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2018 OECD Economic Surveys: Brazil 2018

image of OECD Economic Surveys: Brazil 2018

Strong growth and remarkable social progress over the past two decades have made Brazil one of the world’s leading economies, despite the deep recession that the economy is now emerging from. However, inequality remains high and fiscal accounts have deteriorated substantially, calling for wide-ranging reforms to sustain progress on inclusive growth. A better focus of social expenditures towards the poor would reduce inequality and ensure sustainability of public debt at the same time. This will require difficult political choices, particularly in pensions and social transfers. Reducing economic transfers to the corporate sector, in conjunction with more systematic evaluations of public expenditure programmes, will strengthen growth, improve economic governance and limit the future scope for rent seeking and political kick-backs. Maintaining the growth potential of the economy requires stronger investment, which could also raise productivity and concomitantly, the scope for future wage increases. Simplifying taxes, reducing administrative burdens and streamlining licensing would raise investment returns, while stronger competition could generate new investment opportunities in thriving, high-performing enterprises. At the same time, trade barriers shield enterprises from global opportunities and foreign competition. Fostering a stronger integration into global trade would allow firms to become more competitive and generate new export opportunities.

SPECIAL FEATURES: STRENGTHENING INVESTMENT AND INFRASTRUCTURE; FOSTERING INTEGRATION INTO THE WORLD ECONOMY

 

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Raising investment and improving infrastructure

The economy’s growth potential has declined in recent years and the income gap vis-à-vis advanced economy has widened, mainly due to comparatively weak labour productivity. Following years of falling investment that can explain almost 40% of the decline in labour productivity, Brazil has one of the lowest investment rates among OECD and emerging market economies. As a result, growth is likely to fall substantially below current levels unless new sources of growth are tapped into. Strengthening investment will be one key avenue to maintain solid growth and build on the social progress of the past. The ability of firms to pay better wages without jeopardising their competitiveness will depend crucially on stronger investment and productivity. One area of investment with particularly wide ramifications into other sectors is infrastructure and almost all areas of infrastructure are characterised by quality shortcomings and bottlenecks. Explanations for Brazil's low investment are related to a lack of profitable business opportunities in which the private sector could invest, owing to structural policy settings that act as a drag on the investment climate. Areas where reforms could significantly improve the business climate include red tape and licensing procedures, legal uncertainty, tax compliance costs, labour costs and improvements in workforce skills. Strengthening competition would allow a reallocation of resources to more productive firms and sectors, freeing labour and capital from low-productivity and low-remuneration activities. Financing has also been a constraint and a second important explanation for low investment. Long-term investment lending has so far been dominated by one single public-sector financial institution. Recent policy changes have paved the way for developing private long-term credit markets and tapping into more diverse sources of financing. For infrastructure financing, using a wider array of financial instruments would allow drawing institutional investors, including foreign ones, into financing infrastructure projects in Brazil.

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