Will a Shortage of Qualified Labor Derail the Brazilian Economy?

Brazil is booming. In contrast to the economies of the U.S. and the Eurozone — where a mix of debt woes, dysfunctional politics and consumer weakness has conspired to dampen economic growth — Brazil is on track for yet another year of above-average GDP performance. Driven by a number of factors — including Chinese demand for raw materials, a fast-growing and highly acquisitive middle class, large inflows of foreign investment and the ongoing development of its vast pre-salt oil deposits — the country is experiencing a multiyear growth spurt unlike any in its recent past.

However, while outsized economic growth brings the promise of greater national prosperity, it also poses a host of new challenges, some of which the country may not be fully prepared to address. “One of Brazil’s biggest problems,” says Masao Ukon, a partner in the São Paulo office of the Boston Consulting Group, “is a shortage of qualified labor.” Indeed, as one of the key inputs to Brazil’s burgeoning economy, qualified labor is a precious resource whose inadequate supply could pose significant risks to the country’s growth trajectory.

Demand Outstrips Supply

At its most basic level, Brazil’s shortage of qualified labor is little more than a supply-demand imbalance. With the Brazilian economy firing on all cylinders — and in the context of a legacy of dramatic government underinvestment in education — firms operating across a number of industries and sectors are demanding more skilled workers than the labor market currently offers, leading to unmet hiring quotas, increased pressure on existing employees and slower firm growth. The shortage is especially pronounced for firms in need of technicians and engineers. Given their demand for large numbers of these specialist employees, the oil and gas, real estate and aerospace industries have been hit particularly hard by the shortfall.

In particular, while many developing countries are suffering from a similar phenomenon, the labor problem is especially severe in Brazil, which recently placed third in a global ranking of countries coping with labor shortages. Indeed, according to the study, in which human resources firm Manpower interviewed more than 40,000 employers across 39 different countries, 57% of employers in Brazil are unable to find the skilled workers they need to operate their businesses. Claudio Lampert, chief legal officer of Brazilian logistics firm Grupo LLX, is one these employers. “Lack of qualified labor isn’t a problem for the future; it’s a problem we’re facing today,” he states. “At this very moment, we’re in need of an additional 3,000 employees.” This acute labor shortage has dramatic implications for Brazilian citizens, Brazilian firms, foreign job seekers and the future of the Brazilian economy in general.

What explains Brazil’s lack of qualified labor, and what are the historical underpinnings of this modern-day problem? While the answers to these questions are highly nuanced, many observers begin by pointing to Brazil’s historical underinvestment in education as the primary culprit behind today’s labor shortage. For example, Roberto Civita, chairman and editorial director of Grupo Abril, Brazil’s largest media conglomerate, states that the country lacks qualified labor because “Brazil basically ignored education during a large portion of its history.” In support of this thesis, many academic specialists on the subject state that, beginning in the colonial era, the Brazilian elite deliberately neglected education because their productive assets (which, until the latter half of the 20th century, were focused primarily on the production and export of primary goods) did not require the use of skilled labor. This historical legacy contributed to the formation of an educational system ill-equipped to meet the needs of a fast-growing and diversified economy.

Most experts agree that the solution to Brazil’s labor shortage is a long-term one that involves broadening access to education, building more schools and improving the quality of existing educational institutions. But what can be done to address the issue in the short term? How are Brazilian companies coping with the shortfall? Can and should highly skilled foreigners be used to fill the gap? And what are the long-term implications of a prolonged labor shortage?

Corporates Enter the Stage

Facing an ever-widening gap between healthy growth projections and qualified talent supply shortages, Brazilian companies — such as mining giant Vale (fomerly Companhia Vale do Rio Doce or CVRD), Petrobras and Schincariol — have taken on the talent gap proactively by establishing their own corporate universities. While not intended to replace conventional education systems, corporate universities increasingly resemble them. They seek to accelerate the acquisition of academic knowledge and immediately facilitate practical, on-the-job application through short-term immersion courses such as those found in academic settings.

Vale’s Valer University spent US$34.7 million in 2010 on its educational programs across the value chain — from operational and specialist technicians to management leaders — even reaching suppliers that have difficulty providing high-quality service due to poor management skills.

Valer University trains employees in mining, port operations and railways, among other fields. In 2010 alone, it produced 60 railway engineers who would not otherwise have had the skills necessary for Vale’s operations. It is also considered the unparalleled leader in producing talent specialized in extracting ore from the Amazon rainforest. Although focused on particular technical skills for the mining company, Valer also finds itself picking up the slack for Brazil’s underdeveloped education system. “Teaching math and Portuguese is not part of our core business,” notes Desiê Ribeiro, education manager at Vale. “But because of flaws in the educational system, we frequently find ourselves in that role.”

Petrobras University in Rio de Janeiro confronts another challenge — developing engineers with the brainpower to discover and produce new deepwater techniques for pumping oil from beneath 7,000 meters of ocean, rock, salt and sand. With offshore oil training becoming part of Petrobras University’s core curriculum, the school aims to educate a significant portion of the estimated 8,000 to 9,000 employees who will be required for deepwater operations by 2015, far more than the country’s formal education system is slated to produce. The company is world-renowned for its leading deep-water expertise.

