel and the productive sector and (b) expanding technology parks and incubators. ·Deepen early stage venture capital by (a) strengthening the supply of commercial technology projects and (b) strengthen- ing techno-entrepreneurial training in and with universities. ·Support explicit acquisition of knowledge abroad by (a) setting up a program to foster international research collaborations for the private and public sectors, (b) purchasing foreign com- panies, (c) purchasing foreign R&D labs abroad, and (d) tapping talent from the "Brazilian Diaspora." CNPq ·Support explicit acquisition of knowledge abroad by (a) setting up a program to foster international research collaborations for the private and public sectors, (b) sending more Brazilian students to study abroad, (c) promoting interactions and fac- ulty exchanges with foreign universities, and (d) tapping talent from the "Brazilian Diaspora." Ministries conducting R&D ·Increase private R&D by (a) expanding the mix of applicable public financial instruments to include more risk sharing, matching grants, equity instruments, and loans and (b) improv- ing the monitoring of how well different instruments and mechanisms work. ·Improve public R&D by (a) strengthening public R&D in key strategic areas, such as natural resources, renewable energy, biotechnology, and nanotechnology and (b) improving moni- toring and evaluation of public research, using results to reallocate funds by performance. (continued) 152 Knowledge and Innovation for Competitiveness in Brazil Table 8.1. (continued) Recommendationsinwhichtheyneedtobeactivelyinvolved · Promote diffusion of technical information by (a) improving technology information services and (b) strengthening technol- ogy extension in agriculture, industry, and the service sectors. Ministry of Energy · Facilitate firm-level investment by addressing infrastructural deficienciesthatincreasethecostsofproductionandofdoing business. · Increase the use of public-private partnerships to amplify leveraged investments in infrastructure. Ministry of Transportation · Facilitate firm-level investment by addressing infrastructural deficienciesthatincreasethecostsofproductionandofdoing business. · Increase the use of public-private partnerships to amplify leveraged investments in infrastructure. Ministry of Telecommunications · Facilitate firm-level investment by addressing infrastructural deficienciesthatincreasethecostsofproductionandofdoing business. · Increase the use of public-private partnerships to amplify leveraged investments in infrastructure. · Promote diffusion of technical information by improving technology information services. SEBRAE · Strengthen finance and training for technology absorption by SMEs by (a) developing support mechanisms for industrial clusters, focusing on design as well as technological and marketing capabilities; (b) providing greater support for cluster diagnosis and identification of ways to improve performance; (c) strengthening finance for SME technology absorption. S-system agencies · Enhancetheschool-to-worktransitionbybuildingstronglinkages amongsecondaryschoolsservingolderstudentsandemployers, technical and vocational service providers, and the S-system. · Increase the quality and relevance of tertiary education by (a) emphasizing the education of locally responsible global citizens, (b) encouraging more students to enter science and engineering, and (c) building strong links with top research universities and the productive sectors. Ministry of Labor · Facilitate firm-level investment by challenging the rigidity of Brazil's labor markets. Public universities and labs · Increase private R&D by improving interaction among public labs, universities, and the productive sectors. · Strengthen the commercialization of knowledge by (a) sup- porting technology transfer offices in public universities and R&D institutes, as well as a patent management corporation; (b) promoting greater mobility between public research per- sonnel and the productive sector; and (c) expanding technol- ogy parks and incubators. (continued) From Analysis to Action 153 Recommendationsinwhichtheyneedtobeactivelyinvolved · Deepen early stage venture capital by (a) strengthening the supplyofcommercialtechnologyprojectsand(b)strengthening techno-entrepreneurial training in universities. · Support explicit acquisition of knowledge abroad by (a) setting up a program to foster international research collaborations for the private and public sectors, (b) promoting interactions and faculty exchanges with foreign universities, and (c) tapping talent from the "Brazilian Diaspora." Source:Author. Next Step--Raising Awareness This report takes a first step in moving beyond analysis toward a concrete plan.Because so many institutions and actors will need to be involved, the first and most urgent action is to build awareness of the challenge.Nothing less will suffice than a fundamental change in national mindset. Many national magazines have published article series that have helped heighten public interest in the issues discussed in this report. Among others, the magazines include Veja, Exame, and Época; and the newspapers include Folha de São Paulo, Estado de São Paulo, O Globo, Correio Braziliense, and Valor Economico. Additional public interest has been raised through films, documen- taries, radio, and television. To build upon this public interest, seminars could be offered through the Brazilian Congress that involve government ministries and major civil society organizations, including labor unions and private sector associations. (For a good example of how another country took on this chal- lenge, see box 8.1 on the Vision Korea Project.) Following awareness building, concrete action plans need to be developed and then implemented. These need not be fully integrated plans that tackle all issues at once, as was done in Korea, but they do need to be concrete and explicit about where and with whom to start. Some actions at the federal level should rightly be top-down--in particular, measures applied at the mac- roeconomic level to enable growth from below. Many enabling conditions are better expedited at the state level--the process of getting a permit to start a business, provision of infrastructure services, basic and secondary education, skills training,and so forth.In other cases,bottom-up actions need to percolate from states, regions, clusters, or even organizations. The key is to get the pro- cess moving both from both the top down and from the bottom up.Successful bottom-up actions can powerfully demonstrate ideas that can be replicated and scaled up. Box 8.2 provides an illustration of this kind of process--the major policy changes made during China's very successful trade reforms. Many examples illustrate how countries have made large gains by pursu- ing strategies involving both top-down and concrete bottom-up actions. Too frequently the main impetus is a major crisis, as happened in Finland, Ireland, and Korea. As the case of China demonstrates, however, it is also possible to experiment with changes even without a crisis. 154 Knowledge and Innovation for Competitiveness in Brazil Box 8.1. The Vision Korea Project--A Bottom-Up Initiative that Led to Government Action In 1998, the Republic of Korea officially launched a national strategy to move to a knowledge-based economy in the wake of a financial crisis. The impetus came from the private sector--the Maeil business newspaper. In 1996, even before the crisis, the paper argued for a more coherent vision of the future of the Korean economy. The newspaper owner contracted the consulting firm Booz Allen Hamilton to undertake a study of the vulnerability of the Korean economy to a financial crisis like that in Mexico at the end of 1994. The Maeil convened a national conference to discuss the economic vulner- ability that it found. The paper launched the Vision Korea Project as a national campaign in February of 1997 and commissioned a second consultancy study by McKinsey to underpin it. The 1997 Asian financial crisis, which also severely affected Korea, occurred when the report was still in process. This report found that Korea was caught in a "nutcracker" between low-wage competi- tion from China that was quickly moving into higher-technology production andtechnology-basedcompetitionfromJapan,Europe,andtheUnitedStates. When the study was completed, the newspaper convened a second national conference to discuss the findings. Awareness of the need to change Korea's development strategy began to build among government, business leaders, and civil society at large. Not satisfied with simply changing attitudes, the newspaper contracted a thirdconsultancyfirmtogobeyonddiagnosticsanddevelopaconcreteproposal for action. This study was done by the Monitor consultancy company and was titled "From Knowledge to Action." When this report was completed, the news- paper convened a large national conference to which the president of Korea, key ministers, and representatives from the private sector and civil society were invited. This conference was instrumental in getting the government to change strategy to become a knowledge-based economy. Eventually, the government--the Ministry of Finance and Economy-- became the main champion of the knowledge economy policy agenda. It contracted Korea's premier think tank, the Korean Development Institute, to coordinate the work of a dozen think tanks. A joint World Bank and OECD report provided a framework, outlining concrete steps for reforms in the various policy domains. Progress was monitored closely. This was a crucial step in identifying and addressinganyinertiaorresistance,asforexample,withintheeducationsystem. Korea's knowledge strategy of April 2000 evolved into a three-year action plan for five main areas: information infrastructure, human resources, knowledge- based industry, science and technology, and elimination of the digital divide. To implement the action plan, Korea established five working groups involv- ing 19 ministries and 17 research institutes, with the Ministry of Finance and Economy coordinating implementation. Every quarter, each ministry submits a (continued) From Analysis to Action 155 Box 8.1. (continued) self-monitoring report to the Ministry of Finance and Economy, which puts out an integrated report detailing progress. The midterm results and adjustments to the plan are sent to the executive director of the National Economic Advisory Council,whichreportsontheprogressofimplementationandgivesanappraisal of the three-year action plan to its advisory members. Box 8.2. Export Processing Zones and Trade Reform in China China's trade reform started with the creation of four special export processing zones along the coast and eventually expanded to 19 zones as they proved to be successful. The growth of jobs and foreign exchange was spectacular, and it led to massive migrations of people from the rural areas to the coastal zones. The zones were expanded further. Seeing the benefits from greater insertion into the global trading system, China eventually decided to join the WTO and to significantly reduce its trade barriers while continuing to improve its broader enabling environment. The success of that strategy is seen in how China has been profiting from integration into the global system. Although slow growth has generated concern, Brazil today is not faced with the kind of obvious crisis that mobilizes public concern and generates public outcry for remedial action. From within Brazil, it is not always fully apparent how demanding and intensely competitive the international economic envi- ronment has become--and the extent to which the country, despite its size and many accomplishments, is starting to lag farther and farther behind an increas- ing number of countries. In general, Brazilians have been far too slow in recog- nizing that the path forward will become increasingly steep unless significant reforms are undertaken--and that those reforms must begin now. This report has attempted to diagnose the main challenges and outline a necessary course of action. Not only does this analysis need to be deepened, but as Korea among others has demonstrated, analysis always needs to be linked to decisive action. A high-level task force is required to bring analysts and policy makers together with business and social leaders. As emphasized above, this action planning must be undergirded by a broad strategy to build public awareness of what is at stake and to mobilize support for beginning to tackle the larger problems. In contrast to Korea, Brazil is a heavily decentralized country; thus, many actions will have to occur at the municipal or state level. For this reason, the same diagnostic framework that was applied for Brazil as a nation can be applied 156 Knowledge and Innovation for Competitiveness in Brazil to states or large municipalities. However, the enormous differences among states justifies drilling down more precisely to the state and large-municipality level because different mixes of innovation policies likely are more appropri- ate for different levels of development. In the next section, we discuss the key elements of this framework and how they could be applied in interested subnational entities. Applying the Framework in Subnational Entities The framework applied in this report assesses the strengths and weaknesses in four major areas of analysis: (a) the enabling environment for innovation, (b) the ability to create and commercialize knowledge (with a national-level and firm-level analysis), (c) the ability to acquire and absorb knowledge from abroad (with a national-level and firm-level analysis), (d) the ability to disseminate and use knowledge that exists in-country (with a national-level and firm-level analysis), and (e) the mechanisms and institutions in place to develop human capital (basic and advanced skills) for innovation. Any application of this framework to a subnational entity will begin with a detailed analysis of the growth trends and composition in the entity, always using international comparative indicators and Brazilian state-level compari- sons. This includes a profile of the comparative productive advantages of the geographical region and the implications these advantages hold for future growth and development.These comparative productive advantages are criti- cal, since the main gains in competitiveness lie in stepping up innovation in precisely those processes and products. The analysis must still return to the enabling environment for innovation and growth, with the clear understanding that some elements will be exogenous to the subnational entity (such as exchange and interest rates) because they are parameters set either by international markets or by fed- eral authorities. However, the analysis also should identify elements of the enabling environment that are affected by the subnational government's policies (for example, physical infrastructure, good governance, lower crime, and reduction of red tape) and should propose options to magnify their beneficial impact on innovation and growth. In analyzing an entity's ability to create and commercialize knowledge and technology, its R&D efforts and impact must be studied, whether financed by the public or the private sector.The analysis must study the determinants that explain why and when a firm engages in R&D, and which sectors are more likely to be involved in the kind of subnational entity being studied. Analysis should also examine the instruments and mechanisms available to facilitate interaction between firms and universities. Here, once again, there must be a clear understanding that some elements will be exogenous to the subnational entity (such as the content of national laws, especially the Innovation Law) because they are parameters set either by international markets or by federal authorities. However, the analysis should identify elements for the creation From Analysis to Action 157 and commercialization of knowledge and technology that are affected by the subnational government's policies (for example, creation of incubators, or effectiveness of state or municipal R&D financing), and must propose options to enhance their positive impact on innovation and growth. In analyzing the subnational entity's ability to acquire and absorb foreign knowledge and technology, the exercise must look into the export/import characteristics of the entity; the information and technology networks and connectivity; the access to ports, airports, and land transportation; and local firms' behavior regarding capital investments. In analyzing the entity's ability to disseminate and use knowledge and technology that is already present in the system, the analysis must look at the entity's capacity in technology information services, support mechanisms to industrial clusters and production chains, and laboratories for quality certifica- tion, among other factors. The study must identify entity policies that may contribute to stronger dissemination and use of knowledge and technology. Finally, the analysis should focus on the entity's institutional policies and performance in preparing the critical human capital needed to advance the innovation agenda.This report has established the importance of strong basic skills,especially for the absorption and diffusion of knowledge,and of advanced skills for the creation and commercialization of knowledge. The state-level study must analyze the performance of the formal education system (basic and tertiary) as well as the training offered through alternative institutions, such as the S-system and private training agencies and within firms. Using this analytical framework, the "drill-down" work will yield spe- cific recommendations and policy options for the subnational entity to target its efforts to strengthen and foster innovation, productivity, and economic growth. APPENDIX A Findings from the PINTEC Database1 The initial and final periods of this cross-section analysis are 1997 and 2001, respectively. The econometric models divided firms into three categories: (a) firms that innovate and differentiate their products, (b) firms specialized in standard products, and (c) firms that do not differentiate their products and have lower productivity. One productivity measure used in the analysis was the log of potential value added per worker (log PVA per worker), measured as the log of total net sales less operational costs less total wages divided by the number of workers. Results of this exercise are presented in table A.1 and corroborate econometric findings discussed in chapter 5. Table A.1. Impact of Innovation and Exports on Manufacturing Firm Productivity in Brazil Measured by Log of PVA per Worker, 2001 Firmsthatdo notdifferentiate Firmsthatinnovateand Firmsthatspecializein productsandhave Generalmodel differentiateproducts standardproducts lowerproductivity Variable Coeff. SE Coeff. SE Coeff. SE Coeff. SE Constant ­17.50 ­7.45 94.40 39.17 ­35.50 11.20 ­21.90 10.90 Product innovation (dummy) 0.23 0.06 0.35 0.06 0.03 0.10 R&D expenditures/total sales 0.20 0.06 0.15 0.14 0.48 0.07 0.04 0.17 (R&D expenditures/total sales)2 0.01 0.00 0.00 0.00 0.02 0.00 0.00 0.00 Exporter (dummy) 1.61 0.11 0.47 0.14 0.00 0.00 Exports/total sales 0.13 0.01 0.04 0.03 0.07 0.01 ­0.28 0.26 (Exports/total sales)2 0.01 0.00 0.00 0.00 0.00 0.00 ­0.08 0.01 Average schooling of workforce 0.63 0.05 0.96 0.18 1.29 0.08 0.10 0.08 (continued) 160 Knowledge and Innovation for Competitiveness in Brazil Table A.1. (continued) Firmsthatdo notdifferentiate Firmsthatinnovateand Firmsthatspecializein andhaveproducts Generalmodel differentiateproducts standardproducts lowerproductivity Variable Coeff. SE Coeff. SE Coeff. SE Coeff. SE Average experience of workforce 0.20 0.17 2.19 0.77 ­0.36 0.26 0.59 0.26 Multinational (dummy) 0.50 0.05 0.47 0.09 0.39 0.05 0.30 0.21 Firms that innovate and differentiate products 0.63 0.05 Firms that specialize in standard products 0.53 0.04 R2 0.60 0.59 0.50 0.56 F 72.70 6.39 26.90 24.40 Source:Arbache2005. Note: White's standard error (SE) estimates. Controlled for location (state), industrial sector, average age of workforce, marketing expenditures as a share of total sales, and labor turnover. APPENDIX B Econometric Analysis of the Relationship among R&D, Innovation, and Productivity Using ICS Data for Firm-Level Analysis The econometric model consists of three equation sets that were estimated together, with results reported in table B.1 and table B.2. First, the R&D equations model the sequential processes by which each firm determines its optimal level of investment in R&D. Using a Heckman selection model, the equations estimate the probability of a firm investing in R&D and also the firm's level of investment (the R&D intensity) once the investment decision is made. Second, the innovation equations model the level of innovation, which is dependent on firm-specific characteristics and the R&D investment per employee. Two different innovation measures are considered: (a) an innova- tion dummy, which takes the value of 1 if the firm brought a new product to market or introduced a major new manufacturing process in the previous three years and (b) the innovation intensity, or the actual number of new products or processes developed by the firm in the same three-year span. In the third set, the productivity equations are based on the standard Cobb-Douglas production function framework in which the observed value added per employee is dependent on labor inputs, capital inputs, and an unobserved productivity factor. The framework of Escribano and Guasch (2004) allows for use of observed investment climate variables as proxies for the last component. 16 2 Table B.1. Estimations for R&D, Innovation (Dummy), and Productivity Researchequations Log(R&Dexpenditures Innovationequation Productivityequation Selectionequation perworker) Innovationdummy Log(valueaddedperworker) Market share 0.178 1.276*** Log (R&D expenditures per worker) 0.193 Innovation dummy 0.540*** [0.253] [0.460] [0.133] [0.111] Diversification ­0.001 0.002 Profit share reinvested 0.035 Log (capital stock 0.276*** [0.002] [0.005] [0.083] per worker) [0.029] Professionals in labor 4.510*** 0.963 Professionals in labor force 1.893* Log (inspections) ­0.013 force [0.847] [1.189] [0.918] [0.110] Overdraft 0.158* ­0.181 Overdraft 0.116 Bribe tax 0.947 [0.095] [0.183] [0.114] [1.033] Employment (log) 0.173*** ­0.300*** Employment (log) 0.067 Share of workers 1.274*** [0.041] [0.086] [0.056] using computers [0.260] 000.000 Constant 7.045*** [0.559] Constant ­1.291*** 8.993*** Constant ­1.820 Capacity utilization 0.629*** [0.250] [0.629] [1.221] [0.206] Publicly listed 0.488** company [0.223] Quality certificate 0.291*** [0.093] Professionals in 0.016 labor force [0.956] Overdraft 0.058 [0.121] Employment (log) 0.116** [0.048] Log (power ­0.063 interruptions) [0.059] Losses due to ­3.422*** transport [1.279] interruptions Managerial time ­3.334** dealing with [1.509] regulations Source:Correaetal.forthcoming. Note:Optimalasymptoticleastsquaresestimation.Robuststandarderrorsinbrackets.Regressionsinclude8industrydummies,12statedummies,andaconstant. *Significant at the 10 percent level. **Significant at the 5 percent level. ***Significant at the 1 percent level. 16 3 164 Table B.2. Estimations for R&D, Innovation (Intensity), and Productivity Researchequations Log(R&Dexpenditures Innovationequation Productivityequation Selectionequation perworker) Innovationintensity Log(valueaddedperworker) Market share 0.178 1.276*** Log (R&D expenditures per 0.409* Innovation intensity 0.480*** [0.253] [0.460] worker) [0.177] [0.039] Diversification ­0.001 0.002 Profit share reinvested 0.045 Log (capital stock per 0.275*** [0.002] [0.005] [0.110] worker) [0.029] Professionals in labor force 4.510*** 0.963 Professionals in labor force ­0.260 Log (inspections) ­0.008 [0.847] [1.189] [0.710] [0.110] Overdraft 0.158* ­0.181 Overdraft 0.020 Bribe tax 0.939 [0.095] [0.183] [0.165] [1.033] Employment (log) 0.173*** ­0.300*** Employment (log) 0.277*** Share of workers using 1.233*** [0.041] [0.086] [0.074] computers [0.260] Constant ­1.291*** 8.993*** Constant ­3.290** Capacity utilization 0.625*** [0.250] [0.629] [1.622] [0.206] Constant 6.853*** [0.554] Publicly listed company 0.480** [0.223] Quality certificate 0.291*** [0.093] Professionals in labor 1.098 force [0.715] Overdraft 0.121 [0.124] Employment (log) 0.038 [0.038] Log (power interrup- ­0.064 tions) [1.509] Losses due to transport ­3.570*** interruptions [1.279] Managerial time dealing ­3.352** with regulations [0.059] Source:Correaetal.forthcoming. Note:Optimalasymptoticleastsquaresestimation.Robuststandarderrorsinbrackets.Regressionsinclude8industrydummies,12statedummies,andaconstant. *Significant at the 10 percent level. **Significant at the 5 percent level. ***Significant at the 1 percent level. 