metadata: authors: 0: author: Canuto,Otaviano
1: author: Cavallari,Matheus
2: author: Reis,Jose Guilherme
count: Brazil
docna: 0: docna: Brazilian exports : climbing down a
            competitiveness cliff
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Labor Markets,Export Competitiveness,International Trade and Trade Rules,Trade and Services,Economic Growth
teratopic: Private Sector Development,Macroeconomics and Economic Growth,International Economics and Trade,Finance and Financial Sector Development
abstracts: cdata!: This note examines in detail Brazils
            export performance over the past 15 years, focusing not only
            on growth and composition, but also on different performance
            dimensions, including diversification, sophistication, and
            firm dynamics. The analysis uses international comparisons
            to better situate the Brazilian performance, and explores
            different databases, including firm-level data recently
            published by the World Bank. The note uses a recent
            diagnostic toolkit developed by the World Bank in order to
            suggest some hypotheses about the factors that have been
            inhibiting exports and industrial production expansion.
            Among the latter, it is noted how service sectors, as the
            largest beneficiaries from favorable terms of trade,
            accommodated larger wage increases and "exported"
            cost pressures to other sectors of the economy. Furthermore,
            although a stronger currency can be appointed as one of the
            elements behind the lower competitiveness in Brazilian
            exports, sluggish productivity performance and a real wage
            uptrend explain a significant part of the overall loss of
            competitiveness. This diagnostic reinforces the importance
            of resuming the agenda of microeconomic reforms, increasing
            the investment-to-gross domestic product ratio, and
            advancing toward better-skilled human capital.
geo_reg_key: 119228,517191
repnme: repnme: Brazilian exports : climbing down a
            competitiveness cliff
display_title: Brazilian exports : climbing down a
            competitiveness cliff
listing_relative_url: /research/2013/01/17150344/brazilian-exports-climbing-down-competitiveness-cliff
topicv3: Economic Growth m1326241 471,Trade m1326924 698,Trade in Services m1326928 780,Labor Productivity m1504060 2756,Diversification of Production and Exports
            m1504147 2615
publishtoextweb_dt: 2012-01-13T00:00:00Z
historic_topic: Private Sector Development,Macroeconomics and Economic Growth,International Economics and Trade,Finance and Financial Sector Development
no_of_pages: 31
author_keys: 0: author_key: 713276
1: author_key: 1189866
2: author_key: 691054
model_extractions: WPS6302 Policy Research Working Paper 6302 Brazilian Exports Climbing Down a Competitiveness Cliff _Otaviano Canuto Matheus Cavallari José Guilherme Reis_ The World Bank Poverty Reduction and Economic Management Network January 2013
Policy Research Working Paper 6302

# **Abstract**

This note examines in detail Brazil’s export performance over the past 15 years, focusing not only on growth and composition, but also on different performance dimensions, including diversification, sophistication, and firm dynamics. The analysis uses international comparisons to better situate the Brazilian performance, and explores different databases, including firm-level data recently published by the World Bank. The note uses a recent diagnostic toolkit developed by the World Bank in order to suggest some hypotheses about the factors that have been inhibiting exports and industrial production expansion. Among the latter, it is noted how service sectors, as the largest beneficiaries from favorable terms of trade, accommodated larger wage increases and “exported” cost pressures to other sectors of the economy. Furthermore, although a stronger currency can be appointed as one of the elements behind the lower competitiveness in Brazilian exports, sluggish productivity performance and a real wage uptrend explain a significant part of the overall loss of competitiveness. This diagnostic reinforces the importance of resuming the agenda of microeconomic reforms, increasing the investment-to-gross domestic product ratio, and advancing toward better-skilled human capital.

This paper is a product of the Poverty Reduction and Economic Management Network. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at ocanuto@worldbank.org, mcavallari@worldbank.org or jreis@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Brazilian Exports: Climbing Down a Competitiveness Cliff**

**_Otaviano Canuto, Matheus Cavallari, and José Guilherme Reis_**<sup>**_1_**</sup>

JEL Classification codes: F14, O11, O24.

Keywords: export performance, competitiveness, productivity, economic growth, Brazil.

Sector Board: Economic Policy (EPOL)

> 1 **Otaviano Canuto** is Vice President and Head of the Poverty Reduction and Economic Management (PREM) Network at the World Bank Group. **Matheus Cavallari** is a Consultant for PREM at the World Bank Group. **José Guilherme Reis** is Lead Trade Economist at the World Bank Group’s International Trade Department.

