August 2007 · Number 109 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. Brazil: Seizing the Opportunity to Compete? Human Capital and Innovation: Key Contributors in the Growth Agenda Alberto Rodriguez et al Brazil has made considerable progress toward macroeco- In the new paradigm for middle-income countries, knowl- nomic stability since reform measures began to take hold edge--not natural resources or cheap labor--increasingly in the early 1990s, and its economy has produced stronger constitutes the core of a country's comparative advantage. growth as a result--an average of 2.5 percent annually As well illustrated by dramatic success stories such as over the past decade. Nevertheless, from an international Bangalore, the capital of the Indian software industry, perspective, Brazil's level of economic growth is still a technical innovation and knowledge can work hand in matter of significant concern. Compared with either OECD hand to lead a country from suffocating poverty to strong countries or competitors such as China or India, Brazil not productivity and competitiveness. Indeed, the proportion only is growing slowly, it is falling farther behind. In 1980, of goods in international trade with a medium-high or Brazil's per capita purchasing power parity was about 42 high technology content rose from 33 percent in 1976, to percent that of OECD countries. Twenty-five years later, it 54 percent in 1996, and to 64 percent in 2003. This period had fallen to under 29 percent of OECD countries. was the same one during which Brazil muddled through slow trade liberalization and weak labor reforms, and paid Where Growth Comes From little attention to its lagging basic education system. Had Economic growth is widely understood as the interaction more radical reforms been undertaken, Brazil would have between physical and human capital. Investment in either been much better able to take advantage of domestic and generally increases growth; moreover, when physical and international opportunities to spur growth, as did competi- human capital interact more efficiently, growth occurs more tors such as China. rapidly. Economists generally attribute this incremental ef- ficiency-based growth to Total Factor Productivity (TFP). Brazil can no longer ignore the knowledge economy--and During the exceptional high-growth era of the "Brazilian it is not. An ongoing national dialogue is taking place on Miracle" (1960­80), TFP was critical to growth; however, reforms to sustain strong macroeconomic performance, since then, TFP has declined dramatically. Growth-account- further open trade, improve the physical infrastructure, ing exercises show that the ratio of Brazil's TFP compared strengthen the judicial system and legal environment, and with that of the United States dropped from 1.07 in 1975 to deal with weak and inequitable education system that 1.02 in 1980, to 0.80 in 1995, and to 0.73 in 2000. is not producing the kind of human capital required by today's global competition. The report emphasizes that The macroeconomic shocks of the 1970s and the debt Brazil has indeed made significant progress; yet the hard crisis of the 1980s are important factors in explaining the reality is that Brazil's competitors have too--only faster. slowdown in Brazil's growth. A new report1 argues that The question has become not only how Brazil can make the decline in TFP was a similarly important cause. Why further progress, but how it can catch up. did it happen? Brazil's low rate of investment is one part of the answer. Low productivity is another. A critical fac- Consolidating the Macroeconomic Environment tor, however, is that a new global "knowledge economy" The Brazilian economy has remained stable as a result of has been emerging; and Brazil, despite its relatively suc- prudent macroeconomic management--including fiscal cessful implementation of adjustment policies in the mid- and monetary policy, as well as debt management. Im- 1990s, was not prepared to compete. proved macroeconomic fundamentals have reinforced the 1. Extracted from "Brazil: Knowledge and Innovation for Competitiveness", (June 2007), Brazil Country Management Unit, Human Development Unit, Latin America and the Caribbean Region, World Bank Report 40011-BR · benefit of favorable external demand for Brazil's primary edge and technology; (b) acquisition of knowledge and commodities, raising international reserves to unprec- technology from abroad for local use and adaptation; and edented levels. Fiscal restraint, which has included a cap (c) the dissemination and effective application of knowl- on public investment, has translated into yearly primary edge and technology (whether domestically created or surpluses and macroeconomic stability. However, the acquired from abroad) that is already available in country country's infrastructure now needs upgrading in order to though not broadly utilized. As used here, innovation increase productivity and avoid jeopardizing growth. refers not just to new products and processes, but also to new business processes and new ways of carrying out The challenge facing Brazil is to continue reducing pub- productive activities. Innovation to improve TFP should lic debt and improving the quality of the fiscal adjust- not be understood simply as invention or the first use ment (that is, ensuring adequate resources for key public globally of a new technology, but also as the first applica- investments and poverty alleviation programs)--while tion of a product or process in a specific setting. improving the efficiency of public expenditures to create the fiscal space necessary for pro-growth investments. Creating and commercializing new knowledge and technology. In Brazil, investment in technological inno- Boosting Innovation vation comes mainly from the public sector--about 55 Brazil's growth depends strongly on the export of manu- percent of the total, compared with about 30 percent in factures and commodities, a dependence that is likely to the United States. A research culture that is heavily and continue. Yet with few exceptions, Brazil's manufactur- reliably financed by the public sector has excelled in the ing base lags with respect to innovation--especially when production of conceptual knowledge--for example, Bra- Brazil is compared with China or India, countries that zil accounts for nearly 2 percent of articles published in have taken giant steps in growth-enhancing innovation. If internationally recognized research journals (roughly on recent trends continue, Brazil would continue to be