165 APPENDIX C Assessing Partial Effects of Firm Size Associated with Partial Effects in Explanatory Variables In the Probit estimations, the dependent variables take the value of 1 if an effect is observed for a given firm; observations are pooled across firms.Tables C.1, C.2, and C.3 report the marginal effects of various variables, making it possible to assess the magnitude of the partial effects associated with changes in explanatory variables for each dependent variable. As in the larger pooled datasets, the effects of size persist when controlled simultaneously with indicators for exporting, foreign ownership, and regional location in a regression framework. Small (20 to 99 workers), medium (100 to 499 workers), and large firms (500 plus workers) have higher (and increas- ing) probabilities of investing in R&D (9, 17, and 29 percent, respectively), getting an ISO certificate (11, 23, and 42 percent, respectively), providing worker training (20, 42, and 54 percent, respectively), and developing a new product (7, 9, and 16 percent, respectively) than micro firms (fewer than 20 workers). Results corroborate previous studies. For example, Mohnen and Dagenais (2002) found the propensity to innovate in Denmark to be signifi- cantly determined by firm size (that is, employment) and industrial sector. Lee (2004), studying the determinants of innovation among Malaysian man- ufacturers, found that larger firms were more likely to innovate than their smaller counterparts. De Negri (2006) also found size (natural logarithm of employment) to be a highly significant determinant of innovation probability by Brazilian firms.1 Exporters and firms with some foreign ownership also show higher levels of innovative activities, even when controlled for size, sector, and region. Exporters are significantly more likely to invest in R&D (12 percent), acquire an ISO certificate (13 percent), provide worker training (10 percent), and establish joint ventures (3 percent) than nonexporters of the same size, sec- tor, and region. Salomon and Shaver (2005), examining product innovation and patent application counts of a representative sample of Spanish manu- facturing firms from 1990 to 1997, also found exporting to be positively associated with innovation. In addition, firms with foreign capital present higher probabilities of having an ISO certificate (29 percent), providing 168 Knowledge and Innovation for Competitiveness in Brazil Table C.1. Marginal Effects on Innovation Inputs and Outputs in Brazil Worker Joint Technical New Independentvariables R&D ISO training venture licenses product Improvedline 20 to 99 workers 0.085* 0.113*** 0.200*** 0.004 0.017 0.070** 0.029** [2.61] [3.80] [5.61] [0.38] [1.11] [2.37] [2.42] 100 to 499 workers 0.172*** 0.234*** 0.420*** 0.029** 0.087*** 0.090** 0.027** [4.29] [5.67] [9.58] [2.16] [3.75] [2.51] [2.01] 500-plus workers 0.293*** 0.425*** 0.535*** 0.034* 0.303*** 0.160*** 0.022 [4.19] [5.68] [7.31] [1.61] [5.45] [2.64] [0.96] Exporter 0.117*** 0.130*** 0.103*** 0.026** 0.006 0.043 0.019 [3.72] [5.72] [3.45] [3.10] [0.50] [1.45] [1.50] Foreign ownership 0.001 0.292*** 0.252*** 0.052*** 0.263*** ­0.010 ­0.013 [0.01] [5.40] [3.83] [3.48] [7.47] [0.17] [0.50] Observations 1,642 1,562 1,639 1,640 1,640 1,640 1,640 LR (d.f. 16) 2 120.64 521.26 413.86 111.96 203.73 70.31 46.49 Pseudo R2 0.053 0.342 0.196 0.198 0.233 0.034 0.067 Source:ICS-Brazil. Notes:Z-valueisinbrackets.Forbrevity,sectorandregionalvariableswerenotincludedintableC.1.Thewoodandfurnituresectoristheomittedcategoryfor sector. Southeast is the omitted category for region. Micro is the omitted variable for size. *Significant at the 10 percent level. **Significant at the 5 percent level. ***Significant at the 1 percent level. Table C.2. Marginal Effects on Innovation Inputs and Outputs in Brazil Worker Joint Technical New Independentvariables R&D ISO training venture licenses product Improvedline Exporter 0.093*** 0.134*** 0.094** 0.025*** 0.007 0.051 0.021 [2.66] [5.43] [2.84] [2.90] [0.53] [1.56] [1.45] Sales to exporter/total 0.035 ­0.054** ­0.303 0.044 ­0.010 ­0.060 ­0.011 sales [0.66] [2.04] [0.62] [0.42] [0.60] [1.17] [0.41] Foreign ownership ­0.025 0.233*** 0.210*** ­0.004*** 0.243*** ­0.033 ­0.015 [0.41] [4.47] [3.16] [3.12] [6.94] [0.55] [0.57] Sales to foreign firms/ 0.097*** 0.099*** 0.124*** 0.009 0.016 0.052* 0.003 total sales [3.18] [4.65] [4.24] [1.31] [1.34] [1.83] [0.24] Observations 1,642 1,562 1,639 1,640 1,640 1,640 1,640 LR (d.f. 18) 2 131.28 546.31 432.02 113.81 205.87 74.90 46.70 Pseudo R2 0.058 0.358 0.205 0.201 0.236 0.036 0.067 Source:ICS-Brazil. Notes:Z-valueisinbrackets.Forbrevity,sector,regional,andsizevariableswerenotincludedintableC.2.Thewoodandfurnituresectoristheomittedcategory for sector. Southeast is the omitted category for region. Micro is the omitted variable for size. *Significant at the 10 percent level. **Significant at the 5 percent level. ***Significant at the 1 percent level. Assessing Partial Effects of Firm Size Associated with Partial Effects in Explanatory Variables 169 Table C.3. Marginal Effects on Innovation Inputs and Outputs in Brazil Worker Joint Technical New Independentvariables R&D ISO training venture licenses product Improvedline Employees with high 0.001** 0.001** 0.002*** ­0.001* 0.001* 0.002** 0.001*** school (%) [1.96] [2.17] [4.11] [1.70] [1.64] [2.52] [3.18] Employees with some 0.008*** 0.004*** 0.006*** ­0.001 0.001 0.004*** 0.001** college (%) [5.13] [4.14] [4.14] [0.18] [0.73] [2.68] [1.99] Loan 0.011 0.002 0.021 ­0.002 ­0.005 0.012 0.002 [0.39] [0.09] [0.80] [0.36] [0.49] [0.49] [0.16] Observations 1,631 1,554 1,630 1,631 1,631 1,631 1,631 LR (d.f. 21) 2 161.83 566.68 462.60 117.13 207.69 91.06 63.80 Pseudo R2 0.072 0.375 0.221 0.210 0.240 0.044 0.092 Source:ICS-Brazil. Notes:Z-valueisinbrackets.Forbrevity,variablesforsector,region,size,exportstatus,foreignownership,theshareofsalestoexporters,andtheshareofsales to foreign-owned firms were not included in table C.3. The wood and furniture sector is the omitted category for sector. Southeast is the omitted category for region. Micro is the omitted variable for size. *Significant at the 10 percent level. **Significant at the 5 percent level. ***Significant at the 1 percent level. worker training (25 percent), engaging in joint ventures (5 percent), and holding technology licenses (26 percent) than domestically owned firms. Two separate studies of Scottish and German manufacturing firms, respec- tively, show a significant and positive relationship between foreign owner- ship and innovation (Bertschek 1995; Love et al. 1996). Lofts and Loundes (2000), using a sample of Australian firms between 1994 and 1997, also found foreign shareholding to be a determinant of innovative activity levels in Australia. APPENDIX D The Primary and Secondary Education Systems Institutional Arrangements for Basic Education In the Constitution of 1934 the Brazilian government defined education as a basic right for all its citizens. Today, Brazil's basic education system is divided into (a) preschool; (b) the ensino fundamental, an eight-year cycle joining the former primary (primário) and lower-secondary (ginásio) levels; and (c) a three-year "intermediate" cycle (ensino médio). Preschool education covers the social development of children through age six. Ensino fundamental (for 7­14 year olds) is divided into two stages (grades 1­4 and 5­8), with national testing conducted at the end of each stage and an increasingly diversified cur- riculum and instructional organization during the second half of the cycle. Ensino médio consists of grades 9­11 and is intended for students aged 15­17. The National Education Law--LDB (Lei de Diretrizes Basicas)--describes ensino médio as the "final phase of basic education" to which all citizens are guaranteed access. Despite the formal unification of grades 1­4 and 5­8 into a continuous ensino fundamental cycle, grades 5­8 are a complement to ensino médio. The clearest evidence of this is school organization: most schools that offer grades 9­11 also offer grades 5­8, as indicated in table D.1. Prior to the 1988 Constitution, all three levels of government (municipal, state, and federal) were involved in the financing and provision of all levels of education. The uncoordinated coexistence of federal, state, and municipal education systems for decades has been a primary source of inequity and inef- ficiency within Brazilian basic education. Building upon new guidelines in the 1988 Constitution, the 1996 LDB further delineated administrative respon- sibilities as follows: municipal and state governments share responsibility for financing and provision of grades 1­8, while state governments are primarily responsible for the provision of grades 9­11. State systems in Brazil currently enroll 23 percent of grade 1­4 students, while municipal systems enroll 67 percent.The picture for lower secondary is quite different: state systems account for nearly 53 percent of students, while municipal systems account for 37 percent. States also bear the lion's share of 172 KnowledgeandInnovationforCompetitivenessinBrazil Table D.1. Structure of Brazil's Basic Education System Age Grade Brazilian structure Report terminology 7 1st Ensinofundamental 8 2nd (Series1st­4th) 9 3rd 10 4th Primary 11 5th Ensinofundamental 12 6th (Series5th­8th) 13 7th Lowersecondary 14 8th 15 1st Ensinomédio 16 2nd Uppersecondary 17 3rd Source: Authors. Note: BoldindicatesgradeatwhichSAEB,theNationalAchievementTest,isapplied. upper-secondary education with 85 percent of enrollments, while municipali- ties account for nearly 2 percent, the private sector for nearly 10 percent, and the federal government for less than 1 percent. Most state governments are transferring the school administration of grades 1­4 to municipalities. Together, primary and secondary enrollments account for some 42.5 million students, (33.5 million in primary and approximately 9 million in upper sec- ondary).According to the 2003 teacher census, there are more than 1.5 million teachers, 34 percent of whom lack university education. Of all basic education teachers, 39 percent are hired by the states, 48 percent by the municipalities, and 12 percent by the private sector. Coverage and Access--Consolidating Gains, Addressing New Challenges There is little doubt that Brazil has made significant progress in expanding access to all educational levels in recent years.Table D.2 provides a quick snap- shot of the gains. For primary enrollment in grades 1­8, the country can now boast near-universal coverage, with much of this improvement occurring in aggregate terms before 1999.When the focus shifts to specific target groups-- such as the rural poor in the Northeast--the gains continue to be dramatic. Evidence for preprimary education shows steady improvement between 1999 and 2003. Finally, the immense increase in secondary enrollment rates--from 15 percent nationally in 1990 to 76 percent in 2003--is clearly the most important development in coverage and access in recent years. Table D.2 also highlights some of the remaining educational challenges. Preprimary access is expanding slowly, but more work is needed to improve coverage and quality. Efficiency issues also must be addressed (see the next sec- tion,"The Policy Imperative of Improving School Quality"for fuller discussion). ThePrimaryandSecondaryEducationSystems 173 Table D.2. Coverage, Access, and Efficiency, 1990­2003 percent Year Indicator 1990 1999 2001 2003 Preprimarynetenrollment -- 44 50 53 Primarynetenrollment 86 91 94 93 Secondarynetenrollment 15 66 71 76 Over-ageenrollment(total) -- 56 48 38 Repetitionrates Grade1 -- 31 29 -- Grade4 -- 14 13 -- Secondary -- 18 18 19 Survivaltolastgradeofprimary -- 80 84 -- Transitionfromlowerto secondary -- 84 84 -- Source: UNESCOEducationStatistics2006;UNDPHumanDevelopmentReport2005. Note: --=notavailable. At the primary level, repetition rates are decreasing steadily but remain high by any standard. At the secondary level, the challenges are more pronounced, as shown by the increase from 18 percent to 19 percent in repetition rates between 2001 and 2003. As coverage expands to include social sectors that were largely excluded from the system, outcomes like average achievement and efficiency are unlikely to improve or only will improve slowly. Of course this apparent tradeoff between quantity and quality is not a given, and policy makers can act to bring about more dynamic quantitative and qualitative improvements. Prospects for doing so, however, should be tempered by aware- ness that simultaneous improvements in coverage and quality have proven dif- ficult to realize in most countries. The improvements in educational coverage and access represent a major public policy success in Brazil. Some important antecedents in the history of educational policy making in Brazil have already been reviewed, as well as in Rodríguez and Herrán (2000). Here, we only touch on the more salient points that help explain the data. As previously mentioned, the 1996 LDB legally demarcated the roles of federal, state, and municipal governments, but it also mandated minimum standards for schools. Minimum standards were given some teeth via financial support through the FUNDEF (Fund for the Devel- opment of Fundamental Education & Valorization of Teachers, also known as FVM) program, which requires state and municipal governments to devote a certain percentage of revenues to basic education. The funds are then dis- tributed based on enrollments, which doubtlessly helped expand access and coverage in fundamental education in Brazil. FUNDEF's accomplishments are discussed in detail in several recent Bank studies. However, as Rodríguez and Herrán (2000) note, the FUNDEF scheme also contributed to a bottleneck of basic education graduates who were unable to continue their studies.This has, in fact, contributed to creation of the FUNDEB (Fund for the Development 174 KnowledgeandInnovationforCompetitivenessinBrazil Figure D.1. Average Years of Schooling for Brazilians 15 and Older in Comparison with Other Selected Countries, 1960 and 2000 12 OECD & China Latin America & the Caribbean 10 8 schooling 6 of years 4 2 0 s of ain na go ti ico uay .de ana n a via bia as ua or Japan Sp Peru Chileex Rica aguayta Hai lom ublicndur Brazilarag dStatesRep. ama China Finland Ireland Toba M Rep te ArgentiBarbadoPan & Ho Salvaduatemala rea, Urugla,R.B EcuadorGuyPar Cos CaribbeaJamaicBoliCo Nic EI G Uni ue Ko idad nez the & inican m Trin Ve r. Do Ame L. country 2000 1960 Source: IDB2006. Figure D.2. Net Enrollment Rate for Primary Education, 1990 and 2002 OECD & China Latin America & the Caribbean 100 90 80 70 60 percent 50 40 30 20 an of ain na d D s ru Chile,The Haiti ua ador Pe ama lize a a ia me lic de or as aic uay ala Jap Sp Rep. FinlandChiIrelanO EC ad m State Brazil iviabeanntinabago.B. aRic Ecu ug Pan badosMexicoBeGuyana pubJam Bol To R st aguayndur ombate Bar SurinaRe CaribArge Ur & Co EISalvPar Ho ColGu amasNicarag Korea, United can ini the Bah & idad ezuela, r. Dom Trin Ven Ame L. country 2002 1990 Source: IDB2006. ThePrimaryandSecondaryEducationSystems 175 Figure D.3. Net Enrollment Rate for Secondary Education, 1990 and 2002 100 OECD Latin America & the Caribbean 90 80 70 60 50 percent 40 30 20 10 0 d D r of ica go an B. mbiaaRica de ua c and ana The JapanSpain p. s, Brazil PeruBelize ado rag emala FinlanOECStatesRe Irel badosentinaChileGuy Jama UruguayToba Bolivia Republi ted Bar Arg ama & CaribbeSurinamePanamaMexicoR. Cost Colo ParaguayEcuadorSalvNica EI Guat Uni Korea, Bah the & Trinidad er. Venezuela, Dominican Am L. country 2002 1990 Source: IDB2006. Figure D.4. Tertiary Enrollments for Brazil vs. OECD Comparators: NERs, 1991­2003 90 80 70 60 50 40 percent 30 20 10 0 1991 1999 2000 2001 2002 2003 year UnitedStates UnitedKingdom Spain OECD France Japan Brazil Source: KAM2006. of Secondary Education) program, a funding scheme that includes coverage of both preprimary and upper-secondary education levels to better coordinate supply and demand. Institutional developments related to the LDB and FUNDEF have been complemented by a host of policies to address additional demand and 176 KnowledgeandInnovationforCompetitivenessinBrazil supply issues. The Bolsa Escola and Bolsa Família programs are probably the best-known governmental efforts to stimulate educational demand through direct subsidization of attendance. The programs have become so popular that they now play a central role in the federal government's social protec- tion policy. In addition to school finance reform and demand-side initiatives like Bolsa Família, the government also has helped institute changes within schools. Some of those changes have been positive side effects of the general expansion of education in the 1990s and the creation of minimum standards, which helped push up teacher preparation levels. Other attempts focused on bringing change through decentralized decision making, as in the PDDE (Projeto Dinheiro Direito na Escola) Direct School Funding Project and Plano de Desenvolvimento da Educação (Plan for Educational Development, PDE) initiatives. Both programs provide direct funding to schools, which are then responsible for carrying out school-defined priorities. In addition to develop- ing local capacity, these programs try to reduce educational inequalities within and between municipalities. And there is some evidence that they result in higher retention rates and increased efficiency (Carnoy et al. 2008). In sum, exogenous forces were not responsible for the notable changes in coverage in Brazilian basic and secondary education during the past 15 years: rather a specific public policy goal was defined and achieved.This point is important because it reinforces awareness that the government has a key role to play and that Brazil, despite being a developing country, is not with- out resources to address social problems. The positive consequences of these actions have the potential to create a virtuous circle because the ratcheting up of human capital levels not only means that current cohorts of young people have more skills and opportunities than their parents and (especially) grand- parents had, but their children in turn should also benefit from having better- educated mothers and fathers. Nevertheless, the extent to which quantitative educational changes pro- foundly affect individuals and society depends greatly on quality. In other words, increased access cannot be judged solely by generating more creden- tials and meeting targets like Education for All (EFA). Expanding coverage is a means for increasing relevant skills that individuals can use to improve their lives. Of course the educational system is not solely responsible for how these skills are generated, let alone how they perform on the labor market. For all these reasons, coverage indicators have limits as measures of human capital levels. Turning from quantity to quality spotlights the challenges that remain in Brazilian education, some of which are reflected in the repetition rates in table D.2. The following subsections will discuss these issues in terms of coverage, quality, and equity. The guiding theme is the need to redouble efforts to guarantee that primary and secondary education graduates enter the workforce--or the university--with the kinds of basic skills needed for success. ThePrimaryandSecondaryEducationSystems 177 The Policy Imperative of Improving School Quality Few topics receive more attention in education policy and research circles than school quality. This is true in industrialized and developing countries alike, highlighting the need for all school systems to be continually vigilant amid growing concerns about global competitiveness. How is school quality best measured? Test scores or graduation rates are commonly used indicators of school system performance. However, from a policy-making standpoint, the inputs for creating outcomes like student achievement and retention are more important. These include the school climate, the work of the school director, and the teaching and learning environment inside the classroom. Measuring these inputs is not easy, making it difficult to use them to comparatively assess quality. It also complicates researchers' attempts to identify these processes as determinants of educational outcomes. A second conceptual complication involves who will decide what quality means. In a very narrow economic sense, the labor market decides what school quality is, based on how different credentials predict earnings; but only in an idealized world do the skills learned in school perfectly track a person's earn- ings. School systems also can monitor quality by creating minimum standards for what schools should look like, or by using standardized tests to monitor school performance. Finally, analysis also must allow for individual families to decide what quality is, especially in countries where the state does not actively enforce school attendance laws. For example, when a child is pulled from school because the family does not think the child is learning, or doesn't believe the school experience is valuable, then the family's definition of school quality takes on added significance (Marshall, in press). This discussion of the complexities involved is not meant to suggest that school quality is immeasurable--it is constantly being assessed by someone. But the limits of simplistic formulations of school quality based solely on one kind of input or output must be kept in mind.Indeed,a range of measurements must be taken into account when building an empirical profile of quality in a country like Brazil. In the following sections we do just that, focusing on several elements: (a) education spending; (b) standardized test scores and pass rates; (c) the teaching and learning environment in schools and classrooms, including how students are taught and what they are taught (i.e., curriculum); and (d) the accountability system. EducationSpending We have already reviewed the institutional arrangements for education provi- sion in Brazil. Now we turn to the specifics of education spending and how institutional structures help determine resource allocation. Based on recent experiences, several points are clear. First, the focused efforts on local financing sources (states and municipalities),combined with minimum spending guaran- tees (through FUNDEF), played a major role in expanding the reach of basic 178 KnowledgeandInnovationforCompetitivenessinBrazil education (grades 1­8). Second, education financing relies on capitation, that is, transfers of financial resources are based on the number of students being served. While this is a fairly natural criterion, it has rarely been used in most countries in Latin America, where education financing "follows the teacher" because coverage is largely confined to teacher salaries and teachers are hard to relocate based on rapid demographic changes in student population.Third, the funding success at the basic level not only has gone unreplicated at other lev- els, but the focus on primary education (grades 1­8) has come at the expense (to some degree) of spending on preprimary and secondary education. This is less a criticism of FUNDEF than a recognition of how education priorities may evolve over time. Fortunately, FUNDEB was recently established to extend FUNDEF's financing success to other education levels, although exactly how the new program will operate is still under discussion. Fourth, despite steady improvement in education funding, Brazil still lags behind its neighbors and (especially) developed countries in spending per student. This last issue is especially important moving forward, and is also poten- tially the most controversial. The analysis by Abrahão (2005) of financing in Brazil shows that education spending has increased from 3.9 percent of GDP in 1995 to roughly 4.3 percent in 2002. In real terms, this is roughly a 10 percent increase in a fairly short time span. But as table D.3 and figure D.5 show, Brazilian spending per student is low by international and even regional standards. The comparatively low levels of per pupil spending in Brazil have seri- ous consequences for quality and equity.As Abrahão (2005) notes, substantial supporting evidence comes from the Programme for International Student Table D.3. Comparative per Student Spending by Education Level U.S. dollars Education Level Country Preprimary Primary Secondary Brazil 1,044 832 864 LatinAmerica Argentina 1,745 1,655 2,306 Chile 1,766 2,110 2,085 Mexico 1,410 1,357 1,915 Paraguay -- 802 1,373 Peru 339 431 534 OECDcountries Denmark 4,542 7,372 8,113 France 4,323 4,777 8,107 Germany 4,956 4,237 6,620 Korea,Rep.of 1,913 3,714 5,159 UnitedStates 8,522 7,360 8,779 Source: Abrahão2005:table5. Note: AllnumbersrefertoPPPadjustedper-studentdollarexpenditures/year.