Guillermo Arenas, from the International Trade Department, provided invaluable research assistance. We would like to thank, without implication, Bernard Hoekman and several other colleagues for helpful comments on a preliminary draft. The views herein are entirely those of the authors.
# **INTRODUCTION**

It is widely recognized that the Brazilian economy is facing considerable competitiveness challenges.<sup>2</sup> After several years of strong expansion, the recent slowdown seems related to supply-side difficulties stemming from a wide range of inefficiencies and rising costs, instead of insufficient aggregate demand. Such inefficiencies and costs have increasingly burdened economic activity and have shown signs of aggravation in recent years.

This note examines in detail Brazilian export performance over the last 15 years, focusing not only on growth and composition, but also on different performance dimensions, including diversification, sophistication, and firm dynamics. The analysis uses international comparisons to better situate the Brazilian performance, and explores different databases, including firm-level data recently published by the World Bank. This note uses a recent diagnostic toolkit developed by the World Bank (Reis and Farole 2012). The objective is to generate hypotheses to identify factors that have been inhibiting exports and industrial production expansion.

# **EXPORT PERFORMANCE: 1998–2011**

# **Growth, composition, and destination**

The aggregate performance of Brazilian foreign trade can be considered favorable in the last 10 years. In the wake of strong global economic growth, the expansion of international trade, as well as favorable commodity prices, Brazilian exports of goods and services grew 262 percent between 2000 and 2010, almost twice the global average, 135 percent. As a result, exports have also grown as a proportion of gross domestic product (GDP), from 10 percent of GDP in 2000 to a peak of 16.4 percent in 2004, falling back to 11.2 percent in 2010.

Brazil’s export performance is less stellar when compared with other emerging countries. In fact, the Brazilian export expansion was significantly below the 439 percent growth in the other BRICS countries (a group that includes Brazil, the Russian Federation, India, China, and South Africa). Among BRICS, the most successful case was India, which increased the ratio of exports to GDP from 13.2 to 21.5 percent between 2000 and 2010, followed by China, from 23.3 to 29.6 percent during the same period. In this sense, Brazil is among the countries that have least exploited the potential of international trade (figure 1), and this picture has not changed in more recent years.

> 2 There is controversy over how to define competitiveness. Following Krugman (1996), this note identifies competitiveness as mainly stemming from total factor productivity of the economy.

2
Figure 1. Exports of Goods and Services <!-- Start of picture text --> Ave. 1998-2000 Ave. 2008-2010<br>RUS CHL<br>BRA IND PER COL CHN ZAF CHL BRA COLINDARG PER RUSZAFCHN<br>ARG<br>0 25 50 75 100 125 150 175 0 25 50 75 100 125 150 175<br>200<br>200<br>150<br>150<br>100<br>100<br>50 50<br>0 0<br><!-- End of picture text --> _Source_ : World Bank. World Development Indicators.

Trade openness in Brazil, considering the level of per capita income, is among the lowest in the world. Larger economies do tend to be more dependent on their domestic markets, and thus it should not be a surprise to see Brazil below the predicted level in figure 2. Still, when compared to other BRICS, the level of trade integration remains below the expected line, with no signs of improvement. Over the past decade, trade flow (exports plus imports) to GDP in Brazil rose from 20.2 percent in 2000 to 22.8 percent in 2010, after peaking in 2005 at 29 percent.

Figure 2. Trade to GDP (%) <!-- Start of picture text --> CHL<br>ZAF RUSCHL IND PERCHNZAF RUS<br>CHN PER COL COL ARG<br>IND BRA ARG BRA<br>6 7 8 9 10 11 6 7 8 9 10 11<br>Log of GDP per capita (PPP, av. 1998-2000) Log of GDP per capita (PPP, av. 2008-2010)<br>250 250<br>200 200<br>150 150<br>100 100<br>50 50<br>0 0<br><!-- End of picture text --> _Source_ : World Bank. World Development Indicators.

The economic benefits of greater engagement in international trade have a long-established theoretical basis—gains to trade are as much derived from imports as from exports. Increased exports bring both static efficiency gains derived from the exploitation of comparative advantages and dynamic gains in the export sector, given productivity gains generated by increased competition, economies of scale, better 3
capacity utilization, knowledge dissemination, and uptake of technological progress. Therefore, pursuing greater global integration of the Brazilian economy remains a challenge that, if overcome, should provide significant benefits in the medium and long terms.

