Measuring Brazil’s Wealth: Physical, Human, and Natural Resources

When we look at a country’s level of economic development, the first number we tend to focus on is the Gross Domestic Product (GDP). The total sum of a country’s yearly production of goods and services, GDP figures and growth rates offer key insights into an economy’s overall size, its level of economic dynamism, and the wealth of its population. Yet, as most students learn in Economics 101, GDP numbers cannot in themselves tell the story of a society’s development because they do not take into account crucial factors such as inequality, political structure, quality of life, or pollution levels. To truly understand any economy, we need to look at a variety of economic indicators.

Concepts of Capital and the “Inclusive Wealth Index”

One of the most important figures to consider when measuring wealth is capital formation. Traditional development theory suggests that measurements of gross capital formation are key to understanding a country’s economic trajectory, as they give an idea of much of its resources the country is devoting to investments that will improve productivity and enable business activity to expand. Mathematical formulas such as the Harrod-Domar Model essentially tried to establish simple rules to explain the development process in these terms: the more capital a country accumulates, the more developed it becomes. I have mentioned this briefly in previous posts, comparing ratios of capital per worker in Brazil, India and China as an important gauge of each country’s future potential.

Yet measurements of capital formation also tend to have a fatal flaw: they focus on a very narrow definition of what constitutes “capital”. These measurements normally refer to physical capital: the tools, machinery and infrastructure we use in our daily lives to make each individual worker more productive. To be sure, physical capital is vitally important. It would take a group of construction workers much longer to build a house if they had no saws, trucks, cranes or drills. In my daily life here in Brazil, I see the significant difference in physical capital accumulation in comparison with the U.S., where state-of-the-art equipment allows for much greater efficiency in various activities, thus enabling us to generate more wealth per person.

But physical capital is not the only factor that determines the productivity of a given set of workers. In its new “Inclusive Wealth Index”, the U.N. has determined that a country’s productive base is made up of physical capital, human capital (ability of the workers themselves) and natural capital (resources such as land, oil and gas, water and minerals). There is also a lingering academic debate about whether to include financial capital, the ability of a country’s financial sector to channel investment and savings into productivity-improving activities, but for the purposes of this column I will put that consideration aside.

To understand Brazil’s future, it is therefore key to understand its formation of physical, human and natural capital. I will go through these three items in turn.

Physical Capital

As I mentioned in my recent post on infrastructure, Brazil’s physical capital accumulation has stalled over the last three decades. In addition to not investing enough in its roads, trains, ports and airports, Brazil has not been accumulating enough machinery and equipment to make its economy more productive. Improving infrastructure has become a top priority for the government, but it remains to be seen how much effect new reforms and spending programs will have in this area. In order to increase physical capital more generally, it will be necessary for Brazil to do a better job in promoting savings and investment as well as enacting liberalizing reforms. This must be a top priority for Ms. Rousseff if she is serious about fulfilling her promise to tackle Brazil’s lingering competitiveness problems.

Human Capital

Brazil has done a better job over the last thirty years of improving its human capital stock. A traditionally nebulous term, human capital has gained ground in recent years as a useful way of understanding the differences in productivity among groups of workers with the same physical resources at their disposal. This, of course, depends on many factors, such as how healthy the workers are, their level of educational attainment, what skillsets they possess, and what norms and behaviors guide their ability to work together as a group.

Progress on education and health care are easier to measure through statistics and are normally the two go-to concepts people think about when they think of human capital. Brazil has made much progress on these fronts, though more certainly needs to be done moving forward.

While the country has made significant strides in universalizing education and developing internationally-recognized flagship universities, its public education system still remains weak overall, especially in comparison to East Asian tigers such as China and South Korea. Overall test scores have shown signs of progress in recent years, and the government is working on a new “National Education Plan” to be finalized in 2014 that should increase investment in equipment, infrastructure and salaries, help to create a national standardized curriculum and promote experimentation with streamlining management, improving teacher training and evaluation, and lengthening the school day. As in the U.S., many issues of education reform are quite polemical and there are heated debates regarding merit pay, “teaching to the test” and the importance of poverty as a performance indicator. Also similar to the U.S., much experimentation has gone on so far at the local level, and recent reforms in the Rio municipal school district have shown promise. Like Americans, Brazilians are very aware of the failures of their public education system and the importance of tackling this problem in order to improve the country’s global competitiveness.

