Remarks by Angel Gurría,
Brasília, 4 November 2015
(As prepared for delivery)
Dear Minister, dear Ambassadors, ladies and gentlemen,
It is a great pleasure to be back here this morning to present the OECD’s 2015 Economic Survey of Brazil, the 7th survey since the series began back in 2001. I would like to begin by paying tribute to Minister Levy, not only for his team’s close collaboration on this survey, but also for the leadership he has shown since his appointment in pushing a much-needed reform agenda.
It is fitting that this morning’s launch comes a day after OECD-Brazil cooperation was put on a whole new strategic footing with the signing of a joint work programme, laying out the blueprint of our cooperation for the next two years and beyond. This important evolution in our relationship, and the publication today of this Economic Survey, comes at a critical moment in Brazil’s social, economic, environmental and political development. Before we consider the important challenges facing the country, however, I think it’s important first to reflect on the excellent progress Brazil has made since the turn of the century.
25 million people have been lifted out of poverty in only a decade. Bucking the trends in most OECD countries, inequality has been coming down, albeit from high levels, as the incomes of the poorest 10% have increased at three times the rate of the richest 10% since 2003. Over the past two decades, life expectancy has increased by six years while the average time spent in education has increased from six to nine years. In fact, even the present cloud of corruption scandals may have a silver lining as recent investigations and judicial action demonstrate how much institutions have been strengthened and how justice is working.
Indeed, it is because the country has advanced very far and very quickly that citizens’ expectations are higher than ever. Regaining citizens’ trust, and meeting their legitimate expectations, will require putting Brazil back on a stronger, fairer, greener and more sustainable growth trajectory. With this in mind, let me share with you some of the main messages from our Economic Survey 2015.
Brazil’s impressive past achievements were built on a foundation of macroeconomic stability, supported by favourable external conditions. As the tailwinds from high commodity prices have weakened, however, and as the normalisation of US monetary policy approaches, the economy has slumped. At the same time, macroeconomic policy became less rigorous, while the opportunity to boost productivity through structural reforms was largely missed.
Having stagnated in 2014, Brazilian GDP is set to contract in both 2015 and 2016. Over the last 12 months, the overall budget deficit exceeded 9% of GDP, almost all of which is accounted for by interest payments on the national debt. Even though the debt-to-GDP ratio is below 60% of GDP, markets’ lack of confidence in fiscal sustainability – among other reasons – means the interest rate requested by lenders is over 13%. This results in budgeted interest payments of 7% of GDP per year: more than what Brazil spends on education! Moreover, inflation will be more than double the 4.5% target in 2015.
If the government steps up its reform efforts, however, 2015 can be a turning point. Rebuilding the economy’s strength and its capacity to sustainably improve living standards requires fixing the foundations first: it means restoring Brazil’s previously hard-won reputation for sound macroeconomic policy. Even at this challenging moment, in the midst of recession, it is important to achieve fiscal consolidation targets to avoid further downgrades by rating agencies. This should be done in such a way that is as growth, equity and environment-friendly as possible.
Fiscal discipline will need to be maintained as the population ages, and controlling public spending growth will be crucial to these efforts. This should notably include comprehensive pension reforms that raise the retirement age and change the indexation mechanism of minimum benefits.
The renewed determination of the central bank to fight against inflation is welcome. High inflation not only hurts the economy, it hurts poor households hardest. The survey also discusses ways to make monetary policy more effective in its fight against inflation, such as establishing formal central bank independence with fixed-term appointments for the Central Bank governor and members of the Monetary Policy Committee or adjusting the directed lending rate regularly in line with the monetary policy rate.
Sound macroeconomic policy is an important foundation, but structural reforms are the real building blocks for social progress and economic development. Ensuring inclusive growth over the longer-term will require closing Brazil’s productivity gap with OECD countries, but recent progress has been lagging.
Over the last decade, labour productivity doubled in China. It increased by nearly a third in Colombia and South Africa. In Brazil it increased by only 12%! In addition, weak export competitiveness and relatively high tariffs – as well as many local content rules – mean that Brazil is missing out on significant gains from trade. It comes as no surprise, therefore, that Brazil is the least integrated into Global Value Chains (GVCs) of the 40 economies in the OECD/WTO Trade in Value Added – or TiVA – database.
To understand why Brazil remains an outlier in terms of productivity and trade integration, we also have to explore other policy areas. For example, it takes an average manufacturing firm about 2,600 hours every year to prepare taxes – that’s 7 times the Latin American average and 14 times the OECD average!
Financial markets remain shallow and infrastructure gaps are readily apparent while skill shortages, particularly for technical skills, are still holding back productivity growth. Tariffs on manufactured goods, meanwhile, are twice the level of those in Colombia or the average of the rest of the BRIICS. This results in a relatively weak competitive environment and in weak incentives to innovate.
Brazil has begun to make some progress on structural reforms - in taxes, financial markets and administration, for example - but much more ambition will be needed to address the so-called ‘Brazil cost’. In the industrial sector, a few key reforms could unleash significant unexploited potential. Minister Levy has been championing the reform of indirect taxes, for example. Concluding this important reform, alongside reducing trade barriers, will help Brazilian industry significantly cut costs.
We have to go for “inclusive productivity”, which requires continuing Brazil’s social progress. These two concepts should be mutually reinforcing. When people are better educated and healthier and can satisfy their basic needs, they will be more productive in their workplace, while at the same time higher productivity is itself the basis for better living standards.
Of course, improving productivity, trade and GDP growth are not ends in themselves, but simply means to improve citizens’ daily lives. The drive for productivity need not come at the cost of equity. In fact, as we said before, they can be mutually reinforcing. When people are healthier and better educated, for instance, they are also likely to be more productive in their workplace as well as enjoying better well-being.
The success of Brazil’s public health system in raising health outcomes and improving access to healthcare to all Brazilians is impressive, as witnessed by the 15 years of increased life expectancy over the period 1970 to 2013. However, public health services are facing capacity constraints and are unevenly distributed across the country. Efficiency gains could be achieved through a more explicit definition of what is covered by the public healthcare system and what is not, by improving the collection of performance indicators and by shifting the emphasis away from hospital care towards primary care services.
Investment in education and skills is an example of a ‘win-win’ policy initiative. It improves labour productivity while broadening economic opportunities and increasing social mobility. Brazil’s PISA scores improved markedly between 2003 and 2012, especially among younger students and those from low-income backgrounds. Sustaining this progress, and closing the gap with OECD countries, will require further expansion of early childhood education – for which coverage in Brazil is only 37%, half the OECD average for 3-year-olds – as well as remedial interventions to prevent weaker students falling behind.
Ladies and gentlemen,
Notwithstanding its current pressing challenges, Brazil can again become a beacon for other emerging countries. Sustaining progress, however, and winning back citizens’ trust will require renewed commitment to policy innovation, reform and good governance. You are not alone in these endeavors. As a Key Partner to the OECD, Brazil is already like a member of the family. And, we look forward to ever closer cooperation in the design, development and delivery of better policies for better lives.