Brazil Competitiveness Report 2009

The Brazil Competitiveness Report 2009
Irene Mia, World Economic Forum Emilio Lozoya Austin, World Economic Forum Carlos Arruda, Fundao Dom Cabral Marina Silva Arajo, Fundao Dom Cabral Editors
The Brazil Competitiveness Report 2009 2009 World Economic Forum
The Brazil Competitiveness Report 2009 is published by the World Economic Forum within the framework of the Global Competitiveness Network. The Brazil Competitiveness Report 2009 is the result of a collaboration between the World Economic Forum and Fundao Dom Cabral.
World Economic Forum Geneva Copyright 2009 by the World Economic Forum and Fundao Dom Cabral All rights reserved. No part of this publication can be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise without the prior permission of the World Economic Forum. ISBN-13: 978-92-95044-20-3 ISBN-10: 92-95044-20-7 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Printed and bound in Switzerland by SRO-Kunding, Geneva.
Professor Klaus Schwab, Executive Chairman, World Economic Forum
EDITORS
Irene Mia, Director and Senior Economist, World Economic Forum Emilio Lozoya Austin, Director and Head of Latin America, World Economic Forum Carlos Arruda, Professor of Innovation and Competitiveness, Fundao Dom Cabral Marina Silva Arajo, Economist, Fundao Dom Cabral
GLOBAL COMPETITIVENESS NETWORK
Jennifer Blanke, Director, Senior Economist, Head of the Global Competitiveness Network Ciara Browne, Senior Community Manager Agustina Ciocia, Community Manager Margareta Drzeniek Hanouz, Director and Senior Economist Thierry Geiger, Economist, Global Leadership Fellow Pearl Samandari, Team Coordinator Eva Trujillo Herrera, Research Assistant
THE REGIONAL AGENDA TEAM, LATIN AMERICA
Arturo Franco, Community Manager, Global Leadership fellow, Latin America Antonio Human, Community Relations Manager, Latin America Nathalie de Preux, Senior Community Relations Manager, Latin America A special thank you to Hope Steele for her superb editing work and Pearl Jusem for her excellent graphic design and layout. The terms country and nation as used in this report do not in all cases refer to a territorial entity that is a state as understood by international law and practice. The terms cover well-defined, geographically selfcontained economic areas that may not be states but for which statistical data are maintained on a separate and independent basis.
Contents
Preface ...........................................................................v
by Klaus Schwab, World Economic Forum
Part 3: Taking Advantage of Competitiveness Opportunities ...............................................................49

3.1 Sustainability and Competitive Advantage.................51
by Jacques Marcovitch, University of So Paulo, Brazil
Executive Summary........................................................vii
by Irene Mia and Emilio Lozoya Austin, World Economic Forum; and Carlos Arruda and Marina Silva Arajo, Fundao Dom Cabral, Brazil
3.2 Leveraging Brazils Business Environment for Increased Competitiveness .................................59
Part 1: An Assessment of Brazils Competitiveness............................................................1

1.1 An Appraisal of Brazils Competitiveness Landscape: Insight from the Global Competitiveness Index 20082009...............................3
by Irene Mia and Emilio Lozoya Austin, World Economic Forum; and Carlos Arruda and Marina Silva Arajo, Fundao Dom Cabral, Brazil
by Pablo Haberer and Nicola Calicchio, McKinsey & Company, Inc., Brazil
3.3 Assessing the Performance and Potential of Brazil as a Foreign Direct Investment Destination .............................................................75
by Fabrice Hatem and Anne Miroux, UNCTAD
3.4 Agribusiness: Innovation and Competitiveness in Brazil.........................................87

by Elsio Contini and Francisco Reifschneider, Embrapa, Brazil
iii
Part 2: Overcoming Competitiveness Gaps .................29

2.1 Infrastructure: Will PAC Really Accelerate Growth? .................................................................31
by Paulo Resende, Fundao Dom Cabral, Brazil ..............
Part 4: Country Profiles ...............................................97

How Country Profiles Work ...................................................99 List of Countries...................................................................103 Country Profiles....................................................................104
2.2 Challenges and Institutional Changes to Promote Brazils Competitiveness .............................41

by Claudia Costin, Municipality of Rio de Janeiro, Brazil
About the Authors .........................................................139
Preface
KLAUS SCHWAB Executive Chairman, World Economic Forum
The Brazil Competitiveness Report 2009 is being published at an important moment for Brazil, given the challenges to the national competitiveness agenda brought about by the current global economic downturn. Against the daunting background of what is probably the most serious economic crisis in decades for the United States and the rest of the world, it becomes even more urgent for Brazils public and private sectors to address together the weaknesses in the countrys competitive environment, while at the same time dealing with the negative implications of the global economic outlook. All relevant national stakeholders need, more than ever, to unite in the definition and implementation of a comprehensive competitiveness strategy that is able to ensure sustained economic growth and prosperity for the benefit of all Brazilians for many years to come. The last two decades have been a period of important progress for the country in consolidating macroeconomic stability, liberalizing and opening the economy, and reducing income inequality, among other dimensions. This has put the economy on a sounder foundation in terms of sustainable, long-term growth. Nevertheless, a number of shortcomings continue to undermine national competitiveness. These include high levels of government indebtedness, an overly rigid labor market, and poor educational standards coupled with an enduring inequitable income distribution and low levels of citizens trust in politicians despite the many improvements that have been made. It is a tough call for Brazils institutions to tackle these shortcomings in the present context of major external shocks on export demand and financing availability along with falling commodity prices. The Brazil Competitiveness Report 2009 builds on the methodology and findings of the World Economic Forums Global Competitiveness Report 20082009 and intends to further the understanding of the main competitiveness challenges ahead for Brazil. Moreover, thoughtful essays on specific issues of competitiveness written by leading scholars and practitioners are featured in Parts 2 and 3 of this Report, providing more detailed insight into the challenges and opportunities of Brazils competitiveness landscape. The Report provides a unique platform for discussion and a valuable tool for policymakers, business strategists, and other stakeholders to use in identifying the main hurdles to growth and designing best policies and prac-
tices to foster competitiveness. We hope the Report will provide support for any discussion on Brazils competitiveness aimed at generating concrete insight and priorities for action. We would like to express our gratitude to the distinguished experts and scholars who have contributed excellent papers to the Report, casting light on different aspects key to enhancing Brazils competitiveness. We especially wish to thank the editors of the Report, Carlos Arruda and Marina Silva Arajo at Fundao Dom Cabral, Brazil and Irene Mia and Emilio Lozoya Austin at the World Economic Forum, for their leadership and commitment. Appreciation also goes to the other members of the Global Competitiveness Network: Jennifer Blanke, Ciara Browne, Agustina Ciocia, Margareta Drzeniek Hanouz, Thierry Geiger, Eva Trujillo Herrera, and Pearl Samandari. Last but not least, we would like to convey our sincere gratitude to the network of 150 Partner Institutes around the world and to all the business executives who participated in our Executive Opinion Survey, without whose valuable input the preparation of this Report would not have been possible.
Preface
Executive Summary
IRENE MIA, World Economic Forum EMILIO LOZOYA AUSTIN, World Economic Forum CARLOS ARRUDA, Fundao Dom Cabral, Brazil MARINA SILVA ARAJO, Fundao Dom Cabral, Brazil
With its extensive and growing domestic market, rich natural resources, and diversified industry and export structure, Brazil is increasingly becoming a key player in the global economic and geopolitical landscape. Moreover, since the 1990s, important steps have been taken toward improving fiscal sustainability as well as liberalizing and opening up the economy and reducing poverty and income inequality. This has put the country in a stronger position to weather the current global economic turbulence and the related major external shocks in both export demand and financing as well as falling commodity prices. However, a number of shortcomings continue to affect Brazils competitiveness landscape and prevent the country from fully leveraging its large potential and realizing higher growth and prosperity. Important imbalances are still present in the macroeconomic environment, no doubt caused by the challenges to achieving a prompt fiscal adjustment brought about by large unmet social needs, as well as by widespread rigidities in the tax system, regulatory system, and goods and labor markets, among other factors. Moreover, despite the governments greater focus on education in recent years, the country has failed to upgrade its basic and higher educational standards to the level of best practices. Also a large part of the population has not been lifted out of poverty, and the country continues to display one of the most unequal income distributions in the world. The Brazil Competitiveness Report 2009 provides Brazils policymakers, business leaders, and relevant stakeholders with a unique instrument in identifying the countrys main competitiveness flaws and strengths, together with in-depth analyses on areas crucial for long-term economic growth. In doing so, the Report aims to support national stakeholders in defining a national competitiveness agenda by identifying the priority issues that need to be tackled for Brazil to boost its competitiveness in the context of the current challenging economic outlook. The Report is organized into four thematic parts. Part 1 gauges the current state of Brazils competitiveness and its potential for sustained growth using the broad methodological framework offered by the Global Competitiveness Index (GCI) 20082009. Parts 2 and 3 feature contributions from a number of experts providing additional insights on key challenges and opportunities related to Brazils competitiveness. Part 4 includes
detailed profiles for Brazil and eight selected comparator countries, offering a comprehensive competitiveness snapshot for each of these countries.
Part 1: An assessment of Brazils competitiveness In Chapter 1.1, An Appraisal of Brazils Competitiveness Landscape: Insight from the Global Competitiveness Index 20082009, editors Irene Mia and Emilio Lozoya Austin (both at the World Economic Forum) and Carlos Arruda and Marina Silva Arajo (both at Fundao Dom Cabral, Brazil) provide an account of the main impediments and opportunities related to Brazils competitiveness. The chapter is based on the findings of the most recent GCI, featured in The Global Competitiveness Report 20082009. To properly benchmark Brazils progress and challenges, comparisons are made with selected relevant national and regional comparators. The GCI provides a state-of-the-art methodological framework to assess the set of institutions, policies, and factors that determine the level of productivity of a country and identifies a large number of macro- and microeconomic drivers of growth around 12 pillars of competitiveness. These pillars all drive national competitiveness, but their importance differs according to any given countrys stage of development. The elements driving productivity, and therefore competitiveness, change as countries move along the development path. Accordingly, the GCI classifies countries into three specific stages of development: factor-driven, efficiency-driven, and innovation-driven. Brazil is currently placed in the efficiency-driven stage, together with regional neighbors Argentina, Colombia, and Peru, and other relevant comparators such as South Africa and Thailand. Brazil is ranked 64th among 134 countries in the most recent GCI computation (59th in a constant 200506 sample), showcasing a remarkable eightposition improvement from 2007. Table 1 summarizes the findings of the GCI 20082009 for Brazil, displaying the rankings for each of its component 12 competitiveness pillars. The countrys performance captured by each of the 12 pillars reveals a number of weaknesses and challenges, which need to be addressed if the country is to fully leverage its competitive potential. The poor marks registered for macroeconomic stability (122nd), goods (101st) and labor market (91st) efficiency, and institutions (91st) are particularly worrisome in view of
Executive Summary
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Executive Summary
Table 1 Pillar
Brazils competitiveness at glance, as assessed by the GCI 20082009 Rank 122 101 91 91 79 78 64 58 56 43 35 10
Macroeconomic stability Goods market efficiency Labor market efficiency Institutions Health and primary education Infrastructure Financial market sophistication Higher education and training Technological readiness Innovation Business sophistication Market size
Source: World Economic Forum, 2008.
viii
the importance of basic requirements and efficiency enhancers at Brazils current stage of development. Among the other deficiencies in need of improvement and upgrading are the quality of the educational system (79th and 58th in the health and primary education and higher education and training pillar, respectively), and infrastructure (78th). On a more positive note, Brazil can count on an extensive market for its firms (10th) and a fairly sophisticated and innovative business sector (35th and 43rd in the business sophistication and innovation pillar, respectively) among its main competitive advantages. The authors point out how significant steps have been taken in the last two decades or so toward macroeconomic stability, as well as toward opening, liberalizing, and diversifying Brazils economy. However, the analysis performed by the GCI highlights areas that remain of concern among the basic requirements (e.g., a poor macroeconomic environment and institutions) as well as the efficiency enhancers (e.g., inefficient and rigid goods and labor markets and a poor quality higher education system). These shortcomings need to be addressed by a joint effort of all political parties, the business sector, and civil society. Only then could the country fulfill its potential and generate long-term growth and prosperity for all Brazilians.
Part 2: Overcoming the competitiveness gaps This part of the Report provides an in-depth assessment of two major weaknesses affecting Brazils competitiveness landscape and the remedial steps that have already been taken, together with some proposals for action. The areas examined are infrastructure and the countrys institutional environment. The Growth Acceleration Program (PAC), infrastructure, and competitiveness Infrastructure is one of the basic requirements of any competitive economy. However, as a result of a historical
lack of planning and sustained investment, the current state of Brazilian infrastructure requires robust interventions to improve the capacity and efficiency of all transport modes as well as energy generation and distribution. Indeed, infrastructure as it is today does not fully support Brazils integration into global markets, which is a key determinant of interregional and international competitiveness. Also it results in higher logistics costs in Brazil vis--vis similar economies, with negative implications for interregional trade efficiency. In his chapter Infrastructure: Will PAC Really Accelerate Growth? Paulo Resende (Fundao Dom Cabral, Brazil) provides a thoughtful account of the main challenges involved in upgrading Brazils infrastructure network, as well as of the US$280 billion PAC, launched by Brazils federal government in 2007 to address the accumulated infrastructure demand of the past three decades. Furthermore, he examines PACs implications in terms of accelerating Brazils development and competitiveness.The author argues that PAC is a significant step in the right direction, but further actions and programs are needed. Private participation should become constant through regulatory milestones that permit sustained returns on investment; the states and the federation should share responsibilities and authority for infrastructure facilities, making rational and non-ideologically based decisions, among others. PAC has tried to convey a message about the need for better allocation of expenditure, focusing on strategic goals and thereby reducing the overall cost of infrastructure. How to generate the fiscal ability to increase public investment remains a critical issue. Finally, the success of PAC depends not only on the governments good will and commitment, but also on its capacity to bring different stakeholders together and to change or overcome federal, state, or municipal laws, rules, and procedures that are not conducive to investment in infrastructure, particularly through public-private partnerships.
Institutional environment and competitiveness In her chapter Challenges and Institutional Changes to Promote Brazils Competitiveness, Claudia Costin (Municipality of Rio de Janeiro, Brazil) identifies and examines a number of shortcomings in Brazils institutional environment that have hampered the countrys growth in the recent past and are impeding the improvement of its competitiveness. Among these are a vision of public management and control that focuses on processes rather than results; the very recent consolidation of property rights and creation of several regulatory agencies; the excess and overlapping of public agencies involved in regulation, not completely dissociated from political parties; frequent modifications in the legislation regarding the private sector and private investment; fragile political institutions captured by patronage on one hand and corporatism on the other; and, last but not least, a poorly educated workforce. The author deems that Brazil presents all the conditions necessary for becoming one of the most dynamic BRIC economies, provided the institutional hindrances above are tackled. She puts forward a few remedial measures, including the consolidation of the rule of law and property rights; the simplification of the regulatory framework and of the interface with the private sector; the modernization of public institutions in order to achieve more efficiency; and the upgrading of the workforce, especially at the higher education level. Adopting these measures is crucial to making the countrys regulatory environment become competitiveness friendly and support Brazils efforts to effectively compete in a more integrated world economy.
The author points out how the Brazilian business sector shows a notable inclination toward competitiveness and acts proactively on environmental issues, increasingly using or developing clean technologies. He emphasizes that this approach on the part of businesses provides a good rebuttal to those who wrongly argue that the Kyoto Protocol had no impact on corporate strategy, at least in Brazil. Also, although Brazilian companies are not overly enthusiastic about the competitive gains derived from environmentally friendly practices, according to Marcovitch they show a willingness to maintain ongoing environmental strategies in their respective sectors. On a less positive note, the notion of the environments relevance for domestic competitiveness does not appear to have been sufficiently disseminated in the business world. Senior executives in the private sector, as well as in government-owned companies, do not succeed in effectively transmitting to their respective organizations a strategic vision when dealing with sustainability. The author concludes that the path to changing such a situation will necessarily go through civil society, where the more open-minded and organized sectors can play an important role as change agents. Also, education at all levels should stress environmental responsibility in Brazil as well as globally. Business sophistication as a driver of enhanced competitiveness In their chapter Leveraging Brazils Business Environment for Increased Competitiveness, Pablo Haberer and Nicola Calicchio, (both at McKinsey & Company, Inc., Brazil) highlight how, despite its low overall competitiveness scores, Brazil performs relatively well on a number of indicators related to the quality and dynamism of its business environment, including the sophistication of its production processes, its capacity for innovation, and its marketing and consumer orientation. Therefore it becomes important to explore how Brazil can leverage the dynamism of its business environment for better growth and competitiveness. The authors identify three major avenues toward this end as follows: (1) a higher participation of the formal sector in the overall economy, to be obtained by reducing the high costs of operating formally and hence the incentives to stay informal; (2) the extension of businesssector best practices to increase productivity in the public sector; and (3) the leverage of opportunities for accelerated growth offered by global mega-trends such as the emergence of a new consumer market and the increased demand on natural resources. In 1998, the McKinsey Global Institute published a report on Brazilian economic performance. That reports main conclusion was that the country could embark on a trajectory of accelerated growth that would double GDP over a 10-year period if economic policies that both
Part 3: Taking advantage of competitiveness opportunities This part of the Report focuses on Brazils competitive strengths and opportunities that can be further exploited for enhanced competitiveness. A number of deep-dives on the environment as a competitive advantage, business sophistication, FDI to and from Brazil, and innovation in the agribusiness sector are presented. Environment as a competitive advantage Similar to many other countries, Brazil has not reached yet a satisfactory level of environmental awareness, although significant progress has been made in this area since the second half of the 1980s. Reflecting societys growing awareness of these issues, the corporate world has been moving in the right direction to make sustainable management a competitive differential. Chapter 3.1, Sustainability and Competitive Advantage by Jacques Marcovitch (University of So Paulo, Brazil), examines the degree of environmental sustainability displayed by the private sector in the country, unveiling an encouraging panorama of businesses from all sectors engaged in moving the economy to new levels of sustainability.
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Executive Summary
enabled and motivated productivity growth were put in place. The report emphasized that there were no structural, insurmountable barriers keeping Brazil from achieving much higher productivity levels than it recorded at the time. While Brazils GDP has not doubled since then, the performance of national leading companies across many sectors has been outstanding, particularly during the period of relative stability between 2004 and 2008. The authors believe the transformative and competitive capabilities of Brazils entrepreneurs are a reason for hope in fulfilling the forecast of the 1998 report, taking into consideration that they can enable substantial gains to Brazils competitiveness going forward. Brazil and FDI FDI flows and stocks have significantly increased over the past 15 years in Brazil, making the country the largest host for foreign investment in Latin America and second only to China among developing countries. Assessing the Performance and Potential of Brazil as a Foreign Direct Investment Destination by Fabrice Hatem and Anne Miroux (both at UNCTAD) explores the main enabling factors behind the above encouraging trend, including Brazils competitive advantagessuch as its large and expanding market coupled with its abundant natural resources and its relative openness to FDI. The composition of FDI located in the country by sector, mode of entry, and nationality of the investor are analyzed in the chapter, together with the challenges that lie ahead for Brazil in maintaining and consolidating its status as a top FDI destination. Last but not least, the authors examine the key role taken recently by foreign companies in many activities and sectors of the domestic economy, ranging from the primary sector (mining, biofuels) to manufacturing (automotive, metals, chemicals, food, and so on) and services (telecommunications, retail, banking, and so on). They conclude that, against a background of growing worldwide competition in the attraction of FDI, Brazils recent performance has been positive. Brazils welcoming attitude toward FDI, the countrys vast natural resources, and its market potential are three of the major factors behind its good performance in this area. However, important obstacles to further increasing FDI are to be found in the fairly weak government efficiency and severe competition from low-cost destinations in some labor-intensive, export-oriented activities. The authors also identify a more recent trend toward internationalization of Brazilian companies, with a consequent rise in FDI outflows. This seems to suggest that a new step has been taken in Brazils development pathone that has transformed the country into one of the major economic powerhouses of the Southern Hemisphere.
Agribusiness and innovation for competitiveness Chapter 3.4, Agribusiness: Innovation and Competitiveness in Brazil by Elsio Contini and Francisco Reifschneider (both at Embrapa), focuses on the importance of innovation for Brazil to continue growing and generating wealth for the benefit of all its citizens, by analyzing the factors that allowed Brazilian agribusiness to become competitive in international markets. The authors also examine, from the point of view of innovation and its enabling conditions, what allowed Brazil to adequately supply its domestic market and become a large exporter of products of agricultural origin (both raw and processed). Innovation has played an important role in the development of Brazilian agriculture and, particularly in recent decades, has allowed for growth and the good performance of Brazilian agribusiness. The case of the agribusiness sector makes clear that there are many basic conditions for innovation. These range from investment in public research, which is responsible for a large part of Brazilian agricultural research, to various systems of incentives for Brazilian small, medium, and large entrepreneurs. In the current globalized scenario in which there is a clear international division of labor, the critical question, the authors believe, is whether Brazil will be a world leader in agribusiness products (e.g., foodstuffs, fibers, forestry products) as well as in agro-energy. For this to happen, in the context of the future scenario of climate change, severe limitations on water supply, biological security, and non-tariff and energy barriers, greater speed in innovation on the part of the agribusiness sector will be required. Important enabling elements for this will be greater investment in research, the presence of highly qualified human resources across the producing chains, and a better capacity for institutional innovationwhich is weak at the moment in Brazilso that porosity between the public and private and the national and international sectors may be fairly exploited to the benefit of all citizens.
Part 4: Country profiles Part 4 presents detailed competitiveness profiles for Brazil and the countries used as comparators in the analysis performed in Part 1 of this Report, together with a section on how to read the country profiles and interpret the information they provide.
An Assessment of Brazils Competitiveness

1
CHAPTER 1.1
An Appraisal of Brazils Competitiveness Landscape: Insight from the Global Competitiveness Index 20082009
IRENE MIA, World Economic Forum EMILIO LOZOYA AUSTIN, World Economic Forum CARLOS ARRUDA, Fundao Dom Cabral, Brazil MARINA SILVA ARAJO, Fundao Dom Cabral, Brazil
Displaying an impressive GDP of US$1,314 billion and with a population of 191 million in 2007,1 Brazil is the 10th largest economy and 5th most populous country in the world, as well as the largest market in Latin America and the Caribbean. This, coupled with rich natural resources and a fairly sophisticated industrial base, provides the country with key competitive advantages in agriculture and livestock, an important source of export revenues in times of high commodity prices and an important potential for further industrial and export diversification in the future. These factors have also made Brazil the leading foreign direct investment (FDI) recipient in Latin America, with a US$35 billion inflow in 2007, as compared with US$25 and US$16 billion to the second and third top destinations in the region, Mexico and Chile.2 Further, the last two decades have seen a consolidation in macroeconomic stability in recognition, on the part of successive governments, of the importance of sound macroeconomic fundamentals as a prerequisite for private-sector development. The above remarkable achievements and competitive strengths are not fully reflected to date in Brazils performance in terms of economic growth rates, enhanced competitiveness, and better living conditions for its citizens. Indeed, the country has registered average annual growth rates of 3.9 percent for the 200307 period, rather poor when compared with 10.8 percent, 8.6 percent, and 7.3 percent, respectively, of fellow BRIC countries China, India, and Russia;3 likewise, Brazils evolution in the Global Competitiveness Index (GCI) rankings over the 200508 period has been fairly erratic, with the country placing in middling positions year after year (64th out of 134 countries in the latest computation in 20082009). Last but not least, despite an increase in social spending, Brazils income distribution remains among the most unequal in the world, pointing to the fact that the countrys immense potential has not yet translated into increased prosperity for all Brazilians.4 Moreover, progress in establishing a solid foundation of macroeconomic stability has been slower than expected, reflecting the difficulties of a quick fiscal adjustment in the presence of large unmet social needs, as well as widespread rigidities in the tax system, regulatory system, and goods and labor market, among others. In addition, the major external shock on export demand and financing availability, brought about by the current global economic crisis, coupled with falling commodity prices, is expected to slow Brazils growth to 1.8 percent in 2009. In view of the above, it becomes critical to identify the impediments to sustained growth and competitiveness-enhancing policies and strategies.
1.1: An Appraisal of Brazil's Competitiveness
Figure 1
The 12 pillars of competitiveness
Institutions Infrastructure Macroeconomic stability Health and primary education
Key for economies
Higher education and training Goods market efficiency Labor market efficiency Financial market sophistication Technological readiness Market size
Key for economies
Key for Business sophistication Innovation economies
4 The Brazil Competitiveness Report 2009 provides a comprehensive overview of the countrys current competitiveness landscape, highlighting strengths and problematic areas in need of immediate attention and action. It aims at being a useful tool for policymakers and all interested and relevant stakeholders in the design of an effective competitiveness strategy for Brazil for the years to come. This chapter will introduce the Report by gauging the state of Brazils competitiveness and its potential for sustained growth in the long run through the methodological lens of the GCI, developed for the World Economic Forum by Xavier Sala-iMartin of Columbia University. The GCI offers a snapshot of the factors, institutions, and policies driving countries competitiveness and represents an invaluable instrument for policy prioritization according to national levels of development. In the rest of the Report, respected academics and experts will address the different competitiveness challenges facing Brazil at present (Part 2), while highlighting the competitiveness opportunities that the country could and will need to increasingly leverage to sustain and boost its growth potential going forward (Part 3). The findings of the Report will be presented and discussed during the World Economic Forum on Latin America 2009 to be held in Rio de Janeiro on April 1416, 2009. It is hoped they will raise awareness on the continuing importance of focusing on long-term competitiveness especially in the present time of crisis. After a brief outline of the GCI methodology, this chapter will focus on Brazils performance in the 12 pillars of competitiveness highlighted in the Index, using the results of the latest GCI computation, featured in The Global Competitiveness Report (GCR) 20082009. Comparisons with relevant countries and regions will be made to set Brazils showing into context.
The Global Competitiveness Index: Presenting the methodological framework Introduced by the Forum in 2004, in the years since its inception the GCI has become one of the most respected and broadly used international assessments of national competitiveness. Building on the most recent competitiveness literature and thinking, as well as on previous Forum competitiveness indexes, the GCI represents a comprehensive methodological framework casting light on the the set of institutions, policies, and fac5 tors that determine the level of productivity of a country. Taking into account the complex nature of competitiveness, the Index identifies 12 pillars of competitiveness (see Figure 1), reflecting the diverse and interrelated factors that have a bearing on national long-term potential for sustained growth. Below is a brief description of each of the pillars composing the GCI and the main aspects they take into consideration. Also see Appendix A: Structure of the
Global Competitiveness Index 20082009 at the end of this chapter for more detailed information on the more than 110 variables included in the pillars. Institutions: the quality of public and private institutions, including perceived fairness and transparency of government activities, government efficiency, security level, and corporate governance; Infrastructure: the quality and extent of general and specific basic infrastructure, including roads, railroads, ports, air transport, and fixed telephony; Macroeconomic stability: the soundness of the macroeconomic environment and the related quality of macroeconomic management; Health and primary education: the general health level of a countrys population and the quality of, and access to, basic education; Higher education and training: the quality of, and access to, secondary and higher education and effectiveness of on-the-job training; Goods market efficiency: the extent of domestic and foreign competition in a given market and the quality of demand conditions; Labor market efficiency: the flexibility of the labor market and the degree to which it ensures the efficient allocation and use of talent; Financial market sophistication: the sophistication and trustworthiness of financial markets; Technological readiness: the penetration of information and communication technologies (ICT) and countries capacity to leverage exogenous technology and knowledge, notably through FDI, by adopting and adapting it in their production systems; Market size: the size of the domestic and foreign markets available for firms operating in a given country; Business sophistication: at the firm level, the degree of sophistication of operations and company strategies and the presence and development of clusters; and Innovation: the national potential to generate entirely new products and processes. Underpinning the GCIs methodological framework is the idea that, although the 12 pillars all matter in determining countries competitiveness, each does this in a different way, depending on the specific stage of development of each country. Factors that crucially drive national competitiveness evolve as economies move up in the development path. In this sense, the Index, integrating the well-known theory of stages of 6 development, classifies economies into the three following stages of development: factor-driven, efficiencydriven, and innovation-driven. In the initial, factor-driven stage, nations compete based on their factor endowments, primarily unskilled labor and natural resources, and their economies are centered on commodities and/or basic manufactured products. Efficient public and private institutions (pillar 1), well-
developed infrastructure (pillar 2), good macroeconomic fundamentals (pillar 3), and a healthy and literate labor force (pillar 4) are critical for competitiveness at this stage. As countries progress to the efficiency-driven stage, their competitiveness becomes increasingly driven by wellfunctioning factor markets and efficient production processes and practices at the firm level. Important elements at this stage include quality higher education and training (pillar 5); efficient markets for goods and services (pillar 6); flexible and well-functioning labor markets (pillar 7); sophisticated financial markets (pillar 8); a large domestic and/or foreign market allowing for economies of scale (pillar 9); and the ability to leverage existing technologies, notably ICT, in the national production system (pillar 10). In the most advanced, innovation-driven stage, nations cannot rely exclusively on their factor endowments and efficient market and production systems to continue to grow and need to start developing unique, high value added goods. Therefore, the capacity to generate innovation (pillar 11) and to use sophisticated production processes (pillar 12) become key. Countries are allocated to the different stages of development according to their GDP per capita at market exchanges, rates as a proxy for wages. This criterion is then corrected by a second one measuring the extent to which countries are factor-driven, using as a proxy the share of exports of primary goods in total exports (goods and services); the assumption is that countries that export more than 70 percent of primary products are to a large extent factor-driven. A list of the 134 economies included in The Global Competitiveness Report 20082009, regrouped by stages of development, is displayed in Table 1. The economies falling in between two of the three stages are defined as being in transition. Table 1 shows that Brazil is currently in the intermediate, efficiency-driven, stage of development, therefore its competitiveness depends critically on pillars 1 through 10. The concept of stages of development is used to organize the GCIs 12 pillars of competitiveness into three subindexes (see Figure 1), as follows: 1. pillars 1 through 4 are considered basic requirements of competitiveness, key for factor-driven economies but also representing the foundation of any competitive economy; 2. pillars 5 through 10 are defined as efficiency enhancers, crucial for economies in an efficiencydriven stage; and 3. pillars 11 and 12 represent innovation and sophistication factors, particularly relevant for innovationdriven economies. The above is reflected in the calculation methodology of the GCI, in which different relative weights are
Table 1
List of countries/economies at each stage of development
Stage 1
Transition from 1 to 2
Stage 2
Transition from 2 to 3
Stage 3
Bangladesh Bangladesh d h Benin Bolivia Burkina Faso a Faso s Burundi Cambodia Cambodia d Cameroon Cameroon o Chad Cte d'Ivoire d'Ivoire I r Egypt Ethiopia a Gambia, The Gambia, Th a he Ghana Guyana a Honduras India Indonesia Indonesia s Kenya Kyrgyz Republic Republic R i o Lesotho Madagascar a a Madagascar Malawi Mali Mauritania a Mauritania Moldova v Moldova Mongolia l Mongolia Mozambique u Mozambique Nepal Nicaragua g Nicaragua Nigeria Pakistan Pakistan Paraguay Paraguay Philippines Senega a Senegall Lanka k Sri Lanka Syria Tajikistan a Tajikistan Tanzania Tanzania e Timor-Leste a Uganda m Vietnam Zambia Zimbabwe Zimbabwe
Armenia a Azerbaijan Botswana Botswana n Brunei D Darussalam Darussalam l China El Salvador Salvador d Georgia Guatemala Guatemala a Iran Jordan Kazakhstan Kazakhstan s Kuwait Libya Morocco o Oman Saudi Arabia Arabia r a Venezuela Venezuela e
Albania Algeria Argentin Argentina na Bosnia and Herzegovin Herzegovina z na Brazil Bulgaria a Colombia Costa Rica Dominican Republic Dominican Republic c R u Ecuador Ecuador Jamaica a Macedonia, FYR Macedonia, R o Malaysia Malaysi ia Mauritius Mauritius u Mexico Montenegro Montenegro n o Namibia a Panama a Peru Romania Serbia A a South Africa Surinam me Suriname d Thailand Tunisia e Ukraine y Uruguay
Bahrain n Barbados Chile Croatia Estonia Hungary Hungary Latvia Lithuania Lithuania Poland Qatar Russian Federation n Federation d Slovak Republic Republic R u c Taiwan, China , Trinidad and Tobago d d Tobago b Turkey
Australia Austria Belgium m Canada a Cyprus Czech Republic Republic R u Denmark Finland France Germany Germany n Greece Hong Kong SAR Kong R Iceland Ireland Israel Italy Japan Korea, Rep. R . Luxembourg Luxembourg b Malta Netherlands l Netherlands Zealand e n New Zealand y Norway Portugal a Portugal o Puerto Rico Singapore o Singapore Slovenia Spain n Sweden Switzerland r d Switzerland A b Emirates m United Arab Emirates King m K gdom United Kingdom S United States
assigned to each subindex according to the specific development stage of a country, as detailed in Table 2.7 In the case of Brazil, for instance, 40, 50 and 10 percent of the overall score is determined by the scores obtained respectively in basic requirements, efficiency enhancers, and innovation and sophistication factors. In line with the Forums benchmarking methodology, the GCI is composed of a mixture of hard and survey data capturing both quantitative and qualitative determinants of national competitiveness. Hard data capture quantitative factors, such as inflation rates, public
debt, or enrollment rates and are collected by international organizations, including the IMF, the World Bank, and various United Nations agencies. Internationally collected and validated data ensure the comparability of the latter across countries. The survey data gauge dimensions that are more qualitative in nature or for which there are no hard data available for a large number of countries, but are nonetheless crucial in capturing national competitiveness. These data come from the Executive Opinion Survey (the Survey), which the Forum administered to over
Table 2
Pillar group
Weights of the three subindexes per stage of development

Factor-driven stage (%) Efficiency-driven stage (%) Innovation-driven stage (%)
Basic requirements Efficiency enhancers Innovation and sophistication factors

60 35 5
40 50 10
20 50 40
Table 3
Key indicators, Brazil and selected countries

Population (millions), 2008 GDP (US$ billions), 2007 GDP 200307 growth GINI index
Brazil Chile China India Mexico Russian Federation South Africa Spain Turkey
194.2 16.8 1,336.8 1,186.2 107.8 141.8 48.8 44.6 75.8
1,313.6 163.8 3,250.8 1,098.9 893.4 1,289.6 282.6 1,439.0 663.4
3.84 5.00 10.80 8.60 3.38 7.28 4.70 3.51 6.91
57.0 54.9 46.9 36.8 46.1 39.9 57.8 34.7 43.6
Source: Population Funds State of World Population 2008; International Monetary Fund (IMF)s World Economic Outlook Database (October 2008); WDI 2008.
12,000 business leaders across 134 economies in 2008. Examples include dimensions relating to the efficiency of the government, public ethics standards, or the quality of education, among others. For all these dimensions, for which no hard data are available, the Survey represents an invaluable source of information and insight.
The state of Brazils competitiveness according to the GCI 20082009 This section will provide a broad assessment of Brazils competitiveness, building on the findings of the most recent GCI, featured in The Global Competitiveness Report 20082009. To place Brazils competitiveness performance into context, comparisons will be made with
Figure 2 Brazils competitiveness performance at glance, 2008
selected countries and regions of interest. In this spirit, Brazil will be compared to Chile (the regional top performer) and Mexico within the region; with fellow BRIC countries China, India, and Russia; with other relevant and comparable emerging markets such as South Africa and Turkey; and with Spain, as a European comparator (see Table 3 for some comparative key facts). The averages of Latin America and the Caribbean, the BRIC countries, and EU Accession 12 will also be added to the picture.8 Figures 2 and 3 show, respectively, Brazils competitiveness performance in 200809 by pillar and the evolution of Brazil in the GCI rankings from 2005 to 2008 in a constant 2005 sample.9
Macroeconomic stability Goods market efficiency Labor market efficiency Institutions Health and primary education Infrastructure Financial market sophistication Higher education and training Technological readiness Innovation Business sophistication Market size 0 10 20 40 60 80 100 120 35 43 58 56 64 79 78 91 91 101
122
140
Source: World Economic Forum, 2008. Source: World Economic Forum, 2008.
Figure 3
80
Brazils evolution in the GCI ranking, 20052008
65 60 50
67 59
40
20
20052006
20062007
20072008
20082009
Note: Ranks are in a constant 20052006 sample.
Tables 4 through 7 complement the information of the figures with a comparative perspective, displaying Brazils rankings and scores in the GCI 20082009 and in the three component subindexes together with those of Chile, China, India, Mexico, Russia, South Africa, Spain, and Turkey, as well as the scores for the regional, BRIC and EU Accession 12 averages. Brazil ranked 64th out of 134 economies in the GCI 20082009 and last in the comparative sample, with quite a diverse showing across the 12 competitiveness pillars, as indicated in Figure 2. While Brazil can count on an extensive large market for its firms (10th) and a fairly sophisticated and innovative business sector (35th and 43rd in the business sophistication and innovation pillars, respectively) among its main competitive advantages, the perceived quality of its institutions (91st), the efficiency of its labor (91st) and good (101st) markets, and especially its macroeconomic stability (122nd)
Table 4
remain areas of concern. It is worth noting that some of Brazils best showings are to be found in the innovation and sophistication factors, which, as mentioned, are bound to become increasingly important as the country moves from its current, efficiency-driven stage of development to the most advanced, innovation driven one. Although this may bode well for Brazils growth prospects going into the future, it should not lead to complacency and to overlooking the serious deficiencies affecting several efficiency enhancers and basic requirement of competitiveness, on which the countrys current competitiveness crucially depends. In particular, as Table 4 points out, basic requirements (96th) are especially problematic, as opposed to efficiency enhancers (51st) and innovation factors (42nd), which are sounder. A glance at Brazils evolution over the last four years highlights a relatively erratic trend (Figure 3), with nonetheless a noticeable improvement from 2007 to 2008
GCI 20082009 and its subindexes: Brazil and selected comparators

Basic requirements Efficiency enhancers Rank Score Innovation factors Rank Score
Country/region
Rank
Score
Rank
Score
64 28 30 50 60 51 45 29 63
4.23 4.72 4.70 4.33 4.23 4.31 4.41 4.72 4.15 3.92 4.37 4.29
96 36 42 80 60 56 69 27 72
3.98 5.15 5.01 4.23 4.47 4.54 4.41 5.34 4.34 4.22 4.44 4.67
51 30 40 33 55 50 35 25 59
4.28 4.58 4.41 4.49 4.16 4.29 4.46 4.75 4.10 3.77 4.37 4.30
42 44 32 27 70 73 36 29 63
4.04 4.00 4.18 4.29 3.60 3.56 4.13 4.25 3.70 3.43 4.02 3.78
Latin America & the Caribbean average BRIC average EU Accession 12 average
Table 5
Basic requirements 20082009: Brazil and selected comparators

Macroeconomic stability Rank Score Health and primary education Rank Score Rank Score
Institutions Country/region Rank Score
Infrastructure Rank Score
91 37 56 53 97 110 46 43 80
3.56 4.73 4.18 4.23 3.49 3.29 4.55 4.59 3.72 3.57 3.82 4.07
78 30 47 72 68 59 48 22 66
3.15 4.59 4.22 3.38 3.51 3.75 4.21 5.30 3.54 3.22 3.63 3.72
122 14 11 109 48 29 63 30 79
3.89 5.90 5.95 4.32 5.32 5.55 5.06 5.53 4.79 4.68 4.93 5.20
79 73 50 100 65 59 122 35 78
5.31 5.37 5.71 4.99 5.55 5.59 3.84 5.96 5.33 5.41 5.40 5.70
96 36 42 80 60 56 69 27 72
3.98 5.15 5.01 4.23 4.47 4.54 4.41 5.34 4.34 4.22 4.44 4.67
Table 6
Efficiency enhancers 20082009: Brazil and selected comparators

Higher education and training Goods market efficiency Rank Score Labor market efficiency Rank Score Financial market sophistication Rank Score Technological readiness Rank Score Market size Rank Score Rank Score
Country/region
Rank
Score
58 50 64 63 74 46 57 30 72
4.12 4.34 4.05 4.06 3.83 4.40 4.13 4.75 3.87
101 26 51 47 73 99 31 41 55
3.90 4.91 4.48 4.52 4.14 3.90 4.79 4.63 4.38 4.01 4.20 4.45
91 17 51 89 110 27 88 96 125
4.15 4.90 4.49 4.16 3.97 4.74 4.17 4.11 3.57 4.15 4.39 4.41
64 29 109 34 66 112 24 36 76
4.36 5.05 3.64 4.98 4.30 3.60 5.22 4.93 4.11 4.12 4.15 4.60
56 42 77 69 71 67 49 29 58
3.59 3.99 3.19 3.27 3.25 3.36 3.70 4.59 3.53 3.20 3.35 4.15
10 47 2 5 11 8 23 12 15
5.54 4.26 6.58 5.96 5.48 5.71 4.77 5.47 5.16 3.43 5.95 3.64
51 30 40 33 55 50 35 25 59
4.28 4.58 4.41 4.49 4.16 4.29 4.46 4.75 4.10 3.77 4.37 4.30
Latin America & the Caribbean average 3.74 BRIC average 4.16 EU Accession 12 average 4.54
Table 7
Innovation and sophistication factors: 20082009: Brazil and selected comparators

Business sophistication Innovation Rank Score Rank Score
Country/region
Rank
Score
35 31 43 27 58 91 33 24 60
4.58 4.65 4.50 4.85 4.24 3.70 4.62 4.89 4.23 3.97 4.41 4.20
43 56 28 32 90 48 37 39 66
3.50 3.35 3.87 3.74 2.95 3.41 3.64 3.61 3.16 2.89 3.63 3.37
42 44 32 27 70 73 36 29 63
4.04 4.00 4.18 4.29 3.60 3.56 4.13 4.25 3.70 3.43 4.02 3.78
(up eight positions in a constant 2005 sample). Such a development is the result of important advances registered across the board, particularly marked in the institutions, labor market, and technological readiness pillars. The rest of this section will discuss Brazils performance in each of the 12 dimensions covered by the GCI, in order to highlight competitive strengths and opportunities, as well as weaknesses that need to be addressed for the country to fully leverage its potential. Basic requirements According to the GCI methodological framework, fair and well-functioning institutions, a stable macroeconomic environment, well-developed infrastructure, and a healthy and literate workforce represent basic requirements of competitiveness. These are particularly important for factor-driven economies but also, as their name suggests, are basic elements of every countrys competitiveness. In the case of efficiency-driven economies such as Brazil, they account for a considerable 40 percent of the overall GCI score. Brazil ranks a dismal 96th place for the quality of its basic requirements, by far the worst showing across the three subindexes. The country is also last in the comparative sample, with gaps of 69 and 60 places, respectively, with respect to Spain (27th) and Chile (36th)top performers in this respect. Brazil, with a 3.98 score, also significantly underperforms the EU Accession 12 (4.67), BRIC (4.44), and even regional (4.22) averages. On a more positive note, the country has posted important improvements in the four pillars composing the subindex since 2007, making a definite step in the right direction. Yet the performance gap vis--vis the majority of the comparators suggests that there is a long and difficult path ahead to catch up with international best practices. Institutions A transparent and well-functioning institutional environment is a necessary precondition for national social actorsnamely individuals, businesses, and the governmentto be able to interact efficiently and generate wealth and prosperity. In this sense, competitivenessenhancing public institutions strongly guarantee property rights and a fair environment for contract enforcement and dispute resolution, and operate in a fair and efficient manner. They also define the development strategy and the best allocation of costs and benefits, together with promoting entrepreneurship, maintaining macroeconomic stability, managing risk-taking by financial intermediaries, providing social security and adequate safety nets, and fostering participation and accountability. At the same time, the role of well-run and efficient private institutions, including strong standards of corporate ethics and transparent accounting and reporting practices, cannot be overlooked.
10
In line with the primary role of the institutional framework referenced above, the GCI includes public and private institutions within the basic requirement of competitivenessespecially key for factor-driven and efficiency-driven countries. The institutions pillar is composed of two subpillars, gauging the quality of public and private institutions, respectively. The former accounts for three-quarters and the latter for one-quarter of the overall pillar score. The public institutions subpillar assesses different dimensions related to the quality and efficiency of the national institutional environment. Notably, the protection of property rights (including intellectual property), public ethics standards, and the efficiency of public administration are taken into account, together with the perceived security situation in a given countrywhich has an important bearing for opening and managing businesses. The private institutions subpillar, in turn, measures the quality of corporate ethics displayed by the firms located in a given country, as well as different elements of corporate accountability. Brazil is assessed quite poorly for the quality of its institutions: at 91st, this is its fourth-worst showing among the GCI pillars. With a mediocre score of 3.56, the country compares poorly with the comparator sample best performers Chile (37th), Spain (43rd), and South Africa (46th) as well as with the BRIC (3.82) and EU Accession 12 (4.07) regional averages, but outperforms laggards such as Russia (110th) and Mexico (97th). It is interesting to note that the assessment of Brazils institutions is completely in line with the regional average (3.57), pointing to the fact that the quality of the institutional environment, especially its public component, remains of great concern in Latin America. On a more positive note, the institution pillar is the area in which the country has registered the largest improvement since 2007 (up 13 positions and 0.25 in score), also reflecting a more buoyant mood in the business community in 2008, one partially linked to the higher growth rates experienced by the country in recent years. A closer look at the pillars variables reveals that the problem lies particularly in the public institutions component (98th), while the quality of private institutions is fairly good (61st), especially in terms of corporate accountability (49th). This highlights a number of serious flaws, especially the entrenched culture of bureaucracy and red tape (124th for government efficiency), the perceived poor level of public ethics (121st) and the lack of security (103rd). In particular, the burden of government regulation is perceived as being enormous (129th); this is also corroborated by Brazils showing in the World Banks Doing Business 2009. According to this report, which includes 181 economies, the country is ranked 127th, 121st, and
Table 8
Brazil and infrastructure: The IPAI and IQCI rankings, 2007

Table 8b: IC IQGI rankings, 2007 Score Rank Country Score
Table 8a: IPAI ranking, 2007 Rank Country
1 2 3 4 5 6 7 8 9 10 11 12
Chile Brazil Colombia Peru Mexico Uruguay El Salvador Guatemala Argentina Venezuela Bolivia Dominican Republic
5.43 4.40 4.33 4.23 4.04 4.02 3.97 3.64 3.41 3.37 3.34 3.33
1 2 3 4 5 6 7 8 9 10 11 12
Bolivia Peru Colombia Venezuela Brazil Guatemala Uruguay Dominican Republic Argentina Mexico El Salvador Chile
6.66 5.49 4.90 4.47 4.40 4.23 4.10 3.80 3.77 2.68 2.48 1.37
Source: Mia at al., 2007.
100th, respectively, for starting a business, employing workers, and enforcing contract components. Government spending is also assessed as being extremely wasteful, at 129th, no doubt because of a number of important rigidities in public-sector spending in the form of earmarking revenues to particular expenditure categories, constitutional or legal mandates that establish floors on certain types of spending, the automatic linking of social and pension benefits to the minimum wage, and mandatory transfers to regional governments, among others.10 Moreover, the security situation in the country is considered to impose significant costs on businesses (103rd)in particular, rampant organized crime (116th), violence (123rd), and a low level of trust in the police (117th). Infrastructure Well-functioning and extensive infrastructure plays a fundamental role in enhancing the growth prospects of an economy. Both the level and quality of infrastructure are important in raising private-sector productivity and investment rates,11 particularly the adequate functioning of roads, railroads, ports, and air transport, as well as an electricity supply free of interruption and an adequate telecommunications network. Widespread quality infrastructure can also greatly impact income inequality and poverty, connecting poor communities to important markets, allowing children in remote areas to go to schools or have access to virtual education, and improving health standards by providing potable water, among other benefits.12 In the past decade or so, Brazil has made important efforts toward upgrading and extending its infrastructure network. However, Brazil is no exception to the trend observed for Latin America as a whole, for which it has been estimated that the region needs to invest up to 6 percent of GDP for regional infrastructure upgrading in order to catch up with Korea and keep up with China.13
This mixed performance is reflected in a rather low 78th rank (corresponding to a score of 3.15) registered by Brazil in the infrastructure pillar, last in the comparator sample. Indeed, if Brazil positions itself just below the Latin American (3.22) and the BRIC (3.63) regional averages and comparator countries such as Mexico (68th) and India (72nd), it shows a very consistent gap vis--vis top performers Chile (30th) and China (47th). Of particular concern is the quality of port (123rd), road (110th), and air transport infrastructure (101st). The performance in these indicators represents a serious obstacle to Brazils modernization aspirations. In consideration of the above, President Luiz Incio Lula da Silva (President Lula) launched in 2007 a Growth Acceleration Program (PAC), which earmarked at its inception R$504 billion toward infrastructure spending,14 distributed as follows:R$171 billion for social infrastructure, R$275 billion for energy-related projects, and R$58 billion for logistics.15 Private-public partnership (PPP) modalities of financing are given a preeminent position in the program. Also a leading catalyst role is envisaged for the Brazilian Development Bank (BNDES), given the limited public resources to be invested and the positive developments in Brazilian capital markets, increasingly willing to finance long-term projects in local currency. The main challenge related to PAC is likely to remain the implementation capacity of the government agencies in charge of the above large contracts, especially in the current difficult times. See Chapter 2.1 of this Report for more details on PAC. On a related note, the Infrastructure Quality Gap Index (IQGI) and Infrastructure Private Investment Attractiveness Index (IPAI), developed by the Forum in 2007 for 12 selected Latin American countries, sheds some additional light on the subject, notably identifying the challenges and opportunities for private investment in infrastructure in Brazil.16 The IQGI measures the infrastructure quality gap vis--vis Germany, the best performer globally in the
11
Figure 4
Investment attractiveness: Brazils performance at glance according to the IPAI, 2007

Macro environment 7 Government readiness for private investments 6 5 4 3 2 1 Government and society Political risk Legal framework
Private investment track records Financial markets enablers
Access to information
Brazil
Chile
Average (excl. Chile)
12
infrastructure pillar. Brazil ranked 5th out of the 12 countries covered for its infrastructure gap with respect to best practices; this confirms the extent of the challenge, as well as the opportunity, in terms of required investment. At the same time, Brazil ranks 2nd on the IPAI, reflecting the presence of a friendly environment in the country for private investment in infrastructure (see Table 8). Figure 4 presents a snapshot of Brazils environment for PPPs in infrastructure according to the IPAI. Among the strengths: a very low political risk, with little war or expropriation risk, as well as a fairly well developed local capital market. Other positive aspects include a fairly good track record in private investment in infrastructure, with few projects cancelled or in distress, and a relatively high level of private investment in infrastructure projects over the 19942005 period (2.2 percent of GDP). Among the most important weaknesses: the quality of the countrys legal framework and, to a lesser extent, the inefficiencies in its macro environment. Macroeconomic stability Healthy macroeconomic fundamentals are a sine qua non condition for economic prosperity and efficient market operation since they establish the enabling environment for companies to operate and generate wealth. For this reason, macroeconomic stability is considered by the GCI to be among the basic factors of national competitivenesskey for factor-driven countries but also a basic requirement for any competitive economy. The macroeconomic stability pillar takes into account a plethora of data, such as government budget balance and debt, inflation, interest rate spreads, and national savings rates.
Although since the 1990s, there has been an increasing recognition on the part of the successive administrations of the importance of a stable macroeconomic environment, and important efforts have been made toward putting public finances on a sounder basis,17 progress has been slower than in other countries, reflecting no doubt the complexities faced by Brazil in this respect. Notwithstanding a four-place improvement since last year, Brazil is still ranked a disappointing 122nd place for its macroeconomic stability, which remains its weakest area across the 12 covered by the GCI. Not surprisingly, Brazil is also the laggard in the comparator sample, with a gap of more than 100 places with respect to the two best performers China (11th) and Chile (14th). Key factors explaining Brazils poor showing include extremely high interest rate spreads (131st), still high levels of public indebtedness (close to 50 percent of GDP, at 85th), and deficit (2.23 percent of GDP, at 91st), and low national savings rates (86th). The interest rate spreads present an area of particular concern and burden for economic agents in the country, as this issue is also highlighted by looking at the comparator countries performances (Table 9). Brazil has the highest interest rate spread (33.14 percent) in the sample, way above Spain (6.02 percent) and India (5.56 percent), the second and third highest in the sample. According to the Brazilian Central Bank, despite the increased flexibility of the countrys monetary policy in the last two quarters of 2005, overall spreads were not significantly reduced.18 According to the IMF, this could be linked to the inefficiencies displayed by Latin American banks, high interest rates, and heavier legal demands to maintain reserves. However, banking execu-
Table 9
Macroeconomic stability, Brazil and selected countries, 2007

