Brazil’s economic trap by Amy Kaslow @FortuneMagazine January 15, 2014, 4:42 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Teachers and supporters calling for better public education and services in October 2013 in Rio de Janeiro FORTUNE — Brazil is in a bind. It has a wealth of natural resources and is among the most powerful industrial producers in the world, but the nation’s economic growth hinges on skilled workers it doesn’t have. The country has grown fast, achieving in the past 20 years what “it took the United States to accomplish in 200 years,” marvels Ambassador Thomas Shannon, who recently finished his tour as Washington’s top envoy to Brasilia and now serves as a senior advisor to Secretary of State John Kerry. The world’s sixth-largest economy, Brazil is a top exporter of farm products (sugar, coffee, oranges, beef, poultry, soy) and manufactured goods (from airplanes to vaccines), and it may join the ranks of the world’s biggest oil suppliers before long. But rapid development has far outpaced financing for quality and accessible schools that can turn out work-ready Brazilians. The result: a dearth of skills and knowledge to satisfy economic demand. Intensifying the pressure are the escalating costs of hosting this year’s World Cup and the 2016 Summer Olympics. Brazil has made huge investments in stadiums and other public facilities to accommodate the millions of tourists it hopes to attract to the international games. The drawdown on public and private funds combined is expected to exceed $1 trillion. Preparation for the two sporting events continues 24/7, with Rio and other cities blanketed in construction project dust, according to Robson Braga de Andrade, who heads Brazil’s most influential business and industry association. As president of ORTENG Equipamentos e Sistemas, a Brazilian provider of integrated energy and automation systems, Andrade has become a seasoned talent scout. Like many Brazilian employers, he scours domestic and foreign labor markets for the right workers: “We are in desperate need of engineers,” he says. Despite Brazil’s claims of full employment, and cranes and earthmoving equipment that dot the nation’s landscape, many people have been left behind. United Nations and World Bank data estimates that more than a quarter of the country’s population lives near or at the poverty line (women, youth, and small farmers are the most vulnerable) with no access to clean water, sewage treatment, or even mail delivery. And Brazil’s existing power networks, communications grids, roadways, mass transit, airports, and seaports are all grossly inadequate to meet the country’s current needs. Andrade and his fellow employers want to reverse this trend. “Enrolling high school dropouts in vocational training,” he says, “will prompt them to work for their diploma.” Andrade oversees the national industrial training service and hopes to prepare upwards of 4 million trainees this year. He ticks off the many sectors — oil, gas, civil construction, manufacturing, all inextricably linked — stymied by skills shortages that can easily absorb millions of qualified workers. The International Energy Agency forecasts Brazil will triple its oil output in the next 20 years, with 6 million barrels per day, to become the sixth-largest producer in the world. This optimistic outlook requires hundreds of billions of dollars to develop fields and refineries in the next five years. This cannot happen without the workforce to develop it. Brazil ranks second among the world’s nations suffering from acute skills shortages, according to a 2013 survey by Manpower. Sixty-eight percent of the nation’s employers reported that they have a talent problem, just behind Japan’s 85%. Bordering nine countries, Brazil’s automakers, construction firms, and energy concerns are increasingly reliant on workers from other countries. For the past five years, Brazil’s Ministry of Labor has steadily increased temporary work visas for foreign technical workers. — Responding to mounting pressures, Brazil’s President Dilma Rousseff has set goals to boost the number of work-ready Brazilians, pushing both employers and local and state leaders to collaborate to anticipate and coordinate their staffing needs. The strategy looks promising for Pernambuco, one of Brazil’s fastest growing states. Brazil’s leading pharmaceutical research firm, Novartis NVS , will open the continent’s first biotech plant there in 2017, and it’s already scrambling to attract and train the workers to staff it. Short of this early and sustained effort, says Isabella Maciel de Sa, country legal head at Novartis Biociencias S.A., “we know we would not find the talent.” Along with the state government and Federal University [one of Brazil’s top universities], the company is developing a million-dollar online platform of specialized courses and a pipeline for the Brazil’s disabled population to train for work in labs, biosecurity, and call centers. Intent on beating back provincialism and breaking barriers for Portuguese-only speakers, Rousseff has also set a 2015 deadline for sending 101,000 Brazilian students abroad to study science and math in English. (Only 5% of Brazilians speak the language, which the government has deemed necessary for a competitive workforce.) Rousseff tapped Andrade to advance the government’s hunt for outside help. Working with Denver-based U.S.