As Carnaval in Brazil kicked earlier this month, Brazilians were ready for a party. They have reasons to celebrate. Despite a lackluster GDP performance in the last two years, unemployment rates remain at record low levels. Poverty rates and income inequality have diminished steadily now for more than a decade.
As soon as the Carnaval "folia" wanes, however, the attention will be back to industrial competitiveness problems that have recently surfaced. Despite improved prospects for 2013, the recent sharp downfall of production, investment and exports of the Brazilian manufacturing industry has signaled to policy makers the need to readdress their priorities.
Some of the economic drivers from last decade have been exhausted. Going forward, old competitiveness issues will need to be tackled forcefully, particularly as the global economic recovery stays feeble.
Take the case of Brazilian exports, approached by Matheus Cavallari, José Guilherme Reis and me in the latest Economic Premise - The Brazilian Competitiveness Cliff. Overall figures are impressive. The country's exports were three times higher in 2010 than in 2000.
Boasting a diverse industrial base, Brazil produces a large number of products for many destinations. But how does it stack up alongside other emerging markets, like the other BRICS (Brazil, Russia, India, China, and South Africa)?
Brazil's exports have grown at twice the global average, but the growth rate remained significantly below its peers in the BRICS. Its trade openness remains among the lowest in the world, given its per capita income.
Despite a good performance in the aggregate, our closer look suggested that Brazilian exporters have benefited mostly from geography and sector composition effects, i.e. from being connected to dynamic economies through commodity-based products that have been high on demand.
As for pure competitiveness factors, particularly on the manufacturing side, Brazil is being out-performed by its major competitors.
Industrial productivity has lagged behind rising real wages. Given the astounding growth in domestic consumption, this did not impede some manufacturing growth, although import penetration grew at the same time.
Climbing international commodity prices produced domestic upward wealth effects for natural-resource owners, which combined with minimum wage policies and better household credit conditions, facilitated a services-led growth-cum-jobs boom.
Nevertheless, the effects of aggressive counter-cyclical policies adopted after the Lehman collapse ran their course in 2010. Despite the resilience of domestic consumption, the underlying cost pressures and competitiveness issues in Brazil's industry came to the fore in 2011-12, affecting the decisions of manufacturing producers and investors.
We note that "a wide effort on the supply side will be necessary, rather than just a short-term stimulus or focused policies favoring some export sectors." To strengthen manufacturing industry productivity, broad measures to improve the efficiency of service sectors will be critical.
A number of factors need to be addressed, from weaknesses in the business environment, inefficient logistics infrastructure, to the unwieldy and costly tax system. Engaging in more international trade can provide increased competition, economies of scale, as well as knowledge and technological transfers, which in turn feed into higher productivity.
Brazil's social and economic performance in the last decade has been a good ride, manifested in rising standards of living in a substantial part of the bottom of the social pyramid.
However, to avoid falling off a "competitiveness cliff", Brazil must rapidly move towards higher investments and better management of its infrastructure, while keeping up efforts to improve its human capital base.
Follow the latest from Otaviano Canuto at twitter.com/OCanuto and keep up with the World Bank's efforts to help countries fight poverty and close gaps in income and opportunity at twitter.com/WBPoverty. For more Economic Premise notes, go to worldbank.org/economicpremise.