Economic surveys and country surveillance

Economic survey of Brazil 2006: Fostering long-term growth: the challenges ahead

 

Contents | Executive summary | How to obtain this publication |  Additional information

The following OECD assessment and recommendations summarise Chapter 1 of the Economic survey of Brazil 2006, published on 24 November 2006.

Contents                                                                                                                           

Growth prospects are improving on the back of increased resilience

The 2005 Survey argued that the foundations for sustained economic growth were by and large in place. This assessment remains valid. The macroeconomic environment continues to improve: fiscal policy has stayed on track; the public debt-to-GDP ratio has trended down since 2003, although it remains comparatively high by emerging-market standards; and inflation has been tame at its lowest level since the adoption of inflation targeting in 1999 and well anchored around the current target of 4.5%. Ongoing external adjustment is making the economy increasingly resilient to external shocks, and asset prices are performing well in the face of the current tightening of global liquidity. Efforts to reduce external vulnerability, particularly with respect to public external indebtedness, are paying off: Brazil’s sovereign credit has been upgraded, and interest premia are at historically low levels. The outlook for inflation and growth remains benign. At the same time, income inequality, which is high in Brazil, is coming down as a result of rising earnings and the successful implementation to date of targeted income support initiatives for the poor under the Bolsa Família programme. Continuous growth is the key to maintaining progress on this front. But there are some macroeconomic and structural problems, which, unless addressed, will continue to act as a drag on growth, preventing Brazil from reaping the full benefits of macroeconomic stabilisation. Against this background, the overarching medium-term policy objective for Brazil is to raise the economy’s growth potential so as to close the gap in income per capita with the OECD area, which has widened since the 1980s.

GDP growth has been based predominatetly on factor accumulation,
rather than productivity gains

Source: IPEA and OECD calculations.

The agenda for structural reform is far from completed

The authorities remain committed to a broad range of structural reforms, but achieving the goal of faster sustainable growth will require concerted policy action on many fronts. To this end, this Survey identifies three main policy weaknesses that will need to be addressed to raise Brazil’s growth potential:

  • First, the quality of fiscal adjustment will need to improve to consolidate the gains obtained to date with macroeconomic stabilisation and to enhance economic resilience further. The additional fiscal effort that will be required to put the public debt-to-GDP ratio on a sustained downward trajectory would need to be based predominantly on a retrenchment of current expenditure, including on pensions, rather than further increases in the tax take, with their negative side effects.
  • Second, the business sector will need to become more innovative to boost productivity and to enhance the economy’s competitiveness. Increasing R&D spending, which is currently sub par in comparison with most OECD countries, and is carried out predominantly by government, can do much to boost innovation performance. The fact that Brazil’s R&D intensity in the business sector would have to rise by a factor of four merely to reach the OECD average of about 1.6% of GDP illustrates the scope for action in this area.
  • Third, the use of labour inputs will need to improve through human capital accumulation on and off the job and by reducing informality. Educational attainment has risen over time but not as fast as in Brazil’s main trading partners. In addition, the country currently faces the problem of widespread informality, especially among the less educated, for whom labour turnover is also high. Adding this untapped supply of labour to the formal labour market and accumulating human capital would contribute to raising the economy’s potential growth.

Read also ECO Working Paper 534 Social security reform in Brazil: Achievements and remaining challenges

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.

The complete edition of the Economic survey of Brazil 2006 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 Luiz De Mello and Diego Moccero under the supervision of Peter Jarrett.

 

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