Brazil has 10 years to get rich before it gets old

“Latin America as a region may have one of its last chances over the next 10 to 15 years to get rich before it gets old. And Brazil even more so. In Brazil, it may not be 15 years, it may be 10 years,” Ferreira said, noting that Brazil’s population is already older and growing more slowly than in peers such as Peru and Bolivia.

With Brazil nearing the end of its demographic dividend, productivity growth will have to come through investment in physical and human capital. Labor productivity in Brazil, however, has grown by less than 1% a year for more than a decade, McKinsey says, while other comparable economies have been advancing at close to 2%.

The loss of Latin America’s relevance in the global economy, especially over the past 15 years, is widespread, Ferreira said. “Latin America has about 7.5% of the world’s population and once accounted for 7% of global GDP. Today, it is 6%. And if it keeps growing at the same pace, by 2050 it will be 3.5%,” he said.

Low productivity is a sign of that “difficult” situation, as Ferreira describes it. He points out that while other emerging economies grow by an average of 3.4% a year, Latin America grows by 2.3%.

Of that, 1.5 percentage points come from population growth, and only 0.8 percentage point from productivity. Capital productivity adds 0.9 percentage point, while labor productivity subtracts 0.1 percentage point. “A worker in Latin America today produces almost the same thing, or even a little less, than at the start of the century,” Ferreira said.

Natural strengths

Despite the challenging backdrop, McKinsey sees opportunities. A number of global trends tied to rising protein consumption, the energy transition, the need for digitalization and the emergence of new industrial hubs could make Latin America, and Brazil if it prepares for it, an almost “natural champion” in some of those areas, Ferreira said.

The current production costs for electronics and the automotive industry in Mexico and Central America, for example, are comparable to, or even lower than, China’s, he said. “One-third of the leading medical equipment companies exporting to the United States are in Costa Rica. It is already an export hub,” he said. “The region holds 58% of lithium reserves and 35% of copper reserves, minerals that are essential for the energy transition.”

McKinsey identified seven sectors where Latin America should concentrate investment: next-generation manufacturing for artificial intelligence and automation; renewable energy, not only for power generation itself but also for chemicals and other derivatives; digital services and the digitalization of the economy; data centers; agriculture and food; fossil fuels, which will remain important for some time; and critical minerals.

“These are the seven sectors where we see the region playing a highly prominent role globally. And in several of them, Brazil stands out, such as renewable energy, digitalization, agriculture, data centers, partly because of its renewable and hydroelectric base, and critical minerals,” Ferreira said.

Together, those industries could generate about $400 billion in revenue for Brazil by 2040, McKinsey estimates. For the region as a whole, if it succeeds in growing in those segments and bringing in all the services needed for those industries to operate, the consultancy estimates GDP could rise from $6.5 trillion to $10.5 trillion by 2040.

“That matters because at $10.5 trillion, the region would have per capita income in the range of $15,000, which is roughly the lower threshold for entering the OECD tier,” Ferreira said, referring to the Organization for Economic Cooperation and Development, often seen as a club of wealthy nations.

He noted that Brazil, for example, has per capita income of $10,000, but it is highly uneven across states. “Brazil, like Latin America, could reach income above $15,000 and then, despite all its problems, could have a minimum average income level compatible with more developed countries.”

How to get there

To reach those figures and attract investment into the sectors it identified, McKinsey suggests four steps for Latin American countries.

The first is to diversify trade and investment partners. “The region needs to go to India, Canada, Japan and Southeast Asia, and not remain stuck in this China-U.S. bipolarity,” Ferreira said.

The second is greater integration within the region itself. Central America, for example, has growth rates comparable to Southeast Asia’s, and countries are experiencing a boom similar to what Brazil saw after the Real Plan, yet they are not on the agenda of Brazilian companies, Ferreira said. “But they should be,” he said, citing Guatemala, Honduras, Panama and the Dominican Republic.

The third point is the need for regulatory progress. “The region, and Brazil in particular, still has regulatory and tax complexities that drive away both local and foreign investors,” Ferreira said.

Finally, McKinsey says the region needs to attract international talent, and on that front Brazil is actually in an improving moment, in Ferreira’s view.

One advantage in attracting investment is that Latin America is perhaps “the most geopolitically neutral region in the world,” Ferreira said, something especially important at a time of multiplying conflicts like today’s.

But Brazil could lose investment to Mexico and Central America, for example, if it remains expensive and lagging behind, McKinsey warns. Brazil’s average investment rate between 1997 and 2022 was 18% of GDP, below the regional average of 19.7%, the report says.

“Latin America has the conditions to compete with China. But today that competition is happening in countries such as Mexico, not Brazil, which is more expensive because of its tax burden, logistics and the fact that many of our factories are outdated in terms of production processes,” Ferreira said.

“Brazil risks missing this wave of investment that is coming to the region, to Mexico and Costa Rica, for example,” he warned.

According to Ferreira, reforms are needed, such as reducing public spending, which would help lower interest rates and make investment more attractive. He also said Brazil needs to move forward on cutting red tape and consolidating its tax reform.

“When it comes to the sectors mentioned, Brazil needs a long-term vision of what it wants to be. In the sectors where we could be natural global leaders, there is not necessarily a clear vision of what Brazil wants to be by 2035,” he said. “The private sector and the government could help articulate that.”

AI and productivity

Artificial intelligence will also be key to raising productivity, Ferreira said.

“AI allows us to make jumps in labor productivity in agribusiness, industry and services, so that the productivity that has fallen over the past 25 years in the region can start rising again. There are segments of construction, infrastructure, factory manufacturing and even agribusiness that are still in the early stages of using AI,” he said.

Brazil has potential in this area because it is one of the most digitalized societies in the world, he noted. “This is one of the country’s main priorities across all sectors if it is really going to pursue major productivity gains,” Ferreira said.