Government surplus/deficit (percent GDP) National savings rate (percent GDP)
Country
Interest rate spread
Inflation (percent)
Government debt (percent GDP)
Brazil Chile China India Mexico South Africa Spain Turkey Russian Federation
Source: World Economic Forum, 2008. Source: World Economic Forum, 2008.
33.14 3.05 3.40 5.56 4.36 4.01 6.02 4.40 4.89
2.23 8.70 0.70 5.99 0.00 0.80 2.23 1.20 5.10
18.15 25.46 52.20 35.40 20.40 14.09 21.20 21.40 30.61
3.64 4.39 4.75 6.37 3.97 7.09 2.84 8.76 9.01
46.99 4.11 18.40 75.91 22.70 31.30 42.63 39.40 9.50
tives in Brazil claim that the real culprit is the high cost of money in the country, determined by its long-term interest rate (LTIR), or Central Bankset SELIC, taxes levied on credit operationssuch as the tax on financial operations (IOF) and income tax, among others, in addition to growing defaults in the past. Public debt and deficit levels also remain very high by international standards. On a related note, public spending is high and on the rise, due to higher expenses in the government payroll and social welfare, which have been expanding in an unsustainable way. Public spending accounted for 17 percent of GDP in 2008 (up from 14.7 percent in 2007). A particularly worrisome aspect of public spending structure in Brazil is its rigidity: earmarking revenues for particular expenditure categories, constitutional or legal mandates that establish floors on certain types of spending, the automatic linking of social and pension benefits to the minimum wage, mandatory transfers to state governments, and other forms of interventions limit the ability of the federal government to restructure spending in a way that could allow for greater prioritization of productivity-enhancing expenditure categories, such as education, training, and infrastructure improvement.19 This becomes particularly problematic in times of economic crisis and GDP contraction such as the present one. On a more positive note, Brazils inflation rate is relatively low (3.64 percent in 2007, at 54th), the end result of years of stern control and tight policies of inflation targets. Brazilian monetary policy walks a tightrope. On the one hand, a rigid control of inflation is maintained, inflation striking deep fear into the hearts of Brazilian society and government. On the other hand, economic growth is promoted through a gradual reduction of the interest rate. For some analysts, including Nobel Prize Laureate Paul Krugman, this balancing act can actually place Brazils Central Bank in a more favorable position to deal with the current economic crisis than the Central Banks in Europe and the United States, where near-zero interest rate leave no flexibility in their instruments to foster economic growth.
Health and primary education A healthy and literate work force is a basic requirement for national productivity and competitiveness. Workers who are ill tend to be less productive, adding significant costs to businesses. At the same time, basic education increases workers efficiency and enables them to get training for, and adapt to, more advanced production processes and techniques. Literature and anecdotal evidence both support the key role of basic education and health as a key enabler of competitiveness. Recent studies also highlight the importance of the quality of basic education, on top of enrollment rates. The health and primary education pillar assesses the basic health standards in a country, together with the quantity and quality of primary education. With a score of 5.31, Brazil is ranked 79th for the quality of its basic health and education (five places up from 2007), largely outperforming South Africa (122nd) and India (100th) and clustering with comparators such as Turkey (78th) and, rather surprisingly, the Latin American top performer Chile (73rd). At the same time, the still ample gap with the EU Accession 12 average (5.70) and the samples best performer Spain (35th) suggests there is significant room for improvement. Brazil displays a fairly even performance in the two component subpillars, measuring respectively health quality (80th) and primary education (85th), signaling a median position as compared to the other 133 economies covered by the GCI. Comparing Brazils performance to that of the comparator sample, the country ranks 6th for the quality of its health standards among the nine countries included, quite far from the two best performers, Spain (13th) and Chile (31st). As for the primary education subpillar, Brazil is again 6th among the nine, but not so distant from the top performers, Spain (40th) and China (44th). This might indicate that countries with economic and development levels similar to Brazil face more problems in offering primary education than in offering health services. Surprisingly, Chileleading Latin American countries in general competitivenessgets the worst relative assessment for the quality of its primary education system (105th).
13
Figure 5
20
Health expenditures as a percentage of total government expenditures, 2006
16.5 15.3 15 14.1
10.8 10 7.2 5 3.4 9.9 9.9
11.0
0 India Brazil China South Africa Russian Federation Mexico Chile Spain Turkey
Note: Ranks are in a constant 20052006 sample.
Source: World Health Organization, available at http://www.who.int/en/.
14
Starting from the health subpillar, despite recent advances, Brazil is still far from offering adequate health services. Its huge territory, large population, and scant investment in the health system are all to blame for the existing child mortality rates and life expectancy worse than those of Mexico, for instance: 28 percent and 72 years versus 8 percent and 78 years, respectively. Brazil and Mexico have roughly similar-sized economies, yet Mexico, in 2006, had a larger percentage of government spending (vis--vis total expenditures) in health: 11 percent versus 7.2 percent for Brazil. In terms of government spending in health, India came in last, with 3.4 percent. For the sake of comparison, Turkey and Spain spent 16.5 and 15.3 percent, respectively, of total government spending in the health sector (Figure 5). Turning our attention to the primary education subpillar: although Brazil has achieved almost universal net primary enrollment (94.4 percent, at 58th place), the quality of primary education seems to be an area in particular need of improvement (119th); this despite the high expectations in the Program to Develop Education (PDE) launched by the Ministry of Education in 2007 as a keystone of upgrading the educational system. This could be partly explained by the relatively small amount of resources invested by the government in education4.29 percent of total government expenditure, corresponding to 64th placethe lowest in the comparator sample. Another major weakness shared by the basic and higher education system in Brazil has to do with a large regional bias against the North and Northeast, as confirmed by the results of a test called Prova Brasil, applied by INEP/Ministry of Education in public elementary schools (1st to 8th graders), evaluating performance, by school units, in mathematics and Portuguese. A recent positive development is the increasing awareness among both the private and public sectors
about the need to review and improve the educational system, at all levels. In launching the aforementioned PDE, Education Minister Fernando Haddad stressed the need for a systemic vision of the education process, including the need for good teachers and professors, access to adequate educational infrastructure, and support from families and from society as a whole. Efficiency enhancers At its current stage of development, Brazil relies crucially on efficiency enhancers to support its competitiveness (they make up 50 percent of the total GCI score). In other words, the countrys sustained growth prospects rest in large part on a quality higher education and training system, well-functioning factor markets, the capacity to leverage technology (especially ICT) present in the national economy, and a market large enough to allow for economies of scale to flourish. With a 4.28 score, Brazil is assessed fairly well at 51st, outperforming Turkey (59th) and Mexico (55th) as well as the regional average (3.77) in the comparator sample. It almost matches the EU Accession 12 average (4.30), and the gap with the best performer in the subindex, Spain (25th), is much smaller (26 places) than the gap in the basic requirements subindex. However, a more careful look at the subindex shows a very mixed performance at the pillar levels, whereby a remarkably large market (10th) and a relatively high degree of technological readiness (56th) go together with inefficient goods markets (101st) and rigid labor markets (91st). Higher education and training A quality higher education and training system is an essential precondition for a well-functioning economy, since it provides the national production system with an adequate pool of qualified human resources able to adapt to the changing needs of the latter. This is espe-
cially the case for efficiency-driven economies such as Brazil, which increasingly derive their competitiveness from more advanced production processes requiring well-qualified and trained workers. Ranked 58th (up six positions from 2007) for the quality of its higher education and training system, Brazil clusters with comparator countries such as South Africa (57th) and Chile (50th), while it outdoes Mexico (74th), Turkey (72nd), and, to a lesser extent, China (64th) and India (63rd) as well as the Latin American average (4.12 versus 3.74). At the same time, Brazil lags behind not only highest-ranked Spain (30th) but both the BRIC (4.16) and EU Accession 12 (4.54) averages. It is interesting to note that Brazil does much better in higher education and training than in primary education (85th), which appears to reflect the governments traditional larger focus and investment on higher education. However, this historic trend was reversed by the aforementioned PDE, which earmarked a higher share of government investment both in basic and higher education (4.29 percent and 4.09 percent, respectively).20 With the PDE, the country seems to be moving in the right direction in terms of improving its educational system in its totality, but attention must be paid also to the quality of higher education, as highlighted by the poor ranks registered for the quality of the educational system (117th), especially for math and science education (124th). Also the tertiary enrollment rate, at 25.48 percent, is fairly low (76th). On a more positive note, Brazil displays fairly good management schools (58th), a satisfactory level of onthe-job training (33rd), and universal enrollment in secondary education (14th). Goods market efficiency Well-functioning goods and services markets ensure the allocation of resources to their best use, balancing supply and demand in a given economy. Goods market efficiency is especially important for Brazil, since, at its present stage of development, its competitiveness rests critically on efficient markets and production systems. Key factors for an efficient goods and services market include a competitive environment among both national and international economic actors and the related absence of distortive government regulations or interventions-, and the creation of adequate demand conditions. With a score of 3.90, Brazil ranks a disappointing 101st for the efficiency of its good markets, the second worst performance, after macroeconomic stability, posted by the country among the 12 pillars of competitiveness.21 Moreover, Brazil, together with Russia (99th), is the laggard in the comparator sample, with a significant divide with respect to top performers Chile (26th), South Africa (31st) and, to a lesser extent, Spain (41st). At the same time, the country is not only outperformed by the BRIC (4.20) and EU Accession 12 (4.45) aver-
ages, but also by Latin America (4.01); this is quite worrisome considering market flexibility is a general concern in the region. A note of caution must be introduced here: while both the domestic and foreign competitive conditions in the country seem to be particularly poor, at 117th, the quality of demand conditions is assessed comparatively better, at 61st. This points to distortive regulations and measures as the main area to tackle in order to improve the efficiency of the goods markets in Brazil. Indeed, widespread red tape, a burdensome and inefficient tax system, and an entrenched tradition of bureaucracy all contribute to the creation of a distortive business environment in which it is difficult for both national and international economic actors to operate and create wealth. Although we direct the readers to Chapter 2.2 of this Report for a more detailed analysis of the role of bureaucracy in Brazil, a glance at the variables composing the pillar is enough to appreciate the scale of the problem. With respect to domestic competition conditions, the country positions itself last in the sample for the distortive effect of its taxation system and 116th for the total tax rate (69.20 percent of total profits, according to the World Bank),22 while it ranks 125th and 127th for the number of procedures and number of days to start a business, respectively. The situation is not much better for the quality of foreign competition, fairly distorted by widespread and high trade barriers (106th for the prevalence of trade barrier and 92nd for the trade-weighted tariff rate). This issue is treated more in detail in the description of the market size pillar below. On a more positive note and as already mentioned, Brazil performs well in the quality of demand conditions subpillar (61st), with a fairly high degree of customer orientation (56th) and rather sophisticated buyers (69th). These data reinforce the idea that the greatest difficulty faced by companies located in the country is not a lack of demand or of diversification in the goods and services market, but rather the environmental conditions in which these companies operate. Only by addressing the deficiencies in the general environment for doing business in Brazil and the various regulations with a distortive effect can the country enable economic actors to do business and prosper. Labor market efficiency Flexible labor marketsensuring that the labor force is allocated to its most efficient useis a critical competitiveness enhancer for all economies. This is more so for countries competing mainly on high value added goods in markets that, because of their dynamism, require continuous adjustments to their national production systems, and therefore the ability to move workers to the most dynamic sector at any time. Further, well-functioning labor markets can play a central role in poverty reduction and in fostering social equity. This is particu-
15
Figure 6
Labor market informality in Latin America
80 Labor informality (productive definition) Labor informality (legalistic definition)
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Source: OECD, 2008.
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larly meaningful for countries such as Brazil, characterized by a highly unequal income distribution and widespread poverty. With a score of 4.15, Brazil is ranked a dismal 91st for labor market efficiency, the third-worst assessment among the 12 pillars of competitiveness. This is a reason for special concern given that the countrys current competitiveness rests crucially on the efficiency of its factor markets. Although Brazilian labor markets are assessed as being more efficient than their equivalents in Turkey (125th, the laggard in the comparator sample), Mexico (110th), and even Spain (96th), a comparison with the impressive marks obtained by the best performer in the sample, Chile (17th), or with Russia (27th) and the BRIC average (4.39) shows the magnitude of the challenges on this front. The GCI assessment reflects the particularly inflexible nature of the formal labor market in Brazil, which is characterized by extremely burdensome labor regulations involving important non-wage labor costs (37 percent of total salary, corresponding to a 123rd place), rigid hiring and firing practices (ranked 112th), and wage determination procedures (106th). This, coupled with an onerous and inefficient tax system,23 hinders labor mobility and keeps important human resources trapped in low-productivity sectors. As a result, labor informality is widespread, especially among the less educated, for whom labor turnover is also high, discouraging investment in productivity-enhancing human capital accumulation through labor training. Despite high participation rates, own-account workers and those without social security coverage vary between 33.7 percent to 53.9 percent of the employed populationdepending on the definition of informalityaccording to the latest
OECD data.24 Figure 6 provides a regional overlook with respect to informality for comparison purposes. These data are confirmed by the Forums Survey, which gives Brazil a rank of 91 out of 134 countries for the prevalence of its informal sectorfar below Singapore and Switzerland, the two top performers in this indicator; and also Chile (22nd), the most competitive country in the region; and China (56th) and India (72nd) among the BRIC economies. The large informal market also has serious implications for overall national productivity, given the nature of jobs in the informal market: unstable, poorly paid, and with diminishing returns. Further, it reduces the tax payer base, ultimately jeopardizing the sustainability of the public finances. Structural reforms to tackle these rigidities appear to be a priority in view of enabling the labor market to allocate workers according to the needs of the production system. In this spirit, some of the general guidelines that could be followed are: (1) lowering the social security contributions for low-paid workers,25 as well as reducing the incentives for negotiated separation by raising the rate of return on FGTS balances,26 and by gradually phasing out the severance indemnity in the event of unfair dismissal;27 and (2) improving the supply of vocational training and creating a national skills certification system, and more generally upgrading the educational and training system, since for labor mobility to function, a skilled, continuously trained and eager to learn labor pool is required. Financial market sophistication As underlined by the severe economic consequences of the current global financial crisis, a sophisticated and
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efficient financial system is an important feature of any competitive economymore so for countries at higher stages of development. Cross-country analyses tend to find that financial depth predicts future economic growth, physical capital accumulation, and improvements in economic efficiency, even after controlling for initial income levels, education, and a variety of policy indicators.28 Some studies even suggest that developing deep and efficient financial systems is not only correlated with a healthy economy, but can also reduce poverty and income inequality.29 Development of the financial system contributes to economic growth by reducing the costs of acquiring and processing information, helping investors diversify risks, and reducing monitoring costs. As a consequence, it improves resource allocation. The financial market sophistication pillar measures the degree of development and the efficiency of the financial system, together with its soundness and trustworthiness, by looking at variables such as the ease of obtaining bank loans, the soundness of banks, the ease of raising money on the local stock market and debt markets, and the availability of venture capital, among other aspects. With a score of 4.36, Brazil is ranked 64th for the sophistication of its financial markets, way above fellow BRIC economies China (109th) and Russia (112th), as well as the Latin American (4.12) and BRIC (4.15) regional averages. However, it still displays a large gap with respect to top performers South Africa (24th), Chile (29th), as well as India (34th).30 After transitioning from hyperinflation to price stability, and with the support of well-crafted regulation and supervision, Brazils banking sector has emerged stronger and able to weather numerous crises, both domestic and regional, including the tequila crisis of 1995, the Brazilian real devaluation of early 1999, the Argentinean debacle of 200102, and the Brazilian crisis of confidence in the run-up to the presidential election in late 2002. Brazils top banks have high levels of capitalization and stand today as the most solid and profitable financial institutions in Latin America, poised to expand regionally with their strong balance sheets. The recently merged Banco Ita Unibanco is among the 10 largest banks in the world for market capitalization. The cost of money in Brazil was for many decades a key factor hampering the flow of credit, and therefore economic growth. Corporate lending rates have been on a downward trend since 2004, but remain high by international standards.31 In 2006, corporate lending rates averaged just below 30 percent, down from an average of 33 percent during 2005 and 67 percent in 2003;32 by 2009, they hovered between 20 percent and 30 percent. Spreads on consumer credit operations are significantly higher. Many factors have contributed historically to keeping lending costs high, namely: 1. Wide spreads are partly the result of the long history of price instability and high public-sector borrowing requirements.33
2. Spreads are also affected by explicit and implicit taxation. Explicitly, the banking sector is subject to taxes and contributions; implicitly, to cross-subsidies, such as reserve requirements that are among the highest in the world, enforced loans at lowerthan-market interest rates to special groups,34 and other distortions.35 3. Outmoded bankruptcy legislation has made legal procedures to execute guarantees very expensive for lenders. A reform was passed in 2004, significantly streamlining bankruptcy processes; this is still in the implementation phase but promises to potentially have an impact on lowering spreads. Lowering the cost of credit while maintaining the sturdiness of the banking sectors balance sheet remains an important policy challenge for the country. Box 1 provides more insight on the sophistication of Brazils financial markets, with particular reference to equity and debt capital markets, and to the role of the pension system. Corroborating the positive developments mentioned above, Brazil gets high marks for its financial market sophistication (21st), soundness of banks (24th), regulation of securities exchanges (28th), strength of investor protection (50th), and financing through the local equity market (56th). The above notwithstanding, important challenges lie ahead in improving capital availability for small- and medium-sized enterprises and consumers in general, as highlighted by the very poor marks the country gets on the variables assessing restrictions of capital flows (119th) and the protection of legal rights (119th). This makes part of a vicious circle of relative low credit availability and inadequate legal right protection. The difficulty that creditors have in executing collateral or guarantees remains an important barrier to expanding credit, because of the many days it takes to have a judge award a case and enforce a conviction. Furthermore, the real estate and property registry database, the proper functioning of which is essential for collateral confirmation, are slow and often cited as a barrier to the expansion of mortgage markets. Technological readiness Access to cutting-edge technology becomes increasingly important for firms and countries in sustaining their competitiveness as they progress to the efficiency-driven stage of development and cannot continue to rely exclusively on cheap factors of production as main competitive advantages. At this stage, what really matters is the availability of technology within the country, regardless of its origin: the capacity to generate knowledge domestically becomes a key driver of competitiveness only for economies near to the technological frontier, in the third and most advanced stage of development. In particular, it is critical for firms, as well as for individuals and government, to have access to and fully
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Box 1: A deep-dive into Brazils financial sophistication

Equity markets Corporate financing through the stock market has enjoyed substantial growth over the past several years, thanks notably to efforts to encourage a culture of equity financing through regulatory changes, including measures to protect the interests of minority shareholders. The Novo Mercado is a prime example.1 Brazils main stock exchange, Bovespa, is the largest in Latin America for its market capitalization, which as grown significantly as a percentage of GDP (Table A). The evolution of pension fund portfolios has played an important role in strengthening corporate governance standards. With over 100 companies being listed since the creation of the Novo Mercado in 2005, the pension funds have worked closely with enterprises when considering their initial public offerings (IPOs).2 This voluntary collaboration between issuers and providers of capital has resulted in improved corporate governance; in turn this has attracted additional fundsnot only domestically, but also from the rest of the worldwith a remarkable growth in trading value and activity.3 Debt capital markets The development of Brazils debt capital markets in the past five years has been fairly successful, driven by prudent public debt management strategies that provided market-making schemes for government debt and established clear benchmarks for corporate debt. The government was able to place bonds in local currency at maturities of up to 30 years. Another positive trend was a massive exchange of foreign currency-denominated debt for local currency-denominated debt, which made the country much less vulnerable to swings in the currency markets than it had been in the past. However, it remains to be seen how the appetite for Brazilian securities will evolve in the context of the present financial and economic downturn. Adding to the positive trend in the debt markets, the Brazilian options and futures market (Bolsa de Mercadorias e Futuros de So Paulo) has significantly increased its trading volumes and contract options. It ranks among the five largest such markets worldwide in terms of trading volumes, specializing in currency and interest rate swaps. Pension system investment The pension system policy in Brazil has not followed the Latin American trend of reform from publicly funded payas-you-go programs toward fully funded, privately managed, defined-contribution systems of individual accounts. The countrys approach has been to strengthen the solvency of the public pay-as-you-go system and further develop the existing privately managed, voluntarily funded pension system. A positive aspect vis--vis its Latin American peers is that pension funds portfolios are better diversified and not so heavily invested in government debt, therefore contributing more to financing the productive sector and to strengthening corporate governance standards. The current regulation allows pension funds to invest up to 50 percent of their portfolios in enterprises listed under the new corporate governance guidelines of the Novo Mercado, but only 35 percent in those listed in the regular market. This voluntary collaboration between issuers and providers of capital has resulted in improved corporate governance and has attracted additional funds, as noted above.
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Notes
1 The Novo Mercado is a listing segment designed for shares issued by companies that voluntarily undertake to abide by corporate governance practices and transparency requirements in addition to those already requested by Brazilian law and the Brazilian Securities and Exchange Commission. Given its voluntary aspect, the Novo Mercado is widely seen as a success because both investors and companies consider corporate governance obligations to be advantageous. 2 See http://www.bovespa.com.br/pdf/FactsFigures.pdf. 3 As of February 2008, Brazil became the largest emerging market in the MSCI Global Emerging Market index, bringing it to 14.95 percent of the index. In 2002, Brazil accounted for just 5.3 percent of the index. See http://www.mscibarra.com
Table A
Stock market indicators, Brazil and selected countries and regions

Stock market capitalization (percent of GDP) Value traded (percent of GDP) 1990 0.6 1.2 2.5 0.2 4.6 0.4 2.1 12.9 55 8.9 28.2 30.4 2004 5 12.3a 12.2 1.5 6.3 1.6 8.3 80.7 75.6 111.5a 174.5 165.3
Listed enterprises (number) 1990 179 581 215 80 199 294 1 ,748 1, 089 150 427 1,701 6,599 2004 104 357 239 114 152 194 1,525 1,515 484 3,191 2,684 5,231
Country (or region) Argentina Brazil Chile Colombia Mexico Peru Latin America and the Caribbean Australia Singapore Spain United Kingdom United States
Source: OECD 2008. a 2003.
1990 2.3 3.6 44.9 3.5 12.4 3.1 7.7 35.1 92.9 21.8 85.8 53.2
2004 26.2 42.0 116.2 22.5 23.7 26.1 39.4 122.8 129.6 86.6a 132.6 139.4
leverage ICTthe most innovative technologies of our day. ICT plays a crucial role in stimulating growth by significantly impacting productivity across sectors and industries. It is increasingly moving to the center of national innovation and development strategies in many countries in view of its astounding power as a driver of change, modernization, and competitiveness.36 The technological readiness pillar attempts to gauge countries agility in adopting existing technologies among which ICTto foster their firms productivity. With a score of 3.59, Brazil is ranked 56th for its technological readiness, clustering with Turkey (58th) and South Africa (49th), and largely outperforming fellow BRIC countries China (77th), India (69th), and Russia (67th) as well as regional comparator Mexico (71st). The country is also a great deal more technologically ready than the regional average (3.20). This fairly positive showing can be attributed to Brazilian prowess in attracting FDIone of the main sources of technologyand in absorbing innovation, together with a relatively high degree of ICT penetration. With respect to the former, the country is ranked 58th, 42nd, and 43rd, respectively, for the availability of the latest technologies, firm-level technology absorption, and FDI and technology transfer. In particular, as mentioned, Brazil was the main FDI destination in the region in 2007 and is considered to be among the most attractive destinations by foreign investors because of its large market, natural resources, and sophisticated and diversified industrial base. Chapter 3.3 of this Report provides a thoughtful account of FDI flows to Brazil in recent years. The assessment of the countrys ICT readiness is more mixed, with mediocre national ICT penetration rates.37 After the privatization of the state telecommunications companies in 1999, Brazils basic ICT infrastructure grew rapidly, mobile penetration boomed,38 and the number of personal computers (PCs) increased dramatically, aided by government credit programs and others. However, the country only displayed 52.90 percent, 22.55 percent, 16.90 percent and 3.14 percent penetration rates for mobile telephone subscribers, Internet users, numbers of PCs, and broadband Internet subscribers, respectively, in 2006. The data above, collected on a national basis, conceal a great degree of diversity in the extent of ICT access and computer literacy by region and income level. The enormous economic and social divide affecting the country seems to translate into an important digital one. At the same time, Brazil is home of one of the most advanced e-government services in the region and internationally, with the most elaborate electronic voting system in the world and a remarkable online tax return. Moreover, the government has long considered ICT diffusion an important instrument for improving productivity, growth, and the provision of government services as well as a useful complement in addressing the countrys
huge social and economic problems. Notably, the current administration has focused on two main projects with the aim of using ICT and e-government services to bridge the social gap: the e-Brasil Project, promoting a broad agenda of public policies aimed at building a more equitable and competitive country through the intensive use of ICT; and the 2014-Bis project thatin parallel with the preparation of the World Cup 2014, to be hosted by Brazilintends to create a stronger country brand, showcasing unique Brazilian developments in terms of technology, scope, approach, and social impact.39 Market size An extensive market size plays an important role in enhancing national productivity, since it allows companies to benefit from economies of scale in their production processes and strategies; this makes investment in research and development (R&D) and innovation more profitable. This is especially relevant for companies and countries, whose competitiveness relies fundamentally on efficient production processes and more value-added products, as in the case of Brazil. In todays globalized world, the relevant market for companies operating in a given economy increasingly stretches beyond national borders; therefore a comprehensive definition of market size needs to include both domestic and foreign components. With a rank of 10th, market size represents by far Brazils strongest competitive area among the 12 pillars composing the GCI. In the comparator sample, the country clusters with Mexico (11th), Spain (12th), and Russia (8th), and it is outperformed only by China (2nd) and India (5th) and the BRIC average (5.54 versus 5.95). On the other hand, countries such as ChileLatin Americas leader in competitiveness, with better global indicators than Brazilhave stronger limitations because of the size of their markets. Chile, for instance, is in 47th position in the overall ranking, the last in the sample. Within the market size components, particularly noteworthy is the size of Brazils domestic market, assessed 9th out of 134 economies. The extensive market of some 180 million Brazilians is a strong asset for the country, especially considering that the recently attained macroeconomic stability, expanding credit, and social programs for the poor have contributed to a marked reduction in poverty and to the emergence of a larger middle class with stronger purchasing power. In particular, the middle class, which accounted for 44 percent of the total population in 2002, has risen to 51.89 percent in 2008, representing a 17 percent increase. Neri attributes this phenomenon not only to public income transfers (pension or social programs related to income distribution), but mainly to structural changes in the labor market (related to the increase of formal jobs).40 This has been associated with an increase in monthly average household income, from US$1,569 to US$1,957 between 2004 and 2008. The study also shows an encouraging trend toward
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20
increasing social mobility: the probability of an individual rising to classes A or B has never been so high, while the possibility that this same person would fall to classes D or E has never before been as low as it is now. Further, social programs such as Bolsa Famlia (Family Allowance) and Bolsa Escola (School Allowance) have played an important role in reducing poverty and income inequality, as reflected in the fact that the Gini index has consistently improved over the last five years (falling from 58.8 in 2002 to 56.6 in 2007),41 and in the Fundao Getulio Vargas Misery Index42according to which the population living in conditions of extreme poverty fell from 37.13 percent in 2003 to 25.16 in 2008. In terms of foreign market size, Brazil posts a strong showing at 23rd. Given its important production capacity, Brazil may regard the external market as a target for future expansion, a strategy that would certainly generate competitive gains in the pillar under consideration. Brazil does not currently perform to its full potential as far as commercial openness is concerned. For both total imports (as a percentage of GDP) and total exports (as a percentage of GDP), Brazil occupies the last relative position in the comparator sample. That the percentage rates are below 15 percent of GDP for both imports and exports seems to point to untapped possibilities in terms of international trade. In this area, Brazil appears to be less competitive than countries such as China, Mexico, and Chile, where import and export rates represent more than 30 percent of GDP. Indeed, Brazils economy continues to be relatively closed compared with international peers, as witnessed by the countrys fairly low participation in world trade. This accounted for only 1.16 percent in 2008, with a minor improvement from 2004 (1.05 percent)a small amount especially considering the boom experienced by international trade before the current economic downturn. In particular, the MERCOSUR trade agreement does not seem to have significantly increased Brazils intraregional trade.43 Indeed, in 2007 the signatory countries of MERCOSUR accounted for only 10.8 percent of Brazils total exports and 9.64 percent of total imports. Meanwhile, the United States still accounted for 15.6 percent of total exports and 15.52 percent of total imports for the country.44 According to the Ministry of Foreign Affairs, the poor performance of MERCOSUR intra-regional trade could be related to the maintenance of the high tariff barriers imposed by the signatory countries as well as to problems of access to the markets imposed by foreign countries. The above is corroborated by Brazils relative performance in the sample for the size of its foreign markets, which lags behind China (1st), India (5th), Russia (6th), Mexico (16th), and Spain (19th). It should be emphasized, however, that the distance between the best and the worst performance scores in this comparison is small. Despite these fragmentary comparisons, Brazils overall performance in this pillar lies well above the average.
Innovation and sophistication factors As countries move up the development path and reach the most advanced stage of development, the capacity to produce unique and innovative products and services and to incorporate sophisticated production processes becomes increasingly critical for sustaining national competitiveness. Brazil has not reached yet the innovation-driven stage, and the innovation and sophistication factors currently account for a relatively minor 10 percent of its overall GCI score. However, these factors are going to become more and more important as the country gets closer to the technological frontier and reaches the innovation-driven stage of developmentin a future that, it is hoped, is not too far away. As already mentioned, Brazil posts its best showing across the GCI subindexes in the innovation and sophistication factors, with an impressive 42nd rank. It outperforms Russia (73rd), Mexico (70th), Turkey (63rd), and, quite remarkably, the regional best performer Chile (44th). Also, with a score of 4.04, it largely outdoes the regional (3.43) and EU Accession 12 (3.78) and, to a lesser extent, BRIC (4.02) averages. Moreover, the business sophistication (35th) and innovation (43rd) pillars are the second and third best assessed areas, respectively, in the GCI. For an insightful analysis of Brazils innovative and sophisticated business sector and its potential for bridging the competitiveness gap with the rest of the world, please see Chapter 3.2 of this Report. Business sophistication The business sophistication pillar, together with the innovation one, aims at capturing drivers of competitiveness that are more micro in nature and have a crucial bearing in fostering healthy and competitive business environments. Sophisticated operations, strategies, and business networks enhance firms efficiency, which in turn enables productivity and overall national competitiveness. Important elements include the quantity and quality of suppliers, the presence of deep and developed clusters, efficient production processes, and the nature of a firms competitive advantage and the depth of its value chain, as well as the extent to which a firm controls international distribution and marketing. Business sophistication is particularly important for firms operating at the top end of the value chain and for countries approaching the technological frontier, which crucially derive their competitiveness from a sophisticated and innovative business sector. For its level of development, Brazils competitiveness rests on the efficiency enhancers and, to a lesser extent, basic requirements. Nevertheless, the innovation and sophistication factors will become increasingly relevant as it moves further up the development path. Quite interestingly, given Brazils present development stage, the country gets its second-best mark for the sophistica-
tion of its business sector, being ranked a remarkable 35th out of 134 economies. Within the comparator sample, it clusters with Chile (31st), the best regional performer, and South Africa (33rd) and largely surpasses fellow BRIC Russia (91st) and, to a lesser extent, China (43rd) as well as the other regional giant, Mexico (58th). Moreover, with a score of 4.58, it largely outshines the regional (3.97), EU Accession 12 (4.20) and BRIC (4.41) averages. In particular, the country displays important competitive advantages in the quality and quantity of suppliers (41st and 13th, respectively), in the presence of welldeveloped clusters (43rd), and, more generally, in different elements relating to the sophistication of firms operation and strategy (43rd). Brazils strong showing in the pillar reflects the degree of diversification and sophistication achieved by its production sector. It is worth noting that FDI outflows exceeded the inflows in 2006 (US$28 million versus US$18.8 million) in Brazil, thanks to an extraordinary internalization effort on the part of the Brazilian multilatinas.45 Indeed, Brazil, together with Mexico,46 has spearheaded the Latin American multilatinas phenomenon, through which, thanks to superior technology and organization, successful national companies have gone global by massively investing abroadboth in the region and beyond. The multilatinas are now competing for global leadership in sectors as diverse as oil and gas, metal and mining, cement, steel, food and beverage, and high tech, among others. Brazilian companies such as Petrobras, Vale, Sadia, and Embraer are among those which have proven able to competeand winin the international markets, both in traditional industries and those that are less so (Embraer).47 Brazilian multilatinas are also earning an increasing portion of their revenues abroad. In 2005, 84 percent, 60 percent, 31 percent, and 11 percent of the total sales of Embraer, Aracruz Celulose, Gerdau, and Petrobras, respectively, were in international markets.48 Innovation Innovation, without doubt, represents the most strategic enabler of national competitiveness in the long run, since it is the only good not suffering from diminishing rates of return. Whenever a country approaches the technological frontier, the endogenous generation of innovative processes and products becomes a necessity for sustained growth and productivity. In this sense, innovation and business sophistication are the two key competitiveness drivers for innovation-driven economies in the GCI. At its current stage of development, Brazil can still benefit from absorbing and adapting technology coming from outside the country. Nevertheless, with an eye toward the future, it should continue nurturing its innovation potential, especially by further strengthening a supportive national environment.
With a score of 3.50, Brazil occupies a fairly satisfactory 43rd place for its innovation potential, coming only after China (28th), India (32nd), and the BRIC average (3.63) in the comparator sample. While it clusters with important comparators such as South Africa (37th) and Spain (39th), it largely outperforms Mexico (90th) as well as fellow BRIC Russia (48th), among others. Interestingly enough, Brazil displays a larger innovation potential than the regional best performer in general competitiveness, Chile (56th), and outdoes not only the rather poor regional average (2.89) but also the EU Accession 12 (3.37). Among the factors boosting Brazils rank in this pillar are especially the top-class innovation capacity displayed by Brazilian firms (27th),49 the relatively high company spending on R&D (31st), and the quality of research institutions in the country (43rd). The important innovation potential captured in these variables is, however, challenged by a poor government performance with respect to the acquisition of advanced technologies (84th, down 32 positions from 2006), unsatisfactory levels of intellectual property protection (79th, down 14 positions from 2006), and little collaboration between universities and industry (50th, down 10 positions from 2006). This seems to suggest that the main constraints in view of further materializing companies innovation potential have to do with features of the countrys institutional environment that are not conducive to innovation. Moreover, aspects of the more general environment are reason for concern, including the poor quality of basic (119th) and higher education (117th), and the scarce availability of venture capital (79th), among other indicators. On a similar note, an analysis of the actual data on investment on R&D highlights the long way still to go for Brazil to become an innovation powerhouse. In 2006, the country invested US$58.51 per capita (for a total amount corresponding to only 1.02 percent of GDP) in R&D. In the same year, private investment in R&D reached US$5.452 million, approximately 0.51 percent of GDP and 50 percent of the countrys total expenditures on R&D. This percentage, similar to that of Mexico, is significantly higher than private-sector investment in other Latin American countries such as Chile (21 percent) and Argentina (31 percent), and even India (20 percent). However, this percentage pales when compared with the 1.42 percent of GDP (70 percent of total investment in R&D) invested by the private sector in China, the top-ranked country in the innovation pillar within the comparator sample. The figure for China is very close to the percentage invested by the private sector in R&D in more advanced countries, such as the United States (70 percent), Japan (77 percent), Korea (77 percent), and Switzerland (74 percent). The 2008 data on the number of US utility patents registered for Brazil point in the same direction. With 0.47 patents per million inhabitants, Brazil comes 58th in the GCI rankings, way below global
21
Figure 7
300 270 250
Utility patents per million inhabitants, 2008
262
260
200 160 150
100
50 6.15 0 1.72 1.51 1.32 0.58 0.50 0.48 0.47 0.25
at es
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Source: The United States Patent and Trademark Office, June 2008.
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22
top performers Taiwan (270 patents per million inhabitants), United States (262 patents), Japan (260 patents), and Finland (160 patents), as shown in Figure 7. Within the comparator sample, Brazil is second to last, showing a significant gap with Spain (6.15 patents), South Africa (1.72 patents), and Chile (1.51 patents).
Conclusion The analysis conducted in this chapter has highlighted the important progress Brazil has made recently toward reinforcing the foundations for sustainable long-term growth. At the same time, the challenges to be addressed, together with the opportunities for better leveraging Brazils many competitive advantages, have been discussed. The country has embarked on a virtuous path of fiscal rigor, while opening and improving the efficiency of its well-diversified economy, attracting increasing amounts of FDI, among other factors. Brazil is also home of a very sophisticated and innovative business sector, with its main champions competing successfully and investing in international markets. However, the enormous potential of its extensive domestic market and natural resources, as well as of its fairly sophisticated production and export base, does not seem to have been fully leveraged for the benefit of its citizens. This is also reflected in still high poverty and income inequality levels. The country continues to display a number of important shortcomings in both the basic requirements and efficiency enhancers of competitiveness. Among the basic requirements, despite increasing governments efforts toward putting public finances on a
ss ia
sounder basis, macroeconomic stability at 122nd remains the biggest weakness in Brazils competitiveness landscape as measured by the GCI. Further, the quality of institutions (at 91st), is assessed as worrisome, with a long list of problems to be tackled, among which are poor public governance, low levels of citizen trust in politicians, a deep-rooted culture of bureaucracy and government inefficiency, an onerous tax system distorting incentives to work and invest, and an inefficient legal framework. Epidemic levels of crime and violence impose considerable costs on businesses, not to mention ordinary Brazilians. This is well understood by policymakers, but further action is required to effectively improve the countrys macroeconomic and institutional environment going forward. The efficiency enhancers also show room for improvement: in particular, imperfect competition conditions in the goods and services markets (101st), coupled with rigid labor markets (91st), represent a burden for the dynamic business sector in its operations and strategies, ultimately hampering economic efficiency. Poor educational standards especially in math and science and in higher education are reason for concern, considering the importance for efficiency-driven Brazil to be able to rely on a qualified, constantly learning, and adaptable labor pool. Education is crucial not only for the proper functioning of factor markets, but also for fostering an environment conducive to innovation adoption and creation. Moreover, education is an important complement to the efforts toward reducing income inequality and poverty in the country. Although there is widespread awareness of the deficiencies discussed above and encouraging remedial steps
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have been taken in recent times, for Brazil to rise to its full potential, a joint effort by all relevant stakeholders including all political parties, the business sector, and civil societyis required to design an effective competitiveness strategy. This effort, of course, needs to be matched by a concomitant long-term focus on action and diligent execution, regardless of administration changes. The current challenging times of global economic crisis make collective reflection and action, if anything, more urgent: only in this way can Brazil move to a higher growth trajectory in which all Brazilians will reap the fruits of increased prosperity.
20 However, a caveat must be introduced here since the 4.29 percent spent on primary education needs to meet the requirements of a considerably larger part of the population than the portion earmarked for higher education investment 21 Even more worrisome is the fact that the country has seen its performance in this pillar worsening over time, losing a total of 21 places since 2006. 22 The tax system, in particular, has an important negative impact on national entrepreneurship, and it is at the root of many small enterprises remaining in the informal market. The complex tax laws, the high tax burden, and the lack of reforms are major hindrances for companies operations and performances. According to the BBC, a Brazilians typical enterprise needs to work 2,600 hours per year to pay all taxes while an enterprise from Ireland, for example, needs just 76 hours. In addition to labor taxes and contributions to social security, companies need to pay state sales taxes (for 27 Brazilian states governed by 27 different sets of laws) and a number of other taxes (at the municipal, state, and federal levels) in sales, profits, and payments. For further information, see http://www.bbc.co. uk/portuguese/reporterbbc/story/2008/02/080226_ pressftreformafiscal_ba.shtml. 23 Brazil ranks last out of the 134 economies covered by the GCR 20082009 for the extent and effect of taxation and 116th for its total tax rates, corresponding to 69.20 percent of total profits. 24 OECD 2008. 25 This would reduce the cost of employing low-wage workers without reducing their wages. 26 FGTS or Fundo de Garantia por Tempo do Servio is a severance insurance mechanism. 27 As suggested in OECD 2006. 28 De la Torre and Schmuckler 2007 and Levine et al. 2000. 29 Levine 2005. 30 Interestingly enough, Brazil does well in this pillar compared with the other BRIC economies, with the exception of India. 31 According to Sobrinho, this figure is ten times larger than the average in industrial countries and three times larger than the Latin American average. See Sobrinho 2007 32 EIU 2007. 33 The successful fight against inflation in the past decade has been an important factor in lowering bank spreads. 34 Marcovitch 2007, p. 133. 35 These distortions are taxes or charges such as the CMPF, FGC, income tax, PIS, Cofins, and IOR. See also http://www.bcb.gov.br/?SPREAD. 36 See Mia et al. 2009.
Notes
1 2 IMF 2008. UNCTAD 2008a. Brazil also ranked 5th in the World Investment Prospect Survey 20082010 (UNCTAD 2008b) in terms of its attractiveness for foreign investors for the period 200810. For further details on FDI flows from and to Brazil, see Chapter 3.3 of this Report. IMF 2008. According to the World Development Indicators 2008, Brazil displayed a Gini index of 56.6, one of the highest in the world (see World Bank 2008). Just to put this number in context, the Gini index varied from a maximum of 74.3 for Namibia (the most unequal country) to a minimum of 24.7 for Denmark (the most equal country in the sample). As the definition makes clear, the concept of competitiveness underlying the Index includes both static and dynamic components, since productivity not only determines countries capacity to sustain a high level of income, but also, through its impact on rates of return to investment, national growth potential. The version adopted in the Index is a slightly modified version of Michael Porters theory of stages of development (see Porter 1990). For further details, see Sala-i-Martin et al. 2008. The weights have been derived from a growth regression using data since the establishment of the GCI. The EU Accession 12 are Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovak Republic, and Slovenia. The constant 2005 sample includes only the 117 economies covered in the 20052006 edition.
3 4
10 See Singh et al. 2005. 11 Also Borensztein et al. (1998) consider well-developed infrastructure, in particular in transport and telecommunications, to be a key determinant in attracting FDI. 12 According to Hulten (1996) approximately 40 percent of the growth differential between low- and high-growth countries can be explained by differences in the effective use of infrastructure. 13 Fay and Morrison 2005. 14 Approximately US$220 billion. The amount was recently increased to R$646 billion (around US$281 billion) in an effort to boost investment growth against the background of the present major economic downturn. 15 See http://www.globalinsight.com/SDA/SDADetail8123.htm. 16 For further details, see Mia et al. 2007. 17 In particular, Brazil has consistently reduced its levels of public debt and deficit over recent years, and it has been running primary surpluses to improve its debt dynamics. 18 See Central Bank of Brazil 2006. 45 See UNCTAD 2008a 19 See Singh et al 2005. 37 Ranked 78th, 57th, 50th, and 52nd for mobile telephone subscribers, Internet users, numbers of personal computers, and broadband Internet subscribers respectively. 38 According to Magalhes et al. 2009, Brazil had over 150 million cellular lines at the beginning of 2009, growing at a stellar rate of 1,300,000 a month despite the economic downturn. 39 For a full analysis of Brazils ICT policies and initiatives ahead, please see Magalhes et al. 2009. 40 Neri 2008. 41 See World Bank 2008. 42 This is an index published by Fundao Getulio Vargas; see http://www.fgv.br/. 43 This trade area was established by the treaty of Asuncin among Brazil, Argentina, Uruguay, and Paraguay in 1991, with the purpose of creating a common market and boosting intra-regional trade. 44 These figures are according to the Ministry of Foreign Affairs 2008. See www.mercosul.com.br.
23
46 According to Santiso 2008, among the 50 most profitable multilatinas, 35 are either from Mexico or Brazil. Also among the 100 most important multinationals from emerging markets, 11 are Brazilian and 6 Mexican. 47 Embraer, in particular, has become one of the global players in the aeronautics industry, thanks to its level of technological prowess. 48 See Santiso 2008. 49 One must underscore the significant progress and innovation realized by Brazil in specific knowledge areas such as genetics, biofuels, agribusiness, and software. See Chapter 3.4 of this Report for an interesting account of Brazils progresses in agribusiness.
Magalhes D., P. Knight, and E. Moreira da Costa. 2009. Brazil: Will the Soccer World Cup of 2014 Help Bridge the Social Gap through the Promotion of ICT and E-government in Brazil? In The Global Information Technology Report 20082009. Geneva: World Economic Forum. 13343. Marcovich J., ed. 2007. Economic Growth and Income Distribution in Brazil: Priorities for Changes. So Paulo: University of So Paulo. Mia, I., J. Estrada, and T. Geiger. 2007. Benchmarking National Attractiveness for Private Investment in Latin American Infrastructure. Geneva: World Economic Forum. Available at: http://www.weforum.org/pdf/Global_Competitiveness_Reports/Be nchmarking.pdf. Mia, I., S. Dutta, and T. Geiger. 2009. Gauging the Networked Readiness of Nations: Findings from the Networked Readiness Index 20082009. In The Global Information Technology Report 20082009. Geneva: World Economic Forum. Nassif A. 2008. Estructura y competitividad de la industria brasilea de bienes de capital. Revista de la CEPAL 96 (December): 23962. Neri M. 2008. A Nova Classe Mdia. Rio de Janeiro: Centro de Polticas Sociais/IBRE/FGV. Available at http://www.fgv.br/cps/classemedia. Nieto Parra S. 2008. Public Debt Management and Political Cycles: Challenges for Latin America. Policy Insights 78 (October). OECD. 2006. Economic Survey of Brazil. Paris: OECD. OECD Development Center. 2007. The Latin American Economic Outlook 2008. Paris: OECD __________. 2008. The Latin American Economic Outlook 2009. Paris: OECD Porter, M. 1990. The Competitive Advantage of Nations. New York: The Free Press. Rajan R. G, and L. Zingales. 2003. Saving Capitalism from the Capitalists. New York. Crown Business Division of Random House. Sala-i-Martin, X. J. Blanke, M. Drzeniek Hanouz, T. Geiger, I. Mia, and F. Paua. 2008 The Global Competitiveness Index: Prioritizing the Economic Policy Agenda. In The Global Competitiveness Report 20082009. Geneva: World Economic Forum. 341. Santiso J. 2008. La emergencia de las multilatinas. Revista de la CEPAL 95 (August): 830. Singh, A., A. Belaisch, C. Collyns, P. de Masi, R. Krieger, G. Meredith, and R. Rennhack. 2005. Stabilization and Reform in Latin America: A Macroeconomic Perspective on the Experience Since the Early 1990s. Occasional Paper No. 238. Washington, DC: IMF. Sobrinho, S. N. 2007. The Macroeconomics of Bank Interest Spreads: Evidence from Brazil. Los Angeles: University of California. UNCTAD (United Nations Conference on Trade and Development). 2008a. World Investment Report 2008. New York and Geneva: United Nations. . 2008b. World Investment Prospects Survey 20082010. New York and Geneva: United Nations. World Bank. 2008a. World Development Indicators Online Database.October 2008. World Bank. 2008b. Doing Business 2009. Washington, DC: World Bank. World Economic Forum. 2008. The Global Competitiveness Report 20082009. Geneva: World Economic Forum.
References
Alfaro, L. and E. Hammel. 2006. Latin American Multinationals. In The Latin America Competitiveness Review 2006. Geneva: World Economic Forum. 7981. Browne, C., R. Bryden, M. Delgado and T. Geiger. 2008. The Executive Opinion Survey: Capturing the Voice of the Business Community. In The Global Competitiveness Report 20082009. Geneva: World Economic Forum. 6777. Borensztein, E., J. de Gregorio, and J-W. Lee. 1998. How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics 35: 11535. Central Bank of Brazil. 2006. Recent Evolution of Bank Spread: Inflation Report. June. Rio de Janeiro: Central Bank of Brazil. De Laiglesia, J. R. 2008. Brecha en telecomunicaciones en AL. El Economista February 29. De la Torre, A. and S. Schmuckler. 2007. Emerging Capital Markets and Globalization: The Latin American Experience. The World Bank and Standford University Press. Available at http://siteresources.worldbank.org/DEC/Resources/DelaTorreandS chmuklerEmergingCapitalMarketsandGlobalization.pdf. ECLAC-CEPAL (Economic Commission for Latin America and the Caribbean). 2004. Productive Development in Open Economies. Thirtieth Session of ECLAC-CEPAL. San Juan. EIU (Economist Intelligence Unit). 2007. Country Profile: Brazil. August. London: EIU . 2009a. Forecast: Brazil. February. Available at http://www.economist.com. . 2009b. Factsheet: Brazil. February. Available at http://www.economist.com. . 2009c. Economic Standards: Brazil. February. Available at http://www.economist.com Fay, M. and M. Morrison. 2005. Infrastructure in Latin America & the Caribbean: Recent Developments and Key Challenges. Report No. 32640- LCR, The World Bank Finance, Private Sector and Infrastructure Unit, Latin America & the Caribbean Region. Washington, DC: The World Bank. Gonalves E., M. Borges Lemos, and J. de Negri. 2008. Condicionantes de la innovacin tecnologica en Argentina y Brasil. Revista de la CEPAL 94 (April); 7599. Hulten, C.R. 1996. Infrastructure Capital and Economic Growth: How Well You Use It May Be More Important Than How Much You Have. NBER Working Paper Series, Vol. w5847. IMF (International Monetary Fund). 2008. World Economic Outlook Database, April. . 2009. World Economic Outlook Update. January 28. Levine R. 2005. Finance and Growth. In Handbook of Economic Growth, ed. P. Aghion and S. Durlauf. Amsterdam: Elsevier. Levine R., N. Loayza, and T. Beck. 2000. Financial Intermediation and Growth: Causality and Causes. Journal of Monetary Economics 46 (1): 3177.
24
Appendix: Structure of the Global Competitiveness Index 20082009
This appendix presents the structure of the Global Competitiveness Index 20082009 (GCI). The numbering of the variables matches the numbering of the Data Tables in The Global Competitiveness Report 20082009. The number preceding the period indicates to which pillar the variable belongs (e.g., variable 1.01 belongs to the 1st pillar, variable 12.04 belongs to the 12th pillar). The hard data indicators used in the GCI are normalized on a 1-to-7 scale in order to align them with the Executive Opinion Surveys results.a The Technical Notes and Sources at the end of The Global Competitiveness Report 20082009 provide detailed information on all the hard data indicators. Those variables that are followed by the symbol 1/2 enter the GCI in two different places. In order to avoid double counting, we give them a half-weight in each place by dividing their value by 2 when computing the aggregate score for the two categories in which they appear.b The percentage next to each category represents this categorys weight within its immediate parent category. The computation of the GCI is based on successive aggregations of scores, from the variable level (i.e., the lowest level) all the way up to the overall GCI score (i.e., the highest level), using the weights reported below. For example, the score a country achieves in the 9th pillar accounts for 17 percent of this countrys score in the Efficiency enhancers subindex. Similarly, the score achieved on the subpillar Networks and supporting industries accounts for 50 percent of the score of the 11th pillar. Reported percentages are rounded to the nearest integer, but exact figures are used in the calculation of the GCI. Unlike for the lower levels of aggregation, the weight put on each of the three subindexes (Basic requirements, Efficiency enhancers, and Innovation factors) is not fixed. It depends on each countrys stage of development, as discussed in the text.c For instance, in the case of Brazilset in the second stage of developmentthe score in the Basic requirements subindex accounts for 40 percent of its overall GCI score, while it represents just 20 percent of the overall GCI score of Spain, a country in the third stage of development.
Weight (%) within immediate parent category
BASIC REQUIREMENTS 1st pillar: Institutions......................................................25%

A. Public institutions .................................................................75%
1. Property rights ...................................................................................20% 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 Property rights Intellectual property protection 1/2 Diversion of public funds Public trust of politicians Judicial independence Favoritism in decisions of government officials Wastefulness of government spending Burden of government regulation Efficiency of legal framework Transparency of government policymaking Business costs of terrorism Business costs of crime and violence Organized crime Reliability of police services
2. Ethics and corruption .......................................................................20%
3. Undue influence ................................................................................20%
4. Government inefficiency ..................................................................20%
5. Security ...............................................................................................20%
B. Private institutions ................................................................25%

1. Corporate ethics ................................................................................50% 1.15 1.16 1.17 1.18 Ethical behavior of firms Strength of auditing and reporting standards Efficacy of corporate boards Protection of minority shareholders interests 2. Accountability ....................................................................................50%
2nd pillar: Infrastructure ................................................25%

A. General infrastructure ..........................................................50%
2.01 Quality of overall infrastructure
B. Specific infrastructure .........................................................50%

2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of roads Quality of railroad infrastructure Quality of port infrastructure Quality of air transport infrastructure Available seat kilometers (hard data) Quality of electricity supply Telephone lines (hard data)
3rd pillar: Macroeconomic stability............................25%

3.01 3.02 3.03 3.04 3.05 Government surplus/deficit (hard data) National savings rate (hard data) Inflation (hard data)d Interest rate spread (hard data) Government debt (hard data)
25
Appendix: Structure of the Global Competitiveness Index 20082009 (contd)
4th pillar: Health and primary education....................25%

A. Health.......................................................................................50%
4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 Business impact of malariae Malaria incidence (hard data)e Business impact of tuberculosise Tuberculosis incidence (hard data)e Business impact of HIV/AIDSe HIV prevalence (hard data) Infant mortality (hard data) Life expectancy (hard data)
7th pillar: Labor market efficiency...............................17%

A. Flexibility.................................................................................50%
7.01 7.02 7.03 7.04 7.05 6.04 6.05 7.06 Cooperation in labor-employer relations Flexibility of wage determination Non-wage labor costs (hard data) Rigidity of employment (hard data) Hiring and firing practices Extent and effect of taxation1/2 Total tax rate (hard data)1/2 Firing costs (hard data)
B. Primary education .................................................................50%

4.09 4.10 4.11 Quality of primary education Primary enrollment (hard data) Education expenditure (hard data)1/2
B. Efficient use of talent............................................................50%

7.07 7.08 7.09 7.10 Pay and productivity Reliance on professional management1/2 Brain drain Female participation in labor force (hard data)
EFFICIENCY ENHANCERS 8th pillar: Financial market sophistication 5th pillar: Higher education and training ...................17%
A. Efficiency.................................................................................50% A. Quantity of education............................................................33%
5.01 5.02 4.11 Secondary enrollment (hard data) Tertiary enrollment (hard data) Education expenditure (hard data)1/2 8.01 8.02 8.03 8.04 8.05 8.06 Financial market sophistication Financing through local equity market Ease of access to loans Venture capital availability Restriction on capital flows Strength of investor protection (hard data)
17%
B. Quality of education..............................................................33%
26
5.03 5.04 5.05 5.06
Quality of the educational system Quality of math and science education Quality of management schools Internet access in schools
B. Trustworthiness and confidence........................................50%

8.07 8.08 8.09 Soundness of banks Regulation of securities exchanges Legal rights index (hard data)
C. On-the-job training ................................................................33%

5.07 5.08 Local availability of specialized research and training services Extent of staff training
9th pillar: Technological readiness.............................17%

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies Firm-level technology absorption Laws relating to ICT FDI and technology transfer Mobile telephone subscribers (hard data) Internet users (hard data) Personal computers (hard data) Broadband Internet subscribers (hard data)
6th pillar: Goods market efficiency .............................17%

A. Competition.............................................................................67%
1. Domestic competition ...............................................................variablef 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12 6.13 10.04 Intensity of local competition Extent of market dominance Effectiveness of anti-monopoly policy Extent and effect of taxation1/2 Total tax rate (hard data)1/2 Number of procedures required to start a business (hard data)g Time required to start a business (hard data)g Agricultural policy costs Prevalence of trade barriers Trade-weighted tariff rate (hard data) Prevalence of foreign ownership Business impact of rules on FDI Burden of customs procedures Imports as a percentage of GDP (hard data)
10th pillar: Market size ..................................................17%

A. Domestic market size ...........................................................75%
10.01 Domestic market size index (hard data) h
B. Foreign market size...............................................................25%

10.02 Foreign market size index (hard data) i
2. Foreign competition...................................................................variablef
INNOVATION AND SOPHISTICATION FACTORS 11th pillar: Business sophistication ............................50%

A. Networks and supporting industries.................................50%
11.01 11.02 11.03 Local supplier quantity Local supplier quality State of cluster development
B. Quality of demand conditions .............................................33%

6.14 6.15 Degree of customer orientation Buyer sophistication
Appendix: Structure of the Global Competitiveness Index 20082009 (contd)
B. Sophistication of firms' operations and strategy............50%

11.04 11.05 11.06 11.07 11.08 11.09 7.08 Nature of competitive advantage Value chain breadth Control of international distribution Production process sophistication Extent of marketing Willingness to delegate authority Reliance on professional management1/2
12th pillar: Innovation.....................................................50%

12.01 12.02 12.03 12.04 12.05 12.06 12.07 1.02 Capacity for innovation Quality of scientific research institutions Company spending on R&D University-industry research collaboration Government procurement of advanced technology products Availability of scientists and engineers Utility patents (hard data) Intellectual property protection1/2
e. The impact of malaria, tuberculosis, and HIV/AIDS on competitiveness depends not only on their respective incidence rates, but also on how costly they are for business. Therefore, in order to estimate the impact of each of the three diseases, we combine its incidence rate with the Survey question on its perceived cost to businesses. To combine these data we first take the ratio of each countrys disease incidence rate relative to the highest incidence rate in the whole sample. The inverse of this ratio is then multiplied by each countrys score on the related Survey question. This product is then normalized to a 1-to-7 scale. Note that countries with zero reported incidence receive a 7, regardless their scores on the related Survey question. f. The Competition subpillar is the weighted average of two components: Domestic competition and Foreign competition. In both components, the included variables provide an indication of the extent to which competition is distorted. The relative importance of these distortions depends on the relative size of domestic versus foreign competition. This interaction between the domestic market and the foreign market is captured by the way we determine the weights of the two components. Domestic competition is the sum of consumption (C), investment (I), government spending (G), and exports (X), while foreign competition is equal to imports (M). Thus we assign a weight of (C+I+G+X)/(C+I+G+X+M) to Domestic competition and a weight of M/(C+I+G+X+M) to Foreign competition.
g. Variables 6.06 and 6.07 combine to form one single variable.
Notes
a. The standard formula for converting hard data is the following:
(country score sample minimum) 6x (sample maximum sample minimum +1
h. The size of the domestic market is constructed by taking the natural log of the sum of the gross domestic product valued at PPP plus the total value (PPP estimates) of imports of goods and services, minus the total value (PPP estimates) of exports of goods and services. Data are then normalized on a 1-to-7 scale. PPP estimates of imports and exports are obtained by taking the product of exports as a percentage of GDP and GDP valued at PPP. The underlying data are reported in the Data Tables section. i. The size of the foreign market is estimated as the natural log of the total value (PPP estimates) of exports of goods and services, normalized on a 1-to-7 scale. PPP estimates of exports are obtained by taking the product of exports as a percentage of GDP and GDP valued at PPP. The underlying data are reported in the Data Tables of The Global Competitiveness Report 20082009.
The sample minimum and sample maximum are, respectively, the lowest and highest country scores in the sample of countries covered by the GCI. In some instances, adjustments were made to account for extreme outliers. For those hard data variables for which a higher value indicates a worse outcome (e.g., disease incidence, government debt), we rely on a normalization formula that, in addition to converting the series to a 1-to-7 scale, reverses it, so that 1 and 7 still corresponds to the worst and best possible outcomes, respectively:
(country score sample minimum) 6x (sample maximum sample minimum +7
b. For those groups of variables that contain one or several half-weight variables, country scores for those groups are computed as follows:
(sum of scores on full-weight variables + (count of full-weight variables +
1 2 1 2
x (sum of scores on half-weight variables) x (count of half-weight variables)
c. As described in Chapter 1.1 of the The Global Competitiveness Report, the weights are the following: Factordriven stage (%) 60 35 5 Efficiencydriven stage (%) 40 50 10 Innovationdriven stage (%) 20 50 30
Weights Basic requirements Efficiency enhancers Innovation factors
d. In order to capture the idea that both high inflation and deflation are detrimental, inflation enters the model in a U-shaped manner as follows: for values of inflation between 0.5 and 2.9 percent, a country receives the highest possible score of 7. Outside this range, scores decrease linearly as they move away from these values.
27
Overcoming Competitiveness Gaps
29
CHAPTER 2.1
Infrastructure: Will PAC Really Accelerate Growth?

