Productivity: an agenda for long- term growth · 3 3 Ministério da Productivity as the key to sustainable growth Fazenda Brazil v. USA (Relative GDP per capita, PPP in US constant

João Manoel Pinho de Mello Secretary Secratariat for Promotion of Productivity and Competition Advocacy Ministério da Fazenda

Ministério da

Fazenda

Productivity: an agenda for long-term growth

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Fazenda Productivity as the key to sustainable growth

Background

• Looking backwards to set up the context for looking forward

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Brazil v. USA (Relative GDP per capita, PPP in US constant dollars)

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Brazil v. USA (Relative GDP per capita, PPP in US constant dollars)

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25% of the US

25% of the US

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Background

- No convergence

• Why?

• Looking at the mechanics…

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Four ways to grow

1. Increase the number of people working (labor force)

2. Increase human capital

3. Increase the stock of capital

4. Improve the mix of 1, 2 and 3 (so-called Total Factor Productivity or TFP)

Four sources of growth

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1995 2000 2005 2010year

GDP per capita Human Capital

TFP Stock of Capital

Labor Force

Relative to the US

GDP per capita

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Factors’ v. TFP contribution to growth De Mello, Duarte and Dutz (forthcoming)

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1961 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 2013

Figure 4.1.: Brazil's Economic Performance (1960–2014) (Percent)

Decomposition of output-side real GDP at current purchasing power parity

Production Growth Capital Growth Labor Growth TFP Growth

Source: Fernandez-Arias (2017) Note: TFP = total factor productivity

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Figure 4.2.: Labor productivity - Output per Employed Person (2016 US$)

Brazil Chile Mexico China India Colombia Korea, Rep. Of

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Brazil v. Emerging Countries Synthetic Control Group Exercise

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The diagnosis

• The first three factor contributed to growth. Relative to the US

1. We put people to work, especially after 2002

2. We increased human capital

3. We increased physical capital

• But the mixture (TFP) did terribly …

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Source: Caselli (2015) and author’ calculations. Note: counterfactual refers to output per worker that countries would have had if their TFP were equal to that of the US

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Brazil LAC Mexico Colombia Chile

Actual Counterfactual

World Bank: Brazil productivity flagship report:

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Diagnosis

• The productivity issue: inter sector or intra sector?

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Source: Bazzi, Muendler and Rickey (2014)

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Distribution of Firms by Labor Productivity

Source: Barbosa Filho & Corrêa (2016)

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The diagnosis

• Decomposition exercise (De Mello, Duarte et Dutz, forthcoming):

1. Holding intra-sectoral productivity constant, replicate other country’s structure

2. Holding the structure constant, replicate the other country’s sectoral productivity

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The diagnosis Counterfactual exercise 1: reproducing other countries’ sector structure

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Counterfactual 1 - Productivity Growth (%) Value added per person employed in 2014 (PPP)

Data: WIOD Socio Economic Accounts

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The diagnosis

Counterfactual exercise 2: reproducing other countries’ productivity per sector

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Counterfactual 2 - Productivity Growth (%) Value added per person engaged in 2014 (PPP)

Data: WIOD Socio Economic Accounts

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Diagnosis

• Forensic economics: productivity issue mainly an intrasectoral problema

• Calls for horizontal policies

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Why has productivity stalled?

Mechanisms/Examples

• Centralized (mis)allocation of capital • Bad de facto institution (Bankruptcy Law, for example)

• Labor market legislation distorting business decisions

• Excessive protection, captive demand , excessive local content

• Lack of infrastructure

• Tax system distorting business decisions • Excessive bureaucracy

• Excess of state ownership of assets

• Closed economy

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Mechanisms/Examples

• Centralized (mis)allocation of capital: earmarked credit

• Some figures from Pazarbasioglu et al (2016)

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Government interventions

Central Bank interventions

Public Admin

Public Admin

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Quantities

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BNDES Outstanding credit

R$ 680 bi * (21%)

Households

Firms

The fiscal sector

Households

Firms

Savers Borrowers

Public owned commercial

banks (Caixa, Banco do

Brasil, etc.)