mainly par with Brazil's 2 percent of world GDP). On the other a supplier of primary commodities in world markets and hand, substantial public expenditure has been far less an exporter of manufactured products to Mercosur and successful at energizing technological innovation--for other Latin American countries. In other words, Brazil example, patents that can be commercialized. According risks missing the opportunity to become a serious, diversi- to the World Intellectual Property Organization (WIPO), fied global competitor. Becoming so would require Brazil Brazil accounted for about 0.18 percent of patents in to adjust its path--emphasizing higher value added to 2000. This compares with 3.4 percent of patents attribut- products in the sectors in which Brazil already has some able to Sweden--that is, nearly 19 times more patents comparative advantages, and engaging in higher-value, than Brazil despite a much smaller population. more-income-elastic manufactures and services. Brazil needs not only to diversify and add value to its commodi- Ironically, Brazil invested in R&D infrastructure far earlier ties, but it must improve its competitiveness in manufac- than most other developing countries. Yet the report finds turing and service exports as well. that an intellectual and practical "disconnect" has now emerged in Brazil that is not typically found elsewhere. Until the 1990s, the productive sectors in Brazil operated The public universities and labs where most government- within a relatively protected economy. The government funded research is conducted primarily pursue "pure" provided few incentives for private sector investment conceptual knowledge. Private sector activity does not in innovation; yet that mattered less because protection articulate with these universities and labs, unlike in other from competition made private sector investment in in- countries where entrepreneurial scientists and engineers novation relatively less necessary. The report argues that typically have a foot in both worlds. Moreover, the private two factors--a bias toward overly "theoretical" research sector's own research capacity has been diminished by in publicly funded universities, and significant underin- underinvestment from companies protected by trade bar- vestment by a shielded private sector spared the need to riers from foreign competition. The net result is that Bra- compete--lie at the heart of Brazil's current relative un- zil needs to pay far greater attention to what is produced derperformance in innovation. through public investment, what happens to new knowl- edge once it is created, and how the private sector can be The report proposes a three-stranded typology of innova- mobilized as an active partner. Strengthening the institu- tion, (a) creation and commercialization of new knowl- tions and norms that protect intellectual property and sup- porting business incubators would help immediately. 2 · August 2007 · Number 109 Acquiring and adapting global knowledge and technol- arguably the least expensive and most accessible--Bra- ogy. For countries not already on the cutting edge, it is zil could increase productivity across all sectors. This generally more practical to acquire rather than invent new requires relatively greater effort at disseminating knowl- knowledge and technology. Transfer of technology can edge through channels such as industrial and service be accomplished through several means--direct foreign extension programs, technical information centers, and investment; licensing; technical assistance; technology cluster-based technology improvement programs. While embodied in capital goods, components, or products; some innovation requires newer machinery and better copying and reverse engineering; foreign study; published physical inputs, as well as better management and orga- technical information, especially on the Internet; twin- nization, what matters is what happens on the shop floor. ning; cooperative training partnerships; distance learning; Can workers observe new practices first-hand, and is and more. Trade is probably the most direct and critical there an environment that rewards increased efficiency means of acquiring knowledge and technology--import- and productivity? Indeed, can workers accomplish the ing the latest versions of hardware, machinery, and soft- same things through better use of the equipment and in- ware. Brazil is still struggling to reconcile the relative puts that they already have? comforts of protectionism with the inevitable need to compete in global markets. In this respect, Brazilian firms The fact that job tenure in Brazil is generally low--and are just awakening to the full benefits that acquired for- lower still for less-skilled workers--might be expected eign technology can bring. to increase the flow of good practices between firms. In reality, however, this does not appear to be happen- The capacity of firms to put acquired technologies to ing. Lack of basic skills among workers is probably productive use points to the challenges of human capital the single most significant obstacle to the use of new formation. Technology stands little chance of being ad- technology and equipment or the free flow of innovative opted and adapted successfully if workers lack the basics practices across firms. Unskilled workers are likely to be in reading and math; or at a higher level, the ability to risk-averse and more comfortable with the simple rou- reason conceptually, think outside the box, and apply the tine of procedures that do not demand additional formal scientific method. Workers with these skills are no less training. While Brazilian firms do invest significant time critical than higher-level managers who can quickly ad- and resources training their employees, in most cases just to computerization or imaginatively redesign a pro- this training focuses upon basic skills deficits that should duction strategy. If firms cannot trust in the adaptability have been addressed by the formal education system. of their employees, they necessarily become risk-averse, opting for the low road to economic survival--heavier One notable exception is the production chains that have exploitation of cheap, unqualified labor. In essence, both been developed by SMEs that act as suppliers to large in- basic and advanced skills are needed for a firm to maxi- novative firms such as Embraer, Petrobrás, Gerdau, Ford, mize the rewards of acquired innovation. and others. These smaller firms frequently are able to enhance their productivity by using