Low investment rates are limiting Brazil’s future potential growth rate. This paper analyses a number of potential reasons for these low investment rates and discusses policy options to achieve faster capital accumulation. A shortage of domestic saving appears to be a major constraint to higher investment rates in Brazil. Due to high levels of current expenditures, in particular pension entitlements, public sector saving is negative. In addition to being costly, the pension system redistributes income to individuals with relatively low saving propensities, thereby reducing private saving as well. In order to control pension expenses in the future, this paper suggests a number of parametric pension system reforms. Beyond a scarcity of domestic savings, major curbs on investment include the high level of real interest rates, whose reasons are not easy to pin down, and thin long term credit markets, which are dominated by the national development bank BNDES. Going forward, engaging commercial lenders in the provision of long term funding will be necessary to cover the country’s investment needs. This will require leveling the playing field, which can only be achieved by removing BNDES’ exclusive access to low-cost funding from a workers’ welfare fund and through budget transfers. Another factor limiting investment is the fragmented tax system, which raises firms’ compliance costs and adds to an already high tax burden. Finally, regulatory reforms, including the removal of remaining entry restrictions as well as reductions in trade protection, may reduce firms’ costs and enhance investment incentives. This Working Paper relates to the 2011 OECD Economic Review of Brazil 2011 (www.oecd.org/eco/surveys/Brazil).