Special funds (FGTS, FAT,

Constitutional funds etc.)

Private Commercial

Banks

16% 9%

9% 5%

9% 5%

13% 7%

9% 5%

37% 20%

24% 13%

Public Admin

% of outstanding

credit

% of GDP

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Cost of Funds and Interest Rates

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TJLP

SELIC rate

TR rate + fixed rate

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Mechanisms/Examples

• Centralized (mis)allocation of capital

• The perennial and the recent increase

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R$ 680 bi * (21%)

Households

Firms

The fiscal sector

Households

Firms

Savers Borrowers



Brasil, etc.)



Private Commercial

Banks

1.5% 0.5%

14% 5%

15% 5%

9% 2%

9% 3%

24% 8%

30% 10%

Public Admin

% of outstanding

credit

% of GDP

2007

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R$ 680 bi * (21%)

Households

Firms

The fiscal sector

Households

Firms

Savers Borrowers



Brasil, etc.)



Private Commercial

Banks

16% 9%

9% 5%

9% 5%

13% 7%

9% 5%

37% 20%

24% 13%

Public Admin

% of outstanding

credit

% of GDP

2015

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Source: Brazilian Central Bank Time Series (August/2016)

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PER

CEN

T O

F G

DP

Distribution of credit between Earmarked and Non-earmarked

68% Non-earmarked

32% Earmarked

49.9% Earmarked

50.1% Non-earmarked

Sep/08

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Mechanisms/Examples


• Direct and implied fiscal cost of credit subsidies in 2015: 3.5% of GDP (Pazarbasioglu et al, 2016)

• Total government expenditure in

• education: 5% of GDP

• health: 4% of GDP

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Mechanisms/Examples


• National Champions (meatpacking giant JBS just the leading example), both through equity and debt

• Subsidized credit for service exports (Brazilian contractors in LAC and Africa)

• Programa de Sustentação do Investimento (PSI): ProCaminhoneiro with 2.5% nominal rates

• FINAME and local content

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Mechanisms/Examples


• Policy intervention: Taxa de Longo Prazo, which changes in the funding costs of FAT to a market-based rate with less implicit subsidy

• Bill signed by the president

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Mechanisms/Examples


• Policy intervention: acceleration of BNDES’ repayment to treasury

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Mechanisms/Examples


• Consequences of policy: crowd-in of private markets

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Treasury transfers to BNDES (billion R$)

Data: BNDES * Except for MP nº505/2010 (Petrobras capitalization)

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50,25 55 41

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(15,77)

(113,22)

(50,00)

(30,00)

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150

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Capital Markets: Recent Performance

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2012 2013 2014 2015 2016 2017

Capital Market Performance (million R$) Domestic Market

Corporate Bonds (non financial sector) Promissory Notes Corporate Bonds (financial sector) CRA CRI FIDC IPO Offering Follow-on Offering

Data: Anbima

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2017 2018

Capital Market Performance (million R$)* Domestic Market

Corporate Bonds (non financial sector) Promissory Notes

Corporate Bonds (financial sector) CRA

CRI FIDC

IPO Offering Follow-on Offering

FII

Data: Anbima *Jan-May 2017 and Jan-May 2018

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GRÁFICO 20

Fonte: ANBIMA, BNDES e B3 - Elaboração CEMEC

Como se observa no Gráfico 21, a soma dos desembolsos do BNDES e dos recursos captados no

mercado de capitais (ações e dívida) teve crescimento da ordem de 40% no ano terminado em

2018 (R$ 285 bilhões) em relação ao observado em 2016 (R$ 203 bilhões), dado que o aumento

de recursos do mercado de capitais (R$ 105 bilhões) mais que compensou a redução dos

desembolsos do BNDES (-R$ 23 bilhões). No período mais longo, a partir de 2014, observa-se

uma queda de 15,4% nesse total, caindo de R$ 337 bilhões para R$ 285 bilhões. Trata-se de um

resultado da atuação de vários fatores, que combinam a queda de demanda de recursos de

médio e longo prazo associada com à redução dos investimentos, a redução do crédito

subsidiado e aumento das taxas do BNDES, compensados parcialmente pela forte redução do

custo de capital no mercado de capitais que ocorreu ao longo de 2017 e até o primeiro trimestre

de 2018.