PAULO RESENDE, Fundao Dom Cabral, Brazil
What is the impact of infrastructure on the economic development of a country? And will this impact lay the groundwork for sustainable competitiveness? Debate of this issue has resurfaced strongly in recent years, mostly as a result of the new role played by emerging marketsincluding Brazilin the global economy. Discussions have also been stimulated by the growing belief that Brazil must expand its exports if it is to be a player in the international game of globalized movement of higher added value goods. However, the concentration of industrial activities in a few urban settlements in the country and the divergence in living standards among these and the vast rural areas are notorious. These issues point to the need to establish an efficient and extensive infrastructure network, ensuring that all the regions and sectors of the Brazilian economy have an opportunity to share the improvements in national development. The integration of Brazilian regional economies through infrastructure offers ample opportunities for existing industries to increase their trade in manufactured goods. The value-adding process represents a logical succession of stages in industrial chains. Through investment in infrastructure, productivity and output capacity are expanded, so that increases in real income match population growth and improve living standards. However, the current condition of infrastructure in Brazil requires robust interventions to improve the capacity and efficiency of all transport modes as well as energy generation and distribution. In order to regain speed in infrastructure investment and supply the accumulated demand of the past 30 years, in 2007 the federal government launched the Growth Acceleration Program (PAC), which will be used here to analyze the influence of infrastructure in accelerating Brazilian development and competitiveness.
PAC: An overview PAC is an infrastructure package based on the concept that investment allied to economic policies stimulates growth in all economic sectors, simultaneously bringing social benefits to the Brazilian macro regions. Between the 1990s and 2006, investment from the federal government in Brazil represented less than 0.5 percent of GDP. Figure 1 shows the evolution of investment in the transport system as a percentage of GDP in recent decades. The same trend applied to investment in energy production and distribution, among other infrastructure areas. After 2006, a series of projects with a major focus on oil and gas by the Brazilian petroleum company Petrobrs helped the economy grow at average annual rates of 3.7 percent. In 2008, growth rates reached 6.4 percent, the highest in recent Brazilian history.
2.1: Infrastructure: Will PAC Really Accelerate Growth?
31
Figure 1
Investments in transport as a percentage of GDP
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
1975
1977
1979
1981 1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2007
Source: Resende, 2007.
32
The original PAC provided for US$220 billion in investment for the 200710 period. In 2008, the PAC budget was raised to US$280 billion as a counter-cyclical measure in the context of the current economic slowdown. And, if investments after 2010 are taken into account, an additional US$200 billion should be included, elevating the total PAC budget to approximately US$500 billion. With complex infrastructure projects, PAC has been conceived by the government as a new model for planning and managing public investment. It is focused on articulating infrastructure projects to accelerate growth, together with providing better social and urban conditions, mainly within the most important Brazilian metropolitan areas. PAC does not, however, consist only of new projects. As a matter of fact, most of the projects included had been studied and designed from the 1980s onward. During the 1990s, the federal government started a series of studies based on transportation corridors, which resulted in an infrastructure package called Brasil em Ao (Brazil in Action), focusing on transport projects. This package was the first in many years to consider infrastructure strategic to national development. Despite its strategic focus, the Brasil em Ao package did not reach its objectives because of drastic cuts in public spending in the context of fiscal adjustment. This also negatively affected private investment, except in some areas that had already been privatized. For example, the lack of investment in infrastructure culminated in the energy blackout of 2001, which changed forever the perception of public managers with respect to infrastructure needs in Brazil. Around that time, the government became convinced of the importance of infrastructure investment as an enabler of economic growth and job creation. Specialists
estimated that infrastructure investment in Brazil had to reach 5 percent of GDP to maximize positive impact on economic growth. This figure became the target of any future infrastructure package. At the same time, the strong correlation between infrastructure and economic growth had increasingly become accepted by civil society, which began to claim more infrastructure projects. Based on these premises and on the experiences of the past, PAC was launched in 2007 in a climate of urgency for investment in infrastructure, with the following objectives: to put together the most important infrastructure projects realized in the last 30 years; to build a package that would include not only transport, but also energy, oil and gas, and social and urban projects; to transform the package into a unique set of projects, protected from economic instabilitiesso that it became strategic to the government; and to have a different managing model to accelerate control and achievements in a short timeframe. PAC was adopted by the government as the unique infrastructure package aiming at a better allocation of resources so that new investment would focus on increasing productivity and competitiveness. PAC also encompassed a series of policies to decrease regulatory risks, improve the framework for private participation in infrastructure, and develop risk mitigation mechanisms. Once implemented, PAC would guarantee coverage and quality of infrastructure as well as better access to water and sanitation, electricity, transport, and energy. The program was structured into infrastructure segments (see the breakdown by area of investment in Table 1) in order to
Table 1
Electricity Oil and gas Biofuel Logistics Naval industry
PAC in numbers (US$)

34,086 77,826 7,565 20,738 4,600 28,043 172,861
Social and urban Subtotal
Housing TOTAL
Source: Ministrio da Casa Civil, 2007.
219,078
in return on investment. Against this background, PAC comprised (1) projects attractive only to the public sector; (2) projects attractive only to the private sector; and (3) projects attractive to both public and private sectors, characterizing public-private partnerships (PPPs). Regardless of the characteristics of the specific project, the main question remains: what can the real role of PAC be to satisfy infrastructure demand in Brazil? The answer may rely on a segmented analysis of the projects within PAC. Energy generation Within a moderate scenario, the Brazilian Electricity Regulatory Agency (ANEEL) estimates that an increase of 91,000 megawatts in total capacity is needed in the 2008 to 2012 period with respect to energy generation. In this period, there should be an increase of 1.3 percent per year over current capacity. Figure 2 shows two scenarios for energy generation capacity in megawatts from 2008 to 2012. The energy generation resulting from PACs projects, once completed, will provide approximately 20,000 megawatts. This means that PAC will be sufficient to fulfill all energy generation demands in Brazil. Energy distribution Brazilian specialists indicate that the country needs 34,072 kilometers of energy distribution lines in addition to the current 86,229 kilometers. The new lines represent a cost of approximately US$10 billion. Currently, PAC has projects for a total of 7,120 kilometers, which are not enough to fully address the demand. But the private sector has also expanded its projects in energy distribution lines. Therefore, if PAC alone could
achieve its ambitious objectives. In this chapter, we will focus on PACs transport and energy projects.1
PAC and its impact on infrastructure gaps in Brazil Two major developments have shaped infrastructure trends in the last decades throughout Latin America, including Brazil. First, countries have experienced traumatic macroeconomic crises that have required drastic fiscal adjustments. Second, financial and regulatory changes have led to large turnarounds in the infrastructure paradigm, based on the notion that the private sector should take the main role in both the infrastructure financing and provision while the governments would limit itself to a primarily regulatory role. Private investment, however, never reached the critical mass needed to offset the massive collapse in the public one. Further, it was focused on a limited number of projects, such as telecommunications, some road concessions, railroads, and a few others, and virtually excluded from the great majority of projects without some degree of certainty
Figure 3
Energy generation capacity estimates in megawatts: 200812 Moderate scenario Optimistic scenario
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
2008
2009
2010
2011
2012
Source: ANEEL (2007)
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Figure 3
Transport distribution in Brazil vs. selected countries: Railroads and highways, (percent total freight volumes), 2008
90 80 Belgium 70 60
Highways
France Germany Brazil
50 40 United States 30 20 10 Russian Federation 0 10 20 30 40

Railroads
China
50
60
70
80
Source: Adapted by Resende from Coppead, 2007.
not guarantee an efficient answer to the demands for energy distribution lines, projects from private energy concessionaries may add lines, contributing to the satisfaction of current and future demands. 34 Transport The current deteriorated transport system is responsible for tremendous economic losses and very high accident figures, with negative effects on national competitiveness. Figure 3 displays the current position of Brazil compared with other countries in shares of roads and railroads in their respective transport matrices. PAC has in its budget a total of US$20 billion earmarked for transport projects. This is not enough to respond to the current and near future demands. A more detailed analysis of each transport mode follows. Highways Brazil has the third largest highway network in the world (approximately 1.6 million kilometers, of which only 195,000 kilometers, or around 12 percent, is paved). This network is highly concentrated in the eastern part of the country where the major urban settlements are located. The Brazilian transport matrix is unlikely to face significant changes in the next decades, mostly because of the excessive concentration of freight volumes on the highway network. Associated with this, returns on capital are more likely to occur if investment is directed to highways rather than other transport modes. Therefore, it is clear that any multi-sector investment program related to infrastructure in Brazil must rely heavily on highway improvement. In line with this, 70 percent of the PAC total transport budget is dedicated to highway improvements. According to the National Association for Cargo
Transport Users (ANUT),2 the increasing deterioration of the highway system (70 percent of the highway system is estimated as being of poor quality) is a particular area of concern, also considering its importance for logistics systems in Brazil. Back in 2004, ANUT estimated that approximately US$5 billion would be needed to restore the highway system. PAC has reserved approximately US$14 billion for highways, but the country needs mores than US$25 billion to achieve efficient service levels in its system. Therefore, even taking into account PAC and other projects, Brazil still has a gap of US$10 billion in this respect. Ports After highways, ports are the second priority for eliminating the main logistics bottlenecks and reducing operational transport costs in Brazil. The country has one of the largest coastlines in the world, and the presence of harbors in almost all the coastal states represents an important advantage in international trade flows. However, in spite of these geographical advantages, the current port structure exhibits several critical weaknesses that are in need of immediate attention. Among these are equipment obsolescence, inefficiencies in labor development and allocation, lack of capacity in harbors, and inadequacies in port administration. Investing in port equipment, labor skills, and harbor capacity could lead to important efficiency gains for the Brazilian logistics system. Increasing harbor capacity in Brazil could result in handling Capesize ships capable of moving 150 thousand dead weight tons. Most of the Brazilian ports handle panamax ships with a freight cost of approximately US$36 per ton, while the new Capesize generation operates at a US$12 per ton freight cost. In Brazil, only seven ports are able to handle
Capesize ships, and projects should be conducted to increase the number of ports with water depths of 16 to 18 meters so that Capesize ships could be employed. The port system is one of the most important logistical elements in the country, especially because of its influence on international and national logistics efficiency. The Port Modernization Enactment of 1993 opened port operations to private companies that took responsibility for the operations of 6 out of the 10 major ports in the country. However, in 2005, the National Agency for Waterway Transport (ANTAQ) enacted two controversial resolutions (resolutions 55 and 517) that changed the rules of port operations and private terminal capacity improvements. Concession periods, for example, were reduced from a 25-year-period to a precarious one-year authorization that can be revoked at any moment. These resolutions have discouraged private investment from taking place on a larger scale. PACs port projects include a total of US$5 billion, including ship construction. This is worrisome, since specialists estimate that Brazil needs at least three times more resources to improve its standing in global trade. Other modes of transport One recurring issue in logistics discussions in Brazil has to do with the lack of equilibrium in the Brazilian transport matrix. Incentives to use transport modes other than highways should be a trend already consolidated in the country. And some changes in transport dynamics can be viewed as movements toward the desired equilibrium in the transport matrix. In the last 10 years, under the management of private concessionaries, the Brazilian railroad system has significantly improved. Progress can be seen in the exponential increase in level of investment, traffic volumes, productivity gains, and in the reduction in the number of accidents. Railroads are currently responsible for approximately 26 percent of the freight volume in Brazilan increase of almost 80 percent since privatization in 1996. Investment went up from US$10 million in 1995 to US$3.2 billion in 2006. In the same period, the freight volume unit of transport increased by 55 percent, together with a reduction of 56 percent in the number of accidents.3 It is expected that the railroad share in the transport matrix will have reached 28 percent by 2008; another 2 percent can be added if government invests what is necessary to expand the railroad network. With a 30 percent share, the Brazilian railroad system would be closer to the 42 percent international parameter that has been considered the ideal share of railroads in the transport matrix of countries with similar industrial and regional features. Railroads in Brazil still need to take several actions to be part of a larger logistics network and, consequently, share the right amount of traffic volume for the transport matrix to reach equilibrium. First, the concession contracts of the current operators need to be revised. There
are also some related issues that need to be updated because of the current consolidated private use of railroads. These issues include how to share client demand since the operators have demands of their own, and how to improve the interface among two or more concessionaries in the macro regional corridors. Brazils inland waterways present another mode of transport that demands a more detailed analysis. In Brazil, inland waterways account for less than 1 percent of the total freight volume; these waterways are restricted to a very few rivers, mostly in its northern region. Although the country has more than 28,000 kilometers of navigable rivers, this mode of transport has not received sufficient attention from decision makers. As in any other region of the world, long navigation courses must be planned for inland waterways to reach adequate productivity levels. In Brazil, with a few exceptions, river transport has operated only through poorly sophisticated facilities. The public and private sectors have never presented a sound plan to improve navigable rivers to increase inland waterways potential. As of today, the administration of inland waterways practically does not exist in the context of the Brazilian transport agencies. Financing programs have aimed only to maintain the basic needs of the current facilities, mainly in regions highly dependent on river navigation, specially the Amazon area. A last mode to be investigated is air transport. In spite of the recent lack of capacity in controlling operations, which has created significant bottlenecks for air transport, this mode has shown significant improvement in Brazil. Infraero, the agency responsible for air transport administration, has successfully implemented an investment program that is modernizing and increasing the capacity of terminals. In 2006, Infraero invested approximately R$530 million, improving the capacity of key airports such as Santos Dumont (Rio de Janeiro), Congonhas (So Paulo), Goinia (Gois), and Joo Pessoa (Paraba), to mention only a few. The targets for 2010 are to transform Viracopos (Campinas) into one of the main passenger airports of the country in order to alleviate traffic at the airports of Cumbica (So Paulo) and Congonhas. Together with the provision of investment in air transport, other measures have also led to essential improvements to the sector. These include the replacement of the Civil Aviation Department (DAC) by the National Civil Aviation Agency (ANAC) and its regulation; the continuation of important projects to improve cargo handling at Florianpolis (Santa Catarina), Uberlndia (Minas Gerais), Confins (Minas Gerais), and Curitiba (Paran) airports, among others; and, finally, the gradual but important structuring process of ANAC, slowly demilitarizing the sector and organizing operations throughout the country. Approximately US$12 billion of PACs budget is earmarked for investment in railroads, inland waterways, and air transport. Specialists believe that the country
35
Table 2
Summary of PAC`s resources to address infrastructure demands (US$ billion) PAC budget 28.7 5.6 14.0 5.0 12.0 Demand needs 20.0 10.0 25.0 15.0 25.0 Alternatives and strategic actions Reduce dependence from international credit lines Investments from current concessionaries Incentives to private investments Incentives to private investments Incentives to privates investments
Infrastructure Segment Energy generation Energy distribution Highways Ports Railroads, inland waterways and air transport
needs twice this figure, or a total of US$25 billion. Therefore, once again PAC alone is not enough to satisfy the entire demand of other modes of transportation. Table 2 shows the main infrastructure segments analyzed above together with the relevant actions/budgets provided by PAC. PAC will no doubt be an important factor in accelerating growth in Brazil, but alone it will not be able to meet all the countrys infrastructure demands. Incentives to private investment should therefore be made a main target. However, as elaborated in the next section, the Brazilian environment for private investment is not the most appropriate.
tions does not guarantee modern and efficient operations, and, above all, it does not ensure that operations are ready to accommodate the new infrastructure capacity resulting from PAC. On the contrary, accommodating everyday operations is the main challenge of decision-makers. Nonetheless, having policies is a first step toward achieving efficiency. A few examples are listed below: 1. Highways: there is an agency responsible for the control and regulation of the highway system, the National Agency for Road Transportation (ANTT); a national policy for highway concession (Programa Nacional de Concesses de Rodovias Federais) has been tested and approved. There is also a department to implement highway projects, the National Transport Infrastructure Department (DNIT). The Brazilian Development Bank (BNDES) has approved credit lines for fleet renewal, tracking systems, labor training, and other projects, and, a specific transport tax. The Contribuio sobre Interveno de Domnio Econmico (CIDE) has been created to guarantee permanent funds to road investments. 2. Railroads: since 1996, the railroad system in Brazil has operated under private concessions and been regulated by the ANTT. Policies to create a better environment for passenger and cargo sharing in metropolitan areas have been studied. 3. Ports: in 1993, a new law was passed to modernize port administration and operations, together with specific tax exemptions for equipment and terminal investment in major maritime ports; also a new law has provided important regulations to coastal navigation. 4. Air transport: passenger and cargo movements have been slowly deregulated and a new competitive environment has lessened entry barriers for new airlines to operate both regional and national routes. 5. Energy generation and distribution: ANEEL has been created with strong policies and a consolidated controlling model to regulate energy concessionaries. Regulatory agencies in Brazil are important to support PAC and their role must be reinforced, especially in the following areas: administration of the concessionary
36
An evaluation of the major successes and missing links of PAC There is no doubt that higher amounts of infrastructure investment (from 4 percent to 6 percent of GDP) foster growth, and more growth will require more investment in infrastructure, in a virtuous cycle. It is clear that a failure to keep up with other countries infrastructure can only harm Brazils future competitiveness. And, in terms of investment, PAC tries to cope with the needs of current and near-future demands. Yet, PAC is not likely to address problems alone: improvement to the regulatory and policy environment should go hand in hand with physical investment. It is precisely in policies and regulations that one can find major successful accomplishments as well as missing links for the country. Regulatory agencies Brazil has experienced, in the last 15 years, a series of important regulatory and policy reforms affecting the infrastructure sector. Old agencies have been replaced by new ones with different roles and concepts. Some policies have been created to modernize and consolidate for example, energy generation and distribution, port operations, multimodal transport operators, regulatory milestones to highways and railroad concessions, and administration transfers from the federation to states. In general, the public sector in Brazil has had a clear intention of providing the infrastructure sector proper policies under modern concepts. However, the mere existence of policies and regula-
contracts, from the project concept to contract implementation; regulation and control of tariffs and prices; studies of infrastructure demands; registration of cargo vehicles, operators, fleet control, and accident statistics; multimodal operator registration and control; and promotion of regulatory and control policies to all infrastructure networks in the country. However, distortions that originated from the privatization processes in Brazil have led to a new reality for the regulatory agencies. If the intention is to regulate and control the concession processes, agencies should not be focused on eventualities but instead on the market and the ample policies that direct the ways in which infrastructure facilities are operated in the country. Therefore, the following weaknesses need to be addressed to reinforce the role of the regulatory agencies: The concept of regulatory agencies in Brazil was adopted a hundred years after it was conceived in the United States. This fact points to the importance of the learning process that has been neglected in Brazil; this process must be embraced to make the regulatory agencies more in tune with the realities facing the countrys infrastructure. The main raison dtre of regulatory agencies should be to build a protective shield against political influence. Exactly the opposite seems to be the case of Brazilian regulatory agencies. Public projects should be geared toward giving more autonomy to the agencies. An upgrading of regulatory agencies technical skills is required; this can be reached by increasing the number of highly skilled personnel. Excessive budget cuts seem to have prevented regulatory agencies from becoming an essential element that guarantees the efficiency and safety of infrastructure operations in Brazil. Policies In Brazil, policies have been created with laudable intentions to provide a modern and efficient environment for infrastructure. However, in practice, most of the policies have not worked properly; implementation especially remains an important challenge. For example, national highway policies that address questions related to decentralization and concessions are in place, together with multi-year expenditures programs, such as PAC. Discussions about the responsibilities of railroad expansions are a fact. Port administrations and policies are in the daily news and make for constant debate. Air transport operations have been subjected to important analyses. In sum, infrastructure policies have been the center of attention in Brazilian public and private sectors. However, discussions must lead to actions, and actions should be in the direction of increasing efficiency.
Privatization, PPPs, and the role of the private sector Since the 1990s, the Brazilian government has adopted a primary surplus target as one of its macroeconomic policys foundations. Given that the public sector has not been efficient in cutting expenses, it has not been able to invest more in infrastructure. This, coupled with the privatization process that began in the 1990s, has prompted a change in infrastructure financing, with the private sector playing an increasingly central role. Besides the positive impact vis--vis the primary surplus target, the privatization of infrastructure facilities has achieved other relevant objectives, such as greater efficiency, better service levels, a sustainable investment level, investment in technology and labor training, more taxes, and lower maintenance costs for the public sector. Related to the privatization programs are projects done through PPPs. This type of partnership has already been successfully tested in the United States, Canada, Australia, Italy, South Africa, Mexico, Portugal, and Chile, among other countries. In Brazil, the regulatory framework has only recently been developed, together with fiduciary funds to support PPPs. Initial projects have taken place in the states of Minas Gerais and So Paulo, with the MG-050 and Line 4 of the So Paulo Subway, respectively. The former project was a 25-year concession in Minas Gerais, connecting Belo Horizonte to the north of the So Paulo state; the latter was a 13-kilometer length of urban subway in the capital city of So Paulo, with an estimated flow of 900,000 passengers per day. Following these two projects, a considerable number of PPPs have been started both at the federal and state levels. Despite some unsolved regulatory issues specifically related to federal fiduciary funds, there is full consensus that PPPs should be a fundamental source of value for the concession operators in the long term. This assumption is mostly based on the fact that PPPs are value accretive, even with lower internal rates of return (IRR). Several figures have shown that, with a weighted average cost of capital value of 13.2 percent, implying an approximate 8.5 percent discount rate, the real IRR of the PPPs would fall in a 13.5 percent to 8.5 percent range, which makes the PPPs still accretive. In spite of PPPs attractiveness, there is a need to consolidate the concession and privatization process in Brazil. To this end, economies of scale must prevail and provide an element of financial stability for operators. In Brazil, the contracts are regulated by economic-financial equilibrium. Any changes in the investment plan may lead to tariff revisions in order to maintain the original IRRs. Today, operators of a concession need to continually adjust their value added by cutting operational costs. Since regulations do not permit lower service levels, such cost cutting is limited. Scale is the key for providing value added, since it dilutes highly fixed costs and, consequently, improves profitability and return basis. Current operators and future players should be helped by new concessions to create greater scale. Current operators are
37
in a better position because they already have some scalability in their business models, together with embedded synergies and know-how of relationships with public authorities. Privatization and PPPs involving infrastructure are processes that require a high level of exposure to political risks. Dealing with the public sector depends on several issues that vary according to a very dynamic set of realities. Consequently, operators and private partners are always exposed to risks related to regulatory, administrative, and political frameworks. Below are some examples of these risks: 1. Delays in tariff increases or even tariff revisions have occurred because of the populist appeal of toll roads. These issues have already created a track record of Supreme Court rulings favoring the concessionaries. As the models are consolidated, there is a tendency for these issues to become less important, but they continue to be ranked as political risks. 2. Political interests and excessive bureaucracy still lead to permanent delays in auction processes. Complex bureaucratic rituals involving different public agencies have a negative impact on trust with respect to accelerated implementations of new concessions. 3. There is a lack of strong and reliable regulatory frameworks for PPPs, mainly at the federal level. The acceleration of PPPs should occur not only to improve road efficiency, but also to create a track record of the governments commitment to consolidated regulatory frameworks. This is important because state and federal governments are subjected to different models of partnership fiduciary funds, anddepending on the basis of each fund companies can be exposed to delinquencies.
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Conclusion The infrastructure sector in Brazil displays a number of inefficiencies that negatively affect its competitiveness, mainly in terms of the global reorganization of production and distribution chains. These inefficiencies are not new; they are the result of a historical lack of planning and sustained investment. As a consequence, infrastructure does not fully support Brazils integration into global markets, which is a key determinant of interregional and international competitiveness. Logistics costs in Brazil are higher than in other, similar economies, which results in inefficient interregional trade with unbalanced competitiveness among states. Moreover, an increasing
accessibility to Brazilian products is negatively affected by concomitant increases in infrastructure costs, thereby reducing competitiveness. Several infrastructure sectors have not received enough attention and sustained investment to compete with other countries networks. For example, contrary to developed countries, multimodal transport in Brazil has not been sufficiently developed to take advantage of what each transport mode has to offer. With respect to policies and regulations, the infrastructure sector in Brazil is subjected to modern and appropriate policies and regulatory agencies. However, in practice, operations are still outdated and underdeveloped. Unclear regulations for railroads, excess port labor and bureaucracy, freight transport modes with low productivity, and agencies operating under political influence have created an environment where operators work with a dangerous level of independence. Finally, transfers of infrastructure facilities to the private sector do not seem to follow a path conducive to accelerated concessions needed for maintenance and operation. Comprehensive reviews of concession biddings and contract documents have taken too long, which has also prevented PPPs from becoming a viable alternative. Brazil needs immediate and massive investment in infrastructure. PAC is a significant step in the right direction, but further actions and programs are needed (see Box 1). Private participation should become constant through regulatory milestones that permit sustained returns on investment. Policies should be implemented in the direction of movement efficiencies through interregional integration, in a highly controlled system. PAC has tried to convey a message of better allocation of expenditure. The programs investment focuses on strategic goals, thereby reducing the overall cost of infrastructure networks. PAC also has the advantage of being responsible for much of infrastructure financing, both directly and indirectly, by helping to structure financing networks. However, the critical issue of how to generate the fiscal ability to increase public investment remains. Infrastructure in Brazil should be seen as strategic, and part of a more complex function that must be efficient and balanced. Costs should be followed by level of service so that competitiveness is not negatively affected. Brazil needs to play a larger role in the global market, which requires infrastructure to be part of the daily plans of all public and private high management transactions.
Box 1: Six actions policymakers should take to complement PAC in filling infrastructure gaps
PAC alone is not enough to fill all the gaps in infrastructure demands. A series of actions is needed to complement the role that PAC has played in guaranteeing the right infrastructure level for Brazil. A six-action guideline is presented here to assist policymakers to achieve the same level of investment and infrastructure framework observed in other developed countries. Action 1. The public sector in Brazil needs to create regulatory standards that protect the return on investment to the private sector. Private participation in infrastructure should become constant through regulatory milestones that permit sustained return on investment, mainly for international investors. Action 2. The states and the federal government should share responsibility for infrastructure facilities, and administrative, political, and ideological issues should not become the only elements in decision making. Action 3. PAC should be protected from political influences, mainly with respect to the 2010 elections. PAC needs to become a national program, with societal guarantees and protections, so that investment does not suffer interruptions or distortions due to political processes and ideologies. Action 4. The government must define the infrastructure policies for PPPs. Today, potential private partners are not sure about the boundaries and formats of the federal and state PPPs. A set of policies and PPP formats should be designed based on the specific patterns of each infrastructure project. Action 5. Monetary resources, especially those from dedicated taxes (e.g., CIDE), should be protected from uses other than those described by the law. In Brazil, the centralization of all tax monies and their consequent distribution affects the amount of resources dedicated to infrastructure improvements. Therefore, what is collected for particular purposes should not be used in areas other than those specified. Action 6. Long-term infrastructure projects should be allowed to continue regardless of election outcomes. Projects whose timetables are longer than four years should not suffer from disruptions due to changes in government. Laws and regulations should protect long-term infrastructure investments, thereby guaranteeing the full completion of the projects.
Notes
1 We do not deal with the segments strongly related to the Petrobrs investment mentioned earlier, since these include long-term plans and are relatively distinct from governmental planning. ANUT 2006. ANTT 2006.
2 3
References
ANEEL (Brazilian Electricity Regulatory Agency). 2007. Available at http://www.http://www.aneel.org.br. ANTT (National Agency for Road Transportation). 2002, 2006, 2008. Available at http://www.antt.org.br. ANUT (National Association for Cargo Transport Users). 2006. Soluo para a Competitividade Logstica no Brasil. Available at http://anut.org.br. Coppead. 2007. Estudos Sobre as Perspectivas dos Transportes no Brasil. Rio de Janeiro: Centro de Estudos Logsticos, Federal University of Rio de Janeiro. Ministrio da Casa Civil. 2008. Available at http://www.presidencia.gov.br/casacivil. MT (Ministry of Transport). 2008. Available at http://www.transportes.gov.br. Resende, P. 2007. Introductory Chapter: The Brazilian Transport Section. In The Evaluation of Impact of the Transportation Sector on the Economic Development of Brazil. Washington, DC: World Bank. World Economic Forum. 2008. The Global Competitiveness Report 20082009. Geneva: World Economic Forum.
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CHAPTER 2.2
Challenges and Institutional Changes to Promote Brazils Competitiveness

CLAUDIA COSTIN, Municipality of Rio de Janeiro
Since the early 1990s, Brazil has been opening itself to an increasingly globalized world economy, with the consequent challenge of how best to take advantage of the opportunities produced by the acceleration of international trade and financial exchanges in order, ultimately, to improve the countrys competitiveness. The goal is to produce what is demanded at an affordable cost, attract foreign direct investment (FDI), and create markets for Brazilian products. Brazil has important competitive advantages in the size of its internal market, the diversity of its production, and its growing middle class (currently accounting for more than half of the population). The country is the worlds biggest exporter of meat, oranges, sugar, soybeans, coffee, swine, and poultry. Even so, as Khanna reminds us, agriculture represents only 10% of the countrys economy, one of the worlds ten biggest.1 Brazil can also count on one of the most diversified and high value added production structures in the region. The recent discoveries of oil and gas fields in the country, along with the existence of important water resources, make Brazil a global player in the worlds energy market. But, although the potential for development and improved competitiveness is high, results have been somewhat inconsistent. Growth has lagged behind in recent years as the world economy has shown a positive performance, although the figures still place the country among the BRIC economies, together with Russia, India, and China. Some institutional hindrances have been getting in the way of improving the countrys competitiveness. Many of these obstacles derive from the period when the economy was more closed to the world; others are from an auto-referred management culture that is still alive. Among these latter impediments, we can highlight the following: 1. a vision of public management and control that focuses on processes rather than results, thus emphasizing the rituals followed by the public official in what one researcher calls bureaucratic administration,2 based on Webers analysis; 2. the still very recent consolidation of property rights and creation of some of the regulatory agencies; 3. the excess and overlapping of public agencies involved in regulation, not completely dissociated from political parties; 4. the frequent modification of legislation regarding the private sector, which makes investment risky; 5. the still fragile political institutions captured by patronage on one hand and corporatism on the other; and 6. the poorly educated workforce.
2.2: Challenges and Institutional Changes to Promote Brazils Competitiveness
41
These challenges each need to be addressed for Brazil to be able to compete in a more integrated world economy. The rest of this chapter will analyze each of the above challenges and propose ways to bypass or address them. Changing a bureaucratic culture Nepotism is deeply embedded in Brazilian political culture. It brings with it a strong trend of corruption, opacity in the relations between the public and private sectors, favoritism, and risks for investment. To fight this problem, however, the country has adopted a remedy that can be as harmful as the disease. The state in Brazil was not originally designed to deliver universal public services. It was conceived, historically, to play two roles. One was to generate income and employment for the white impoverished population that arrived with the Portuguese royal family fleeing Napoleon in the beginning of the 19th century. The other role involved the reduction of the cost of capital production by means of investment that could enable the private sector to operate in a sustainable way in the country. This reduction was carried out primarily by the state-owned companies, which appeared to be quite efficient and important in promoting the development of the country. This was done throughout the entire multifaceted steel, energy, road construction, and, more recently, telecommunications industries. The first role of generating income and employment for the newly arrived populationwas greatly influenced by the nepotistic system that exchanged votes and political loyalty for jobs. Positions were offered in what was called direct administration, where salaries were always lower and services of poor quality. In fact, there was a third function of the state that was related to delivering services and generating opportunities for segments of the elite population and the ascending middle class; this was intended to avoid problems that might have endangered the whole population, such as infectious diseases or natural disasters. An example of this third function of the state is public schools, whose attendance was limited until the 1930s to only 21.5 percent (compare this with 83.5 percent in countries such as Argentina) of school-age children.3 But in most cases, the role of the state was not seen as delivering universal public services or reducing poverty. The state was not prepared or equipped for that. An inflection point requiring a change in public administration procedures was reached when citizens began to have a voice. With democracy and the demand for better services, the whole logic that governed public service had to change. Thus, the legal system accepted that ethics, or the use of nondiscretionary procedures in dealing with civil service and state affairs, rather than efficiency should have been the main driving force of the state machinery. In practice, this meant that no
42
merit-system career was allowed, and a very strict (yet often inefficient, especially for certain positions) public selection system was established to recruit public servants, while salariesespecially for higher and more complex positionswere not comparable to those prevailing in the private labor market. The reasoning behind this development was connected to what was seen as the main role of the state. If the state is not concerned with delivering universal public services, but instead is concerned only with providing jobs and income to some, one has to make sure that patronage cannot capture the whole process. That is why isonomyor an equality of laws, rights, and privilegesamong public servants and avoiding independent management judgment became more important than efficiency. With the 1988 Constitution, curiously, things got worse on the public administration front. Because of administrative excesses that had occurred during the dictatorship, when the press was censored and there was no possibility of social control, with the new Constitution the spirit of the time attempted to inject morality into public service by introducing rigid legal controls. Less flexibility was admitted. This had a huge impact on administrative procedures and very often formal procedures replaced any effort to attain good results for the citizens or for the country's development. In this context, innovationwhich requires flexibilitybecame very difficult. The new emphasis on control in order to avoid corruption and nepotism made good management almost impossible, and turned the life of companies and individuals having any contact with government into a nightmare. There is, one should note, an awareness of this problem, and vigorous processes of de-bureaucratization have been put in place.
Property rights The national Constitution protects property rights and even considers them to be a human right (article 5) and an important principle of the economic order (article 170), together with the social function of the property, which in a sense limits the full exercise of this constitutional right. Heritage is also an ensured right under the Constitution. Expropriation is possible with the payment of compensation (either monetary or in public bonds), but it is possible only in order to pay debts that have been legally contracted, such as payments related to workers rights or taxes established by law, or in the name of a collective interest. Brazil has an independent judicial system. The courts tend to respect most cases of property rights with one exception: workers rights come first in specialized courts called the Work Tribunals, which were created at the time of Getlio Vargas administration and inspired by Mussolinis labor laws.
More recently, there has been a consolidation of industrial property rightsin other words, there is now a time-limited right for the creators of industrial inventions and for brands and company names giving them privileges regarding their utilization. The same has happened with authors rights, which Brazilian law associates with the creations of the mind and for which it provides a list of works protected by law, including texts of literary, artistic, and scientific works, conferences, choreographies, music with or without lyrics, computer programs, translations, and artistic and similar works. The agency responsible for industrial rights is the National Institute for Industrial Property (INPI), which is responsible for brand registration, patents concession, contracts of technology transfers, computer programs, and similar industrial processes and products. Although the agency was established in 1970, it was, until very recently, ineffective, disorganized, and subject to corruption. There is still a long way to go to reduce bureaucracy and excessive paperwork in this agency. The new bankruptcy law, adopted in 2005, is another important piece of property rights protection. This law provides a process of recovery for the company filing for bankruptcy and, at the same time, gives an eventual acquirer clarity on judicial procedures involved with the closing of the asset purchased. The creation and the proper functioning of regulatory agencies ensure the transparency of the rules related to the private sectors utilities and the operation of other public services. In the 1990s, just after the widespread privatization process, Brazil put in place different regulatory agencies for different purposes, such as the Brazilian Electricity Regulatory Agency (ANEEL), the Telecommunications Agency (ANATEL), and the Oil and Gas Agency (ANP). Other agencies followed, each with similar aims of avoiding overpricing in areas where monopolies or oligopolies are possible and establishing clear and independent rules for investors. The independence of these agencies is crucial to ensuring that private investment is protected against discontinuity in government policies. However, this has not been the case in every circumstance. Mixed signals have been sent by the present government in its first term, asserting the independence of agencies while, at the same time, pressing their boards to change their rules or to resign. Fortunately, a better understanding of the model of regulatory agencies now seems to be in place. Another situation where private property and investment might be at risk even when protected by law occurs when a populist approach is taken with respect to road concessions or in other sectors of infrastructure and social policies. More often than we would like to admit, a governor tries to enhance his popularity right after elections by threatening to freeze the tariffs defined by contract of a privately operated road toll. One governor even supported the populace taking over the polling sta-
tions in elections. In the end, the tariffs were adjusted as established in the contracts, but behind the threat is a culture still averse to private investment.
Excessive and overlapping organizations involved in regulations and trade control Private investment is vital for Brazil, especially under the current circumstances of fiscal crisis and budget rigidity coupled with huge expenditures in personnel and current expenses. In this context, it is important to analyze organizations that might favor or discourage FDI and national private investment. Appendix A provides an overview of the most significant organizations dealing with private investment in the country. To deal with the inevitable bureaucratic disputes among the different agencies involved in external trade and simplify the procedures for the companies, the federal government has created SISCOMEX, an integrated system through which government control over external trade can be exercised. SISCOMEX is a tool that reduces (but does not eliminate) parallel controls and thus diminishes the paperwork involved in investment operations. It does so by integrating, with the help of information technologies (IT), the activities of all the organizations involved in external trade, allowing for monitoring, orientation, and control of the different phases of the importing and exporting processes. Other agencies can make business difficult if they are not properly conducted. Those are state and local regulatory agencies. Brazil is a federation and national governments establish their own organizations on issues covered by competitive legislation. There is, for example, in most states an Environment Agency and Secretariat that is also responsible for licensing works that might affect the rivers, the air, and the biomes. The same happens with the local agencies. Often, an investment gets an approval by one level of government and yet is not approved by the agencies of the other levels. Many attempts have been made to coordinate the requirements of different agencies involved with private operation and investment in the country; some progress has been made, as with SISCOMEX. Unfortunately, the culture behind the legislation, and even the interpretation of the law by some of these agencies, still seems biased against the private sector and, thus, against the very possibility of development. We should make Brazilian democracy and political institutions favorable to development.4 Piquet Carneiro also predicts a dark future for the management of the state, should action not be taken. He declares that the President is very angry at bureaucracys slow pace, that the ministers claim that public biddings are almost entirely bogged down in excessive formal requirements, and that disputes among competitors in the judiciary system threaten to paralyze the use of
43
energy from the river Madeira. He further asserts that initiatives to simplify external trade run up against the conservatism of the large number of organizations and authorities that are necessarily involved. And it is not only the Executive Branch that should be blamed: there are irregularities in 70 percent of airport ventures, according to the external Union Court of Auditors, and the federal prosecutors office gets injunctions to suspend works in progress. Piquet Carneiros recipe for change is simple: to introduce flexibility in the design of the state, which would require among other measures the simplification of bidding processes and more effective autonomy for public agencies.5 The appointment of directors of some of these agencies has not been divorced from political parties. This persistent relationship might bring with it the possibility of the political capture of rule-making and strong discontinuity, which may in turn harm long-term investments. The approval of candidates for directorships by the Senate and fixed terms is a measure that has introduced some protection in the process, but it is apparently not enough. The difficulties of the elected government in 2003 in understanding the regulatory agencies put the model at risk, as they pressed the directors of the agencies to resign. Fortunately, the misunderstandings were apparently temporary.
44 Modification of legislation regarding the private sector Brazil has undergone, in the last decade or so, a spectacular change in its institutions and has created an investment climate more favorable to the private sector (even though the political culture has a long way to go in this regard). These advances would have not been possible without an important transformation in the Constitution, laws, and regulations. The judiciary is proud of its hard-won independence after years of dictatorship, and the reform of Justice (brought about by a Constitutional amendment and different laws) is responsible for it. Organizations, such as the regulatory agencies, were created or strengthened (as in the case of CADE) also by Constitutional amendments and laws. The concession law, for instance, was vital to the telecommunications sector. The Secretariat of Federal Revenues has been modernized and has improved the process of income tax declaration, which can be done via the Internet. The regulatory activities performed by the agency have also been adapted to take advantage of IT. On the other hand, an effort to reduce the costs and time to pay taxes in the country is still required. The number of employees and the paperwork needed in order to pay taxes and establish a relationship with government adds to the operating costs of companies. Another important recent law is the Lei de Falncia e Recuperao de Empresas (Law 11.101, issued in 2005, which replaces the previous DL 7661 that had been in effect from 1945 until 2005). This New Bankruptcy Law,
which applies to most corporations, provides enhanced protections and flexibility for debtors to reorganize while continuing to operate their businesses. At the same time, creditors may improve their debt recovery prospects when businesses are liquidated, giving them a more relevant role in the negotiation of restructuring plans and in reorganization proceedings than they had under the previous bankruptcy law. A federal law was issued in December 2004 providing for the possibility of private-public partnerships (PPPs), and some states have established their own legislation on the topic. This federal legislation established PPP as a contract that is funded and operated by a partnership of government and one or more private companies. The private partner is responsible for the investment and the public sector pays an additional fee over the tariff practiced (sponsored concession) or pays for the service without users payment (administrative concession). Under those two modes, the PPP requires bidding. The process was so complicated and the bureaucratic views so steeped in the administrative culture that few PPPs ever left the drawing table. But the law was certainly an advance and it is a matter of time before it can support more such ventures. All these laws certainly helped businesses and ultimately development, and changes were welcomed, but the instability and uncertainties introduced by the frequent reissuing of legal documents and judicial questioning of their constitutionality made business decisions difficult. The inexperience of the country with regulatory agencies and those agencies own immaturity made regulations change more frequently than they should have. Novelty has a cost. The division of labor between ministrieswhich should coordinate national policiesand the agencies in charge of regulations, inspection, and concessions was also a matter of tension that affected private-sector operations. Fragile political institutions Brazilian democracy suffered an important setback in 1964, when the elite and the military joined to fight what they, in the climate of the Cold War, perceived as the threat of the establishment of a communist regime in Brazil. The Congress was closed, political freedoms were suspended, and, as in Argentina and Chile, opponents of the regime were jailed. The military regime, as the dictatorship of this period is often called, lasted 21 years. But the modernization of the country continued (and accelerated), and the national-developmentalist mode, adopted by Getlio Vargas in the 1930s, was preserved. The return to democracy resulted from a confluence of factors: the economic crisis that made the elites less happy with the military government and less paranoid about the risk of a communist regime, an international climate more favorable to democracy and the existence of a viable alternative project from the opposition. With the return to democracy, state governments were
strengthened: a process that was, in fact, started in 1982, during the military rule, and according to Abrucio the process lasted until the Plan Real (the name of the currency adopted in Brazil in 1994).6 Also a new Constitution was issued in 1988. The text enshrined democratic institutions, amplified social and political rights, established rules of fiscal prudence and tighter legislative control over the budget and public expenditure, and gave greater autonomy to states and municipalities. However, written as it was in a climate of resentment against the dictatorship and of search for social justice, some mistakes were made. The text is too lengthy (345 articles) in an attempt to please every interest group; there are provisions for more social services than the public budget could afford to cover; there is too much constitutional protection for public officials (including stability of employmenttenurefor all positions, an annual wage revision independent from inflation, extremely favorable conditions for retirement, and even the establishment of the amount of wages for specific positions, such as chief of police); there is no external administrative control for the judiciary; and a maximum rate of interest is established, among other provisions. Ames emphasizes the sins committed by the Brazilian Congress during and after the drafting of the Constitution, and the weaknesses associated with the legislative procedures and the electoral-political system of the country. 7 But these errors do not invalidate the importance of the Constitution in the process of consolidating democracy and making it more inclusive and mature. Constitutional amendments were proposed by the last administrations, and some of these early problems have been addressed. Moreover, even with its alleged weaknesses, as shown by Armijo et al., it is remarkable how Brazil has remained politically stable since its return to democracy.8 This stability has persisted despite a presidentFernando Collor de Melloresigning to avoid impeachment, and with the calm transfer of power from Fernando Henrique Cardoso, the head of a center-right coalition, to a leftist president, President Luiz Inacio Lula da Silva (Lula). Lulas government is based on the largest coalition in the countrys history, involving 12 parties with 3 additional small parties that always vote with the government in Congress. It is important to understand that alliances may be different at the federal level than at the state level. This difference may also be explained by local conflicts between regional oligarchies. National parties, in this situation, end up being a federation of state parties.9 In this context, parties do not necessarily represent different ideologies. Some represent local or regional interests, in a rather parochial way, enhancing the patronage approach that is still very present in the political culture. Others are more connected to trade unions, professional groups, and corporations. The same politician can
even be found practicing patronage and advocating a specific professional group. Modernizing institutions demands, under these circumstances, requires great effort and political ability. Brazilian political institutions are characterized on one hand by republican, presidential, and federalist alternatives, and on the other by a history of anachronism, patronage, and of what Bolivar called consociativisma diversity of centers of power. Federalism certainly offers a multiplicity of actors, but the political parties behave as though they are federations of local parties, the governors have great power to block public policy so as to obtain specific advantages for their constituents, and regional oligarchies still veto any efforts to modernize the country. These institutions still favor the fragmentation of objectivesin other words, multiple actors are accountable to diverse and fragmented constituencies. 10 Brazil has a proportional representation in open lists, in which candidates from each party are also in competition with their peers. This encourages independent personal voting where the candidates tend to vote as they want, without necessarily following the party line. On a more positive note, democratic institutions are much stronger now than at any previous time. The three branches are truly independent: governments proposals must be approved by Congress and are often rejected; and there is a reasonable alternation of parties, both at the federal and the subnational levels, without causing serious political crises. In addition, the state is well organized: regulatory agencies are in place and are quite independent, which ensures continuity of rules, minimizes investors risks, and provides predictability in the quality of services offered to citizens. Public servants are, at least at the federal level, professionalized, reasonably well paid, and recruited through public competitive selection. These positive changes are only now beginning to be reproduced at the state level. Funding approved by the Inter-American Development Bank (IADB) in 2006 was intended to strengthen public administration so as to make it more professional, transparent, and modern. Two years from the inception of the program, changes have begun to be visible. Even though a significant number of state-level positions are still freely appointed by the governor and the administrative procedures are slow and subject to a sometimes corrupt system, services are delivered more universally and with improving quality. The presence of a free and independent press further strengthens Brazilian institutions. According to IADB, Brazil and Chile, despite their different models, are the best examples of good governance and are the most institutionalized countries in the region.11 In the same vein, Sanchez, in his excellent analysis of the process of de-institutionalization of political parties in South America, considered Brazil and Chile the only exceptions to a negative trend.12
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Workers qualifications Unfortunately, Brazil has been somewhat late in providing access to basic education for all school-age children. In the 1960s, access to schooling for Brazilian children was similar to most countries in Asia; by 1990, the country had still a long way to go. It was only in 1997 that the target of putting every child in school was established. As a result, 10 percent of Brazils adults are considered illiterate and 74 percent are functionally illiterate (they are able to write their names but unable to read a book)a total of 84 percent of the adult population of the country is at a serious disadvantage. Moreover, only 65 percent of enrolled children finish primary school, and only 42 percent of enrolled children finish secondary school. The mean years of schooling of the adult population is 7.4; it is important to note that one additional year of schooling in the country has the power to improve workers income by around 10 percent. There is visible growth in this area over previous years, but the speed of the change is low. As for the quality of the education offered, most school-age children are not learning what is expected for their age and grade in either math or reading. The Ministry of Education has begun an aggressive effort to improve enrollment of the poor segments of the society, who were until recently excluded from schools for various reasons. Investment in teacher training, assistance, and intervention in low-performing schools along with assistance in transporting rural children to schools are among the measures that have been adopted. Most of this progress was made possible during Cardosos administration, through the competent financing system FUNDEF, which is a public fund for primary education that controls the distribution of resources to states and municipalities according to the number of children enrolled. The resources for education in the budget became earmarked at the federal, state, and municipal levels, and public funding for education increased significantly. During Lulas administration, the fund was extended to secondary schools and early childhood education, and an evaluation system was introduced for children in 4th through 8th grades with an index that made monitoring school by school feasible, ensuring a better targeting for educational policies. These advances are very important and compensate for the lack of interest of elected officials in educational achievements. In fact, their constituents do not press for results in this area. A recent poll done by IBOPEan institute for research on public opiniondiscovered that only 1 percent of voters considers the educational propositions of their candidates when voting for a mayoral candidate. Unfortunately, there is still a long way to go. Brazil has performed poorly in the OECDs Programme for International Student Assessment (PISA) test given every
three years to 15-year-old students in 57 countries to assess their scholastic capabilities in reading as well as their mathematic and scientific literacy. Brazil has participated since 2000 and has consistently been among the worst performers in all three tests given since then. As a result, the workforce is poorly prepared and, since access to the public university system is even more restrictive than access to public primary and secondary education, and since the quality of the education provided is also poor at this level, a college degree does not ensure a competent worker. To make things worse, an excessive emphasis on humanities and academicism in some universities fails to help prepare a competitive workforce for higher positions. Conclusions Brazil has the potential to become one of the most dynamic BRIC economies. This goal can be realized with the help of a number of measures where institutions play a major role. First and most important, Brazil has to continue to consolidate democracy and the rule of law. As we have seen above, important advances have been made in recent years, especially with respect to the independence of the judiciary, the peaceful transition from one elected government to another, and changes in important laws and even in the Constitution brought about by the elected Congress using legal mechanisms to ensure due process. Second, the country has to implement new measures to simplify the lives of its citizens and companies in their interface with government. This would require an effort to substitute a bureaucratic culture, which is based on control over formal procedures and red tape, with a more managerial culture that is more result-driven. If inclusive and sustainable development is the goal, it is not through organizations that exhibit inflated control and competing requirements from different agencies that the goal can be attained. This cultural change would require intensive training in measurements. Civil servants and public officials should be comfortable identifying costs involved in projects and in comparing expected goals and actual results achieved through each government program. Measures such as the internal program contracts adopted by the government of Minas Gerais, where each secretariat or agency has targets to be reached and ceilings for expenditures, is a good example to follow. It is also important to develop more tools to measure the impact of each public policy. Important advancessuch as the index of development of basic education (IDEB), which allows a comparison among school systems and the international experience, as well as other measurements in health or public securityhave been introduced. Now the thrust of the effort should be to develop accountability and reward for the attainment of goals.
Respect for property rights and private investment has shown great improvement and institutional progress. The new bankruptcy law is certainly among these positive developments, as well as the recent strengthening of INPI. But, to ensure that property rights are fully protected, INPI still has a long way to go and the protection of intellectual property should gain more support. There is an unfortunate myth in the country about ideas and inspiration having to be socialized. However poetic this may sound, behind this apparently generous proposition is an implied disrespect for intellectual work and investment. On the overlapping of organizations dealing with private investment and international trade, SISCOMEX and the establishment of regulatory agencies have been important (although not so recent) steps. But great care should be taken to ensure, on one hand, that additional paperwork is not required outside the system in a demonstration of micro-power in bureaucratic disputes and, on the other hand, that independence for the agencies to issue regulations and avoid noncompetitive bad practices is maintained. A better definition of the roles of federal, state, and municipal level governments in different policies should organize not only public services but also the competing requirements of each level. Citizens and companies should not be penalized for operating in regulations gray areas. Environmental requirements should be emphasized in the design of ventures, so as to save time and money on large projects. At the same time, simplification and a reduction of bureaucratic requirements and inter-organizational disputes (a result of three levels of the federation being involved with environmental impact analyses and licensing) should be considered to allow good investments to be more rapidly pursued. Recent changes in legislation regarding private-sector operation and investment have been preceded by public hearings. This is a very welcome change. The technocratic approach that prevailed during the dictatorship period has unfortunately outlived its authoritarian times; listening to all groups involved is a development that must be preserved. It is also important to understand that some changes are necessary to modernize both the way the market operates and its relationship with the state. At the same time, predictability is essential for businesses and allows for long-term investment. Political institutions should be modernized, ensuring that nepotism and patronage are part of Brazilian past and not a cultural trait to be preserved. While the possibility of political reform remains remote for the time being, the climate for change needs to be created, allowing an improvement of the electoral system and the strengthening of the political parties. Last but not least, the present attention given to basic education should be enhanced, with an emphasis on uni-
versal access to secondary school and a strong investment in technical education and scientific careers. Brazil needs more engineers and more science teachers and researchers. Here the institutions are readyall we need is strategic persistence. Notes
1 2 3 Khanna 2008, p. 210. Bresser Pereira 1998b, p. 15. As shown by Lindert 2004, p. 92. In this book, Lindert compares children enrolled in primary schools between the ages of 5 to 14 in various countries, from 1830 to 1930. Normally, in Brazil we work with data related to children from 7 to 14 years old, when they should be attending 1st to 8th grade (Brazilian 2nd to 9th). Reis Velloso 2009, p. 6. Piquet Carneiro 2009, p. 167. Abrucio 2003. Ames 1995, p. 325. Armijo et al. 2006, p. 763. This description is from Armijo et al. 2006, p. 762.
4 5 6 7 8 9
10 Armijo et al. 2006. 11 IADB 2007. 12 Sanchez 2008, p. 334.
References
Abrucio, F. L. 2003. Reforma Poltica e Federalismo: Desafios para a democratizao. In Reforma Poltica e Cidadania, M. V. Benevides, P. Vanuchi, and F. Kerche, eds.1st edition. So Paulo: Editora Fundao Perseu Abramo. 22565. Ames, B. 1995. Electoral Rules, Constituency Pressures, and Pork Barrel: Bases of Voting in the Brazilian Congress. The Journal of Politics 57 (2): 32443. Armijo, L. E., F. Faucher, and M. Dembinska. 2006. Compared to What? Assessing Brazils Political Institutions. Comparative Political Studies 39 (6): 75986. Bresser Pereira, L. C. 1998a. Reforma do Estado e Administrao Pblica Gerencial. Rio de Janeiro: Editora da Fundao Getlio Vargas. . 1998b. A Reforma do Estado nos anos 90: Lgica e Mecanismos de Controle. Lua Nova 45: 4995. IADB (Inter-American Development Bank). 2007. A poltica das polticas pblicas: Progresso economic e social na Amrica Latina Relatrio 2006. Rio de Janeiro: Elsevier; Washington, DC: IADB. Khanna, P. 2008. O Segundo mundo: Imprios e influncia na nova ordem global. Rio de Janeiro: Intrnseca. Lindert, P. 2004. Growing Public: Social Spending and Economic Growth since the Eighteenth Century. New York: Cambridge University Press. Piquet Carneiro, J. G. 2009. Bases de uma Reforma Adminitrativa de Emergncia. In Na crise global, como ser o melhor dos BRICS, ed. J. P. Reis Velloso and R. Cavalcanti de Albuquerque. Rio de Janeiro and So Paulo: Elsevier and INAE. 16784. Reis Velloso, J. P. 2009. Prefcio. In Na crise global, como ser o melhor dos BRICS, ed. J. P. Reis Velloso and R. Cavalcanti de Albuquerque. Rio de Janeiro and So Paulo: Elsevier and INAE. Sanchez, O. 2008. Transformation and Decay: The De-institutionalization of Party Systems in South America. Third World Quarterly 29 (2): 31737.
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Appendix A: Public organizations dealing with private investment in Brazil

Among the important organizations dealing with different aspects of private investment in Brazil, one must mention: The Brazilian Agency for the Promotion of Exports and Investment (APEX) was created in1997 and operated as a special department of the Brazilian Support Service to Micro and Small Enterprises (SEBRAE ) until 2003, when it was renamed APEXBrasil and began to act as an autonomous agency working in association with the Ministry of Development, Industry and Foreign Trade. Under its new status, APEX-Brasil took on the role of coordinating and implementing trade promotion policies endorsed by the federal government. Its main function is promoting the insertion of national companies into the world market, diversifying and raising exports, consolidating existing markets, and opening up new ones. The Brazilian Agency for Industrial Development (ABDI), created in 2004, operated as part of the Ministry of Development with the mission of promoting the implementation of the Ministrys industrial policy, in accordance with external trade and science and technology policies. The Brazilian Chamber of External Commerce (CAMEX) belongs to the structure of the Government Council. It is in charge of the formulation, adoption, implementation, and coordination of policies and activities related to external trade of goods and services, including tourism. Among its functions are the coordination of the organizations related to external trade; the regulation of certification of companies for the practice of external trade; the classification of products and rules of origin of goods; the formulation of directives on tariffs; and directives for bilateral and multilateral negotiations, for bad practices in external trade, and for export financing. The Secretariat of the Federal Revenues (SRF), subordinate to the Ministry of Finance, is responsible for administering federal taxes. At the same time, it assists the executive branch of the government in formulating Brazilian tax policy and is responsible for preventing and combating tax evasion, contraband, smuggling, counterfeiting, and trade fraud, along with other international trade-related illicit acts. The SRF is also in charge of managing and executing customs administration, inspection, and control. The Ministry of Development, Industry and External Trade (MDIC) is responsible for different aspects of industry, trade, and services promotion such as intellectual property and technology transfer, measures, norms and industrial quality, as well as external trade policies. MDIC also takes care of regulating external trade and implementing programs and safeguard mechanisms in the area, participating in international negotiations, and supporting small and medium enterprises and activities of the registry of commerce. This is done through the Secretariats of External Trade, Industrial Development, Commerce and Services and Industrial Technology. INPI, discussed above, is responsible for the registry of brands, patents, and contracts of technology transfers and company franchising, as well as the registry of software, industrial design, and geographic indications. The National Institute of Metrology, Normalization and Industrial Quality (INMETRO) acts as the Executive Secretariat of the National Council of Metrology, Normalization and Industrial Quality, and is responsible for enforcing the technical and legal rules related to measurement of industrial processes. It is also in charge of harmonizing measurements with international patterns and of accreditation activities for laboratories of calibration and organizations of certification, inspection, and training necessary for the development of the infrastructure of technological services in the country. The Brazilian Development Bank (BNDES) was established with the goal of supporting projects that contribute to the development of the country. Since its creation in 1952, the Bank has financed important public and private works in industry, agriculture, public transport, and infrastructure. It also contributes to the strengthening of the capital structure of private companies and the development of financial markets. The Secretariat of Agriculture Defense (SDAA), part of the Ministry of Agriculture, coordinates the countrys system of agricultural defense, including its international agricultural surveillance program. The Administrative Council of Economic Defense (CADE) is the antitrust agency within the Ministry of Justice. It has the role of orienting, auditing, and investigating, as well as preventing abusive behavior by a firm dominating a market and anti-competitive practices that tend to lead to such a dominant position. The Brazilian Institute of Environment and Renewable Resources (IBAMA), a federal agency that is within the Ministry of Environment, is responsible for implementing the national environment policy, including the control and investigation of the use of natural resources and the licensing for investment that might have an environment impact. There are other regulatory agencies for specific sectorssuch as ANATEL for telecommunications, ANA for water and sanitation, ANEEL for utilities, ANP for oil and gas, ANTT for road and train transports, and ANVISA for sanitary surveillance.
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An Assessment of Brazils Competitiveness

