Opinion – Marcos Mendes: Investing in people

There is an illusion that Brazil is rich, and that it would be enough to redistribute income for everyone to live well. Is not true. If everyone received the same income, each inhabitant would have just over R$ 2,500 per month. We would be a country of the poor or the well off.

To end poverty, it is essential to grow systematically over decades. We have failed terribly. Between 1980 and 2019, Brazil’s GDP (Gross Domestic Product) per capita grew by only 34%. Our Latin American neighbors grew by 74%.

In the US, 95%. In the countries of Southeast Asia and the Pacific, responsible for historical poverty reduction, GDP per capita grew by 342%.

Where did we go wrong? We lost a great opportunity in the first decades of the 20th century, when migration from the countryside to the city intensified. The move to the urban environment was a chance for the individual to get rid of the social immobility typical of rural areas.

If there had been a massive public education program for this population that was starting a new life in the city, the cycle of poverty could have been broken, opening up opportunities for more qualified work, generating more productivity, growth and equal opportunities.

However, the chosen path was different. He chose to subsidize and protect companies, to stimulate their investment, instead of investing in people. This model was consolidated and has been repeated since then.

There are several problems with this strategy. The growth process is volatile. It is unknown which companies and sectors will be most dynamic in the future. What is modern and cutting-edge today will be outdated tomorrow. Who could have predicted, a few decades ago, that among the biggest companies in the world would be businesses like Google, Uber or Alibaba? Or the fall of Kodak and IBM? There is a great chance that the State will make wrong bets.

Furthermore, only investment in physical capital, without productivity gains, does not guarantee long-term growth. When a new factory goes into operation, GDP goes up. But in the following years, with the factory maintaining the level of operation, the GDP will remain at the same level.

Or if there is an expansion of production, the yields will be decreasing. Continued growth will only occur if that factory becomes more productive. An essential component of this is having educated workers and technical innovation capacity.

Subsidy and protection are addictive. Companies arm themselves with lobbies so as not to lose the benefits. They gain market and political power, they block competition. Without competition, there are no incentives to innovate and increase productivity. The capital subsidy reinforces income inequality.

The chosen model worked for a while. Migration from the countryside to the city, in itself, has already allowed productivity gains: an individual without education, working in civil construction, for example, under the guidance of engineers, is more productive than in a subsistence farming.

Adding to this the subsidies to business investment, the country grew for a few decades. But then it stopped. The migration process was exhausted, the subsidized factories were outdated or unable to compete.

Our growth stagnated after 1980, precisely when the world economy started to function on the basis of global value chains: many companies stopped making the complete product, specializing in parts of the production, exporting them to be assembled in another country. Our companies proved incapable of integrating themselves into this globalized production process.

If we had an educated population, we would be better able to innovate, undertake and adapt to changes. By choosing to subsidize companies rather than investing in people, we not only kill growth, we miss the opportunity to break the back of inequality.

In recent decades, public investment in education has increased significantly. However, ineffectively. We can’t turn more years of study into more productivity. The next governments face the challenge of improving the quality of investment in people and putting aside subsidies and protection for companies.