The most important Brazilian exports are minerals (25.2 percent), foodstuffs (13.8 percent), and vegetables (12.3 percent). These sectors are also those with the highest average growth in the post crisis 2009–11 period. Growth rates in these sectors relative to the average for 2006–8 were significant: 77 percent, 46 percent and 50 percent, respectively. Furthermore, the mineral sector stands out with the largest share gain since the 1996–98 period. The sectors that lost share in total exports were transportation (8.4 percent), machinery and electronics (8.2 percent) and metals (8.7 percent), in that order. Interestingly, almost 70 percent of Brazilian exports are concentrated in 5 out of 15 sectors in this classification, which includes the 3 sectors that gained more participation, and 2 out of the 3 biggest losers.

One measure of sector competitiveness—revealed comparative advantage (RCA)—can be obtained by comparing the share of exports in a given sector of a country with the participation of this sector in world exports. Table 1 shows RCA ratios for different sectors; an RCA of greater than 1 indicates a revealed advantage for that sector. Thus, table 1 shows that the foodstuff, vegetable, and animal sectors are those with higher average RCA in 2009–11. However, the biggest RCA gain was in the mineral sector, followed by the vegetable and foodstuff sectors, when comparing the averages for 2006–8 with 2009–11. The greatest losses in revealed competitiveness were in footwear and skins, respectively. The footwear sector has shown a significant decrease since 1996–98.

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**Table 1**

# **SECTORAL COMPOSITION (HS2) OF EXPORTS AND REVEALED COMPARATIVE ADVANTAGE**

|**Type**|**Value**<br>**1996–98**|**Value**<br>**2006–8**|**Value**<br>**2009–11**|**Share**<br>**1996–98**|**Share**<br>**2006–8**|**Share**<br>**2009–11**|**RCA**<br>**1996–98**|**RCA**<br>**2006–8**|**RCA**<br>**2009–11**|
|---|---|---|---|---|---|---|---|---|---|
|**01–05 Animal**|4,410|32,901|39,885|3.0|6.8|6.7|1.2|3.9|3.6|
|**06–15 Vegetable**|16,599|48,544|72,620|11.3|10.1|12.3|3.2|3.6|3.9|
|**16–24 Foodstuffs**|25,252|55,745|81,520|17.1|11.6|13.8|5.0|4.2|4.5|
|**25–27 Minerals**|9,930|84,498|149,408|6.7|17.5|25.2|0.9|1.0|1.4|
|**28–38 Chemicals**|8,520|23,882|30,363|5.8|5.0|5.1|0.7|0.6|0.5|
|**39–40 Plastic /**<br>**rubber**|4,534|14,084|16,323|3.1|2.9|2.8|0.7|0.7|0.6|
|**41–43 Hides,**<br>**skins**|2,259|6,338|5,237|1.5|1.3|0.9|1.6|2.1|1.5|
|**44–49 Wood**|9,387|23,675|24,382|6.4|4.9|4.1|1.5|1.8|1.6|
|**50–63 Textiles,**<br>**clothing**|3,663|6,797|6,999|2.5|1.4|1.2|0.4|0.3|0.3|
|**64–67 Footwear**|4,634|6,045|4,611|3.1|1.3|0.8|2.7|1.7|1.0|
|**68-70 Stone/glass**|2,008|5,959|4,800|1.4|1.2|0.8|1.1|1.3|0.9|
|**71–83 Metals**|19,887|55,069|51,345|13.5|11.4|8.7|1.4|1.1|0.9|
|**84–85**<br>**Machinery/electr**<br>**icity**|18,092|53,929|48,398|12.3|11.2|8.2|0.4|0.4|0.3|
|**86–89**|15,794|57,263|49,711|10.7|11.9|8.4|0.9|1.2|0.9|
|**Transportation**||||||||||
|**90–97**<br>**Miscellaneous**|2,522|6,761|6,639|1.7|1.4|1.1|0.3|0.2|0.2|

_Source_ : World Integrated Trade Solution.

5
Europe, China, the United States, Argentina, and Japan are the main trading partners of Brazil, accounting for 60.9 percent of total sales in 2009–11 (table 2). The top five destinations accounted for 59.9 percent in 2006–8 and 66.9 percent in 1996–98. China has undoubtedly been the destination that has recently gained the most, up 14 percentage points from 1996–98, followed by India and St. Lucia, both up 1.4 percentage points each. Europe, the United States, and Argentina were the largest declines in shares of Brazilian exports, down 8.8, 4.2 and 3.5 percentage points, respectively.