49
CHAPTER 3.1
Sustainability and Competitive Advantage

JACQUES MARCOVITCH, University of So Paulo, Brazil
Like almost every other country, Brazil has not yet reached a satisfactory level of environmental awareness, although significant progress has been made in this area since the second half of the 1980s. Reflecting societys growing awareness of these issues, in order to compete, the corporate world needs to include environmental sustainability high in its agenda and among its key values. In less than three decades, significant advances have been made; still, much ground must be covered to reconcile sustainability with competitiveness from a global perspective. Through its executive, legislative, and judicial branches, the government of Brazil has consolidated broad and consistent legislation on this theme. The federal government, through successive mandates, has implemented welcome environmental practices, the most recent being voluntary goals to reduce deforestation in the Amazon. Furthermore, despite credit restrictions imposed by the global crisis, the Brazilian Development Bank (BNDES) offers unlimited credit lines for sustainable projects presented by companies. Several large Brazilian corporations have already established themselves among the most sustainable on the planet, mainly in energy efficiency, and they do not hesitate to point out that such innovation is an enabling tool for their growing market shares. Some comments about the role of economics for such a major theme are appropriate. Economic aspects of the environmental issue have, for a long time, occupied a less prominent position than the issues political and scientific determinants. The Kyoto Protocol has contributed to changing this picture, putting all factors that relate to the issue of the environment on the same level. By imposing limitations on the emissions of polluting gases, the Protocol has strengthened ethical commitments in relation to the well-being of future generations and has inspired models for measuring the efficiency of countries with respect to global warming. Within such a context, the need for urgent technological innovations and the consolidation of international trade in carbon certificates inserted in clean development mechanisms (CDM) has emerged. This market amounted to US$97 billion in 2008. Until now there have been 840 projects registered in 49 emerging countries; another 1,800 are in line to be registered. Long-term forecasts estimate that the market for low carbon energy products will grow to at least US$500 billion by 2050. In September 2007, over 60 Brazilian companies were negotiating credits issued by the United Nations (UN). As a consequence, 11.3 million tons of greenhouse gases were not expelled into the atmosphere. Financial transactions related to these credits are estimated to stand at around 90.4 million euros.1 The outlook appears to be quite positive. In 2008, at the opening of COP 14th in Poznan, UN SecretaryGeneral Ban Ki-moon highlighted some encouraging
3.1: Sustainability and Competitive Advantage
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signs. Brazil uses clean fuel to meet 44 percent of its energy needs, while the global average is less than 13 percent. China invested over US$10 billion in 2008 to expand its renewable matrix. It is estimated that worldwide investment in zero emission energy will reach US$1.9 billion in 2020enough to reconfigure the existing industrial model.2 This paper builds on the insight of the project To Change the Future: Climate Changes, Public Policies and Business Strategies.3 The first study, in 2006, featured the perceptions of highly innovative companies and sectoral representatives, gathered in surveys, and described their strategies to mitigate greenhouse gas effects in productive models. The second study, in 2008, assessed the results obtained.4
and regulatory instability of the United Nations regarding changes in the methodology used to measure emissions. A very important plant in the sugar and alcohol sector has dedicated itself to the co-generation of energy from bagasse and has obtained excellent results in this enterprise, which can be placed among the most innovative green technologies. To be able to achieve these results, some important physical alterations were made in the industrial process and new environmental management procedures were implemented in the companys planting areas. The largest Brazilian company, the state-owned oil company, acts selectively in the wind, solar, biodiesel, and biogas energy markets, among others. It estimates that 10 percent of the electrical energy it uses in its plants will be obtained from renewable sources by 2010. In 2008, it increased its goals to reduce greenhouse gas emissions to 21.3 million tons of equivalent CO2 between 2007 and 2012. A major multinational in Brazil dealing with solutions for the environment has been recovering the biogas that is released in its sanitary landfill and use it as an energy source. This company forecasts digital monitoring in its CDM project, which will be carried out in real time with indicators that can be simultaneously observed by the company and by external auditors. Another large corporation from the reforesting sector has been working with three projects simultaneously. It has strived for great reductions in greenhouse gas emissions since 2001, and it works with a 28-year horizon. In Nova Iguau, Rio de Janeiro, the first project in the world to obtain CDM registration is being developed. This project is being carried out by a company founded over 50 years ago, operating in several heavy construction sectors. It foresees being able to use energy gases from organic material that can be found in landfills. This sample, taken from the top level of Brazilian industry, makes it clear that a new era has arrived for the world economy, in which profit is no longer an end in itself but rather it performs social functions that had never been imagined before. Taken as a group, the companies that were included in the study represent quite a promising scenario. The answers obtained from the survey refer to the entire 2008 period. These companies show a notable inclination toward competitiveness and they act proactively in environmental issues. Clean technologies are increasingly being used or developed. It is worth stressing that they have strengthened the technical makeup of their profes-
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Brazils commitment to environmentally sustainable enterprises If it were necessary to point out three traits that would best characterize a modern company, these would undoubtedly be strategic sensitivity, social responsibility, and innovation. All these are present in each of the projects that were assessed in the study of 2008. The responses that were gathered detailed the experiences as presented by the companies managers. The goals that were forecasted or met demanded sophisticated technological standards and highly complex methodologies. The panorama unveiled by this assessment in 2008 reveals efforts that demonstrate the commitment of Brazilian businesses to moving the economy to new levels of sustainability:5 The largest reforesting company in So Paulo selected a large area to develop its project within the Chicago Climate Exchange (CCX) so as to measure the real conditions of greenhouse gas emissions in its respective production process chain and analyze its capacity to reduce these emissions and thus set up an involvement strategy in the carbon market. In the steelmaking industry, the third largest company in Brazil, according to the ranking of the biggest producers, has implemented an energy model based on gas recovery, developed new applications for its co-producers, and minimized atmospheric emissions. A very large corporation operating in the Brazilian pork, beef, chicken, and turkey byproducts industry has installed biodigesters to capture and burn methane and CO2 and thus improve its waste management systems and its suppliers quality of life. Although it maintained its choice for sustainable expansion, this company made a substantial review and reduced the goals it set out in 2005. This reduction was a consequence of the institutional
sional staff dedicated to reducing greenhouse gases. The data from the study show great dynamism in all the experiences observed, and provide a good rebuttal to those who wrongly argue that the Kyoto Protocol is only a paper agreement. In this survey, the impact from the Protocol on corporate strategy can be demonstrated in great detail. When carrying out the survey, we dealt with outstanding contributors to domestic GDPblue chip companies that are successful in their businesses and are engaged in effectively modernizing Brazil. These companies distinguish themselves by the social balance sheet they have presented in the last few years. The answers to the questionnaires describe sustainability lines that have been well thought out and metdifferentiating them from mere corporate marketing ploys. They are trend setters that inspire other businesses to follow their lead.
The sectoral landscape Another recent study analyzed, by means of interviews, sustainable practices in several sectors of the Brazilian economy. Overall, although they were not overly enthusiastic about the competitive gains derived from such practices, these companies showed that they intend to maintain ongoing environmental strategies in their respective sectors.6 In the approach taken by agricultural firms that raise cattle and produce beef products, it was underscored that there is no tension between the development of an economic sector and the sustainable production projects that may be implemented. Several casesGrupo Bertin, Carrefour, Po de Aucar, and Wal-Mart Brasil were examined one by one, emphasizing the internal measures these companies have been adopting in environmental management. In the domestic cattle raising sector, despite delays in implementation, productivity gains have influenced the mitigation of greenhouse gas emissions, mainly methane. However, the extensive mode of cattle raising still prevails and the average time to slaughter is three years; it takes only two years to bring cattle to slaughter in countries that adopt intensive cattle raising processes. The case study finds that, in the cattle supply chain, there is a technical gap between raising cattle and bringing the beef to market in Brazilthe latter have already reached international levels but bringing them to market remains an unsteady potentiality. The aggregate of Brazilian cattle herds has also earned the negative distinction of causing the largest domestic methane emissions: it is responsible for 76 percent of methane emissions and significantly contributes to deforestation in the Amazon. In the cattle supply chain it was possible to identify an excess of informality in transactions and a low-quality product. However, standards of excellence that are continuously evolving to supply foreign markets and large
Brazilian cities can already be seen. It is estimated, for example, that there will be a progressive internal reduction in the number of butcher shops, which will be replaced by supermarkets. Brazil has the largest cattle herd in the world, and is the second largest beef producer. The adoption of intensive practices and genetic enhancement programs has increased productivity in several states. An increasingly demanding international consumer has brought about tech-nological innovations and better sanitary conditions. However, it is necessary to overcome factors that do not allow Brazil to reach in natura beef markets such as the United States and Japan, as well as overcome recent barriers created by the European Union along the same lines. To mitigate the volume of greenhouse gases, the cattle-raising sector will have to improve pasture management through appropriate diet and nutritional supplements as well as develop better animal handling practices. According to the scientific community, if such measures were taken in South America they would reduce methane emissions by 8 percent. Nevertheless, the main idea is that increased productivity is the best path to bring about the reduction of these emissions. An analysis of the steelmaking industry demonstrates concrete ways to overcome environmental limitations of steel plants that go beyond a simple, broad diagnostic assessment. In relation to greenhouse gas emissions, the Brazilian steelmaking industry still includes sectors that do not recycle steel because of a lack of scrap iron; several still use mineral coal while others, although working with vegetal charcoal, extract it from native forests, thus indirectly contributing to CO2 emissions through deforesting. The recycling mirrored in the aluminum sector deserves particular attention. Here the plants in the productive chain have joined forces to make recycling plants feasible and have created a collection model that generates efficiency, jobs, and income. It is suggested that the integrated and semi-integrated steel plants and scrap iron operators should act in a synergetic way together with the independent companies and adopt the same procedures. Such an initiative would benefit the solid waste treatment system and decrease CO2 emissions in steel replacement in the market. Exemplary and successful projects by ArcelorMittal and Plantar could more broadly insert the industry into the clean development mechanism. Above all, the initiative would involve independent pig iron producers; it would also induce large Brazilian steel makers to adopt new competitive models that would reduce polluting gases. In a nutshell, we propose that integrated and semiintegrated steel plants should act synergistically with independent companies to increase current levels of renewable charcoal use under the rules recommended by the international scientific community.
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Paper and pulp, originating from re-forested eucalyptus, are emblematic sustainability products in Brazil. Brazil leads the world in pulp production from short fiber. Aracruz Celulose is the largest company in the industry, and 94 percent of its production is exported. Other significant players are Klabin, Suzano, and Votorantim. As for paper production, there are two strong conglomerates besides Suzano and Votorantim: International Paper and Ripasa. The peculiarities and innovative opportunities of the sectors productive process are described in the study.7 Although we recognize important results that come from mitigating greenhouse gas emissions, it is also necessary to adopt innovative measures such as carbonizing and fixing biomass to soils, improving the use of waste to generate energy, using clean fuel in transportation, and even setting environmental goals by sector. The approach of the Brazilian energy sector is based on the premise that there is room for environmental management without great costs, counting on investment being made as a result of proven economic returns. From such a perspective, we demonstrate that reducing waste can coexist with meeting demands for electricity. Aterro Sanitrio Bandeirantes is a pioneering initiative in Brazil that is dedicated to generating electricity from waste. It aims to mitigate the emission of methane gas that is produced by the decomposition of organic residues. It is a thermoelectric plant installed in So Paulo that generates a total of 22 megawatts. Such volume makes this landfill the most powerful thermoelectric plant run on biogas in the world, and it is the only one in Brazil. Its capacity is large enough to generate energy to supply four large shopping malls for 24 consecutive hours. California in the United States undertook major innovative public policies regarding climate change and energy management. In this regard, its experience with energy efficiencyparticularly with electricity consumptionis an inspiring one. A broad look through the programs mentioned shows that electricity consumption per capita was 40 percent lower than the national average, and this lower consumption did not set back economic development. Some concrete measures should reinforce initiatives that have already been adopted in Brazil among these are rationalizing consumption through incentives; repotentializing older plants; reducing electricity transmission and distribution losses; increasing the efficiency of motors, lamps, showerheads, refrigerators, and air conditioners; and creating a new revenue structure for the utility companies. A priority agenda can be sketched with respect to the role of the productive sector to enable it to face environmental and social challenges while also helping strategic business plans, as follows: 1. To reduce the effects that cause climate changes, it
is crucial to reach high energy efficiency levels and invest in innovations that drastically reduce greenhouse gas emissions into the atmosphere, including using renewable bioenergy and fighting deforestation. 2. To maintain biodiversity it is essential to ensure the sustainable use of biological resources, reduce threats to habitats, catalog new species, avoid environmental damage, support pro-biodiversity initiatives, promote the egalitarian distribution of natural benefits, and share data and information on biodiversity. 3. To respond to social challenges, it is necessary to select some lasting priorities that can reconcile economic growth and income distribution. Among them are universal access to basic sanitation, fighting against the housing deficit, promoting access to credit, increasing the generation of decent jobs, and guaranteeing quality education for all. Opportunities for new enterprises and for companies consolidation can be found in emerging markets, in new technological frontiers, and in dynamic sectors. Against such a background, it will be the innovative and visionary companies that will be able to turn environmental and social challenges into a source of competitive advantage. This will make them more efficient and profitable while strengthening their surroundings, on which they depend for their survival.
The Amazon An indispensable dimension related to sustainability in Brazil and to its competitive insertion into the global economy relates to an important issue that carries much weight both in the country and in the world. It focuses on the set of sustainable practices of the logging sector in the Amazon and its controversial role in regional deforestation. The study also examines government actions within this same scenario.8 A careful assessment of the socioeconomic panorama of the group of states that make up the Brazilian Amazon highlights their differences, common culture, singularities, and conflicts. Based on technical sources, we analyze the role of the tropical forests as CO2 sinkholes, as a counterpoint to the dominant discourse that focuses only on the high volume of emissions that forest burning releases into the atmosphere. We believe that forest burning also reflects a social issue, as it mobilizes labor that has no alternative source of income. The formal logging sector is resentful of the delay in the governments approval of projects for sustainable management, while the illicit logging sector supplies the domestic market with the demand that is not met by regular operations. The two groups that were studied, Orsa and Cikel, described their wood certification prac-
tices, which fully meet legal guidelines. In the case of Orsa, although it has no program focusing on greenhouse emissions or carbon credit commercialization, such a goal is indirectly met by the use of nonpolluting and efficient logging technologies. The Cikel group does not develop greenhouse gas mitigating actions either. It will consider implementing such actions after it has carried out a carbon inventory (an ongoing study) that will allow it to gain entry into the certificate market. Among the initiatives that enhance productivity, the charcoal industry stands out. This way, an alternative supply for the regions steel plants is created.
The role of civil society The environmental issue receives heterogeneous treatment by the business sector. The notion of its relevance to domestic competitiveness has not been sufficiently disseminated in the business world. Senior executives in the private sector, as well as in government-owned companies, fail to imbue their respective organizations with a strategic vision when dealing with sustainability. The path to changing such a situation will necessarily involve civil society, where the more open-minded and organized sectors can play the role of pressure and change agents. All the progress made so far has been the result of this increasingly influential force, although it is not strong enough yet to reinforce competitiveness via green production. While several corporations increase their environmental projects and even modify their traditional production models toward this end, institutional industry representatives conclude agreements with the federal government along these same lines. In some ways the conceptual model of the Montreal Protocol and the Kyoto Protocol, which has historically established ethical obligations along with coercive tools, is being applied to the Amazon to mitigate polluting emissions. These sectoral agreements between industry and government could become a model and achieve greater repercussion through the setting up of an Environmental Development Council, along the lines of the Economic Development Council, that would be coordinated by the Environment Ministry. Its aim would be to seek a broad domestic agreement around public hearings and encourage predictable confrontation among nongovernmental organizations, lobbies, government, scientists, and business people. One of the Councils executive roles would be, for example, the consolidation of laws dealing with the theme of environmental sustainability and its attendant established jurisprudence and contradictions among related codes. The new mechanism would in no way substitute for the healthy and democratic debate among the parties that is traditionally carried out in public hearings. It would introduce a moderating force that would be able
to resolve conflicts summarily and bring about, as a unifying element, the consensus that environmentalism can no longer be divorced from development and from companies competitive strengths. As a matter of fact, this has been the main inspiration for the pacts that we sum up below. In July 2008, a covenant was signed by the Environment Ministry, the Brazilian Association of Vegetable Oils, and the National Association of Soybean Exporters that extended to July 2009 the enforcement of a soybean moratorium suspending the commercialization of the product should it come from deforested areas in the Amazon. Civil society organizations that were involved in the agreement supplied technical information to the specific work group. The Environment Ministry was charged with implementing a register of rural properties and activating Ecologic-Economic Zoning in the Amazon basin. During this same period, the Pact for Legal Wood and Sustainable Development was enacted. This was signed by the Par Industry Federation (FIEPA), the Association of Wood Industry Exporters from the State of Par (AIMEX), the Group of Certified Forest Producers in the Amazon (PFCA), the Environment Ministry, and the government of Par. Businesses agreed not to buy products from illegal sources and to monitor whether the legal papers accompanying the merchandise met official guidelines. They also had to show the source of a primary wood product and any contingent irregularities detected in purchasing that would have been detrimental to activities in logging areas. In this document, the Environment Ministry committed to auctioning 4 million hectares of forest concessions, regulating logging in planted forests, and making the standing of suppliers available on the Internet. The government of the state of Par committed to auctioning 150,000 hectares of state forests. Another document brings together the Federation of industries of the State of So Paulo (FIESP) and the Environment Ministry to encourage the sustainable consumption and use of wood products from the Amazon forest in that state. Among the various objectives covered by the agreement one should emphasize the formal commitment undertaken by FIESP to abide by the same obligations undertaken by its sister organization in Par. The federal government has also undertaken identical obligations. This agreement becomes even more relevant when one considers that So Paulo is currently a more important center than the foreign market for the commercialization of wood from the Amazon. Instituto Ethos, also from So Paulo, has launched the program Business Connections: So Paulo the Amazon, which encompasses a pact for the use and commercialization of certified forest products. By expressly mentioning community concessions and forest handling, the Ethos document establishes the obligation, for early
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comers and new companies that are associated with the program to engage members of the value chain. A pact follow-up committee has been set up and will present its first report on the actions stemming from this totally new program in the business sector. For this commitment to become reality, it is hoped that problemssuch as the lack, in eight states of the Amazon (the exception is Mato Grosso), of an official property register defining the legal origin of a product can be overcome. When faced with this obstacle, Instituto Ethos initially adopted two consensual criteria. First, wood, beef, grain, and vegetable oil suppliers could not be on the list of companies that employ slave labor. Second, these suppliers had to show that illegal deforesting has not been practiced on their lands. The large companies that have signed the pact have the ability to demand that their suppliers follow environmental rules. These facts demonstrate a new positioning on the part of business entities vis--vis issues related to the environment. In the past, a culture of confrontation was encouraged. This led to endless court actions that were extremely damaging to the principles of social responsibility. Even though a pact might not have negative consequences for nonconformance, it forces those who have signed it to position themselves in relation to society and to undertake clear commitments. This is related to a valuable asset of the whole corporations brand: its market image. There is also an economic component to inspiring the agreed-upon obligations. Different from the criticisms made of these agreements, their adoption involves no naivety. In environmental management, private companies are undertaking original and greatly relevant procedures for the history of Brazils development.
The role of education The future is the only stage on which yesterdays and todays dreams can be realized. As it is clearly impossible to change the pastand as we must take into account that current changes had to be imagined before they were realizedit is up to todays leaders to care for the environment and the place where the next generation will live. These leaders can currently be found in companies, schools, governments, and civil society. Among other legacies, Albert Einstein left us this advice: No problem can be solved by the same level of consciousness that created it. We must learn to see the world anew." Eastern wisdom, on the other hand, has brought about the idea that change is the only thing that is permanent. The next day, a time that has not yet been lived, can be changed for the better now, when we have the transforming intelligence of scientists on our side. But it is not enough to follow the hypotheses and conclusions of the scientists. In the case of the environment, it is also essential that the society constantly enhance its values and notions of social interactions so that it can change the future. Education is the most important path to reach such an objective.
To face the complexities of our times, environmental education has become much broader than the ecological orientation provided in a classroom for children and teenagers. The target audience of environmental education must truly be society as a whole, particularly the adults that must re-consider their behavior, their production and consumption, among other habits. The merely ludic and civic concept at the basis of ecologic pedagogy of the past is currently not only insufficient but also inconvenient, as it restricts to the domain of basic learning an issue that is strategic and of general interest. It is up to universities to align their curricula so that they can supply staff to a productive sector that increasingly depends on sustainable innovation and on a society that is concerned about the frightening effects of global warming. No academic project anywhere in the world will be attuned to the future if it does not contemplate defending the environment. A complete inventory of the programs offered by Brazilian universities on the environment would surely find over a thousand programs. The University of So Paulo, the most productive in the country, has identified over 400 on this theme. Educators and students must be reminded that modern education is going through a propitious scenario that can lead to important advances in curricula, all because of the notorious climate change phenomenon and the enactment of the Kyoto Protocol. Education in Brazil could benefit very much from university leaders paying attention to this knowledge frontier that has become exceptionally relevant. It surely will not be easy, even with the technological means that are being developed or that are already available, to lead society to quickly change its attitudes and embrace responsible consumption, the economy of natural resources, the option of nonpolluting transportation, and other habits that only continuing education will bring. It is also necessary to preserve essential human values in any educational agenda. It is perfectly feasible to harmonize these values with the challenges brought about by the new realities. As it was Hannah Arendts wish, we must do our utmost so that in our world we all become fully aware that, at the same time, we inhabit our country and we inhabit planet Earth.9 It is up to Brazil to clean up its production of commodities, independently from it being convenient to overcome environmental or protectionist barriers in Europe and the United States. In the case of the North American market, we have to be careful about the effects of public policies announced by the Obama administration with respect to the production of alternative energy. This could make it feasible to produce ethanol from wood pulp in the United States, which would make it even more difficult for Brazilian sugarcane-derived bio fuel to be freely imported. The ongoing economic crisis has been interpreted by UK Prime Minister Gordon Brown as de-globalization, as each country seeks its own way out. It has led to a hardening of almost all frontiers, which has severely
impacted free trade. For a long time, even products from environmentally certified origins will likely lose their competitive strength, despite their attractive prices and quality. At the height of globalization, we are all vulnerable to the effects of major turbulences. Let us say, to parody John Donnes poem about man, that no country, not even England, is an island.
Notes
1 Portal Fator Brasil, available at http://www.revistafator.com.br/ver_noticia.php?not=67395. Marcovitch 2008. Marcovitch 2006. Marcovitch 2008. The second stage of the survey we have already mentioned dealt with Scrivens conceptualization, according to which an assessment is always a value or merit judgment. The questionnaires sought to identify the quality of the projects, but also evoked answers on punctual objectives and on the means to achieve them. On the other hand, the reports presented went beyond the dilemma of internal assessment versus external assessment. The final table brings together our perceptions and the companies experiences. See Marcovitch 2008. Marcovitch 2009. Marcovitch 2009. Marcovitch 2009. Arendt 2000.
2 3 4 5
6 7 8 9
References
Agerri, F., E. Pezet, C. Abrassart, and A. Acquier. 2005. Organiser le development durable: Espriences des enterprises ponnires et formation de rgles daction collective. Paris: Vuilbert. Arendt, H. 2000. A Condio Humana. 10th edition. Rio de Janeiro: Forense Universitria. Marcovitch, J. 2006. Para Mudar o Futuro Mudanas Climticas, Polticas Pblicas e Estratgias Empresariais. So Paulo: Edusp/Saraiva. _____. 2008. A Economia e o Futuro do Planeta. Available at http://www.usp.br/mudarfuturo/ecoplan/. _____ . 2009. Introduo. In Mitigao de Gases de Efeito Estufa: a Experincia Setorial e Regional no Brasil. Available at http://www.usp.br/mudarfuturo. Portal Fator Brasil. Ciclo de palestras sobre emisses de carbono e mercado global. Available at http://www.revistafator.com.br/ver_ noticia.php?not=67395. Stern, N. 2006. The Economics of Climate Change: The Stern Review. Cambridge, UK and New York: Cambridge University Press. Touraine, A. 1997. Pourrons-nous vivre ensemble? gaux et diffrents. Paris: Librairie Arthme Fayard. Worthen, B. R., J. R. Sanders, and J. L. FitzpatrickL. 2004. Avaliao de Programas Concepes e Prticas. So Paulo: Edusp/Editora Gente.
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CHAPTER 3.2
Leveraging Brazils Business Environment for Increased Competitiveness

PABLO HABERER, McKinsey & Company, Inc., Brazil NICOLA CALICCHIO, McKinsey & Company, Inc., Brazil
Brazils ranking in a number of dimensions pertaining to competitiveness as measured by various surveys of comparative national performance has been consistently poor. Brazil is typically ranked at or below the median of survey samples, as well as below its own relative ranking in terms of GDP per capita. According to the World Economic Forums Global Competitiveness Index (GCI) 20082009 presented in Chapter 1.1 of this Report, for example, the country ranks 64th in competitiveness among the 134 countries studied, well behind the other BRIC economies of China (30th), India (50th), and Russia (51st). In certain narrower studies, Brazils performance is even worse: for instance, it ranked 52nd out of 57 countries in the OECDs Programme for International Student Assessment (PISA) tests, an indicator of the relative performance of education systems in different countries (Figure 1). Yet, despite Brazils low overall competitiveness scores, it performs relatively well in a number of factors related to the quality and dynamism of its business environment, including the sophistication of its production processes, its capacity for innovation, and its marketing and consumer orientation. Of the 10 main indicators for which the business sector is chiefly responsible, Brazil is ranked 30th, behind only India in terms of BRIC performance. In contrast, when we consider Brazils position relative to 10 indicators in which the business environment has limited involvement, the nation ranks 121st out of 134 countries (Figure 2). In no other country from the sample is the ranking of business competitiveness so different and superior to the ranking in government competitiveness. In light of the above, the purpose of this chapter is to explore how Brazil can leverage the relative quality and dynamism of its business environment in order to increase its competitiveness. The strong correlation between productivity and competitiveness rankings and the relationship between the change in competitiveness and the change in GDP suggest that success in this effort could contribute to improving the living standards of the countrys population (Figure 3). After providing an overview of the methodological approach, this chapter will offer a diagnosis of the quality and dynamism of Brazils business environment and propose a few options to explore to leverage Brazils business environment for increased competitiveness.
The opinions expressed in this chapter are those of the authors and do not necessarily reflect the views of McKinsey & Company. The authors wish to thank Bernardo Neves, Rafael Stille, and William Jones for their invaluable contribution to this chapter. They also wish to thank Andrew Whitehouse, Baudouin Regout, Heinz-Peter Elstrodt, Igor Meskelis, Jaana Remes, Marcos Cruz, and Wieland Gurlit for their efforts in discussing the topics and revising the content in their respective areas of expertise.
3.2: Leveraging Brazils Business Environment for Increased Competitiveness
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Figure 1
Brazil's current performance is poor against competitiveness indexes

Brazil's rank (out of total) Relative performance
Institution World Economic Forum IMD World Bank Economist Intelligence Unit Heritage Transparency International United Nations Development Programme Mastercard OECD
Index Global Competitiveness Index Overall Competitiveness Ranking Ease of Doing Business Index Quality of Life Index
2005 65 (117) 42 (51) n/a 1 39 (111)
2006 66 (122) 44 (53) n/a 1 n/a 1
2007 72 (131) 49 (55)
2008 64 (134) 43 (55)
= = = -
122 (178) n/a 1
125 (181) n/a 1
Index of Economic Freedom Corruption Perception Index
63 (155) 62 (158) 70 (177) 2 n/a 1 n/a 1
69 (157) 70 (163) n/a 2 n/a 1 52 (57) 5
97 (157) 72 (179) n/a 2 48 4 (63) n/a 1
97 (157) 80 (180) n/a 2 56 4 (75) n/a 1
Human Development Index Worldwide Centers of Commerce Index Programme for International Student Assessment (PISA)
Source: World Economic Forum; World Bank; Economist Intelligence Unit; IMD; Heritage Foundation, Transparency International; United Nations Development Programme; Mastercard; Organisation for Economic Co-operation and Development; McKinsey analysis. 1. Report not published that year. 2. The latest 20072008 Human Development Report provides the Human Development Index for the year 2005. 3. There is a + sign if the most recent ranking is in the top 20 percent, = if it is between 20 percent and 45 percent, and if it is below 45 percent (Brazil ranks in the 45th percentile in GDP per capita among countries in the GCI 20082009). 4. This is the ranking for So Paulo, the top performing Brazilian city in the ranking. 5. Based on average of scores in reading as well as science and math literacy. .
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Figure 2
Brazil's relative ranking in indicators measuring the performance of the business environment is higher than in those of the state/public sector
Average of rankings in ten aspects for which the private sector is chiefly responsible (out of 134 countries) United States Germany Japan India Brazil Chile China Mexico Argentina Russian Fed. Venezuela Aspects considered Reliance on professional management Financial market sophistication Local supplier quantity Local supplier quality State of cluster development Production process sophistication Extent of marketing Willingness to delegate authority Capacity for innovation Company spending on R&D 76
Average of rankings in ten aspects for which the government is chiefly responsible (out of 134 countries) Chile United States Germany Japan China India Mexico Russian Fed. Argentina Brazil Venezuela Aspects considered Wastefulness of government spending Burden of government regulation Efficiency of legal framework Transparency of government policymaking Extent and effect of taxation Total tax rate Number of procedures required to start a business Time required to start a business Burden of customs procedures Non-wage labor costs
Source: World Economic Forum 2008, McKinsey analysis.
Figure 3
Cross-country evidence shows there is a strong relationship between a countrys competitiveness and its labor productivity
Cross-country experience shows positive correlation between productivity and competitiveness
Countries that substantially improved their competitiveness managed to grow at high rates
Global Competitiveness Index Overall score, 20062007
Real GDP growth rates CAGR (percent)
Singapore (198696) Dubai (19922002)
9.3
8.4
Hong Kong (197888) Chile (198898)
8.2
7.6
Labor productivity GDP at PPP per worker, US$ thousands
Taiwan (19902000)
6.6
Source: World Economic Forum 2006, General Organization for Social Insurance (GOSI); Global Insight data service; McKinsey analysis.
Overview of the methodological approach We begin this review of our methodological approach with our proposed definition for business environment. To arrive at the definition below, we draw from the methodology developed over the past 18 years by the McKinsey Global Institute (MGI) in its research on the reasons for differential economic performance across countries:1 The business environment includes activities in the market economy, which in turn includes both competitive market sector activities and non-competitive market activities. In most countries, the competitive market sector accounts for two-thirds of the economic activities, whose very nature makes it feasible for the products and services to be supplied by privatesector companies operating in competitive environments. These cover a broad set of sectors in manufacturing (e.g., automotive, food processing) and services (e.g., food retail, retail banking, and construction). About 10 percent of the overall economic activity occurs in non-competitive market sectors, where the nature of the industry may not lead to an effective competitive dynamic among private-sector companies. These may include electricity distribution, utilities, or railroad services. Within the market economy, our definition of the business environment includes elements related to the production processes of firms, to their competitive environment, and to capital markets (e.g., governance practices), while excluding external factors (also called enablers) such as macroeco-
nomic stability, workforce educational levels, and property rights and contract enforcement. The non-market economy accounts for about 25 percent of economic activities. In this case, the nature of the service does not lend itself well to market-based transactions because of long-time lags between service and resulting benefits, lack of easily observable metrics for quality, and/or simply because, as public-sector services, they tend not to be provided by profit-maximizing firms. The most important segments here include healthcare, education, and pure public-sector services such as defense or taxation, customs, and excise. In our diagnostic of the Brazilian business environment, we also apply a framework developed by MGI in the context of national or regional development projects. This framework distinguishes between those factors predominantly related to the business environment (e.g., structure of supply, structure of demand, and market efficiency) and those predominantly associated with the external environment (e.g., government efficiency, institutional enabling factors, and macroeconomic stability). The analyses and proposals herein draw from a number of sources, including (1) global competitiveness rankings, in particular the GCI; (2) a review of academic and MGI research on economic performance; (3) interviews with McKinsey consultants and other specialists; and (4) McKinsey proprietary research on themes such as informality, education, healthcare, and global mega-trends.
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Figure 4
Despite its low overall competitiveness scores, Brazil performs relatively well in factors related to the quality of its business environment
Capability institutions Market efficiency
Competition Competition and openness intensity of competition, entry/exit barriers Factor market efficiency
Labor market Financial market Land market Competitive disadvantage Competitive advantage Business environment
Potential economics Supply

Labor force talent skilled professionals, entrepreneurship Natural resources location, endowment of natural resources Financial capital availability of capital, domestic savings, etc.
Corporate governance
Enabling factors
Hard
Education/scientific infrastructure Logistics and core infrastructure Telecommunications Telecom and IT and IT services services Energy and utilities
Demand
Soft
Property rights protection Contract enforcement Macroeconomic stability Rule of law (e.g., crime, corruption) Size of domestic market total domestic demand Customer sophistication level of customer expectations and power Size of accessible foreign markets foreign demand
Regulatory burden process efficiency
Institutional capacity execution efficiency and responsiveness to private-sector concerns
Government efficiency
Source: MGI; World Economic Forum, 2008; McKinsey analysis.
62 Diagnostic of the quality and dynamism of Brazils business environment Our diagnostic of the Brazilian business environment reaches two major conclusions. The first is that the quality and dynamism of the Brazilian business environment is strong at the aggregate level; the second is that, in spite of this strength, the same performance is not consistent throughout the economy, with the formal-sector performance being significantly superior to that of the informal sector. Performance at the aggregate level As noted previously, despite Brazils low overall competitiveness scores, the country performs relatively well in a number of factors related to the quality and dynamism of its business environment. A diagnosis of Brazils relative performance using the framework developed by MGI indicates that Brazil performs relatively well on the structure of supply and demand (Figure 4).2 These dimensions reflect, among other elements, the overall sophistication of company operations and strategy and the endowment in natural resources, market size, and consumer capabilities. The importance of strong performance in these dimensions is critical, since they indicate an economys intrinsic potential. Brazil also performs well on indicators of market efficiency, in particular those related to competitiveness and openness and to corporate governance. The significance of the good performance on competitiveness is hard to overestimate.3 MGI research of comparative economic performance has consistently found that exposure to competition from best practice and high levels of competitive intensity are crucial determinants of differences in sectoral labor productivity, and therefore in GDP per capita.4 Relatively weaker performance on factor market efficiency (i.e., efficiency in land, capital, and labor markets) already hints at the relative weaknesses in government efficiency, as measured by both its efficiency as a regulator and its institutional capacity. Anecdotal support for Brazils relative strength in the supply dimension can be found in a listing of accomplishments by Brazilian companies either in terms of their overall competiveness (i.e., as reflected in their dominant or leading share of global trade) or of the sophistication of their business processes (e.g., Brazilians count on one of the fastest, most automated, and efficient payment systems in the world). On the demand dimension, Brazils importance as a consumer market can be demonstrated by its relative importance for a number of leading global companies and by the fact that a high proportion of the worlds largest companies73 out of Fortune 100 firmsoperate in Brazil (Figure 5). Differences in performance between the formal and informal sectors Although aggregate performance is relatively strong and pockets of excellence are found in the Brazilian business environment, this is not true for all businesses.
Figure 5
Supply Agribusiness
Competitiveness and importance as a consumer market illustrate Brazils high scores on structure of supply and demand
Demand
The world's largest exporter of coffee, orange juice, and ethanol Basic Materials The world's largest exporter of iron ore and hardwood market pulp 2 nd largest exporter of steel slabs High value-added manufacturing Auto OEM's have more plants in Brazil than in any other country, except the United States and China Embraer is the world leader in regional commercial jets; it was the biggest Brazilian exporter in 200204 Services One of the world's most robust payment systems; approximately 85 percent of all bank transactions are electronic (vs. ~90 percent in the United Kingdom and ~75 percent in the United States) 202+ million telecommunication lines (fixed, mobile, and broadband) 2 nd cleanest energy matrix in the world (based on hydro)
Top 100
2 nd largest market worldwide by volume for Avon and Nestl 2 nd largest global consumer of meat and coffee 3 rd largest market worldwide for Coca-Cola and Unilever 3 rd largest global consumer of cosmetics and soft drinks
4 th largest global consumer of beer
5 th largest mobile market in the world (151 million users, 78 percent of the population)
Among McDonald's 8 largest consumers
73 of Fortune's Global top 100 are present in Brazil
Source: Company websites; international and local industry associations; Brazilian government; McKinsey analysis.
Figure 6
Nearly 80 percent of the Brazilian workforce is employed in sectors with either high or medium informality levels
Percent of workers employed in both Market economy Low informality
Level of informality1
Sector
Agriculture, livestock Personal services Domestic services Construction Apparel and accessories Accommodation and catering Recreational and cultural activities Textile Commerce Furniture Fuel and automotive retail/ maintenance Transportation Wood products Foods and beverages Metal products Non-metallic minerals Services rendered to companies Leather and shoes Real-estate activities and rent Tobacco products Chemical products 2 Health and social services Mail and telecommunications Education Machinery and equipment 2 Financial intermediation 2 Public administration Automotive vehicles 2 28 sectors (out of 48)
Share in the total of jobs (percent) 19.7 1.7 7.7 6.4 2.0 3.9 1.3 1.0 16.6 1.0 2.0 3.5 0.5 2.4 0.8 0.6 4.8 0.7 0.6 0.0 0.1 3.2 0.6 5.2 0.5 1.0 5.2 0.6
Informality (percent)
High
63.3%
Medium
13.9%
Low
2.8
16.4%
Total
93.6%
Source: IBGE, 2003a and 2003b; McKinsey, 2004. 1. Estimate from the share of employed population not contributing to public welfare. 2. Considering only sectors of the market economy: chemicals, machinery and equipment, financial intermediation, and automotive.
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Figure 7
We see three key pillars through which the Brazilian business environment can achieve those objectives
Leveraging Brazils Business Environment for Increased Competitiveness
Increasing the share of the formal sector in the market economy
Using business sector practices to increase productivity in the non-market economy
Capturing opportunities for growth offered by certain global mega-trends
64
Specifically, there is a significant gap between the performance of the predominantly formal and the predominantly informal sectorsa particularly serious issue in Brazil given the prevalence of informality. We estimate that nearly 65 percent of Brazilian workers are employed in sectors where informality is high (that is, where over 50 percent of employment is informal) (Figure 6). Less than 15 percent of all workers are in sectors where informality is considered medium-level (i.e., where formal employment represents 2550 percent of employment in the sector). In these sectors, even if direct employment in informal companies is small, the impact of even a small number of companies operating informally can seriously and adversely affect the competitive dynamics in the sector, and thus the ability of formal companies to earn sufficient profits to expand, gain share, and thereby disseminate higher productivity business practices throughout the economy. The majority of workers in the low-informality sectors are employed in the non-market economy by sectors including public administration (5.2 percent of employment), education (5.2 percent), and health and social services (3.2 percent). Only approximately 3.0 percent of Brazilian workers are employed in market economy sectors with low informality.
MGIs research in Brazil and in over a dozen countries at various stages of economic development has concluded that informality is a key obstacle to higher productivity growth. Companies operating informally adopt lower productivity business models that remain competitive because of non-productivity-related factors. Further, the advantages of informality can be such that they surpass the advantages provided by higher productivity, in some cases quite dramatically so.5 A first step in leveraging Brazils business environment is therefore ensuring that business models from higher productivity segments are more widely disseminated throughout the economy. It is to this topic that we turn next.
Proposals to leverage Brazils business environment We believe the Brazilian business environment can contribute significantly to increasing the countrys competitiveness and thereby raise the standards of living in an inclusive and sustainable manner. We see three major levers, or pillars, through which this can take place: (1) increasing the share of the formal sector in the market economy; (2) using business-sector practices to increase productivity in the non-market economy; and (3) capturing opportunities for accelerated growth offered by certain global mega-trends (Figure 7).
Figure 8
To capture the full potential of the quality of its business environment, Brazil should address informality and macroeconomic instability
Major obstacles to business productivity Key barriers to growth of the formal sector
Participation of barriers in Brazils productivity gap Percent of total gap Informal practices enable low-productivity companies and business models to survive (and thrive), impeding the spread of highproductivity practices
100
35
65
Macro-instability reduces a key competitive advantage of formal companies: their access to capital markets
39
13 8
Brazil's productivity gap Second- order barriers 1 First- order productivity gap Informality and regulation Macroeconomic instability Public service provision (e.g., judiciary system)
5
Infrastructure
First-order barriers
Source: MGI, 2006; McKinsey analysis. 1. Second-order constraints that will naturally relax with Brazil's growth.
Pillar 1: Increasing the share of the formal sector in the overall economy. To increase aggregate productivity and thereby capture the full potential of the quality and dynamism of its business environment, policymakers should consider how good business-sector practices might occupy an increased share of business practices in Brazil. Doing so requires addressing the major obstacles to the countrys productivity growth namely, informality and macroeconomic instability. Research conducted by McKinseys Brazil office in 2006 under the oversight of MGI concluded that informality and macroeconomic instability were the two most important first-order barriers explaining the productivity gap between the United States and Brazil (Figure 8). As mentioned above, informality delays the adoption of higher-productivity business models by creating a non-level competitive playing field in which productivity differentials may not be a definitive source of competitive advantage. Widespread informality deters sector consolidation and modernization. As an illustration, between 1997 and 2006 the three highest ranking sectors in terms of number of merger and acquisition transactions were telecommunications, utilities, and financial intermediationthe three largest sectors in the market economy where informality is low. In contrast, construction and commerce had jointly fewer transactions than financial intermediation alone. That said, while the latter accounts for less than 1 percent of total employment, the former two combined account for 23 percent.
Macroeconomic instability exacerbates this challenge by removing what would otherwise be an important source of competitive advantage for formal players: the access to lower-cost and lower-risk sources of financing. Whereas Brazils macroeconomic fundamentals have improved significantly, the conditions and costs of access to capital even for the countrys best companies remain inadequate. This is manifested, for example, in its very high real interest rates and in the virtual unavailability to private-sector companies (or to the public sector) of long-term, local currency denominated, fixed-rate financing at costs comparable to those prevailing in international markets. Current conditions of financing in Brazil deny companies in formal sectors a source of competitive advantage that could increase further the capital intensity and technology gap between those in formal and informal sectors. The critical importance of combating informality to promote extensive adoption of best business practices is confirmed when we verify that reduction in informality is associated with step-changes in productivity levels (Figure 9). Average productivity doubles in situations of medium informality relative to low informality, and doubles again in the low-informality sectors. Only one sector with medium or high informality (tobacco products) had labor productivity above 50 percent above the market economy average, whereas every low-informality sector performed above that level. With few exceptions, (e.g., leather articles and shoes) the productivity levels
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Figure 9
Lower levels of informality are associated with significantly higher levels of productivity
Share of employment (percent) Average productivity (index)
Sectorial productivity level vs. informality level PRODUCTIVITY LEVEL Productivity index: 100 = average productivity of the market economy, 2006 1,000
Trucks and Buses Light vehicles and trailers Finance and insurance Manufacture of tobacco products
650
250 200 150
Other transport equipment
Chemical products
Vehicles parts
Machines and Equipments
13.9
187
2.8 100 50 0
248
Metal products Transports Services to companies Leather articles and shoes
63.3
49 Total market economy productivity
Construction
Domestic & personal services
Agriculture and Livestock
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
Informality level Percent 1

Source: IBGE, 2003a, 2003b, and 2009; McKinsey analysis. 1. Estimate from the share of employed population not contributing to public welfare.
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Figure 10 Several countries successfully implemented programs to reduce informality
Lever Set aspiration targets and define Key Performance Indicators Reduce burden of being formal Objectives Initiatives Set targets, standards and indicators for the public sector through the Prime Ministers Office of Public Sector Reform Countries United Kingdom Results Spain increased tax collection by 75 percent on SMEs and observed unemployment decrease by 40 percent In Slovakia, there was a 12 percent increase in the number of registered companies In three years, unemployment dropped from 7 to 4 percent in Singapore
Simplification of tax code Allowed temporary work, extended extra hours Labor deals overrule general labor regulation Part-time contracts with no labor "obligations" Created single point of contact to business Electronic registration of business via Internet Collaboration between producers and police Update, integration and automation of tax, labor and social databases (cross-check) Private enforcement, new collateral law Campaign about the effects of informality Communicate tax evasion fighting programs
Spain Spain, Slovakia Singapore Netherlands Portugal United States, Canada Poland Spain Slovakia Spain Italy, United States
Policies
Enhance auditing and enforce penalties Raise awareness and create a culture of formality Set implementation structure
Created tax evasion control bureau, specialized
Execution
courts clerks
Moved incorporation cases from judges to court Created Project Management delivery unit to coordinate implementation of measures
Spain, United States, Netherlands Slovakia United Kingdom
Source: McKinsey & Company, 2004.
Figure 11
Opportunities exist to strengthen Brazil's performance in the public sector

Infrastructure deficit Indexed US = 1.0, 2007 Distribution infrastructure United States Chile China Latin America and Asia Developed countries 40,000 50,000 GDP (PPP) per capita Intl $, 2006 India Brazil Mexico 1.00 0.93 0.79 0.57 0.44 0.58 0.43 0.40 0.55 Water transportation 1.00 1.01 0.83 0.46 0.66 0.60 Energy infrastructure 1.00 0.80 0.86 Total infrastructure 1.00 0.92 0.82 0.49 0.49 0.58
Tax revenues vs. GDP per capita Total tax revenues Percent of GDP, 2006 50 40 30 20 10 0 0 10,000 20,000 Brazil Brazils tax burden is higher than other emerging countries
30,000
Average time for judiciary debt recovery Days World average 389 days 421 250 305 425
Time and procedures to open a business Days, number of procedures 2008 180 546 150 120 90 60 30 Mexico Canada Australia 0 5 Russia Colombia Chile Portugal United States 10 Brazil
241
India China 15 Argentina 20 25
China
United States
Chile
Mexico
India
Brazil
Source: IMD, 2008; World Bank, 2008; McKinsey analysis.
of the medium-informality sectors are likewise nearly uniformly superior to those with high informality. While informality alone certainly does not explain these productivity differentialsinformality tends to be inversely correlated to capital intensityit contributes to both exacerbating differences across sectors and keeping the employment share of high-productivity sectors low. In Brazil, several important initiatives that are likely to contribute to reduced informality have been implemented recently. These include the introduction of the Simples, a simplified tax system for small and mediumsized businesses; the operational integration of internal revenue service and social security administrator; and the Nota Fiscal Paulista, an initiative to raise awareness of the importance of requesting invoices in So Paulo. The level of impact of these programs remains to be seen. Our observations of experiences in other countries reveal that successful programs to reduce informality include clearly defined and aspirational objectives, a coherent and self-reinforcing set of policies, and an appropriately empowered and resourced structure for execution (Figure 10). These successful experiences suggest that initiatives in all three dimensions are advisable in order for transformation to be more effective, as each reinforces the effects of the others (Spains program is a good example of many initiatives working together to generate impressive results). The most successful programs included many sector-specific initiatives that were prioritized and launched in waves and a limited set of horizontal initiatives (such as the streamlined tax and labor laws adopted
in Spain). Program coordinators followed a pragmatic approach, where feasibility prevailed and coordination and alignment across multiple stakeholders was emphasized. The results obtained from such programs in terms of increased tax collection, employment levels, and formally registered companies are highly encouraging. Pillar 2: Using business-sector practices to increase productivity in the non-market economy. Brazils private sector can also be a source of learning to improve the performance of the non-market economy, which includes major sectors such as education, healthcare, and other government services. Increasing their productivity would be important not only for the direct effect this would have on aggregate productivity, but also for its indirect effect in the market economy. This impact can be highly relevant: as shown in Figure 8, less efficient provision of public and infrastructure services together account for as large a portion of the productivity gap between Brazil and the United States as 6 macroeconomic instability. While measuring public sector efficiency is very hard, evidence from indicators across a range of public sector functions suggests room for improvement. Despite showing relatively high tax revenues, Brazils infrastructure, particularly regarding transportation, is outdated and insufficient. The judicial system is among the least effective in the world, and opening a business is a lengthy and bureaucratic process (Figure 11). For the government to turn into an effective catalyst of economic growth, evidence suggests that
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Figure 12
Three of the seven important principles of healthcare reforms are aimed at increasing access and should be considered in the short term
Measures to increase access
Long term
Medium term Short term 4 3

Increase system-wide organizational capabilities and implementation skills Promote improvements to safeguarding and to service levels
5
Increase availability of healthcare infrastructure, labor and technology (drugs and equipment)
Promote improvements to cost competitiveness
Ensure value-conscious consumption
Promote wellness to reduce incidence of injury and disease
Promote sustainable financing mechanisms to collect and distribute funds
Source: MGI, 2006a; McKinsey analysis, based on MGI's framework to guide the reform of healthcare systems.
68 inefficiencies will need to be removed. Adapting business frameworks to the rules of the public sector to streamline processes and improve performance could contribute to this objective. We illustrate this concept by two fundamental non-market sectors: healthcare and education. Healthcare: Although improvements in healthcare provided to the overall population have been achieved in the past few years, providing increased access remains a key challenge in Brazilian healthcare. Only about 20 percent of the population has access to private health plans (below 10 percent in the poorer regions of the North and Northeast), with the remaining population relying on government-provided healthcare. Based on our experience in the sector and expert interviews, the challenges include the low quality of services; lack of infrastructure, especially in poor areas; difficulty in attracting the most qualified professionals; and limited distribution of free medicines. MGI research benchmarking healthcare systems around the world has identified seven key levers for their improvement.7 In Brazil, given the criticality of increasing access, three levers might merit particular attention for the short and medium terms: (1) increasing the availability of healthcare infrastructure, labor, and technology (drugs and equipment); (2) promoting wellness to reduce incidence of disease and injury; and (3) increasing system-wide organizational capabilities and implementation skills (Figure 12). Extending business-sector practices and/or presence in the healthcare sector may provide an important contribution for these three levers. The business sector can contribute to increasing the availability of healthcare by both supplying specialized practitioners and promoting the use of best technologies. It can also do much more to encourage healthy life styles and to build organizational capabilities (Figure 13). Education: Recently published research by McKinseys Public Sector Practice reveals that increased spending alone is not enough to improve the quality of an educational system, and that high-performing school systems consistently do three things well:8 getting the right people to become teachers; developing these people into effective instructors (the only way to improve outcomes is to improve instruction); and putting in place systems and targeted support to ensure that every child is able to benefit from excellent instruction (Figure 14). The implications of these findings are highly significant as well as a reason for optimism in Brazil, since they imply that improvement in education can be achieved through better administrative practices. Research findings are also positive in that educational systems that implemented such
Figure 13
The private sector could play different roles regarding the levers of health systems
Levers Create adequate physical resources Adequate supply of labor and use of medical technology Private sector role unclear Some options on how to leverage Brazil's environment in the public heath sector Locally centralized system for patients to book non-emergency care and optimize current structure Partnerships to allow for training of public professionals and sharing of best practices by private institutions Sanitization through concessions (public-private partnerships) Expansion of current preventive care programs within the companies and to employee communities Adoption of some regions or small cities (e.g., Trombetas-Par) Build organizational capabilities and governance model Deploy the right approaches to implementation Local, state, and national demand planning and optimization with multilayered approach: primary, secondary, and tertiary care models with gatekeeping and different roles and accountabilities per level (e.g., cities responsible for local medical centers and primary care) Incentive programs and variable compensation for professionals based on performance metrics (e.g., effective treatment on the first visit; appropriate exams)
1. Promote efficient capacity
Reduce environmental hazards 2. Promote wellness Comprehensive immunization programs Promote healthy lifestyles
3. Provide adequate organizational framework, strategy, and management
Source: MGI, 2006a; McKinsey analysis.
Figure 14
A study of the top-performing school systems showed higher spending alone will not improve performance
US teachers, spending and performance Linear 70 index 60 50 40 30 20 10 0 1970 Spending per student (US$, 2004) To improve instruction, highperforming school systems consistently do three things well: They get the right people to become teachers (the quality of an education system cannot exceed the quality of its teachers) They develop these people into effective instructors (the only way to improve outcomes is to improve instruction) They put in place systems and targeted support to ensure that every child is able to benefit from excellent instruction (the only way for the system to reach the highest performance is to raise the standard of every student)
Student-to-teacher ratio Literacy (17 years) Literacy (13 years) Literacy (9 years) 1975 1980 1985 1990 1995 2000 2005
Spending and outcomes in the OECD Increase in real expenditure per student 1 (197094, percent) Belgium United Kingdom Japan Germany Italy France New Zealand Australia 65 77 103 108 126 212 223 270 -7 -10 -2 -5 1 Increase in student achievement 2
(197094)
-5 -8
Source: McKinsey & Company, 2007. 1. Real expenditure, corrected for the Baumol effect using a price index of government goods and service 2. Math and science
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Figure 15
A McKinsey study identified 10 major global trends that are changing the worlds corporate landscape, three of which are key for Brazils future
Description of the issues While measuring public sector efficiency is very hard, evidence from indicators across a range of public sector functions suggest room for improvement Brazil is an outlier in terms of time and procedures to open a business Brazils infrastructure index is 50 percent that of the United States These inefficiencies and gaps contribute to a high tax burden that could get worse if nothing is done to increase public-sector efficiency A new consumer market is emerging in Brazil, due to demographic shifts Low-income population becoming consumers Increased importance of north/northeast regions Growing number and wealth of retirees Importance of university students to gain future consumer loyalty Growing importance of newly rich and value trends Global connectivity and media Environmentally conscious Health and well-being Premiumization (branding)
10 major global trends 1 Macroeconomic trends 2 3 Shifting centers of economic activity
Overburdened public sector New consumers