--=notavailable. ThePrimaryandSecondaryEducationSystems 179 Figure D.5. Comparative Public Spending on Education as a Percentage of GDP, 1990 and 2002 9 OECD & China Latin America & the Caribbean 8 7 6 5 4 percent 3 2 1 0 d D s a r c i of ana an go de p. andJapanChina ChileBrazilduraentins, ragua B. ado The Peru Haitemala ador FinlanOECStatesSpainRe Irel BoliviaMexicoBelizembiaaRicaJamaicaPanama Toba R. Paraguay SalvUruguayRepubli Ecu ted GuyBarbados Suriname ColoCost Caribbe& HonArg ama Nica EI Guat Uni Korea, the Bah & er. Trinidad Venezuela, Dominican Am L. country 2002 1990 Source: IDB2006. Note:DatafortheUnitedStates,Japan,Brazil,andEcuadorarefor2001.DataforChinaandHondurasarefor1999and 1998,respectively. Assessment (PISA) testing project in 2003, which shows a fairly strong cor- relation between spending and performance on the tests (the PISA data will be examined more closely below). The fact that Brazil lags behind industrial- ized countries in spending is unsurprising. Yet the discrepancies are notable when compared with Brazil's closest neighbors and with competitors such as Argentina, the Republic of Korea, and Mexico. Macroanalyses of spending are useful for providing a general overview, but outcomes such as spending per pupil result from a very complicated interplay between politics, economics, and other factors. Any discussion of present or future education financing in Brazil must grapple with the histori- cal realities of institutionalized inequality.This does not mean that structure is supremely important or that policy makers are helpless to redress massive inequalities; the country's experiences with basic education in the past 15 years strongly belie such assertions. Yet the issue cannot be reduced to a simple question of policy choices, and one must be realistic about what pace of change is feasible. Despite their utility as benchmarks for the government's commitment (or ability) to finance education, the kinds of internationally comparable data shown in table D.4 have definite limitations. For example, according to table D.3 the United States is the biggest spender in education, and Korea ranks in the middle (or lower). And yet Korean students consistently score among the highest on international mathematics exams (for example, the Trends in International Mathematics and Science Study [TIMSS] and PISA), while 180 KnowledgeandInnovationforCompetitivenessinBrazil Table D.4. Breakdown of Basic and Secondary Education Spending by Brazil and Four Comparators percent of total education spending Spending type Country Salaries Other current Capital Brazil 75 16 9 Argentina 89 10 1 Mexico 92 5 3 Korea,Rep.of 59 23 18 Malaysia 49 11 40 Source: UNESCOInstituteforStatistics2006. Note: All numbers refer to percentage of total budget at education ISCED (International Standard Classification of Education)levels1­4. U.S. students are in the bottom tier of the distribution. Clearly there are choices about how to spend public resources, and based on evidence from international tests, some countries appear to be more proficient at maximiz- ing their results. This is the promise that good policy making holds out, in theory, for poorer countries to catch up with their more developed neigh- bors. And this provides a very useful segue into the issue of the makeup of spending, which is arguably of equal or greater importance than the overall level of spending. Table D.4 provides a basic overview of Brazil's spending structure compared with a handful of other countries. The results show the tendency in Latin America to focus expenditures on salaries, whereas the two sample countries from Asia devote a larger percentage of their budgets to other current and capital outlays.The important point is that countries like Brazil have little left to invest in quality upgrades because they are busy hiring teachers to keep pace with burgeoning student populations. Are teachers overpaid in Brazil? This question has received much generic attention, especially in countries where teachers' unions are active. According to UNESCO data, Brazil's ratio of primary and secondary education teacher salaries to spending per student is one of the highest in the world and is nearly three times as high as the OECD ratio (Di Gropello 2006). Given the perfor- mance of Brazilian students on international tests (summarized below), this would appear to be an inefficient use of resources because teachers are paid as much as or more than teachers in countries that have higher achievement. One factor that exacerbates the challenge is the generous pension system and the rewards structure for Brazilian public employees. The makeup of educational expenditures could be the focus for a study of its own, and the topic of teacher labor markets also looms large. The evidence clearly shows that Brazil is not spending as much on education as needed to compete internationally. Nevertheless, this does not justify automatically ratcheting up expenditures along traditional lines such as hiring more teach- ers to reduce class sizes or raising pay. In fact, some evidence suggests that ThePrimaryandSecondaryEducationSystems 181 Brazilian teachers receive a disproportionate share of resources, or at least are not performing to the level their pay would predict. There is one final component to Brazil's spending dilemma: repetition. In an unpublished policy note commissioned by the World Bank, Ioschpe (2006) estimates that students repeating primary and lower secondary grades costs Brazil R$12.6 billion annually. This represents a significant loss of budget resources, although how much depends to some degree on how much learning takes place. Nevertheless, Brazil's high rates of repetition (detailed below) continue to put fiscal pressure on a system that is already stretched thin. Addressing this problem through more effective teaching and learning envi- ronments will not only accelerate human capital formation, but will thereby generate new resources to invest in improved student achievement. StandardizedTestScoresandPassRates:LowEfficiency SuggestsLowQuality Several references already have been made in this appendix to the low quality of public education in Brazil. Where does this belief arise? Criticisms com- monly refer to results from the SAEB national testing system and from inter- national tests (such as PISA). Student scores, whether considered domestically or compared internationally, are very low.The SAEB results are based on tests constructed by Brazilian curriculum experts and are designed to communi- cate student results in words--through levels of performance--rather than as simple statistical summaries. The 2003 SAEB shows that student abilities in grades four and eight are far below what is expected based on the intended curriculum. For example, the average of 177.1 in grade four mathematics is significantly under the 200-point level that is considered an acceptable level of knowledge. Students who scored at the 2003 average level of proficiency can only do basic multiplication and tell time with digital clocks instead of traditional timepieces. The language proficiency results in Portuguese and for grade eight are also considerably below expected achievement levels. If expectations are not being met, is the direction of SAEB results at least improving?When the SAEB time series was analyzed rigorously,Biondi (2007) found several trends. A slight but statistically significant improvement that started in 2001 has been noted in fourth-grade students in both mathemat- ics and Portuguese. Previously--starting in 1995--fourth-grade performance had been worsening. This switch is unsurprising, since universal enrollment of 1st­4th graders occurred in the mid-1990s, so that the poorest students with the lowest social capital finally were being schooled and tested. Once the impact of serving a massive inflow of underprivileged students was absorbed by the system, average performance stabilized and began to inch upward.The wave of new students from the mid-1990s is now old enough to affect results from the 8th and 11th grades, helping explain the downward trend observed in math and Portuguese performance for those grades between 2003 and 2005. However, intertemporal comparisons of student knowledge levels in a country the size of Brazil are complicated by numerous factors, not the least 182 KnowledgeandInnovationforCompetitivenessinBrazil of which is the fact that more students are remaining in the system.Although more time is needed to establish the exact learning trend countrywide, it is already apparent that the overall level of knowledge is low, and great improve- ment is required to raise Brazilian achievement levels to those being posted by key neighbors and international competitors. Brazil's participation in the 2000 and 2003 PISA international achieve- ment study provides still more dramatic evidence of the work that remains in improving quality. In both years Brazilian eighth-grade students scored at the bottom of the distribution in mathematics, below countries such as Indonesia and Mexico and far below high scorers like Korea. In terms of proficiency, the results showed that more than half of Brazilian students fell below even Level 1 on a six-level ascending scale (1­6). In other words, the PISA results largely confirm the low proficiency attainments demonstrated by SAEB, but on an international scale. The dramatic increase in Brazil's matriculation coverage in recent years affects these results in several ways. First, per pupil expenditures on educa- tion are lower, even compared with some other Latin American countries. A cohort effect has also emerged because more students of low socioeconomic status are remaining in school longer, requiring resources to be diverted into hiring new teachers to keep up with the advancing wave.Test score compari- sons underline the obvious importance of improving quality and spotlight the dangers of relying on coverage indicators to measure the "health" of Brazil- ian education. Test score data also serve an important monitoring function, which is why the high-quality work of the SAEB must continue. The same is true for participation in international testing, however painful the findings may be. Table D.5 presents international data on grade repetition rates. Results show that, despite recent improvements in its internal efficiency, Brazil still has some of the highest repetition rates in the world. The consequences are easily detailed. First, equity is a serious concern because the poorest students tend to repeat more often and eventually leave school with fewer of the skills needed to rise out of poverty.Additionally, overall spending is affected, as previously discussed. Why are Brazil's repetition rates so high? It makes intuitive sense that low school quality leads to high repetition and dropout rates. But we must be wary of concluding that low achievement is the sole proximate cause. Gomes-Neto and Hanushek (1994) show that grade repeaters score higher than nonrepeat- ers in Brazil, which suggests that other causative factors may be involved. Marshall's (2003b) analysis of repetition in Honduras reaches a similar con- clusion. Several factors may be in play. Poorly trained teachers may use grade failure (or the threat of failure) to control student behavior, especially for older children. A stigmatizing effect also may be at work, whereby students are labeled as repeaters and treated differently as a result. Students may drop out of the system because of poor learning environments (fights or hazing, for example) or from boredom. In sum, we should be concerned about the potential for low achievement to reduce efficiency and overall attainment. ThePrimaryandSecondaryEducationSystems 183 Table D.5. Repetition Rates in Brazil and Comparator Countries percent Grade level Country 1 2 3 6 Brazil 28 19 15 -- Argentina 10 7 6 4 Chile 1 3 1 2 Guatemala 28 14 11 2 Mexico 8 8 5 0 Paraguay 14 10 7 0 Peru 6 14 11 3 Cambodia 18 11 8 2 India 4 3 4 -- Philippines 5 2 2 0 Vietnam 5 3 2 -- Ethiopia 19 14 13 -- Ghana 9 6 5 4 Kenya 6 7 6 6 Mozambique 26 25 25 24 SouthAfrica 7 5 6 5 Source: UNESCOEducationStatistics2006. Note: All numbers refer to repetition rates for a specific grade. Most of the data comes from the 2002 school year orfrom2003if2002isunavailable.--=notavailable. Nevertheless, each outcome is a product of multiple factors, so simply raising overall achievement will not necessarily solve either problem. TheTeachingandLearningEnvironmentinSchoolsandClassrooms Repeated references have been made to deficient teaching and learning envi- ronments or, more generally, to low-quality schools. Such judgments are easy to defend based on outcome measures, especially from standardized testing. But improved policy making to redress those results requires deeper under- standing of the specific mechanisms curtailing school quality. Multiple sources of information are available to shed light on this concern. Qualitative studies of Brazilian classrooms and teachers are abundant as are quantitative studies of student test scores from SAEB (Barros and Mendonça 2001) and other test applications (Carnoy et al. 2008; Fuller et al. 1999).This report relies on data sources from international studies of Brazilian education, including the aforementioned PISA study from 2003 and the qualitative class- room comparisons conducted by Carnoy, Gove, and Marshall (2007). These results are extensive and cover multiple dimensions, and each represents a possible policy mechanism for improving school quality in Brazil. 184 KnowledgeandInnovationforCompetitivenessinBrazil Table D.6 briefly summarizes performance on the PISA 2003 test by Brazil and four other countries: Korea, Thailand, Mexico, and Uruguay. The list of "competitors" was chosen to create a somewhat diverse set of comparisons involving high- and medium-performing Asian countries as well as other Latin American countries. The Korean case is clearly the most important in terms of drawing lessons, based both on its rapid rate of development in the past four decades and its very high test scores. But Brazilian performance vis-à-vis the other countries is also likely to uncover clues about possible policies for improving Brazilian education and, by extension, competitiveness. Figures D.6 through D.8 provide a somewhat broader picture of PISA results. In all three subjects covered in table D.6,Brazilian upper-primary and lower- secondary students scored significantly below test takers in almost all other sample countries. For mathematics, the differences are especially large, while for language and (to a lesser extent) science, the gaps with Thailand, Mexico, and Uruguay are less large. In the case of Korea, the gap is very large (upwards of two standard deviations). Examining the socioeconomic profile of test takers,we see that both Korea and Uruguay have more affluent students in their samples. But this is not Table D.6. Overview of PISA Performance in Brazil and Four Other Countries, 2003 Country Korea, Variable Brazil Rep. of Thailand Mexico Uruguay Mathematicsscore 356 542* 417* 385* 422* Readingscore 404 535* 420* 400 434* Sciencescore 392 539* 429* 404* 438* Povertyindex ­0.95 ­0.10* ­1.18* ­1.12* ­0.35* Parenteducation(years) 10.7 12.5* 8.9* 9.6* 12.2* Marginal difference Mathregression1 -- 120.4* 20.5* 6.9 25.6* Mathregression2 -- 104.4* 25.2* 13.6* 16.5* Readingregression1 -- 71.3* ­24.9* ­26.6* ­7.4 Readingregression2 -- 62.0* ­20.2* ­17.4* ­14.3* Scienceregression1 -- 90.3* 2.2 ­6.6 12.3* Scienceregression2 -- 77.1* 9.6* ­1.7 4.1 Source: PISA2003. Note: Sample weights are used for calculating means. T-test comparisons are based on individual comparisons betweenBrazilandeachcountryseparately.Thepovertyindexisastandardizedmeasurethatisbasedonallpartici- pating countries, not just these five. Regression 1 includes basic controls for the student's grade, type of school and location, and the country dummies only. Regression 2 adds student and family SES background measures. Coeffi- cientsforregressions1and2refertothemarginaldifferenceinachievementbetweeneachcountryandtheexcluded category,Brazil.Dashesareusedtosignifythatdataarenotavailable. *Differenceinmean(orregressioncoefficient)issignificantat0.05level. ThePrimaryandSecondaryEducationSystems 185 Figure D.6. Quality of Education in Terms of Learning Outcomes from PISA, 2003 650 600 550 500 450 scores 400 350 300 250 0) 0) (2003) (2003) (2003) (2003) (2003) (2003) (2003) (2003) (200 (200 (2003) (2003) (2003) of D p. and an Jap Spain Chile Brazil Peru Finland Re Irel States OEC Uruguay Mexico ted Argentina Korea, Uni country highest25% meanscore lowest25% Source: IDB2006. Note: Todate,onlysixLatinAmericancountrieshaveparticipatedinPISA. Figure D.7. Percentage of Students at Each Level of Proficiency on PISA Reading Scale, 2003 Mexico Latin America Brazil Uruguay Spain UnitedStates O country Japan E C OECD D Ireland Korea,Rep.of Finland ­70 ­60 ­50 ­40 ­30 ­20 ­10 0 10 20 30 40 50 60 70 80 90 100 percent level1 belowlevel1 level2 level3 level4 level5 Source: IDB2006. Note:Thezero-lineconstitutesathresholdbelowwhichperformanceissolowthateventhemostroutineorobvious tasksarecompletedwithdifficulty. so for Thailand and Mexico, which suggests that both countries are getting more from their education systems than Brazil is from its.This proposition is tested more directly at the bottom of table D.7. For each subject examined by PISA, a baseline regression is run that includes only basic controls for grade level, type of school, location, and student gender. Then controls are 186 KnowledgeandInnovationforCompetitivenessinBrazil Figure D.8. PISA Math/Space and Shape Scale, 2003 Brazil Latin America Mexico Uruguay UnitedStates Ireland O E country Spain C OECD D Korea,Rep.of Japan Finland ­90 ­80 ­70 ­60 ­50 ­40 ­30 ­20 ­10 0 10 20 30 40 50 60 70 80 90 100 percent level1 belowlevel1 level2 level3 level4 level5 level6 Source: IBD2006. Table D.7. School Resources, PISA 2003 Country Korea, Variable Brazil Rep. of Thailand Mexico Uruguay Student-teacherratio 33.6 16.3* 22.6* -- 16.8* Mathminutes/week 206 245* 227* 245* 189* Totalminutes/week 1,143 1,815* 1,836* 1,489* 1,345* Shortages of Textbooks 2.41 1.29 2.42 2.19 2.86 Computers 2.92 1.55 2.73 2.62 2.96 Labequipment 3.12 1.92 2.56 2.69 2.64 Computersperstudent 0.02 0.28* 0.05* 0.09* 0.06* Teachersw/masters(%) 21.0 93.3* 96.2* -- 7.1* Source: PISA2003database. Note: -- = No data available. Shortages are measured on a scale from 1­4, as reported by school director. 1 = Not at all,2=Verylittle,3=Tosomeextent,4=Alot. *Variablewithastatisticallysignificantimpact. added for socioeconomic status of the family in the second regression.Three results stand out. First, school quality is clearly superior in Korea compared with Brazil (and other countries), even if no specific information is identi- fied yet on what accounts for such a big difference. Second, Brazilian per- formance vis-à-vis this group of countries is especially low in mathematics and, to a lesser extent, science. This is troubling given the importance of these skills in the larger picture of competitiveness and innovation. Third, the marginally more efficient Brazilian achievement in reading skills versus ThePrimaryandSecondaryEducationSystems 187 Thailand, Mexico, and Uruguay must be noted because it suggests that favor- able factors exist inside Brazilian schools to produce this outcome. This rare piece of good news from Brazilian participation in international testing should not be overlooked. We now turn to focused comparisons between Brazil and its four com- parator countries to learn more about the factors that underlie the observed differences in test scores. The data in table D.7 provide a good counterpart to the spending summaries highlighted earlier (table D.4), at least for the coun- tries that appear in both tables (Brazil, Korea, and Mexico). Compared with Korea especially, but also to some extent with the other three countries, Brazil has significant resource deficiencies. First, Brazilian student-teacher ratios are much higher than the other countries. This variable is not the same as class size, although it is related,1 and given the centrality of teacher salaries in edu- cation expenditures (see table D.4) this provides a good indication of why per student expenditures are so much lower in Brazil. The results in table D.7 also show a dramatic difference in learning oppor- tunities for Brazilian students compared with their counterparts in Korea and Thailand and, to a lesser extent, Mexico and Uruguay. For example, Korean students receive upward of 50 percent more class time overall per week than students in Brazil. This difference is quite large as is, but its effect may be much larger still when one considers possible differences in the efficiency of in-class activities.There are also some additional resource gaps between Brazil and other countries. Other comparisons using the PISA data (not presented) highlight some important environmental differences. For example, Brazilian classrooms are less ordered than in other countries.The Brazilian students report the most frequent occurrences of "students don't listen," "noise/disorder," "teacher has to wait for quiet,""students don't work well," and "work begins long after lesson begins." Table D.8 also presents evidence about school autonomy and school gov- ernance regimes. Overall autonomy is lowest in Brazilian secondary schools, with the exception of Uruguay, where a very centralized system is in place. It is frequently argued that schools with more autonomy and control over resources are better managed. Extensive research touches on this area, and the analysis, for example, by DiGropello (2006) of secondary schooling in Latin America and Asia offers a detailed analysis using the PISA data. The variables in the bottom half of table D.8 also address these issues to some extent. One finding is that students in the other four countries are more frequently absent, according to school directors, than are students in Korea. But Brazilian schools also report more environmental problems than the other countries. These include disruptions, lack of respect, and bullying. Brazilian teachers, according to school directors, are also more likely to be absent and resistant to change than Korean and Thai teachers. These indicators also are commonly linked with autonomy and the ability of schools to control personnel. The tables and figures in this section provide a comparative framework for considering school quality in Brazil. Several findings clearly stand out. First, when controlling for student and family background, Brazilian school 188 KnowledgeandInnovationforCompetitivenessinBrazil Table D.8. Teaching and Learning Environment, PISA 2003 Country Korea, Variable Brazil Rep. of Thailand Mexico Uruguay Autonomy over Resources 2.4 2.6* 3.7* 3.9* 1.9* Curriculum 3.3 4.0* 3.9* 3.2* 1.9* Problems reported in school Studentsabsent 2.5 1.6 2.5 2.5 2.5 Student-teacher 1.8 1.5 1.9 2.0 1.9 relations Disruptions 2.5 1.7 2.0 1.9 1.5 Teachersabsent 2.0 1.5 1.9 2.1 2.8 Lackofrespect 2.1 1.9 1.7 1.8 1.7 Resistanceto 1.9 1.8 1.6 2.2 2.3 change Bullying 2.0 1.7 1.7 2.1 1.5 Source: PISA2003database. Note: Autonomy over resources is measured on a scale of 0­6. Autonomy over curriculum is measured on a scale of0­4.Problemsreportedinschoolaremeasuredonascaleof1­4,asreportedbyschooldirector.Forallscales,low numbers=low,highnumbers=high. *Countrymeanissignificantlydifferentfromtherestofthesampleatthe0.05level(p<=0.05,two-tailtest). efficiency is clearly inferior in mathematics and, to a lesser extent, science. This trend does not turn up for language, which is an exception noted above that has not received much attention elsewhere. Second, there are clear re- source differences between Brazilian schools and others, especially in class time and teacher qualifications. Finally, the learning environment in Brazilian classrooms is not conducive to maximum achievement and is characterized by problems between students and inefficient time use. How Students Are Taught. We now turn to a very different source of compara- tive information on Brazilian school performance:the study by Carnoy, Gove, and Marshall (2007) comparing Brazilian, Cuban, and Chilean primary schools. Chile is a salient comparator because it is a natural competitor for Brazil, and Cuba is useful given the high scores Cuban students obtain on standardized tests (see Carnoy and Marshall 2005). The qualitative find- ings of this study are based on small samples (roughly 12­15 classrooms per country), so caution is urged about generalizing to the entire country. However, the results are largely consistent with comparisons from PISA and provide greater contextual information grounded in actual classroom observations and analyses of the delivered curriculum. This is especially useful because we are trying to identify how schools are teaching the skills that have been identified as critical in the knowledge economy: com- munication, participation, questioning, critical thinking, and higher-order