-Brazil Connect, Andrade has teamed up with U.S. community colleges — including Texas’s Houston Community College, Colorado’s Red Rock Community College, and Michigan’s Jackson Community College, where expanding career-based and English proficiency programs attract young Brazilians. Among them is Wesley Melo, a 17-year-old from Salvador, in the northeastern Brazilian state of Bahia, who visited Colorado schools this past fall. “The real idea of the program is to send students to get immersion and then to return to Brazil and work in industry and help the country to grow,” says Melo, who is pursuing a two-year mechatronics (mechanical and electronics) degree in Bahia. Back home, he says, “it should be easy to get a job … In Brazil, we need technical, industrial automation, and so many other skills.” — But Melo is not sure he’ll stay in Brazil long enough to “help the country change.” He says he is fed up with the daily safety and public transportation difficulties. “I live about 10 minutes from technical school, which is on a road near a favela,” says Melo. It takes him two hours to get home. “The busses pass, and they are really crowded. And there are big delays. Waiting for the bus, I was robbed by thugs who took my backpack. My chemistry book was in there.” Melo contends that if there were better public transportation, he would not have been so vulnerable to thieves. And if the poor were not so marginalized, there would be less crime. Emblematic of the Brazilian government’s shifting fiscal priorities, Salvador’s subway system, under construction and stalled since 1997, offers concrete pillars to nowhere and rusting rails. The government promises to improve mobility in time for the World Cup. Upward of a million Brazilian protestors have taken to the streets in recent months, seething over the government’s commitment to build stadiums, hospitality centers, and an array of other public facilities for the games, which, they contend, diverts investments for paved roads, mail delivery, and potable water. Melo says that basics remain out of reach for the burgeoning unskilled underclass living in favelas, or shantytowns. It’s not just the poor or the young who are demonstrating, he says: “If my mother had let me go, I would have joined the demonstrations.” Lugging a sack of recyclables, this Brazilian resident of a Rio de Janeiro favela collects and prepares plastics. He is part of a Coca-Cola training, employment and entrepreneurship program. In recent years, Brazil became the poster-child for developing nations. Its expanding middle class — which added 35 million people to its ranks in the past decade alone, according to Brazil’s Instituto Datapopular — has translated into greater purchasing power. But it has also led to a debt trap, as the government handed out cost of living subsidies to the poor and then offered low-interest loans to encourage families to buy cars, televisions, and a host of other products. The socio-economic transformation has had a breathtaking impact on Brazil’s landscape. In the 1950s, Brazil was 85% rural. Today, it is roughly 85% urban. The untrained and uneducated face joblessness and crushing poverty, with 35% of Brazilians living on less than two dollars a day according to the UN’s International Fund for Agricultural Development. Favelas have seen an escalation of violence in recent years that drug lord combatants have elevated to war. Rampant violence and soaring death tolls have forced schools to close and shops to shutter. The Rio-based Brazilian Center for Latin American Studies claims Brazil is the seventh most violent country in the world; Melo’s northern city of Salvador tops the list, where impunity is the norm and 90% of homicides go unresolved. In anticipation of the World Cup and the Olympics, Brazil’s government has accelerated what it calls pacification, driving drug lords and gangs from their turf and installing a well-armed police presence in their stead. — Police tactics aside, Andrade argues that education and job training can serve as a powerful antidote to poverty and violence. He plans to send 2,000 more Brazilians to American community colleges to study disciplines like mining, civil construction, energy, and engineering. U.S.-based corporations intent on penetrating Brazil’s consumer market have also extended their reach into communities, with initiatives like Coca Cola’s KO Collectivo. Targeting at-risk youth, jobless men, and women entrepreneurs, Collectivo is making its mark on favelas across Brazil with after-school and job readiness programs that lead to job placements. Participants work at recycling centers that train and pay them to process plastics for repurposed products that women design, make, and sell in stores. Collectivo says these women entrepreneurs have increased their earnings by 50%. Meanwhile, Brazil’s spending on research and technology grew by 7% last year, outpacing every other country except China, where investments climbed by 11%. But, ultimately, the progress Brazil makes in cultivating homegrown talent across the economic spectrum will determine its ability to realize its ambitions, at home and abroad.