But what about those companies that do not have their own corporate universities to provide a controllable, if undersupplied, pipeline of qualified talent ready to be employed in positions critical for meeting growth expectations? Even Petrobras is facing a talent challenge given that 45% of its workforce is set to retire in the near term, taking with them a significant amount of the company’s experience and know-how. Logistics company LLX, part of Eike Batista’s Grupo EBX, is already experiencing the lack of a qualified labor force. With construction of the Açu Superport Industrial Complex — eventually one of the three largest port complexes in the world — already underway, “the lack of manpower is not going to be a problem; it already is,” according to Claudio Lampert, the company’s general counsel. LLX is struggling to find more than 3,000 workers to construct and operate the port.

Similar demands for skilled laborers and technically trained employees in the financial services, consulting, beer and industrial sectors, among others, have many Brazilian companies worried. “We’ve run out of Brazilians,” says Luiz Mendonça, CEO of Braskem’s international business unit, a chemical company that is a global leader in bioplastics.

Toward an Open-door Policy

Considering the educational challenges and dramatic economic growth underway, it may seem desirable for Brazil to admit skilled labor selectively into the domestic economy. However, since the first presidency of Getúlio Vargas from 1930 to 1945, Brazil’s federal bureaucracy has included a powerful Ministry of Labor and a hierarchy of specialized courts focusing on extensive labor laws, all of which seek to protect the domestic labor market. Successive governments mostly have supported the status quo, especially with respect to limits on foreign workers. On July 7, 2011, Carlos Lupi, Brazil’s current Minister of Labor, summarized the government’s reluctance to issue work permits, observing that “in Brazil, we are in a growth process, and we must ensure that the labor market continues strongly for Brazilians.”

The volume of recent work authorizations conceded by the Ministry of Labor, a prerequisite before a work visa can be issued by a Brazilian embassy or consulate, reveals the magnitude of the problem facing Brazilian companies. During the first six months of 2011, work authorizations increased by nearly 18% over previous years, to 28,556. However, only 44% were valid for one to two years, the maximum duration granted for a temporary work permit, while 39% were valid for less than 90 days. Even though the state of São Paulo had a GDP of US$548 billion in 2008, representing 33% of the national economy, only 1,461 work permits were issued to business professionals and executives within the state, further demonstrating the extent of protectionist policies. Furthermore, 17% of Brazilian work visas were issued for technical-support visits of less than 90 days, without a Brazilian work contract, in line with government policy goals of transferring know-how while maximizing job vacancies available to locals.

A review of the work authorization data also identifies areas where the foreign labor market is addressing domestic labor shortages. During the first six months of 2011, fully 25% of work visas were issued to crews of offshore oil platforms or ships in the state of Rio de Janeiro, representing by far the largest bloc of recipients and a key area for foreign direct investment. After the U.S., the second largest national origin of successful work visa applicants is the Philippines, at 2,294 (9%), with many hired under short-term contracts for fully staffed ships. The largest category of recipients in the state of São Paulo is “artists and athletes,” followed by short-term technical support and tourism-related flight or ship crews Thus, the top three categories of São Paulo visa recipients do not displace local employees.

Senator Cristovam Buarque sums up the predicament of the Brazilian economy by saying that “o Brasil está bem, mas não vai bem,” meaning that Brazil is doing well now, but it is not headed in the right direction. As a leader in the fight to improve the quality of education in Brazil, Buarque faces the daily challenge of convincing stakeholders in the Brazilian economy that education is an issue deserving immediate attention. With at least US$30 billion headed to infrastructure projects in preparation for the 2014 World Cup and 2016 Olympic Games, Buarque’s voice seems to be taking a back seat. Most politicians do not want to talk about the long-term implications of a failing education system. The more popular response to the current economic moment is to take advantage of the boom while it lasts.

For nearly a year, a proposed National Education Plan (Plano Nacional de Educação) has been held up in Congress and has already been through more than 3,000 amendments. The education plan seeks to establish quantifiable goals to measure the improvement of the country’s education system over a period of 10 years. The fact that many Brazilian politicians are holding up the legislation may be simply a reflection of culture. According to Julio Sampaio, president of Associação Alumni, a Brazilian nonprofit dedicated to English language instruction, traditionally the powerful elite have lacked interest in guaranteeing a quality education for all Brazilians.

Where will Brazil be in 20 years without a government-driven effort to improve the quality of education? What will the impact of doing nothing be on GDP and foreign investment? While no one can answer these questions directly with figures, there is a general consensus that Brazil’s education problem is not going away anytime soon and that executives from the outside looking in ought to keep this major issue in mind.

Despite being home to a culture that is only just beginning to value education and professional preparedness, Brazil is also host to a wide variety of opportunities that it will display proudly on the world stage for the first time in 2014 at the World Cup. While Brazilian business leaders recognize the labor challenges facing them in the short- and mid-terms, they continue to be optimistic about their growth scenarios. Whether some companies plan to establish or bolster current corporate university programs or to increase the number of foreign workers as the visa process becomes ever-more lenient, executives are hopeful that their growth projections are on track. As the demand for a qualified labor force becomes more significant, so, too, will the efforts to find and create it. As Civita says, “If I could be anywhere in the world at age 27, I would be in Brazil.”

This article was written by Marcus Anderson, Thomas Baldwin, Lisa Lovallo and Gabriel Pumariega, members of the Lauder Class of 2013.

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