processing of information. ThePrimaryandSecondaryEducationSystems 189 The data come from taped grade-three mathematics classes in each coun- try. One instrument measured the time segments in each class while another focused on more qualitative processes within each class session. Finally, the tapes were reviewed to analyze the content of the lesson. Among the differ- ences encountered were the following: · Brazilian students spend much more time copying instructions and lessons from the chalkboard than do students in the other countries. This contrib- utes to a less efficient lesson and exacerbates inequality in lesson results because the slowest students sometimes fail to complete the written activi- ties before the lesson proper begins. In Chile, this problem is minimized by the use of photocopied problem sheets,an indicator of a resource advantage. In Cuba, the teachers frequently have parents write out student activities before class. · Brazilian teachers rely more heavily on recitations by the whole class than on individual questions and answers. This is another potential source of unequal learning in the classroom because "class choir" activities result in a less rigorous monitoring of student progress. · Brazilian classrooms are frequently organized in groups, but in practice, the work done is individual rather than group-oriented. This is a common finding in Latin American classrooms, where teachers are frequently dis- posed to using child-friendly techniques but do not fully implement the activities as intended. · Brazilian students are noticeably (and significantly) less engaged during the lessons. This means there are more instances of talking, playing around, or generally not paying attention while the teacher is speaking. This observa- tion-based conclusion is consistent with PISA data about children's and directors' perceptions of schools. · In Brazilian classrooms, teachers infrequently check every student's work, and usually only check some of any student's work. This is very different from Chile and especially Cuba, where students are more likely to be asked to demonstrate competence on the lesson before moving on. · Brazilian teachers also make much less use of direct questions to students. In some classes no questions were asked of students, and when questions were used, they tended to be rudimentary rather than probing. In no class was the teacher observed asking questions that required a conceptual or analytical response. (The curriculum content analysis also identified some very clear differences between Brazilian classrooms and those in Chile and Cuba, which will be dis- cussed further in the next section.) Caveats about the sample size aside,the results from these qualitative obser- vations of Brazilian classrooms speak volumes about the current quality of Brazil's primary schools and help fill in more gaps about why results on SAEB 190 KnowledgeandInnovationforCompetitivenessinBrazil and PISA are so low. In sum, the classes lack the dynamic teaching required for engaging the interest of poor children and preparing them with the basic skills they need to continue learning. What is most disturbing about this qualitative evidence is the obvious gen- eration of inequality within the classroom.A lot of research focuses on equity issues across schools, states, or regions. But the Carnoy, Gove, and Marshall study clearly demonstrates the challenges of preparing all children within a classroom with the basic skills they need to advance.When children obviously have not completed copying the instructions by the time the lesson ends, and teachers are averse to checking every student's work or asking individual ques- tions, it is hard not to assume that the teacher knows all too well that not every student is progressing. Even when some of the students in the classroom do move forward, the overall cognitive skills they master are undemanding and the lessons they process seem very basic. The rest not only fall farther behind their successful classmates but also watch students in other school systems race far ahead. What Students Are Taught: The Role of Curriculum. A natural place to begin discussion of lesson materials is with the National Curriculum Parameters (PNC) defined in 1997. The PNC represent official goals or guidelines, but they are not mandated curriculum. A mandated curriculum can only be enforced through strong accountability and measurement mechanisms, which are not currently in place in Brazil (as the next section shows). The curricu- lum standards are not even envisioned as a complete rendering of curriculum coverage because they leave approximately 25 percent of the lesson content to be defined by the schools (that is, free). How well is the official curriculum being implemented? The answer has obvious implications for overall efficiency and quality, as well as for equity. Given the low scores on SAEB, many students in Brazil clearly are not mas- tering the officially sanctioned curriculum. On its face, this would appear to be more attributable to school quality than to the curriculum per se. But if the official curriculum is spread too thinly between numerous elements, or if the introduction of different cognitive skills is poorly formulated, then low achievement has a curricular component as well. Are schools strictly adhering to the official curriculum or are additional elements being introduced that water down the main subjects? Anecdotal evi- dence suggests that schools are incorporating sex education, drug prevention, and other topics into primary learning activities. These life skills are relevant to young people in Brazil, but time devoted to them may reduce time spent learning the skills needed to move onward in school or on a job. This raises the question of curricular relevance--whether schools are tar- geting the kinds of skills that students will need to compete in an increasingly globalized and technically demanding labor market. In their review of labor market skills in the United States, Levy and Murnane (2004) highlight the dramatic changes in skill requirements that are occurring in the workplace. Compared with 1960, priority skills are increasingly related to specialized ThePrimaryandSecondaryEducationSystems 191 thinking and complex communication. So-called routine manual and cogni- tive skills are in less demand. Which kinds of skills are being created by Brazilian schools? Answering this question is not easy,and sweeping statements about curriculum in Brazil are to be avoided. This is especially true given that the PNCs were introduced only in the past decade, and more time is necessary to evaluate the impact of these goals on the system. Nevertheless, the SAEB results show clear gaps between the intended and implemented curriculums. Using an international standard, the PISA confirms the breakdown, putting the negative consequences for com- petitiveness and future economic growth into starker perspective. The qualitative analysis of classroom performance undertaken by Carnoy, Gove, and Marshall (2007) provides another comparative snapshot of curri- culum development in Brazil based on a small cross-section of grade-three classrooms. Their analysis includes comparisons of curriculum content and goals in the Brazilian, Chilean, and Cuban mathematics lessons being observed. The results are troubling and, at the very least, provide more specific contex- tual detail to the school quality deficiencies identified earlier in this appendix. The analysis of curriculum in this three-country study was conducted along four dimensions: mathematical proficiency of lesson, level of cognitive demand, format or goal of lesson, and level of support.We will focus on results for the first two areas. In the case of Brazil, all of the observed lessons (except one) possessed the basic component of conceptual understanding, or a mini- mum level of mathematical proficiency. The exception was a class that relied solely on rote memorization, making it impossible to rate in terms of profi- ciency.The Brazilian average on this construct was significantly lower than for Chile and (especially) Cuba. As the authors noted: The gap [in mathematics proficiency] between Cuban classroom lessons and those of Chilean and Brazilian classrooms stemmed from the use of the profi- ciency strands of strategic competence and adaptive reasoning. That is, Cuban teachers engage in continual dialogue with the students, asking them both how and why a given problem should be answered. For cognitive demand, the measure is derived from work by Stein et al. (2000) in classrooms in the United States and is divided into four categories: memorization tasks and procedures without connections (both classified as lower-level demands) and procedures with connections and "doing mathe- matics" tasks (higher-level demands). Brazilian classrooms scored significantly lower on this construct as well: [In Brazil]... the lessons were focused on producing correct answers rather than developing understanding.Interestingly,when considering urban-only class- rooms, Brazil's score actually decreased as the rural teachers scored higher than their urban counterparts on the cognitive demand score. This may have been due to the presence of a new curriculum and extensive training in two of the rural schools which are part of the Escola Ativa program... For the most part, Brazilian lessons consisted of a teacher writing on the board, students copying, 192 KnowledgeandInnovationforCompetitivenessinBrazil and little interaction. In most cases, almost no effort to link concepts to the procedure was made. Explanations, when they were made, focused solely on describing the procedure that was used. These descriptions of content proficiency and cognitive learning in Brazilian classrooms are consistent in many ways with the results of Brazilian students on standardized tests. Evidence shows that classroom lessons are focusing almost entirely on very basic elements that do not help students develop the kinds of skills they need to be active learners and apply acquired knowledge in real-life situations. TheAccountabilitySystem Two general explanations help explain why test scores are low and teaching and learning environments are deficient in Brazil.The first can be called the "low existing capacity" explanation, and exhibit A in this line of reasoning is the low per pupil spending. Simply stated, governments get the education systems they pay for, and in the Brazilian case, a low-quality system is to be expected. A counterpart thesis can be termed the "low capacity maximization" expla- nation. In this scenario, teachers and schools are not necessarily underfunded, they are just not using their existing capacity to obtain the best possible results from available resources. Low teacher attendance, limited use of homework, frequent use of copying from the textbook--each may occur when educational agents are not properly motivated or held accountable for their actions. These explanations are not mutually exclusive,and support for each is com- mon in the developing world. A convincing case has already been made that Brazil lags behind others in spending, so existing capacity levels are likely to be comparatively low as well. Nevertheless, some countries (namely Korea) have also been shown to outperform others despite spending much less money. Many possible explanations for this result exist, but this section will highlight the important role that accountability systems play in determining educa- tional performance. Institutionally, the present accountability system in Brazil is a product of several fairly recent initiatives.Central to this schematic are standards,resources, and results. Standards describe the goals--or requirements--of the system.The previously cited curriculum standards (PNC) are critical here because they lay out in detail what Brazilian students are expected to learn by grade and subject. These goals are not accompanied by equally specific methods, however, and schools are intentionally left some room for flexibility. We have also sketched how resources are distributed in Brazil via a com- plicated system with three levels (federal, state, and local).Through programs like FUNDEF, the government has worked to ensure minimum funding. Schools also receive direct aid through specific interventions like PDDE and PDE. Finally, specific support programs are in place to provide items such as textbooks and school meals and for school improvement through federal efforts such as Fundescola. ThePrimaryandSecondaryEducationSystems 193 The element that ties together standards and resources can be termed results (or performance). For example, the entire system is evaluated every two years through the SAEB national standardized testing system, which uses tests closely aligned with the curricular goals laid out by the PNC. In 2005 the SAEB reached all schools rather than a sample, as in typical studies. Schools also report enrollment, repetition, and dropout rates through the school cen- sus. Each constitutes a potential metric for measuring school performance against standards or goals. Given the FUNDEF scheme, enrollment defines financing at the state and municipal levels. Performance could be used--in theory--as a means of holding schools accountable for service delivery, per- haps through the use of financial incentives for high results. As in many countries--developed and developing alike--the Brazilian sys- tem includes individual elements keyed to accountability, but lack of coordi- nation among the elements makes it difficult if not impossible to hold schools truly accountable. For example, the most powerful performance measure (student achievement) is collected in all schools very infrequently. Meanwhile the measures of school performance that do exist are not incorporated into funding decisions, and there is minimal formal evaluation of work by teachers and school directors. Instead, school funds are distributed mainly by a fixed funding formula based on enrollment.Teacher salaries are determined by level of education, training, and seniority and not by comparable measures of per- formance based on student outcomes. Holding schools and teachers individually accountable for performance is very difficult, mainly because it requires valid measures and a credible system for evaluating the work of school personnel. The evidence from other coun- tries, namely Chile and the United States, is mixed when it comes to measur- ing the impact of these kinds of policies. It is possible that low performance in Brazil is a function of low capacity rather than low maximization of capacity. This argues for spending more money or spending funds more wisely, and underlines the continued need for systemic diagnoses through activities like SAEB. Reaping additional gains by harnessing existing capacity more effec- tively can build on the elements of an effective accountability system already in place (SAEB, school census, local funding sources). APPENDIX E The Tertiary Education System and Advanced Out-of-School Training Introduction to the Tertiary System In 2005, the most recent year for which official statistics are available, the Brazilian tertiary education system comprised more than 2,100 institutions enrolling nearly 4.5 million students (table E.1). Gross enrollment accounted for more than a quarter of young people in this age group. Size alone does not determine the impact of a higher education system. To assess how well the system contributes to innovation-driven economic growth, three other aspects need to be taken into account--first, access and equity (has the system expanded so that all social groups have equal oppor- tunities to participate); second, quality and relevance (are tertiary institutions producing the kind of graduates and research outputs that the new knowl- edge economy requires); third, governance, financing, and management (is the governance structure appropriate to facilitate transformation of the system; is Brazil investing sufficiently at the tertiary level; are resources being allocated and utilized effectively). Access and Equity CoverageofandAccessibilitytoTertiaryEducation Brazil's tertiary education system is among the largest in the world and, para- doxically, among the least developed in Latin America. In fact, a quarter of the relevant age group in Brazil attending a tertiary institution in 2004 rep- resents the next-to-lowest enrollment rate (followed only by Mexico) among Table E.1. Brazil's Tertiary Education System, 2005 Public Private Total Institutions 231 1,934 2,165 Students 1.2million 3.3million 4.5million Source:MinistryofEducationWebportal(March2007). 196 KnowledgeandInnovationforCompetitivenessinBrazil the more developed Latin American countries and considerably below the regional average of 30.3 percent (table E.2). Brazil's relatively low tertiary coverage is also apparent when comparisons are made beyond Latin America. For example, not too long ago China ranked far behind Brazil.Yet China has been catching up rapidly, and its coverage rate is likely to surpass Brazil's within two to three years. Table E.3 compares the share of the labor force with tertiary education in Brazil, Chile, the Republic of Korea, Mexico, and the OECD average. With only 12 percent of 25-to-34-year-olds with tertiary education, Brazil is clearly at a disadvantage compared with its economic competitors. Two factors stand out in explaining Brazil's low coverage.First,secondary education has grown relatively slowly. Second, the government has main- tained the public tertiary education subsector at a constant size, allowing private institutions to absorb the bulk of expansion. Between 1996 and 2004, the number of public institutions grew by only 5 percent (from 211 to 224), while the number of private institutions more than doubled (from 711 to 1,789). Half the private tertiary institutions in operation today were established after 1998; and indeed, Brazil has the highest pro- portion of students (73 percent, see table E.1) attending private institu- tions in Latin America. Equity:WhoGetsIn? Not only is coverage low in Brazilian tertiary education, its equity remains a serious concern. Access to tertiary education is heavily skewed against Table E.2. Tertiary Education Coverage in Latin America, 1980­2004 percent Increase Countries 1980 1990 2004 1980­2004 Argentina 21.8 38.5 63.9 292 Brazil 11.2 11.3 25.1 224 Chile 12.3 21.3 46.9 381 Colombia 8.6 13.4 27.1 315 CostaRica 21.0 26.4 43.7 208 Cuba 17.3 20.9 41.7 241 Dominican Republic -- 20.4 36.9 -- Mexico 14.3 15.2 24.6 172 Peru 17.4 31.1 33.9 195 Uruguay 16.7 30.7 42.2 253 Venezuela,R.B.de 20.6 29.2 44.6 217 LatinAmerica -- 15.6 30.3 -- Sources:EdStats,TheWorldBank,lastdataupdateJune2006,retrievedSeptember5,2006;IESALC2006. Note:--=notavailable. TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 197 Table E.3. Share of Labor Force with Tertiary Education, 2004 percent 25­64 25­34 Country age group age group Brazil 8 12 Chile 13 18 Korea 30 49 Mexico 16 19 OECDaverage 25 31 Sources: OECD. "Education at a Glance 2006." Tables, Indicator A1, accessed on November 2, 2006. www.oecd.org/ edu/eag2006. Figure E.1. Distribution of Students by Income Group 60 55.3% 50 45.1% 40 36.9% 30.9% 30 percent 20 17.3% 10 6.2% 6.7% 1.6% 0 Upto3mw 3to10mw 10to30mw Above30mw multiples of the minimum wage (mw) workingpopulation students Source:JBIC2005,withMEC/INEPdata. poorer students. Only about 5 percent of students come from the two lowest economic quintiles (2004 Household Survey, IBGE Pesquisa Nacional por Amostra de Domicilios). To illustrate inequality, figure E.1 compares the pro- portion of workers by income groups, measured as multiples of the minimum wage and the proportion of students from these same groups. The State University of Campinas (UNICAMP) in the state of São Paulo is widely considered to be among the best universities in Brazil.Table E.4 shows the socioeconomic characteristics of UNICAMP compared with the overall state and national populations, vividly illustrating the extent of social bias in an elite Brazilian university. Several factors have contributed to the social biases of tertiary access. First, the government-controlled system at the federal and state levels limits the number of student slots in public universities. Second, the low quality of public schools does not adequately prepare secondary students for entry 198 KnowledgeandInnovationforCompetitivenessinBrazil Table E.4. Socioeconomic Characteristics of Undergraduate Students at UNICAMP Compared with the State and Nation percent of tertiary-age students Low-income Attended public Father has Mother has family high school tertiary degree tertiary degree UNICAMP 10 27 53 41 SãoPaulo 57 84 11 12 Brazil 69 83 8 9 Source:Pedrosa2006. and success at prestigious public universities. Third, admissions are skewed toward student applicants from private high schools--for example, two- thirds of new entrants at UNICAMP are from private high schools, compared with only 6 percent of all students from São Paulo state. Fourth, financial aid is insufficient for academically deserving students from low-income fami- lies. Brazil is a classic case of a highly regressive system. The most qualified students--that is, the children of middle- and high-income families, who usually graduate from exclusive private secondary schools--fill the ranks of the free top public universities. Students less academically qualified, from families much less well off, are limited to fee-charging, private, tertiary edu- cation institutions. EquityImprovementProgramsinTertiaryEducation ProUni. In 2004, the Ministry of Education launched ProUni (Programa Uni- versidade para Todos), a program to place academically qualified low-income students into private universities. To qualify, a student must have a passing grade in the voluntary national end-of-secondary-school examination (ENEM) and demonstrate that he/she comes from a low-income family. Full-time stu- dents who receive the full scholarship are also eligible for a monthly mainte- nance grant of R$300. The government's program target is to finance up to 400,000 students by 2008, which would be equivalent to 35 percent of the current public university enrollment. In practice, there is no actual transfer of resources from the Ministry of Education to participating universities. Instead, the universities receive a tax exemption up front during the first year of participation in the program. The tax exemption continues every year as long as scholarships are maintained for students that entered in previous enrollment rounds, and provided that schol- arships for new students who qualify for ProUni constitute one of every 10.7 new enrollments (one of every nine in the case of a nonprofit university). Even though ProUni is only in its third year of operation, the program has produced tangible benefits. About 120,000 students benefited during the first year (out of 340,000 candidates), and another batch of 91,000 was enrolled during the first part of the 2005/06 academic year (out of 800,000 candidates). The drastic increase in the number of candidates has allowed TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 199 the Ministry to raise the cut-off point for eligibility based on student ENEM results from 56 in 2004/05, to 62 in 2005/06. Notwithstanding its innovative character and ingenuous financial design, ProUni raises a number of questions requiring further investigation before the program's effectiveness and impact can be fully assessed: (a) Is there proper targeting? (b) What is the quality of the participating private universities? (c) What is the actual opportunity cost of the tax exemption? (d) Is ProUni rein- forcing the existing unequal pattern of tertiary education development? Affirmative Action Programs. The government of Brazil increasingly has been concerned with racial inequities reflected in the education system. In a country where 6.2 percent of the people consider themselves black, only 2 percent of the university student population is black. To address this issue, the govern- ment submitted legislation to Congress that would oblige the federal universi- ties to reserve at least half of new places for students originating from public schools to be divided among black, mixed race, and indigenous students. Notwithstanding the good intentions behind these quota programs, the government of Brazil needs to carefully review international experience with affirmative action programs, which has highlighted the following challenges: (Sowell 2004): · How to limit preferences and quotas in time and scope · How to ensure that the actual beneficiaries are those targeted by the pref- erence program · How to avoid polarization leading to intergroup resentment and conflict · How to avert overall efficiency losses. Student Loan Programs. Brazil has had a national student loan program since 1976. The program has been managed