**Table 2**

**MAIN EXPORT DESTINATIONS**

|**Destinations**|**1996–98**<br>**(%)**|**2006–8**<br>**(%)**|**2009– 11**<br>**(%)**|
|---|---|---|---|
|**European Union (27)**|26.1|24.4|21.9|
|**China**|2.1|7.4|16.1|
|**United States**|19.1|16.1|10.3|
|**Argentina**|12.6|9.0|9.1|
|**Japan**|5.6|3.0|3.5|
|**Chile**|2.2|2.7|2.1|
|**Venezuela, R. B. de**|1.3|2.8|2.0|
|**Russian Federation**|1.3|2.5|1.9|
|**Korea, Rep. of**|1.4|1.5|1.9|
|**Mexico**|1.7|2.7|1.7|
|**India**|0.3|0.6|1.7|
|**Saudi Arabia**|0.8|1.1|1.4|
|**St. Lucia**|0.0|1.0|1.4|
|**Paraguay**|2.6|1.1|1.2|
|**Canada**|1.1|1.3|1.2|
|**Colombia**|0.9|1.4|1.1|
|**Others**|20.8|21.5|21.5|

_Source_ : World Integrated Trade Solution.

# **Diversification of exports**

The recent global economic crisis has highlighted the importance of diversification (products, markets, and firms) to reduce risks associated with growth volatility. On the other hand, recently intensified globalization has contributed to a resurgence of specialization in diverse economies. Although predicted by trade theory, the degree of vertical specialization has surprised many with its intensity, which emerged from increasing fragmentation of trade in global supply chains. Consequently, economic diversification is now a high priority on the policy agenda for most developing countries.

Brazil is recognized as a global trader, endowed with a wide range of natural resources along with a welldiversified industrial structure. This translates into an impressive level of export diversification, not only in terms of number of destinations, but also of products. When compared with other countries (figure 3), 6
the Brazilian economy proves to be able to sell a large number of products in many markets. This suggests a considerable potential to be explored in terms of export growth, since the initial fixed costs to start new markets have been largely overcome.<sup>3</sup> Figure 3. Product and Markets (2008–10) <!-- Start of picture text --> CHN<br>IND<br>KOR<br>THA<br>MEX BRA<br>IDN<br>ARG<br>COL VNM<br>CHL<br>PER PHL<br>URY<br>0 50 100 150<br>Number of countries<br>5000<br>4000<br>3000<br>2000<br>1000<br>0<br><!-- End of picture text --> _Source:_ World Integrated Trade Solution.

Figure 4. Markets and Products—the Herfindahl Index (2008–10 and 1998–2000) <!-- Start of picture text --> Herfindahl Index - Markets Herfindahl Index - Products (HS6)<br>ARG 0.063 0.108 ARG 0.023 0.036<br>BRA 0.060 0.082 BRA 0.013 0.035<br>CHL 0.0800.087 CHL 0.067 0.122<br>CHN 0.076 0.158 CHN 0.0050.008<br>COL 0.151 0.249 COL 0.0930.101<br>IND 0.047 0.079 IND 0.0250.029<br>PER 0.088 0.148 PER 0.043 0.061<br>RUS 0.0370.039 RUS 0.072 0.188<br>ZAF 0.0480.054 ZAF 0.0230.023<br>0 .05 .1 .15 .2 .25 0 .05 .1 .15 .2<br>0810 9800 0810 9800<br><!-- End of picture text --> _Source:_ World Integrated Trade Solution.

As a way to evaluate the recent evolution of Brazil’s export diversification, we calculated the Herfindahl Index for a group of countries (figure 4)—the lower the index, the less concentrated the export basket, the greater the level of diversification. In terms of markets, the index showed a reduction in the degree of

> 3 F or a discussion on this topic, see Melitz (2003).

7
concentration. Most of the included countries were able to increase diversification to access different markets. China’s performance stands out because of the significant number of new destinations.

In terms of products, the picture is not so favorable. As in many countries, Brazilian exports showed increased concentration for products in recent years. Commodity products gained significant relevance. Other commodity exporters, such as Chile and Russia, also showed similar performance with nonnegligible increases in the degree of concentration. China presented a slight deterioration, but from a low level of concentration. Anyway, as shown in figure 5, despite some worsening in recent years, Brazil still shows low levels of concentration when considering the level of GDP per capita.

Figure 5. Herfindahl Index and GDP per Capita (2008–10) <!-- Start of picture text --> R U S<br>C H L<br>P E RC O L<br>IN D J OR B R AU R YA R GM E X K O R<br>C H N<br>0 1 0 0 0 0 2 00 00 3 00 0 0 4 0 0 0 0<br>G D P p e r ca p ita (P P P , a v .)<br>.3<br>.2<br>H H In d e x<br>.1<br>0<br><!-- End of picture text --> _Source_ : World Development Indicators; authors’ calculation.

