Economic Survey of Brazil 2011

 

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Since the mid 1990s, Brazil has enjoyed improved economic and financial stability largely owing to a strengthening of its macroeconomic framework. In order to quickly catch up with the group of high income countries the overriding need is to achieve strong and sustainable growth. This will require continued good macroeconomic, social and environmental policies and structural reforms designed to boost savings and investment and foster infrastructure development. Higher international uncertainties and cross country interdependence, rapid population ageing and a greater reliance on oil revenues will call for policymakers to expand their tool kit to respond to this challenge.

The key macroeconomic challenge is to damp inflation in a context of abundant global liquidity. The economy recovered rapidly from the 2008-09 global crisis thanks to a timely policy response. Annual growth in 2010 was the strongest in two decades. Driven by both structural factors and international financial conditions, the real has steadily appreciated since 2003, except during the 2008 financial crisis and more recently when a flight from risk in the midst of financial-market turbulence weakened it. Inflation pressures have emerged. To prevent excessive currency fluctuations and safeguard financial stability the authorities initially combined increases in interest rates and reserve requirements with foreign exchange intervention and a temporary tax on short term capital inflows (IOF). As the global outlook worsened, the policy mix was shifted toward easier monetary policy and some fiscal consolidation. If that proves insufficient in the current uncertain environment, policymakers can have recourse to macro prudential measures or adjusting the IOF.

However, they should rely more prominently on fiscal consolidation. The spending cuts announced earlier this year and the setting of primary surplus targets for the next three years in levels consistent with public debt reduction in the draft 2012 Budget Law are welcome and the government should continue in this direction. Over the medium term, moving to a headline budget target and introducing an expenditure ceiling while removing widespread revenue earmarking would foster sustainability of government and social security accounts.

Social progress has been impressive, with a marked fall in poverty and inequality. The fight against extreme poverty has been put at the forefront of the government policy agenda. Since 1993, Brazil has experienced a sharp and continuous decline in inequality, reflecting good labour market performance and successful redistribution policy. The poverty rate has declined by half. This remarkable progress must be continued to further reduce the still high levels of inequality and poverty. Further required action will involve an extension in scale and scope of the highly efficient conditional cash transfer programme Bolsa Familia, which has managed to relieve poverty at relatively low fiscal cost.

 

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Removing obstacles to investment will be crucial to sustaining strong economic growth. A shortage of public and household saving appears to be a major barrier to higher investment rates. Parametric reforms to the pension system could restore its sustainability. Reduced expected pension benefits could also encourage people to save more during their working lives. Lower bank reserve requirements, the removal of directed lending obligations and a liberalisation of savings accounts would help to spur investment. Approval of the federal government’s proposals to simplify the tax system would also strengthen investment incentives. The authorities have started to implement measures to develop private long term capital markets. Levelling the playing field between private sector banks and the national development bank and providing an explicit tax credit independent of the lending institution could further facilitate private entry in long term financial markets. Once private lenders have entered the segment, subsidies could be phased out progressively.

Faster infrastructure development would help to achieve better economic and social performance. For Brazil, returns to investment in infrastructure are likely to be substantial, especially if designed with environmental benefits in mind. The government is implementing a second large infrastructure programme, which has been rightly protected from fiscal cutbacks. A stronger focus on its most worthwhile projects would facilitate implementation. Attracting sufficient private investment will require streamlining the public private partnership framework. Despite progress, frequent disputes around infrastructure projects often slow the licensing process. This could be addressed by adopting rules for financial compensation for residents harmed by projects. It is in water and sanitation that needs are greatest. The formation of local consortia needs to be encouraged to reap available economies of scale.

How to obtain this publication

 

The complete edition of the Economic Survey of Brazil is available from:

 

Additional information

For further information please contact the Brazil Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Annabelle Mourougane and Jens Arnold under the supervision of Peter Jarrett. Research assistance was provided by Anne Legendre.

www.oecd.org/eco/surveys/brazil

 

 

 

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