by the Federal Savings Bank (Caixa Economica Federal, CEF) and has evolved through different structures over time. It ran into serious difficulties in the early 1990s because of excessive defaults (up to 70 percent of loan recipients) from high inflation rates and ineffective claims procedures against defaulters. The student loan program was cancelled in 1994, and a new scheme was set up in 1997 as the Fundo de Financiamento ao Estudante do Ensino Superior (FIES). FIES loans finance 50 percent of tuition fees (reduced from 70 percent in earlier years) at a fixed annual interest rate of 6.5 percent or 3.5 percent, depending on the program of study (down from 9 per- cent since 2006). Participating students, who need to have two guaran- tors (except in Alagoas state), can enroll only in institutions accredited by the Ministry of Education and must maintain good grades (a 75 percent average) to continue benefiting from the loan. By 2006, about 390,000 students had received a FIES loan. The administrative setup of FIES seems reasonably lean. The program is supervised by a small group within the Ministry of Education and administered 200 KnowledgeandInnovationforCompetitivenessinBrazil by CEF on behalf of the ministry. Because ProUni handles financial aid for the poorest students, it can be assumed that FIES is reaching the majority of non- ProUni students who need financial assistance. Verification, however, requires an appropriate survey. Notwithstanding the positive features of FIES in terms of management and coverage, several adjustments could be considered. The first concern involves eligibility. Because there is no family income ceiling to qualify, there is a risk that students from wealthy families could take advantage of the 6.5 percent concessional interest rate to support expenditures not directly linked to their studies (because money is fungible). Second, the loan covers only half the tuition fees, and low-income students may not be able to fund the other half themselves. They may also be unable to cover living expenditures if they are not working. Third, the repayment schedule provides for equal monthly installments. This has the major drawback of constituting a relatively high proportion of income at the beginning of a graduate's professional career and a relatively smaller burden as postgraduate income increases with time. Finally, the financial sustainability of the student loan system needs to be investi- gated. So far, payment compliance has been satisfactory, with only 11 percent of graduates defaulting on their loans. But it is still important to monitor the accumulated costs of the program--namely the 2 percent administrative fee to Caixa, the cost of nonpayments, and the interest rate subsidy--to ensure that the FIES program does not decapitalize. Out-of-School Advanced Skills Training Brazil has developed an extensive out-of-school skills training system in the years since the mid-twentieth century industrial boom. Today the system comprises a group of institutes, collectively known as the S-system, offering advanced skills training and other services for workers. The earliest S-system institutes focused on training and services for industrial workers, but over the years, new institutes emerged to offer skills training in agriculture, commerce, and small business. Despite the strengths of this approach, Brazil needs to establish stronger links between the S-system and the tertiary education sys- tem. The disconnect is hampering cross-fertilization between academia and business and slowing Brazil's potential for disseminating and commercializing new knowledge, significant shortcomings from an innovation perspective. At the same time, few other advanced skills training options have emerged. VocationalEducation:TheBrazilianS-System Brazil's S-System is the largest consolidated professional training system in Latin America. The system initially emerged from the industrial sector in the 1940s, when the National Confederation of Industry (CNI) joined with state-level industry federations to lobby for the establishment of SENAI, the National Service for Industrial Apprenticeship, and SESI, the Social Service TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 201 for Industry. The objective of SENAI was to train and qualify personnel for industrial sector jobs; SESI offered social services to improve the quality of life for industrial workers. The S-system was subsequently expanded with the establishment of parallel institutions serving the commercial, transporta- tion, agriculture, and worker cooperative sectors. Today the system is not a single entity but an assemblage of nine separate, loosely related national insti- tutes organized by sector.With a presence in all 26 states of the nation and in the Federal District, the system operates in more than 3,000 municipalities through nearly 5,000 units and attendance points. Participants in its training and social service activities can be grouped into three broad categories--a small group of youth up to the age of 18 who are concentrated primarily in apprenticeship and training; a large group of youth between the ages of 18 and 30 who are unemployed, working in the informal market, or seeking to improve their technical skills; and an equally large contingent of workers between the ages of 20 and 40 who are directly sponsored by their employ- ers to receive training. The nine institutes composing the S-System include (a) the National Service for Industrial Apprenticeship (SENAI), (b) the National Service for Commercial Apprenticeship (SENAC), (c) the Social Service for Commerce (SESC), (d) the Social Service for Industry (SESI), (e) the Brazilian Service for Assistance to Small Business (SEBRAE), (f) the National Service for Agriculture Apprenticeship (SENAR), (g) the Social Service for Transport Industries (SEST), (h) the National Transport Appren- ticeship Service (SENAT), and (i) the National Apprenticeship Service in Cooperative Activities (SESCOOP). (See below for further information on each of the national institutes.) Taken together, the S-System offers an estimated 2,300 courses per year, with an annual enrollment of roughly 15.4 million students. In 2006, the combined budget was projected at more than R$13 billion. A compulsory 2.5 percent payroll tax on private companies supplies 85 percent of the budget; the rest comes through contracts with the public sector, informal relationships with companies, unions, mayors, and communities, as well as through out-of-pocket expenses paid by participants. The components of the S-System are briefly summarized below. National Service for Industrial Apprenticeship (SENAI). SENAI was set up on January 22, 1942, by Decree-Law No. 4,048 of President Getúlio Vargas to train manpower for the basic industries that were about to be launched. Without such vocational training, industrial development in Brazil would be stillborn. Over the next 20 years (from the 1940s to the end of the 1950s) SENAI became a reference point for innovation and quality in vocational training, serving as a model for similar institutions in Argentina, Chile, Peru, and the República Bolivariana de Venezuela. In the 1960s, SENAI invested in systematic training courses, increased on- the-job training, and sought partnerships with the Ministries of Education and Labor and with the National Homestead Bank. During the economic crisis of the 1980s, SENAI recognized the major shift under way in the economy 202 KnowledgeandInnovationforCompetitivenessinBrazil and decided to invest in technology and in developing its specialist staff. It increased the assistance it offered to companies,acquired the latest technology, and set up teaching centers for research and technological development.With the technical and financial support of institutions in Canada, France, Germany, Italy, Japan, Switzerland, and the United States, SENAI entered the 1990s ready to advise Brazilian industry in production technology, product design, and business management. From an average of 15,000 students in the early years, enrollments have grown to about 2 million annually, totaling approximately 39 million enroll- ments since 1942.The first handful of schools became a network of 744 opera- tional units distributed nationwide,which today offer more than 1,800 courses and more than 80,000 technical and technological advisory services per year to companies. Currently, SENAI has 27 regional departments, all linked to a national department. It offers courses through the following conduits: · Vocational education centers--236 vocational education units develop courses and programs in different types of education for young people and adults, as well as attending to the production sector. · Technology centers--43 vocational education units transfer technology through training, provision of technical services, and the diffusion of infor- mation about technology. · Mobile units--316 vocational education units provide SENAI services in regions far from Brazil's centers of production. In addition to a river unit, SENAI has a fleet of trailers and vehicles that act as real traveling schools. · Mobile Activities Program (PAM)--310 PAM teaching teams operate as portable workshops. The PAM kits were specially designed to reach the remotest parts of the country with programs in 27 vocational areas. The National Service for Commercial Apprenticeship (SENAC). Serviço Nacional de Aprendizagem Comercial is a vocational educational institution working in the commerce and services sector. It was created by the National Confederation of Business (CNC) on January 10, 1946, through Decree-Law Nos. 8,621 and 8,622. During its 58 years of operation SENAC has trained more than 40 million people in the commercial and service trades, helping to raise respect for workers through vocational training in 12 areas: the arts, commerce, com- munication, conservation and curatorship, design, management, personal image, computing, leisure and social development, environment, health, and tourism and hospitality. SENAC currently operates in nearly 2,000 municipalities, offering 1.8 mil- lion trainees access to a spectrum of educational opportunities--(a) classroom- based courses; (b) distance learning, which includes correspondence courses as well as television- and radio-taught courses; (c) part-time courses involving two different but complementary phases (alternating direct contact between teacher and student with periods of independent study guided from a distance TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 203 by the teacher); and (d) the SENAC Móvel (Mobile SENAC) Program, which sends mobile educational units all over Brazil, carrying educational infrastruc- ture to the remotest regions. Mobile units stay in each municipality from six months to a year, and their stays are arranged through partnerships with local councils, state governments, or bodies representing community interests. The Social Service for Commerce (SESC). The Social Service for Com- merce (Serviço Social do Comércio, SESC) was created by Decree-Law No. 9,853 in 1946. It is supported by employers in retail trade and services to promote the social well-being of its workforce through enhanced edu- cation, health, leisure, culture, and social assistance. The organization also assists those living on the edges of small, medium, and large towns to form partnerships with public service providers, private firms, trade unions, and residents' associations. Today, SESC serves about 3.6 million people who are mostly workers in the goods and services sector and their families and dependents. It is found in all state capitals in Brazil and in small and medium-size towns. Education is SESC's historic mission and is identified as the essential path to lead workers and their families to a better quality of life.Various activities are designed to engage children, teenagers, and adults in active citizenship. Social and educational activities include nurseries, early childhood educa- tion, primary education, adult education, preparation for university entrance examinations, preventative and supportive medicine, dentistry, nutrition, cinema, theater, the plastic arts, dance, crafts, libraries, sport, community action, and targeted assistance. The Social Service for Industry (SESI). Serviço Social da Indústria was created in 1946 to improve the quality of life of industrial workers and their families. SESI sponsors activities in basic and complementary education, medical and dental care, leisure, sports and culture, and other efforts of social benefit. In addition to the services provided through its 324 activity centers and 891 operational units and 748 mobile units, its Regional Department develops activities inside industrial firms tailored to the employer's needs and expecta- tions.Various projects benefit the community through partnerships and agree- ments with national and international governments and private institutions. SESI's 1,963 units are distributed across 2,006 municipalities in 27 states, including physical infrastructure that includes 11,701 classrooms,1,229 dental offices, 150 laboratories, 127 workers' clubs, 198 fitness centers, 64 stadiums, 184 auditoriums/cinemas/theaters, 8 vacation camps, 527 swimming pools, 623 sports venues, 312 football fields, and 80 industrial kitchens. The Brazilian Service for Assistance to Small Business (SEBRAE). SEBRAE, originally CEBRAE, was created in 1972 to improve the business climate for small businesses in Brazil. As of 2003, its priorities included (a) tax reduc- tions; (b) decreased bureaucracy; and (c) greater access to credit, technology, and knowledge. Currently, SEBRAE is present in all 26 states and the Federal 204 KnowledgeandInnovationforCompetitivenessinBrazil District, with more than 600 points of attendance distributed across the coun- try from the northernmost to the southernmost boundaries. SEBRAE offers training, facilitates access to financial services, promotes cooperation between businesses, organizes work fairs, and serves as an information clearinghouse for small businesses. The National Service for Agriculture Apprenticeship (SENAR). SENAR was created by Law No. 8,315 in 1991. Linked to the Brazilian Confederation of Fish and Agriculture (CNA), SENAR is charged with nationally organizing, administering, and implementing Rural Professional Training (FPR) and Social Promotion (PS) programs for youth and adults in farming areas. Pro- gram activities focus on strengthening the self-esteem and technical skills of rural laborers through multidisciplinary teams that design and teach rele- vant courses. At the end of each course, participants receive documentation to certify their satisfactory participation and learning. The Social Service for Transport (SEST/SENAT). Serviço Social de Transporte and the National Transport Apprenticeship Service (Serviço Nacional de Aprendizagem do Transporte) were created in 1995 to "develop and dissemi- nate the culture of transport, improving its workers' quality of life and job performance, as well as training new workers to provide efficient and quality services beneficial to society." The two organizations have 96 units distributed through all 27 states. SEST offers products and services such as (a) basic dental treatment; (b) medical treatment (gynecology, pediatrics, ophthalmology, and gen- eral clinical care); and (c) leisure activities, sports, and culture to meet the needs of transport workers, their families, and the community. SEST plans and funds numerous projects for social inclusion at the municipal, state, and federal levels, including campaigns serving the elderly, women, and expectant mothers. SENAT offers supplementary education at the primary and secondary levels and training and certification programs for transport workers. The National Apprenticeship Service in Cooperative Activities (SESCOOP). Serviço Nacional de Aprendizagem do Cooperativismo originated as RECOOP, the Recovery Program for Cooperative Activity in Agriculture (Programa de Recuperação do Cooperativismo Agropecuário), which was founded to orga- nize, administer, and carry out vocational training, development, and social advancement of cooperative members throughout Brazil. The National Apprentice Service in Cooperative Activities was created in 1998 along the lines of the other eight centers in the Brazilian S-System (SENAI, SESI, SENAC, SESC, SENAT, SEST, SENAR, and SEBRAE), which coalesce private sector initiatives to develop vocational training programs by productive sector.What makes SESCOOP unique is its focus on those involved in cooperatives, tailoring its techniques and goals to raising productivity and management in cooperative societies. TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 205 LifelongLearning Brazil does not have a lifelong learning strategy yet. As discussed above, the country has a well-developed network of vocational training institutions--the S-System--but there are very few linkages between it and the tertiary educa- tion system administered by the Ministry of Education.Even within the tertiary education system, mobility across different institutional types is limited. Few institutions have modular course organization based on academic credits that would facilitate transfer from one kind of institution to another.There is no rec- ognition of prior or on-the-job learning. Career guidance is not well developed, and there are no special financing mechanisms for lifelong learners. ShortCoursesforAdults A key dimension of a lifelong learning system is the opportunity to enroll in short professional programs--for example, offerings modeled on those in the French institutes of technology or the coursework in North American com- munity colleges that has highly practical content directly linked to local labor market requirements. Historically, very few institutions and programs of this sort have operated in Brazil. New legislation was passed in 1996 that opened the door to two kinds of short-duration programs--technology courses and sequential courses within existing programs. The technology courses, which usually cover two-and-a-half years, can be offered through either tertiary edu- cation institutions or specialized training centers. They lead to a degree that allows the holder to continue postgraduate training. The sequential courses, which take up to two years, are offered as part of regular four-year programs, with the student receiving a certificate of study upon completion. The number of these short programs has grown slowly, constituting only 2 percent of overall enrollment by 2003.A 2003 survey of technology train- ing courses (JBIC 2005) confirms that these programs do indeed perform a critical lifelong learning role and offer educational opportunities to uncon- ventional students. DistanceLearning The final dimension to consider in this context is the availability of distance education as a flexible modality for employed youths to study part-time. Dis- tance education appears to be at a very early stage of development. In 2004, it enrolled a mere 1.4 percent of all students. In sum, while important components are in place to develop a lifelong learning strategy, a major roadblock remains the lack of a framework for recognition of skills acquired through formal schooling, the S-system, or on- the-job experience. This flexible framework is essential because adults are less likely to invest in continuously upgrading their skills by any of the host of alternative means available if they cannot be certain that their learning is certified and carries cachet in the labor market. Many developed nations 206 KnowledgeandInnovationforCompetitivenessinBrazil have created such frameworks, and other developing nations such as Chile are in the process of doing so. Quality and Relevance of Brazilian Universities Brazil boasts a small number of excellent universities among its 2,000 institu- tions of higher learning. The top-five federal and state universities account for a large proportion of scientific research carried out in the country and most of the better national graduate programs.A single university,UNICAMP,accounts for about 15 percent of all scientific output in Brazil and 10 percent of all post- graduate degrees. The 1,800 private institutions range from first-rate universi- ties engaged in research and teaching, such as the Catholic universities of Rio de Janeiro (PUCR) and São Paulo (PUCSP), to a multitude of single-faculty institutions of variable standards. Many of the smaller public institutions also are considered to be of average quality. AreBrazilianUniversitiesWorldClass? Notwithstanding the methodological limitations of any ranking exercise, inter- national league tables show that the world's highest ranked universities are those that make significant contributions to the advancement of knowledge through research; teach with the most innovative curricula and pedagogical methods under the circumstances most conducive to learning; make research an integral component of undergraduate teaching; and produce graduates who stand out because of their success in intensely competitive arenas during their education and, more important, after graduation.These concrete accomplish- ments and the international reputation that accrues from them make a uni- versity "world class."1 How do Brazilian universities stack up against the world's best, and against Latin American universities in particular? Two prominent international rank- ings have emerged since 2003. Aside from the merits of individual rankings, both are useful in comparing the priority and support for tertiary education among countries of similar economic development, population, political sta- bility, and other indices. First, the United Kingdom's Times Higher Education Supplement (THES) ranks the top 200 universities in the world. Although no Brazilian institution was included in the 2004 THES ranking, the University of São Paolo cracked the list in 2005 by landing at 196 before slipping out in 2006. The only other Latin American institution to make the THES ranking is UNAM, the National Autonomous University of Mexico, which ranked 195th in 2004, rose to 95th in 2005, and reached 74th in 2006. By comparison, four Chinese universities rank in the top 100 (at 15, 62, 72, and 93). India's Institutes of Technology and China's Institutes of Management, which are multicampus institutions, ranked 57th and 84th, respectively, in 2006. Second, Shanghai Jiao Tong University in China has developed its own World University Rankings into clusters using a methodology that employs TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 207 Table E.5. World University Rankings by the TimesHigherEducation Supplement,2006 Number of THES Country top-200 institutions Ranking positions Brazil 0 none China 6 14,28,116,165,179,180 India 3a 57,84,183 Korea,Rep.of 3 63,150,198 RussianFederation 2 93,164 Mexico 1 74 Argentina 0 none Source:TimesHigherEducationSupplement2006. a. Two of India's ranked universities (the Institutes of Technology and Institutes of Management) are multicampus institutions. seemingly objective indicators,such as the academic and research performance of faculty, alumni, and staff. Shanghai's 2005 ranking of the top 500 univer- sities worldwide includes seven Latin American universities, four of which are from Brazil--the University of São Paolo (101­52 cluster), the Univer- sity Estadual Campinas (203­300), the Federal University of Rio de Janeiro (301­400), and the University Estadual Paulista (401­500). Mexico's UNAM is ranked lower (153­202) than Brazil's University of São Paulo. Argentina's University of Buenos Aires (UBA) is ranked in the 203­300 cluster, and the University of Chile is ranked in the 301­400 cluster. By contrast, China has eight institutions in this ranking, India has three (with its management and technology institutions including multiple campuses), and Korea has seven. Comparing Brazil's place in such rankings provides an interesting per- spective on the position of its universities in the broad context of inter- national tertiary education. Even though Brazil is the fifth most populous nation and the eighth largest economy on the planet, unlike China and India it has no university ranked among the world's top 100 in either assessment. In the more subjective, reputation-based survey (THES), in the only year it appeared, Brazil's University of São Paolo was listed lower than it was in the Shanghai ranking. This may indicate the limited exposure of Brazilian ter- tiary education to a broad international audience (perhaps due to a greater language barrier or more-limited exchanges of faculty and students than is the case for comparator countries). HigherEducationandtheBrazilianEconomy'sNeedfor Competitiveness To increase economic competitiveness, Brazil must better align its tertiary edu- cation system with the job market. Too few students are acquiring relevant