Letter IEDI n. 1173—Productivity: the Brazilian challenge
For a country's economy to grow in a sustained way, with an increase in per capita income and with less inequality, it is essential that it obtains a favorable trajectory of productivity gains. This is important to soften the tensions inherent to the growth process and mitigate potential distributional conflicts, which could put pressure, over time, on the supply of labor, energy and natural resources and also raise inflation.
Brazil has a lot to do on the productivity agenda, especially now that the so-called “demographic bonus” is coming to an end, making it difficult to achieve more robust GDP growth rates, and when the results of the last elections indicate the adoption of a policy of real wage appreciation.
By different angles and measuring ways, our insufficient performance is evident. In the case of the manufacturing industry, for example, the level of productivity per hour worked in 2021 was 16.2% lower than 25 years earlier and the value added per worker in the sector registered a drop of 22.7% between 1995 and 2021.
In addition to curbing our economic growth, this performance also erodes Brazil's international competitiveness. Taking our economy as whole, labor productivity in the country was equivalent to 46% of the average labor productivity in the United States in 1980, but regressed to 25% in 2021, that is, the same level seen in 1955. It is worth noting that this period of regression coincides with the fall in the share of the industry in Brazilian GDP.
In this same direction, a CNI study on the most recent period, between 2000 and 2019, shows that the average productivity of our main international competitors advanced faster than that of Brazil, resulting in a drop in the effective productivity of Brazilian industry of about 14.8%.
Productivity, however, is the result of a complex equation of factors of different natures, both cyclical and structural, as well as external and internal to companies. Thanks in part to the economies of scale of the industry, when GDP accelerates based on industrial dynamism the productivity of the entire economy tends to progress more. For this reason, the last few years of weak industry development are a major obstacle.
Despite this, the truth is that everything that influences value added influences productivity, which includes the quality of the business environment, the goods and services tax framework, the adequacy of infrastructure, the degree of international integration and the quality of education. At the same time, it is also influenced by the qualification of company managers, the renewal of capital stock, the adoption of better management practices, the use of digital technologies and the development of new products with greater addition of value.
Today's Letter IEDI emphasizes the importance of Brazil ensuring a superior performance for its productivity, especially in the industry as it is more exposed to international competition and because its strong presence in the production of inputs and other intermediate goods can work as an axis for the propagation of productivity gains across the economy as a whole.
To this end, this Letter addresses the study “A hora e vez da productividade” [The time of productivity] carried out, at the request of the Institute, by economist João Emílio Gonçalves, former superintendent of Industrial Development of CNI. In addition to analyzing the recent evolution of productivity, the document also suggests ways to accelerate it, quickly and inexpensively to public coffers.
According to the author, the analysis of the elements that make up the so-called Custo Brasil [Brazil Cost] offers clues about external actions to companies that would have a relevant positive impact on productivity. The issue is that these actions either require political articulations and their implementation tends to take time, as suggested by the debate on tax reform, or else have an important fiscal impact, as in the case of a revival of public investments in infrastructure.
In view of this, João Emílio Gonçalves argues that, in parallel to the development of long-term structural solutions—necessary to address systemic obstacles to increasing productivity—measures should be adopted at the company level meeting the following requirements: high impact, low cost, short implementation time and horizontality.
Actions focused on improving production management would be able to meet all these goals, the author argues. And there is already evidence of this. Research from the London School of Economics on a global scale indicates that a 1% increase in the quality of company management is associated with a 6% rise in productivity. In Brazil, the successful experience of the Brazil More Productive (B+P) program, implemented in 2016–2018, suggests the magnitude of productivity gains that could be obtained through this route.
According to the evaluation carried out by ECLAC/IPEA, already discussed in Letter IEDI n. 918, through the diffusion of lean manufacturing techniques in small and medium-sized companies, B+P has great potential for intra-firm impacts. In the period in which the program was in effect, it generated an average increase in productivity of 52.1% and an average reduction in work movement of 60.6% and in rework of 64.8%. The payback time of the investment made by the company in the program was about 5 months.
In its newest edition, renamed Brasil More (B+), it included two additional phases of digitalization and expanded the target of companies to be served. The results remain promising: from 2020 to Nov'22, the average productivity gain was 69.2% in the industrial companies served, the reduction in movement was of 68.9% and in material losses of 31%, according to a SENAI survey.
Despite all these results, adherence to the program remains very low in the industry. Between 2020 and 2022, the target set was of 47 thousand companies in the sector, but until Nov'22 only 1.776 assistances were provided, that is, something like 3,8% of the expected target. In the digital mentoring phase, only 3 assistances were carried out until the beginning of November 2022.
Based on the evaluation of B+P as well as the obstacles to adherence to B+, Gonçalves points out some improvements that could make the program more effective. Among them, we can mention:
• re-evaluate the logic of subsidies, considering replacing them with a financing solution suitable for smaller companies;
• create a strategy to sensitize companies, since many are unaware of lean manufacturing techniques and of the positive results of the B+P/B+ program and since, in general, the smaller ones do not see digitalization as a real possibility for them;
• explore productive chains from anchor companies, following the example of other countries' initiatives, such as those of the Korea Productivity Center (KPC);
• form a network of independent consultants accredited in the program methodology to increase its capillarity and service capacity;
• define a strategy to focus on the target audience of companies with the greatest potential to deliver more expressive gains in aggregate productivity to the Brazilian industry. One of the criteria that deserves to be analyzed, in Gonçalves' view, is the size of the firms;
• promote the integration of the program with other instruments to support competitiveness—such as export promotion—because, by doing so, the benefited company, in addition to becoming more competitive in the domestic market, could also expand its participation in the foreign market.
Finally, to expand the scale of the B+P/B+ program, the author emphasizes the importance of an action to mobilize and raise awareness of small and medium-sized companies which, unlike larger enterprises, usually employ very little internal policies of continuous improvement aimed at increasing productivity. It would be necessary to break with this current culture.
Gonçalves suggests the promotion of an initiative that brings together the successful methodology of B+P/B+ with the mobilization capacity of a national program similar to the Brazilian Quality and Productivity Program (PBQP), launched in the context of the commercial opening of the 1990s, exploiting results already achieved as a demonstration effect to create a “culture of productivity” in Brazilian industry.
A mobilization of the industry for productivity, according to the author, could:
• promote awareness-raising actions to create a culture of productivity in the industry and demonstrate to SME entrepreneurs that there are opportunities to increase productivity within everyone's reach;
• involve leading companies, which will be able to demonstrate how they operate their internal programs and the gains from these;
• develop a campaign to disseminate sectors' success stories that, using simple solutions associated with lean manufacturing techniques, generated significant productivity gains;
• develop a methodology for the certification of independent consultants to serve the industry;
• mobilize public (ME, MCTI, BNDES, FINEP, ABDI, APEX) and private (SEBRAE) actors to offer, in an integrated and complementary way, instruments to support productivity increases that are currently dispersed in various initiatives.
With regard to the digitalization process as a vehicle for accelerating productivity, Gonçalves observes some specific actions:
• awareness-raising actions should focus on increasing knowledge about Industry 4.0 and creating a sense of urgency regarding digitalization. They should be addressed both to the leaders of companies and to managers;
• guidance actions are essential to support companies to elaborate digitalization plans that point out, among the numerous technologies available, those that will make the greatest contribution to increasing competitiveness;
• productive chain actions, involving anchor companies and their suppliers, can be another initiative for digitalization. There are successful cases in the Brazilian industry, with methodologies developed, for example, by Bosch and the CNI.