Given the recent trend toward more concentration, a key question is how Brazil is dealing with international competition. Figure 6 shows the main products exported, as introduced in table 2, between 2006 and 2011. The circle size shows the representativeness of this specific product in total exports. If above the line, it shows that Brazilian sales grew more than exports of this specific product in international trade between 2006 and 2011. Therefore, among the top 20 products exported, Brazil is losing international market share in only two of them (oil exclusive crude and automobiles)—a very positive result, which reflects the high competitiveness achieved in commodity products.

Figure 6 also shows how the growth of Brazilian exports to each market can be compared with the growth of exports of all other countries to that same market. Brazil increased its participation in 11 major markets, representing 58.7 percent of the total, with exception of the United States, Chile, and Argentina. Thus, we can argue that Brazil gained presence in most markets, as well as in more relevant products. Interestingly, Brazilian export growth to China more than doubled the other countries’ expansion in the recent period. This performance has a direct connection with the increasing Chinese demand for commodities.

8
Figure 6. Relative Growth: Markets and Products <!-- Start of picture text --> 260111 260111<br>100590 100590<br>710813 710813<br>270900 260112 270900 260112<br>20721 720712 17011190111 120100 20721 720712 17011190111 120100<br>230400 230400<br>20741 20741<br>281820 281820<br>470329 470329<br>240120 240120<br>170199 170199<br>88024020230 88024020230<br>870323 271000 870323 271000<br>-10 0 10 20 30 -10 0 10 20 30<br>World: Export Growth, 2006-2011(%) World: Export Growth, 2006-2011(%)<br>40 40<br>30 30<br>20 20<br>10 10<br>0 0<br>-10 -10<br><!-- End of picture text --> _Source:_ World Integrated Trade Solution; authors’ calculation.

A cross-country gravity model can be used to evaluate Brazil’s pairwise export relationships with its trading partners. The model uses bilateral export values between 2005 and 2010.<sup>4</sup> Based on a theorygrounded model, this exercise allows us to compare pairwise observed export relationships with the predicted value from the gravity equation. Figure 7 shows all bilateral trade relationships in the dataset of 181 countries (light grey dots). Brazil’s bilateral exports are colored in blue, and key trading partners are labeled according to their 3-digit ISO (International Organization for Standardization) code in red.

If an observation is above (below) the 45-degree line, the observed export relationship in the period is more (less) than what the gravity model predicts and the exporter is said to be overtrading (undertrading) with its trading partner. Controlling for size of trading partners, trade frictions, sample selection and firm heterogeneity, this analysis suggests that the country is trading above the predicted level with China and Russia. Interestingly, although the gap between actual and predicted exports with Russia is shrinking over time, the gap with China seems to have increased lately (table 3). On the other hand, Brazil trades less than what the model predicts with the United States, with actual exports lagging predicted exports by about 5 percent over most of this period.

> 4 Specifically, the model used bilateral exports for 181 countries for each year between 2005 and 2010. The gravity equation regresses observed bilateral exports against the following bilateral characteristics: distance, contiguity, common language, colony, common colonial power, as well as country of origin and country of destination fixed effects. This model also incorporates three innovations to the standard model. _First_ , a measure of remoteness is computed by summing distances weighted by the share of GDP of the destination in world GDP. This is to take note of the fact that relative distances matter greatly, alongside absolute distances. _Second_ , the model controls for zero trade flows with the use of the Heckman sample selection correction method. When observations with nonexistent bilateral trade are dropped, as ordinary least squares (OLS) does, the dependent variable is not really measuring bilateral trade, but one _contingent_ on an existing relationship. An important variable left out of the model therefore is the probability of being included in the sample, that is, having a nonzero trade flow. To the extent that the probability of selection is correlated with GDP or distance, this has the potential to bias OLS estimates. _Third_ , following Helpman, Melitz and Rubinstein (2008), the model controls for firm heterogeneity without using firm-level data, utilizing the fact that the features of marginal exporters can be inferred from the export destinations reached. With these steps, the gravity results are better grounded on modern trade theory.

9
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# **Firm-level dynamics of exports**

The recent public availability of microdata allows crucial evaluation of export performance, that is, the entry, exit, and survival dynamics of firms in global markets. Export survival sustainability—first addressed by the seminal work of Besedes and Prusa (2006)—is a key dimension to understanding export performance, and has become an important factor for policy makers to consider in the design of policy to promote exports.