skills and knowledge at the undergraduate level, and there are limited opportu- nities to pursue cutting-edge research at the graduate level,especially in science, technology, and business programs. Those graduate programs that do pursue 208 KnowledgeandInnovationforCompetitivenessinBrazil cutting-edge research tend to emphasize theoretical knowledge and academic publication rather than patents and knowledge with commercial potential. Graduate Unemployment. Unemployment has been rising steadily in Brazil, from about 3 percent in 1993 to 9.3 percent in 2004. According to the 2004 Household Survey, the unemployment rate among university graduates was 16.4 percent, almost double the national average. In recent years, rising unemployment among university graduates has become a seri- ous concern, reflecting a potential mismatch between the supply of gradu- ates and labor market needs. Skills Mismatch. One of the most worrisome features of the Brazilian tertiary education system is the lack of priority assigned to science and technology programs. Although numbers vary with the method of clas- sification, it is clear from figure E.2 that science and engineering receive insufficient emphasis in Brazil. Analysis of graduates' distribution by discipline shows that the social scienc- es accounted for 65 percent of all undergraduate degrees at public institutions and 75 percent of all undergraduate degrees at private institutions in 2003. By contrast, engineering, sciences, mathematics, and computing accounted for a mere 18 percent of graduates in public universities and only 11 percent in Figure E.2. Proportion of Students Enrolled in Science and Engineering Programs in Selected Latin American Countries 40 35.1 35 33 32.2 31.1 30 28.8 25 22.9 22.6 21.9 20 18.9 18.8 percent 15 14.6 10 5 0 o a r co ca Tobag Chile mbi Ri ntina Mexi ibbean Brazil temala & Colo Salvado Panama Costa Car El Gua Arge the & Trinidad r. Ame L. country Source:IESALC2006. TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 209 private institutions. The JIBC study (2005) attributes this pattern to a combi- nation of supply and demand factors. Most enrollment expansion in Brazil, for instance, has occurred in private sector institutions opting to offer "soft" career paths that do not require heavy institutional investments. Industrial growth and job opportunities have not warranted such investments. Another potential mismatch is the imbalance between degree-level and technician-level qualifications.As discussed,short professional courses account for just 2 percent of Brazilian student enrollment, far below the rates of other Latin American countries or OECD countries. Another reason for slow growth in technical disciplines is that they are not well regarded in Brazilian society. It is more prestigious to enroll in a regu- lar university program than in technology studies. The competition to enter technical programs, even though they are much shorter, is much less intense than for access to traditional universities. For 2003, INEP statistics indicate an average of 2.4 candidates for every university place versus 1.8 candidates for places in technology studies. Business Education. Brazilian MBA programs also do not fare particularly well in international or Latin American regional rankings. Of the many MBA programs in Brazil, only the COPPEAD Graduate School of Business at the Federal University of Rio de Janeiro made the Financial Times world ranking of MBAs (92nd place). Three Chinese programs ranked much higher. The regional business magazine América Economía also listed COPPEAD as Bra- zil's top management program. However, it ranked COPPEAD only ninth regionwide, with programs from Argentina, Chile, Costa Rica, and Mexico finishing higher. Graduate Programs and University Research. CAPES (Coordenação de Aperfeiçoamento de Pessoal de Nível Superior), which operates under the authority of the Ministry of Education,has primary responsibility for financ- ing and evaluating postgraduate studies, disseminating scientific research, and promoting international scientific cooperation. CAPES has played a crucial role in the rapid expansion of postgraduate programs during the past decade, with the number of master's students growing from about 44,000 in 1996 to 65,000 in 2003, and the number of doctoral students rising from about 20,000 to 37,000 in the same time frame. The increas- es have coincided with better geographical distribution of postgraduate courses, resulting in significantly fewer regional disparities in opportunities for advanced training. Despite the recent rapid expansion, postgraduate student enrollment remains relatively low compared with other countries in Latin America. Figure E.3 shows that Brazil's 2.8 percent enrollment rate (2003) was only about half of Mexico's or Colombia's. One positive feature is that program distribution at the masters and doctoral levels is much more balanced than for undergraduate studies. The humanities and social sciences account for about 28.5 percent of the total enrollment in masters programs and about 26.8 percent in doctoral 210 KnowledgeandInnovationforCompetitivenessinBrazil Figure E.3. Proportion of Graduate Students in Selected Latin American Countries, 2003 9 8 7.7 7 6.8 6 6 5.7 5 4 percent4 3.3 3 2.8 2.6 2.5 2 1.5 1.4 1.1 1 0 Cuba B.de Brazil Chile R. Mexico Panama Bolivia Colombia Republic Honduras Salvador Guatemala El Venezuela, Dominican country Source:IESALC-UNESCO2006. programs. For undergraduate studies in public universities, the correspond- ing proportion is 65 percent. UniversityResearchOutput Brazil is the primary contributor of research products in Latin America. The number of patents it registered in the United States almost doubled from 63 in 1995 to 106 in 2004. The output of scientific publications kept pace, increasing from 2.2 articles per 100,000 inhabitants in 1995 to 4.1 in 2001. Brazil was outperformed, however, in the latter by Argentina (8.1 publications per 100,000 people in 2004), Chile (also 8.1), and Uruguay (4.6). Similarly, Brazil's rate of patent acquisition was far outstripped for 1995­2004 by Korea, which quadrupled its rate, and China, which posted a sixfold increase. Contrary to the pattern in industrial countries, most researchers in Brazil are employed in the university sector (70 percent of new PhDs were hired by universities in the 1990s). Contrary to the trend in most countries, the propor- tion of PhDs working in firms actually has decreased in recent years.2 The national averages mask important disparities among institutions. In reality, research is concentrated at a very small number of universi- ties. Three universities in São Paulo state (USP, UNICAMP, and UNESP) account for roughly half of Brazil's total scientific production. In consider- ing research output, the Brazilian university sector basically can be divided into three groups: (1) three to five top institutions that are very productive TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 211 and maintain research quality at the leading edge internationally; (2) five to ten universities that are reasonably productive in specific fields; and (3) the majority of institutions, which conduct little if any research (despite widespread aspiration to be recognized as research universities). In many cases, "research universities" operate more as university colleges or even as community colleges. To illustrate the skewed distribution, table E.6 pres- ents the results of a recent CAPES evaluation to identify research universi- ties with programs considered to be world class (levels six and seven on the CAPES evaluation scale). In general, research in Brazilian universities tends to be mostly theoretical in nature, partly because CAPES evaluations emphasize the publication of articles in scientific journals.Very few institutions have managed to forge close links with industry. UNICAMP, for instance, operates a self-financed Innova- tion Agency that has been quite successful in creating a culture of applied research, helping researchers to register as many as 30 patents between 2004 and 2007. The Catholic University of Rio de Janeiro, which is strong in the area of computer and software engineering, has established a flourishing incu- bator for business applications. USP has an excellent record in biotechnology, energy, informatics, and engineering. Table E.6. Research Universities with at Least Two Programs Highly Ranked Internationally Number of highly Acronym Institution rated programs USP UniversidadedeSãoPaulo 55 UFRJ UniversidadeFederaldoRiodeJaneiro 25 UNICAMP UniversidadeEstadualdeCampinas 23 UFMG UniversidadeFederaldeMinasGerais 14 UFRGS UniversidadeFederaldoRioGrandedoSul 13 UNIFESP UniversidadeFederaldoSãoPaulo 8 UFV UniversidadeFederaldeViçosa 8 PUC-RIO PontificiaUniversidadeCatólicadoRiodeJaneiro 6 UFSC UniversidadeFederaldeSantaCatarina 5 UNB UniversidadedeBrasília 4 UNESP UniversidadeEstadualPaulistaJúliodeMesquitaFilho 4 UFSCAR UniversidadeFederaldeSãoCarlos 3 UFF UnniversidadeFederalFluminense 3 UFSM UniversidadeFederaldeSantaMaria 2 UFC UniversidadeFederaldoCeará 2 UFBA UniversidadeFederaldaBahia 2 UFPR UniversidadeFederaldoParaná 2 INPE InstitutoNacionaldePesquisasEspaciais 2 Source:CAPES. 212 KnowledgeandInnovationforCompetitivenessinBrazil Governance and Financing Brazil needs greater legal and administrative flexibility in its tertiary system as well as stronger performance incentives in its federal support for public uni- versities.A restrictive legal framework prevents public universities from mak- ing flexible and effective use of the resources they have, and federal funding provides few incentives to increase efficiency, much less to produce patents or pursue research with commercial potential. Even at the macro level, federal financing is ineffectively distributed, going mainly to public universities at- tended by a small percentage of the population. GovernanceandManagement The Ministry of Education's Secretary for Higher Education (SESU) is the main body in charge of steering and managing tertiary education in Brazil. Its mission is to plan, coordinate, and supervise implementation of higher- education policies. Three semi-independent agencies complement the work of SESU. CAPES is responsible for the development and improvement of postgraduate training and research. INEP collects data and publishes sta- tistics on tertiary education institutions. CNPq (the National Council for Scientific Research) coordinates and funds research activities in public and private universities. While SESU determines policies for the entire sector, the federal govern- ment has no direct jurisdiction over state and municipal tertiary education institutions. The various higher education councils of Brazil's states make all management decisions pertaining to their institutions' budgets, personnel, sal- ary policies, student admissions, the status of new institutions, and so forth. State and municipal institutions are required to follow federal guidelines only in curriculum because only the national government can certify diplomas. Article 207 of Brazil's 1988 Constitution guarantees university autonomy in pedagogical, scientific, administrative, and financial matters; and the 1996 National Education Law (Lei de Diretrizes e Bases, LDB) provides universities with the freedom to set their own personnel policies, establish research pro- grams, adjust their enrollments to capacity, and enter into contracts as legal entities. However, these principles of autonomy are undermined by the pleth- ora of laws, decrees, resolutions, and regulations that organize the tertiary edu- cation sector and define how universities actually may operate. In the words of N.B.S. Ranieri (2006), a legal expert writing on the impact of the Brazilian higher-education legal framework,"In reality, the more the legislation attempts to discipline and regulate the higher-education system, the less the state is able to expand its range of action and mobilize the instruments that are at its disposition to achieve its desired objectives; and the more it legislates, the less internal consistency there is. From this perspective, it appears that the Law, as far as university autonomy is concerned, does not fulfill its function of provid- ing incentives and stimulating socially desirable behaviors, notwithstanding the plethora of organizational norms." TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 213 Comparatively, public universities in Brazil appear to have less autonomy than counterpart institutions in,say,OECD countries.Among the more salient differences are the right to borrow from commercial banks, the ability to create positions to hire new teaching staff, the flexibility to offer competitive remuneration, and the authority to dismiss nonperforming staff members. On the other hand, these restrictions do not extend to all public universi- ties in Brazil. São Paulo State's universities enjoy greater flexibility--including the right to decide on the number of new positions and the right to increase the salaries of better-performing academic staff. Indeed, this flexibility goes a long way toward explaining one of the most striking features of the Brazilian tertiary education system,namely that the top two universities (USP and UNI- CAMP) are not federal institutions. Generally speaking, public universities in Brazil are subject to administrative rigidity that constrains the management of their resources and prevents them from operating with the flexibility that uni- versities enjoy in other parts of the world. For example, although professors are hired through open competition, the federal and state governments con- trol the number of positions. The salary scale is the same throughout Brazil, and promotion is based on years in service, not performance. It is difficult to recruit part-time practitioners from industry and almost impossible to cross- fertilize departments by bringing in visiting professors for a term (much less a full academic year) from public universities in other states. In selecting a rector,however,public universities have almost full autonomy. University rectors are appointed by the president of the Republic. Three can- didates, who must hold at least a master's degree, are elected by the entire university community, including students, administrative personnel, and teach- ers (with the latter maintaining 70 percent voting power). Rectors serve a renewable four-year term.As in other countries, the electoral dimension of the selection process introduces issues of political clientelism. Financing Federal support for tertiary education is unequally distributed and inefficiently used. A large pool of resources goes to educate a relatively small number of students at public universities, and funding is not linked to productivity. Resource Mobilization. At 54 percent (in 2005), tertiary education's share of federal education spending is more than almost any other country's in the world. This unusually high proportion reflects two factors. First, the financing of primary and secondary education is shared between the federal government and the state governments. Second, the federal universities historically have been financed generously by the federal government, often without concern for efficiency in the deployment and use of resources. All in all, the Brazilian government devotes the equivalent of 1 percent of GDP to tertiary education, a little bit less than the 1.3 percent OECD average. This level of public spending certainly seems high considering, first, the low level of enrollment in tertiary education in general and, second, that 214 KnowledgeandInnovationforCompetitivenessinBrazil three-quarters of students attend private universities at their own expense. A major determinant of this relatively high public expenditure is that public university tuition is heavily subsidized. In accordance with the 1988 Consti- tution, all federal, state, and municipal public universities are free of charge. The federal tertiary institutions generate less than 3.5 percent of their total resources (Schwartzman and Castro 2005). Resource Allocation. Until the mid-1990s, the budgets for public tertiary education institutions were utterly "de-linked" from performance. Like many countries in the developing world,Brazil had negotiated an allocation system to distribute the budget among federal and state public universities. In 1997, the federal government enacted measures to encourage tertiary education institu- tions to be more efficient, linking their financial resources to objective indica- tors such as the number of students and postgraduate activities. The impact of these measures has been mitigated by the disproportionate share of salaries and pensions in the budgets of each federal university. For example, personnel expenditures grew from 77.6 percent of the total budget transferred to the federal universities in 1995 to about 85.2 percent in 1992 (JIBC 2005). Generally speaking, the distribution of funding of public universities takes neither institutional nor individual performance and productivity into account. Universitiesreceivefundingwhetherornottheyperformwell,produceemploy- able graduates, or efficiently use their resources. Other than intrinsic motiva- tion and perhaps personal allegiance to the task of nation building, individual faculty members have few incentives to improve their research and teaching. As civil servants, their positions are secure. Their success is not bound to the impact of their scholarship, research, or the competitive capacities of the stu- dents whom they train. Resource allocation occurs in a somewhat more transparent, objective manner at the postgraduate level. The scholarships given by CAPES and the research grants available from the Ministry of Science and Technology (through CNPq and FINEP) are allocated competitively, based on the qual- ity of programs and research proposals. As a demand-side mechanism, ProUni is the other atypical mechanism for resource transfer within the tertiary education system (even though, as noted earlier, no additional money goes directly to universities because the purchase of "seats" for low-income students is financed through tax exemp- tions). It is worth noting that few countries in the world allocate public resources to universities through a demand-side mechanism as transpar- ent and objective as ProUni. Kazakhstan and Georgia in Central Asia and the state of Colorado in the United States provide vouchers to university students--the only other examples of demand-side schemes to finance recurrent expenditures in tertiary education. Resource Utilization. Brazil's tertiary education system has long had a repu- tation for high unit costs, especially in the federal universities. A recent UNESCO study shows the extent to which Brazil is an outlier in Latin TheTertiaryEducationSystemandAdvancedOut-of-SchoolTraining 215 America (figure E.4). The data indicate that Brazil's unit costs are at least twice as high as those of Colombia and Cuba (the most expensive systems in the region) and three times as expensive as those of Argentina, Mexico, or Uruguay. Two factors primarily explain the extraordinarily high costs--first, an exce- ptionally low student-teacher ratio of 11.4 to 1 in 2004 (despite significant improvements since the mid-1990s); and high personnel costs. Not only is the number of teachers excessive relative to the number of students, but public universities are also financially responsible for pensions of their retired profes- sors. Brazil has a generous pension system. Professors are allowed to retire at 100 percent of their salary after 25 years of service.As a result, the proportion of the personnel budget taken up by pensions increased from 27.6 percent in 1995 to 33.5 percent in 2002. In addition, Brazilian universities employ large numbers of administrative and support staff whose remuneration swells the high cost of personnel. In this area, too, Brazil stands out as the Latin American university system with the highest proportion of nonteaching staff. In fact, Brazil is the only country with more administrative than teaching staff. Unit costs hardly tell the full story. A thorough assessment of internal effi- ciency would first require hard analysis of the costs of producing individual graduates, as well as kinds of graduates and the economic output that gradu- ates eventually contribute. Unfortunately, no recent studies have been done to determine, for example, the theoretical versus the actual time to complete Figure E.4. Unit Costs in Selected Latin American Countries Uruguay Dominican Republic Peru Panama Nicaragua Mexico Honduras country Cuba CostaRica Colombia Brazil Bolivia Argentina 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 U.S. dollars privateinstitutions publicinstitutions Source:IESALC2006.InformesobrelaEducaciónSuperiorenAméricaLatinayelCaribe2000­05. 216 KnowledgeandInnovationforCompetitivenessinBrazil particular courses of study. Limited information available from UNICAMP reinforces the impression that considerable waste occurs despite the rigors of an exceptionally selective admission process. A survey of students admitted in 1994­97 revealed that only 72 percent had graduated by January 2005, another 26 percent had dropped out or been expelled, and the remaining 2 percent were still active (Pedrosa 2006). One measurement of resource efficiency is to calculate a productivity ratio for each university, defined as the number of highly rated programs (levels six and seven in CAPES evaluations) divided by the number of professors with a PhD.The data show that the most productive universities in terms of research volume (USP and UNICAMP) are not the most efficient institutions when their teaching resources are factored in.Then UNIFESP and PUC-RIO are the most research efficient universities. Below, table E.7 details the range of funding sources for Brazilian tertiary education institutions. Table E.8 lists several recent initiatives to promote research in national university systems around the world. While most of the initiatives are sponsored by OECD nations, the reader will note that Chile, China, and Korea also figure in the list. Table E.7. Resource Diversification Matrix for Public Tertiary Education Institutions by Category and Source of Income Source of income Government (national, Alumni and state, Students Industry other International Category of income municipal) and families and services philanthropists cooperation Budgetarycontribution Generalbudget X Dedicatedtaxes(lottery,taxonliquorsales,taxoncontracts) X Payrolltax X Feesforinstructionalactivities Tuitionfees Degree/nondegreeprograms X X On-campus/distance-educationprograms X X Advancepayments X Charge-back X Otherfees(registration,labs,remotelabs) X Affiliationfees(colleges) X Productiveactivities Saleofservices X X Consulting X X X Research X Laboratorytests Patentroyalties,shareofspin-offprofits,monetized X X patentroyalties Operationofserviceenterprises (television,hotel,retirementhomes,malls,parking, X drivingschool,Internetprovider,gym) X (continued) 217 218 Table E.7. (continued) Source of income Government (national, Alumni and state, Students Industry other International Category of income municipal) and families and services philanthropists cooperation Financialproducts(endowmentfunds,shares) X Productionofgoods(agriculturalandindustrial) X X X Thematicmerchandise X X X X X Rentaloffacilities(land,classrooms,dormitories,laboratories, ballrooms,drive-throughs,concerthalls,mortuaryspace) X X Saleofassets(land,residentialhousing) Fundraising Directdonations Monetarygrants X X X Equipment X X Landandbuildings X X Scholarshipsandstudentloans X X X X Endowedchairs X X Indirectdonations(creditcard,percentageofgassales, percentageofstockexchangetrade,challenginggrant) X X Tieddonations(accesstopatents,shareofspin-offprofits) X Concessions,franchising,licensing,sponsorships,partnerships (productssoldoncampus,names,concerts,museum showings,athleticevents) X Lotteriesandauctions(scholarships) X X Loans Regularbankloans X X X Bondissues X X X Source:CompiledbyJamilSalmi. Table E.8. Recent Research "Excellence" Initiatives Number of target institutions and Country eligibility criteria Resources allocated Investment horizon Germany Excellence Initiative 2006 40graduateschools US$2.3billionintotal Five-yearfunding 30clustersofexcellence(universitiesand Tworounds:2006,2007 privatesector) 10topresearchuniversities Brain Korea 21 Program Scienceandtechnology:11universities US$1.17billionintotal Sevenyears Humanitiesandsocialsciences:11universities Tworoundsin1999 Leadingregionaluniversities:38universities Professionalgraduateschoolsin11universities Korea Science and Engineering Foundation1)Scienceresearchcenters(SRC)/engineering 1)US$64.2millionperyear 1)Uptonineyears (KOSEF) researchcenters(ERC):Upto65centers 2)Uptonineyears 2)Medicalscienceandengineeringresearch 