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Aggregate Cost of Funding - Corporate Bonds (non-financial sector) (% a.a.)

Weighted Average

Data: Cemec – Fipe

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Data: Anbima

Corporate Bonds (non financial sector) - Average Length Domestic Market

Data: Anbima


Corporate Bonds (non financial sector) - Average Length Domestic Market

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jan-may 2017 jan-may 2018

less than 3 years 4 to 6 years

7 to 9 years more than 10 years

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Funding Costs (% a.a.)

Cemec/Fipe

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GRÁFICO 07

No Gráfico 08 é possível observar que um movimento análogo ao do mercado de debêntures

ocorreu com as taxas médias de emissão das notas promissórias. Essas taxas que se

aproximavam de 7,5% a.a., com spread pouco superior a 100 b.p. em relação ao CDI, saltaram

para 9,3% a.a. Entretanto as taxas de juros de notas promissórias continuam em nível que

equivale praticamente à metade das taxas de juros médias cobradas em operações de crédito

para de capital de giro, que aliás também apresentam alguma elevação no final desse período.

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Mechanisms/Examples


• Policy intervention: list of interventions to improve the performance of non-earmarked credit markets and capital markets

• Agenda BC+ (portability, increasing competition on means of payment, extension of access to SCR to two years, European covered bonds for mortgages, etc)

• Positive information credit bureaus

• Infrastructure for a guarantee central for receivables and and financial assets; reform of the receivables’ law)

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Mechanisms/Examples

• Bad de facto institutions

• Example: Bankruptcy Law

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Mechanisms/Examples

• Bad de facto institutions (Bankruptcy Law, for example)

• Bankruptcy Law (2005): good law, room for improvement in the judiciary. From the Doing Business:

• Recovery rate (cents on the dollar)

• Brazil: 16. LAC average: 31

• Time to resolve

• Brazil: 4 years. LAC average: 2.4 years

• Cost (% of the estate)

• Brazil: 12%. LAC average: 14.5%

• Position in the DB: 67th (but de facto probably worse)

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Mechanisms/Examples

• Policy intervention: overhaul of the Bankruptcy Code

• Bill proposal in Congress

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Mechanisms/Examples


• Labor legislation from the 1940s, inspired by Mussolini’s labor law

• State regulates and mediates almost all dimensions of the employee-employer relationship

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Mechanisms/Examples


• Social security design incentivizes early termination of labor relationship

• Judicialization and ex-post negotiation before judges

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Mechanisms/Examples


• Gerard and Gonzaga (2016)

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Mechanisms/Examples


• Camargo and Gonzaga (2015)

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Mechanisms/Examples


• Camargo and Gonzaga

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Mechanisms/Examples

• Labor market legislation: excessive judicialization

• 2017: 2.8 million new labor lawsuits (740,000 executed)

• US: in 2015, 91,000 law suits (statistic from the Equal Employment Opportunity Commission)

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Mechanisms/Examples

• Policy intervention: Labor Code Reform, outsourcing law, migration code

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Mechanisms/Examples

• Policy intervention: Labor Code Reform

• Consequences

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Fonte: CNJ

Elaboração: Casa Civil/PR

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Mechanisms/Examples

• Excessive protection, captive demand

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Mechanisms/Examples

• Excessive protection, captive demand. Two examples:

1. Local content policies in O&G and Petrobras

2. Automotive Regime (Inovar – Auto)

3. Finame (local content for the machinery industry through BNDES financing)

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Mechanisms/Examples

• Excessive protection, captive demand: local content in O&G

15% 15% 15% 15%

40% 40%

20% 20% 20% 20% 20% 20%25%

42%

28%

39%

79%

86%

74%69%

79%

62%

73% 73%

27%

48%

40%

54%

86%89%

81%77%

84%

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84%80%

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100%

Rodada1 Rodada2 Rodada3 Rodada4 Rodada5 Rodada6 Rodada7 Rodada9Rodada10Rodada11Rodada12Rodada13

PesodoCL ConteúdoLocalMédioExploração ConteúdoLocalMédioProdução

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Mechanisms/Examples


27 23 53 54

908 913

1134

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130

289240 266

56%

09%

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BlocosLicitados PercentualdosBlocosNãoArrematados

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Mechanisms/Examples


• The O&G sector paid a heavy cost

• Petrobras’s production increased much less than expected

• Expected by Petrobras in 2015: 3.07 million barrels/day. Actual production: 2.13

• Frequent delays in delivering platforms

• Since 2010, Petrobras commissioned 10 platforms from local suppliers. None on time. Delays over three years are common.

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20000

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70000

80000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Employment: Shipbuilding Industry Construction, Maintenance and Repair of Floating Structures

Source: RAIS

33 thousand jobs

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Mechanisms/Examples • Excessive protection, captive demand: local content in O&G.

• Difference in projected and actual Petrobras’s production between 2012

and 2017 • Example: for 2015 3.07 million barrels/day. Actual: 2.13

• Attribute half the shortcoming to the LC policy

• Unit cost per barrel: USD35

• Jobs in the shipbuilding industry: 33,000

• Cost per job: USD 422,000

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Mechanisms/Examples

• Excessive protection, captive demand: local content in O&G.

• Policy intervention: reduce and rationalize the local content policy in O&G

• Four categories, local content between 25% and 40%

• Consequences:

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Petrobras (PETR4; índice 100=jan/16) S&P Óleo e Gás (Índice 100=jan/16)

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Mechanisms/Examples • Excessive protection, captive demand: auto sector policy

• Inovar-Auto: a 30 p.p. increase in “tariff” (starting from 30p.p. tariff)

• Useless the assembler has a certain level of local content in auto-

parts

• Number of assemblers increased to 22 (World Bank study suggests 7 at most in Brazil)

• Innovation and energy efficiency have improved less than in peers

• August 2017: several features of program deemed illegal under WTO rules

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Mechanisms/Examples

• Excessive protection, captive demand: auto sector policy

• Policy intervention: overhaul the program

• Rota 2030

• Cut additional 30p.p. protection

• Reduce (almost to zero) the local content component

• Only direct taxation-based R&D incentives (50% lower than Inovar-Auto)

• Reduce import tariffs on auto-parts

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Mechanisms/Examples

• Excessive protection, captive demand: FINAME and local content for the machinery industry

• Policy intervention: TLP and TJLP

• Reduction of local contents for FINAME in the new BNDES operational policy

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Mechanisms/Examples

• Tax system distorting business decisions

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Mechanisms/Examples


• Brazil has four taxes (or “contributions”) on production and consumption of goods and services

• Imposto sobre Produtos Industrializados (IPI), Imposto sobre Circulação de Bens e Serviços (ICMS), Imposto sobre Serviços (ISS) and PIS/Cofins (firms’ revenues)

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Mechanisms/Examples


• ICMS is a IVA-type like, state-level tax

• Very imperfect, depends on the origin of production

• “Tax wars” distort location decisions

• PIS/Cofins has two different regimes (cumulative and non-cumulative)

• Multiplicity of rates and no less than 40 Special Regimes

• Produces major distortions

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Mechanisms/Examples


• The construction sector is illustrative

• If value is added at site, tax incidence is ISS (5% maximum), PIS/Cofins cumulative (3.65%)

