Brazil: Doing More With Less / by Mark Langevin

In every sense of the word, Carnaval is over in Brazil. Many have spent their savings and leveraged their future earnings (parceled over the next 6 months or so) to express the very essence of Brazilian culture, enjoying the most passionate side of life framed by reflection on past difficulties and inspired by future possibilities.

Most economists and institutional investors distain the intersection of finance and passion and point to the lack of discipline as an unforgivable sin.  Yet, year after year Brazilians navigate this junction with every emotion under the sun, and then move on to the rest of the year doing more with less. It is a cycle of life, an economic reality, and the reason we all find Brazil as perplexing as it is riveting.

2016 will not be any different, but many Brazilians will consider new ways of achieving economic security to preserve their recent prosperity. This may lead increasing numbers of Brazilian workers and managers to seek ways of increasing their productivity as economic globalization tries to head off the delirious suggestions of the Orixás and more than a few in the Brazilian Congress. Most economists predict a dismal 2016, but optimism is also a powerful emotion that can drive people toward change, transformation, and more to the point, productivity.  Families adjust monthly budgets to fit falling incomes and rising prices, managers frequently empower retained employees to cover for those left behind, and the government must find success in spending less. Most journalists will cover the easy story, the boring story of downturn and fiscal crisis, but between the headlines of economic contraction one can find the initial sparks of economic renewal, and possibly transformation.

Some of these stories can be found far from Brazil’s bustling metropolitan areas, but where Brazil is one of the most competitive international producers: agriculture. According to the OECD-FAO Agricultural Outlook, 2015-2024,

“The agricultural sector plays an important role in underpinning Brazil’s economic performance, even though agriculture’s share of GDP is no more than one would expect given the country’s level of development, at 5.4% in 2010-13. Brazilian agriculture has seen strong growth for over three decades. Total agricultural output has more than doubled in volume compared to its level in 1990 and livestock production has almost trebled, primarily on the basis of productivity improvements… The agricultural sector absorbed about 13% of Brazil’s employment in 2012, or almost three times its share in GDP. The implied low labour productivity compared to the rest of the economy reflects in part the dualistic nature of farming in Brazil, where capital intensive and large-scale production co-exists with traditional farms, including many small and resource-poor farms producing for self-consumption or local markets. Nevertheless, the labour productivity gap in agriculture is declining, with rapid improvements in labour productivity driven mainly by more capital-intensive production. Some of that growth occurred among small-scale farms producing high value products (OECD-FAO Agricultural Outlook, 2015-2024:62).”

The agricultural sector reflects the broad variation in Brazil’s labor productivity, but may also tell us something about the future recovery as well. Despite a slow growing world economy, Brazil’s agricultural sector continues to raise production and productivity levels with very little assistance from government and under the duress of low commodity prices and dollar denominated, imported inputs. For example,

“Brazil is set to achieve record soybean production. According to the fifth survey of grain harvest released by CONAB – the national supply agency - on February 4, output was estimated at 100.93 million tons of the oilseed in the 2015/2016 harvest, up by 4.9% on the 96.22 million tons harvested the previous season.

CONAB predict a record harvest marked by a 3.6% increase in planted area with a total 33.23 million hectares (82.11 million acres) planted to soybeans. ‘Despite specific problems, such as delayed planting, production and yield are expected to be up,” stated CONAB in a recent release (Agriculture.com).”

Throughout the agricultural sector, producers are finding ways to become more productive and profitable despite the evident economic challenges as well as the mounting uncertainty of climate change.

Can the rest of the economy follow agriculture’s lead?

There are signs that productivity is rising measurably in the export sector.  Prof. Nelson Marconi of Fundação Getúlio Vargas (FGV-EESP) reports in the January 2016 edition of Conjuntura Econômica that from December 2014 to October 2015 unit labor costs for manufactured exports fell 16 percent while profit margins increased 10.8 percent. These numbers reflect the immediate competitiveness impact of the Real’s devaluation, but also the increased productivity from more efficient use of human resources. It is precisely this combination that promises a sustainable recovery built upon the external sector.

Clearly Brazil must surmount multiple challenges this year, many of which are further complicated by President Dilma political weakness and the Brazilian Congress’ propensity to delay the most difficult budget decisions. Yet, even incremental reforms that bring down inflation and lower the price of credit contribute toward increasing productivity, albeit very modestly. If labor productivity increases spread across the economy, then expect the alarming drop in plant and equipment purchases to bottom out and begin to rise as producers prepare for the next cycle of expansion, in part fueled by manufactured exports.