2)US$7millionperyear 3)Uptosevenyears centers(MRC):18centers AllthreeprogramslaunchedinFY2002or 3)Nationalcoreresearchcenters(NCRC): 3)US$10.8millionperyear FY2003 6centersfundedin2006 Japan Top-30 Program (Centers Of 31higher-educationinstitutions US$150millionperyear(Programtotal:¥37.8 Five-yearfunding Excellence for 21st Century Plan) billion) Launchedin2002 Threerounds:2002,2003,2004 Japan Global Centers of Excellence 50­75centersfundedperyear(fivenew ¥50­¥500millionpercenterperyear Fiveyears Program fieldsofstudyeachyear) (~US$400,000­US$4million) Launchedin2007 European Commission, Framework TBD­determinedbystructureofresearch BasedonnumberofRFPswitha"centreof Launchedin2007 Programme 7 (FP7) proposals(RFPs) excellence"structure 2007­13 TheoverallFP7budgetis¥50.5billionfor 2007­13 China 211 Project 100higher-educationinstitutions US$18billionin7years(US$400millionto Launchedin1996 fundingworld-classresearchdepartments) China 985 Project 34researchuniversities ¥28.3billion 1999­2001 (continued) 219 220 Table E.8. (continued) Number of target institutions and Country eligibility criteria Resources allocated Investment horizon Chinese Academy of Sciences (CAS) Mathematicsandphysics:15 -- -- Institutes Chemistryandchemicalengineering:12 Biologicalsciences:20 EarthSciences:19 Technologicalsciences:21 Others:2 Canada Networks of Centers of Excellence 23currentlyfundednetworksofcentersof Can$77.4millionperyearsince1999 Operatingsince1988 excellence Can$47.3millionayearin1997­99 Permanentprogramsince1997 16previouslyfundednetworks Can$437millionintotalin1988­98 UK Funding for Excellent Units Universitieswiththehighestmarksafterthe US$8.63billiondisbursedafter2001RAE FiveyearsforResearchCouncil­funded ResearchAssessmentExercise centers Tworounds:1996and2001 2008RAE scheduled Chile Millennium Science Initiative Groupsofresearchers Threescienceinstitutes:$1millionayearfor Every5yearsfornucleiandevery10years 10years forinstitutes 5­12sciencenuclei:US$250thousandayear US$25millionintotalfor2000­2004 Denmark (Globalization Fund) Fundstobeallocatedcompetitivelyto US$1.9billionbetween2007and2012 Launchedin2006 researchuniversities NEPAD/Blair Commission for Africa RevitalizeAfrica'sinstitutionsofhigher US$500millionayear,over10years Tenyears (Proposed) education Developcentresofexcellenceinscience UptoUS$3billionover10years andtechnology,includingAfrican institutesoftechnology Taiwan Development Plan for University Selectionandfinancialsupportof US$400million Fouryears Research Excellence internationallyleadingfields Source:ElaboratedbyNataliaAgapitova,MichaelEhst,andJamilSalmi(lastupdateMarch9,2007). APPENDIX F The Demographic Window of Opportunity Although there are several labor market indicators of interest, the evolution of variables like population growth and labor supply are critical components of job creation and employment.An increasing population generally implies a larger labor supply that should be accompanied by sufficient labor demand or, in other words, more job creation. However, an increasing labor supply does not solely represent a challenge for the labor market. It is also a potential asset because increasing labor participation lowers society's dependency ratio and ensures labor revenues for pensions and other social expenditures--provided that this increasing labor force is employed and does not remain idle. According to figure F.1, the proportion of Brazilians able to work (those older than 15 and younger than 64) has been increasing as a proportion of the total population, while Brazil's dependent population (those under 15 and above 64) has been consistently declining as a proportion of the labor force. Moreover, the proportion of the population able to work that actually participates in the labor force (active population) has risen from 66 percent to 74 percent during the past 25 years.1 The population above 64 as a propor- tion of the labor force has remained relatively low and stable throughout the period at around 10 percent. In short, demographics are encouraging in terms of intergenerational transfers because there are more people able to work than in the past. However, this demographic "window of opportunity" will not last forever, because overall population growth is decreasing and the population above 64 is increasing. Brazil is a populous country, with over 186 million people. However, popu- lation growth has declined from an annual 3 percent growth in the 1960s to 2 percent in the 1970s and 1980s before finally stabilizing at 1 percent in the 1990s. This is also true for the population growth of those aged 15­64. These demographics seem to predict lower pressures on the labor market in a 20-year scenario because labor supply is likely to decline as a consequence of lower population growth in the 1990s and early 2000s. In contrast, Brazil's labor market during the 1990s experienced the combined pressure of the late 1960s and 1970s baby boomers and higher female labor participation. 222 Knowledge and Innovation for Competitiveness in Brazil Figure F.1. Dependent Population and the Labor Force in Brazil, 1980­2005 1.2 1 0.8 0.6 percent 0.4 0.2 0 1980 19811982198319841985198619871988198919901991 1992199319941995199619971998 1999200020012002200320042005 year population aged 15­64 labor force / population / total population aged 15­64 population aged +64 / dependent population / labor force labor Force Source:StaffcalculationswithdatafromtheWDI2006. Figure F.2. Population Trends by Age Group in Brazil, 1981­2005 4.5 4.0 3.5 3.0 2.5 percent 2.0 1.5 1.0 0.5 0 1981 1982 19831984198519861987 19881989199019911992 19931994 19951996 1997199819992000 20012002200320042005 percent total population growth population 15­64 growth dependent population growth population aged +64 growth Source:StaffcalculationswithdatafromtheWDI2006. The Demographic Window of Opportunity 223 During the past 20 years, labor force growth has followed a more erratic and volatile path than population growth (figure F.3). There is a tendency to fall below 3 percent but with occasional jumps and, at other times, severe contractions. However, the population growth of the dependent population (those aged 0­14 and 65 and above) has also been declining. Female labor participation has been increasing in Brazil, and this is likely to continue in the foreseeable future. In 1980, women constituted only 31 percent of the labor force, but by 2005 they constituted 43 percent (World Development Indicators 2006). Our analysis of labor supply contains two main features. At this moment, Brazil's labor force is much larger than it once was, so generating labor income to sustain social policies and old-age pensions is within reach, provided that there is sufficient employment creation. At the same time, low population growth will naturally decrease flows into the labor market. This will facilitate job creation, although female labor participation will moderate this effect. Brazil is undergoing what is commonly referred to as a process of demographic transition, a development that recently has been confirmed by Brazil's leading economic research institute (De Negri et al. 2006). In short, Brazil can take advantage of this demographic window for the next 20 years. After that, an increasing population in the over 64 age group and a shrinking labor force will put the system under stress, other things being equal. Figure F.3. Population and Labor Supply in Brazil, 1981­2005 7 6 5 4 3 percent 2 1 0 ­1 1981 19821983198419851986 19871988 1989199019911992 19931994 1995 1996 199719981999200020012002200320042005 year labor force growth total population growth population aged 15­64 growth Source:StaffcalculationswithdatafromtheWDI2006. Notes Chapter 1 1. Brazil recently revised its national accounts from 1995 to 2006, showing an economy about 10 percent larger than previously estimated. Although the average real growth for 2003­06 rose to 4.1 percent (from 3.4 percent), average growth for 1996­2006 overall rose only to 2.5 percent (from 2.3 percent before the revision). All the estimates and calculations in this chapter include the newly revised national accounts data. 2. Knowledge-based industries include high- and medium-high-technology industries; communication services; finance, insurance, and other business services; and community, social, and personal services. 3. The technology intensity of trade presented in this table is based on the research and development (R&D) content of different sectors as derived from R&D spending in OECD countries and using input-output matrices to estimate the indi- rect R&D content of inputs. 4. This is supposed to characterize an economy at Brazil's level of GDP per capita and level of development. However, as can be seen by the rankings, Brazil is still struggling to improve the basic requirements that it should have mastered at an earlier stage. 5. For a good synopsis of the potential of services for growth in Latin American countries see Farrell and Remes (2007). 6. Knowledge-intensive services were defined as mail and telecommunications, finance and insurance, and business services (excluding real estate). The definition excludes government services, health, and education. A considerable part of health and education (which averaged 11 percent of GDP for OECD countries) could also be considered knowledge services, so these figures could be considered an underesti- mate of the share of knowledge services in the economy. See OECD (2005). 226 Notes Chapter 2 1. See Rebelo 1990; and Barro 1991. 2. See, for example, Romer 1990; and Becker et al. 1990. 3. The data spanned more than 100 years for 23 of these countries. 4. Latin America is used here to refer to the countries included in the World Bank designation, LAC, which also includes Caribbean countries. 5. This growth decomposition exercise performed for Brazil highlights the importance (although it does not imply causality) of capital accumulation in the long run: growth of physical capital explains nearly half of GDP growth in all periods except the "lost decade" (1980s). During 1981­92, capital was used inefficiently, the result being negative rates of TFP change (­1.3 percent per year), which are mainly attributable to decreased capital productivity. Prior to that decade, capital contrib- uted between 49 percent and 66 percent of GDP growth. Finally, in the "Real Era" (1993­2004), a much slower path of capital accumulation (3 percent per year, which yields a contribution to GDP growth of 1.52 percent) accounted for 52 percent of GDP growth. 6. Regarding the link between infrastructure and economic growth, Esfahani and Ramírez (2003) estimated a growth model for the average infrastructure (only in the power and telecommunications sectors) and GDP per capita growth rates of 75 countries for which complete data over any of the three decades 1965­75, 1975­85, and 1985­95 were available. Cross-country estimates showed that the contribution of infrastructure services to GDP is indeed substantial and generally exceeds the cost of such service provision. In addition, the steady-state elasticity of infrastructure with respect to total investment was found to be greater than one. Moreover, the widening infrastructure gap between East Asian and Latin American and Caribbean (LAC) countries accounted for nearly 25 percent of the GDP output gap between these two regions during 1980­2000 (Easterly 2000). Evidence exists that demonstrates not only the effects of infrastructure capital stock but also of infrastructure quality on the economic growth of LAC countries (Calderon and Serven 2005). In the Brazilian case, the infrastructure gap is estimated to be slightly smaller than the LAC average, although it is higher than in Argentina, Chile, and Uruguay (Calderon and Serven 2002). Data for Brazil confirms the positive relationship between infrastructure and economic growth in the long term, with telecommunications, electricity, and trans- portation as the most important sectors (Ferreira and Malliagros 1997). The same relationship was found for South Africa, where investment in infrastructure appears to have led economic growth during 1975­2001 (both directly and indirectly): while evidence of an output impact on infrastructure is weak, evidence of an infrastructure growth impact on output is robust (Fedderke et al. 2006). 7. In Brazil, 88 percent of commercial cases are appealed, compared with 30 percent in Mexico and 13 percent in Argentina. 8. Ruehl et al. 2005, provide an excellent summary of the analytical view on growth constraints in Brazil. Chapter 4 1. The grouping of Brazil, Russia, India, and China was featured in a Goldman Sachs 2003 analysis, projecting the dominant position these economies may acquire in the global economy by 2050. See the Wikipedia BRIC entry for more detail. Notes 227 2. See the Ministry of Science and Technology Web site link to Indicadores de Ciência e Tecnologia at www.mct.gov.br. 3. Ibid. 4. Patents granted in the United States in the past 17 years.The number of patents granted to Petrobrás by the U.S. Patent and Trademark Office between 1988 and 2005 is slightly lower than the total of 176 patents granted to it since 1976. 5. No updated numbers are available. 6. For more details, see Cruz and de Mello (2006). 7. See Beintema et al. 2001. 8. Lederman and Maloney (2003) estimated that the economic return on R&D in countries of Brazil's income level are high (around 65 percent), indicating that Brazil should be investing between two and eight times more in R&D than the 1990s levels. 9. This section draws heavily upon Alfred Watkins (2007). 10. Interestingly, if coincidentally, both Russia and Brazil fell nine places in WEF's overall competitiveness ranking between 2005/06 and 2006/07. 11. While analyzing productivity dispersion within sectors is a thought-provoking exercise, it must be noted that variance in productivity levels may be caused by fac- tors such as economies of scale and intensive use of capital. 12. See World Bank (2007), "Unleashing India's Innovation Potential," for the productivity dispersion data on India and other countries. 13. The Conselho Nacional de Desenvolvimento Científico e Technológico (CNPq) was created in 1951, and two decades later the Fundo Nacional de Desenvolvimento Cientí- fico e Tecnológico (FNDCT) began operations.The former supported research mostly in the physical and natural sciences (directly through its institutes and indirectly through grants), while the latter, administered by FINEP (created in 1967), provided funding to boost graduate studies in universities in the 1980s and research activities in public enterprises (in addition to public research organizations) in the 1970s.The Ministry of Science and Technology was created as an overall coordinating body in 1985. 14. The original statute authorized the key incentive of an 8 percent corporate income tax write-off for R&D expenses, which the 1997 amended law reduced to 4 percent (including firms' expenditures with the Programa de Alimentação do Trabalhador). Although the incentives granted between 1994 and 2002 under Law 8.661/93 totaled R$1,158.2 million, corresponding to R$4,147.6 million of invest- ments, only R$239.8 million were actually used during the period, while investments totaled R$3,338.6 million (all in current Brazilian reais). For an excellent discus- sion of the Brazilian R&D support system, particularly its different fiscal incentive regimes, see Confederação Nacional da Indústria 2005. 15. The MCT and the CCT were created by Decree No. 91,146/1985 and Law No. 9,257/1996, respectively. 16. The Coordination for the Improvement of Higher Education Staff (Coorde- nação de Aperfeiçoamento de Pessoal de Nível Superior, CAPES), attached to the Min- istry of Education, is also responsible for improving the qualifications of university professors, mostly by financing postgraduate studies. 17. In addition to federal institutions, Brazil has several state-level institutions, such as the São Paulo State Institute for Technological Research (Instituto de Pesquisas Tecnológicas do Estado de São Paulo, IPT) and the São Paulo State Research Foundation (Fundação de Amparo à Pesquisa do Estado de São Paulo, FAPESP). 18. In 2005, the state of São Paulo invested about R$700 million in R&D. Figures for Rio de Janeiro, Minas Gerais, and Rio Grande do Sul were R$77 million, R$57 million, R$49 million, respectively. 228 Notes 19. For example, through Carta-Convite, FINEP publicly invites firms, as well as universities and research centers, to submit their project proposals. Funding is directed to public institutions and requires matching contributions by the private sector, which can also be financed through FINEP under its credit lines. 20. For an extensive examination of the performance of the funds since their creation, see Guimarães (2006). Chapter 5 1. The Investment Climate Survey (ICS) is a comparative assessment undertaken annually by the World Bank and private partners. It uses a standard questionnaire to capture and quantify firms' real-world encounters with their national investment climates--the financial institutions, governance, business regulations, tax policies, labor relations, and technology that affect operations. Standardized data across a broad range of countries allows us to compare the "enabling-environments" of firms, both within Brazil and in other countries.A significant limitation of this database for our analysis is that the only questions it had on innovation in Brazil were whether firms had developed new products or updated product lines. It did not cover process innovation, which is the most prevalent type of innovation by firms in developing countries. However, this database is used because we have been able to undertake significant relevant analytical work on some critical relationships with it, whereas we have not had direct access to the PINTEC database. 2. See Viotti, Baessa, and Koeller (2005). 3. The PINTEC database analysis developed byArbache (2005) combines several databases: (a) IBGE's Annual Industrial Survey (Pesquisa Industrial Anual, PIA) for firms' characteristics, (b) the Ministry of Labor and Employment's Annual Listing of Social Information (Relação Anual de Informações Sociais, RAIS) for variables related to the labor force, (c) IBGE's Industrial Survey­Technological Innovation (Pesquisa Industrial­Inovação Tecnológica, PINTEC) for information on innovation, (d) the central bank's Foreign Capital Census (Censo do Capital Estrangeiro no Brasil, CEB), and (e) the administrative database of the International Trade Secretariat (Secretaria de Comércio Exterior, Secex) for exporting information. For this report, the PINTEC database is more appropriate because it covers a much larger sample (over 72,000 firms), has a wider range of variables (including, in particular, a definition of innova- tion that covers both product and process innovations and many more questions about the information sources for innovation), and contains a time dimension. 4. See Romer (1990) and Aghion and Howitt (1997). 5. This finding could be explained by the sample's characteristics. Another pos- sible explanation, suggested by the author, is that this coefficient would be capturing the effect of firms whose comparative advantage is in the production of goods inten- sive in unskilled labor and natural resources. 6. Independent variables included IC variables,plant control variables,and several dummy variables. 7. The drawback of this analysis is that its econometric specification is restricted to the IC variables, which are the sole explanatory variables. 8. The restricted case assumes that input-output elasticities are constant for all firms or are allowed to vary at the industry level (that is, the average cost share of each input is taken across the entire sample of plants from the seven countries). In the unrestricted case, the coefficients of the production function inputs are allowed Notes 229 to vary industry by industry (that is, the cost share of each input is obtained for each of the nine manufacturing industries; and for each industry, plants were pooled from all the countries). 9. For detailed information on the econometric approach, see the technical annex of World Bank (2005a). 10. Note that certain reverse causality effects may be present. For example, it may be the case that more productive firms choose to provide external training. 11. This section is based on results of Correa et al. (forthcoming). 12. Other studies addressing these questions have been done for Chile, China, the Netherlands, and Sweden (Hall and Mairesse 2006). 13. In environments where capital markets tend to be imperfect, large firms tend to have greater possibilities to secure the resources needed for R&D activities. Phelps and Zoega (2001), working in a large sample of OECD countries, found that a well- developed stock market helps create profitable opportunities for entrepreneurs. 14. This finding is similar to that of Sbragia et al. (2004), who studied Brazilian firms using the database of the National Association of Research, Development, and Engineering in Innovative Firms (Associação Nacional de P,D&E das Empresas Inova- doras, ANPEI) during 1994­98. 15. For example, see Baldwin and Scott (1987) and Scherer and Ross (1990). 16. For more details on human capital, see chapter 6 of this report. Chapter 7 1. A background discussion paper, videotape of speakers, and presentations from guests can be found at http://www.worldbank.org/stiglobalforum. 2. See, most recently, World Bank (2007a). Also see the Jobs Report (World Bank 2002a: Vol. 1), which recommended changes in labor regulations to achieve a more flexible and effective workforce, and see World Bank (2001) on pension reform. 3. See World Bank (2006b: Overview). 4. In past years, the Bank has assisted the Brazilian government to focus atten- tion on some of these areas, including key studies to analyze the main challenges faced by the education sector. These include "A Call to Action, Combating School Failure in the Northeast of Brazil" (1997); "Brazil: Higher Education Sector Study" (2000); "Secondary Education in Brazil: Time to Move Forward" (2000); "Brazil: Teachers Development and Incentives" (2001); "Eradicating Child Labor in Brazil" (2001); "Brazil: Jobs Report" (2002); "Next Steps for Education in Four Selected States in Brazil" (2003); "An Assessment of the Bolsa Escola Programs" (2001); "Brazil: Early Child Development,A Focus on the Impact of Preschools" (2001); and "Brazil: Municipal Education, Resources, Incentives, and Results" (2002). Appendix A 1. This section is based on Arbache (2005), which explored the relationship between innovation and exports, and the performance of manufacturing firms in Brazil. It combined the following databases: (a) IBGE's Annual Industrial Survey (Pesquisa Industrial Anual, PIA) for firms' characteristics, (b) the Ministry of Labor and Employment'sAnnual Listing of Social Information (Relação Anual de Informações 230 Notes Sociais, Rais) for labor force variables, (c) IBGE's Industrial Survey­Technological Innovation (Pesquisa Industrial­Inovação Tecnológica, PINTEC) for information on innovation, (d) the central bank's Foreign Capital Census (Censo do Capital Estrangeiro no Brasil, CEB), and (e) the administrative database of the International Trade Secretariat (Secretaria de Comércio Exterior, Secex) for exporting information. Appendix C 1. Sanguinetti (2005) found total employment to be a determinant of R&D expenditure per employee for Argentinean firms (a nonlinear relationship). Appendix D 1. This ratio is computed by dividing total enrollment by full-time and part-time teachers, with the latter given a value of 0.5 (PISA Technical Manual 2003). 