The World Bank has recently assembled an Exporter Dynamics Database that includes exporter characteristics and exporter growth measures based on firm-level customs information from 38 developing and 7 developed countries, primarily for the period between 2003 and 2010.<sup>5</sup> The use of this database makes it possible to compare Brazilian exports with other middle-income economies in the world (results are shown in figures 11–13).

The survival rate of exporters in Brazil stood at very high levels during 2003–9 (figure 11), only lower than levels observed in Turkey. While this result can be considered positive, it reflects a small and decreasing entry rate of firms into foreign trade. The entry rate of exporters was already low in Brazil, and dropped further to 22 percent, much lower than the values observed in countries chosen for comparison (around 35 percent).<sup>6</sup> That result—a matter of concern—also confirms other indicators recently released by the Ministry of Development, Trade and Tourism for Brazil.<sup>7</sup> Several studies, such as Clerides, Lach, and Tybout (1998) for Colombia, Mexico and Morocco, or Bernard and Jensen (1999) for the United States, present convincing evidence that new exporters are on average more efficient than nonexporters. Low and decreasing entry rates can be associated with low productivity at the firm level and/or high costs to export. In any case, this is a point that requires more detailed diagnosis to guide policy actions.

Lack of integration into global value chains can possibly explain the low levels of dynamism in the export sector. The emergence of global production networks has changed the world trade landscape, and this has been a driving force behind emergent trade powerhouses, many of them located in Asia.

Latin America, especially the southern countries, has not been an active participant in this new trade arrangement. The extent to which Brazil is out of the global supply chain can be gauged, at least partially, by looking at trade in parts and components. Looking at trade in parts and components also helps distinguish between assembly activities and participation in value chains. It is likely that a country exporting finished product might have just assembled high-value intermediate inputs made elsewhere. As such, rising imports of parts and components indicate a country’s increased assembly activity, whereas a rise in their exports suggests its growing importance in the global supply chain.

> 5 See Cebeci and others (2012) for a full and detailed description of the database. 6 Cebeci and others (2012) argued that Brazil presents the lowest entry rate among 44 countries in the above-mentioned database.

> 7 _Estado de São Paulo_ , August 3, 2012 (editorial).

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# **RESULTS OF COMPARATIVE ANALYSIS OF BRAZILIAN EXPORTS**

# **Composition effects on export growth**

To argue that a country is "more competitive" in foreign trade than other countries just because of their better export performance is obviously too simplistic. Even using relative performance in terms of market participation can lead to misinterpretations. First, export growth can be associated with the existence of composition effects (pull) and also performance effects (push). Two countries may have equally competitive exporters, but export performances can be different in the short and medium term due to different composition of exports in terms of geographical and sector composition of export baskets.

To better analyze this issue, export growth is decomposed using a methodology developed by the International Trade Department of the World Bank.<sup>8</sup> Table 4 shows the main findings of such a decomposition, comparing Brazil with the other BRICS, the MIST group (Mexico, Indonesia, the Republic of Korea, and Turkey), and with the United States, the European Union, and Japan for the period 2005–11, as well as for the post crisis subperiod, 2009–11.

The main findings presented in table 4 are:

- (i) Between 2005 and 2011, the average annual growth of Brazilian exports reached almost 15 percent, with its world market share rising by 5.6 percentage points. This increase in market share is the second highest among the countries selected for comparison, equivalent to India and below only the performance of China.

- (ii) The composition effect is important to explain Brazilian export performance between 2005 and 2011. The sum of geographical and sector effects in Brazil (3.3 percent) is the second highest, lower only than the impact observed in Russia, where a sector composition effect (petroleum) is extremely high.

- (iii) For the same period, the geographical composition effect predominated in the Brazilian case, which has to do with the fast growth of the Chinese economy—which explains why only Korea has a geographical effect more intense than Brazil’s.

- (iv) Excluding the composition effects, the growth in the share of Brazilian exports associated more directly to competitiveness is reduced to 1.8 percent on average per year, still significant, but less than several of the other BRICS (China and India) and MIST (Mexico and Turkey) countries.

- (v) The strong export growth in the postcrisis subperiod was widespread, with developing countries (BRICS and MIST) gaining market shares (except Turkey), and, in parallel, developed countries losing shares.

> 8 The method consists of three main steps, as described in Gaulier, Taglioni and Zignago (2012). First, it computes the so-called “mid-point growth rates” of exports (Davis and Haltiwanger 1992). The advantage of using these growth rates is that, unlike more traditional measures of export growth, they account for the extensive margin of trade, even at the finest level of disaggregation. Second, starting from a data set disaggregated by destination and sector (or product), the export growth is decomposed into a sector effect, a geographical effect, and a pure competitiveness effect. Specifically, it regresses the mid-point growth rate on three sets of fixed effects, that is, exporter, importer, and sector/product fixed effects—here denoted with the letter _f_ by means of a weighted OLS estimation. Third, it computes the indices from estimated coefficients, after normalizing the coefficients and standard errors (see Gaulier, Taglioni and Zignago [2012]).