Social life in technological world Turbulent tides of talent
4 Social & environmental trends
6 7
Social cost of
free market Limited resources, unlimited demands Evolving industry & ownership structures Science of management Economics of knowledge
8 Business trends 9 10
While most countries are concerned with the scarcity of natural resources, Brazil is blessed with abundant natural resources, for example: Guarani reserve holds 13 percent of the world's fresh water There are still 90 million hectares available for agriculture The Amazon forest has 70 percent of the world's biodiversity This creates an immense opportunity for economic development by attracting resource-intensive industries, and by developing leading global exporters The key question going forward is: how to leverage these opportunities?
Source: Davis and Stephenson, 2006; McKinsey analysis.
70 practices obtained improvements in the relative near term (e.g., United Kingdom and Boston cases).9 And although the paths taken by various school systems in the past and the paths that other school systems will have to take in the future to achieve similar performance are, inevitably, very different, they all share the same key success factor: a more actively managed approach to core functions such as teacher recruitment and assessment. In addition to the transfer of managerial practices, another way in which the business sector can improve Brazils educational system is by providing secondary and technical education. Since completion of secondary education does not appear to lead to dramatically higher paid employment opportunitiesjobs for graduates of secondary schools have salaries on average 26 percent higher than jobs for workers with no education at all this results in lack of incentive to pursue studies. But technical education can have a much higher salary differentiation (up to 160 percent higher pay than salaries for workers with no education at all), especially when the right skill set is available. The business sector can contribute here by participating in the definition of the necessary skill set, in creating syllabi, and in creating opportunities for the resulting professionals to be employed. Pillar 3: Capturing opportunities for accelerated growth offered by certain global mega-trends. Empirical research conducted by McKinseys Strategy Practice both abroad and in Brazil indicates that corporate decisions about where to compete (i.e., their choice of product markets, technology, and geography) are critical components of long-term economic performance. In sectors such as banking, telecommunications, and technology, almost two-thirds of the organic growth of listed western companies can be attributed to being in the right markets and geographies. Companies that ride the currents succeed; those that swim against them usually struggle. Identifying these currents and developing strategies to navigate them are vital to corporate success. Within this context, McKinseys Strategy Practice undertook a major effort to identify the 10 major macroeconomic, social, environmental, and business trends that will make the world of 201520 a very different place than the one in which we do business today. Three of these trends are particularly relevant to Brazil: (1) increased burden on the public sector (e.g., due to an aging population); (2) expansion of the consumer landscape, with over 1 billion new consumers entering the market over the next decade; and (3) the impact of population growth and economic development on the demand for natural resources (Figure 15). Whereas the first of these presents a challenge that may compromise the countrys fiscal balance, and therefore
Figure 16
Some key policy changes could help address the overburdened public sector
that could benefit from changes in government policy and in how it is implemented Transferring knowledge and best practices From private to public sector Within the public sector Attracting and retaining talent Meritocratic practices Attractive value proposition Promoting dialog with the private sector and stakeholders Reducing tax burden and complexity Simplifying labor laws Improving judicial system 30 Improving social services
Growing public spending on pensions and healthcare benefits (percent of GDP) Japan Italy Germany Brazil United States France 11.5 19.7 33.3
2001 2030E2
... leading to potential tax increases Increase in taxes necessary to maintain current benefit levels for the future generation 1 (percent increase) Japan Italy Germany 90 80 40 140 175
23.1 17.3 28.8 12.9 21.5 10.5 15.5 17.6 25.8
CAGR +1.7%
Growing social security deficit (percent of GDP) CARG 10% 1.8 2007 2.2 2017E
Brazil United States France
0.3 1997
Source: OECD 1995; 1996; 1997 and US Census Bureau; Ministrio da Fazenda; McKinsey analysis. 1. Assumes no change in taxes or other spending and assumes all other savings continues at the same rate.
its macroeconomic stability, the remaining two are likely to generate major opportunities for Brazilian businesses to capitalize upon. Increased burden on the public sector: The unprecedented aging of populations across the developed world will call for new levels of efficiency and creativity from the public sector. Without clear productivity gains, the pension and health-care burden will drive taxes to stifling proportions. But this problem is not confined to developed economiesin many emerging markets, including Brazil, governments will have to decide what level of social services to provide to citizens, who increasingly demand state-provided protections such as healthcare and retirement security. Unless public-sector productivity is increased, taxes in Brazil would need to rise by 80 percent from present (relatively high) levels in order to maintain current benefits for future generations. Thus, the adoption of proven private-sector approaches will likely become pervasive in the provision of social services across the world (Figure 16). Expansion of the consumer landscape: Almost a billion new consumers will enter the global marketplace in the next decade as economic growth in emerging markets pushes them beyond the threshold level of US$5,000 in annual household incomea point when people generally begin to spend on discretionary goods. Over the next decade, the consumers spending power in emerg-
ing economies will increase from US$4 trillion to more than US$9 trillionnearly the current spending power of Western Europe. Over this period we estimate that more than 30 million Brazilians will pass the US$5,000 threshold. These new consumer trends in Brazil present enormous opportunities for growth. Historically, the country has had a very homogeneous consumer base, which helped make mass market strategies with a focus on efficiency quite effective. However, the playing field is now changing. The demographic evolution of the Brazilian population, in combination with changing trends in their values, has contributed to significantly increasing diversity as well as making way for an important share of new arrivals to the consumer arena. Combined with increased consumer credit, the result will be even further buying power. In terms of values, greater concern for sustainability and the protection of natural resources, as well as the awareness of the social cost of economic activity for the climate and the environment, has also led to changes in consumer behavior. A recent McKinsey survey showed that Brazilians are the most likely consumers to reward a com10 pany for social responsibility. In view of all the above, the growth champions in Brazil in the next 20 years will most likely be those who can de-average their view of the market and develop a granular perspective on
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Figure 17
Brazil has the potential to create opportunities for energy- and water-intensive industries
could Brazil create an opportunity for energy-intensive companies? Besides clear opportunity for agribusiness, are there water intensive industries that Brazil could explore?
With increasing international pressure for renewable resources and Brazil's potential for developing low-cost energy Share of renewable energy in 2020 Percent of total consumption 100 100 15
Energy consumption Gigawatt hours per establishment
The Amazon river provides 18 percent of total fresh water flowing into the oceans 2,068
Primary aluminum
Newsprint mills Renewable 86 85 Petroleum refineries Non-renewable 14 Brazil Rest of the world Paper mills (excl newsprint) Iron & steel mills Brazil has historically one of the lowest energy costs in the world Primary copper smelting & refining 189
533
Alkalies & chlorine
324
176
174 Guarani ground water reserve complex holds 12 percent of worlds' fresh water
161
Source: ANEEL; US Census Bureau; DOE/EIA; McKinsey analysis.
72
trends, future growth rates, and market structures. The companies that move to cater to these new consumers in Brazil and translate these skills to new consumers abroad will undoubtedly derive much benefit. Impact of population growth and economic development on the demand for natural resources:11 As economic growth acceleratesparticularly in emerging marketswe are using natural resources at unprecedented rates. Surging demand across a broad range of commodities is being verified. For example, oil demand is projected to grow by 50 percent in the next two decades, and without large new discoveries or radical innovations supply is unlikely to keep up. In China, demand for copper, steel, and aluminum nearly tripled in the past decade. This whole scenario is increasingly constraining the worlds resources, and in many countries, water shortages will be the key constraint to growth. Innovation in technology, regulation, and the use of resources will be thus central to creating a world that can both drive robust economic growth and sustain environmental demands. With its wealth of biodiversity, ample territory, and excellent and varied climate and soil, Brazil is particularly well positioned to strengthen its commodity production and performance in international trade to further capture the opportunities
presented by this surge in demand. The country has a number of the worlds largest and most competitive mineral deposits, as well as the possibility of consolidating its position as a key international player in agribusiness and bio energies by exploring its land and hydro potential (Figure 17). The public sector plays a crucial role in enabling Brazilian businesses to capture these opportunities. Currently many resource projects in the world are on hold, or even cancelled. However, the combination of resource depletion with a broken investment pipeline will aggravate the shortage of many commodities in the future, even where analysts assume more modest economic growth rates when compared with the period preceding the financial crisis. While the capital project pipeline is on hold, Brazil should pursue initiatives to become an even more attractive place for those investments once they are back, and secure more than its fair share of the global investment pie. This requires addressing the barriers that may have delayed or even prevented billions of capital investments in Brazil. Such initiatives might include regulatory reform and efforts to strengthen infrastructure (energy, ports, railways).
Conclusion Brazils competitiveness rankings have typically been disappointing, in line with or below its GDP per capita ranking. However, the average ranking masks significant
differences in the countrys performance in indicators relating to primarily government related activities versus those primarily related to the business sector. Whereas Brazil would rank approximately 120th out of the 134 countries on a government competitiveness index, its business-sector competitiveness would rank around 30th. The main objective of this chapter has therefore been to explore how Brazil can lever the quality and dynamism of its business environment to increase the countrys competitiveness. We explored three major avenues through which this contribution could take place: Expanding the participation of the formal sector in the overall economy. Currently, high costs of operating formally provide substantial nonproductivity-related advantages to informal players. These costs must be reduced (and the perceived risks of adopting informal practices increased) to accelerate the share of economic activity adopting high-productivity business models. Further consolidation of macroeconomic conditions that ensure that terms and costs of financing are comparable to those in normal markets will contribute to this trend. Using business-sector practices to increase productivity in the non-market economy. While there has been much effort to improve, and pockets of excellence can be found, the efficiency of Brazils government is relatively low in many areas. Brazils ranking in those GCI indicators where government involvement is most intensive is very low lower even than that of BRIC countries at an earlier stage of economic development, such as India and China. The business sector can contribute to increasing public-sector productivity by supporting the transfer of best managerial practices. The country will benefit not only from the direct impact on productivity in these sectors, but also from the follow-on indirect impact that improved public services will bring, whether in healthcare, education, the judiciary, or infrastructure services. Capturing opportunities for accelerated growth offered by certain global mega-trends. Finally, Brazils business environment can contribute to the countrys overall competitiveness by riding the tailwinds major global trends provideparticularly those involving the emergence of a new consumer market and the increased demand on natural resources. Brazilian companies that are able to position themselves will experience accelerated growth and extend their benefits to the country by increasing its strategic importance as a major supplier of scarce resources to the world. Brazilian business can also play an important role in mitigat-
ing the impact of a potentially unfavorable trend associated with the increased burden on the public sector that will ensue from an aging population, again through contributions to increase publicsector productivity. Over 10 years ago, MGI published an in-depth 12 report on Brazilian economic performance. The basic conclusion for Brazil was an optimistic one: the country could embark on a trajectory of accelerated growth that would double GDP over a 10-year period if economic policies that both enabled and motivated productivity growth were put in place. Underpinning this assertion was a critical finding arising from in-depth analyses of the productivity growth potential in eight sectors of the Brazilian economy: there were no structural, insurmountable barriers keeping Brazil from achieving much higher productivity levels than it recorded at the time. One key piece of evidence of that finding was that in several sectors we found examples of leading Brazilian companies operating at productivity levels comparable or superior to those of their counterparts in developed markets. Brazils leading banks, for example, achieved higher productivity than their peers in the United States and Europe. Leading food processing companies, recently established automotive manufacturers, and formal-sector retailers registered slightly lower productivity than their US comparables, but this could be explained by rational decisions regarding capital intensity given the far lower wages prevailing in Brazil, as well as income-related factors that contribute to economies of scale (e.g., higher incomes lead to higher average tickets in retail). While Brazils GDP has not doubled since 1998, the performance of its leading players across many sectors has been extraordinary, particularly during the period of relative stability between 2004 and 2008. The convergence of favorable macroeconomic conditions and a strong competitive position in selected industries made this a unique moment in the history of corporate Brazil. With significant global liquidity and Brazilian macroeconomic fundamentals consistently improving, local companies gained from the falling cost of capital and broadening alternatives for funding their growth plans, while locally established multinationals benefited from stable conditions to establish an exporting platform or to capture potential growth in the domestic market. This period was one of significant, productivityenhancing transformation in a number of sectors: in basic materials, a number of companies made moves to consolidate their presence abroad and/or to strengthen their dominant position in global trade flows. Agribusiness companies also expanded via a combination of consolidation and export growth, while the real estate sector seemed to emerge from scratch as capital markets conditions and prospects of a reasonably priced real estate financing improved. Consolidation continued in a num-
73
ber of sectors, such as banking and telecommunications. All this shows the transformative and competitive capabilities of Brazils entrepreneurs, and gives strong reason to believe that such capabilities can substantially contribute to future gains in Brazils competitiveness.
Global Insight data service. Available at http://www.globalinsight.com/. GOSI (General Organization for Social Insurance). Available at http://www.gosi.com.sa/intro.html. Heritage Foundation. 2008. Index of Economic Freedom. Washington, DC: Heritage Foundation and Wall Street Journal. Available at http://www.heritage.org/index/. IBGE (Brazilian Institute of Geography and Statistics). 2003a. National Household Sample Survey. Rio de Janeiro: IBGE. Available at http://www.ibge.gov.br. . 2003b. Economia Informal Urbana 2003. Rio de Janeiro: IBGE. Available at http://www.ibge.gov.br. . 2009. Data available at www.ibge.gov.br. IMD. 2005, 2006, 2007, 2008. World Competitiveness Yearbook. Switzerland: IMD. Available at http://www.imd.ch/research/ publications/wcy/wcy_online.cfm. Mastercard Worldwide. 2008. Worldwide Centers of Commerce Index 2008. New York: Mastercard Worldwide. Available at http://www.mastercard.com/us/company/en/insights/index.html. McKinsey & Company. 2004. Eliminando as Barreiras ao Crescimento Econmico e Economia Formal no Brasil. So Paulo: McKinsey & Company, Inc. Available at http://www.mckinsey.com/ideas/pdf/ Diagnostico_da_Informalidade-final.pdf. . 2007. How the Worlds Best-Performing School Systems Come Out on Top. London: McKinsey & Company, Inc. Available at http://www.mckinsey.com/locations/ukireland/publications/pdf/Edu cation_report.pdf. McKinsey Global Institute. 1998. Productivity: The Key to an Accelerated Development Path for Brazil. So Paulo, Washington, DC: McKinsey & Company, Inc. Available at http://www. mckinsey.com/mgi/reports/pdfs/brazil/Brazil.pdf . 2006a. A Framework to Guide Health Care System Reform. San Francisco: McKinsey & Company, Inc. Available at http://www. mckinsey.com/mgi/publications/Framework_Health_Care_System. asp . 2006b. How Brazil Can Grow. So Paulo and Washington, DC: McKinsey & Company, Inc. Available at http://www.mckinsey. com/mgi/publications/brazil_grow.asp, Ministrio da Fazenda. Available at http://www.fazenda.gov.br/. OECD (Organisation for Economic Co-operation and Development). Available at http://www.oecd.org/home/0,2987,en_2649_201185_ 1_1_1_1_1,00.html. Transparency International. 2005, 2006, 2007, and 2008. Corruption Perceptions Index. Berlin: Transparency International. Available at: http://www.transparency.org. UNDP (United Nations Development Programme). 2007. Human Development Report 2007/2008 Fighting Climate Change: Human Solidarity in a Divided World. New York: Palgrave Macmillan. Available at http://hdr.undp.org. US Census Bureau. Available at http://www.census.gov/. World Bank. 2008. Doing Business 2009: Comparing Regulations in 181 Economies. Washington, DC: World Bank, International Finance Corporation, and Palgrave Macmillan. Available at http://www.doingbusiness.org/downloads. World Bank and Oxford University Press. 2004. Doing Business in 2004: Understanding Regulation. Washington, DC: World Bank. Available at http://www.doingbusiness.org/Documents/DB2004full-report.pdf. World Economic Forum. 2005. The Global Competitiveness Report 20052006: Hampshire: Palgrave MacMillan. . 2006. The Global Competitiveness Report 20062007: Hampshire: Palgrave MacMillan. . 2007. The Global Competitiveness Report 20072008. Hampshire: Palgrave MacMillan. . 2008. The Global Competitiveness Report 20082009. Geneva: World Economic Forum.
Notes
1 The McKinsey Global Institute is McKinsey & Companys economics research arm. Founded in 1990, its primary purpose is to undertake original research and develop substantive points of view on critical economic issues facing businesses and governments around the world. MGIs research is funded by the partners of McKinsey and not commissioned by any business, government, or other institution. Brazils relative performance for these dimensions was based on an analysis of its relative competitiveness ranking in the indicators of the GCI, as well as on other competitive indexes. Competitiveness in the MGI framework refers strictly to the intensity of competition in a given sector, a narrower sense than that employed in the GCI. Since 1990, the McKinsey Global Institute has analyzed relative economic performance in 17 countries at various stages of economic development and adopting different economic development models (among these are countries as diverse as the United States, Japan, Korea, Brazil, Russia, Thailand, Turkey, and India). The factors identified in all countries as barriers to higher labor productivity are microeconomic policies that inhibit exposure to best practice (e.g., via tariffs or restrictions on foreign direct investment) or that diminish competitive intensity (e.g., zoning restrictions on retailers or price controls). Prior MGI research estimates that evasion of sales, social security, and income taxes can more than triple the sales margins of a representative Brazilian food retailer. The material below draws from research conducted by McKinseys Brazilian office in 2006 on the major barriers to faster economic growth in Brazil. The conclusions of the study were summarized in four editions of Exame Magazine, published in August/September 2006 (editions 874, 875, 876, and 877). Excerpts of this research are also available in MGI 2006b. MGI 2006a. McKinsey & Company 2007. McKinsey & Company 2007.
74
7 8 9
10 September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, the United Kingdom, and the United States. 11 The data included in this section are drawn from research conducted by McKinseys Global Forces Initiative, an internal research effort focused on identifying and describing the major global trends shaping the corporate landscape over the next decade
12 MGI 1998.
References
ANEEL (Brazilian Electricity Regulatory Agency). Available at http://www.aneel.gov.br/. Davis, I. and E. Stephenson. 2006. Ten Trends to Watch in 2006. The McKinsey Quarterly January. DOE/EIA (Energy Information Administration). Official Energy Statistics from the US Government. Available at http://www.eia.doe.gov/. EIU (Economist Intelligence Unit). 2005. The Economist Intelligence Units Quality-of-Life Index. London: Economist Intelligence Unit. Available at http://www.economist.com/media/pdf/QUALITY_OF_LIFE.PDF. Exame Magazine. 2006. Editions 874, 875, 876, 877, published in August/September.
CHAPTER 3.3
Assessing the Performance and Potential of Brazil as a Foreign Direct Investment Destination
FABRICE HATEM, UNCTAD ANNE MIROUX, UNCTAD
One of the most striking features of globalization is that a growing share of companies investment projects are implemented abroad. The capacity to attract the resulting international investment flows appears therefore to be an important component of national competitiveness. This chapter aims at shedding some light on this issue by providing an overview on foreign direct investment (FDI) to Brazil as well as on the presence of foreign companies in the Brazilian economy.1 FDI flows and stocks have significantly increased over the past 15 years, making Brazil the largest host country for foreign investment in Latin America and second only to China among developing countries. The following sections will explore the main enabling factors of this encouraging trend, including Brazils competitive advantagessuch as its large and expanding market coupled with its abundant natural resources and its relative openness to FDI. The composition of FDI located in the country by sector, mode of entry, and nationality of the investor will be analyzed in detail, together with the challenges that lie ahead for Brazil in maintaining and consolidating its status as a top FDI destination.
Brazil as one of the top FDI recipients in the developing world Traditionally one of the major FDI recipients in the developing world, Brazil had lost ground in this regard during the 1980s as a consequence of the debt crisis. However, after an increase in FDI inflows in the mid1990s, Brazil seems to have fully recovered its position as one of the largest FDI recipients in the developing world. A global analysis of FDI trends over the past 15 years FDI in Brazil is quite an old story. One century ago, there was already substantial FDI in areas such as railways, ports, infrastructure, and banks. And from the end of World War II until the early 1980s, the country had been both the largest FDI recipient in Latin America and one of the largest FDI recipients (and sources) among all developing countries. In the aftermath of the debt crisis, however, the importance of Brazil for investors declined. Because of a period of macroeconomic instability extending until the beginning of the 1990s,2 FDI flows decreased from almost US$2.5 billion annually in the 197782 period to a little more than US$1 billion between 1983 and 1993. By that year, Brazil had receded to 14th place as an FDI inflows recipient among developing countries. Flows started to pick up again in the mid-1990s, in conjunction with the large privatization programs undertaken at that time (especially in services), the different reforms aimed at liberalizing the Brazilian economy, the
The opinions expressed in this article are those of the authors and do not necessarily reflect the views of the United Nations.
3.3: Brazil as a Foreign Direct Investment Destination
75
Figure 1
US$ billions 50,000
FDI to and from Brazil, 19702008
Inflow 40,000
30,000
20,000
Outflow
10,000
10,000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2008
Source: UNCTAD, based on data from the Central Bank of Brazil.
76
opening of its markets to foreign investors and international trade, and the increased regional integration (notably with the creation of the Mercosur in 1991). Inflows reached a peak of nearly US$33 billion in 2000 (Figure 1), and Brazil recovered its position as a top FDI recipient among developing countries by that year, second only to China. After a decline in the early 2000s,3 growth in FDI resumed in 2004incidentally, with important positive effects on job creationreflecting both an increase in greenfield projects and a new wave of mergers and acquisitions (M&As) (see Figure 2 and Box 1). The strength of this upward trend was reflected in its resilience to the recent global economic downturn. Indeed, FDI in Brazil reached a historical record of US$45.1 billion in 2008 (an increase of 30 percent over 2007), while total world inflows fell by 21 percent.4
Figure 2
Number of projects 350
Brazil vs. the developing world At the global level today, the position of Brazil as an FDI recipient could be considered relatively marginal. Its share in world FDI inflows decreased somewhat over the last decade to reach about 2 percent in 200713th position in the world. In the same year, its share of world FDI inward stocks was also around 2 percent (Figure 3). This somehow disappointing performance is largely the result of the relatively low value (compared to world levels) of cross-border M&As having targeted Brazilian companies in recent years. In fact, the overall high levels of FDI global flows reflect the surge in M&As that has taken place over the last 10 years. Most of these purchases have been concentrated in developed countries, while Brazildespite a marked increase of M&A operations in its territory attracted only a very limited share: less than 1 percent of the worlds total over the 200508 period.
International greenfield projects and related job creation in Brazil, 200308

Number of jobs 120
Projects
Jobs (thousands)
300
100
250 80 200 60 150 40 100 20 50 0 2003

Source: FDi Markets.
0 2004 2005 2006 2007 2008
Figure 3
6
Brazilian FDI inward flows and stock as a share of world total, 19802008
3 Inward stock 2 Inward flows
0 1980
Source: UNCTAD.
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Box 1: Cross-border M&As in Brazil

The rise of FDI to Brazil during the late 1990s was largely attributable to the privatization programs that took place between 1991 and 2002. This privatization was one of the most extensive in the world. The total value of sales of state companies to private investors during this period exceeded US$ 100 billion; these sales peaked in 199899. Three-quarters of these privatizations involved the services sector, mostly telecommunications and electricity. After the slowdown of this privatization program and the global overall decline of M&As, acquisition of domestic firms by foreign companies dropped abruptly between 2000 and 2002 (see figure A). Their marked resurgence since 2005with more focus than previously on the secondary sectorwas one important factor in the recent increase in FDI inflows to Brazil.
Figure A Cross-border M&As in Brazil, 19872008
Since 2004, most of the major M&As in Brazil have targeted privately owned companies. Among the most notable operations are the finalization in 2005 of the merger between the beverages companies Ambev and Interbrew (Belgium) (US$1.3 billion); the acquisition of Banco Pactual by UBS (Switzerland) in 2006 (US$2.6 billion); the acquisition in 2007 of the retail company Atacado by Carrefour (France) (US$1.1 billion) and of the credit services company Serasa by Experian Group (United Kingdom) (US$1.2 billion); the acquisition in 2008 of the iron ore mining company IronX Mineraco by Anglo-American (United Kingdom) (US$3.5 billion), and (partially) of the iron mining company Namisa by a consortium of Japanese investors led by Itochu (US$3 billion).
Number of deals 200 180 160 140 120 100 80 60 40 20 0

19
Number of deals
Value (million US$)
Value of deals
25,000
20,000
15,000
10,000
5,000
0
87 1988 989 1990 1991 1992 993 1994 1995 996 1997 998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1 1 1 1
Source: UNCTAD, based on Thomson Financial database.
77
Table 1
Country
Greenfield projects: Worldwide share of the main recipient countries, 200308

Number of projects Share (percent)
China India United States United Kingdom France Russian Federation Germany Spain Poland Romania United Arab Emirates Vietnam Brazil Hungary Canada Singapore
Source: fDi Market database.
8,174 4,364 4,279 3,778 2,703 2,647 2,126 1,849 1,694 1,647 1,581 1,264 1,259 1,247 1,228 1,219
12.0 6.4 6.3 5.5 4.0 3.9 3.1 2.7 2.5 2.4 2.3 1.9 1.8 1.8 1.8 1.8
Table 1
78
The performance of Brazil (as well as of developing countries as a whole) is much better when it comes to attracting greenfield projects. Among the top 15 host countries in terms of number of operations between 2003 and 2008, 6 are from the developing world (Table 1).5 And the world share of Brazil is also more substantial than in the case of M&As, with respectively 1.8 percent and 2.9 percent of greenfield projects and related jobs. An analysis carried out only at the world level would therefore not fully capture the real importance of Brazil as an FDI recipient, because it would be somewhat biased by
the geographical patterns of cross-border M&As. It is more accurate to compare Brazil with its peer group of developing economies. Within this group, Brazil plays an outstanding role as a host country for FDI. With almost 6 percent of inward flows over the 200407 period, it ranked second behind China. It is also the major FDI recipient in Latin America, with 23 percent of inflows (on average for 200507) and 29 percent of inward stocks (in 2007). From 2003 to 2008, according to the fDi Market database, it also accounted for around 30 percent of all greenfield projects in the region (see Appendix A).
Figure 4
Percent* 6
Brazil in UNCTADS WIPS ranking
2007 survey 5
2008 survey
China
India
United Russian States Federation
Brazil
Vietnam Germany Indonesia Australia Canada
Mexico
United Poland Kingdom
South Africa
France
Turkey
* Percentage of responses to UNCTAD's survey.

Source: UNCTAD, 2008b.
Table 2
Ten most attractive countries for FDI by factors favoring investment, 200810 (percent of responses for a given country)
Access to Access to international / local capital regional markets markets (finance) Access to natural resources Availability of skilled labor and Availability expertise of suppliers Follow- Government Cheap ing your effectivelabor competitors ness Quality of infrastructure Market growth rate
Rank
Host country
Access to incentives
Market size
1 2 3 4 5 6 7 8 9 10 10 10
China India United States Russian Federation Brazil Vietnam Germany Indonesia Australia Canada* Mexico* United Kingdom* World average
13 12 14 12 17 9 13 5 18 15 13 14 14
2 2 7 2 2 4 2 8 5 3
3 2 2 5 8 4 4 15 9 13 8 3 5
2 2 1 2 8 4 8 2 3 4 3
5 10 11 3 4 15 16 5 14 13 13 14 8
6 4 7 3 4 6 7 10 2 13 13 11 6
14 15 1 8 8 21 13 19 8
4 4 6 3 2 8 4 5 2 8 3 4
3 3 8 2 4 2 13 10 9 5 2 8 6
4 3 13 2 4 16 11 10 6 19 7
22 24 8 30 25 19 7 15 18 8 13 5 18
22 22 21 29 22 9 13 13 11 8 10 19 18
Source: UNCTAD, 2008b. * Canada, Mexico, and the United Kingdom are all ranked 10th.
Brazils major factors of attractiveness for foreign investors Brazil enjoys a good image among international investors, due in particular to its market potential and its availability of natural resources. Government efficiency and the regulatory environment, however, are generally seen as weaknesses for the country. The nature of the major Brazilian competitive advantages has a direct impact on its pattern of FDI performance by kind of activity. Brazils potential to attract FDI Brazil is often mentioned by the executives of multinational corporations as one of the privileged investment locations in the world. The country was, for instance, ranked 6th in 2007 (as against 7th in 2005) by the latest issue of A.T. Kearneys FDI Confidence Index,6 and as the 5th favorite location in the world in the 2008 edition of UNCTADs World Investment Prospects Survey (WIPS),7 a strong progression from the year before (see Figure 4). Main competitive advantages and disadvantages of Brazil as an FDI destination Investors perceptions of Brazil are influenced by a number of factors, of which the most prominent are its large and growing market potential and its natural resources endowment. In particular, the size and growth rates of the Brazilian market appear to be a major asset for marketseeking investments of all kinds. This is illustrated by investors responses to UNCTADs WIPS survey, which highlighted those elements as key factors prompting their firms to invest in Brazil (see Table 2).8 At the same time, the richness in natural resources displayed by the country makes it very attractive for resources-seeking export-oriented FDI. Brazil is the third largest agricultural exporter in the world, as well as a major exporter of mineral commodities. A survey by A.T. Kearney in 2007 found that, among all the respondent companies, those active in commoditiesas well as
infrastructurewere the ones expressing the most favorable views on Brazil as an FDI destination. UNCTADs WIPS survey finds that access to natural resources is a more important location factor for Brazil than, on average, for the rest of the world. Among the other competitive advantages displayed by Brazil, the limited labor costs also contribute to the countrys attractiveness for export-oriented FDI in the manufacturing sector. However, UNCTADs WIPS does not find this criteria to be particularly determinant, especially vis--vis Asian countries such as India, China, or Vietnam. The same applies for the industrial environment criteria (availability of suppliers, infrastructure) and the availability of skilled labor.9 Furthermore, Brazils relative openness to foreign investment represents another relevant asset in attracting FDI to the country (see Box 2). On a more negative note, a lack of government effectiveness is generally considered to be a problematic area of the business environment in Brazil. For instance, Brazil was ranked 125th (of 181 countries) in the 2009 issue of the World Banks Doing Business study, a decline of 6 positions from 2006 (119th of 155 countries).10 And, based on the World Banks ranking of Brazil on various criteria, it appears that there is large room for improvement in the areas of paying taxes, starting and closing a business, employing workers, registering property, dealing with construction permits, and enforcing contracts. According to the World Economic Forums Global Competitiveness Report 20082009, Brazil is lagging behind in terms of the quality of its institutions (91st of 134 countries), labor market efficiency (91st), and goods market efficiency (101st).11 Such weaknesses may partly explain why, despite achieving significant FDI inflows in recent years, Brazil remains below its potential with respect to attracting FDI. This is illustrated by the fact that, according to UNCTAD, Brazils ranking for its FDI performance index, as compared with 141 countries in the world, remains below its FDI potential index: 97 against 70.12
79
Box 2: The regime for FDI in Brazil

Brazil welcomes FDI in almost all business activities, and no distinction has been made since 1995 between foreign and national ownership. National treatment applies in principle to all foreign investors. However, there is no general foreign investment law or code and Brazil does not have any bilateral investment treaties with third countries. Some restrictions remain on FDI entry in a number of selected sectors such as mining, telecommunications, media, financial services, and transportation. In the mid-2000s, financial servicesespecially banking, where foreigners already owned a large share of the local marketwere further liberalized. With a few exceptions, FDI does not require prior approval, but investment must be registered with the Central Bank. Fund transfers and capital remittances are allowed with some restrictions, among which is the governments ability to cap the repatriation of profits to 10 percent of the investments historical value. Capital repatriation may also be restricted whenever the economic situation warrants, but this has never been applied in the past 20 years. International arbitration is possible in the case of a dispute between the state and a foreign investor, but is not binding. In recent years, there has been little evolution directly affecting the foreign investment regime in Brazil. It should be mentioned, however, that measures were taken in 2008 toward the opening of the reinsurance sector (ending the monopoly on reinsurance by the state-owned Instituto de Resseguros do Brasil). FDI is now permitted in this sector, but will be restricted to 40 percent of the Brazilian market during the first three years. Also in 2008, the government proceeded with the first privatization of road infrastructure in Brazil in almost 10 years. Other recent measures may also have a significant, albeit indirect, impact on foreign companies operating in Brazil, notably the Growth Acceleration Program (PAC) announced in 2007, aimed at boosting economic growth (see Chapter 2.1 of this Report). Among the measures included in PAC are some corporate tax reductions of some R$10 billion (US$4.7 billion) over the following four years, as well as an annual rise of R$10 billion in public infrastructure investment. Tax incentives were introduced the same year to stimulate investment in specific sectors of the economy, principally in the textile and leather, agriculture, and automotive industries. A series of incentives and benefits have also been made available to exporters, such as the Special Tax Regime for Exports of Information Technology Services (REPES) and the Special Regime for Acquisition of Capital Goods for Export Companies (RECAP). Furthermore, foreign exchange transactions affecting exporters have been liberalized. Companies selling goods abroad can now open a bank account outside the country and deposit up to 30 percent of their export revenues there.
80 Brazils FDI performance by kind of activity Transnational corporations (TNCs) decide on investment locations on the basis of a large set of criteria, the hierarchy of which differs depending on the activity involved. A country will hence be more attractive for projects whose characteristics are well in line with its own competitive advantages. An analysis of Brazils FDI market share by industries and business functions can shed light on the nature of Brazils competitive advantages and complement the foregoing assessment. A review of FDI data for the 200308 period suggests that, by industry, Brazils world market share, in terms of FDI projects, seems especially high in metals, minerals, business machines and equipments, wood products, chemicals, rubber, communications, alternative and renewable energy, and beverages.13 It is lower than average in such activities as medical devices, textiles, biotechnologies, consumer products and consumer electronics, semi-conductors and electronic components, healthcare, and business services. And by business functions, Brazils shares are relatively high in production and extraction. They are below average in such activities as research and development (R&D), shared services centers, business services and headquarters, retail, and sales marketing and support. Brazil therefore appears to be a very attractive location for a large set of activities, ranging from exploitation of natural resources and production of renewable energies to a number of manufacturing activities (especially in heavy industries, automotive assembly, some equipment goods, and food and beverages), where TNCs have already set up large production bases in the country. In addition, the countrys privatization program has resulted in a large-scale foreign presence in such activities as telecommunications, utilities, banking, and transportation. However, Brazilian attractiveness seems relatively more limited in three categories of activities: (1) innovation-related activities such as semi-conductors, electronic components, and health industries; (2) high value added business support functions such as R&D centers, regional headquarters, or shared services centers; and (3) some light industries such as consumer electronics, textiles and garments, and other consumer goods where competition from countries with low factor costs, as is especially the case in Asia, is higher.
Who, where, how? Patterns of FDI in Brazil Although the United States has historically been the most important source of FDI in Brazil, European companies have markedly increased their presence in the country over the past 15 years. FDI flows had been focused mainly in services during the late 1990s but the share of manufacturing has noticeably increased in recent times. Trends of European FDI in Brazil By country of origin, the major investors in Brazil have historically been US companies. Nonetheless, their sharethough still significanthas declined over time to
Table 3
FDI stocks and inflows by home country of investor in Brazil

Inward stocks (percent) 1995 Inward stocks (percent) 2000 Inward flows (percent) 200106
Total world Developed countries Europe European Union France Germany Italy Netherlands Portugal Spain United Kingdom Belgium - Luxembourg Other developed Europe Norway Switzerland North America Canada United States Other developed countries Australia Japan Bermuda Developing economies Africa Latin America and the Caribbean Caribbean British Virgin Islands Cayman Islands South America Central America Mexico Panama Asia and Oceania Southeast Europe and CIS
Source: UNCTAD.
100.0 82.3 43.3 35.8 4.9 14.0 3.0 3.7 0.3 0.6 4.5 2.3 7.5 0.1 6.8 30.4 4.4 26.0 8.6 0.2 6.4 2.0 12.6 0.5 11.7 6.3 2.2 2.1 3.7 1.7 0.1 1.6 0.3
100.0 79.7 49.6 46.6 6.7 5.0 2.4 10.7 4.4 11.9 1.4 1.6 3.1 0.2 2.2 25.8 2.0 23.8 4.4 0.1 2.4 1.9 17.0 0.2 16.0 11.2 3.1 6.0 3.0 1.7 0.1 1.5 0.9
100.0 82.3 51.1 47.4 6.2 4.4 1.8 18.1 3.5 6.7 1.7 3.7 3.7 0.5 2.7 23.5 4.2 19.3 7.7 0.9 3.7 3.0 17.7 16.8 11.6 2.3 8.4 2.0 3.2 2.3 0.8 0.9
the benefit of European investors. All together, Europe (in particular the Netherlands, Spain, France, and Germany in that order; see Table 3)14 accounted for roughly half of FDI inflows from 2001 to 2006.15 Canada, Japan, Belgium, Luxembourg, and Portugal have also been significant investors in recent years. Some companies from developing Asia (notably China and Korea, Rep.) have also recently begun to set up activities in the country. The evolving patterns of FDI by type of industry Historically, the bulk of FDI in Brazil was in manufacturing: this sector accounted for more than two-thirds of FDI stocks in 1995. However, the privatization program of the late1990s prompted a sharp increase in FDI flows in services. FDI stocks in this activity thus rose very quickly to reach more than two-thirds of total stocks in 2000 (Table 4). In more recent years, following the deceleration of the privatization program, the share of services in FDI inflows has declined significantly, even if it has continued to exceed 50 percent over the 200106 period.16 Conversely, the increasing importance of the primary sector and manufacturing was largely due to significant
FDI flows in oil and mining, chemicals, automotive, metals, and food and beverages. A large part of investment in services took the form of M&As, but, in contrast with the previous period, most of the acquired companies were privately owned (see Box 1). Modes of entry for FDI in Brazil Entry modes in Brazil differ widely depending on the specific industry. In some activities, such as infrastructure and finance, TNCs could expand their activities through the acquisition of existing assets. As a result, M&As between 1998 and 2008 have been very much concentrated in four industries, amounting to more than twothird of the value of M&A operations in Brazil over the period: finance, telecommunications, utilities, and mining and petroleum (see Table 5). In other industries, the more limited number of local targets for M&As (as is the case in the automotive industry) and/or the importance of the local unexploited potential in terms of market and resources (for example, in real estate) led TNCs to rely more widely on greenfield investments. Five sectors (metals, automotive OEM, food & tobacco, real estate, hotels & tourism) accounted
81
Table 4
FDI flows and stocks by industry, 1995 and 2000

Stocks
1995 Amount (US$ millions) Percent 2000 Amount (US$ millions) Percent 200106 Amount (US$ millions)
Flows
Percent
Total Primary Secondary Food, beverages, and tobacco Textiles, clothing, and leather Chemicals and chemical products Metal and metal products Basic metals Electrical and electronic equipment Motor vehicles, trailers, and semi-trailers Other manufacturing Tertiary Electricity, gas, and water Construction Trade Transport and storage Post and communications Finance Business activities Other services
41,695.62 924.99 27,907.09 3,542.93 1,036.26 5,331.12 3,577.66 3,004.9 2,343.86 4,837.7 4,232.66 12,863.54 2.09 202.68 2,885.7 193.06 398.74 2,178.42 6,545.9 456.95
100.0 2.2 66.9 8.5 2.5 12.8 8.6 7.2 5.6 11.6 10.2 30.9 0.0 0.5 6.9 0.5 1.0 5.2 15.7 1.1
103,014.51 2,401.08 34,725.62 5,342.49 874.4 6,042.71 3,106.66 2,513.35 3,440.81 6,351.39 7,053.81 65,887.81 7,262.24 415.62 10,240.14 495.25 18,761.54 12,651.55 15,178.73 882.74
100.0 2.3 33.7 5.2 0.8 5.9 3.0 2.4 3.3 6.2 6.8 64.0 7.0 0.4 9.9 0.5 18.2 12.3 14.7 0.9
116,740.6 8,248.729 44,916.71 11,220.95 1,224.354 7,295.417 4,347.819 3,759.349 4,737.351 6,335.233 5,996.232 63,575.18 8,897.715 1,437.901 9,581.471 1,287.856 17,215.58 11,437.57 11,472.03 2,245.062
100.0 7.1 38.5 9.6 1.0 6.2 3.7 3.2 4.1 5.4 5.1 54.5 7.6 1.2 8.2 1.1 14.7 9.8 9.8 1.9
Source: UNCTAD, based on data from the Central Bank of Brazil.
Table 5
Cross-border acquisitions of Brazilian companies by foreign TNCs, 19982008

Number of deals Value (US$ billions) Amount Percent
82
Deals
Percent
Total industry 1,151 Primary 87 Mining, quarrying, and petroleum 56 Secondary 421 Food, beverages, and tobacco 79 Chemicals and chemical products (including refining and drugs) 89 Services 643 Electric, gas, and water distribution 53 Trade 105 Telecommunications 59 Finance 102 Business services 173
Source: UNCTAD, Based on Thomson Financial.
100.0 7.6 4.9 36.6 6.9 7.7 55.9 4.6 9.1 5.1 8.9 15.0
100.5 9.6 8.5 18.4 5.2 6.4 72.6 10.7 5.2 23.1 24.1 4.1
100.0 9.5 8.5 18.3 5.2 6.3 72.2 10.6 5.2 22.9 24.0 4.1
for roughly 55 percent of job creation related to overseas greenfield projects during the 200308 period.17 The key role of TNCs in the Brazilian economy The large inflows of FDI into Brazil during the last 15 years have resulted in a significant increase in the foreign presence in the country. More recently, a number of Brazilian companies have also increased their presence overseas, resulting in a rise of outward FDI flows from the country. The growing presence of TNCs in Brazil Over the past 15 years, the presence of foreign companies in the Brazilian economy has significantly increased. Since 1995, the ratio of inward FDI stocks to GDP has multiplied by more than 4, increasing from less than 7 percent to more than 25 percent in 2007 (Figure 5). During the same period, the estimated number of for-
eign affiliates more than doubled, from 6,312 to over 11,000 in 2006. Today most of the TNCs in UNCTADs top TNCs list and approximately 80 percent of the Fortune Global 500 companies have a presence in Brazil. Presently, foreign companies account for a large share of the Brazilian economy.18 More than half of the top 20 Brazilian non-financial companies ranked by total assets are foreign-owned. TNCs are especially active in sectors such as automotive (where they represent three-quarters of sales), retail, paper and pulp, electronic equipment, chemical, telecommunications, and utilities (see also Box 3). 19 By region, FDI into Brazil follows the country patterns of economic development. The Southeast, which remains the most developed part of the country, is by far the prime FDI destination, even if other regions, with the exception of the North and Northeast, have also increased their share of total FDI stock in recent years.
Figure 5
% of GDP 35 30 25 20 15 10 5 0 1980
Source: UNCTAD.
FDI stocks as a percentage of GDP, Brazil vs. the world, 19802007
World outward stocks World inward stocks Inward stocks into Brazil
Outward stocks from Brazil
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Box 3: Some TNCs present in Brazil, by sector

Natural resources and commodities: Cargill, Monsanto, Global Foods, ADM (agrifood); Chevron, Texaco, Norsk Hydro, British Gas Group (oil and gas); Anglo American PLC, BHP Billiton, Rio Tinto Group, Kinross Gold, China Minmetals Group (mining); Noble Group Limited (commodity trading). Infrastructure: Verizon, Telefnica de Espaa, Portugal Telecom, Amrica Mvil, Telecom Italia (telecommunications). Heavy industries and metallurgy: Holcim (building materials); Japan Brazil Paper & Pulp, International Paper, Veracel (paper), Dongkuk Steel Mill, Vallourec, ArcelorMittal, Nippon Steel, Shanghai Baosteel Group, ThyssenKrupp, Nucor (steel), Du Pont (chemicals), Aluminum Corporation of China, Alcan/Rio Tinto, Alcoa (non-ferrous metals), KME (tubes), Huvis (plastics), Automotive: Fiat, Renault, Volkswagen, Ford, Daimler AG, Hyundai Motor, General Motors, Honda, Daimler, Toyota Motor (automotive assembly); Yamaha (motorbikes); Delfingen (automotive cables) Equipment goods: Tyco Internacional, Dell Computers, Ericson, IBM (ITC); China Harbour Engineering, SembCorp Marine Ltd (Shipbuilding); Mitsubishi, A.M.G. (other equipment goods). Food products: Nestl, Pepsico, Coca-Cola, Interbrew, Bunge. Other consumer goods: Procter & Gamble, Samsung (consumers electronics), Rexam (packaging). Non-financial services: Pestana, Grupo Iberostar, Accor (tourism and hotels); Sonae, Carrefour, Wal Mart, Casino (Retail); Ingeconser, Aker Kvaerner (engineering); Experia, MCI Communications Corp (business services). Financial services: Banco Santander, Central Hispano SA, UBS AG, ABN-AMRO Holding NV, Banco Privado Portugues (BPP), HSBC, GoldenTree.
Brazil and outward FDI Until the early 2000s, investment abroad by Brazilian companies was limited: outward FDI flows stagnated at a very low level and stocks were declining, both as a share of world FDI stocks and Brazilian GDP (see Figure 5). This situation, however, began to change at the beginning of this decade, as an increasing number of Brazilian companies began to actively internationalize. While outward FDI flows were not even equivalent to 10 percent of inward flows in the 1990s, they rose sharply in recent years. In 2006, they surpassed inflows for the first time in history as a result of the acquisition of the Canadian mining company Inco by Vale (Figure 1).20 Today, Brazil is the leading foreign investor among Latin American countries in terms of outward FDI stocks, even if its
holdings in this area amount to only less than 1 percent of the worlds total FDI stock. An analysis of the top Brazilian TNCs reveals that Brazils outward FDI is dominated by a few giants: the top 20 TNCs account for more than half of Brazilian outward investment stocks. Three quarters of their assets are concentrated among the three biggest ones:Vale (raw materials), Petrobras (oil and gas), and Gerdau (steel). These three companies also rank among the UNCTADs list of top 100 investors from developing countries. Another trend is that Brazilian TNCs seem to remain mainly regional for the time being. The top 20 carry out half of their sales and hold two-thirds of their jobs abroad in Latin America. Their internationalization and geographical spread level remain below the levels
83
achieved by their counterparts in developed countries; however, this is rapidly increasing in terms of sales as well as jobs. This quick internationalization process is largely carried out through M&As (as Petrobras did in oil and biofuels in 2007).21
Notes
1 This does not, however, provide evidence or elements of debate regarding the impact of foreign transnational corporations (TNCs) in the Brazilian economy. It also only marginally addresses the question of outward FDI by Brazilian TNCs. This stage alternated between periods of recession (198183 and 199092) and rapid growth (198487). This decline was due to a number of reasons, including the end of the privatization program, a reduction in the dynamism of domestic economic activity, and the overall downturn in global investment flows. FDI to Brazil, however, remained substantially higher than previous historical levels. UNCTAD 2009. Moreover according to the criteria of the number of jobs created, the number of host countries from the developing world is 9, because of an overall larger size of projects in developing countries. A.T. Kearney 2007. UNCTAD 2008a. UNCTAD 2008b. It should be mentioned, however, that Brazil enjoys a large-scale and diversified industrial base.
84
Conclusion In the context of a growing worldwide competition in the attraction of international investment, Brazils recent performance has been positive. The country is now one of the most prominent locations for TNCs in the developing world, ranking second only to China for inward FDI flows for this group of countries. Foreign companies, whose number has increased in Brazil over the past 15 years, now play a key role in many activities and sectors ranging from the primary sector (mining, biofuels) to manufacturing (automotive, metals, chemicals, food, and so on) and services (telecommunications, retail, banking, and so on). Brazils welcoming attitude toward FDI, the countrys vast natural resources, and its market potential are three of the major factors behind its good performance in this arena. However, in terms of FDI attractiveness, fairly weak government efficiency and severe competition from low-cost destinations in some labor-intensive, export-oriented activities represent notable challenges. More recently, Brazilian companies have begun to develop their presence abroad, triggering a rise in FDI outflows. This suggests that a new step has been taken in the development path of the country, which now appears as one of the major economic powerhouses of the southern hemisphere.
4 5
6 7 8 9
10 World Bank 2008. 11 World Economic Forum 2008. 12 UNCTAD 2008b. Those two indexes compare 141 economies in the world: The FDI performance index is expressed as a ratio of FDI stocks to GDP for the three last years. The FDI potential index integrates a dozen of basic macroeconomic and structural indicators. 13 This analysis is based on the fDi Markets database (200308). See also OCO 2009 and Appendix A. 14 It should be noted, however, that the importance of FDI from and to tax havens, such as the Cayman Islands, blurs the geographical analysis of flows. 15 Spanish companies have been especially active in M&As. 16 Some foreign companies, which had acquired formerly state owned foreign assets in services activities, even disinvested; an example is EDF in the utilities sector in 2007. 17 See OCO 2009. An analysis by function of the same data for the 200308 period shows that manufacturing production is by far the strongest contributor to most of the job creation related to international greenfield projects in Brazil (62 percent), followed distantly by construction (10.6 percent), extraction (7.3 percent), and retail (5.9 percent). Other functions seem to make only a marginal contribution to job creation. 18 Foreign companies already accounted for 49.3 percent of imports, 41.3 percent of exports and 19.7 percent of sales in 2000. The findings of the 2005 census were not available at the time this paper was written, but preliminary results suggest that these figures have significantly increased since then. 19 There is an on-going debate on the impact of FDI in Brazil. On one hand, TNCs are more productive, are capital- and skills-intensive, and grant higher wages than their domestic counterparts. Linkages with the local economy have been growing over time in industries such as automotive, including R&D activities (see Balcet 2007). On the other hand, some authors consider that the predominantly market-seeking strategies implemented by these firms in Brazil, as well as their high propensity to import (especially in innovation intensive activities), involve some negative consequences, such as a growing technological dependence of the country from the rest of the world and crowding-out effects detrimental to domestic firms (see, for instance, Hiratuka 2008). In addition, some authors point to some negative social and environmental impact of activities carried out by TNCs in the primary sector (agriculture, biofuels, oil and mining and forestry; see Past 2008). 20 It should be noted, however, that a large part of outward FDI (two-thirds in 200405) goes to offshore financial centers. 21 See also FDC-CPII 2007.
References
A.T. Kearney. 2007. New Concerns in an Uncertain World: The 2007 A.T. Kearney Foreign Direct Investment Confidence Index. Vienna, VA: A.T. Kearney. Available at http://www.atkearney.com/shared_res/FDICI_2007.pdf. Balcet, G. 2007. Global Technology and Knowledge Management: Product Development in the Brazilian Car Industry. Communication to the 15th Gerpisa International Colloquium, Paris. June. FDC-CPII. (Fundao Dom Cabral Columbia Program on International Investment). 2007. Brazils Multinationals Take Off: Release of the FDC-CPII 2008 Ranking of Brazilian Multinational Enterprises. Press release. December 3. Hiratuka C. 2008. Foreign Direct Investment and Transnational Corporations in Brazil: Recent Trends and Impacts on Economic Development. Discussion Paper No. 10, April. The Working Group on Development and Environment in the Americas. Available at. http://ase.tufts.edu/gdae/Pubs/rp/DP10HiratukaApr08.pdf. fDiMarkets.com. 2009. FDI to Brazil, January 2003 to December 2008. Mimeo. OCO. 2009. FDI to Brazil, January 2003 to December 2008, February. Past, A. 2008. Multinational Likely Cause of Poverty in Landless Agricultural Workers. Ireland: Mercyhurst College. UNCTAD (United Nations Conference on Trade and Development). 2008a. World Investment Report: Transnational Corporations and the Infrastructure Challenge. New York and Geneva: United Nations. . 2008b. World Investment Prospects Survey 20082010. New York and Geneva: United Nations. . 2009. Global Foreign Direct Investment Now In Decline And Estimated To Have Fallen During 2008. Press release PR/2009/001, January 19. Geneva: United Nations. World Economic Forum. 2008. The Global Competitiveness Report 20082009. Geneva: World Economic Forum. World Bank. 2008. Doing Business 2009. Washington, DC: World Bank.
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Appendix A
A snapshot of international greenfield projects in Brazil, 20032008

Percent of international projects in Brazil Percent of international projects
In Latin America In the world
Number of projects
Aerospace Alternative/Renewable energy Automotive Components Automotive OEM Beverages Biotechnology Building & Construction Materials Business Machines & Equipment Business Services Ceramics & Glass Chemicals Coal, Oil and Natural Gas Communications Consumer Electronics Consumer Products Electronic Components Engines & Turbines Financial Services Food & Tobacco Healthcare Hotels & Tourism Industrial Machinery & Equipment Leisure & Entertainment Medical Devices
5 24 40 46 20 5 16 30 53 5 72 34 81 16 34 28 9 71 79 4 41 61 18 4 109 7 17 14 23 30 31 14 9 130 1 30 25 8 15 1,259
0.4 1.9 3.2 3.7 1.6 0.4 1.3 2.4 4.2 0.4 5.7 2.7 6.4 1.3 2.7 2.2 0.7 5.6 6.3 0.3 3.3 4.8 1.4 0.3 8.7 0.6 1.4 1.1 1.8 2.4 2.5 1.1 0.7 10.3 0.1 2.4 2.0 0.6 1.2 100.0
11.9 32.9 29.2 28.4 33.3 26.3 34.0 47.6 26.9 35.7 52.2 14.8 36.7 18.2 23.4 26.9 40.9 32.6 32.0 25.0 21.2 37.9 24.3 10.5 27.2 41.2 54.8 34.1 31.5 35.7 30.7 35.9 36.0 29.7 25.0 28.8 22.1 20.5 38.5 29.6
0.6 2.4 1.7 2.4 2.6 1.1 1.6 3.4 1.3 1.7 3.2 1.7 3.0 1.3 1.2 1.3 2.2 1.2 2.2 1.3 2.1 2.0 2.0 0.6 4.2 4.0 4.9 1.9 1.9 2.1 1.2 3.2 0.8 1.7 0.5 0.9 1.1 1.0 3.0 1.8 Source. fDi Markets.
86
Metals Minerals Non-Automotive Transport OEM Paper, Printing & Packaging Pharmaceuticals Plastics Real Estate Rubber Semiconductors Software & IT services Space & Defence Textiles Transportation Warehousing & Storage Wood Products Total
Source: fDi Markets.
CHAPTER 3.4
Agribusiness: Innovation and Competitiveness in Brazil

