Freeman

ARTICLE

Government-Created Poverty

Brazil's Debt Has Destroyed Economic Growth

APRIL 01, 1994 by JOSEPH P. MARTINO

Dr. Joseph P. Martino is a senior research scientist at the University of Dayton Research Institute. He was a guest lecturer last year at the Institute for Technological Research in São Paolo.

Every morning, outside my apartment building, I see a woman sweeping the sidewalk. She wields her broom briskly, marshaling the scraps of paper and dead leaves into an orderly pile. She then sweeps them into a long-handled dustpan made from a cut-down salad-oil can with a broom-handle nailed to it.

Downtown, São Paolo is a clean city. It’s kept that way, not only by people like the woman outside my apartment, but by an army of municipal workers, men and women, clad in safety-orange coveralls. Like the woman in front of my apartment, they wield brooms and long-handled dust-pans. Their only concession to a greater volume of work is the barrel-shaped push-carts into which they dump the refuse.

Street cleaning is not the only labor intensive activity I see. At a gas station, I count six pumps and four attendants in clean uniforms. Another attendant, in a different uniform, puts air in tires. I am told that there are only one or two self-service gas stations in all of São Paolo.

On the university campus where my office is located, there are numerous well-tended gardens. The campus seems to be covered with flowering shrubs and trees. This beautiful landscape is tended by a host of workers who trim, cut, and plant by hand. The newly planted trees are watered regularly by a man who stands by them, holding a hose.

The contrast with my own campus in the United States is instructive. Planting a tree on my home campus means bringing in a truck-mounted auger which digs a hole in minutes, following which a tree is dropped into the hole by another truck with a crane. Trimming the hedge in front of my building is done with a chain-saw. Leaves are cleaned off the sidewalk with a gasoline-powered blower carried by one of the grounds workers.

One of my colleagues in São Paolo, an economist whose office is just down the hall from the one I use, tells me that Brazilian institutions can afford to use so much labor because wages are so low.

Although no one I meet in Brazil makes the argument, there are those among my colleagues in the United States who would praise the Brazilian arrangement. “It provides jobs for poor people. If you mechanized, they’d be out of work.”

Nevertheless, what is true in any other country is true in Brazil as well. You cannot eat what you do not grow. You cannot wear what you do not weave. You cannot live in what you do not build.

Money is simply an improvement on barter. The man who earns his wages trimming hedges does not need to find a farmer with a shaggy hedge in order to obtain food. He can trim a hedge at a university, and use his money wages to buy food, clothing, or shelter. The key point is that his money wages represent the value to his employer of his labor services. They represent what he has put into the economy. His wages allow him to take an equivalent value out of the economy, in whatever form he prefers.

Low wages mean the worker can take only a little out of the economy. He cannot live very well on that. His wages are low, however, because he has put so little into the economy. In short, his productivity is low.

It will not do to say that a Brazilian university cannot afford to buy a leaf-blower or a chain-saw. That misses the point. Hiring additional workers is cheaper than equipping a few workers with productivity-enhancing tools like chain-saws and blowers. Why is it cheaper? Because productivity in the rest of the Brazilian economy is low as well.

Why does my home university equip its workers with chain-saws and blowers? Why is it concerned with increasing their productivity? Why doesn’t it simply hire more workers to use pruning shears and leaf-rakes?

Because it must compete with other employers for the services of workers. If a worker with certain skills can earn a high wage at the local auto plant, my university must match that wage to attract a worker with the same skills. Once forced to pay a competitive wage, my university must increase the worker’s productivity by equipping him with chain-saws, blowers, and other tools. In short, forced to match the going wage, my university must invest in capital equipment so its employees can match the productivity of equivalent workers in the rest of the economy. That is, high industrial productivity is the driver which forces all other U.S. employers to increase their workers’ productivity, by threatening to draw them away.

Likewise, in Brazil, all other employers compete with industry to attract workers. Since productivity is so low in the rest of the economy, the university whose campus I am visiting does not need to provide much in the way of productivity-enhancing tools. Since other Brazilian workers do not put much value into the economy, they cannot take much out either, and employers such as the university, the petroleum company, and the streets department of the city, can pay low wages and still attract workers. Total output can be increased more cheaply by hiring more workers than by investing in capital equipment.

Why is productivity so low in Brazilian industry? A visit to a combination sugar mill and alcohol distillery helps explain why. My companion, also from the university, has been trying to convince the mill managers to install new equipment which would save energy, cut expenses, and increase profits. The savings would repay the cost of the new machinery in less than three years.

Our host, the chief engineer of the mill, explains the situation in simple terms. The cost of the machinery would exceed the mill’s available cash. The managers would have to borrow the money. The current real interest rate is 40 percent per year, over and above the inflation rate of approximately 1 percent per day. The interest on the loan would more than eat up the savings from the new machinery. Part of the mill’s current profits would have to be used to meet interest payments, and they would never pay off the principal of the loan. My companion admits ruefully that the interest rate on his credit card is 48 percent per month.

Why are real interest rates so high? A U.S.-trained faculty member from the business school of the university explains the problem to me. The external and internal debt of the Brazilian government is absorbing nearly all the capital the nation can raise, just to pay interest and avoid default on the loans. This enormous drain on the economy prevents all industry, not just one sugar mill, from modernizing and increasing the productivity of Brazilian workers.

How did the Brazilian debt become so high? During the “oil shocks” of the 1970s, the Brazilian government made the same mistake many other people made. They assumed the price of oil would remain high. They borrowed heavily against their anticipated oil revenues. They intended to use the money to force economic growth. Unfortunately, for the most part they spent it on uneconomic industries, following the then-popular “development economics” doctrine of “import replacement.” Worse yet, they spent much of it on showcase projects like roads in the Amazon which have since been abandoned, on the show-place city of Brasilia, and similar extravagances.

Now the chickens have come home to roost. The oil cartel failed, as all cartels do eventually. The price of oil is down. Since the borrowed money was not invested productively, there is no income stream from it to meet interest and repay the loans. The present Brazilian government, in order to maintain its credit rating, is making repayments from current savings. The high inflation rate is in effect a tax on savings, allowing the government to siphon off the nation’s savings. Virtually none of Brazil’s current savings are available to invest in industry.

By attempting to force economic growth with borrowed money, the Brazilian government ended up destroying the possibility of economic growth.

That is why Brazilian industry has such low productivity. That is why it isn’t drawing workers away from low-paying jobs. And that is why the woman outside my apartment building sweeps every morning with a badly worn broom and a homemade dustpan.

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April 1994

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