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- (vi) Finally, excluding the composition effects, the growth participation of Brazilian exports after the global financial crisis that can be linked to competitiveness was only 1.1 percent, the lowest among developing countries (including Turkey, which faces strong negative composition effects in that period).

These results suggest that, despite the recent aggregate good performance, Brazilian exports were mostly benefiting from geographical and sector composition effects. Excluding these favorable environment effects, the "pure" export performance is still positive, but of much lower intensity, and smaller than some of its major emerging market competitors.

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# **Table 4**

# **EXPORT GROWTH DECOMPOSITION: BRAZIL (FIRST QUARTER 2005 TO THIRD QUARTER 2011)**

|<br>|**Export**<br>**growth**<br>**(%)**|**Export**<br>**market**<br>**share**<br>**change**<br>|**Performance**<br>**(export growth**<br>**without**<br>**composition**<br>|**Pull fa**<br>**(speciali**<br>**compositio**<br>**of wh**|**ctors**<br>**zation,**<br>**n effects),**<br>**ich:**|**Push fac**<br>**growth wit**|**tors (export m**<br>**hout compositi**<br>**which:**|**arket share**<br>**on effects), of**|
|---|---|---|---|---|---|---|---|---|
|||**(%)**|**effects) (%)**|**Geo-**<br>**graphical**<br>**(%)**|**Sectoral**<br>**(%)**|**Overall**<br>**(value)**<br>**(%)**|**Price**<br>**component**<br>**(%)**|**Volumes**<br>**component**<br>**(%)**|
|**G-3**|||||||||
|**European Union (EU27)**|6.7|-0.8|7.7|-0.8|-0.2|-2.0|-0.9|-1.1|
|**—of which Euro Area**<br>**(EA17)**|6.4|-3.5|7.5|-0.8|-0.3|-2.2|-1.0|-1.2|
|**Japan**|6.2|-3.8|5.5|1.7|-1.1|-4.2|0.5|-4.6|
|**United States**|7.4|-1.9|5.6|1.6|0.3|-3.6|-0.4|-3.2|
|**BRICS**|||||||||
|**Brazil**|14.9|5.6|11.7|2.1|1.1|1.8|2.6|-0.8|
|**Russian Federation**|12.4|3.0|8.4|0.9|3.1|-1.2|0.6|-1.8|
|**India**|14.9|5.5|14.4|0.4|0.0|4.6|-1.7|6.4|
|**China**|17.3|7.9|20.1|-0.2|-2.6|10.3|1.4|8.8|
|**South Africa**|12.1|2.7|10.6|0.9|0.6|1.0|0.1|0.8|
|**MIST**|||||||||
|**Mexico**|9.9|0.5|13.3|-4.7|1.3|4.1|1.4|2.6|
|**Indonesia**|12.5|3.1|10.8|0.3|1.5|1.1|0.3|0.8|
|**Korea, Rep. of**|11.4|2.1|11.1|2.5|-2.2|1.6|-2.5|4.1|
|**Turkey**|**11.8**|**2.4**|**13.1**|**1.0**|**-2.4**|**3.6**|**0.6**|**3.0**|

_Source:_ Authors’ calculation. _Note_ : Figures are in average annual growth.

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# **Table 5 Export Growth Decomposition: Brazil (first quarter 2009 to third quarter 2011)**

