Brazil's social and economic shortcomings in the past two decades

23 May 2018

In the first installment of Oliver Wyman’s Brazil Panorama series, entitled ‘Brazil: Income and Productivity in the last two decades’, the consulting firm analyzes how the last twenty years have shaped Brazil today. The report, released earlier this year, is the foundation which outlines why Brazil has not performed as well in comparison to other developing nations, even in times of great economic and social progress.

The Oliver Wyman report looks at the economic and social benefits which the boom brought to the Brazilian economy as well as where the country continues to struggle, focusing on aspects which are indicators of wealth and equality such as investments in human capital, access to healthcare, and guides such as the Gini Index and Product Per Worker to determine the outcome.

In the late 1990’s, Brazil emerged as one of the countries that would dominate the 21st century. Alongside China, India and South Africa, Brazil seemed to have a flare for the spotlight, especially due to the Bolsa Familia social welfare reforms. The agenda saw the country recognised by its peers as a leader in social justice and poverty eradication. 

Brazil has, in the twenty years to 2015, taken a great leap forward, reducing the percentage of its population living in extreme poverty by -66%, from 16.5% to 4.3%. In the same time, the population grew by roughly 23 million people (or the size of Australia) to 207 million inhabitants. 

Extreme poverty relating to the % of the population

Social and economic indicators have also improved significantly over the same period. GDP per capita rose by 31% to just under $15,000. Infant mortality dropped sharply by -68%, and life expectancy gained 8 years. 

According to the report, the country has pulled an estimated 53 million people out of poverty - people living on less than $5.50 per day - and given birth to an emerging middle class. Yet, in 2015 the country experienced an economic downturn and has only recently managed to pull itself out of corruption scandals and recession.

The end of the Brazilian commodity boom saw an end to public spending and the social spending cuts focused on health and education. With job cuts hitting those who had most recently joined the formal economy first, millions began to edge back under the poverty line. 

The economic efforts of Brazil have seen it excel in the region as leaders, but whilst Brazil’s economy today is still outperforming many of its Latin peers, the country is still faces staunch income inequality.

With a more prosperous population, comes increased purchasing power to keep the Brazilian economy turning. Prosperity also brings with it an obligation to improve a set of national foundations on which future prosperity can be built; improving the quality of education, the national infrastructure, creating a strong business environment, and improving factors of openness in politics and the economy.

However, the report states that whilst Brazil has grown richer, it has failed to solidify many of the social benefits which lay the foundations for further economic growth. Successive Brazilian governments have failed to invest in the future in terms of both bricks and mortar infrastructure and social benefits which tackle inequality.

Income inequality from the Gini Index

Included in the report is a graph representing income inequality taken from information provided by the Gini coefficient which ranges from 0 to 100. A reduction in the value of the score on the index represents a lower level of inequality in a country.

It can be seen that Brazil started with a Gini score of 60 in 1997, the highest level in Latin America. Whilst this may be taken into the context of a reduction to a score of 53 in 2012, and 51.3 in the latest index (2016), inequality is still much higher than that of its Latin peers. 

By 2016, the average income of a Brazilian belonging to the richest 1% was R$ 27,085, the equivalent of 36 times the average income of the poorest half of the country at R$ 747. 

Quality of functional education in Brazil in comparison to rest of world

These numbers show that whilst Brazil’s economy was growing, the benefits were not shared by the majority of the country. The Gini Index gives a good example of this, however, a factor which is more quantifiable can be measured in human capital. Investment in human capital in the report has been divided into two subsections. Years of education and quality of education.

The report states that “the level of education of the population is often identified as one of the determinants for a country's productivity and income growth. As is the case with infrastructure, education – is not merely measured in its quantity, but also in its quality – generates broader impacts on society and the economy.” 

Whilst the average years of education has risen in line with emerging markets, it still sits behind that of the rest of Latin America. The quality in education had a brief period of rise between 2006 and 2009 but has stagnated since. Student scores have been falling in comparison to both emerging markets and Latin America, showing that education did not improve with economic gains.

The fragility which this inequality has caused in Brazilian society has been coupled with a lack investment in infrastructure and the business environment. High levels of bureaucracy and little agenda to reform trade agreements make Brazil less enticing for investors and businesses. All of these factors combined lead to the quality of life in Brazil not advancing in line with economic growth. 

Environment of business confidence in Brazil in comparison to the rest of the world

The author of the report, Ana Carla Abrão, asks the questions: “How did Brazil arrive here? What are the root causes of Brazil’s problems in these areas? What is the true situation on the ground in Brazil and what is the country’s trajectory for the future?” 

The following editions of Oliver Wyman Consulting’s Panorama Series will focus on these questions and attempt to analyze the decisions that have brought Brazil into its current state of being whilst advising how the country can “return to a sustainable path with better income distribution”.

Abrão is a partner at Oliver Wyman and has worked previously as a former Secretary of State in Finance of Goiás. She has also worked as director of Risk and Modelling at Itaú Unibanco, chief economist at Tendências Consultoria Integrada, and analyst at the Brazilian Central Bank. Abrão holds a Ph.D. in economics from the University of São Paulo, and a master's degree from the Getulio Vargas Foundation.


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Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.