• If value is added at a plant (prefabricated): ICMS (12% in SP), PIS/Cofins cumulative (9.75%) and IPI (rates varies a lot)

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Mechanisms/Examples


• Huge judicialization

• R$ 4 trillion in tax litigation

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Mechanisms/Examples


• Policy intervention: agenda on simplification

• Revision of tax compliance procedures

• Local-level, federally supported revision of procedures to open and close firms

• Trade facilitation

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Mechanisms/Examples

• Excessive bureaucracy

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Mechanisms/Examples

• Excessive bureaucracy • Tax system extremely hard to comply with (judicialization)

• Excessive difficulty in opening and closing firms

• Burdensome notary system

• Burdensome patenting system (judicialization)

• Burdensome licensing system (judicialization)

• Burdensome expropriation system (judicialization)

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Mechanisms/Examples

• Excessive bureaucracy

• Policy interventions: agenda on simplification and reducing bureaucratic burden

• Notary certification of signatures, Electronic drivers’ licenses, etc

• Trade facilitation

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Mechanisms/Examples

• Trade openness

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Tariffs on Capital Goods – Comparação Internacional Economias Emergentes – “EAGLES” (Média Ponderada “MFN”)

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Brasil China Indonésia México Turquia Índia África do Sul

Fonte: WITS

BRASIL

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Tarifas sobre Bens de Capital – Comparação Internacional Países Desenvolvidos – membros da OCDE (Média Ponderada “MFN”)

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Austrália Brasil Canadá Chile Coréia, Rep.

Estados Unidos Islândia Israel Japão Noruega

NovaZelândia Suíça União Européia

Fonte: WITS

BRASIL

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O custo de aquisição de bens de capital é 44% mais alto no Brasil do que nos pares emergentes

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Brasil Chile China Colômbia Índia Coreia do Sul México

Índice de Preços para Bens de Capital Mundo = 100 (em 2011)

Fonte: ICP – Banco Mundial Elaboração: Seprac/MF

Média dos emergentes (99)

Brasil: 44% mais alto

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O custo de aquisição de bens de capital é 44% mais alto no Brasil do que nos pares emergentes

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Brasil Chile China Colômbia Índia Coreia do Sul México

Índice de Preços para Bens de CapitalMundo = 100 (em 2011)

Fonte: ICP – Banco MundialElaboração: Seprac/MF

Média dos emergentes (99)

Brasil: 44% mais alto

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Além de elevado, o custo de aquisição de bens de capital no Brasil subiu muito em relação aos pares emergentes

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Mechanisms/Examples

• Trade openness

• Slow but steady reduction on the (ab)use of trade defense mechanisms

•

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Mechanisms/Examples

• Excessive state ownership of assets

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Mechanisms/Examples

• Excessive state ownership of assets

• Policy intervention

• Energy transmission

• Airports

• Lottery

• Eletrobras

• Mint

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97

Ministério da


Good news

Privatization and Concessions

• Energy transmission

• Airports

• Lottery

• Eletrobras

• Mint

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98

Ministério da


Productivity agenda

• Create conditions to compete

• Expose to competition

• Reduce factors that induce distortions

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99

Ministério da


Productivity agenda

• Change in the mindset of the private-public interactions

• From rent-seeking to problem solving

• “Off the table” at the margin: tax exemptions, subsidies, demand guarantees (e.g., local content), protection

• Scope for intervention is ample, but a different type

• Social returns > private returns (in line with BNDES new operational policy)

• Coordination and appropriation problem

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100

Ministério da


Productivity agenda

Long and hard road

• Resistance is concentrated

• Results accrue slowly overtime

• No silver bullet but a roadmap

Deputy Finance Minister João Manoel Pinho de Mello

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Ministério da Fazenda

Productivity: an agenda for long- term growth · 3 3 Ministério da Productivity as the key to sustainable growth Fazenda Brazil v. USA (Relative GDP per capita, PPP in US constant

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