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.

Breaking the Vicious Cycle: Crime and Trust in Latin America

When foreigners visit Brazil, one of the first things they tend to notice is the heavy security presence everywhere they go. Houses and apartment buildings are hidden behind high walls and electric fences, private guards stand at the entrances to stores and shopping malls, and cameras everywhere remind passers-by that they are constantly being filmed. Visitors also quickly become aware of how cautious local residents tend to be in their daily lives, whether it involves going out on the street, leaving doors unlocked, or stopping a car at a red light.

For those unaccustomed to this world, it can be a difficult reality to adjust to. In many ways, it makes Brazil feel unwelcoming and reinforces the perception that this is a society rigidly divided along class lines, where interaction between groups is fairly limited. It is easy to feel trapped in a bubble, moving from gated sanctuary to gated sanctuary, unable to wander freely and securely. Whereas in the U.S. it is common for people to spend time playing in their yards and many scoff at the us-versus-them “Gated Community Mentality”, in Brazil it is accepted as fact that any worthwhile property will need a heavy layer of protection in order to be livable.

Yet, after spending more time in this country, it becomes much easier to understand the “bunker mentality” of many Brazilians. Simply put, these communities are very dangerous. I have heard enough personal accounts of armed break-ins, kidnappings, and car thefts to understand that the intense security truly is necessary for people to feel safe. Violent crime in Brazil has long been legendary; tourists in Rio are constantly advised to remain on guard against kidnapping, carjacking, and armed robbery. The past few decades have seen the problem become more acute: the national homicide rate has jumped from 11.7 murders per 100,000 people in 1980 to 26.2 in 2010, putting it on par with infamously chaotic Somalia.

Aside from creating the need for a ubiquitous security presence, Brazil’s crime problem has an even more pernicious effect on society: the erosion of interpersonal trust. Because of the need to constantly be on guard against potential threats, Brazilians are trained instinctively to be distrustful of strangers. This effect has been studied closely through so-called international “trust surveys” where respondents are asked whether, in general, it is ok to confide in others or whether it is better to be more cautious. Brazil consistently comes out toward the bottom of these rankings, as shown by this “World Map of Interpersonal Trust”:

It should be pointed out that Brazil is not alone in this regard. The Latin America region overall is known for high crime rates and low levels of interpersonal trust, measured annually in the Latinobarometro surveys. While Brazil may be the most extreme example of this issue, the trust deficit is also widening in countries like Mexico that are bogged down in endless drug wars that have led to spikes in violence. Even Chile, considered the most stable and prosperous of Latin American nations, compares unfavorably to the OECD countries on this important indicator.

While the importance of interpersonal trust may seem somewhat nebulous, it should not be overlooked. Latin America is still undergoing a period of democratic consolidation, and institution-building is an essential priority to creating open, inclusive societies with dynamic economies. When people do not trust each other, it becomes more difficult to build efficient legal systems and bureaucracies and there are more barriers to promoting economic interactions. Societies become less cohesive and participatory and people separate themselves more and more into isolated enclaves. Any attempts to create pluralistic democracies will be undermined if a country is plagued by a persistent trust deficit.

When looking for factors to explain Latin America’s crime and trust problems, many people tend to point out inequality. Countries with high rates of inequality, such as Brazil, tend to have high crime rates and low levels of interpersonal trust, whereas more equal countries such as Norway and Sweden tend to have the lowest crime rates and the highest levels of trust. As the most unequal region in the world, it should come as no surprise that Latin America has the highest trust deficit as well. Unequal societies are a natural breeding ground for crime because they create supply (material wealth concentrated in the hands of a few) as well as demand (poor people with either resentment of the rich or the desire to imitate the lavish lifestyles they witness daily).

But the other closely-related factor that is sometimes overlooked is in many ways more direct: the presence of “law-and-order” institutions. While inequality may sow the conditions for crime, it is a breakdown in policing structures that makes it viable. Often, therefore, violent crime tends to spike in periods of transition between established orders. Recent research has noted that Brazil’s upswing in crime came about during the fall of the military dictatorship and the transition to democracy. A similar phenomenon was observed during the collapse of apartheid in South Africa and, so far, the Mubarak regime in Egypt. These examples underscore a point that often is not recognized in discussions about crime: transitions from dictatorship to democracy are often accompanied by waves of violence that erode societal trust and create barriers to forming new, inclusive institutions. Indonesia, another country that recorded low levels of interpersonal trust on the map above, is still going through a democratic consolidation process that began in 1998 and has seen sporadic outbreaks of violence and secessionist movements. While traveling in China in 2008, I was struck by how safe I felt wherever I went; the country’s highly fortified police presence, while meant primarily to quell domestic unrest, made it easier to feel relaxed and secure. In a chaotic transition period, it is easy to imagine how a sudden power vacuum can lead to a surge in crime.

In Brazil, the surge in the murder rate occurred during the transitional decades of the 1980s and 1990s, when the nation was working to consolidate a new democratic regime. The murder rate has dropped slightly since 2003, though it remains much higher than pre-1980 levels:

This suggests that the worst may have passed, and that steady improvements in policing and reductions in inequality could slowly enable the country to overcome its violent past. It is, of course, an incredibly complex challenge to break the cycle between low interpersonal trust, high crime rates, and high inequality. There are no quick fixes and simple solutions. But success stories indicate that progress is indeed possible. Much has been made of the fall in crime rates in the U.S. and the numerous attempts to identify the key factors. Brazil’s Southeast region has seen a similarly stunning decline, with the homicide rate falling by 48.6% in Rio and 67.0% in São Paulo between 2000 and 2010. (Unfortunately, this was somewhat negated on a national level by spikes in violent crimes in the North and Northeast.) As in the U.S., no single analysis has emerged to clarify the underlying causes. At the very least, the figures provide reason for optimism that Brazil can ultimately turn the corner on this issue.

The next few decades will be a crucial test for Brazil to address this lingering problem. It is a shame that people here constantly have to walk around with their guard up and feel that living in gated communities is the only way to have a house with a yard and a social environment where people can interact openly with their neighbors. If the nation can finally bring violent crime under control and create an environment where citizens feel relatively safe out on the streets and in their houses, it may help to solidify interpersonal trust and reduce the need for omnipresent heavy security apparatuses. For a nation that prides itself on being warm and receptive to outsiders, that would be a truly welcome change.