The IEDI has argued that the industrial revival that Brazil needs to leverage its socioeconomic development involves obtaining superior productivity gains, which requires a profound improvement of our business environment and a modern industrial strategy based on innovation and international integration.

This is the argument of the Institute's position paper “Industry and Strategy for Socioeconomic Development in Brazil”, but also of many of its other publications, such as Letter n. 1173 “Productivity: the Brazilian challenge” and Letter n. 1209 “The need for a net zero strategy for Brazil, according to the World Bank”, to cite some recent examples.

Productivity is the result of a complex equation of factors of different natures, both cyclical and structural, as well as external and internal to companies. 

Strictly speaking, everything that influences value added influences productivity, including the quality of the business environment, the tax system, the adequacy of infrastructure, the degree of international integration and the quality of education, as well as the renewal of capital stock, adoption of best management practices, use of digital technologies and development of new products with higher value added, etc.

In addition, thanks to the economies of scale of the industry, when GDP accelerates based on industrial dynamism, productivity in the entire economy tends to advance more. When the industry grows little, it achieves less gains in scale and limits the overall progress in productivity.

Today's Letter IEDI takes up the theme based on a study carried out, at the request of the Institute, by economist and professor at Ibmec-RJ and UFRJ Thiago Moreira on the recent evolution of labor productivity in the Brazilian industrial sector in the second half of the 2010s, particularly in manufacturing.

As many studies have pointed out, the productivity of Brazilian industry has been growing very little. The pattern verified in 2010–2015, already analyzed in Letter IEDI n. 864, Jun 2018, also marks the more recent period (2014–2020) analyzed by Moreira.

In the general industry, productivity grew 1.6% per year between 2014 and 2020, with great volatility, and in manufacturing it achieve a mere 0.6% per year on average. Moreira's study evaluates this evolution in two periods: 2014–2017 and 2017–2020, highlighting the path of productivity in each industrial segment, but also the sectoral composition of Brazilian industry.

In the case of manufacturing productivity, the low pace of growth in the period under analysis is not the only unfavorable aspect to be highlighted, since this growth occurred in a context of contraction of value added and employment in the sector, signaling that it was the result of defensive strategies in an adverse economic context. Greater productivity gains would have been better in a context of expansion of the sector, with the conquest of market share and expansion of addition of value. 

In order to group activities that tend to present greater homogeneity, the industry was classified into the following categories: "intensive in processed natural resources," "labor intensive," "scale intensive," "intensive in engineering and R&D" and "others." The mineral extractive industry was called “intensive in primary natural resources.” 

The main highlights and conclusions of the study are summarized below.

The “ intensive in primary natural resources” industry, that is, extractive, was the category with the highest labor productivity growth in 2014–2020: +6.7% per year, due to the extraction of oil, gas and iron ores. This pace was much higher than that of the industry aggregate, but its path was marked by significant volatility.

As Moreira argues, the evolution of the productivity of extractive branches is inherently volatile, due to several factors, such as the natural conditions of deposits, the influence of international commodity cycles and the mismatch between the prices of marketed products and their operating costs. 

For these reasons, the increase of 24.7% p.a. in the productivity of the “intensive in primary natural resources” industry in 2014–2017 was followed by a decrease of 8.8% p.a. in 2017–2020. According to the author, the volatility to which mineral extraction activities are structurally subject prevents them from being responsible for a consistent dynamic of expansion in labor productivity in the general industry.

The other positive highlight of the study was the "intensive in processed natural resources" industry, as it was the only group to register an increase in labor productivity throughout the analyzed period. The negative aspect is that the pace of growth was very low, only 0.2% p.a. in 2014–2017 and 0.8% p.a. in 2017–2020.

The productivity of the food sector was an important hurdle for this group, registering -1.0% p.a. in both periods. The impoverishment of the Brazilian population, with the crisis of 2015/2016 and then the pandemic, which reduced the country's GDP per capita, removed dynamism from the domestic market, contributing to such path.

On the other hand, the difficulties brought resilience to branches of the "intensive in processed natural resources" industry associated with extractive activities, notably production of coke, petroleum derivatives and biofuels and non-metallic minerals, as well as wood products.

In manufacturing, the groups that had higher rates of productivity increase, even in the face of some volatility over the period, were precisely those that lost participation in the country's industrial structure, weakening their contribution to the aggregate evolution of the sector.

The "intensive in engineering and R&D" industry, which includes activities more intensive in technology and innovation, registered a rise in productivity of 1.11% per year between 2014 and 2020, but its weight in the total industry value added decreased from 13.5% to 11.2%. In the case of the "labor-intensive" industry, there was an increase of 1.06% p.a. in productivity, but its share fell from 8.9% to 7.0% between 2014 and 2020.

These structural changes— leading to a drop in the participation of activities that presented greater advances in productivity, as in the case of the "intensive in engineering and R&D" category, and to an increase in the participation of activities that presented stability/contraction of productivity or very volatile paths —act to curb the expansion of industrial productivity in aggregate terms. 

Finally, the worst performance was seen in the "scale-intensive" industry, that is, that part of the sector whose production process allows the achievement of important gains in scale in times of accelerated growth in the level of activity. Given that the period under review includes two deep crises, the 2015/2016 recession and the pandemic in 2020, and years of partial recovery, it is not surprising that this category fared poorly.

The "scale-intensive" industry was the only one to register a drop in labor productivity in 2014–2020: -0.6% per year, with virtual stability in 2014–2017 (+0.2% p.a.) and intense contraction in 2017–2020 (-1.4% p.a.). The main responsible for this weak performance was the motor vehicle segment, which showed a strong decrease in productivity in both periods: -5.3% per year in 2014–2017, and -8.3% per year in 2017–2020.

The full text is available in Portuguese.