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See Federal Savings Bank B Center for Management and Strategic Studies (CGEE), 74b banking system, 129 Centers of Excellence for 21st Century Bird program, 134 Plan, 219t BNDES. See National Bank for Social Central Bank, 146t and Economic Development Central Radio and TV University, 108 Bolsa Escola, 176 Chile Millennium Science Initiative, 220t Bolsa Familia, 141, 176 Chile, exports, 24 Booz Allen Hamilton, 154b China, 26­27, 63, 64t, 67t, 155b Brain Korea 21 (BK21), 107, 219t 211 and 985 projects, 219t Brazilian Miracle, 15, 17t, 37t average years of schooling and primary Brazilian Service for Assistance to Small enrollment, 174f Business (SEBRAE), 152t, 203­4 education spending, 179f BRICKM countries (Brazil, Russia, India, government consumption, 45f China, Korea, and Mexico), 63, human capital formation, 108­9 64t, 67t R&D expenditure increase, 61 bureaucracy, 43, 86t Chinese Academy of Sciences (CAS) business education, 209 Institutes, 220t business entry, 43. See also doing business clusters, 137 CNC. See National Confederation of Business C CNPq. See National Council for Scientific Canada Networks of Centers of and Technological Development Excellence, 220t Cobb-Douglas production function frame- CAPES. See Coordenação de work, 161 Aperfeiçoamento de Pessoal commercialization, 5­6, 53, 66. See also de Nível Superior under knowledge; technology 240 Index and research universities, 144 computers, 112t, 186f promoting, 75 coverage and access, 172­73, 173f, comparative advantages, 26, 26t, 116t 175­76 knowledge, 2, 19 curriculum role, 190­92 competition, opening economy to, 128 efficiency, lack of, 185­88 competitiveness, 4, 207­9 enrollment, 171­72, 173f­175f and globalization, 18­23, 100 expansion of, 126 competitiveness strategies, 79­80, 82t faculty exchanges, 135 average wages, schooling, and tenure, 93t funding, 173, 176, 192 computer use, 84, 87, 112t, 186f allocation of, 178 Coordenação de Aperfeiçoamento de governance, 138­39, 187, 188t Pessoal de Nível Superior (CAPES), innovation inputs and outputs, 92t 149t, 209, 212 innovation, impact on, 91­92 COPPEAD Graduate School of Business, lack of coordination at government levels, 209 171, 193 crisis and stagnation period, 16, 17t, 37t language scores, 184, 184t critical thinking, 104 lesson time, 187­88 levels of and innovation, 102 lifelong learning, adult education, and D distance learning, 205 linkages between universities and firms, data, 13 144, 211 debt crisis, 16 math achievements, 184, 184t, 186, 186f demographic transition, 221, 222 math gap, 191 Denmark Globalization Fund, 220t math lesson minutes by country, 186f development and innovation, 32, 71b math testing, 179­80 diaspora, 135 necessary to utilize technology, 28, 95 Direct School Funding Project (PDDE), 176 not producing needed skills, 123t distance learning, 120t number of students and teachers, 172 doing business, 39t, 43, 86t PISA, 178­79, 182, 184, 184t, 185f preschool, 112t, 140 primary system, 111t­112t, 112 E productivity, impacts on, 83, 85 East Asian Miracle, 33 quality, 53, 139­40, 176 (See also under economic data, comparison with Russia, 65t school quality) economic evolution, compared to Korea, and quantity, 36 22­23 and teaching style, 11 economic underperformance, 17 by outcomes, 185f economic volatility period, 16 lack of demand for better, 105 economy, stability of, 4 measuring, 177 education, 6, 110. See also human capital reading results, 184t, 186­87 formation; teachers; universities repetition rates, 111t, 173, 173f, absenteeism, 188t 181, 182, 183t accountability, 117t, 147t, 192­93 resource allocation inefficiency, 192 affirmative action programs, 199 resource deficiencies and learning assessment and monitoring, 138­39 opportunities, 187 attendance opportunities unequal due to SAEB, 181, 191, 193 income, 10 salaries, 102t, 103, 103t, 126 autonomy of institutions, 147t, 187, 188t comparison by country, 180t basic, 10­11, 138­42 school organization, 171, 172f institutional arrangements, 171­72 school performance and governance, recommended actions, 147t, 150t 116t­117t building on existing schools, 140 school principals, 116t, 140 business, 209 school quality, 183, 187­88 capital spending, 180t school resources by country, 186f challenges remaining, 172­73 school-to-work transition, 141­42, 147t classroom environment, 188t recommended actions, 150t classroom inequality, 190 science and engineering, 143­44 classroom performance, 191 enrollment by country, 208f cognitive demand, 191­92 science results, 184t, 186 Index 241 secondary system, 8, 115 F expanding access, 140­41, 147t FAPESP. See São Paulo State Research recommended actions, 150t Foundation indicators for innovation, 113t­115t FDI. See foreign direct investment sending students abroad, 135 Federal Savings Bank (CEF), 199 shortages of supplies, 186f Federal University of Rio de Janeiro, 209 socioeconomic profile of test takers, FIES. See Fundo de Financiamento ao 184­86 Estudante do Ensino Superior spending, 177, 180t financial instruments to foster R&D, 130 per student, 178, 178t, 179­81 financial intermediation barriers, 40 standards, 139, 173 Financier of Studies and Projects (FINEP), student distribution by income, 197f 70, 74b, 147t­148t student loans, 142, 199­200 S&T sector funds, 72 student-teacher ratios, 118t, 186f Finland, knowledge as driver of growth, 22 tenure, 102t firm-level studies, 78 tertiary system, 9­10, 124, 144, 195t firms and competitiveness, 207­9 and training, 102, 120t coverage and access, 195­96, 196t average wages, education, and distribution of graduates by discipline, tenure, 93t 208­9 becoming innovative, 81, 87 equity, 10, 196­200 classification of, 79, 79t, 159 financing, 213­16 educated workers and innovation, 100 governance, 212­13 exporters more productive, 83 governance and financing of, exporting and innovation, 90, 96, 133 142­43 innovation income and resources matrix, and growth, 32­33 217t­218t and manufacturing, 92 indicators for innovation, 122t­124t by category of, 80t monitoring graduates, 143 information sources, 82t research excellence initiatives, inputs and outputs, 77 219t­220t obstacles, 81, 82t resource efficiency assessment, 216 sources of, 81t resource utilization and unit costs, type and rate of, 78t, 79 214­15, 215f innovation and exports impact on tests scores and quality, 181­84 productivity, 77, 159t­160t validation exam, 142 less innovative, 7 weakness of, 99 linkages with universities, 144, 211 years of attainment, 9, 93, 93t, 94, producer-services companies, 22 102t, 174f quality control, 137 and salaries, 103, 103t R&D spending, 89, 128­29, 161 educational credit program, 142 recommended actions, 151t Egypt, Arab Republic of, 104 size of, 88, 96, 130 Embrapa, 71b tax burden, 39 employment, 37t, 79t, 105 technology absorption, 94, 94t enabling environment. See investment technology transfer, 95­96 climate fiscal management, 4 engineering field, promoting, 143­44 food exports, 25t engineering programs' enrollment, 208f foreign direct investment (FDI), 84, 134 Ewing Marion Kauffman Foundation, 144 foreign ownership, 88, 90, 93 export processing zones, 155b FPR. See Rural Professional Training exporting firms, 83, 96 "From Knowledge to Action," 154b exports, 41, 64, 90, 92 fuel exports, 25t changing of structure, 20t, 24, 24t, 25t Fund for the Development of Fundamental diversification to drive growth, 22 Education & Valorization of Teach- expansion and growth, 43­44 ers (FUNDEF or FVM), 173 impact on firm productivity, Fund for the Development of Secondary 159t­160t Education (FUNDEB), 173, 175 manufactures and technological intensity, Fundo de Financiamento ao Estudante do 25, 25t Ensino Superior (FIES), natural resources, 25, 25t, 26 199, 200 242 Index G incubators, 52­53, 132 India, 45f, 60, 63, 64t, 67t, 106 Germany Excellence Initiative 2006, 219t Indian Institute of Technology (IIT), 109­10 Global Competitiveness Index (GCI), 20, industrial clusters, 137 21, 21f industrial sector, 24t, 69, 69t globalization, 18­23, 100, 155 industrialization, reversal of, 65­66 governance, improving, 129 INEP. See Institute for government Educational Research application of framework to subnational inflation rates, 16, 16f governments, 156­57 information diffusion, 136, 137 consumption, 45f infrastructure, 40, 46, 86t, 129 related to public sector size, 44­46, 47 Infrastructure Fund, 74b education expenditure, 116t innovation, 5, 111t­115t, 195 education reform, 112t and economic growth, 32­34 expenditures, 39, 40 and exports impact on firm productivity, improve public R&D, 131 159t­160t recommended actions, 146t and productivity and growth, 83­88 municipalities, 150t­151t boosting, 4­8 states, 149­50t costs of technology adoption, 54­55 gross domestic product (GDP), 17t, 18t exporting firms, 133 capital formation, employment, firm size, 88, 89f, 92 and TFP, 37t firm-level analysis of, 85­88 per capita, 23f, 61f human capital and productivity, 93­95 growth, 1, 22, 32 information sources, 81, 82t compared to Asia, 18 inputs and outputs, 88­93 education levels of workforce impacts, 36 by firm size, 89f innovation and productivity impacts, by region, 91f 83­88 by sector, 90t model of components, 3f measure of, 161 out of sync in region, 17 need for educated workers, 7, 99, 100 public sector impact, 44­46 obstacles to, 81, 82t TFP, 33, 34 PINTEC and ICS databases findings, TFP growth impact, 23 95­97 TFP regional comparison, 35f product, 80 growth comparisons, 15­18 and process, 78, 80t growth conceptualization, neoclassical, 29, 30 recommendations for, 146 growth decomposition, 36­39 relationship with R&D and productivity, growth model, 29­31, 31f, 34 84, 162t­165t growth sources, services sector, 24 school performance, 116t­117t sources of, 49, 50, 77, 95 capital goods, 80­81 H new product development, 83 human capital, 34t, 53, 93­95. See also of firms, 81t education type and rate by firms, 78t, 79 Brazil and comparators, 106­10 type by category of firm, 80t education and training investment, 5 types, 100 necessary for innovation and underperformance of, 59 productivity, 7, 99 Innovation Agency, 211 needs for national innovation system, Innovation Law, 75, 76b, 132 56t­57t innovation system, national, 11­12, 55, 70­71, 74­75 incubators, 52­53 institutions, 56t­57t I organizational chart, 73f ICS. See Investment Climate Survey structure of and initial funding, 72 imports, versus imports of capital goods, 68f innovative assets compared to Russia, 66f income gap with OECD countries, 1, 2f, INPI. See National Institute for Intellectual 18, 19f Property income, knowledge impact for Brazil and inputs and outputs, 77, 92t Korea, 23f analysis of by variables, 88­93 Index 243 average growth, 34t knowledge, foreign, 133, 146t by firm size, 89f acquiring, 134­35, 147t Institute for Educational Research (INEP), recommended actions, 148t, 149t, 212 151t, 152t instruments for innovation, 56t­57t Korea Science and Engineering Foundation intellectual property rights (IPR), 54, 63 (KOSEF), 219t interest rates, 40 Korea, Republic of, 22­23, 63, 64t, 67t, International Standards Organization (ISO), 179­80 84, 87, 89f, 91f GDP per capita, 23f by sector, 90f government consumption, 45f effects of education, 92t human capital formation, 106­7 Internet use, 84 income differences with Brazil, 23f invention process, 50­51 PISA results, 184, 184t investment climate (IC), 3f, 21, 39­41, school quality, 186 67­68 Vision Korea Project and knowledge analysis of, 156 strategy, 154b­155b developing to encourage private Korean Development Institute, 154b investment, 128­29 for innovation system, 57t growth model, 31 L issues, 97 labor market indicators, 221 variables, 84­85, 86t labor market, rigidity of, 128 Investment Climate Survey (ICS) database, labor regulation, 40­41, 86t 77, 84­85, 95­97 labor-market observatory, 143 laboratories, recommendations for innovation, 152t J Latin America, 185f, 186f, 210f Japan Global Centers of Excellence education spending, 178t, 215f Program, 219t lower growth rates, 35 Japan Top-30 Program, 219t tax burden, 39, 39t job market, skills demand changing, 103­6, Latin America and Caribbean (LAC) 104f education spending, 179f joint ventures, 89f, 90f, 91f, 92t enrollment, 174f, 175f judicial system inefficiency, 43 R&D expenditure and GDP per capita, July 30 Educational Reform, 106­7 61f LDB. See National Education Law lending, 40 K licensing, 89f, 90f, 91f, 92t lifelong learning, 123t, 205 knowledge, 20 literacy, impact on growth, 36 acquiring, 53­54, 56t, 67­68 logistics costs, 40, 129 and adapting, 6­7 comparative data, 67t as a comparative advantage, 2, 19 M capacity for using, 22 creating and commercializing, 5­6, macroeconomic stability, 128 50­53, 56t, 101, 129­33 Maeil, 154b analysis of an entity's ability, manufacture products, 20, 20t, 25, 25t 156­57 China impact, 27 recommended actions, 146t, 148t, manufacturing firms, innovative, 92 150t, 151t manufacturing sector, 24t, 72 dissemination and use of, 54, market information, 82t 68­70 merchandise exports, 25t existing, inefficient use of, 27 metals exports, 25t growth contribution, 22, 30 methodology, 13 income impacts, 23f metrology, standards, testing, and investing in, 28 quality-control (MSTQ) services, role of R&D in creating, 49 136­37, 146t, 148t using and diffusing existing, 57t Mexico, 63, 64t, 67t knowledge economy, 2, 104 microenterprises, 68b 244 Index Ministry of Education, 147t doing business comparison with LAC, 39t Secretary for Higher Education education enrollment, 174f, 175f (SESU), 212 education spending, 178t, 179f Ministry of Energy, 152t income gap, 1, 2f, 18, 19f Ministry of Justice, 149t labor force with tertiary education, 197t Ministry of Labor, 152t PISA results, 185f, 186f Ministry of Science and Technology, Oslo Manual, 78 147t­148t outputs, 34t, 69. See also inputs and outputs Ministry of Telecommunications, 152t Ministry of Trade, Industry, and Commerce, 146t P Ministry of Transportation, 152t PACTI. See Support Program for Mobile Activities Program (PAM), 202 Technological Industrial Training Mobile SENAC Program, 203 PADCT. See Support Program for Scientific Monitor consultancy company, 154b and Technological Development PAM. See Mobile Activities Program patents, 6, 52f, 64t, 210 N PBQP. See National Program for Quality National Achievement Test (SAEB), 181, and Productivity 191, 193 PDDE. See Direct School Funding Project National Apprenticeship Service in PDTI/PDTA. See Programas de Cooperative Activities Desenvolvimento Tecnólogico (SESCOOP), 204 Industrial and Agropecuário National Autonomous University of Mexico Petroleum Fund, 74b (UNAM), 206 physical capital, positive effects of, 34, 34t, National Bank for Social and Economic 35­36 Development (BNDES), 149t PINTEC database, 77, 83­84 National Confederation of Business findings, 95­97, 159­60 (CNC), 202 PISA. See Programme for International National Confederation of Industry Student Assessment (CNI), 10 Plan for Educational Development (PDE), National Council for Scientific and 112, 176 Technological Development PNC. See National Curriculum Parameters (CNPq), 70 policies for innovation, 56t­57t National Curriculum Parameters policy framework, 46 (PNC), 190 population, 222f, 223f National Education Law (LDB), 171, 212 active working, 105­6, 221 National Fund for S&T Development, 74b poverty index, 184t National Institute for Intellectual Property primary products, 20, 20t (INPI), 63, 131 primary school. See under education National Program for Quality and private sector, 73f, 76b Productivity (PBQP), 72 encouraging investment, 128­29 National Service for Agriculture infrastructure investment, 40 Apprenticeship (SENAR), 204 interaction with universities, 6, 9 National Service for Commercial R&D, 53 Apprenticeship (SENAC), 202­3 investment increase, 5, 130­31, National Service for Industrial 149t, 151t Apprenticeship (SENAI), 200­202 process innovation, 78, 80t National System of Agricultural R&D, 71b producer-services companies, 22 National Transport Apprenticeship, 204 product improvement, 89f, 90f, 91f, 92t NEPAD/Blair Commission for Africa, 220t product innovation, 78 , 80, 80t Networked Readiness Index (NRI), 60 product, new, 89f, 90f, 91f nontariff barriers, 41, 41b, 67t productivity, 36, 100 and human capital, 93­95 and innovation and growth, 83­88 and trade liberalization and growth, 44 O determinants, 87 ore exports, 25t dispersion of, 69, 69t Organisation for Economic Co-operation exporting firms, 84 and Development (OECD) firm-level analysis of, 85­88 Index 245 measuring, 83, 159 innovation and productivity, 84 relationship with innovation and R&D, input and output indicators, 63, 64t 84, 162t­165t intensity, 83, 87 Programa Universidade para Todos interaction among firms, universities, and (ProUni), 198, 214 labs, 53, 131, 144 Programas de Desenvolvimento Tecnólogico knowledge creation, 49 Industrial and Agropecuário management of, 66 (PDTI/PDTA), 70 private sector budgets, 53 Programme for International Student private sector increase, 5, 130­31, 149t Assessment (PISA), 178­79, 182 recommended actions, 151t proof-of-concept centers, 144 public sector improvement, 131, 149t, PS. See Social Promotion 150t, 151t public awareness, 153 public support of private sector, 70 public debt, 46 purchasing foreign labs, 134­35 public sector size effects, 44­46, 47 recommended actions, 146t, 147t­148t public-private partnerships for for ministries, 151t­152t infrastructure investment, 129 role of states, 71 successful centers, 71 tax incentives, 72, 74­75, 75t Q underperforming, 75­76 universities, 210­11, 211t quality, MSTQ, 136­37 research excellence initiatives, 219t­220t researchers, 50f, 64t, 132 in university sector, 210 R per inhabitants, 62f RCA. See revealed comparative advantage revealed comparative advantage reading and language achievement, 113t (RCA), 26t real interest rate, 46 royalty and license fees, comparative Real Plan, 16 data, 67t recommendations, 146t­153t Rural Professional Training (FPR), 204 RECOOP. See National Apprenticeship Russian Federation, 63, 64, 65t, 66f Service in Cooperative Activities R&D, 64­65, 66 recovery period, 16, 17t research and development (R&D), 9, 22, S 60, 135 adapting to local conditions, 55 S-system, 9­10, 115t, 200­204 analysis of entity's ability, 156­57 recommended actions, 152t and innovation and productivity estima- SAEB. See National Achievement Test tions, 162t­165t salaries, 102t, 103, 103t, 126. See also under as innovation source, 80, 81, 81t teachers collaboration between public and private sales, share by firm category, 79t sectors, 134 São Paulo, 71, 198t data, 65t São Paulo State Research Foundation determinants of, 86­87 (FAPESP), 148t effectiveness, 5, 61, 62f, 63 savings, low levels of, 46 effects of education, 92t school performance and governance, expenditure, 60, 64, 64t, 96 116t­117t and GDP per capita, 61f school-to-work transition, 125, 141­42, by region, 91f 147t, 150t by sector, 90f schooling, years of, 9, 93, 93t, 94, country comparison, 50f 102t, 174f firm size, 87, 88 and salaries, 103, 103t firms, 128­29, 161 Schumpeterian hypothesis, 87 history of, 70 science and math achievement, 111t, 114t innovation inputs, 89f science and technology (S&T) funds, overcoming obstacles, 128­29 72, 130 exporting firms more likely to invest, 133 science field, promoting, 143­44 firm-level analysis of, 85­88 science programs' enrollment, 208f for sustainable development, 71b scientific and technical journal articles, 51f, funding, 74b 64t, 210 246 Index scientific and technological institutions T (STIs), 76b Taiwan Development Plan for University scientific progress, 60 Research Excellence, 220t SEBRAE. See Brazilian Service for tariffs, 41, 41bt, 67t Assistance to Small Business tax burden, 39, 39t secondary school. See under education tax incentives for R&D, 72, 74­75, Sector Funds Program, 74b 75t, 128 sectoral breakdown, 90f tax reform, technology upgrading, 136 SENAC. See National Service for teacher absenteeism, 119t, 139 Commercial Apprenticeship teachers, 139­40. See also education SENAI. See National Service for Industrial salaries, 10, 118t, 180 Apprenticeship style of teaching, 111t, 118t­119t, SENAR. See National Service for 188­90 Agriculture Apprenticeship technical and vocational education and services sector, 24, 24t training (TVET), 109. See also SESC. See Social Service for Commerce vocational education SESCOOP. See National Apprenticeship technical information, diffusion of, 136 Service in Cooperative Activities technological change residual, 30 SESI. See Social Service for Industry technological information sources, 82t SEST/SENAT. See Social Service for technological progress, 60 Transport technology SESU. See Ministry of Education, Secretary absorption, 94, 94t, 137­38 for Higher Education recommendations for action, 146t, Shanghai Jiao Tong University, China, 148t, 149t 206­7 acquiring and adapting, 6­7, 56t, 101 Singapore, human capital formation, adopting, 96­97 107­8 creating and commercializing, 5­6, 101, skills, 8­11, 138­42 129­33 created by schools, 191 creation of agricultural, 69­70 demand for changing, 103­6, 104f early development support, 132­33, lack of, 8, 105­6 148t, 149t mismatch, 8, 105, 123t, 208­9 education necessary to utilize, 95 skills training, 120t­121t, 200­204 existing, 135­38 advanced, 142­44 adopting, 69, 96­97 small and medium enterprises (SMEs), 68b, using and disseminating, 7­8, 101 137­38, 146t, 150t exports, 20t, 67t Social Promotion (PS) programs, 204 intensity of, 25, 25t social security reform, 128 growth-conceptualization model, 29, 30 Social Service for Commerce (SESC), 203 lack of skills as barrier, 8 Social Service for Industry (SESI), proprietary, 54 200­201, 203 purchase of, 55 Social Service for Transport (SEST/SENAT), support infrastructure, 82t 204 through capital expansion, 38 Solow method, 22­23 technology centers, 202 Solow residual, 33 technology parks, 132 Soviet Union, 63 technology transfer, 6, 67, 134 stabilization program, 16 offices of, 132 State University of Campinas (UNICAMP), underutilized, 95­96 197, 198t, 211 tenure, 93t states' roles, 71, 73f Thinking Schools, Learning Nation, 108 Statue of Microenterprises and Small Times Higher Education Supplement Enterprises, 68b (THES), 206, 207t student loans, 142, 199­200 Tong, Goh Chok, 108 subnational government, applying total factor productivity (TFP), 1, 23 framework to, 156­57 export expansion and productivity, Support Program for Scientific and 43­44 Technological Development factor in performance decline, 37 (PADCT), 74 growth, 30, 34 Support Program for Technological causes of low, 38 Industrial Training (PACTI), 72 GDP, 37t Index 247 model, 3f, 31f low interest in technical disciplines, 209 new theory, 33 personnel expenditures, 214 LAC, 35, 38 quality of, 206­7, 216 output growth, 34t recommended actions, 152t regressions, 86t research and graduate programs, 207­10 significant factors for, 85 research output, 210­11 trade, 5, 7, 43 teacher-student ratios and pensions, 215 comparative data, 67t university research, disconnect with private liberalization and increased production, sector, 6 44, 128 University-Industry Collaborations Fund, limited openness, 41, 41b­42b 74b trade reform, China, 155b training, 89f, 118t, 120t­121t advanced skills, 200­204 V by region, 91f by sector, 90f value added, 19­20, 69 effects of education, 92t venture capital, 133, 151t, 152t in-house, 102 Vision Korea Project, 154b­155b link with productivity and growth, 36 vocational education, 115t, 121t, 202 postsecondary, 9­10 S-system, 200­204 techno-entrepreneurship, 133 technology absorption of SMEs, 137­38 TVET. See technical and vocational W education and training wages, 93t workforce, 49, 223f. See also skills ability to effectively use U knowledge, 28 UK Funding for Excellent Units, 220t and dependents, 222f UNAM. See National Autonomous as innovation source, 80, 81t University of Mexico attributes, 104 unemployment, 8, 120t, 123t, 208 capacity by innovation type, 101­3 UNICAMP. See State University of characteristics in TFP regressions, 86t Campinas demand for skills changing, 103­6 United States, education spending, 179­80 education and innovation, 91­92 Universidade de São Paulo (USP), 211 education levels and growth impacts, 36 universities, 144. See also under education growth of and female participation, 223 autonomy, 147t, 212­13 improving skills, 8­11 graduate students, 210f need for educated supply, 100, 125­26 highly ranked research programs, 211t with tertiary education by country, 196, interaction with faculty from abroad, 135 197t links with industry, 9, 123t, 211 World University Rankings, 206­7, 207t ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. · 9 trees The Office of the Publisher has chosen · 6 million BTUs of to print Knowledge and Innovation for total energy Competitiveness in Brazil on recycled paper · 765 pounds of net with 30 percent post-consumer waste, in greenhouse gases accordance with the recommended stand- · 3,176 gallons of ards for paper usage set by the Green Press waste water Initiative, a nonprofit program supporting · 408 lbs of publishersinusingfiberthatisnotsourcedfrom solid waste endangered forests. For more information, visit www.greenpressinitiative.org. BRAZIL Brazilistheworld'slargestexporterofcoffee,sugar,cane-basedethanol,orange juice,andironore.Yetoverthepast10years,itseconomyhasgrownanaverageof only2.5percentperyear.Thequestionincreasinglybeingaskedis,HowcanBrazil improveitscompetitivenessintheglobaleconomy? Knowledge and Innovation for Competitiveness in Brazil makesacompelling argumentthatinaglobaleconomythatisincreasinglyknowledgedriven,human capitaliskeytogrowth.Thebooksupportsthisargumentbymappingthe relationshipbetweenmicroeconomicinputs,suchashealthandeducationservices, andmacroeconomicoutputs,suchasgrowth.Itthengoesontorecommendspecific stepsthatcanbetakentofosterinnovationandcompetitiveness. Groundedineconomictheoryandbackedbyeconomicanalysis,Knowledgeand Innovation for Competitiveness in Brazil willserveasanimportantsourcebookfor policymakers,academicsandresearchers,andbusinesspeoplebothinsideand outsideBrazil. ISBN 978-0-8213-7438-2 SKU 17438