How to support business productivity: three lessons learned in Brazil
Increased productivity is considered the only sustainable model for improving living conditions over the long term: it reduces the use of resources and increases production, which is reflected in higher per capita gross domestic product (GDP) and is a necessary – although not always sufficient – condition for wage growth. Unfortunately, in Latin America and the Caribbean, productivity has not increased since the mid-70s, and has in fact shrunk in many countries.
A recurrent action by governments to change this situation is the creation of business support programs. Although the model varies according to sector and country, the basic argument is the same: market deficiencies keep companies from reaching their potential; if these obstacles were eliminated, companies could operate more efficiently and generate greater social well-being based on increased competition, innovation and access to external markets or better coordination in value chains.
Business-support programs: the case of Brazil
But are business support programs of this type really effective? To answer this question, a recent study by the IDB Office of Evaluation and Oversight analyzed the case of Brazil, where nearly 900,000 companies received more than 1.4 million government subsidies to support their productive activities between 2002 and 2012.
During this period, 5.4 million mostly small-sized companies (75% had less than 10 employees in 2012) were operating in the country, basically in the trade and services sectors. 16.4% of these companies participated in at least one productive support program, primarily in the form of capital provided for investments.
The largest companies, which also offered better salaries and employed workers with higher educational levels, generally received training for export and support for innovation. Support in the form of working capital and, to a lesser extent, investment capital, benefitted smaller companies, with lower salaries and employees with lower educational levels.
The Results: What can we learn from them?
Due to the intertwined nature of the programs, it is difficult to link effects and interventions, so that the study focuses on the nearly 600,000 companies that only participated in a single program. The results are not very promising: there have been few effects on productivity or other indicators.
One of the positive results determined by the study is that the survival rate of the beneficiary companies (90%) exceeded the average for Brazilian companies (67%). However, in only a few companies was it possible to draw a connection between the interventions and increased productivity. The results, although better in support programs for companies in the industrial sector, were rarely positive for the trade and services sectors. In fact, the interventions tend to be associated with decreased salaries and employment.
These results point to the need to redefine the scope, design and monitoring of business support programs in Brazil, and leave us with key challenges for improving their efficacy in the future:
- Improved incentives: given that productivity is not explicitly defined in the programs as an expected outcome, the programs have no incentives to encourage companies to invest in new technologies and take measures to increase efficiency.
- Coordination of efforts: even though several programs are designed to work in combination or at least in parallel with others, the results suggest the need to optimize the current mechanisms for coordination among organizations working together.
- Results measurement: difficulty in evaluating some of the programs underscores the importance of incorporating monitoring and evaluation mechanisms in their design, which will make it possible to learn from the results.
Understanding the effect of productive development programs on companies and on the economy, beyond the Brazilian case, requires additional analyses, but this study can be a starting point. I invite you to access all the data here.