ELSIO CONTINI, Embrapa, Brazil FRANCISCO J. B. REIFSCHNEIDER, Embrapa, Brazil
It will be seen that the material development of the country, coupled with the parallel growth of the energies of the race, will unleash a flourishing of the sciences, the arts and letters. Arthur Dias, Brazil Actual, 1904
The World Economic Forum, in its Global Competitiveness Report, analyzes 12 pillars determining the future growth potential of an economy, among them innovation.1 Of the 134 countries analyzed in the 200809 edition, Brazil occupies the 43rd position in the innovation pillar, with a score of 3.5 (out of 7). This pillar is broken down into a number of indicators, namely firms capacity to innovate, the quality of scientific research institutions, company spending on research and development (R&D), university-industry research collaboration, government procurement of advanced technology products, availability of scientists and engineers, and utility patents per capita. The aggregated data presented for the innovation pillar place Brazil in an intermediate position, apparently compatible with that of an emerging economy. However, within the country itself the perception is more negative; one can find some trenchant criticisms and dissatisfaction in academic circles and within the government and the business sector with respect to (1) the lack of investment in research, development, and innovation (RDI), (2) the bureaucracy and rigidity of the standards applied to RDI, and (3) the low degree of transformation of the knowledge generated in universities and other research institutes into innovation. Research is a necessary condition for innovation, but it is not sufficient by itself. Our general hypothesis is that, for Brazil to continue growing and generating wealth for the benefit of all its citizens, it will need to make an additional effort in innovation, eliminating bottlenecks and strengthening its notoriously weaknesses while stimulating its strenghts. In the current globalized worldin spite of recent hitchescompetitiveness will determine who will be the real producers of knowledge, the suppliers of technologies/products, and the providers of services in the world market. We believe there is a significant space to be occupied by Brazil in that domain. The present work analyzes the factors that allowed Brazilian agribusiness to become competitive in the international markets. It also examines, from the point of view of innovation and its minimum conditions, what allowed Brazil to adequately supply its domestic market and
The authors would like to thank Dr Carlos Alberto Lopes and Mr Osrio Vilela Filho, both from the Brazilian Agricultural Research Corporation (Embrapa), for their contributions. The article represents the opinion of the authors and not necessarily that of their institution.
3.4: Agribusiness: Innovation and Competitiveness in Brazil
87
become a large exporter of products of agricultural origin, both in natura and processed. In a globalized scenario where there is a clear international division of labor, the critical question of whether Brazil will be a world leader in agribusiness products (e.g., foodstuffs, fibers, forestry products) as well as in agro-energy is posed. Although some of the previously mentioned innovation indicators refer more specifically to the industrial and service sectors, this chapter presents indications that the modern agricultural sector in Brazil has an important component of innovation. This chapter focuses on two important aspects: (1) innovation and (2) the offering and adoption of technologies that impact the agricultural sector and agribusiness as a whole. The latter encompasses the results of the transformation of Brazilian agriculture, with its increasing production, productivity, and contribution to the countrys external accounts. Last but not least, some light will be shed on innovation in agriculture going forward.
88
Innovation and its process To innovate (from the Latin innovare) is to change, to introduce new things. The innovator is he or she who innovates and the word, curiously, was used to characterize the Lutherans, Calvinists and Anabaptists, among others who introduced dogmas contrary to the Catholic faith.2 It is interesting to note that the first annual publication on the countryBrazil Actual, by Arthur Dias (1904)already contained a specific chapter on Inventors and Scientists, separating those who were transforming knowledge into products from those who were doing science. The ability to innovate depends on a process of experimentation where new products and services are created or existing ones are improved. But it is recognized that, among other factors, the costs of experimentation have limited the capacity for innovation. In the recent past there still existed a mistaken biunique link, a real synonymy, between research and innovation. Innovation is much more than research: real innovation certainly requires research (and the knowledge generated by it) as a condition, but is associated with a knowledge of the market, a conducive financing system (classical or innovative such as risk capital, among others), training (and its components such as creativity, tenacity, etc.), collaborative mechanisms, and supportive policies enforced by solid institutions or organizations (sensu lato). 3 Innovation can be seen as the last link of a full chain.4 Without demand, real or potential, there is no innovation.5 The discussion on innovation, nevertheless, is not a recent one. Possibly one of the greatest contributions to the theory of innovation we owe to the work of Joseph A. Schumpeter, who was working in this area as early as the 1910s. He initially conceived of innovation as a dynamic process of substitution of old technologies by new onesthat is, creative destruction.6 New, more
efficient technologies replace the old ones in a continuous process, which leads capitalism toward economic development. But even with all the euphoria in recent decades about the new technologies appearing with impressive speed, these technologies do not develop products and servicesthey are developed by people, as amply discussed by Thomke.7 Innovation can be categorized in distinct ways; classically, this has resulted in two groups: (1) radical innovation, which occurs when profound ruptures are produced in the productive system, and (2) incremental innovation, which occurs when modifications are added to the productive processes. Schumpeter made finer distinctions, identifying five types of innovation as follows: (1) the introduction of new products, (2) new methods of production, (3) the opening up of new markets, (4) the development of new sources of raw materials, and (5) new market structures.8 In a more recent work, the OECD/FINEP classifies innovation into four types: (1) product innovation, (2) process innovation, (3) marketing innovation, and (4) organizational innovation.9 More recent contributions of the neoclassical theory associate innovation with the creation of assets. In this sense, it is a part of the business strategy for the development of products or improvement of its efficiency. Recent ideas center on the concept of cost reduction to enter new markets or create competitive advantage.10 This can be expressed in the pithy phrase of Howard Rush: Innovation only exists in fact when some value is created from the practical application of an idea.11 Ownership of the benefits of innovation through the several forms of intellectual property (patents, copyrights, etc.) is important since it stimulates companies and research bodies to take risks for their development.12 In general, public research institutions generate public goods, accessible to all; private companies register their innovations and charge for their use. International experience with public RDI institutions indicates that, although intellectual property fees provide them with the capacity to recover a small part of their expenditures, they cannot be self-sustaining by investing in high-risk areas and issues that have a low return or that require investment without return for long periods. The law on intellectual property and the recent Law 10.973, of December 2004which deal with incentives for innovation and scientific and technological research in the productive environmentare important, but these laws do not provide sufficient advances for supporting innovation and the competitiveness of Brazilian agribusiness. The standards and processes are still slow, complex, highly bureaucratic, and very often doubtful. National Institute of Industrial Property (INPI) data on patents, covering the last five years, are not exactly good news. In Brazil, the funding of research and innovation is still predominantly public. In this context, it is important to emphasize the greater porosity of the formerly firm
boundaries between public and private sectors as well as between national and international ones. It is, however, a fact that researchers in Brazils public institutions are not properly conscious of their real and important role in innovation. There is a big hiatus between the conception of research, its results, and innovation. The evolution of public funding has been the object of recent studies that draw attention to the challenges and the slowness with which countries adjust themselves (e.g., legally, institutionally) to new models. 13 We are going through a period of enormous and rapid change in the public financial architecture, including new options of public/private support to RDI,14 with great expectations for the impact of agribusiness in innovation. The Brazilian Ministry of Science and Technologys Plan of Action 20072010 in Science, Technology and Innovation for Development identifies several strategic priorities. Among these are the promotion of technological innovation and R&D in strategic areas, such as the sustainable development of the Amazon Region and the Semi-Arid Region.15 To explain innovation in agriculture, Hayami and Ruttan developed the theory of induced innovation.16 Based on historical data, particularly from the United States and Japan, they established trajectories for technical change in agriculture. When the supply of land is inelastic, the market brings pressure to develop biological technologies that substitute for land, as was the case in Japan. When labor is inelastic, this restriction can be overcome by the development of mechanical technologies, as was the case in the United States. Expensive inputs should be substituted by cheaper ones. Rapid growth in agriculture depends on the proper choice between these alternative trajectories. These different signs of relative scarcity or abundance of the factors of production are transmitted, through pressures in relation to relative prices, to the organizations and institutions that generate technology. Innovation in agribusiness can occur along the whole chain or in some of its components. The complexity of the agribusiness chain, with its multiple players, extends from the supply of inputsagricultural, cattle raising, or forestry production itselfto agro-industrial processing, marketing, institutional arrangements, and finally the end consumer. This conception, which extrapolates the concept of agricultural production sensu stricto, was defined by Davis and Goldberg in their classical work A Concept of Agribusiness,17 used the Brazilian Association of Agribusiness (ABAG) and by the Ministry of Agriculture, Cattle Raising and Supply (MAPA) in their process of strategic planning.18 In this point-of-view, agribusiness includes small, average, and large rural producers as well as family and business agriculture. Finally, the risks associated with the elements of innovation are many, but the diaspora of highly capable professionals, academic endogamy, the highly variable government support for RDI programs, bureaucracy, the several international barriers to interchange, institutional
Table 1
Census year 1940 1950 1960 1970 1980 1991 2000 2010 (forecast)
Urbanization of the Brazilian population (percent)

Percent 31.2 36.2 44.7 55.9 67.6 75.6 81.2 86.8
Source: Brazilian Institute of Geography and Statistics (IBGE).
aging, and the short-term vision of the political classes are possibly the principal elements in need of attention.
Conditioning factors of innovation in agribusiness The transformation of traditional agriculture into a modern and competitive agribusiness, domestically and internationally, has its basis in the modernization of Brazilian economy and society. The decision of the Brazilian government, at the beginning of the 1950s, to support a policy of forced industrialization accelerated a rural exodus and started a process of rapid urbanization (see Table 1). Industrialization diversified the economy and increased citizens purchasing power. More urban and richer, Brazilians increased the demand for foodstuffs, giving rise to an environment favorable to the growth and modernization of agriculture, based on science and technology.19 One of the foundations of innovation in agriculture consists of the idea that the sector is location-specific in its technologies and its products. There are few opportunities where one can copy or directly transfer technologies and products from one country to another without adaptation and without considering differences in climate, soil, vegetation, and culture. This idea is even more relevant for technologies developed for countries with temperate climates that one wants to apply in tropical countries. This was the case of Brazil in the conquest of the cerrados (Brazilian savannahs). There was no technology specific to agriculture in the cerrados; the solution was to adapt forms of agriculture being used elsewhere to this large system. This idea is mirrored in the expression tropical technology. Allied to the availability of labor, one important factor that allowed innovation in Brazilian agribusiness was the availability of cheap land, principally in the cerrado regions of the country. Until the 1960s, marginal land for extensive cattle raising, with around one head of cattle per 10 hectaresa total of 207 million hectares of land, which was, in large part, mechanizable and demographically emptychallenged RDI institutions to incorporate cheap land into the production process. The first solution proposed was the correction of the acidic soil, with its low phosphorous and high toxic aluminum
89
Figure 1
The Embrapa RDI network
90
Source: Alves et al., 2008, p. 72.
content. The adjustment of the soil was followed by the creation of crops adapted to the tropical climate, the development of production systems compatible with the region, the offer of credit for investment, and the availability of inputs and machinery. The results began to be visible in the 1990s, both in the production of grains and in more pasture and meat.20 The strategic decision of the then military government to invest in the education of personnel and technology through several public companies and institutions (the embras), among them Embrapa, was one of the pillars that facilitated the achievement of results. Efforts by various states and their institutions, all strongly supported by the Brazilian universities, were also fundamental. Another pillar of the technological revolution in Brazilian agribusiness was the implementation of agricultural policy instruments to support large-scale production. The first instrument was the agricultural credit that permitted the opening of new areas and the purchase of machinery and equipment to expand the amount of land being cultivated, and the guarantee of minimum prices reduced producers risk. Although there
is controversy regarding the role of government in this process, its presence was really important for the transformation of a traditional agriculture into a technical one, incorporated in the conception of agribusiness. Brazilian entrepreneurship certainly deserves special mention. Without entrepreneurial farmers, the agricultural revolution, particularly in the cerrados, would not have occurred. In the south of Brazil, a culture in the production of grainssuch as soy, corn, rice, and wheathad been created that was restricted to properties that were too small for scale gains, principally by means of more efficient machinery and equipment. From the 1940s to the 1960s, medium and small gaucho producers migrated to the west and southwest of the state of Paran, and then to Mato Grosso do Sul. Subsequently, in the 1970s and 1980s, these producers started conquering the cerrados in the states of Mato Grosso, Gois, Minas Gerais, Bahia, and Maranho. The raising of beef cattle began in the North, with improved pastures and increased productive efficiency. The epic narrative of the conquest of the cerrados continues, increasing the production of grains and transforming many small producers of
Figure 2
Evolution of agricultural credit, 19692006
Agricultural credit (R$ millions) 120,000 100,000 80,000 60,000
40,000 20,000 0
19 69 19 70 19 71 19 72 19 73 19 74 19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06
Source: Brazilian Central Bank, 2007.
the South into successful business people. And today, more than ever, the balance between production and the environment deserves our attention so that future generations may continue to benefit from the large contribution of agribusiness.
The beginning of institutional innovation The training of highly capable human resources is one of the innovation pillars and depends on higher education organizations. Degree courses in agriculture began a hundred years ago, but the momentum took off in the 1960s and 1970s with the creation of Masters and PhD courses in agricultural sciences supported by foreign universities, especially from the United States. Fewer people in the interior and more demand for foodstuffs in the cities raised prices and generated greater pressure for responses from agriculture. The fertile land had already been occupied; therefore increase in foodstuffs supply could occur only by increasing productivity and taming marginal land, such as the cerrados. Strong R&D institutions were needed. In response to these concerns, the Brazilian federal government created Embrapa in 1973, with the mission of transforming traditional agriculture into a modern, technically and scientifically based one, based on two pillars: (1) qualified human resources, trained in centers of excellence (in Brazil but principally abroad), and (2) a concentrated research model covering the whole country, with research centers located in important producing regions, creating critical mass. Additionally, the Brazilian system of agricultural research, SNPA, was established, encompassing the state system, universities, and private initiative, and recognizing the importance of joint collaboration among the various players (Figure 1). With the constitutional shifts of 1988 limiting the transfer of resources to the states, the SNPA became quite frail.
Other agents had an impact on agriculture modernization, among them the official rural extension provided by cooperatives, the private sector, and development banks. Important roles were also played by the Bank of Brazil, which provided credit for the payment of operational costs, and the Brazilian Development Bank (BNDES), which financed machinery and equipment. In relation to official extension, in the 1970s, the federal government created the Empresa Brasileira de Extenso Rural (Embrater) to coordinate the Brazilian system. With the new Constitution of 1988, the responsibility of rural extension was transferred to the states; many of them had limited activity in agricultural extension. States such as So Paulo, Paran, Santa Catarina, and Minas Gerais, among others, continued to help their agricultural workers, principally the small ones. With the appearance of the Ministry of Rural Development (MDA), the federal government again took up support for the small producer via rural extension. Figure 2 shows agricultural credit evolution from 1969 to 2006. The private sector worked principally at the leading edge of the agribusiness chain, in areas such as the supply of agricultural machinery and equipment as well as fertilizers and pesticides, essential inputs in the modernization of agriculture. According to the Brazilian Association of Automotive Vehicle Producers (ANFAVEA), the sale of tractors of all sizes has been increasing, especially those utilized the most in extensive grain-producing areas. From 2000 to 2004 there was a 35 percent increase in the sales of harvesters, from 3,651 to 5,598 units. The total apparent consumption of fertilizers from 1975 to 2005 went from 1,977,000 to 8,526,000 tons, with an annual geometrical growth rate of 4.1 percent. Pesticides in 2007 had a sales value of 21 over R$5 billion.
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Examples of technologies for the transformation of tropical agriculture One of the big merits of Brazilian agricultural players and agriculture and cattle raising research in recent decades has been the incorporation of the cerrados into agricultural production, both for grains and for cattle raising. Together with the cerrados, research has tropicalized crops traditionally associated with a more amenable climate. Researchers in the genetic improvement of soybeans have developed varieties adapted to low latitudes and created resistance to important diseases.22 The availability of human resources concentrated in one center (Londrina), the availability of germplasm, and an extensive network of experimentation with the participation of public and private institutions were essential factors in the advance of the genetic improvement of soybeans. From 1997, legislation relative to the registration and protection of adapted varieties apparently gave an impetus to this work. From 1968 to 1997, 116 new varieties of soybeans were launched; in 1998, 183 varieties; and from 1999 to 2006, 419just under 100 per year. The establishment of a seed production industry, under tropical conditions, also contributed to the development of soy cultivation and other crops, together with the parallel development of techniques for the integrated management of diseases and pests, management of irrigation, and the correction/fertilization of the soil. Another important grain for the production of animal protein is corn. The technological progress of corn is due to advances in its breeding, as well as to improvement of agricultural practices and productive processes.23 Tall plants, subject to lodging and low sowing density, gave place to shorter ones that have greater resistance to lodging, greater planting densities, greater adaptability to conditions of water stress and acid soils, greater capacity to respond to fertilizing, and greater resistance to pests and diseases. There was a large-scale introduction of improved germplasm, recurring selection for adaptation to different agro-ecological regions, and ample distribution of these materials to the several research organizations, led by Embrapa Corn and Sorghum. Another important program in corn improvement was the adaptation to abiotic stresses, such as tolerance to aluminum toxicity, adaptation to acidic soils, and greater efficiency in the use of nutrients such as phosphorous and nitrogen. At the beginning of the 1980s, an innovative model of public-private partnership between Embrapa and the Brazilian corn seeds sector was established, with the production of double hybrids. Public research into the cultivation of corn in Brazil contributed to genetic change, innovated in the implementation of public-private agreements in the form of franchise/licensing of adapted varieties, worked for the adaptation to acid soils, and transferred knowledge to other developing countries, especially in Africa. In
recent years, large multinational companies have started to dominate the seed market. This new reality can be seen as an opportunity for partnership for the development of cutting edge technologies, such as the modern biotechnology tools including transgenesis and other research techniques. But at the same time, this reality requires from Embrapa and other public institutions the identification of niches, in the science and technology market, where the public sector can and should make significant contributions. For the time being, we are forced to admit that the public sector has not demonstrated the speed and flexibility needed to form a large number of public-private partnerships. In the area of beef cattle, research contributes to genetic improvement for (1) biological characterization and causes of variation and estimates of genetic parameters, (2) programs of genetic evaluation, and (3) evaluation of breeds and crossings. This last line of research comprises feed conversion, nutritional demands, utilization of foodstuffs, evaluation of carcasses, resistance to parasites, milk production, and effect of animal size on 24 production efficiency. The area of forage crops has been an important component for the competitiveness of cattle raising in Brazil. In the 1980s, programs for the genetic improvement of forage were started in Brazil. Noteworthy features of the research work have been the introduction and genetic improvement of varieties of Brachiaria and Panicum (tropical grasses), relationship of the forage crop with soil fertility, grazing behavior, development of new adapted varieties of other grasses and legumes, management of pastures, and the integration of grains and livestock production. Results have been various varieties of grasses such as the Tobiat, Centenrio, and Centauro launched by the IAC; and Vencedor, Tanzania, Mombaa, and Massai launched by Embrapa.25 Another innovation of great impact was the biological fixation of nitrogen. Selected bacteria withdraw nitrogen from the air and transfer it to plants, substituting, in large part, this element in fertilizers. Legumes and some grasses are the plants that present greater potential for substitution. All soy cultivation in Brazil today occupying around 22 million hectaresutilizes this technology with an estimated economy of R$7 billion/year. Focusing on fruit, irrigation and adapted varieties enabled the cultivation of grapes near the tropics, as is the case of Petrolina/Juazeiro in the Northeast. It has a ready-made external market as the grapes can be produced year round, depending on the irrigation programming. The processing of fine wines is also beginning. Thirty years ago, almost all commercial apples consumed in Brazil were imported from Argentina and Chile. Experiments and the adaptation of the apple in Santa Catarina and Rio Grande do Sul produced good results and captured the preference of
Brazilian consumers. Today Brazil produces around 1 million tons of apples. And the Brazilian peach, with adapted varieties developed in Brazil, already occupies a prominent position. No-tillage (NT), although a well-known technology, became feasible over extensive areas only when combined with chemical weed control. This technology was introduced in the South in Brazil in 1969 with the principal purpose of controlling water erosion. From the 1980s, it started to be seen as a tool of conservationist agriculture, involving the diversification of species via crop rotation, making continuous planting feasible without prior preparation of the soil. In consequence, NT requires less machinery and equipment infrastructure; demands less labor and fossil fuel; benefits the biological activity of the soil; favors biological pest, disease, and weed control; minimizes erosion; optimizes utilization of fertilizers; and provokes the processes of soil aggregation and its development. NT was established as a widely used technology from 1991, reaching more than 22 million hectares in 2006, which represents almost half of the 26 annual cultivated area. In a large number of cases, the development of knowledge, products, technologies, and services of interest to Brazilian agriculture enjoyed important external support through international cooperation, with foreign and international research institutes, universities, multilateral organs, and the private sector as active players. This international cooperation was, and will continue to be, critical. It is noteworthy that of the total, worldwide investment in RDI, only 3 percent is directed to agriculture. For the country to benefit from part of the other 97 percent, international cooperation in its most diverse forms, in addition to interinstitutional Brazilian cooperation, is essential. The establishment by Embrapa of virtual laboratories abroad, the LABEXoperating in North America (for around 10 years) and in Europe, and expanding into Asia exemplifies one of the strategies used for mobilizing external competence in Brazils interests.
Some significant results The final result of an entire innovation chain is an increase in production, productivity, efficiency (economics of factors of production), and the sustainable use of the natural resource base. Technologies incorporated into the production systems are part of innovation, as they overcome restrictions imposed by scarce resources. Brazilian agribusiness over the last 40 years provides a good example of the application of institutional and technological innovations in an ample and diversified spectrum of products. Growth of agricultural production depends on an expansion of the area cultivated and/or on an increase in productivity. In traditional economics, expansion through the incorporation of new areas into the production process is the dominant element, as was the case in the 1950s and 1960s of the western part of Paran State and Mato Grosso do Sul. From the 1970s, land and labor productivity became the determining factors in the increase of agricultural production. The taming of the cerrados is a victory of courageous entrepreneurs, proper public policies, and the application of science and technology. In more recent times, productivity emerges as the motivating force of the increase in grain production. In the 197677 harvest, 37 million hectares of cereals, legumes, and oilseeds were planted in Brazil, producing 46,943,000 tons, with an average productivity of 1,257 kilograms per hectare; in 200405, 49 million hectares were planted, with 114,695,000 tons produced and an 27 average productivity of 2,339 kilograms per hectare. Another important result that received significant technological input, principally in the Center-West and Paran, is the production of corn in a second harvest, after the soybean harvest. The adoption of this system of production, starting in the 1980s, produced, in the 198990 harvest, 1 million tons; production exceeded 10 million tons a year from 2002 to 2008. Two harvests a year optimize land and labor use, reduce unit costs of machinery and equipment per unit of product, protect the land for a longer period because of the crop coverage, and favor supply during the year. Tables 2, 3, and 4 highlight the annual growth rates of the cultivated area, production, and productivity for
Table 2
Years 1975 to 2007 1980 to 1989 1990 to 1999 2000 to 2007
Annual growth rate of area harvested

Rice 2.37 0.97 3.25 1.10 Corn 0.25 1.72 0.95 0.48 Beans 0.62 1.35 3.04 0.51 Soy 3.49 3.35 2.66 7.65 Wheat 2.14 5.08 6.15 3.50 All * 0.65 1.87 0.56 5.92
Source: Brazilian Institute of Geography and Statistics (IBGE). * All temporary cultivation, up to 2005.
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Table 3
Years 1975 to 2007 1980 to 1989 1990 to 1999 2000 to 2007
Annual growth rate of quantity produced

Rice 1.00 2.98 0.82 1.81 Corn 3.25 2.98 3.54 2.65 Beans 1.48 1.13 0.28 4.14 Soy 5.44 4.16 6.80 7.07 Wheat 0.90 14.76 2.09 5.24 All* 3.62 5.16 3.29 5.68
Table 4
Years 1975 to 2007 1980 to 1989 1990 to 1999 2000 to 2007
Annual growth rate of productivity

Rice 3.45 3.99 4.20 2.94 Corn 2.99 1.24 4.53 2.16 Beans 2.11 0.22 3.43 3.61 Soy 1.88 0.79 4.04 0.53 Wheat 3.11 9.21 4.32 1.68 All* 2.95 3.23 3.87 0.23
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the five main grains. With the exception of soybean, with the considerable increase in area of 7.7 percent a year, the other crops do not show an increase in the cultivated area in most of the periods considered. However, all the grains showed large increases in production and productivity in all the periods considered, with the exception of beans between 1980 and 1989 for productivity, soybean between 2000 and 2007 (the result of two bad droughts), and wheat for production between 1990 and 1999. Two crops deserve special mention: soy and corn. Their growth rate, higher than the rate of population, is due to their use as input for the production of animal protein (swine and poultry) and as export crops. Genetic improvement, planted pastures, and more efficient production systems contributed to a revolution in the production of meat in Brazil. A production of 2.7 million tons in 1975 increased to 17.8 million tons in 2007; especially noteworthy is the production of poultry meat, which went from 373,000 tons to 8,368,000 tons in the same period. The period of greatest dynamism is from 2000 to 2007, with an overall growth of meat production of 72 percent. As with grains, the increase of production coincides with the period of exchange liberalization. This shows that macroeconomic policy in Brazil has a strong influence on agricultural production, as the country is open to the international market. In the area of fruit and vegetables, an innovative highlight was the introduction of the apple. From 1975 to 2005, growth was 12.5 percent a year. The crop enjoyed significant gains in productivity with the exception of the more recent period. Between 2000 and 2005, the production of grapes grew 4.22 percent a year and potatoes 5.02 percent a year. Potato productivity increased by 100 percent over the last 20 years. Another sector that demonstrated extraordinary performance in recent years is agro-energy. The production of sugar cane grew from 290 million tons in 199697 to 427 million in 200607, and the production of fuel
alcohol went from 14.43 million cubic meters to 17.89 million in the same period. Growth in the demand for fuel alcoholprincipally in the internal market through flex-fuel cars, which run on any combination of alcohol and gasolineand the rise in the price of sugar in the external market partly explain this expansion. In the Brazilian energy matrix, sugar cane has already overtaken hydro-generated energy. The measurement of the global efficiency of the sector is estimated by the methodology of the total productivity of the factors (TPF). In the Brazilian case 61 crops were considered, along with six products of animal origin, and three types of meat as well as the inputs used to produce them such as land, pastures, labor, agricultural machinery, fertilizers, and pesticides. The productivity of Brazilian agriculture as a whole grew, over the last 30 years, at an average annual rate of 2.5 percent (19752005). Considering the period 200005, the TPF 28 grew at 3.87 percent a year. The positive performance of Brazilian agriculture contributed to the balance of the external accounts in Brazil. Exports of Brazilian agribusiness totaled US$20 billion in 2000, reaching US$71.3 billion in 2008. All the positive balance of the Brazilian trade is due to the sector, especially meat, soybean, and timber.29 The degree of international opening to agribusiness as a whole, measured by the exported value of total production, reached 20 percent in 2006; this is up from 4 percent in 1995. A large part of the expansion of agribusiness products is the result of the increase in exports. Brazil is a country well supplied with land, entrepreneurs, and tropical technology capable of supplying a considerable part of the worlds need for foodstuffs and other raw materials of agricultural origin. The growing internal demand that comes from the improvement in the social situation of the Brazilian population, along with the increase in demand both of countries with large populations such as China and India, and of
others undergoing a rapid process of industrialization and an overt expansion of consumption (in spite of having smaller populations) offer special opportunities for Brazilian agribusiness. Some bottlenecks still have to be overcome. Brazil needs improvement in its infrastructure, a solution to sanitary problems, a resolution to conflicts for the possession of land, and a more rational approach to environmental restrictions on production.
Thinking about the future: The agricultural innovation of tomorrow The data presented demonstrate that innovation has played an important role in the development of Brazilian agriculture and, particularly in recent decades, has allowed for growth and the good performance of Brazilian agribusiness. It is clear also that there are many basic conditions for innovation; these range from investment in public research, which is responsible for a large part of Brazilian agricultural research, to various systems of incentives for Brazilian small, medium, and large entrepreneurs. The growing Brazilian and world concern about environmental issues and their relation to agricultural production cannot pass without mention, nor can concern about product quality. The contribution of agriculture to Brazilian development requires one to look at agricultural issues carefully; a balanced discussion about production and environmental protection is required to enable them to co-exist and to provide benefits for this and future generations. Quantity and quality shall necessarily march together. The more developed the country, the greater the concern about the quality of agricultural products, as the asymmetry of risks between the industrialized and the less developed is sadly enormous. Equally relevant is the land tenure question and the social movements that contribute nothing to the necessary peace required by a productive rural sector, and little to the growth of agribusiness and the quality of life of the Brazilian population, urban and rural. The future scenario of climate change, severe limitations on water supply, biological security, and non-tariff and energy barriers will require greater speed in innovation on the part of agribusiness. A much larger investment in higher risk research will certainly be necessary; equally necessary will be the intensive utilization of several tools, as simulation and pre-prototypes, allowing an acceleration of the transformation of part of the knowledge in products and technology and the conse30 quent lowering of the final cost of the innovation. Brazils production systems will have to increasingly use intelligent decision tools to remain competitive. And these tools and machinery, which should utilize intensively the systems of global positioning, modeling, and so on, should benefit small farm (family) agriculture as much as business agriculture in the production
of primary products and those of added value. The use of nano-technology, of biotechnology tools, and of intelligent remote control systems will be common in tomorrows advanced agricultures. The quantity of knowledge and information being generated will need an excellent filtering and organization capacity for it to be used efficiently. The future scenario requires highly capable human resources throughout the producing chains, fluent in the language(s) of the day used in international transactions (today English), with a sensitivity for public, private, environmental, and social questions. It requires, equally, an enormous capacity for institutional innovationstill very weak in Brazilso that porosity between the public and private and the national and international sectors may be fairly exploited to the benefit of all citizens within the legal framework in force. Institutional innovation will necessarily be different from the past where a model was used and, if approved, replicated elsewhere. No longer will there be only one model, but different models that are efficient in the search for solutions to the problems that arise every day need to be created. Work networks, creation nets,31 and many other real and virtual innovation systems will have to co-exist within the same institution. Legal flexibilization becomes, accordingly, critical to prevent the innovation process from being strangled. The domestic capacity to absorb technologies, as presented by the World Bank,32 provides a partially somber indication of the technological applications that Brazil will not probably succeed in commanding fully by 2020, such as tissue engineering or disposable computers, because there are limitations in the countrys adaptive technological capacity. This forecast, right or wrong, should switch on a yellow light for all who deal with public policy and RDI in Brazil. Finally, we believe that the future opportunities are many and that Brazil has the basic elements for agriculture to continue to be an important basis of development. The present crisis, which presumably will be long and difficult, certainly works against some of these ideas, making countries turn more inward. But the current globalization process, we believe, is irreversible and expansionist. The lions share of world development will go to the more competitive, environmentally responsible, and socially fair. We would like to believe that Brazil will be one of these winners. Brazils children and grandchildren will tell whether this exercise in futurology was a valid one.
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Notes
1 See Sala-i-Martin et al. 2008 for a detailed analysis of the Global Competitiveness Index and its 12 pillars of competitiveness. As defined in one of the most classical dictionaries of the Portuguese language, the Diccionario Portuguez or Thesouro da Lingua Portugueza by Dr Frei Domingos Vieira of the Eremitas Calcados de Santo Agostinho, in 5 volumes. Porto, 1871. Included here are all the new forms of informal organizations such as networks and virtual groups. See OECD 2002. World Bank 2003. Schumpeter 1934. Thomke 2003. OECD /FINEP 1997. Product innovation is described as a new or significantly improved good or service as regard to characteristics or envisaged use; process innovation consists of the new or significantly improved implementation of a method of production or distribution (techniques, equipment, and/or software); marketing innovation encompasses significant changes in the conception of the product or in its packaging, in the positioning of the product, in its promotion or in the establishment of prices; and, finally, organizational innovation encompasses a new organizational method in the practice of company business, in the organization of its work place or in its external relations.
References
Albuquerque, A. C. S. and A. G. Silva, eds. 2008. Agricultura Tropical, volume 1. Braslia: Embrapa. Alves et al. 2008. Evoluo da produo e da produtividade da Agricultura Brasileira. Agricultura Topical. Available at http://www.embrapa.br/. Davis, J. H. and R. A. Goldberg. 1957. A Concept of Agribusiness. Cambridge: Harvard University Press. Dias A. 1904. Brazil Actual. Rio de Janeiro: Imprensa Nacional. Gasques, J. G., E. T. Bastos, and M. P. Bacchi. 2007. Produtividade e fontes de crescimento da agricultura brasileira. Braslia, March. Mimeo. Hayami, Y. and V. W. Ruttan. 1988. Desenvolvimento Agrcola Teoria e Experiencia Internacionais. Brasilia: Embrapa. Kaul, I. and P. Conceio, eds. 2006. The New Public Finance: Responding to Global Challenges. United Nations Development Programme. Oxford University Press. MAPA (Ministry of Agriculture, Cattle Raising and Supply). 2007. Plano Estratgico. Braslia: MAPA. Ministrio da Cincia e Tecnologia. 2007. Cincia, tecnologia e inovao para o desenvolvimento nacional: Plano de ao 20072010: resumo. Imprenta Braslia: Ministrio da Cincia e Tecnologia. OECD (Organisation for Economic Co-operation and Development). 2002. Frascati Manual. Paris: OECD. OECD/FINEP (Organisation for Economic Co-operation and Development and The Brazilian Innovation Agency). 1997. Manual de Oslo. Rio de Janeiro: Terceira Edio. Portugal, A. D, F. J. B., Reifschneider, E. Contini, and A. B. Oliveira. 1999. Taxa voluntria de desenvolvimento tecnolgico (Agromais) - Um mecanismo inovador de financiamento para a Pesquisa, Desenvolvimento e Promoo do Agronegcio. Idias & Debate 517. Ruttan, V. W. and Y. Hayami. 1991. Rapid Population Growth and Technical and Institutional Change. In Consequences of Rapid Population Growth in Developing Countries. Published for and on behalf of the United Nations. New York and London: Taylor & Francis. Proceedings of the United Nations/Institut National Dtudes Dmographiques Expert Group Meeting, New York, August 2326 1988, by the United Nations and the Institut National dtudes Dmographiques (France). Sala-i-Martin, X. J. Blanke, M. Drzeniek Hanouz, T. Geiger, I. Mia, and F. Paua. 2008. The Global Competitiveness Index: Prioritizing the Economic Policy Agenda. In The Global Competitiveness Report 20082009. Geneva: World Economic Forum. 341. Schumpeter, J. A. 1934. The Theory of Economic Development. Cambridge: Harvard University Press. Initially published in German in 1912 Thomke, S. H. 2003. Experimentation Matters: Unlocking the Potential of New Technologies for Innovation. Boston: Harvard Business School Publishing Corporation. World Bank. 2003. Agriculture and Rural Development (ARD), Enhancing Agricultural Innovation: How to Go Beyond the Strengthening of Research Systems. Washington, DC: World Bank. . 2008. Global Economic Prospects: Technology Diffusion in the . Developing World. Washington, DC: World Bank
4 5 6 7 8 9
10 Sutton 1992 in OECD/FINEP 1997. 11 Interview given to the Revista poca, available at (25/06/08). 12 At issue is whether to guarantee access to all (i.e. public good) or to guarantee specific financial benefits for the proprietor.
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13 Kaul and Conceio 2006. 14 Portugal et al. 1999. 15 Ministrio da Cincia e Tecnologia 2007. 16 See also Ruttan and Hayami 1991. 17 Davis and Goldberg 1957. 18 MAPA 2007. 19 Alves et al. in Albuquerque and Silva, eds. 2008. 20 Alves et al. in Albuquerque and Silva, eds. 2008. 21 Figures are from ANFAVEA, available at http://www.anfavea.com.br (accessed on December 8, 2008). 22 Kiihl and Calvo, in Albuquerque and Silva, eds. 2008. 23 Bahia et al., in Albuquerque and Silva, eds. 2008. 24 Euclides Filho, in Albuquerque and Silva, eds. 2008. 25 Euclides et al. in Albuquerque and Silva, eds. 2008. 26 Denardin et al. in Albuquerque and Silva, eds. 2008. 27 Alves et al. in Albuquerque and Silva, eds. 2008. 28 See Gasques et al. 2007. 29 MAPA 2007. 30 Thomke 2003. 31 http://www.johnseelybrown.com/creationnets.pdf. 32 World Bank 2008.
Part 4
Country Profiles
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How to Read the Country Profiles
This part of the Report presents detailed information in the form of competitiveness profiles for Brazil and eight comparator countries.
Brazil
Population (millions), 2008............................................................................194.2 GDP (US$ billions), 2007.............................................................................1,313.6 GDP (PPP) per capita (int'l $), 2007..........................................................9,703.2 Real GDP growth (%), 2007 ..............................................................................5.4 GDP (PPP) as share (%) of world total, 2007.................................................2.8 Current account balance (% GDP), 2007 .......................................................0.1 Foreign reserves (months of imports), 2008 ................................................10.6 Unemployment (% labor force), 2008 .............................................................7.9 Human Development Index, 2006..................................................................0.81
Page 1
Key indicators
Stage of development: 2
1 5.7 United States 5.7 United States
Global Competitiveness Index 20082009....64.........4.1

GCI 20072008 (out of 131)....................................72..........4.0 GCI 20062007 (out of 122)....................................66..........4.1 Basic requirements...............................................96..........4.0 1st pillar: Institutions .............................................91..........3.6 2nd pillar: Infrastructure.......................................78..........3.2 3rd pillar: Macroeconomic stability..................122..........3.9 4th pillar: Health and primary education ...........79..........5.3 Efficiency enhancers ............................................51..........4.3 5th pillar: Higher education and training ...........58..........4.1 6th pillar: Goods market efficiency...................101..........3.9 7th pillar: Labor market efficiency ......................91..........4.2 8th pillar: Financial market sophistication.........64..........4.4 9th pillar: Technological readiness.....................56..........3.6 10th pillar: Market size..........................................10..........5.5 Innovation factors .................................................42..........4.0 11th pillar: Business sophistication ....................35..........4.6 12th pillar: Innovation............................................43..........3.5
Source: World Economic Forum.
The first section presents a selection of key indicators. Population figures come from the United Nations Population Funds State of World Population 2008. Gross domestic product and current account data come from the October 2008 release of the International Monetary Fund (IMF)s World Economic Outlook. Import cover ratios come from the IMFs International Finance Statistics database and the Economist Intelligence Unit (EIU)s CountryData Database (both consulted on March 17, 2009). The latter is also the source for the unemployment data. Finally, the Human Development Index scores are from the United Nations Development Programme (UNDP)s Human Development Report 2007/2008. For all indicators, the most recent data available for each country are displayed.
Global Competitiveness Index
5.8 United States 6.2 Finland 6.2 Singapore 6.6 Germany 6.5 Kuwait 6.6 Finland 5.8 United States 6.1 Finland 5.8 Singapore 6.2 United States 6.0 Hong Kong SAR 6.6 Netherlands 6.9 United States 5.8 United States 5.9 Germany 5.8 United States
Brazil
Best
LA&C
EU Acc 12
BRIC
Tax regulations................................................................19.0 Inadequate supply of infrastructure ...........................15.1 Tax rates...........................................................................14.8 Restrictive labor regulations ........................................13.8 Inefficient government bureaucracy ..........................13.5 Corruption ..........................................................................6.7 Inadequately educated workforce................................5.7 Access to financing .........................................................4.3 Policy instability................................................................2.4 Foreign currency regulations.........................................1.7 Crime and theft .................................................................1.2 Poor work ethic in national labor force .......................0.7 Poor public health ............................................................0.7 Inflation ..............................................................................0.3 Government instability/coups ........................................0.1
0
10 Percent of responses
15
20
Note: From a list of 15 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.
Chile
Key indicators
Population (millions), 2008..............................................................................16.8 GDP (US$ billions), 2007................................................................................163.9 GDP (PPP) per capita (int'l $), 2007........................................................13,921.2 Real GDP growth (%), 2007 ..............................................................................5.1 GDP (PPP) as share (%) of world total, 2007.................................................0.4 Current account balance (% GDP), 2007 .......................................................4.4 Foreign reserves (in months of imports), 2007..............................................3.7 Unemployment (% labor force), 2008 .............................................................7.8 Human Development Index, 2006..................................................................0.87
The table shows the countrys rankings in the Global Competitiveness Index (GCI) 20082009 as presented in The Global Competitiveness Report (GCR) 20082009. Ranks are measured against the 134 countries covered by that edition of the GCR. For Brazil, a bar chart on the right-hand side compares its scores on each dimension of the GCI with the average score for Latin America and the Caribbean (LA&C), the BRIC countries (Brazil, Russian Federation, India, and China), the European Unions 12 newest member countries (EU Accession 12),1 and the best performing country. For other countries, a spiderweb chart on the right-hand side shows their scores per subindex and pillar, as compared with Brazils scores.
The most problematic factors for doing business

Stage of development: Transition from 2 to 3
Rank (out of 134) Score (17)

GCI 20072008 (out of 131)....................................26..........4.8 GCI 20062007 (out of 122)....................................27..........4.8 Basic requirements...............................................36..........5.1 1st pillar: Institutions .............................................37..........4.7 2nd pillar: Infrastructure.......................................30..........4.6 3rd pillar: Macroeconomic stability....................14..........5.9 4th pillar: Health and primary education ...........73..........5.4 Efficiency enhancers ............................................30..........4.6 5th pillar: Higher education and training ...........50..........4.3 6th pillar: Goods market efficiency.....................26..........4.9 7th pillar: Labor market efficiency ......................17..........4.9 8th pillar: Financial market sophistication.........29..........5.1 9th pillar: Technological readiness.....................42..........4.0 10th pillar: Market size..........................................47..........4.3 Innovation factors .................................................44..........4.0 11th pillar: Business sophistication ....................31..........4.7 12th pillar: Innovation............................................56..........3.3
Institutions Innovation Business sophistication

7 6 5 4 3 2
Infrastructure Macroeconomic stability
Market size
Health and primary education Higher education and training Goods market efficiency
Technological readiness Financial market sophistication Labor market efficiency
Chile
Brazil

Chile
Restrictive labor regulations ........................................26.0 Inefficient government bureaucracy ..........................17.6 Inadequately educated workforce..............................11.7 Corruption ..........................................................................6.5 Poor work ethic in national labor force .......................5.2 Access to financing .........................................................5.1 Inflation ..............................................................................4.9 Tax rates.............................................................................4.7 Inadequate supply of infrastructure .............................4.1 Policy instability................................................................4.1 Tax regulations..................................................................4.0 Crime and theft .................................................................3.8 Poor public health ............................................................1.6 Foreign currency regulations.........................................0.4 Government instability/coups ........................................0.3
0 5 10 15 Percent of responses 20 25
Chile Brazil 30
This chart summarizes factors considered by business executives as the most problematic for doing business in their country. The information is drawn from the World Economic Forums Executive Opinion Survey 2008. From a list of 15 factors, respondents were asked to rank in order the five most problematic. For the comparator countries, the results for Brazil are shown for comparison.
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Page 2
Brazil
GDP (PPP) per capita (intl $), 19962007
12,000
This chart shows the evolution of GDP based on purchasing power parity (PPP) per capita for the period 19962007. The data were obtained from the IMFs World Economic Outlook database.
FDI inflows, 19962007 (US$ millions)
Brazil
10,000
Western Hemisphere
8,000 6,000 4,000 2,000 0
Source: IMF.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(US$ millions) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Source: UNCTAD.
This chart tracks the evolution of foreign direct investment (FDI) inflows for a 10-year period through 2007. The data are from the United Nations Conference on Trade and Development (UNCTAD)s Foreign Direct Investment Database, consulted in March 2009.
Main exports,19962007 (US$ billions)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(US$ billions) 200
All commodities Machinery and transport equipment Food and live animals
100 150
Manufactured goods classified chiefly by material
50
0 1996
Source: United Nations Statistics Division.
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
European Union 25.2%
Brazil ..............................................................9.1
Source: World Bank.
This chart illustrates the evolution in the composition the countrys exports. It shows the total value in billions of US dollars for all exports, as well as for the top three categories of exports, according to the Standard Inter-national Classification Trade Classification (SITC). Data come from United Nations Statistics Divisions Comtrade Database.
Share of merchandise exports by main destination, 2007
Others 40.4%
United States 15.8%
Venesuela 2.9% China 6.7%

Source: WTO.
Argentina 9.0%
Note: For further details and explanation, please refer to the section How to Read the Country Profiles at the beginning of this chapter.
100
This figure presents the breakdown of exports by destination country or region with the total value of a countrys exports appearing below, for 2007 or the most recent year available. These figures come from the World Trade Organizations statistical database, Trade profiles, consulted in March 2009.
Export Product Concentration Index, 2006
The bottom right area features an indicator of a countrys score of the 2006 Export Product Concentration Index. This value reflects the Herfindahl-Hirschman index measure of the degree of export concentration within a country. For further details on the calculation of this Index please consult the following link: http://info.worldbank.org/etools/wti2008/docs/ userguide.pdf.
Page 3 (and 4 for Brazil)
Brazil
The Global Competitiveness Index in detail
The Global Competitveness Index in detail
INDICATOR RANK SCORE EVOLUTION LATAM
Competitive advantages Competitive disadvantages

BRIC EU ACC 12 BEST PERFORMER
Page 3 (and 4 for Brazil) provides detailed information on each component and indicator included in the GCI.
INDICATOR This column contains the title of each component and each indicator of the GCI. Hard data indicators are identified by an asterisk and the units are indicated in parenthesis. The number to the left of each indicator refers to the numbering of the Data Tables presented in the GCR 20082009. For a full description of all the indicators of the GCI, please refer to Appendix A of Chapter 1. RANK This column reports the countrys position among the 134 economies covered by the GCI. For Brazil, next to the rank, a colored square indicates whether an indicator constitutes an advantage (n) or a disadvantage (n) for the country. For Brazil, as for all economies ranked lower than 50 in the overall GCI, any individual variables ranked higher than 51 are considered advantages. Any variables ranked lower than 50 are considered as disadvantages. For comparator countries, next to the rank, a symbol indicates whether the country ranks higher (+), lower (), or the same (=) as Brazil. SCORE This column reports the countrys score. For indicators drawn from the Survey, scores range from 1 (lowest) to 7.
1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18
4 Global Competitiveness Index......................................64.......................4.1 ....... ......... ........3.9 .......4.4 .......4.4 .......5.7 United States
Basic requirements......................................................................96 ..........................4.0......... .......... ..........4.2.........4.4.........4.8 .........6.2 Finland 4 Efficiency enhancers...................................................................51 ..........................4.3......... .......... ..........3.8.........4.4.........4.4 .........5.8 United States 4 3 Innovation and sophistication factors .....................................42 ..........................4.0......... .......... ..........3.4.........4.0.........3.8 .........5.8 United States
1st pillar: Institutions ..........................................................................91 ............................3.6.......... ........... ...........3.6..........3.8..........4.1 ..........6.2 Singapore 4 Property rights ......................................................................................70 ............. Intellectual property protection .........................................................79 ............. Diversion of public funds ..................................................................118 ............. Public trust of politicians ..................................................................122 ............. Judicial independence ........................................................................68 ............. Favoritism in decisions of government officials .............................63 ............. Wastefulness of government spending..........................................129 ............. Burden of government regulation ...................................................133 ............. Efficiency of legal framework ............................................................98 ............. Transparency of government policymaking...................................101 ............. Business costs of terrorism................................................................12 ............. Business costs of crime and violence............................................123 ............. Organized crime..................................................................................116 ............. Reliability of police services.............................................................117 ............. Ethical behavior of firms .....................................................................89 ............. Strength of auditing and reporting standards .................................60 ............. Efficacy of corporate boards..............................................................46 ............. Protection of minority shareholders interests................................42 ............. ...........4.6.......... ...........3.3.......... ...........2.5.......... ...........1.6.......... ...........3.8.......... ...........3.2.......... ...........2.2.......... ...........1.9.......... ...........3.0.......... ...........3.6.......... ...........6.5.......... ...........3.1.......... ...........4.1.......... ...........2.8.......... ...........3.8.......... ...........5.0.......... ...........4.9.......... ...........5.0.......... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ...........4.2..........4.5..........4.9..........6.7 ...........3.1..........3.4..........3.9..........6.3 ...........3.1..........3.2..........3.7..........6.5 ...........2.2..........2.3..........2.6..........6.5 ...........3.4..........3.9..........4.2..........6.6 ...........2.7..........3.2..........2.9..........6.0 ...........2.9..........3.2..........3.2..........6.1 ...........2.9..........2.8..........3.1..........5.7 ...........3.1..........3.6..........3.6..........6.3 ...........3.7..........3.9..........3.9..........6.3 ...........5.5..........5.5..........6.2..........6.8 ...........3.4..........4.5..........5.4..........6.7 ...........4.4..........4.6..........5.6..........6.8 ...........3.3..........3.8..........4.4..........6.7 ...........3.9..........3.9..........4.2..........6.6 ...........4.5..........4.7..........5.1..........6.3 ...........4.6..........4.8..........4.7..........6.1 ...........4.2..........4.4..........4.4..........6.1 Switzerland Switzerland Denmark Singapore New Zealand Denmark Singapore Singapore Denmark Singapore Finland Syria Norway Finland Sweden Hong Kong SAR Sweden Sweden
2nd pillar: Infrastructure ....................................................................78 ............................3.2.......... ........... ...........3.2..........3.6..........3.9 ..........6.6 Germany 3 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.........................................................98 ............. Quality of roads...................................................................................110 ............. Quality of railroad infrastructure .......................................................86 ............. Quality of port infrastructure............................................................123 ............. Quality of air transport infrastructure.............................................101 ............. Available seat kilometers (per week, in millions)* .........................12 ............. Quality of electricity supply ................................................................58 ............. Main telephone lines (per 100 population)* ....................................62 ............. ...........2.7.......... ...........2.5.......... ...........1.8.......... ...........2.5.......... ...........3.7.......... ....2,353.9.......... ...........5.0.......... .........20.5.......... ........... ........... ........... ........... ........... ........... ........... ........... ...........3.3..........3.2..........3.9..........6.8 ...........3.4..........3.0..........3.5..........6.7 ...........1.5..........3.6..........3.5..........6.8 ...........3.7..........3.5..........4.3..........6.8 ...........4.5..........4.2..........4.7..........6.9 .......327.2...3,677.4......104.6.33,454.2 ...........4.2..........4.4..........5.3..........6.9 .........17.5........20.7........32.6........66.9 Switzerland France Switzerland Singapore Singapore United States Denmark Switzerland
3rd pillar: Macroeconomic stability ..............................................122 ............................3.9.......... ........... ...........4.7..........4.9..........5.2..........6.5 Kuwait 3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*............................................91 ............. .........2.2.......... ............=..........0.2........0.6........0.8........43.8 Kuwait National savings rate (% GDP)*.........................................................86 ............. .........18.1.......... ........... .........20.9........34.1........17.7........67.5 Kuwait Inflation (%)* .........................................................................................54 ............. ...........3.6.......... ........... ...........7.1..........5.9..........4.8........8.8 Chad Interest rate spread (%)* ..................................................................131 ............. .........33.1.......... ........... ...........8.6........11.7..........3.7..........1.0 Switzerland Government gross debt (% GDP)*.....................................................85 ............. .........47.0.......... ........... .........46.7........37.7........32.5..........0.0 Multiple (2) 4th pillar: Health and primary education........................................79 ............................5.3.......... ........... ...........5.4..........5.4..........5.9 ..........6.6 Finland 5 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ................................................................66 ............. Malaria incidence (cases per 100,000 population)*.....................101 ............. Business impact of tuberculosis .......................................................51 ............. Tuberculosis incidence (cases per 100,000 population)*..............64 ............. Business impact of HIV/AIDS.............................................................71 ............. HIV prevalence (% adult population)* ..............................................86 ............. Infant mortality (deaths per 1,000 live births)* ................................88 ............. Life expectancy at birth (years)* .......................................................66 ............. Quality of primary education ............................................................119 ............. Primary education enrollment (net rate, %)* ..................................58 ............. Education expenditure (% GNI)* .......................................................64 ............. ...........6.3.......... .......206.4.......... ...........6.2.......... .........50.0.......... ...........5.2.......... ...........0.6.......... .........28.0.......... .........72.0.......... ...........2.5.......... .........94.4.......... ...........4.3.......... ........... ...........5.9..........6.0..........6.7..........7.0 ............=........393.7........93.3..........0.0..........0.0 ........... ...........5.7..........5.8..........6.1..........6.9 ........... .........61.1......106.0........34.9..........4.0 ........... ...........4.7..........5.4..........5.8..........6.6 ........... ...........0.8..........0.5..........0.3..........0.1 ............=..........22.5........29.5..........6.9..........1.8 ............=..........72.4........68.5........74.8........83.0 ..........n/a ..........3.0..........3.8 ..........4.6..........6.7 ........... .........93.8........92.8........92.8........99.9 ............=............4.0..........3.4..........4.8 ..........9.3 Finland Multiple (60) Finland Multiple (2) Norway Multiple (26) Hong Kong SAR Japan Finland Malaysia Lesotho
5th pillar: Higher education and training .......................................58 ............................4.1.......... ........... ...........3.7..........4.2..........4.7..........6.1 Finland 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.........................14 ............. Tertiary education enrollment (gross rate, %)*...............................76 ............. Quality of the educational system ...................................................117 ............. Quality of math and science education..........................................124 ............. Quality of management schools ........................................................58 ............. Internet access in schools .................................................................67 ............. Local availability of research and training services ......................26 ............. Extent of staff training .........................................................................46 ............. .......105.5.......... .........25.5.......... ...........2.7.......... ...........2.7.......... ...........4.2.......... ...........3.4.......... ...........4.9.......... ...........4.3.......... ........... ........... ........... ........... ........... ........... ........... ........... .........81.9........79.8........97.2......150.3 .........29.7........32.8........57.6........94.9 ...........3.0..........3.8..........4.0..........6.2 ...........3.2..........4.4..........5.0..........6.5 ...........4.1..........4.4..........4.3..........6.1 ...........3.0 ..........3.8..........4.8..........6.4 ...........3.8..........4.5..........4.2..........6.1 ...........3.7..........4.2..........4.1..........5.9 Australia Greece Finland Finland France Finland United States Denmark
6th pillar: Goods market efficiency................................................101 ............................3.9.......... ........... ...........4.0..........4.2..........4.5..........5.8 Singapore 6.01 6.02 6.03 6.04 Intensity of local competition.............................................................43 ............. ...........5.3.......... ........... ...........4.7..........5.3..........5.4..........6.4 Germany Extent of market dominance...............................................................32 ............. ...........4.6.......... ........... ...........3.5..........4.4..........4.2..........6.1 Germany Effectiveness of anti-monopoly policy..............................................36 ............. ...........4.6.......... ........... ...........3.5..........4.2 ..........4.2..........6.0 Netherlands Extent and effect of taxation ..............................................................134.............. ............1.7 .......... ........... ...........3.2 ..........3.3 ..........3.6 ..........6.2 United Arab Emirates
Chile
+ Better than Brazil (87 times)
INDICATOR RANK/134 SCORE INDICATOR
Worse than Brazil (23 times)

RANK/134 SCORE
1st pillar: Institutions

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................40.......+ ......5.4 Intellectual property protection .......................................................63.......+ ......3.6 Diversion of public funds ..................................................................52.......+ ......3.8 Public trust of politicians ..................................................................42.......+ ......3.4 Judicial independence ......................................................................52.......+ ......4.5 Favoritism in decisions of government officials ...........................41.......+ ......3.6 Wastefulness of government spending..........................................49.......+ ......3.7 Burden of government regulation ...................................................34.......+ ......3.7 Efficiency of legal framework ..........................................................30.......+ ......4.8 Transparency of government policymaking...................................26.......+ ......4.9 Business costs of terrorism..............................................................27....... ......6.3 Business costs of crime and violence............................................84.......+ ......4.4 Organized crime..................................................................................32.......+ ......6.2 Reliability of police services.............................................................16.......+ ......6.1 Ethical behavior of firms ...................................................................23.......+ ......5.3 Strength of auditing and reporting standards...............................32.......+ ......5.6 Efficacy of corporate boards..............................................................7.......+ ......5.6 Protection of minority shareholders interests..............................32.......+ ......5.3
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................61.......+ ....27.0 Agricultural policy costs .....................................................................3.......+ ......5.1 Prevalence of trade barriers ..............................................................5.......+ ......6.1 Trade-weighted tariff rate (% duty)*...............................................57.......+ ......4.7 Prevalence of foreign ownership ....................................................11.......+ ......6.1 Business impact of rules on FDI ......................................................19.......+ ......5.8 Burden of customs procedures .........................................................7.......+ ......5.6 Degree of customer orientation.......................................................47.......+ ......5.0 Buyer sophistication ..........................................................................29.......+ ......4.4
7th pillar: Labor market efficiency

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................51.......+ ......4.7 Flexibility of wage determination.......................................................6.......+ ......6.0 Non-wage labor costs (% workers salary)* .................................12.......+ ......3.0 Rigidity of Employment Index (0100, 100 is worst)*....................32.......+ ....24.0 Hiring and firing practices ................................................................74.......+ ......3.7 Firing costs (in weeks of wages)* ...................................................81....... ....52.0 Pay and productivity ..........................................................................21.......+ ......4.8 Reliance on professional management..........................................18.......+ ......5.6 Brain drain .............................................................................................6.......+ ......5.3 Female-to-male participation ratio in labor force ......................111....... ......0.5
2nd pillar: Infrastructure

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................29.......+ ......5.1 Quality of roads...................................................................................22.......+ ......5.5 Quality of railroad infrastructure .....................................................73.......+ ......2.1 Quality of port infrastructure............................................................37.......+ ......4.9 Quality of air transport infrastructure.............................................24.......+ ......5.9 Available seat kilometers (per week, in millions)* .......................39....... ..427.1 Quality of electricity supply ..............................................................49.......+ ......5.3 Main telephone lines (per 100 population)* ..................................63....... ....20.2
8th pillar: Financial market sophistication

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................26....... ......5.8 Financing through local equity market ...........................................10.......+ ......5.4 Ease of access to loans ....................................................................28.......+ ......4.2 Venture capital availability ...............................................................37.......+ ......3.7 Restriction on capital flows..............................................................36.......+ ......5.5 Strength of Investor Protection (010, 10 is best)* ......................26.......+ ......6.0 Soundness of banks...........................................................................18.......+ ......6.5 Regulation of securities exchanges................................................14.......+ ......5.8 Strength of Legal Rights (010, 10 is best)* ...................................72.......+ ......4.0
This column shows Brazils evolution in the score of each component and indicator. The first arrow indicates whether the score in 20082009 has improved (s), worsened (t), or remained unchanged (=) compared with the 20072008 edition. The second arrow indicates whether the score achieved in 20072008 has improved (s), worsened (t), or remained unchanged (=) compared with 20062007.
EVOLUTION
3rd pillar: Macroeconomic stability

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................10.......+ ......8.7 National savings rate (% GDP)*.......................................................51.......+ ....25.5 Inflation (%)* .......................................................................................60....... ......4.4 Interest rate spread (%)* ..................................................................23.......+ ......3.1 Government gross debt (% GDP)*.....................................................7.......+ ......4.1
9th pillar: Technological readiness

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................42.......+ ......5.2 Firm-level technology absorption ....................................................33.......+ ......5.4 Laws relating to ICT ...........................................................................26.......+ ......5.0 FDI and technology transfer.............................................................31.......+ ......5.3 Mobile telephone subscribers (per 100 population)* ..................55.......+ ....75.6 Internet users (per 100 population)* ...............................................51.......+ ....25.2 Personal computers (per 100 population)* ....................................53....... ....14.8 Broadband internet subscribers (per 100 population).................38.......+ ......5.9
4th pillar: Health and primary education