Health care has also improved greatly over the last few decades, thanks in large part to the expanding reach of the country’s public health care system, known as SUS. Considered a pioneer in Latin America, SUS offers free medical care to all comers and has greatly expanded access to health care for Brazil’s poor. The country's successful response to the AIDS crisis has often been toted as a model for the developing world. Yet SUS has come under heavy criticism in recent years for its inability to provide quality care. The upper and middle classes prefer to seek treatment in private facilities, and private care as a percentage of health care spending is even higher in Brazil than in the U.S., which does not even have a universal public health care program. And as a tropical country, Brazil faces some particularly difficult health care challenges as it seeks to rein in diseases such as malaria and dengue. Health care is a heated discussion topic in the ongoing municipal election campaigns, and there is no doubt that expanding and strengthening the government’s public health programs will be pivotal in improving the country’s human capital.

Aside from education and health care, other forms of human capital are not as easy to quantify and analyze. These have to do with the rules and norms governing interactions among citizens. Part of this has to do with developing strong institutions that contribute to a country’s long-term economic dynamism. I have written previously about several forms of institutional development, such as promoting political stability and pluralistic democracy, reducing corruption, enhancing  interpersonal trust, and increasing mechanisms for project planning and execution. I will write in the future about other institutional issues such as reshaping cultural norms and promoting an independent, efficient judiciary to strengthen the rule of law. Institution building along these lines is the hardest development to track in quantitative terms, but I believe that it is where Brazil has made the most drastic progress over the last few decades and will continue to improve in the future. While such gains may not fit neatly onto a simple chart comparing countries’ economic development, they represent an absolutely pivotal part of the human capital formation process. By strengthening society’s norms and interactions, we strengthen the ability of our workforce to cooperate in productive endeavors, thus accelerating the process of economic development. 

Natural Capital

Natural capital may be the easiest of the three concepts to understand, as it generally refers to a country’s natural resources. Some of these resources may be extracted for one-time use and are thus diminished over time, such as oil and gas reserves or mineral deposits. Others can replenish themselves if cared for properly, such as water, land, and forest resources.

Knowing how to manage one’s natural resources is thus a crucial element for a country to build its capital base. In this case, accumulating physical capital (tools) and human capital (know-how) is sometimes necessary in order to utilize one’s natural capital. Good examples of this are Brazil’s large offshore oil projects, mountain mining initiatives, hydroelectric dam structures, and agricultural development programs, which have all required high amounts of investment and technical expertise. Having developed strong specialties in these areas, Brazil has been able to take advantage of its huge natural resources to develop a competitive economy in the commodities sector.

Brazil’s other challenge in this regard is to make reductions in natural capital sustainable. This means not only protecting reusable resources to prevent irreversible environmental damage (as I discuss in a previous post on sustainable development), but also offsetting reductions in natural capital with increases in other forms of capital accumulation. The U.N. Inclusive Wealth Report indicates that an economy can be considered sustainable if a drop in natural capital is balanced out by an increase in physical or human capital. An example of this would be Brazil using its new oil revenues to invest in infrastructure and public education. If such investments are not made, however, then the country can end up wasting its natural resources windfall. The U.N. report indicates that Brazil’s trajectory over the last decade has indeed been sustainable, as a drop in natural capital was more than offset by an increase in human capital formation. But Brazilians should not be complacent on this front, especially as the profits from the coming oil boom will no doubt become a major temptation for greedy politicians.

A more complete look at Brazil’s process of capital accumulation shows that the country has many chances ahead to improve productivity in a variety of ways and accelerate its development process. Investments in infrastructure, machinery and equipment, education, health care, institutional development and natural resource extraction and conservation will all be crucial for increasing wealth and solidifying the gains of the last few decades. These are the keys to improving Brazil’s competitiveness in the 21^st century global economy.