Executive summary
Sustaining inclusive growth with further significant reforms
Over the past two decades, strong growth combined with remarkable social progress have made Brazil one of the world’s leading economies, despite the long recession that began in 2014 and from which the economy is now slowly emerging. 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. Fighting corruption will require continuing reforms to improve accountability.
Stronger investment and productivity are key for future growth
Growth, which was supported by a rising labour force over many years, will slow down due to rapid population aging. Maintaining the growth potential of the economy requires stronger investment, which could also raise productivity and concomitantly, the scope for future wage increases. Public spending has crowded out private investment in the past, and the absence of well-developed private financial markets with longer maturities has hindered the flow of savings into more efficient projects, including infrastructure. Simplifying taxes, reducing administrative burdens and streamlining licensing would raise investment returns. Stronger competition will allow high-performing enterprises to thrive and will further enhance investment opportunities.
Brazil can seize greater benefits from greater global and regional integration
Integration into global trade is much lower than in other emerging markets as trade barriers shield enterprises from global opportunities and foreign competition. Exports and growth could be stronger if firms could source the best inputs and capital goods from international markets. More exposure to trade will also lead to rising productivity among domestic producers as they improve efficiency and seize new export opportunities. This would create new jobs across the economy, but especially for those with lower skills and incomes, making growth more inclusive. Consumers would also benefit from more competitive prices, with particularly strong effects among low-income households. A stronger integration into the global economy would be an effective way to enhance competition and would help the most productive firms and industries to succeed, although a select few sectors would see their output decline. Well-designed policies that protect workers rather than jobs through a combination of training and income protection, can shield the poor and vulnerable from the burden of adjustment, ensuring inclusive growth.