Brazil is emerging from its long recession and is headed for solid growth in 2018 and 2019 as recent structural reforms start to bear fruit. Sustaining this recovery, unleashing Brazil’s full economic potential and spreading the benefits fairly will require additional efforts to rein in public spending, increase trade and investment, and further focus social spending on those most in need, according to a new OECD report.
The latest OECD Economic Survey of Brazil says that deepening reforms to strengthen institutions, improve business regulation and reap the benefits of tighter integration into the global economy could lift GDP by at least 20% over 15 years, which would boost household incomes and help compensate for the economic drag of a rapidly ageing population. Better targeting of welfare spending on the poorest households would be crucial for fostering inclusive growth.
“Brazil is back on a positive growth path, but there is no time for complacency,” said OECD Secretary-General Angel Gurría, presenting the Survey in Brasilia. “With the demographic dividend now over, getting the economy fully back up to speed will require greater investment, higher productivity and closer integration into the global economy. For this, Brazil needs to continue on the path of active structural reform to ensure the sustainability of its fiscal accounts and the inclusiveness of its growth”.
The Survey says Brazil is foregoing the benefits of integration into the world economy due to a trade policy that has prioritised safeguarding domestic markets over facilitating access to foreign markets. Brazil has especially high tariffs on intermediate and capital goods, and non-tariff trade barriers such as local content rules and anti-dumping measures are widespread.
Lowering trade barriers would make Brazilian firms more competitive by allowing them to source inputs at lower prices. This would boost trade volumes and raise productivity and wages. It would also reduce prices for consumers, in particular low-income households.
Investment, already low compared to other Latin American and emerging economies, has declined in both real terms and as a share of GDP in recent years, weighing on the overall economy and adding to existing infrastructure bottlenecks. Reversing this trend will require concrete actions to improve infrastructure planning, open up new sources of finance, reduce administrative burdens, simplify taxes, and streamline licencing. Continuing to fight corruption with reforms to increase accountability would also help to draw investment and restore citizens’ trust in institutions.
On public finances, the Survey warns that without a significant reform of mandatory public spending, Brazil’s fiscal accounts risk becoming unsustainable. To promote growth that is more inclusive while achieving fiscal targets, a comprehensive pension reform is the top priority for Brazil in the short term.
The Survey also recommends improving the allocation of social spending, much of which benefits middle-class households, to firmly target those most in need. For example, Bolsa Familia is a highly effective scheme but only accounts for 0.5% of GDP out of the 15% of GDP that goes to social spending. Shifting more resources towards this scheme while reforming other transfer programmes would help to decrease inequality and poverty.
Transfers to private companies, including through tax reductions, have risen strongly in recent years, creating fertile grounds for rent-seeking behaviour and political kick-backs without halting the substantial decline in investment.
As Brazil works to strengthen public governance and improve accountability for public spending, the OECD is also launching on the occasion of the Secretary-General’s visit to Brasilia a new 3-year project with the Tribunal de Contas da União, Brazil’s supreme audit institution, aimed at strengthening its capacity to improve the effectiveness and evidence base of policies and programmes in areas such as education, health and security.