technologies adapted Disseminating and using knowledge and technology from the larger innovative companies. Cases such as that is already available in-country. While the study these tend to occur in specific geographic clusters. The found that some Brazilian firms were innovators, mainly local qualifications of human resources--both advanced large enterprises with many employees and strong out- and basic--are crucial to these processes, as the experi- puts, in general, Brazilian firms were found to innovate ence of Embraer demonstrates. less than those of other countries. There is relatively little demand for innovation in the unsophisticated internal Improving Skills across the Labor Force market. Protection continues to undercut the need for in- Brazil's unemployment rates worsened for all workers novation and creative risk taking. Firm productivity is during the 1990s--ranging from those with no education low, and dispersion of productivity is enormous, much through those with primary, secondary, and tertiary educa- greater than in most other countries for which data were tion. The proportion of unemployed university graduates available, including India and China. rose to 16.4 percent, compared with an unemployment rate The report argues that using the knowledge already in of 9.3 percent for the population at large, highly sugges- Brazil provides the quickest and most-promising route tive of a mismatch between the skills of formal education- for increasing productivity and competitiveness to spur al system graduates and the needs of the labor market. The growth. Through this third type of innovation--which is August 2007 · Number 109 · extremely high rate of secondary school dropout similarly theory--but very weak in the applied art of teaching. reflects weakness in the school-to-work transition. · Over the past 20 years, the number of places in primary and secondary schools has increased dramatically; and Strengthening tertiary education. It is well accepted access to primary education is now virtually universal. that more and better education improves employability It is less certain, however, that the quality of education and earnings. However, average educational attainment has increased. This is related less to absolute lack of for the Brazilian population 15 and older is still only 4.3 financial resources (public educational expenditure rose years. Only 8 percent of the labor force has tertiary- from 3.9 percent of GDP in 1995 to 4.3 percent of GDP level educational qualifications and the system is heavily in 2005) than to management factors. skewed toward upper-income families · Pedagogical and curricular factors also contribute to low quality in basic education. Classroom teaching Despite the existence of a number of centers of excellence at the primary level (especially in rural areas) is still at the tertiary level, the overall lack of consistent high conducted very much as it was a generation ago. That quality is critical. Brazil is the world's eighth-most-popu- means students passively copy what the teacher writes lous country, yet no Brazilian university is to be found on the board and are expected to learn by rote memo- among the 100 top-ranked universities worldwide. rization, an approach diametrically opposite to the · Research production is concentrated in a very small kind of active learning that rewards flexible thinking, group of elite public or state universities. conceptual reasoning, and problem-solving skills--in · In the vast majority of small under-funded private other words, the very traits that adult workers need for universities--quality is worse than uneven and serious competitiveness in a knowledge economy. research is neither financed nor rewarded. · The vast majority of academics have not been trained in From Analysis to Action: Who Needs to Do What? research through doctoral training, and have virtually no The report proposes concrete actions in six key ar- opportunity to participate in publicly funded basic R&D. eas--the enabling environment, knowledge creation and · The university and private sector realms remain re- commercialization, acquisition of foreign knowledge, markably segregated and do not intersect, much less leveraging and dissemination of technology use, basic cross-fertilize. education and skills, and tertiary education (advanced · Only a relatively small minority of Brazilian faculty skills). Taken together, these recommendations represent study abroad. In 2005, only 2,075 students were of- a first step toward a comprehensive national plan for ficially sponsored for graduate studies outside Brazil. innovation. Continued analysis, increased public aware- ness, and a vigorous national debate can translate these Other postsecondary training is offered by private pro- recommendations into an integrated national strategy to viders and, in particular, by a set of institutions that form foster innovation-led growth. the "S-system." Present in about 60 percent of Brazilian municipalities, the S-system offers an estimated 2,300 What is clear is that Brazil needs to undertake a broad, courses per year and enrolls about 15.4 million trainees systemic reform process in order to increase the com- annually and could serve as the cornerstone for a lifelong petitiveness of its economy and to accelerate growth. learning framework in Brazil. There is a danger that the recently improved trade perfor- mance--driven by the current boom cycle in commodity Improving basic education. There are a number of rea- prices--will improve economic performance enough to sons why the nation's primary and secondary schools are temporarily justify complacency. Given the fundamental failing to provide the minimum literacy and numeracy changes that are taking place globally, that short-sighted skills necessary for active citizenship and productive par- approach would be costly. ticipation in a technology-based labor market. · Nearly a third of those who teach Brazil's 45 mil- About the Authors lion students have not completed university training, The author is a Lead Education Specialist with the Human Development and only about 20 percent hold masters degrees. For Dept of the Latin America and Caribbean Region of the World Bank. Co- the most part, the training of those who are univer- authors are Carl Dahlman, Jamil Salmi, Jose Guilherme Reis, and Julio sity-educated tends to be very strong in pedagogical Revilla with other contributors listed in the main report. "en breve" is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac · August 2007 · Number 109