||**Export**<br>**growth**<br>**(%)**|**Export**<br>**market**<br>**share**<br>|**Performance**<br>**(export growth**<br>**without**<br>|**Pull factors (sp**<br>**composition**<br>**whic**|**ecialization,**<br>**effects), of**<br>**h:**|**Push fact**<br>**growth with**|**ors (export ma**<br>**out compositio**<br>**which:**|**rket share**<br>**n effects), of**|
|---|---|---|---|---|---|---|---|---|
|**G-3**||**change (%)**|**composition**<br>**effects) (%)**|**Geo-graphical**<br>**(%)**|**Sectoral (%)**|**Overall**<br>**(value) (%)**|**Price**<br>**component**<br>**(%)**|**Volume**<br>**component**<br>**(%)**|
|**European**<br>**Union**<br>**(EU27)**|6.9|-2.9|9.0|-1.6|-0.5|-0.6|0.0|-0.6|
|**of which Euro Area**<br>**(EA17)**|5.8|-4.1|7.4|-1.3|-0.3|-2.2|-0.4|-1.7|
|**Japan**|7.4|-2.4|4.5|3.6|-0.6|-5.1|2.4|-7.2|
|**United States**|6.5|-3.3|5.1|1.2|0.2|-4.3|-0.8|-3.7|
|**BRICS**|||||||||
|**Brazil**|13.2|3.4|11.2|0.8|1.2|1.1|0.6|0.4|
|**Russian Federation**|18.4|8.6|16.0|-0.8|3.3|5.2|0.9|4.3|
|**India**|16.3|6.5|13.9|-1.3|3.8|3.3|0.5|2.8|
|**China**|11.8|2.0|15.9|-0.2|-3.9|6.1|-0.7|6.9|
|**South Africa**|14.4|4.6|13.0|2.2|-0.8|2.6|-0.9|3.5|
|**MIST**|||||||||
|**Mexico**|12.3|2.5|15.5|-3.0|-0.2|5.6|-0.3|6.0|
|**Indonesia**|17.1|7.3|14.9|1.0|1.2|4.4|1.8|2.6|
|**Korea, Rep. of**|15.7|5.9|12.8|4.3|-1.4|2.4|0.2|2.2|
|**Turkey**|8.7|-1.1|12.5|-1.4|-2.4|2.8|-1.9|4.8|
|Source:Authors’calculat<br>Note: Figures are in aver|ion.<br>age annual|growth.|||||||

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- The survival rate for exporters was at fairly high levels in 2003–9, but the reality is that this indicator reflects a low and decreasing entry of firms in export markets. The entry rate was already low in Brazil, compared to selected peers, and recently dropped even more.

- Brazilian exports benefited significantly from geographical and sector composition effects. Once these effects are excluded, the pure export performance is still positive, but much less intense and lower than in some of the major emerging countries.

- The assessment of Brazilian exports in terms of sophistication suggested a clear decline in the share of products with higher technological content. Primary and resources-based products have gained significant weight between 2000 and 2010. The fallen share of high-technology products reflects its poor absolute performance, and not just the success of commodity-related exports.

This assessment confirms that there are significant cost pressures and competitiveness issues affecting the industrial sector, not only with respect to foreign trade, but also domestically. The findings here support the hypothesis that the challenges to a better export performance are more linked to the supply-side agenda, rather than to export-promotion types of policy.

When considering potential elements associated with the revealed declining competitiveness, policies aiming at higher productivity are crucial to better compete globally and domestically. To strengthen industry productivity, broad measures to improve the efficiency of service sectors are important. Thus, a wide effort on the supply side will be necessary, rather than just short-term stimulus or focused policies favoring some export sectors.

Favorable terms of trade can be cited as a key economic driver through their wealth effects. The impact of this shock helps explain the higher economic dynamism based on domestic consumption. Service sectors, as the largest beneficiaries, could accommodate larger wage increases, given their ability to mark up prices, maintaining/creating jobs, but “exporting” cost pressures to the other sectors of the economy.

The combination of rising real average earnings and stagnant (or falling) labor productivity has harmed Brazil’s export competitiveness, particularly the industrial sector’s capacity to compete with imports. The sharp increase in unit labor costs is part of the explanation of that weakness, although only for recent quarters.

The appreciation of the real effective exchange rate was certainly not negligible in the last decade. Although a stronger currency is one of the elements behind the lower competitiveness in Brazilian exports, sluggish productivity performance and a real wage uptrend explain a significant part of the current overall loss of competitiveness.

The fact that trade openness in Brazil is among the lowest in the world, considering the level of income per capita, deserves more attention. Larger economies are usually more dependent on their domestic markets, yet when compared to the other BRICS, Brazil still shows trade flow levels that are well below the predicted value. Pursuing greater global integration of the Brazilian economy remains a challenge that, if successful, can provide significant benefits in the medium and long terms.

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The business environment has not helped Brazil weather stronger competition in global markets. The logistics infrastructure, which is widely recognized as inefficient and costly to Brazilian exports, as well as many other factors, such as a very complex and costly tax system, have taken a toll on Brazilian firms. This diagnostic reinforces the importance of resuming the agenda of microeconomic reforms, increasing the investment-to-GDP ratio, and advancing toward a better-skilled human capital base. Promoting and rewarding productivity gains in a competitive economy, including the service sector, are the only options to accelerate growth and overcome possible middle-income growth traps (Agenor and Canuto 2012).

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