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................26.......+ ......6.8 Malaria incidence (cases per 100,000 population)*.......................1.......+ ......0.0 Business impact of tuberculosis .....................................................22.......+ ......6.6 Tuberculosis incidence (cases per 100,000 population)*............31.......+ ....15.0 Business impact of HIV/AIDS...........................................................43.......+ ......5.8 HIV prevalence (% adult population)* ............................................68.......+ ......0.3 Infant mortality (deaths per 1,000 live births)* ..............................39.......+ ......8.0 Life expectancy at birth (years)* .....................................................29.......+ ....78.0 Quality of primary education ..........................................................110.......+ ......2.7 Primary education enrollment (net rate, %)* ................................99....... ....88.0 Education expenditure (% GNI)* .....................................................84....... ......3.7
10th pillar: Market size

10.01 10.02 Domestic market size index*............................................................47....... ......4.0 Foreign market size index* ...............................................................43....... ......4.9
11th pillar: Business sophistication

11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................20....... ......5.4 Local supplier quality.........................................................................28.......+ ......5.3 State of cluster development ...........................................................53....... ......3.7 Nature of competitive advantage....................................................69.......+ ......3.4 Value chain breadth...........................................................................55.......+ ......3.9 Control of international distribution ................................................24.......+ ......4.7 Production process sophistication..................................................36....... ......4.4 Extent of marketing ............................................................................18.......+ ......5.5 Willingness to delegate authority....................................................36.......+ ......4.6
5th pillar: Higher education and training

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................54....... ....91.2 Tertiary education enrollment (gross rate, %)*.............................41.......+ ....46.6 Quality of the educational system ...................................................86.......+ ......3.2 Quality of math and science education........................................107.......+ ......3.1 Quality of management schools ......................................................19.......+ ......5.2 Internet access in schools ...............................................................41.......+ ......4.5 Local availability of research and training services ....................46....... ......4.3 Extent of staff training .......................................................................48....... ......4.2
12th pillar: Innovation

12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................57....... ......3.3 Quality of scientific research institutions ......................................62....... ......3.9 Company spending on R&D..............................................................64....... ......3.1 University-industry research collaboration ...................................51....... ......3.5 Gov't procurement of advanced tech products............................53.......+ ......3.7 Availability of scientists and engineers..........................................35.......+ ......4.7 USPTA utility patents, 2007 (per million population)*...................40.......+ ......1.5
6th pillar: Goods market efficiency
For the sake of comparison, we report the average scores of the Latin America & the Caribbean region (LA&C), the BRIC countries (BRIC), the 12 newest EU members (EU Acc 12), and the best performer, whose name is also indicated.
LA&C BRIC EU Acc 12
Note 1 These are Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovak Republic, and Slovenia.
6.01 6.02 6.03 6.04 6.05 6.06
Intensity of local competition...........................................................19.......+ ......5.7 Extent of market dominance.............................................................57....... ......3.9 Effectiveness of anti-monopoly policy............................................25.......+ ......5.0 Extent and effect of taxation ............................................................45.......+ ......3.8 Total tax rate (% profits)* ..................................................................12.......+ ....25.9 Number of procedures required to start a business* .................58.......+ ......9.0
* Hard data. Note: For further details and explanation, please refer to the section "How to Read the Country Profiles" at the beginning of this chapter.
101
List of Countries
Country
Page
104 108 112 116 120 124 128 132 136
List of Countries
103
4: Country Profiles
Brazil
Key indicators
Population (millions), 2008............................................................................194.2 GDP (US$ billions), 2007.............................................................................1,313.6 GDP (PPP) per capita (int'l $), 2007..........................................................9,703.2 Real GDP growth (%), 2007 ..............................................................................5.4 GDP (PPP) as share (%) of world total, 2007.................................................2.8 Current account balance (% GDP), 2007 .......................................................0.1 Foreign reserves (months of imports), 2008 ................................................10.6 Unemployment (% labor force), 2008 .............................................................7.9 Human Development Index, 2006..................................................................0.81

1 5.7 United States 5.7 United States

GCI 20072008 (out of 131)....................................72..........4.0 GCI 20062007 (out of 122)....................................66..........4.1 Basic requirements...............................................96..........4.0 1st pillar: Institutions .............................................91..........3.6 2nd pillar: Infrastructure.......................................78..........3.2 3rd pillar: Macroeconomic stability..................122..........3.9 4th pillar: Health and primary education ...........79..........5.3 Efficiency enhancers ............................................51..........4.3 5th pillar: Higher education and training ...........58..........4.1 6th pillar: Goods market efficiency...................101..........3.9 7th pillar: Labor market efficiency ......................91..........4.2 8th pillar: Financial market sophistication.........64..........4.4 9th pillar: Technological readiness.....................56..........3.6 10th pillar: Market size..........................................10..........5.5 Innovation factors .................................................42..........4.0 11th pillar: Business sophistication ....................35..........4.6 12th pillar: Innovation............................................43..........3.5
5.8 United States 6.2 Finland 6.2 Singapore 6.6 Germany 6.5 Kuwait 6.6 Finland 5.8 United States 6.1 Finland 5.8 Singapore 6.2 United States 6.0 Hong Kong SAR 6.6 Netherlands 6.9 United States 5.8 United States 5.9 Germany 5.8 United States
104
Brazil
Best
LA&C
EU Acc 12
BRIC

Tax regulations................................................................19.0 Inadequate supply of infrastructure ...........................15.1 Tax rates...........................................................................14.8 Restrictive labor regulations ........................................13.8 Inefficient government bureaucracy ..........................13.5 Corruption ..........................................................................6.7 Inadequately educated workforce................................5.7 Access to financing .........................................................4.3 Policy instability................................................................2.4 Foreign currency regulations.........................................1.7 Crime and theft .................................................................1.2 Poor work ethic in national labor force .......................0.7 Poor public health ............................................................0.7 Inflation ..............................................................................0.3 Government instability/coups ........................................0.1
0
10 Percent of responses
15
20

12,000
Brazil
10,000
Western Hemisphere
8,000 6,000 4,000 2,000 0
Source: IMF.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
FDI inflows, 19962007

(US$ millions) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Main exports, 19962007

(US$ billions) 200
All commodities Machinery and transport equipment Food and live animals
100 150
Manufactured goods classified chiefly by material
50
0 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Share of merchandise exports by destination, 2007

European Union 25.2% Others 40.4%

Brazil ..............................................................9.1
Source: World Bank.
United States 15.8%
Venesuela 2.9% China 6.7%

Source: WTO.
Argentina 9.0%
4: Country Profiles
Brazil
105
4: Country Profiles
Brazil
INDICATOR RANK SCORE EVOLUTION LATAM
n Competitive advantages n Competitive disadvantages

BRIC EU ACC 12 BEST PERFORMER
Global Competitiveness Index......................................64.......................4.1 .......s .........t ........3.9 .......4.4 .......4.4 .......5.7 United States
Basic requirements......................................................................96 ..........................4.0.........s..........t..........4.2.........4.4.........4.8.........6.2 Finland Efficiency enhancers...................................................................51 ..........................4.3.........s..........s..........3.8.........4.4.........4.4.........5.8 United States Innovation and sophistication factors .....................................42 ..........................4.0.........s..........s..........3.4.........4.0.........3.8.........5.8 United States
1st pillar: Institutions ..........................................................................91 ............................3.6..........s...........t...........3.6..........3.8..........4.1..........6.2 Singapore 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ......................................................................................70 .............n ...........4.6..........s...........t...........4.2..........4.5..........4.9..........6.7 Intellectual property protection .........................................................79 .............n ...........3.3..........t...........t...........3.1..........3.4..........3.9..........6.3 Diversion of public funds ..................................................................118 .............n ...........2.5..........s...........t...........3.1..........3.2..........3.7..........6.5 Public trust of politicians ..................................................................122 .............n ...........1.6..........s...........t...........2.2..........2.3..........2.6..........6.5 Judicial independence ........................................................................68 .............n ...........3.8..........s...........s...........3.4..........3.9..........4.2..........6.6 Favoritism in decisions of government officials .............................63 .............n ...........3.2..........s...........t...........2.7..........3.2..........2.9..........6.0 Wastefulness of government spending..........................................129 .............n ...........2.2..........s...........t...........2.9..........3.2..........3.2..........6.1 Burden of government regulation ...................................................133 .............n ...........1.9..........s...........t...........2.9..........2.8..........3.1..........5.7 Efficiency of legal framework ............................................................98 .............n ...........3.0..........s...........t...........3.1..........3.6..........3.6..........6.3 Transparency of government policymaking...................................101 .............n ...........3.6..........s...........t...........3.7..........3.9..........3.9..........6.3 Business costs of terrorism................................................................12 .............n ...........6.5..........s...........s...........5.5..........5.5..........6.2..........6.8 Business costs of crime and violence............................................123 .............n ...........3.1..........s...........s...........3.4..........4.5..........5.4..........6.7 Organized crime..................................................................................116 .............n ...........4.1..........s...........t...........4.4..........4.6..........5.6..........6.8 Reliability of police services.............................................................117 .............n ...........2.8..........s...........t...........3.3..........3.8..........4.4..........6.7 Ethical behavior of firms .....................................................................89 .............n ...........3.8..........s...........t...........3.9..........3.9..........4.2..........6.6 Strength of auditing and reporting standards .................................60 .............n ...........5.0..........s...........s...........4.5..........4.7..........5.1..........6.3 Efficacy of corporate boards..............................................................46 .............n ...........4.9..........s...........s...........4.6..........4.8..........4.7..........6.1 Protection of minority shareholders interests................................42 .............n ...........5.0..........s...........s...........4.2..........4.4..........4.4..........6.1 Switzerland Switzerland Denmark Singapore New Zealand Denmark Singapore Singapore Denmark Singapore Finland Syria Norway Finland Sweden Hong Kong SAR Sweden Sweden
2nd pillar: Infrastructure ....................................................................78 ............................3.2..........s...........t...........3.2..........3.6..........3.9..........6.6 Germany
106
2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08
Quality of overall infrastructure .........................................................98 .............n ...........2.7..........s...........t...........3.3..........3.2..........3.9..........6.8 Quality of roads...................................................................................110 .............n ...........2.5..........s...........t...........3.4..........3.0..........3.5..........6.7 Quality of railroad infrastructure .......................................................86 .............n ...........1.8..........s...........t...........1.5..........3.6..........3.5..........6.8 Quality of port infrastructure ............................................................123 .............n ...........2.5..........t...........t...........3.7..........3.5..........4.3..........6.8 Quality of air transport infrastructure.............................................101 .............n ...........3.7..........t...........t...........4.5..........4.2..........4.7..........6.9 Available seat kilometers (per week, in millions)* .........................12 .............n ....2,353.9..........s...........s.......327.2...3,677.4......104.6.33,454.2 Quality of electricity supply ................................................................58 .............n ...........5.0..........s...........t...........4.2..........4.4..........5.3..........6.9 Main telephone lines (per 100 population)* ....................................62 .............n .........20.5..........t...........t.........17.5 ........20.7........32.6........66.9
Switzerland France Switzerland Singapore Singapore United States Denmark Switzerland
3rd pillar: Macroeconomic stability ..............................................122 ............................3.9..........s...........t...........4.7..........4.9..........5.2..........6.5 Kuwait 3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*............................................91 .............n .........2.2..........s............=..........0.2........0.6........0.8........43.8 National savings rate (% GDP)*.........................................................86 .............n .........18.1..........t...........t.........20.9........34.1........17.7........67.5 Inflation (%)* .........................................................................................54 .............n ...........3.6..........s...........s...........7.1..........5.9..........4.8........8.8 Interest rate spread (%)* ..................................................................131 .............n .........33.1..........s...........s...........8.6........11.7..........3.7..........1.0 Government gross debt (% GDP)*.....................................................85 .............n .........47.0..........s...........s.........46.7........37.7........32.5..........0.0 Kuwait Kuwait Chad Switzerland Multiple (2)
4th pillar: Health and primary education........................................79 ............................5.3..........s...........t...........5.4..........5.4..........5.9..........6.6 Finland 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ................................................................66 .............n ...........6.3..........t...........s...........5.9..........6.0..........6.7..........7.0 Malaria incidence (cases per 100,000 population)*.....................101 .............n .......206.4..........s............=........393.7 ........93.3..........0.0..........0.0 Business impact of tuberculosis .......................................................51 .............n ...........6.2..........s...........s...........5.7..........5.8..........6.1..........6.9 Tuberculosis incidence (cases per 100,000 population)*..............64 .............n .........50.0..........s...........s.........61.1 ......106.0........34.9..........4.0 Business impact of HIV/AIDS.............................................................71 .............n ...........5.2..........t...........t...........4.7..........5.4..........5.8..........6.6 HIV prevalence (% adult population)* ..............................................86 .............n ...........0.6..........t...........s...........0.8..........0.5..........0.3..........0.1 Infant mortality (deaths per 1,000 live births)* ................................88 .............n .........28.0..........s............=..........22.5........29.5..........6.9..........1.8 Life expectancy at birth (years)* .......................................................66 .............n .........72.0..........s............=..........72.4 ........68.5........74.8........83.0 Quality of primary education ............................................................119 .............n ...........2.5..........s ..........n/a ..........3.0..........3.8..........4.6..........6.7 Primary education enrollment (net rate, %)* ..................................58 .............n .........94.4..........t...........t.........93.8........92.8........92.8........99.9 Education expenditure (% GNI)* .......................................................64 .............n ...........4.3..........s............=............4.0..........3.4..........4.8..........9.3 Finland Multiple (60) Finland Multiple (2) Norway Multiple (26) Hong Kong SAR Japan Finland Malaysia Lesotho
5th pillar: Higher education and training .......................................58 ............................4.1..........s...........t...........3.7..........4.2..........4.7..........6.1 Finland 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.........................14 .............n .......105.5..........s...........s.........81.9........79.8........97.2......150.3 Tertiary education enrollment (gross rate, %)*...............................76 .............n .........25.5..........s...........s.........29.7........32.8........57.6........94.9 Quality of the educational system ...................................................117 .............n ...........2.7..........s...........t...........3.0..........3.8..........4.0..........6.2 Quality of math and science education..........................................124 .............n ...........2.7..........t...........t...........3.2..........4.4..........5.0..........6.5 Quality of management schools ........................................................58 .............n ...........4.2..........s...........t...........4.1..........4.4..........4.3..........6.1 Internet access in schools .................................................................67 .............n ...........3.4..........s...........t...........3.0..........3.8..........4.8..........6.4 Local availability of research and training services ......................26 .............n ...........4.9..........s...........t...........3.8..........4.5..........4.2..........6.1 Extent of staff training .........................................................................46 .............n ...........4.3..........s...........t...........3.7..........4.2..........4.1..........5.9 Australia Greece Finland Finland France Finland United States Denmark
6th pillar: Goods market efficiency................................................101 ............................3.9..........s...........t...........4.0..........4.2..........4.5..........5.8 Singapore 6.01 6.02 6.03 6.04 Intensity of local competition.............................................................43 .............n ...........5.3..........s...........s...........4.7..........5.3..........5.4..........6.4 Extent of market dominance...............................................................32 .............n ...........4.6..........s...........s...........3.5..........4.4..........4.2..........6.1 Effectiveness of anti-monopoly policy..............................................36 .............n ...........4.6..........s...........t...........3.5..........4.2..........4.2..........6.0 Extent and effect of taxation ..............................................................134..............n............1.7 ..........s ...........t ...........3.2 ..........3.3 ..........3.6 ..........6.2 Germany Germany Netherlands United Arab Emirates
The Global Competitveness Index in detail (contd)

INDICATOR RANK
s/t Improve/worsen between GCI 20072008 and GCI 20082009 s/t Improve/worsen between GCI 20062007 and GCI 20072008
SCORE EVOLUTION LATAM BRIC EU ACC 12 BEST PERFORMER
6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Total tax rate (% profits)* ..................................................................116 .............n .........69.2..........s............=..........50.2........66.3........44.6........14.4 Number of procedures required to start a business*..................125 .............n .........18.0..........t............=..........10.6........13.0..........7.6..........2.0 Number of days required to start a business*..............................127 .............n .......152.0...........=.............=..........74.4........62.3........24.4..........2.0 Agricultural policy costs .....................................................................27 .............n ...........4.5..........s...........s...........3.9..........4.2..........3.7..........5.8 Prevalence of trade barriers ............................................................106 .............n ...........4.1..........s...........s...........4.4..........4.3..........5.3..........6.7 Trade-weighted tariff rate (% duty)*.................................................92 .............n ...........8.5..........t............=............7.4........14.1..........1.1..........0.0 Prevalence of foreign ownership ......................................................80 .............n ...........4.9..........s...........t...........5.2..........4.5..........5.3..........6.7 Business impact of rules on FDI ........................................................82 .............n ...........5.0..........s...........t...........4.9..........4.8..........5.2..........6.7 Burden of customs procedures .......................................................127 .............n ...........2.5..........t ..........n/a ..........3.4..........3.3..........4.4..........6.5 Degree of customer orientation.........................................................56 .............n ...........4.8..........s...........t...........4.3..........4.7..........4.7..........6.2 Buyer sophistication ............................................................................69 .............n ...........3.6..........t...........t...........3.6..........4.0..........3.7..........5.4
Multiple (2) Multiple (3) Australia New Zealand Hong Kong SAR Multiple (2) Hong Kong SAR Ireland Singapore Japan Switzerland
7th pillar: Labor market efficiency...................................................91 ............................4.2..........s...........s ...........4.1..........4.4..........4.5..........5.8 United States 7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations..........................................84 .............n ...........4.3..........s...........s...........4.3..........4.5..........4.4..........6.2 Flexibility of wage determination.....................................................106 .............n ...........4.3..........s...........s...........4.9..........5.1..........5.4..........6.3 Non-wage labor costs (% workers salary)* .................................123 .............n .........37.0..........s............=..........14.8........32.3........28.6..........0.0 Rigidity of Employment Index (0100, 100 is worst)*......................93 .............n .........46.0..........t............=..........38.0........36.0........44.1..........0.0 Hiring and firing practices ................................................................112 .............n ...........3.0..........s...........t...........3.5..........3.7..........3.6..........6.0 Firing costs (in weeks of wages)* .....................................................67 .............n .........37.0..........t............=..........63.4........50.3........22.2..........0.0 Pay and productivity ............................................................................66 .............n ...........4.2..........s...........s...........4.0..........4.7..........4.6..........5.9 Reliance on professional management............................................25 .............n ...........5.4..........s...........s...........4.5..........5.2..........4.6..........6.4 Brain drain .............................................................................................34 .............n ...........4.3..........s...........s...........3.4..........4.0..........3.3..........6.1 Female-to-male participation ratio in labor force ...............................75 .............n ...........0.7..........s............=............0.7..........0.7..........0.8..........1.0 Denmark Hong Kong SAR Multiple (8) Multiple (3) Denmark Multiple (4) Hong Kong SAR Sweden United States Mozambique
8th pillar: Financial market sophistication ....................................64 ............................4.4..........s...........s...........4.1..........4.1..........4.7..........6.2 Hong Kong SAR 8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .........................................................21 .............n ...........6.0..........s...........s...........4.2..........4.7..........4.6..........6.8 Financing through local equity market .............................................56 .............n ...........4.6..........t...........t...........3.8..........4.5..........4.2..........5.8 Ease of access to loans ......................................................................77 .............n ...........3.2..........s...........t...........3.0..........3.2..........3.9..........5.4 Venture capital availability .................................................................79 .............n ...........2.9..........s...........s...........2.8..........3.3..........3.3..........5.1 Restriction on capital flows..............................................................119 .............n ...........3.3..........s ..........n/a ..........4.8..........3.5..........5.3..........6.6 Strength of Investor Protection (010, 10 is best)*.........................50 .............n ...........5.3...........=.............=............4.8..........5.3..........5.5..........9.7 Soundness of banks.............................................................................24 .............n ...........6.4..........s...........s...........5.6..........5.5..........5.8..........6.8 Regulation of securities exchanges..................................................28 .............n ...........5.5..........s ..........n/a ..........4.6..........4.6..........4.8..........6.3 Strength of Legal Rights (010, 10 is best)* ...................................119 .............n ...........2.0...........=.............=............3.7..........3.5..........6.0........10.0 Switzerland Hong Kong SAR Denmark United States Hong Kong SAR New Zealand Canada Sweden Multiple (2)
9th pillar: Technological readiness .................................................56 ............................3.6..........s...........s...........3.2..........3.4..........4.3..........6.0 Netherlands 9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies......................................................58 .............n ...........4.8..........s...........s...........4.1..........4.5..........4.9..........6.7 Firm-level technology absorption ......................................................42 .............n ...........5.3..........s...........s...........4.5..........5.0..........4.9..........6.6 Laws relating to ICT .............................................................................49 .............n ...........4.2..........s...........t...........3.4..........4.1..........4.4..........6.1 FDI and technology transfer...............................................................43 .............n ...........5.2..........s...........t...........4.7..........4.9..........5.0..........6.4 Mobile telephone subscribers (per 100 population)* ....................78 .............n .........52.9..........s...........s.........58.5........52.1......102.9......138.1 Internet users (per 100 population)* .................................................57 .............n .........22.6..........s...........t.........20.5........15.4........43.3........92.5 Personal computers (per 100 population)* ......................................50 .............n .........16.1..........t...........s...........8.6..........9.4........29.2........94.6 Broadband internet subscribers (per 100 population) ...................52 .............n ...........3.1..........s............=............2.5..........2.3..........9.6........31.9 Iceland Iceland Denmark Singapore Lithuania Barbados Canada Denmark
10th pillar: Market size .......................................................................10 ............................5.5..........s...........t...........3.4..........5.9..........3.8..........6.9 United States 10.01 10.02 Domestic market size index*................................................................9 .............n ...........5.6..........s...........t...........3.2..........5.9..........3.5..........7.0 United States Foreign market size index* .................................................................23 .............n ...........5.5..........s...........t...........4.0..........6.1..........4.3..........7.0 China 11th pillar: Business sophistication ................................................35 ............................4.6..........s...........s...........4.0..........4.4..........4.3 11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 5.9 Germany Japan Austria Taiwan, China Germany Sweden France Japan United States Sweden
Local supplier quantity ........................................................................13 .............n ...........5.5..........s...........s...........4.6..........5.3..........4.9..........6.3 Local supplier quality...........................................................................41 .............n ...........5.1..........s...........s...........4.5..........4.7..........4.9..........6.4 State of cluster development .............................................................43 .............n ...........3.9..........t...........t...........3.3..........4.0..........3.5..........5.6 Nature of competitive advantage......................................................96 .............n ...........3.0..........s...........t...........3.3..........3.1..........3.6..........6.3 Value chain breadth .............................................................................66 .............n ...........3.6..........t...........t...........3.4..........3.7..........4.1..........6.1 Control of international distribution ..................................................46 .............n ...........4.3..........s...........t...........3.8..........4.2..........4.1..........5.5 Production process sophistication....................................................33 .............n ...........4.5..........s...........s...........3.4..........4.0..........4.0..........6.2 Extent of marketing ..............................................................................27 .............n ...........5.3..........s...........t...........4.5..........4.7..........4.6..........6.5 Willingness to delegate authority......................................................37 .............n ...........4.6..........s...........s...........4.1..........4.3..........3.9..........6.2
12th pillar: Innovation..........................................................................43 ............................3.5..........t...........t...........2.9..........3.6..........3.4..........5.8 United States 12.01 Capacity for innovation........................................................................27 .............n ...........4.0..........t...........s...........2.9..........3.9..........3.4..........6.0 12.02 Quality of scientific research institutions ........................................43 .............n ...........4.3..........s...........s...........3.4..........4.5..........4.2..........6.3 12.03 Company spending on R&D................................................................31 .............n ...........3.9..........s...........s...........2.9..........3.9..........3.3..........6.0 12.04 University-industry research collaboration .....................................50 .............n ...........3.6..........s...........s...........3.0..........3.8..........3.5..........5.8 12.05 Gov't procurement of advanced tech products..............................84 .............n ...........3.4..........t...........t...........3.2..........3.6..........3.6..........5.5 12.06 Availability of scientists and engineers............................................57 .............n ...........4.4..........t...........s...........3.7..........4.8..........4.3..........5.9 12.07 USPTA utility patents, 2007 (per million population)*.....................58 .............n ...........0.5..........t...........s...........0.7..........0.7..........2.7......270.4 Germany United States Switzerland United States Singapore Finland Taiwan, China
4: Country Profiles
Brazil
107
4: Country Profiles
Chile
Key indicators
Population (millions), 2008..............................................................................16.8 GDP (US$ billions), 2007................................................................................163.9 GDP (PPP) per capita (int'l $), 2007........................................................13,921.2 Real GDP growth (%), 2007 ..............................................................................5.1 GDP (PPP) as share (%) of world total, 2007.................................................0.4 Current account balance (% GDP), 2007 .......................................................4.4 Foreign reserves (in months of imports), 2007..............................................3.7 Unemployment (% labor force), 2008 .............................................................7.8 Human Development Index, 2006..................................................................0.87


GCI 20072008 (out of 131)....................................26..........4.8 GCI 20062007 (out of 122)....................................27..........4.8 Basic requirements...............................................36..........5.1 1st pillar: Institutions .............................................37..........4.7 2nd pillar: Infrastructure.......................................30..........4.6 3rd pillar: Macroeconomic stability....................14..........5.9 4th pillar: Health and primary education ...........73..........5.4 Efficiency enhancers ............................................30..........4.6 5th pillar: Higher education and training ...........50..........4.3 6th pillar: Goods market efficiency.....................26..........4.9 7th pillar: Labor market efficiency ......................17..........4.9 8th pillar: Financial market sophistication.........29..........5.1 9th pillar: Technological readiness.....................42..........4.0 10th pillar: Market size..........................................47..........4.3 Innovation factors .................................................44..........4.0 11th pillar: Business sophistication ....................31..........4.7 12th pillar: Innovation............................................56..........3.3

7 6 5 4 3 2
Market size
108
Chile
Brazil

Chile
Restrictive labor regulations ........................................26.0 Inefficient government bureaucracy ..........................17.6 Inadequately educated workforce..............................11.7 Corruption ..........................................................................6.5 Poor work ethic in national labor force .......................5.2 Access to financing .........................................................5.1 Inflation ..............................................................................4.9 Tax rates.............................................................................4.7 Inadequate supply of infrastructure .............................4.1 Policy instability................................................................4.1 Tax regulations..................................................................4.0 Crime and theft .................................................................3.8 Poor public health ............................................................1.6 Foreign currency regulations.........................................0.4 Government instability/coups ........................................0.3
Chile Brazil 30
Chile
16,000
Chile Bazil
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF.

(US$ millions) 16,000
12,000
8,000
4,000
0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 70
All commodities
60
Crude Materials, inedible, except fuels Food and live animals Manufactured goods classified chiefly by material
50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


Chile..............................................................39.3
Source: World Bank.
Korea, Rep. 6.1% China 8.8% Japan 10.8%

Source: WTO.
United States 16.0%
4: Country Profiles
109
4: Country Profiles
Chile

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................40.......+ ......5.4 Intellectual property protection .......................................................63.......+ ......3.6 Diversion of public funds ..................................................................52.......+ ......3.8 Public trust of politicians ..................................................................42.......+ ......3.4 Judicial independence ......................................................................52.......+ ......4.5 Favoritism in decisions of government officials ...........................41.......+ ......3.6 Wastefulness of government spending..........................................49.......+ ......3.7 Burden of government regulation ...................................................34.......+ ......3.7 Efficiency of legal framework ..........................................................30.......+ ......4.8 Transparency of government policymaking...................................26.......+ ......4.9 Business costs of terrorism..............................................................27....... ......6.3 Business costs of crime and violence............................................84.......+ ......4.4 Organized crime..................................................................................32.......+ ......6.2 Reliability of police services.............................................................16.......+ ......6.1 Ethical behavior of firms ...................................................................23.......+ ......5.3 Strength of auditing and reporting standards...............................32.......+ ......5.6 Efficacy of corporate boards..............................................................7.......+ ......5.6 Protection of minority shareholders interests..............................32.......+ ......5.3
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................61.......+ ....27.0 Agricultural policy costs .....................................................................3.......+ ......5.1 Prevalence of trade barriers ..............................................................5.......+ ......6.1 Trade-weighted tariff rate (% duty)*...............................................57.......+ ......4.7 Prevalence of foreign ownership ....................................................11.......+ ......6.1 Business impact of rules on FDI ......................................................19.......+ ......5.8 Burden of customs procedures .........................................................7.......+ ......5.6 Degree of customer orientation.......................................................47.......+ ......5.0 Buyer sophistication ..........................................................................29.......+ ......4.4

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................51.......+ ......4.7 Flexibility of wage determination.......................................................6.......+ ......6.0 Non-wage labor costs (% workers salary)* .................................12.......+ ......3.0 Rigidity of Employment Index (0100, 100 is worst)*....................32.......+ ....24.0 Hiring and firing practices ................................................................74.......+ ......3.7 Firing costs (in weeks of wages)* ...................................................81....... ....52.0 Pay and productivity ..........................................................................21.......+ ......4.8 Reliance on professional management..........................................18.......+ ......5.6 Brain drain .............................................................................................6.......+ ......5.3 Female-to-male participation ratio in labor force ......................111....... ......0.5

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................29.......+ ......5.1 Quality of roads...................................................................................22.......+ ......5.5 Quality of railroad infrastructure .....................................................73.......+ ......2.1 Quality of port infrastructure............................................................37.......+ ......4.9 Quality of air transport infrastructure.............................................24.......+ ......5.9 Available seat kilometers (per week, in millions)* .......................39....... ..427.1 Quality of electricity supply ..............................................................49.......+ ......5.3 Main telephone lines (per 100 population)* ..................................63....... ....20.2

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................26....... ......5.8 Financing through local equity market ...........................................10.......+ ......5.4 Ease of access to loans ....................................................................28.......+ ......4.2 Venture capital availability ...............................................................37.......+ ......3.7 Restriction on capital flows..............................................................36.......+ ......5.5 Strength of Investor Protection (010, 10 is best)* ......................26.......+ ......6.0 Soundness of banks...........................................................................18.......+ ......6.5 Regulation of securities exchanges................................................14.......+ ......5.8 Strength of Legal Rights (010, 10 is best)* ...................................72.......+ ......4.0
110

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................10.......+ ......8.7 National savings rate (% GDP)*.......................................................51.......+ ....25.5 Inflation (%)* .......................................................................................60....... ......4.4 Interest rate spread (%)* ..................................................................23.......+ ......3.1 Government gross debt (% GDP)*.....................................................7.......+ ......4.1

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................42.......+ ......5.2 Firm-level technology absorption ....................................................33.......+ ......5.4 Laws relating to ICT ...........................................................................26.......+ ......5.0 FDI and technology transfer.............................................................31.......+ ......5.3 Mobile telephone subscribers (per 100 population)* ..................55.......+ ....75.6 Internet users (per 100 population)* ...............................................51.......+ ....25.2 Personal computers (per 100 population)* ....................................53....... ....14.8 Broadband internet subscribers (per 100 population).................38.......+ ......5.9

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................26.......+ ......6.8 Malaria incidence (cases per 100,000 population)*.......................1.......+ ......0.0 Business impact of tuberculosis .....................................................22.......+ ......6.6 Tuberculosis incidence (cases per 100,000 population)*............31.......+ ....15.0 Business impact of HIV/AIDS...........................................................43.......+ ......5.8 HIV prevalence (% adult population)* ............................................68.......+ ......0.3 Infant mortality (deaths per 1,000 live births)* ..............................39.......+ ......8.0 Life expectancy at birth (years)* .....................................................29.......+ ....78.0 Quality of primary education ..........................................................110.......+ ......2.7 Primary education enrollment (net rate, %)* ................................99....... ....88.0 Education expenditure (% GNI)* .....................................................84....... ......3.7


11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................20....... ......5.4 Local supplier quality.........................................................................28.......+ ......5.3 State of cluster development ...........................................................53....... ......3.7 Nature of competitive advantage....................................................69.......+ ......3.4 Value chain breadth...........................................................................55.......+ ......3.9 Control of international distribution ................................................24.......+ ......4.7 Production process sophistication..................................................36....... ......4.4 Extent of marketing ............................................................................18.......+ ......5.5 Willingness to delegate authority....................................................36.......+ ......4.6

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................54....... ....91.2 Tertiary education enrollment (gross rate, %)*.............................41.......+ ....46.6 Quality of the educational system ...................................................86.......+ ......3.2 Quality of math and science education........................................107.......+ ......3.1 Quality of management schools ......................................................19.......+ ......5.2 Internet access in schools ...............................................................41.......+ ......4.5 Local availability of research and training services ....................46....... ......4.3 Extent of staff training .......................................................................48....... ......4.2

12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................57....... ......3.3 Quality of scientific research institutions ......................................62....... ......3.9 Company spending on R&D..............................................................64....... ......3.1 University-industry research collaboration ...................................51....... ......3.5 Gov't procurement of advanced tech products............................53.......+ ......3.7 Availability of scientists and engineers..........................................35.......+ ......4.7 USPTA utility patents, 2007 (per million population)*...................40.......+ ......1.5

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition...........................................................19.......+ ......5.7 Extent of market dominance.............................................................57....... ......3.9 Effectiveness of anti-monopoly policy............................................25.......+ ......5.0 Extent and effect of taxation ............................................................45.......+ ......3.8 Total tax rate (% profits)* ..................................................................12.......+ ....25.9 Number of procedures required to start a business* .................58.......+ ......9.0
4: Country Profiles
China
Key indicators
Population (millions), 2008.........................................................................1,336.8 GDP (US$ billions), 2007.............................................................................3,280.2 GDP (PPP) per capita (int'l $), 2007..........................................................5,325.2 Real GDP growth (%), 2007 ............................................................................11.9 GDP (PPP) as share (%) of world total, 2007...............................................10.8 Current account balance (% GDP), 2007 .....................................................11.3 Foreign reserves (in months of imports), 2007............................................17.8 Unemployment (% labor force), 2008 .............................................................9.0 Human Development Index, 2006..................................................................0.76
Competitiveness rankings

GCI 20072008 (out of 131)....................................34..........4.6 GCI 20062007 (out of 122)....................................34..........4.6 Basic requirements...............................................42..........5.0 1st pillar: Institutions .............................................56..........4.2 2nd pillar: Infrastructure.......................................47..........4.2 3rd pillar: Macroeconomic stability....................11..........5.9 4th pillar: Health and primary education ...........50..........5.7 Efficiency enhancers ............................................40..........4.4 5th pillar: Higher education and training ...........64..........4.1 6th pillar: Goods market efficiency.....................51..........4.5 7th pillar: Labor market efficiency ......................51..........4.5 8th pillar: Financial market sophistication.......109..........3.6 9th pillar: Technological readiness.....................77..........3.2 10th pillar: Market size............................................2..........6.6 Innovation factors .................................................32..........4.2 11th pillar: Business sophistication ....................43..........4.5 12th pillar: Innovation............................................28..........3.9

7 6 5 4 3 2
Market size
112
China
Brazil

China
Access to financing .......................................................13.7 Policy instability..............................................................13.1 Inefficient government bureaucracy ..........................11.5 Inflation ............................................................................10.8 Tax regulations..................................................................8.0 Corruption ..........................................................................7.4 Inadequate supply of infrastructure .............................7.2 Tax rates.............................................................................6.8 Inadequately educated workforce................................6.2 Poor work ethic in national labor force .......................4.1 Restrictive labor regulations ..........................................4.0 Foreign currency regulations.........................................3.9 Government instability/coups ........................................1.9 Poor public health ............................................................0.9 Crime and theft .................................................................0.6
China Brazil 30
China
12,000
China
10,000
Brazil
8,000 6,000 4,000 2,000 0
Source: IMF.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

80,000
60,000
40,000
20,000
0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 1,400
All commodities
1,200
Machines and transport equipment Miscellaneous manufactured articles Manufactured goods classified chiefly by material
1,000 800 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


China ............................................................11.0
Source: World Bank.
United States 19.1% Korea, Rep. 4.6% Japan 8.4% Hong Kong SAR 15.2%
Source: WTO.
4: Country Profiles
113
4: Country Profiles
China

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................54.......+ ......5.0 Intellectual property protection .......................................................53.......+ ......3.9 Diversion of public funds ..................................................................66.......+ ......3.5 Public trust of politicians ..................................................................36.......+ ......3.6 Judicial independence ......................................................................69....... ......3.8 Favoritism in decisions of government officials ...........................47.......+ ......3.4 Wastefulness of government spending..........................................36.......+ ......3.9 Burden of government regulation ...................................................23.......+ ......3.9 Efficiency of legal framework ..........................................................54.......+ ......3.9 Transparency of government policymaking...................................46.......+ ......4.5 Business costs of terrorism..............................................................89....... ......5.3 Business costs of crime and violence............................................56.......+ ......5.1 Organized crime..................................................................................84.......+ ......4.9 Reliability of police services.............................................................50.......+ ......4.7 Ethical behavior of firms ...................................................................60.......+ ......4.2 Strength of auditing and reporting standards...............................86....... ......4.4 Efficacy of corporate boards............................................................90....... ......4.4 Protection of minority shareholders interests..............................94....... ......4.1
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................83.......+ ....35.0 Agricultural policy costs .....................................................................6.......+ ......5.1 Prevalence of trade barriers ............................................................72.......+ ......4.5 Trade-weighted tariff rate (% duty)*.............................................122....... ....14.2 Prevalence of foreign ownership ..................................................105....... ......4.4 Business impact of rules on FDI ......................................................55.......+ ......5.4 Burden of customs procedures .......................................................42.......+ ......4.5 Degree of customer orientation.......................................................73....... ......4.6 Buyer sophistication ..........................................................................21.......+ ......4.8

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................65.......+ ......4.5 Flexibility of wage determination.....................................................52.......+ ......5.3 Non-wage labor costs (% workers salary)* ...............................126....... ....44.0 Rigidity of Employment Index (0100, 100 is worst)*....................32.......+ ....24.0 Hiring and firing practices ................................................................53.......+ ......4.0 Firing costs (in weeks of wages)* .................................................108....... ....91.0 Pay and productivity ............................................................................9.......+ ......5.1 Reliance on professional management..........................................46....... ......5.0 Brain drain ...........................................................................................36....... ......4.2 Female-to-male participation ratio in labor force ........................32.......+ ......0.9

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................58.......+ ......3.9 Quality of roads...................................................................................51.......+ ......4.1 Quality of railroad infrastructure .....................................................28.......+ ......4.1 Quality of port infrastructure............................................................54.......+ ......4.3 Quality of air transport infrastructure.............................................74.......+ ......4.4 Available seat kilometers (per week, in millions)* .........................2.......+7,215.1 Quality of electricity supply ..............................................................68....... ......4.7 Main telephone lines (per 100 population)* ..................................47.......+ ....27.8

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................83....... ......3.8 Financing through local equity market ...........................................80....... ......4.1 Ease of access to loans ....................................................................99....... ......2.7 Venture capital availability ...............................................................49.......+ ......3.3 Restriction on capital flows............................................................121....... ......3.3 Strength of Investor Protection (010, 10 is best)* ......................67....... ......5.0 Soundness of banks.........................................................................108....... ......4.9 Regulation of securities exchanges..............................................109....... ......3.6 Strength of Legal Rights (010, 10 is best)* ...................................93.......+ ......3.0
114

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................49.......+ ......0.7 National savings rate (% GDP)*.........................................................5.......+ ....52.2 Inflation (%)* .......................................................................................62....... ......4.8 Interest rate spread (%)* ..................................................................33.......+ ......3.4 Government gross debt (% GDP)*...................................................22.......+ ....18.4

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................83....... ......4.2 Firm-level technology absorption ....................................................46....... ......5.1 Laws relating to ICT ...........................................................................47.......+ ......4.2 FDI and technology transfer.............................................................79....... ......4.7 Mobile telephone subscribers (per 100 population)* ..................90....... ....34.8 Internet users (per 100 population)* ...............................................85....... ....10.4 Personal computers (per 100 population)* ....................................81....... ......5.6 Broadband internet subscribers (per 100 population).................49.......+ ......3.8

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................77....... ......5.9 Malaria incidence (cases per 100,000 population)*.....................71.......+ ......2.0 Business impact of tuberculosis .....................................................73....... ......5.7 Tuberculosis incidence (cases per 100,000 population)*............87....... ....99.0 Business impact of HIV/AIDS...........................................................48.......+ ......5.7 HIV prevalence (% adult population)* ............................................23.......+ ......0.1 Infant mortality (deaths per 1,000 live births)* ..............................80.......+ ....23.0 Life expectancy at birth (years)* .....................................................55.......+ ....73.0 Quality of primary education ............................................................34.......+ ......4.7 Primary education enrollment (net rate, %)* ..................................5.......+ ....99.5 Education expenditure (% GNI)* ...................................................120....... ......1.8

10.01 10.02 Domestic market size index*..............................................................2.......+ ......6.4 Foreign market size index* .................................................................1.......+ ......7.0

11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................18....... ......5.5 Local supplier quality.........................................................................62....... ......4.7 State of cluster development ...........................................................19.......+ ......4.6 Nature of competitive advantage....................................................71.......+ ......3.4 Value chain breadth...........................................................................56.......+ ......3.8 Control of international distribution ................................................47....... ......4.3 Production process sophistication..................................................59....... ......3.7 Extent of marketing ............................................................................62....... ......4.6 Willingness to delegate authority....................................................58....... ......4.2

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................92....... ....75.5 Tertiary education enrollment (gross rate, %)*.............................81....... ....21.6 Quality of the educational system ...................................................55.......+ ......3.8 Quality of math and science education..........................................38.......+ ......4.8 Quality of management schools ......................................................74....... ......3.9 Internet access in schools ...............................................................33.......+ ......4.6 Local availability of research and training services ....................39....... ......4.5 Extent of staff training .......................................................................42.......+ ......4.4
12th pillar: Innovation 6th pillar: Goods market efficiency

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition...........................................................27.......+ ......5.6 Extent of market dominance.............................................................39....... ......4.4 Effectiveness of anti-monopoly policy............................................55....... ......4.0 Extent and effect of taxation ............................................................36.......+ ......4.0 Total tax rate (% profits)* ................................................................120....... ....73.9 Number of procedures required to start a business* ...............108.......+ ....13.0 12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................25.......+ ......4.2 Quality of scientific research institutions ......................................37.......+ ......4.4 Company spending on R&D..............................................................24.......+ ......4.2 University-industry research collaboration ...................................23.......+ ......4.5 Gov't procurement of advanced tech products............................20.......+ ......4.2 Availability of scientists and engineers..........................................52.......+ ......4.5 USPTA utility patents, 2007 (per million population)*...................54.......+ ......0.6
4: Country Profiles
India
Key indicators
Population (millions), 2008.........................................................................1,186.2 GDP (US$ billions), 2007.............................................................................1,100.7 GDP (PPP) per capita (int'l $), 2007..........................................................2,563.3 Real GDP growth (%), 2007 ..............................................................................9.3 GDP (PPP) as share (%) of world total, 2007.................................................4.6 Current account balance (% GDP), 2007 .....................................................1.4 Foreign reserves (in months of imports), 2007............................................11.7 Unemployment (% labor force), 2008 .............................................................6.8 Human Development Index, 2006..................................................................0.61
Competitiveness rankings

GCI 20072008 (out of 131)....................................48..........4.3 GCI 20062007 (out of 122)....................................42..........4.5 Basic requirements...............................................80..........4.2 1st pillar: Institutions .............................................53..........4.2 2nd pillar: Infrastructure.......................................72..........3.4 3rd pillar: Macroeconomic stability..................109..........4.3 4th pillar: Health and primary education .........100..........5.0 Efficiency enhancers ............................................33..........4.5 5th pillar: Higher education and training ...........63..........4.1 6th pillar: Goods market efficiency.....................47..........4.5 7th pillar: Labor market efficiency ......................89..........4.2 8th pillar: Financial market sophistication.........34..........5.0 9th pillar: Technological readiness.....................69..........3.3 10th pillar: Market size............................................5..........6.0 Innovation factors .................................................27..........4.3 11th pillar: Business sophistication ....................27..........4.8 12th pillar: Innovation............................................32..........3.7

7 6 5 4 3 2
Market size
116
India
Brazil

India
Inadequate supply of infrastructure ...........................25.5 Inefficient government bureaucracy ..........................14.6 Corruption ........................................................................10.1 Restrictive labor regulations ..........................................9.9 Tax regulations..................................................................8.8 Inflation ..............................................................................5.6 Policy instability................................................................5.0 Inadequately educated workforce................................4.8 Tax rates.............................................................................4.3 Poor work ethic in national labor force .......................3.8 Access to financing .........................................................3.1 Foreign currency regulations.........................................1.7 Government instability/coups ........................................1.3 Poor public health ............................................................1.3 Crime and theft .................................................................0.3
India Brazil 30
India
12,000
India
10,000
Brazil
8,000 6,000 4,000 2,000 0
Source: IMF.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

20,000
15,000
10,000
5,000
0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 160
All commodities Manufactured goods classified chiefly by material Mineral fuels, lubricants and related materials Miscellaneous manufactured articles
140 120 100 80 60 40 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


India..............................................................14.2
Source: World Bank.
United States 13.8%
United Arab Emirates 9.9% Singapore 4.9%

Source: WTO.
China 6.5%
4: Country Profiles
117
4: Country Profiles
India

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................52.......+ ......5.0 Intellectual property protection .......................................................57.......+ ......3.7 Diversion of public funds ..................................................................55.......+ ......3.7 Public trust of politicians ..................................................................84.......+ ......2.3 Judicial independence ......................................................................43.......+ ......4.9 Favoritism in decisions of government officials ...........................58.......+ ......3.2 Wastefulness of government spending..........................................62.......+ ......3.5 Burden of government regulation ...................................................90.......+ ......2.9 Efficiency of legal framework ..........................................................42.......+ ......4.4 Transparency of government policymaking...................................55.......+ ......4.2 Business costs of terrorism............................................................106....... ......5.0 Business costs of crime and violence............................................53.......+ ......5.2 Organized crime..................................................................................71.......+ ......5.2 Reliability of police services.............................................................62.......+ ......4.4 Ethical behavior of firms ...................................................................61.......+ ......4.2 Strength of auditing and reporting standards...............................30.......+ ......5.6 Efficacy of corporate boards............................................................45.......+ ......4.9 Protection of minority shareholders interests..............................33.......+ ......5.2
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................77.......+ ....33.0 Agricultural policy costs ...................................................................82....... ......3.8 Prevalence of trade barriers ............................................................69.......+ ......4.6 Trade-weighted tariff rate (% duty)*.............................................131....... ....18.7 Prevalence of foreign ownership ....................................................69.......+ ......5.2 Business impact of rules on FDI ......................................................61.......+ ......5.3 Burden of customs procedures .......................................................72.......+ ......3.7 Degree of customer orientation.......................................................45.......+ ......5.0 Buyer sophistication ..........................................................................38.......+ ......4.2

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................44.......+ ......4.7 Flexibility of wage determination.....................................................54.......+ ......5.3 Non-wage labor costs (% workers salary)* .................................69.......+ ....17.0 Rigidity of Employment Index (0100, 100 is worst)*....................48.......+ ....30.0 Hiring and firing practices ..............................................................104.......+ ......3.2 Firing costs (in weeks of wages)* ...................................................85....... ....56.0 Pay and productivity ..........................................................................45.......+ ......4.5 Reliance on professional management..........................................24.......+ ......5.4 Brain drain ...........................................................................................49....... ......3.7 Female-to-male participation ratio in labor force ......................122....... ......0.4

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................90.......+ ......2.9 Quality of roads...................................................................................87.......+ ......2.9 Quality of railroad infrastructure .....................................................21.......+ ......4.4 Quality of port infrastructure............................................................93.......+ ......3.3 Quality of air transport infrastructure.............................................66.......+ ......4.7 Available seat kilometers (per week, in millions)* .......................10.......+2,724.9 Quality of electricity supply ............................................................108....... ......3.2 Main telephone lines (per 100 population)* ................................107....... ......3.6

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................33....... ......5.3 Financing through local equity market .............................................8.......+ ......5.4 Ease of access to loans ....................................................................42.......+ ......3.9 Venture capital availability ...............................................................27.......+ ......4.0 Restriction on capital flows..............................................................83.......+ ......4.4 Strength of Investor Protection (010, 10 is best)* ......................26.......+ ......6.0 Soundness of banks...........................................................................51....... ......5.9 Regulation of securities exchanges................................................25.......+ ......5.6 Strength of Legal Rights (010, 10 is best)* ...................................29.......+ ......6.0
118

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*........................................127....... ....6.0 National savings rate (% GDP)*.......................................................19.......+ ....35.4 Inflation (%)* .......................................................................................77....... ......6.4 Interest rate spread (%)* ..................................................................69.......+ ......5.6 Government gross debt (% GDP)*.................................................113....... ....75.9

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................43.......+ ......5.2 Firm-level technology absorption ....................................................26.......+ ......5.5 Laws relating to ICT ...........................................................................38.......+ ......4.6 FDI and technology transfer.............................................................20.......+ ......5.4 Mobile telephone subscribers (per 100 population)* ................115....... ....14.8 Internet users (per 100 population)* ...............................................84....... ....10.7 Personal computers (per 100 population)* ....................................96....... ......2.8 Broadband internet subscribers (per 100 population).................92....... ......0.2

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ............................................................107....... ......5.0 Malaria incidence (cases per 100,000 population)*...................100.......+ ..165.0 Business impact of tuberculosis .....................................................92....... ......5.1 Tuberculosis incidence (cases per 100,000 population)*............99....... ..168.0 Business impact of HIV/AIDS...........................................................98....... ......4.5 HIV prevalence (% adult population)* ............................................68.......+ ......0.3 Infant mortality (deaths per 1,000 live births)* ............................105....... ....56.0 Life expectancy at birth (years)* ...................................................105....... ....63.0 Quality of primary education ............................................................80.......+ ......3.4 Primary education enrollment (net rate, %)* ................................94....... ....88.7 Education expenditure (% GNI)* .....................................................77....... ......3.9


11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ........................................................................4.......+ ......5.9 Local supplier quality.........................................................................37.......+ ......5.2 State of cluster development ...........................................................24.......+ ......4.5 Nature of competitive advantage....................................................83.......+ ......3.3 Value chain breadth...........................................................................28.......+ ......4.5 Control of international distribution ................................................29.......+ ......4.6 Production process sophistication..................................................41....... ......4.2 Extent of marketing ............................................................................28....... ......5.2 Willingness to delegate authority....................................................25.......+ ......4.8

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.....................104....... ....54.0 Tertiary education enrollment (gross rate, %)*.............................98....... ....11.8 Quality of the educational system ...................................................37.......+ ......4.3 Quality of math and science education..........................................17.......+ ......5.2 Quality of management schools ......................................................12.......+ ......5.4 Internet access in schools ...............................................................60.......+ ......3.5 Local availability of research and training services ....................32....... ......4.7 Extent of staff training .......................................................................34.......+ ......4.6

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition...........................................................11.......+ ......5.9 Extent of market dominance.............................................................19.......+ ......5.1 Effectiveness of anti-monopoly policy............................................28.......+ ......4.9 Extent and effect of taxation ............................................................28.......+ ......4.3 Total tax rate (% profits)* ................................................................117....... ....70.6 Number of procedures required to start a business* ...............108.......+ ....13.0 12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................35....... ......3.8 Quality of scientific research institutions ......................................27.......+ ......4.8 Company spending on R&D..............................................................29.......+ ......3.9 University-industry research collaboration ...................................45.......+ ......3.6 Gov't procurement of advanced tech products............................88....... ......3.4 Availability of scientists and engineers............................................3.......+ ......5.7 USPTA utility patents, 2007 (per million population)*...................57.......+ ......0.5
4: Country Profiles
Mexico
Key indicators
Population (millions), 2008............................................................................107.8 GDP (US$ billions), 2007.............................................................................1,022.8 GDP (PPP) per capita (int'l $), 2007........................................................14,119.8 Real GDP growth (%), 2007 ..............................................................................3.2 GDP (PPP) as share (%) of world total, 2007.................................................2.1 Current account balance (% GDP), 2007 .....................................................0.6 Foreign reserves (in months of imports), 2007..............................................3.4 Unemployment (% labor force), 2008 .............................................................4.0 Human Development Index, 2006..................................................................0.84


GCI 20072008 (out of 131)....................................52..........4.3 GCI 20062007 (out of 122)....................................52..........4.2 Basic requirements...............................................60..........4.5 1st pillar: Institutions .............................................97..........3.5 2nd pillar: Infrastructure.......................................68..........3.5 3rd pillar: Macroeconomic stability....................48..........5.3 4th pillar: Health and primary education ...........65..........5.6 Efficiency enhancers ............................................55..........4.2 5th pillar: Higher education and training ...........74..........3.8 6th pillar: Goods market efficiency.....................73..........4.1 7th pillar: Labor market efficiency ....................110..........4.0 8th pillar: Financial market sophistication.........66..........4.3 9th pillar: Technological readiness.....................71..........3.2 10th pillar: Market size..........................................11..........5.5 Innovation factors .................................................70..........3.6 11th pillar: Business sophistication ....................58..........4.2 12th pillar: Innovation............................................90..........2.9

7 6 5 4 3 2
Market size
120
Mexico
Brazil

Mexico
Inefficient government bureaucracy ..........................18.4 Corruption ........................................................................13.1 Inadequate supply of infrastructure ...........................10.3 Restrictive labor regulations ........................................10.0 Tax regulations..................................................................8.8 Access to financing .........................................................7.7 Tax rates.............................................................................7.6 Crime and theft .................................................................6.7 Inadequately educated workforce................................6.4 Policy instability................................................................3.9 Poor work ethic in national labor force .......................3.3 Government instability/coups ........................................1.6 Inflation ..............................................................................1.6 Foreign currency regulations.........................................0.4 Poor public health ............................................................0.3
0
Mexico Brazil 5 10 15 Percent of responses 20 25 30
Mexico
16,000
Mexico Brazil
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF.

(US$ millions) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 300
All commodities Machines and transport equipment Mineral fuels, lubricants and related materials Miscellaneous manufactured articles
250 200 150 100 50 0 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Venezuela 0.9% Colombia 1.1% Canada 2.4% European Union 5.3% Others 8.2%

Mexico .........................................................15.3
Source: World Bank.
United States 82.2%

Source: WTO.
4: Country Profiles
121
4: Country Profiles
Mexico

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................89....... ......4.1 Intellectual property protection .......................................................82....... ......3.2 Diversion of public funds ..................................................................95.......+ ......3.0 Public trust of politicians ..................................................................98.......+ ......2.1 Judicial independence ......................................................................86....... ......3.4 Favoritism in decisions of government officials ...........................90....... ......2.8 Wastefulness of government spending..........................................80.......+ ......3.2 Burden of government regulation .................................................121.......+ ......2.4 Efficiency of legal framework ........................................................111....... ......2.9 Transparency of government policymaking...................................94.......+ ......3.8 Business costs of terrorism..............................................................71....... ......5.6 Business costs of crime and violence..........................................125....... ......3.0 Organized crime................................................................................127....... ......3.5 Reliability of police services...........................................................124....... ......2.5 Ethical behavior of firms ...................................................................82.......+ ......3.9 Strength of auditing and reporting standards...............................71....... ......4.7 Efficacy of corporate boards............................................................82....... ......4.6 Protection of minority shareholders interests..............................69....... ......4.5
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................61.......+ ....27.0 Agricultural policy costs .................................................................105....... ......3.5 Prevalence of trade barriers ............................................................55.......+ ......4.8 Trade-weighted tariff rate (% duty)*.............................................105....... ....11.1 Prevalence of foreign ownership ....................................................25.......+ ......5.8 Business impact of rules on FDI ......................................................62.......+ ......5.3 Burden of customs procedures .......................................................74.......+ ......3.6 Degree of customer orientation.......................................................55.......+ ......4.8 Buyer sophistication ..........................................................................52.......+ ......3.8

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................68.......+ ......4.5 Flexibility of wage determination.....................................................72.......+ ......5.1 Non-wage labor costs (% workers salary)* .................................89.......+ ....21.0 Rigidity of Employment Index (0100, 100 is worst)*....................99....... ....48.0 Hiring and firing practices ................................................................91.......+ ......3.5 Firing costs (in weeks of wages)* ...................................................81....... ....52.0 Pay and productivity ..........................................................................70....... ......4.2 Reliance on professional management..........................................76....... ......4.5 Brain drain ...........................................................................................64....... ......3.4 Female-to-male participation ratio in labor force ......................115....... ......0.5

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................76.......+ ......3.3 Quality of roads...................................................................................66.......+ ......3.5 Quality of railroad infrastructure .....................................................72.......+ ......2.1 Quality of port infrastructure............................................................94.......+ ......3.3 Quality of air transport infrastructure.............................................56.......+ ......5.0 Available seat kilometers (per week, in millions)* .......................18.......1,740.3 Quality of electricity supply ..............................................................87....... ......4.0 Main telephone lines (per 100 population)* ..................................68....... ....18.3

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................56....... ......4.5 Financing through local equity market ...........................................77....... ......4.2 Ease of access to loans ....................................................................95....... ......2.8 Venture capital availability ...............................................................99....... ......2.5 Restriction on capital flows..............................................................45.......+ ......5.4 Strength of Investor Protection (010, 10 is best)* ......................26.......+ ......6.0 Soundness of banks...........................................................................55....... ......5.8 Regulation of securities exchanges................................................43....... ......5.2 Strength of Legal Rights (010, 10 is best)* ...................................93.......+ ......3.0
122

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................59.......+ ......0.0 National savings rate (% GDP)*.......................................................74.......+ ....20.4 Inflation (%)* .......................................................................................57....... ......4.0 Interest rate spread (%)* ..................................................................54.......+ ......4.4 Government gross debt (% GDP)*...................................................34.......+ ....22.

