If you were to ask a Brazilian how it is they make money, they will likely begin by telling you about the wage they earn for working a certain number of hours at their job. They may even go on to tell you about the business, or the piece of land, or even the government bonds they own, all of which pay a certain amount of money in the form of profit, rent, and interest respectively. Looking at all these Brazilians in aggregate we can see how it is that Brazil makes its money since Brazil’s income is just the sum total of all its individual citizens’ incomes.

At this aggregate level we find that Brazil has a lot going for it in that it is endowed with both an abundance of natural resources and people, but just as individuals may be endowed with certain natural talents, it is ultimately how these talents are managed and developed that determine income. Examining the fundamentals of how Brazil earns its income we find that while having an abundance of resources, including people, the country needs to begin to refocus its management and development strategies.

Brazil’s Income vs. the Brazilian’s Income

We may be tempted to think that Brazil must be doing relatively well with its management and development strategies, considering that its total income (i.e. GDP) was the seventh largest in the world in 2013 at $2.246 trillion. That’s a lot of money, making Brazil a major player in the global economy.

Yet, considering Brazil’s total population (approximately 200.4 million in 2013), the average Brazilian income (i.e. GDP per capita) is relatively small at only about $11,208 in 2013. This ranks it 63rd globally, according to the most recent data from the World Bank

Although Brazil’s income is relatively large, the relative smallness of its individual citizens’ income suggests that productivity improvements could be made. Before considering some of these improvements let’s first take a look at what it is that Brazilians do to make money. (For more, see: Investing In Brazil 101.)

Brazil’s Income Decomposed

Decomposing Brazil’s income, we find that it is derived from the following three sectors: agriculture, industry, and services. According to 2014 estimates, 5.8% of Brazil’s income came from agriculture, 23.8% from industry, and 70.4% from services.

A further decomposition shows that the agriculture sector is comprised of coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus, and beef; the industry sector is comprised of textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, and other machinery and equipment; and finally, the service sector is comprised of hospitality, finance, IT BPO, retail sales, and personal services.

The work done in these sectors determines the supply of goods and services to both domestic and foreign consumers. In turn, the spending from these consumers results in income for Brazil’s workers. Yet, it is primarily domestic consumption that is responsible for supplying Brazil’s workforce with income as the country’s total exports comprised only 12.6% of GDP in 2013. We now examine the fundamentals of this consumer demand in recent years.

The Boom: Increases in Foreign and Domestic Demand

The recent explosion in Chinese growth fueled a global commodity boom from 2003 to 2011. As China is Brazil’s leading foreign consumer, this boom had significant benefits to Brazil’s exports, the value of which increased by approximately 250% over the same period.

Brazil’s economic climate during this time also helped attract large capital flows, leading to an enormous expansion of consumer credit. Domestic consumption rose significantly as household debt increased from 20% of personal income to 43% between 2005 and 2012.

Government spending also helped fuel consumption growth. Spending from the government, largely fueled by higher taxes and increased debt, increased between 2002 and 2013 from 15.7% of GDP to 18.9%.

Thus, much of the strong economic growth witnessed by Brazil in the first decade of the 21st century was primarily due to external factors and not to the country’s prudent management and development strategies. As we shall see, these external factors soon dried up, revealing the real intrinsic weakness of Brazil’s economy. (For more, see: Economic Indicator Sources for Brazil.)

The Downturn: Lower Demand

Currently, all Latin American economies are experiencing a decline in growth due to the end of the global commodity boom cycle, slower growth in China, and a decrease in capital flows to emerging economies. Brazil is no exception. What is obvious now is that the country cannot simply wait things out in hopes that these external factors will reignite.

For one, the higher prices fueled by the commodity boom are an exception to their long term historical trend. In real terms, there has been a definite downward trend of commodity prices since 1913. The recent fall in commodity prices between 2011 and 2014 has actually brought them back in line with this long term trend and are thus unlikely to return to the high levels characteristic of the period between 2003 to 2011 in the near future.

Further, government spending appears somewhat handicapped as Brazil’s fiscal accounts have significantly worsened. In fact, one rating agency recently downgraded Brazil’s sovereign credit rating from stable to negative while keeping the country at the second-lowest investment grade rating of BBB. This downgrade comes despite the government’s recent actions to cut spending and raise taxes.

These austere measures take their toll on the individual consumer’s disposable income, of which a large proportion is already used to service consumer debt. Consumers will not be taking on more debt any time soon and thus the debt-fueled consumption of recent years has come to an end.

All of these factors are contributing to serious difficulties for Brazil’s economy and are highlighting the weaknesses that may have been hidden during the country’s strong growth during the first decade of this century. The only way to improve is to refocus on prudent management and development strategies.

Moving Forward: Improvements for Income Growth

As evidenced by Brazil’s relatively low GDP per capita noted above, the country needs to focus its energy on increasing productivity, which will in turn increase its international competitiveness. In fact, a recent competitiveness study ranked Brazil 15th among 16 peer nations, and the country has been at the bottom of these rankings for the past three years.

There are several development improvements Brazil could undertake to increase its competiveness. According to McKinsey & Company, these improvements include increasing investment, promoting closer integration with major markets, upgrading infrastructure that will connect Brazil to the rest of the world, lowering regulatory costs, improving public sector efficiency, and improving education and training.

The Bottom Line

Brazil has a lot going for it as it has an abundance of natural resources and people. Yet, as recent events have shown, having an abundance of these things does not necessarily mean strong incomes for citizens. These resources must be appropriately managed and developed. Brazil has some of the fundamental components of what it takes to make money, but if it wants to truly improve the lives of its citizens then it will need to develop greater productivity and increase its international competitiveness.