Brazil’s economic and social progress between 2003 and 2014 lifted 29 million people out of poverty and inequality dropped significantly. Restoring fiscal sustainability is the most pressing economic challenge for Brazil.
Brazil experienced a period of economic and social progress between 2003 and 2014, when more than 29 million people left poverty and inequality declined significantly. The Gini coefficient dropped 6.6% (from 58.1 to 51.5) during that time. The income level of the poorest 40% of the population increased by an average of 7.1% (in real terms) between 2003 and 2014, compared to a 4.4% increase in income for the population as a whole. Since 2015, however, the pace of poverty and inequality reduction seems to have stagnated.
In the wake of a strong recession, Brazil has been going through a phase of highly depressed economic activity. The country’s growth rate has been slowing since the beginning of the decade, from an annual growth rate of 4.5% (between 2006 and 2010) to 2.1% (between 2011 and 2014). There was a significant contraction in economic activity in 2015 and 2016, with the GDP dropping by 3.6% and 3.4% (respectively). The economic crisis was a result of falling commodity prices and the country’s limited ability to carry out necessary fiscal reforms at all levels of government, thus undermining consumer and investor confidence. 2017 saw the beginning of a slow recovery in Brazil’s economic activity, with 1% of GDP growth. For 2018, estimates are only slightly higher than for 2017 – largely because of a weak labor market, investments deferred by uncertainties about the elections and the truckers’ general strike, which brought economic activities to a halt in May of 2018.
Restoring fiscal sustainability is the most pressing economic challenge for Brazil. To address the dynamics of unsustainable debt, the government has enacted Constitutional Amendment 95/2016, which limits the rise of public spending. This amendment imposes a fiscal adjustment of 5% of GDP through 2024 and stabilizes the debt at about 89% of GDP in 2026. Implementing this fiscal adjustment requires reducing the rigidity of public spending and revenue-earmarking mechanisms, which make more than 90% of the federal government’s primary spending mandatory. A comprehensive social security reform will also be required to limit the projected increase of the pension deficit. This large-scale fiscal imbalance also affects subnational governments, whose capacity to handle increasing wage and pension payments will be limited in the absence of reforms.
Brazil also needs to accelerate productivity growth and infrastructure development. The average income of Brazilian citizens has increased only 0.7% per year since the mid-1990s, which is one tenth of the rate in China and half the OECD average. This can be explained by a lack of Total Factor Productivity (TFP) growth between 1996 and 2015. Brazil’s productivity problem can be attributed to the absence of an adequate business environment, distortions created by market fragmentation, several support programs for companies that have yet to yield any results, a market that is relatively closed to foreign trade and little domestic competition. Brazil also features one of the lowest levels of infrastructure investment (2.1% of GDP) in comparison to its peers, and the quality of these investments is low. Accelerating productivity growth remains one of the country’s top priorities, as the demographic transition comes to an end and the fiscal space for expansionary policies remains severely limited. Higher investments in infrastructure will also be required to ensure proper maintenance of existing infrastructure, by eliminating bottlenecks and expanding access to social services. This will require improving the government’s planning capacity, improving the regulatory framework and leveraging private resources to finance investments.
A comprehensive diagnosis was produced by the World Bank’s technical team in July 2018, containing a summary of Brazil’s primary challenges in economic and social development and pointing to a possible course of action to overcome them. This material is entitled Public Policy Notes and is available for consultation on the World Bank website. It covers the following topics: stabilization and fiscal adjustment, the tax system, intergovernmental fiscal issues, the pension reform, the State reform, productivity, credit markets, infrastructure, education, logistics & transportation, the labor market, ways to address the violence epidemic, climate change (NDC) and water resources management.