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................92....... ......4.0 Firm-level technology absorption ....................................................92....... ......4.4 Laws relating to ICT ...........................................................................69....... ......3.8 FDI and technology transfer.............................................................60....... ......5.0 Mobile telephone subscribers (per 100 population)* ..................80....... ....52.6 Internet users (per 100 population)* ...............................................63....... ....19.0 Personal computers (per 100 population)* ....................................55....... ....13.8 Broadband internet subscribers (per 100 population).................56....... ......2.8

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................37.......+ ......6.7 Malaria incidence (cases per 100,000 population)*.....................75.......+ ......3.7 Business impact of tuberculosis .....................................................37.......+ ......6.3 Tuberculosis incidence (cases per 100,000 population)*............39.......+ ....21.0 Business impact of HIV/AIDS...........................................................68.......+ ......5.3 HIV prevalence (% adult population)* ............................................68.......+ ......0.3 Infant mortality (deaths per 1,000 live births)* ..............................77.......+ ....22.0 Life expectancy at birth (years)* .....................................................50.......+ ....74.0 Quality of primary education ..........................................................116.......+ ......2.6 Primary education enrollment (net rate, %)* ................................23.......+ ....97.7 Education expenditure (% GNI)* .....................................................31.......+ ......5.3

10.01 10.02 Domestic market size index*............................................................12....... ......5.4 Foreign market size index* ...............................................................16.......+ ......5.8

11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................55....... ......4.9 Local supplier quality.........................................................................46....... ......4.9 State of cluster development ...........................................................58....... ......3.6 Nature of competitive advantage....................................................68.......+ ......3.4 Value chain breadth...........................................................................59.......+ ......3.8 Control of international distribution ................................................69....... ......4.0 Production process sophistication..................................................67....... ......3.6 Extent of marketing ............................................................................53....... ......4.7 Willingness to delegate authority....................................................54....... ......4.2

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................67....... ....87.2 Tertiary education enrollment (gross rate, %)*.............................74.......+ ....26.1 Quality of the educational system .................................................109.......+ ......2.8 Quality of math and science education........................................127....... ......2.6 Quality of management schools ......................................................53.......+ ......4.3 Internet access in schools ...............................................................76....... ......3.2 Local availability of research and training services ....................55....... ......4.1 Extent of staff training .......................................................................87....... ......3.6

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition...........................................................78....... ......4.8 Extent of market dominance...........................................................103....... ......3.1 Effectiveness of anti-monopoly policy............................................92....... ......3.4 Extent and effect of taxation ............................................................89.......+ ......3.1 Total tax rate (% profits)* ..................................................................92.......+ ....51.2 Number of procedures required to start a business* .................44.......+ ......8.0 12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................67....... ......3.1 Quality of scientific research institutions ......................................79....... ......3.7 Company spending on R&D..............................................................71....... ......3.0 University-industry research collaboration ...................................84....... ......3.0 Gov't procurement of advanced tech products..........................104....... ......3.2 Availability of scientists and engineers........................................105....... ......3.5 USPTA utility patents, 2007 (per million population)*...................56.......+ ......0.5
4: Country Profiles
Russian Federation
Key indicators
Population (millions), 2008............................................................................141.8 GDP (US$ billions), 2007.............................................................................1,289.5 GDP (PPP) per capita (int'l $), 2007........................................................14,705.0 Real GDP growth (%), 2007 ..............................................................................8.1 GDP (PPP) as share (%) of world total, 2007.................................................3.2 Current account balance (% GDP), 2007 .......................................................5.9 Foreign reserves (in months of imports), 2007............................................20.3 Unemployment (% labor force), 2008 .............................................................6.3 Human Development Index, 2006..................................................................0.81


GCI 20072008 (out of 131)....................................58..........4.2 GCI 20062007 (out of 122)....................................59..........4.1 Basic requirements...............................................56..........4.5 1st pillar: Institutions ...........................................110..........3.3 2nd pillar: Infrastructure.......................................59..........3.7 3rd pillar: Macroeconomic stability....................29..........5.6 4th pillar: Health and primary education ...........59..........5.6
Innovation Business sophistication
Institutions
7 6 5 4 3 2
Market size
124
Efficiency enhancers ............................................50..........4.3 5th pillar: Higher education and training ...........46..........4.4 6th pillar: Goods market efficiency.....................99..........3.9 7th pillar: Labor market efficiency ......................27..........4.7 8th pillar: Financial market sophistication.......112..........3.6 9th pillar: Technological readiness.....................67..........3.4 10th pillar: Market size............................................8..........5.7 Innovation factors .................................................73..........3.6 11th pillar: Business sophistication ....................91..........3.7 12th pillar: Innovation............................................48..........3.4
Russian Federation
Brazil

Russian Federation
Corruption ........................................................................19.4 Tax regulations................................................................14.8 Access to financing .......................................................12.8 Inefficient government bureaucracy ..........................11.5 Tax rates.............................................................................9.2 Inflation ..............................................................................8.4 Inadequate supply of infrastructure .............................8.3 Inadequately educated workforce................................6.7 Crime and theft .................................................................3.8 Poor work ethic in national labor force .......................2.0 Foreign currency regulations.........................................0.9 Government instability/coups ........................................0.8 Restrictive labor regulations ..........................................0.6 Policy instability................................................................0.6 Poor public health ............................................................0.4
0 5 10 15 Percent of responses 20
Russian Federation Brazil 25 30
Russian Federation
16,000
Russian Federation Brazil
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF.

(US$ millions) 60,000 50,000 40,000 30,000 20,000 10,000 0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 400
All commodities Mineral fuels, lubricants and related materials Manufactured goods classified chiefly by material Goods not classified by kind elsewhere in the SITC
350 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Others 25.6%

Russian Federation ....................................34.7
Source: World Bank.
Switzerland 4.1% China 4.5% Ukraine 4.8% Turkey 5.2%

Source: WTO.
4: Country Profiles
125
4: Country Profiles
Russian Federation

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ..................................................................................122....... ......3.3 Intellectual property protection .......................................................98....... ......2.9 Diversion of public funds ................................................................102.......+ ......2.9 Public trust of politicians ................................................................111.......+ ......1.9 Judicial independence ....................................................................109....... ......2.9 Favoritism in decisions of government officials ...........................88....... ......2.8 Wastefulness of government spending..........................................82.......+ ......3.2 Burden of government regulation .................................................118.......+ ......2.5 Efficiency of legal framework ........................................................107....... ......2.9 Transparency of government policymaking.................................119....... ......3.2 Business costs of terrorism............................................................100....... ......5.1 Business costs of crime and violence............................................80.......+ ......4.5 Organized crime................................................................................105.......+ ......4.3 Reliability of police services...........................................................105.......+ ......3.2 Ethical behavior of firms .................................................................112....... ......3.5 Strength of auditing and reporting standards.............................108....... ......3.8 Efficacy of corporate boards............................................................35.......+ ......5.1 Protection of minority shareholders interests............................128....... ......3.3
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................66.......+ ....29.0 Agricultural policy costs .................................................................104....... ......3.5 Prevalence of trade barriers ..........................................................114....... ......4.0 Trade-weighted tariff rate (% duty)*.............................................125....... ....14.8 Prevalence of foreign ownership ..................................................127....... ......3.5 Business impact of rules on FDI ....................................................129....... ......3.5 Burden of customs procedures .....................................................121.......+ ......2.7 Degree of customer orientation.......................................................79....... ......4.5 Buyer sophistication ..........................................................................74....... ......3.5

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................82.......+ ......4.3 Flexibility of wage determination.....................................................56.......+ ......5.3 Non-wage labor costs (% workers salary)* ...............................112.......+ ....31.0 Rigidity of Employment Index (0100, 100 is worst)*....................87.......+ ....44.0 Hiring and firing practices ................................................................23.......+ ......4.6 Firing costs (in weeks of wages)* ...................................................28.......+ ....17.0 Pay and productivity ..........................................................................11.......+ ......5.0 Reliance on professional management..........................................58....... ......4.8 Brain drain ...........................................................................................44....... ......4.0 Female-to-male participation ratio in labor force ........................21.......+ ......0.9

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................78.......+ ......3.3 Quality of roads.................................................................................104.......+ ......2.5 Quality of railroad infrastructure .....................................................32.......+ ......4.0 Quality of port infrastructure............................................................76.......+ ......3.7 Quality of air transport infrastructure.............................................88.......+ ......4.2 Available seat kilometers (per week, in millions)* .......................11.......+2,415.6 Quality of electricity supply ..............................................................65....... ......4.8 Main telephone lines (per 100 population)* ..................................39.......+ ....30.8

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................89....... ......3.7 Financing through local equity market ...........................................87....... ......3.8 Ease of access to loans ....................................................................86....... ......3.0 Venture capital availability ...............................................................64.......+ ......3.0 Restriction on capital flows............................................................125....... ......3.2 Strength of Investor Protection (010, 10 is best)* ......................67....... ......5.0 Soundness of banks.........................................................................107....... ......4.9 Regulation of securities exchanges..............................................110....... ......3.6 Strength of Legal Rights (010, 10 is best)* ...................................93.......+ ......3.0
126

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................19.......+ ......5.1 National savings rate (% GDP)*.......................................................27.......+ ....30.6 Inflation (%)* .....................................................................................109....... ......9.0 Interest rate spread (%)* ..................................................................62.......+ ......4.9 Government gross debt (% GDP)*...................................................11.......+ ......9.5

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................98....... ......3.9 Firm-level technology absorption ..................................................105....... ......4.1 Laws relating to ICT ...........................................................................79....... ......3.5 FDI and technology transfer.............................................................99....... ......4.4 Mobile telephone subscribers (per 100 population)* ..................25.......+ ..105.7 Internet users (per 100 population)* ...............................................67....... ....18.0 Personal computers (per 100 population)* ....................................58....... ....13.3 Broadband internet subscribers (per 100 population).................59....... ......2.0

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................36.......+ ......6.7 Malaria incidence (cases per 100,000 population)*.......................1.......+ ......0.0 Business impact of tuberculosis .....................................................47.......+ ......6.3 Tuberculosis incidence (cases per 100,000 population)*............90....... ..107.0 Business impact of HIV/AIDS...........................................................28.......+ ......6.0 HIV prevalence (% adult population)* ..........................................103....... ......1.1 Infant mortality (deaths per 1,000 live births)* ..............................51.......+ ....11.0 Life expectancy at birth (years)* .....................................................96....... ....66.0 Quality of primary education ............................................................31.......+ ......4.7 Primary education enrollment (net rate, %)* ................................81....... ....90.9 Education expenditure (% GNI)* .....................................................89....... ......3.5


11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................89....... ......4.5 Local supplier quality.......................................................................100....... ......4.0 State of cluster development ...........................................................96....... ......3.0 Nature of competitive advantage..................................................109....... ......2.9 Value chain breadth.........................................................................105....... ......3.0 Control of international distribution ................................................98....... ......3.7 Production process sophistication..................................................66....... ......3.6 Extent of marketing ............................................................................90....... ......3.9 Willingness to delegate authority....................................................85....... ......3.8

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................76....... ....84.0 Tertiary education enrollment (gross rate, %)*.............................16.......+ ....72.3 Quality of the educational system ...................................................36.......+ ......4.3 Quality of math and science education..........................................24.......+ ......5.0 Quality of management schools ......................................................72....... ......3.9 Internet access in schools ...............................................................59.......+ ......3.6 Local availability of research and training services ....................71....... ......3.8 Extent of staff training .......................................................................80....... ......3.7

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition.........................................................108....... ......4.4 Extent of market dominance.............................................................79....... ......3.6 Effectiveness of anti-monopoly policy............................................95....... ......3.3 Extent and effect of taxation ............................................................94.......+ ......3.1 Total tax rate (% profits)* ..................................................................94.......+ ....51.4 Number of procedures required to start a business* .................44.......+ ......8.0 12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................45....... ......3.4 Quality of scientific research institutions ......................................45....... ......4.3 Company spending on R&D..............................................................46....... ......3.4 University-industry research collaboration ...................................48.......+ ......3.6 Gov't procurement of advanced tech products............................66.......+ ......3.6 Availability of scientists and engineers..........................................34.......+ ......4.8 USPTA utility patents, 2007 (per million population)*...................41.......+ ......1.3
4: Country Profiles
South Africa
Key indicators
Population (millions), 2008..............................................................................48.8 GDP (US$ billions), 2007................................................................................283.1 GDP (PPP) per capita (int'l $), 2007..........................................................9,767.5 Real GDP growth (%), 2007 ..............................................................................5.1 GDP (PPP) as share (%) of world total, 2007.................................................0.7 Current account balance (% GDP), 2007 .....................................................7.3 Foreign reserves (in months of imports), 2007..............................................4.0 Unemployment (% labor force), 2007 ...........................................................23.0 Human Development Index, 2006..................................................................0.67


GCI 20072008 (out of 131)....................................44..........4.4 GCI 20062007 (out of 122)....................................35..........4.5 Basic requirements...............................................69..........4.4 1st pillar: Institutions .............................................46..........4.6 2nd pillar: Infrastructure.......................................48..........4.2 3rd pillar: Macroeconomic stability....................63..........5.1 4th pillar: Health and primary education .........122..........3.8
Institutions
7 6 5 4 3 2
Market size
128
Efficiency enhancers ............................................35..........4.5 5th pillar: Higher education and training ...........57..........4.1 6th pillar: Goods market efficiency.....................31..........4.8 7th pillar: Labor market efficiency ......................88..........4.2 8th pillar: Financial market sophistication.........24..........5.2 9th pillar: Technological readiness.....................49..........3.7 10th pillar: Market size..........................................23..........4.8 Innovation factors .................................................36..........4.1 11th pillar: Business sophistication ....................33..........4.6 12th pillar: Innovation............................................37..........3.6
South Africa
Brazil

South Africa
Inadequately educated workforce..............................22.3 Crime and theft ...............................................................19.8 Inadequate supply of infrastructure ...........................12.9 Inefficient government bureaucracy ............................8.3 Restrictive labor regulations ..........................................8.1 Corruption ..........................................................................6.2 Poor work ethic in national labor force .......................6.0 Policy instability................................................................5.8 Inflation ..............................................................................5.7 Access to financing .........................................................1.6 Poor public health ............................................................1.4 Tax regulations..................................................................1.1 Foreign currency regulations.........................................0.7 Government instability/coups ........................................0.2 Tax rates.............................................................................0.0
0 5 10 15 Percent of responses 20
South Africa Brazil 25 30
South Africa
12,000
South Africa
10,000
Brazil
8,000 6,000 4,000 2,000 0
Source: IMF.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ millions) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 -1,000
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 70
All commodities
60
Manufactured goods classified by chiefly by material Machines, transport equipment Crude Materials, inedible, except fuels
50 40 30 20 10 0 2000
2001
2002
2003
2004
2005
2006
2007

South Africa ................................................15.6
Others 35.5%
Source: World Bank.
Zambia 2.2% China 6.5% Japan 11.0%

Source: WTO.
United States 11.8%
4: Country Profiles
129
4: Country Profiles
South Africa

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................20.......+ ......6.0 Intellectual property protection .......................................................23.......+ ......5.3 Diversion of public funds ..................................................................49.......+ ......4.1 Public trust of politicians ..................................................................50.......+ ......3.2 Judicial independence ......................................................................30.......+ ......5.2 Favoritism in decisions of government officials ...........................50.......+ ......3.4 Wastefulness of government spending..........................................29.......+ ......4.1 Burden of government regulation ...................................................95.......+ ......2.8 Efficiency of legal framework ..........................................................20.......+ ......5.2 Transparency of government policymaking...................................29.......+ ......4.9 Business costs of terrorism..............................................................36....... ......6.2 Business costs of crime and violence..........................................134....... ......1.8 Organized crime................................................................................126....... ......3.6 Reliability of police services...........................................................109.......+ ......3.1 Ethical behavior of firms ...................................................................42.......+ ......4.6 Strength of auditing and reporting standards.................................4.......+ ......6.2 Efficacy of corporate boards..............................................................8.......+ ......5.6 Protection of minority shareholders interests..............................13.......+ ......5.6
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*..............................70.......+ ....31.0 Agricultural policy costs ...................................................................12.......+ ......4.8 Prevalence of trade barriers ............................................................43.......+ ......5.0 Trade-weighted tariff rate (% duty)*...............................................75.......+ ......6.2 Prevalence of foreign ownership ....................................................58.......+ ......5.4 Business impact of rules on FDI ......................................................77.......+ ......5.0 Burden of customs procedures .......................................................58.......+ ......4.0 Degree of customer orientation.......................................................78....... ......4.5 Buyer sophistication ..........................................................................28.......+ ......4.5

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations......................................119....... ......3.7 Flexibility of wage determination...................................................123....... ......3.5 Non-wage labor costs (% workers salary)* .................................14.......+ ......4.0 Rigidity of Employment Index (0100, 100 is worst)*....................81.......+ ....42.0 Hiring and firing practices ..............................................................129....... ......2.3 Firing costs (in weeks of wages)* ...................................................39.......+ ....24.0 Pay and productivity ..........................................................................81....... ......4.0 Reliance on professional management..........................................16.......+ ......5.7 Brain drain ...........................................................................................72....... ......3.1 Female-to-male participation ratio in labor force ......................103....... ......0.6

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................46.......+ ......4.5 Quality of roads...................................................................................40.......+ ......4.8 Quality of railroad infrastructure .....................................................37.......+ ......3.5 Quality of port infrastructure............................................................49.......+ ......4.4 Quality of air transport infrastructure.............................................25.......+ ......5.9 Available seat kilometers (per week, in millions)* .......................21.......1,081.5 Quality of electricity supply ............................................................101....... ......3.4 Main telephone lines (per 100 population)* ..................................91....... ......9.9

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................12.......+ ......6.3 Financing through local equity market .............................................4.......+ ......5.7 Ease of access to loans ....................................................................31.......+ ......4.2 Venture capital availability ...............................................................29.......+ ......3.9 Restriction on capital flows............................................................111.......+ ......3.7 Strength of Investor Protection (010, 10 is best)* ........................9.......+ ......8.0 Soundness of banks...........................................................................15.......+ ......6.5 Regulation of securities exchanges..................................................5.......+ ......6.1 Strength of Legal Rights (010, 10 is best)* ...................................52.......+ ......5.0
130

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................47.......+ ......0.8 National savings rate (% GDP)*.....................................................102....... ....14.1 Inflation (%)* .......................................................................................91....... ......7.1 Interest rate spread (%)* ..................................................................45.......+ ......4.0 Government gross debt (% GDP)*...................................................54.......+ ....31.3

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................37.......+ ......5.4 Firm-level technology absorption ....................................................32.......+ ......5.5 Laws relating to ICT ...........................................................................34.......+ ......4.8 FDI and technology transfer.............................................................38.......+ ......5.2 Mobile telephone subscribers (per 100 population)* ..................48.......+ ....83.3 Internet users (per 100 population)* ...............................................95....... ......7.8 Personal computers (per 100 population)* ....................................68....... ......8.4 Broadband internet subscribers (per 100 population).................77....... ......0.7

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................95....... ......5.4 Malaria incidence (cases per 100,000 population)*.....................85.......+ ....29.0 Business impact of tuberculosis ...................................................129....... ......3.6 Tuberculosis incidence (cases per 100,000 population)*..........134....... ..940.0 Business impact of HIV/AIDS.........................................................133....... ......2.2 HIV prevalence (% adult population)* ..........................................132....... ....18.1 Infant mortality (deaths per 1,000 live births)* ............................101....... ....51.0 Life expectancy at birth (years)* ...................................................121....... ....51.0 Quality of primary education ..........................................................104.......+ ......2.8 Primary education enrollment (net rate, %)* ................................97....... ....88.3 Education expenditure (% GNI)* .....................................................32.......+ ......5.3


11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................43....... ......5.1 Local supplier quality.........................................................................24.......+ ......5.4 State of cluster development ...........................................................40.......+ ......3.9 Nature of competitive advantage....................................................72.......+ ......3.4 Value chain breadth...........................................................................75....... ......3.5 Control of international distribution ................................................37.......+ ......4.5 Production process sophistication..................................................43....... ......4.2 Extent of marketing ............................................................................15.......+ ......5.6 Willingness to delegate authority....................................................22.......+ ......4.8

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................44....... ....94.7 Tertiary education enrollment (gross rate, %)*.............................93....... ....15.4 Quality of the educational system .................................................110.......+ ......2.8 Quality of math and science education........................................132....... ......2.2 Quality of management schools ......................................................25.......+ ......5.0 Internet access in schools ...............................................................91....... ......2.8 Local availability of research and training services ....................29....... ......4.7 Extent of staff training .......................................................................15.......+ ......5.1

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition...........................................................59....... ......5.1 Extent of market dominance.............................................................33....... ......4.6 Effectiveness of anti-monopoly policy............................................13.......+ ......5.5 Extent and effect of taxation ............................................................25.......+ ......4.5 Total tax rate (% profits)* ..................................................................45.......+ ....37.1 Number of procedures required to start a business* .................44.......+ ......8.0 12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................36....... ......3.8 Quality of scientific research institutions ......................................31.......+ ......4.7 Company spending on R&D..............................................................28.......+ ......4.0 University-industry research collaboration ...................................28.......+ ......4.2 Gov't procurement of advanced tech products............................63.......+ ......3.6 Availability of scientists and engineers........................................110....... ......3.4 USPTA utility patents, 2007 (per million population)*...................39.......+ ......1.7
4: Country Profiles
Spain
Key indicators
Population (millions), 2008..............................................................................44.6 GDP (US$ billions), 2007.............................................................................1,440.0 GDP (PPP) per capita (int'l $), 2007........................................................30,118.4 Real GDP growth (%), 2007 ..............................................................................3.7 GDP (PPP) as share (%) of world total, 2007.................................................2.1 Current account balance (% GDP), 2007 ...................................................10.1 Foreign reserves (in months of imports), 2007..............................................0.5 Unemployment (% labor force), 2008 ...........................................................11.3 Human Development Index, 2006..................................................................0.95


GCI 20072008 (out of 131)....................................29..........4.7 GCI 20062007 (out of 122)....................................29..........4.7 Basic requirements...............................................27..........5.3 1st pillar: Institutions .............................................43..........4.6 2nd pillar: Infrastructure.......................................22..........5.3 3rd pillar: Macroeconomic stability....................30..........5.5 4th pillar: Health and primary education ...........35..........6.0
Institutions
7 6 5 4 3 2
Market size
132
Efficiency enhancers ............................................25..........4.7 5th pillar: Higher education and training ...........30..........4.7 6th pillar: Goods market efficiency.....................41..........4.6 7th pillar: Labor market efficiency ......................96..........4.1 8th pillar: Financial market sophistication.........36..........4.9 9th pillar: Technological readiness.....................29..........4.6 10th pillar: Market size..........................................12..........5.5 Innovation factors .................................................29..........4.2 11th pillar: Business sophistication ....................24..........4.9 12th pillar: Innovation............................................39..........3.6
Spain
Brazil

Spain
Restrictive labor regulations ........................................17.3 Access to financing .......................................................13.0 Inefficient government bureaucracy ..........................12.6 Inadequately educated workforce..............................11.6 Tax rates...........................................................................10.9 Inadequate supply of infrastructure .............................9.3 Inflation ..............................................................................9.1 Policy instability................................................................6.4 Tax regulations..................................................................5.5 Poor work ethic in national labor force .......................2.2 Corruption ..........................................................................1.4 Poor public health ............................................................0.6 Crime and theft .................................................................0.3 Foreign currency regulations.........................................0.0 Government instability/coups ........................................0.0
Spain Brazil 30
Spain
35,000
Spain Brazil
30,000 25,000 20,000 15,000 10,000 5,000 0
Source: IMF.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ millions) 60,000 50,000 40,000 30,000 20,000 10,000 0
Source: UNCTAD.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

(US$ billions) 300
All commodities Machines and transport equipment Manufactured goods classified by chiefly by material Chemicals and related products, n.e.s.
250 200 150 100 50 0 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Others 20.0%

Spain ............................................................10.6
Source: World Bank.
Switzerland 1.5% Turkey 1.6% Mexico 1.7% United States 4.4% European Union 69.9%
Source: WTO.
4: Country Profiles
133
4: Country Profiles
Spain

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................42.......+ ......5.4 Intellectual property protection .......................................................34.......+ ......4.7 Diversion of public funds ..................................................................32.......+ ......4.7 Public trust of politicians ..................................................................39.......+ ......3.6 Judicial independence ......................................................................56.......+ ......4.3 Favoritism in decisions of government officials ...........................43.......+ ......3.5 Wastefulness of government spending..........................................28.......+ ......4.1 Burden of government regulation ...................................................94.......+ ......2.9 Efficiency of legal framework ..........................................................43.......+ ......4.4 Transparency of government policymaking...................................89.......+ ......3.8 Business costs of terrorism............................................................108....... ......4.9 Business costs of crime and violence............................................59.......+ ......5.0 Organized crime..................................................................................54.......+ ......5.6 Reliability of police services.............................................................26.......+ ......5.7 Ethical behavior of firms ...................................................................33.......+ ......4.9 Strength of auditing and reporting standards...............................37.......+ ......5.3 Efficacy of corporate boards............................................................36.......+ ......5.1 Protection of minority shareholders interests..............................53....... ......4.8
6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Number of days required to start a business*............................102.......+ ....47.0 Agricultural policy costs ...................................................................92....... ......3.7 Prevalence of trade barriers ............................................................45.......+ ......4.9 Trade-weighted tariff rate (% duty)*.................................................5.......+ ......1.1 Prevalence of foreign ownership ....................................................63.......+ ......5.3 Business impact of rules on FDI ......................................................76.......+ ......5.1 Burden of customs procedures .......................................................40.......+ ......4.5 Degree of customer orientation.......................................................43.......+ ......5.0 Buyer sophistication ..........................................................................31.......+ ......4.4

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations........................................74.......+ ......4.4 Flexibility of wage determination...................................................104.......+ ......4.4 Non-wage labor costs (% workers salary)* ...............................117.......+ ....33.0 Rigidity of Employment Index (0100, 100 is worst)*..................114....... ....56.0 Hiring and firing practices ..............................................................116....... ......2.9 Firing costs (in weeks of wages)* ...................................................85....... ....56.0 Pay and productivity ..........................................................................84....... ......4.0 Reliance on professional management..........................................33....... ......5.3 Brain drain ...........................................................................................28.......+ ......4.5 Female-to-male participation ratio in labor force ........................78....... ......0.7

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................27.......+ ......5.1 Quality of roads...................................................................................30.......+ ......5.1 Quality of railroad infrastructure .....................................................19.......+ ......4.7 Quality of port infrastructure............................................................33.......+ ......5.0 Quality of air transport infrastructure.............................................34.......+ ......5.6 Available seat kilometers (per week, in millions)* .........................7.......+3,428.2 Quality of electricity supply ..............................................................38.......+ ......5.6 Main telephone lines (per 100 population)* ..................................21.......+ ....45.8

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................23....... ......5.8 Financing through local equity market ...........................................55.......+ ......4.6 Ease of access to loans ....................................................................47.......+ ......3.7 Venture capital availability ...............................................................32.......+ ......3.9 Restriction on capital flows..............................................................72.......+ ......4.8 Strength of Investor Protection (010, 10 is best)* ......................67....... ......5.0 Soundness of banks...........................................................................20.......+ ......6.5 Regulation of securities exchanges................................................46....... ......5.1 Strength of Legal Rights (010, 10 is best)* ...................................29.......+ ......6.0
134

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................32.......+ ......2.2 National savings rate (% GDP)*.......................................................72.......+ ....21.2 Inflation (%)* .......................................................................................44.......+ ......2.8 Interest rate spread (%)* ..................................................................76.......+ ......6.0 Government gross debt (% GDP)*...................................................75.......+ ....42.6

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................40.......+ ......5.2 Firm-level technology absorption ....................................................57....... ......5.0 Laws relating to ICT ...........................................................................35.......+ ......4.8 FDI and technology transfer.............................................................58....... ......5.0 Mobile telephone subscribers (per 100 population)* ..................22.......+ ..106.4 Internet users (per 100 population)* ...............................................32.......+ ....42.8 Personal computers (per 100 population)* ....................................30.......+ ....36.9 Broadband internet subscribers (per 100 population).................25.......+ ....15.4

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................43.......+ ......6.6 Malaria incidence (cases per 100,000 population)*.......................1.......+ ......0.0 Business impact of tuberculosis .....................................................31.......+ ......6.5 Tuberculosis incidence (cases per 100,000 population)*............51.......+ ....30.0 Business impact of HIV/AIDS...........................................................41.......+ ......5.8 HIV prevalence (% adult population)* ............................................79.......+ ......0.5 Infant mortality (deaths per 1,000 live births)* ..............................10.......+ ......4.0 Life expectancy at birth (years)* .......................................................5.......+ ....81.0 Quality of primary education ............................................................55.......+ ......4.0 Primary education enrollment (net rate, %)* ..................................4.......+ ....99.7 Education expenditure (% GNI)* .....................................................78....... ......3.9

10.01 10.02 Domestic market size index*............................................................11....... ......5.4 Foreign market size index* ...............................................................19.......+ ......5.7

11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................10.......+ ......5.6 Local supplier quality.........................................................................25.......+ ......5.4 State of cluster development ...........................................................37.......+ ......4.0 Nature of competitive advantage....................................................28.......+ ......4.4 Value chain breadth...........................................................................21.......+ ......4.8 Control of international distribution ................................................32.......+ ......4.6 Production process sophistication..................................................28.......+ ......4.6 Extent of marketing ............................................................................14.......+ ......5.6 Willingness to delegate authority....................................................40....... ......4.5

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.........................4.......+ ..118.7 Tertiary education enrollment (gross rate, %)*.............................18.......+ ....67.4 Quality of the educational system ...................................................52.......+ ......3.8 Quality of math and science education..........................................78.......+ ......3.9 Quality of management schools ........................................................6.......+ ......5.9 Internet access in schools ...............................................................43.......+ ......4.3 Local availability of research and training services ....................37....... ......4.5 Extent of staff training .......................................................................63....... ......3.9

6.01 6.02 6.03 6.04 6.05 6.06 Intensity of local competition...........................................................15.......+ ......5.8 Extent of market dominance.............................................................15.......+ ......5.2 Effectiveness of anti-monopoly policy............................................33.......+ ......4.7 Extent and effect of taxation ............................................................75.......+ ......3.4 Total tax rate (% profits)* ................................................................110.......+ ....62.0 Number of procedures required to start a business* .................75.......+ ....10.0 12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................30....... ......3.8 Quality of scientific research institutions ......................................55....... ......4.1 Company spending on R&D..............................................................39....... ......3.7 University-industry research collaboration ...................................46.......+ ......3.6 Gov't procurement of advanced tech products............................55.......+ ......3.7 Availability of scientists and engineers..........................................38.......+ ......4.6 USPTA utility patents, 2007 (per million population)*...................28.......+ ......6.1
4: Country Profiles
Turkey
Key indicators
Population (millions), 2008..............................................................................75.8 GDP (US$ billions), 2007................................................................................659.3 GDP (PPP) per capita (int'l $), 2007........................................................12,858.4 Real GDP growth (%), 2007 ..............................................................................4.6 GDP (PPP) as share (%) of world total, 2007.................................................1.4 Current account balance (% GDP), 2007 .....................................................5.7 Foreign reserves (in months of imports), 2007..............................................5.2 Unemployment (% labor force), 2008 ...........................................................10.7 Human Development Index, 2006..................................................................0.80


GCI 20072008 (out of 131)....................................53..........4.2 GCI 20062007 (out of 122)....................................58..........4.1 Basic requirements...............................................72..........4.3 1st pillar: Institutions .............................................80..........3.7 2nd pillar: Infrastructure.......................................66..........3.5 3rd pillar: Macroeconomic stability....................79..........4.8 4th pillar: Health and primary education ...........78..........5.3 Efficiency enhancers ............................................59..........4.1 5th pillar: Higher education and training ...........72..........3.9 6th pillar: Goods market efficiency.....................55..........4.4 7th pillar: Labor market efficiency ....................125..........3.6 8th pillar: Financial market sophistication.........76..........4.1 9th pillar: Technological readiness.....................58..........3.5 10th pillar: Market size..........................................15..........5.2 Innovation factors .................................................63..........3.7 11th pillar: Business sophistication ....................60..........4.2 12th pillar: Innovation............................................66..........3.2

7 6 5 4 3 2
Market size
136
Turkey
Brazil

Turkey
Inefficient government bureaucracy ..........................13.5 Tax regulations................................................................12.1 Policy instability..............................................................11.8 Access to financing .........................................................9.6 Tax rates.............................................................................9.6 Inadequately educated workforce................................8.8 Inadequate supply of infrastructure .............................7.7 Foreign currency regulations.........................................5.5 Inflation ..............................................................................4.9 Corruption ..........................................................................4.8 Government instability/coups ........................................4.2 Poor work ethic in national labor force .......................3.2 Restrictive labor regulations ..........................................2.4 Poor public health ............................................................1.8 Crime and theft .................................................................0.2
Turkey Brazil 30
Turkey
14,000
Turkey Brazil
12,000 10,000 8,000 6,000 4,000 2,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

25,000
20,000
15,000
10,000
5,000
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

120
All commodities Machines and transport equipment Manufactured goods classified by chiefly by material Miscellaneous manufactured articles
100 80 60 40 20 0 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Others 28.8%

Turkey...........................................................47.3
Iraq 2.7% United Arab Emirates 3.0% United States 3.9% Russian Federation 4.4% European Union 57.2%
4: Country Profiles
137
4: Country Profiles
Turkey

RANK/134 SCORE

1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Property rights ....................................................................................83....... ......4.2 Intellectual property protection .......................................................93....... ......3.0 Diversion of public funds ..................................................................83.......+ ......3.2 Public trust of politicians ..................................................................78.......+ ......2.4 Judicial independence ......................................................................64.......+ ......4.0 Favoritism in decisions of government officials ...........................77....... ......3.0 Wastefulness of government spending..........................................97.......+ ......2.9 Burden of government regulation .................................................104.......+ ......2.7 Efficiency of legal framework ..........................................................82.......+ ......3.3 Transparency of government policymaking...................................97.......+ ......3.7 Business costs of terrorism............................................................117....... ......4.6 Business costs of crime and violence............................................65.......+ ......4.8 Organized crime..................................................................................89.......+ ......4.7 Reliability of police services.............................................................83.......+ ......4.0 Ethical behavior of firms ...................................................................58.......+ ......4.2 Strength of auditing and reporting standards...............................79....... ......4.4 Efficacy of corporate boards..........................................................127....... ......3.8 Protection of minority shareholders interests..............................80....... ......4.3
6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15
Agricultural policy costs ...................................................................88....... ......3.7 Prevalence of trade barriers ............................................................44.......+ ......4.9 Trade-weighted tariff rate (% duty)*...............................................48.......+ ......4.0 Prevalence of foreign ownership ....................................................42.......+ ......5.6 Business impact of rules on FDI ......................................................50.......+ ......5.4 Burden of customs procedures .......................................................83.......+ ......3.5 Degree of customer orientation.......................................................69....... ......4.6 Buyer sophistication ..........................................................................78....... ......3.5

7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 Cooperation in labor-employer relations......................................116....... ......3.7 Flexibility of wage determination.....................................................83.......+ ......4.9 Non-wage labor costs (% workers salary)* .................................94.......+ ....22.0 Rigidity of Employment Index (0100, 100 is worst)*....................81.......+ ....42.0 Hiring and firing practices ................................................................51.......+ ......4.1 Firing costs (in weeks of wages)* .................................................113....... ....95.0 Pay and productivity ........................................................................102....... ......3.7 Reliance on professional management..........................................93....... ......4.1 Brain drain ...........................................................................................67....... ......3.3 Female-to-male participation ratio in labor force ...........................129....... ......0.4

2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 Quality of overall infrastructure.......................................................70.......+ ......3.5 Quality of roads...................................................................................54.......+ ......3.9 Quality of railroad infrastructure .....................................................69.......+ ......2.2 Quality of port infrastructure............................................................88.......+ ......3.4 Quality of air transport infrastructure.............................................55.......+ ......5.0 Available seat kilometers (per week, in millions)* .......................24....... ..916.3 Quality of electricity supply ..............................................................84....... ......4.2 Main telephone lines (per 100 population)* ..................................53.......+ ....25.4

8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Financial market sophistication .......................................................39....... ......5.0 Financing through local equity market ...........................................65....... ......4.5 Ease of access to loans ....................................................................75.......+ ......3.3 Venture capital availability ...............................................................97....... ......2.5 Restriction on capital flows..............................................................25.......+ ......5.6 Strength of Investor Protection (010, 10 is best)* ......................50 .......=.......5.3 Soundness of banks.........................................................................114....... ......4.7 Regulation of securities exchanges................................................69....... ......4.6 Strength of Legal Rights (010, 10 is best)* ...................................93.......+ ......3.0
138

3.01 3.02 3.03 3.04 3.05 Central government balance (% GDP)*..........................................75.......+ ....1.2 National savings rate (% GDP)*.......................................................71.......+ ....21.4 Inflation (%)* .....................................................................................107....... ......8.8 Interest rate spread (%)* ..................................................................55.......+ ......4.4 Government gross debt (% GDP)*...................................................68.......+ ....39.4

9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 Availability of latest technologies....................................................45.......+ ......5.1 Firm-level technology absorption ....................................................48....... ......5.1 Laws relating to ICT ...........................................................................55....... ......4.0 FDI and technology transfer.............................................................86....... ......4.7 Mobile telephone subscribers (per 100 population)* ..................60.......+ ....71.0 Internet users (per 100 population)* ...............................................68....... ....17.7 Personal computers (per 100 population)* ....................................80....... ......5.9 Broadband internet subscribers (per 100 population).................50.......+ ......3.7

4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 Business impact of malaria ..............................................................55.......+ ......6.5 Malaria incidence (cases per 100,000 population)*.....................80.......+ ....13.0 Business impact of tuberculosis .....................................................54....... ......6.2 Tuberculosis incidence (cases per 100,000 population)*............48.......+ ....29.0 Business impact of HIV/AIDS...........................................................37.......+ ......5.9 HIV prevalence (% adult population)* ..............................................1......n/a...<0.1 Infant mortality (deaths per 1,000 live births)* ..............................84.......+ ....26.0 Life expectancy at birth (years)* .....................................................55.......+ ....73.0 Quality of primary education ............................................................91.......+ ......3.0 Primary education enrollment (net rate, %)* ................................77....... ....91.4 Education expenditure (% GNI)* .....................................................90....... ......3.5


11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity ......................................................................32....... ......5.2 Local supplier quality.........................................................................55....... ......4.8 State of cluster development ...........................................................54....... ......3.7 Nature of competitive advantage....................................................91.......+ ......3.1 Value chain breadth...........................................................................38.......+ ......4.1 Control of international distribution ................................................51....... ......4.3 Production process sophistication..................................................56....... ......3.8 Extent of marketing ............................................................................70....... ......4.5 Willingness to delegate authority....................................................95....... ......3.6

5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment (gross rate, %)*.......................84....... ....78.6 Tertiary education enrollment (gross rate, %)*.............................60.......+ ....34.6 Quality of the educational system ...................................................77.......+ ......3.4 Quality of math and science education..........................................73.......+ ......3.9 Quality of management schools ......................................................65....... ......4.1 Internet access in schools ...............................................................55.......+ ......3.7 Local availability of research and training services ....................68....... ......3.9 Extent of staff training .......................................................................90....... ......3.6

12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation......................................................................55....... ......3.3 Quality of scientific research institutions ......................................52....... ......4.1 Company spending on R&D..............................................................73....... ......3.0 University-industry research collaboration ...................................57....... ......3.4 Gov't procurement of advanced tech products..........................106....... ......3.1 Availability of scientists and engineers..........................................59....... ......4.3 USPTA utility patents, 2007 (per million population)*...................66....... ......0.3

6.01 6.02 6.03 6.04 6.05 6.06 6.07 Intensity of local competition...........................................................42.......+ ......5.3 Extent of market dominance.............................................................51....... ......4.0 Effectiveness of anti-monopoly policy............................................41....... ......4.3 Extent and effect of taxation ..........................................................123.......+ ......2.6 Total tax rate (% profits)* ..................................................................70.......+ ....45.1 Number of procedures required to start a business* .................19.......+ ......6.0 Number of days required to start a business*................................6.......+ ......6.0
About the Authors
Carlos Arruda Carlos Arruda is a Professor of Innovation and Competitiveness as well as Advisor on International Relations and Coordinator of the Department of Innovation at Fundao Dom Cabral (FDC), Brazil. He also is a member of the Board of Trustees of the University Consortium for Executive Education (UNICON) in the United States. Previously he worked at FDC as Director of Development and Finances, Director of the Corporate MBA Programme, and Coordinator of the Department of Internationalization and Competitiveness. He is the lead author or editor of publications in Brazil and abroad. Prior to joining FDC, he worked for the Superior Officer of the Division of Business Development and Support at the International Trade Centre (ITC). His main research interests are in the fields of company longevity, innovation, competitiveness, cultural management, and the internationalization of companies. Dr Arruda holds a PhD in International Business Administration from the University of Bradford, United Kingdom. Claudia Costin Claudia Costin is Secretary of Education of the Municipality of Rio de Janeiro, in charge of 1,062 schools and 254 early childhood education centers. Previously she held positions in the federal government, including Secretary of Planning and Evaluation of the Ministry of Economy, Secretary of Private Social Security, and Federal Minister of Public Administration and State Reform. She was also State Secretary of Culture in Sao Paulo, a position where she promoted the largest nationwide program establishing municipal libraries. Dr Costin has significant international experience, including a visiting professorship in Qubec University and work experience in Angola and Cape Verde in state modernization and improvement of public policies. Since 2007, she has been Manager of the Public Sector Unit for Latin America at the World Bank. Other recent positions include Executive Vice-President of Fundao Victor Civita, a private foundation devoted to improving the quality of public education in Brazil. A board member of the Nature Conservancy; the Dow Chemical International Environ-mental Advisory Council; and DASA, a public company in the health industry, Dr Costin is also a columnist for a daily newspaper, o Estado de So Paulo, and has a strong record of publications in the area of public policy. Dr Costin is a graduate in Public Administration and Economics from Fundao Getlio Vargas, Brazil, and holds a Master and PhD in those areas. Nicola Calicchio Nicola Calicchio is a Director in the McKinsey Brazil office and leader of the Consumer Goods and Retail Practice for Latin America. For the last 10 years he has led consumer and durable goods producers and retailers on several fronts, including presenting long-term strategies for core businesses, providing corporate and business unit
strategy, restructuring programs, reassessing overall business portfolios and organizational models and commercial and logistics effectiveness, and evaluating format redesign and category management. Mr Calicchio was in charge of a major effort aimed at developing a regional strategy for one of the largest states in Brazil. The study identified the potential to generate 100,000 jobs and double the growth rate of the states GDP for the following five years. He has actively participated in the study promoted by the McKinsey Global Institute about how productivity can leverage the growth of the Brazilian economy, and supported over 50 McKinsey teams working on developing strategies and improving operations of companies in Brazil, Argentina, Chile, Mexico, Colombia, the United States, Europe, India, China, and South Africa, among others. Prior to joining McKinsey, Mr Calicchio worked as a sales rep/manager for a software company. Mr Calicchio holds a BS in Civil Engineering from the UFMG and an MBA from MIT Sloan School of Management, United States. Elisio Contini Elisio Contini is Head of the Office of International Affairs at the Brazilian Agricultural Research Corporation (Embrapa). Previously, he worked as Head of the Strategic Management Office (AGE) for the Cabinet of the Minister at the Ministry of Agriculture, Livestock and Food Supply of Brazil. Dr Contini worked in the preparation and evaluation of projects funded by international agencies, such as the IADB and the World Bank, in Latin American countries. Since 1995, he has been Adviser to the President of Embrapa. Previously, Dr Contini worked as a researcher in agricultural economics and published four books as well as 60 scientific and other technical publications. Since 1996, he has been a member of the Board of Trustees of the International Center for Tropical Agriculture (CIAT) and Executive Director of the Brazilian Rural Economist Association. He has also been an Economics and Business Administration Guest Professor at several Brazilian universities. His main areas of expertise include agricultural research management, agricultural economics, strategic and project planning, and food policies. Dr Contini obtained a Master in Public Administration from Fundao Getlio Vargas, Brazil, and a PhD in Public Economics from Muenster University, Germany. Pablo Haberer Pablo Haberer is a Director in the McKinsey Brazil office. Mr Haberer leads the MERCOSUR Media and Entertainment Practice, and is a member of the Global Media and Entertainment Leadership Group and the Global Telecom Leadership Group Practice of McKinsey. Furthermore, he leads the Latin American Strategy Practice and has led the Global Champion Initiative of McKinsey. His main areas of expertise are strategic growth and business creation for media, entertainment,
About the Authors
139
and telecommunications companies. He has helped leading telecommunications and media companies in Brazil, Chile, Argentina, Spain, and Venezuela with strategic, operational, and organizational issues. Mr Haberer has extensive experience in supporting growth strategies for consumer-driven companies in Brazil, in sectors such as electronics, apparel, real estate, and financial services. Before joining McKinsey, he worked as a Senior Consultant for Deloitte & Touche Uruguay and as a Brand Manager for Philip Morris Argentina. Mr Haberer holds a Master of Science in Management from Purdue University, United States, and is a Certified Public Accountant from the University of the Republic of Uruguay. Fabrice Hatem Fabrice Hatem works as a Senior Economics Officer at UNCTAD, where he participates in the drafting of the World Investment Report, among other tasks. Previously he was Chief Economist at Electricit de France International and the Invest in France Agency. He has written many books and articles on international investment and multinational corporations. Dr Hatem holds a PhD in Economics from Universit Paris X Nanterre, France. Emilio Lozoya Austin Emilio Lozoya Austin is Director, Head of the Latin America regional team, and a Global Leadership Fellow at the World Economic Forum. Prior to joining the Forum, Mr Lozoya Austin worked as an Investment Officer at the Inter-American Investment Corporation (the private arm of the Inter-American Development Bank) in the structured finance and distressed assets units, focusing on local currency projects and investments in different industries, as well as in the capital markets of the region. He is a cofounder of TerraDesign, a Harvard Business School startup focused on social housing, with projects in Senegal and Mexico. Before launching TerraDesign, he worked in the Operations Department of the Central Bank of Mexico, investing the countrys international reserves in distinct securities, as well as performing optimization strategies for the different portfolios and hedging strategies for the countrys oil production. Mr Lozoya Austin is the author of studies in monetary policy, public policy efficiency, IT education, and electoral systems. He holds a BSc in Economics from ITAM, Mexico; a BA in Law from UNAM, Mexico; and a Master in Public Administration in International Development from Harvard University, United States. Irene Mia Irene Mia is Director and Senior Economist with the Global Competitiveness Network at the World Economic Forum. She is also responsible for competitiveness research on Latin America and Iberia. She has written and spoken extensively on issues related to national competitiveness, serving as lead author and editor on a number of regional and topical competitiveness papers and reports; notably, she is the co-editor of The Global Information Technology Report series. Before joining the Forum, she worked at the headquarters of Sudameris Bank in Paris for a number of years, holding various positions in the international affairs and international trade divisions. Her main research interests are in the fields of development, international trade, economic integration (with special reference to the Latin American region), and competitiveness. Dr Mia holds an MA in Latin American Studies from the Institute of Latin American Studies, London University , United Kingdom, and a PhD in International Economic and Trade Law from L. Bocconi University, Italy.
Jacques Marcovitch Jacques Marcovitch is a Professor at the University of So Paulo in Brazil, Senior Adviser to the World Economic Forum, and member of the Global Agenda Council on the Future of Latin America. He is Steering Committee Chairperson of a two-year multi-institutional report on economic impacts of climate change in Brazil. Among his past appointments are President, University of So Paulo (Brazil); Director, Institute for Advanced Studies/USP and President of Electric Utilities of the State of Sao Paulo. A graduate of Vanderbilt University, United States, in Management, he is the recipient of numerous international awards, including the Doctor Honoris Causa from Universit Lumire, Lyon, and Chevalier de la Lgion dHonneur, France. As a member of scientific institutions he was awarded the Medal of Brazilian Scientific Merit. Professor Marcovitch is the author of several books and articles, among which are Pioneiros e Empreendedores: A Saga do Desenvolvimento no Brasil (2003, 2005, and 2007) and Para Mudar o Futuro: Mudanas Climticas, Polticas Pblicas e Estratgias Empresariais (2006), both published by Edusp/Saraiva, So Paulo, Brazil. He was the editor of Economic Growth and Income Distribution in Brazil: Priorities for Change (also published by So Paulo, Edusp, in 2007), which won the Jabuti Award of Best Book in Economics and Business in 2008. Anne Miroux Anne Miroux is Chief of the Investment Issues Analysis Branch in the Division at Investment, Technology and Entreprises (DITE) at UNCTAD, and directs the research and analysis activities of the Division on FDI and its impact on development. She has been the team leader of UNCTADs World Investment Report for many years. Dr Miroux began her career at the United Nations as an economist at the UN Centre on Transnational Corporations in New York, where she was involved in the negotiations on the UN Code of Conduct on Transnational Corporations. She has also led a number of research and policy analysis projects, including the recent UNCTAD series Current Studies on FDI and Development, the UNCTAD project on FDI and tourism, and the World Investment Prospects Surveys. Dr Miroux holds an MBA from cole des Hautes tudes Commerciales (HEC) in France and a PhD in Economics from Universit Paris, France. Francisco J. B. Reifschneider Francisco J. B. Reifschneider is a Senior Researcher at the Brazilian Agricultural Research Corporation (Embrapa) and a member of its Managerial Committee for Strategies (SGE), and leads publicly and privately financed research projects on pepper breeding. Additionally, he serves as a Special Advisor to the Brazilian Minister of Agriculture. His technical and scientific expertise is in plant pathology and plant breeding, and most of his technological contributions have been linked to the development of disease-resistant vegetable cultivars and hybrids that today occupy significant areas in Brazil. As a university professor, he has advised students from Cornell University, University of Braslia, ESALQ, and FTB. As a manager, he has occupied several positions in Brazil and abroad, including Technical Director and Director General of the National Research Center for Vegetable Crops in Brasilia; Agricultural Officer at the Investment Center, at FAO; and Director of the Consultative Group on International Agricultural Research, at the World Bank. He has also received major awards, including Embrapas highest award, the Frederico de Menezes Veiga Prize, in 1989, and the Jabuti Prize, in 2001, for the book Capsicum: Pimentas e pimentes no Brasil. Dr Reifschneider graduated from the University of
140
About the Authors
Paulo Resende Paulo Resende is Associate Dean for Research and Development, as well as Professor and Researcher of Logistics, Value Chain, Supply Chain and Transportation Planning at Fundao Dom Cabral (FDC), Brazil. Professor Resende is also Chief-Editor of DOM, a magazine published by FDC. He worked as Academic Coordinator of the Professional Masters in Administration, FDC/Pontifcia Universidade Catlica de Minas Gerais (PUC). Previous positions held include professor at several universities, including PUC, Centro Universitrio (UNA), Universidade Federal de Minas Gerais (UFMG), Memphis State University, and the Instituto Brasileiro de Mercados Capitais. He is the author of books and articles in the fields of logistics, transportation, value chain, supply chain management, sales, and distribution channels. Professor Resende received his PhD in Transportation Planning and Logistics from the University of Illinois at UrbanaChampaign, where he also holds qualifications as a Specialist in Urban Planning and Statistics. He holds a Master in Planning and Transportation Engineering from Memphis State University, United States, and a Bachelor degree in Civil Engineering from Fundao Mineira de Educao e CulturaFUMEC, Brazil. Marina Silva Arajo Marina Silva Arajo is an Economist and member of the Competitiveness Team at Fundao Dom Cabral (FDC), Brazil. Her responsibilities include the coordination of the World Economic Forums Global Competitiveness Network activities and studies in Brazil, and the construction and development of indexes as well as data analysis for various projects and studies. She has written and spoken on issues related to national competitiveness, international investment, and Chinese foreign direct investments. Before joining FDC she worked at the Center of Regional Planning and Development (CEDEPLAR) and at the Laboratory of Finance at the Federal University of Minas Gerais. Her main areas of expertise include competitiveness, macroeconomics, econometrics, international investments, emerging countries, and economic development. Ms Arajo holds a BA in Economics from the Federal University of Minas Gerais, Brazil, with a specialization in quan-titative methods and company economics.
About the Authors
Brasilia and received his PhD from the University of Wisconsin, United States, in Plant Pathology.
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The Brazil Competitiveness Report 2009

The Brazil Competitiveness Report 2009 2009 World Economic Forum

Professor Klaus Schwab, Executive Chairman, World Economic Forum

GLOBAL COMPETITIVENESS NETWORK

THE REGIONAL AGENDA TEAM, LATIN AMERICA

The Brazil Competitiveness Report 2009 2009 World Economic Forum

Part 3: Taking Advantage of Competitiveness Opportunities ...............................................................49

3.2 Leveraging Brazils Business Environment for Increased Competitiveness .................................59

Part 1: An Assessment of Brazils Competitiveness............................................................1

3.4 Agribusiness: Innovation and Competitiveness in Brazil.........................................87

Part 2: Overcoming Competitiveness Gaps .................29

Part 4: Country Profiles ...............................................97

2.2 Challenges and Institutional Changes to Promote Brazils Competitiveness .............................41

About the Authors .........................................................139

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

An Assessment of Brazils Competitiveness

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

1.1: An Appraisal of Brazil's Competitiveness

1.1: An Appraisal of Brazil's Competitiveness

The 12 pillars of competitiveness

Institutions Infrastructure Macroeconomic stability Health and primary education

Key for economies

Key for economies

Key for Business sophistication Innovation economies

Source: World Economic Forum, 2008.

The Brazil Competitiveness Report 2009 2009 World Economic Forum

The Brazil Competitiveness Report 2009 2009 World Economic Forum

1.1: An Appraisal of Brazil's Competitiveness

1.1: An Appraisal of Brazil's Competitiveness

List of countries/economies at each stage of development

Source: World Economic Forum, 2008.

The Brazil Competitiveness Report 2009 2009 World Economic Forum

Weights of the three subindexes per stage of development

Basic requirements Efficiency enhancers Innovation and sophistication factors

Key indicators, Brazil and selected countries

194.2 16.8 1,336.8 1,186.2 107.8 141.8 48.8 44.6 75.8

1,313.6 163.8 3,250.8 1,098.9 893.4 1,289.6 282.6 1,439.0 663.4

3.84 5.00 10.80 8.60 3.38 7.28 4.70 3.51 6.91

57.0 54.9 46.9 36.8 46.1 39.9 57.8 34.7 43.6

The Brazil Competitiveness Report 2009 2009 World Economic Forum

1.1: An Appraisal of Brazil's Competitiveness

1.1: An Appraisal of Brazil's Competitiveness

Brazils evolution in the GCI ranking, 20052008

Note: Ranks are in a constant 20052006 sample.

GCI 20082009 and its subindexes: Brazil and selected comparators

The Brazil Competitiveness Report 2009 2009 World Economic Forum

Basic requirements 20082009: Brazil and selected comparators

Institutions Country/region Rank Score

Infrastructure Rank Score

Efficiency enhancers 20082009: Brazil and selected comparators

4.12 4.34 4.05 4.06 3.83 4.40 4.13 4.75 3.87

Innovation and sophistication factors: 20082009: Brazil and selected comparators

The Brazil Competitiveness Report 2009 2009 World Economic Forum

1.1: An Appraisal of Brazil's Competitiveness