By Sean Buchanan
LONDON (IDN) – 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, but the country still has some way to go.
The mixed outlook comes in the latest OECD Economic Survey of Brazil which notes that 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 the OECD, 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 percent over 15 years, which would boost household incomes and help compensate for the economic drag of a rapidly ageing population.
At the same time, 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. “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.”
A major challenge is said to be sustaining inclusive growth because Brazil is still one of the countries with the highest levels of inequality in the world. The richest half of the population earns 90 percent of total household incomes, while the bottom half earns only 10 percent. Severe inequalities continue to hit women, racial minorities and youths hardest.
The Economic Survey 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 percent of GDP out of the 15 percent 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, says the OECD.
Meanwhile investment, which is already low compared with 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 licensing.
“Without a demographic bonus to rely on, stronger investment and productivity are key for future growth,” said Gurría. “However, Brazil has one of the lowest investment rates among OECD and emerging market economies. Stronger investment could help raise productivity and therefore the scope for future wage increases.”
On public finances, the Economic 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.
Continuing to fight corruption with reforms to increase accountability would also help to draw investment and restore citizens’ trust in institutions. “The pervasive dimensions of corrupt practices exposed by recent allegations have also revealed significant challenges in economic governance which require action,” said Gurría.
These events also show the steady strengthening of Brazil’s institutions. Its independent judiciary has not shied away from pursuing senior figures. By continuing to strengthen its institutional framework Brazil can distance itself from the past and reduce future vulnerabilities as well as strengthen inclusive growth.
As Brazil works to strengthen public governance and improve accountability for public spending, the OECD is launching a new three-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.
According to Gurría, “another key challenge is to strengthen Brazil’s integration into the global economy.” Currently, Brazil is less integrated into global trade than other emerging markets. Exports and imports account for less than a quarter of GDP, which is far less than other emerging market economies in the region such as Chile and Mexico, where they represent more than 60 percent of GDP.
The Economic 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.
The OECD recommends lowering tariffs and scaling back local content requirements. This would boost productivity and jobs, including for those with lower skills. Consumers would also benefit from more competitive prices. This would have particularly strong effects among low-income households, since tariffs are particularly high on food, clothing and home appliances.
Finally, said Gurría, Brazil faces the important challenge of protecting Brazil’s natural resources such as the Amazon rainforest.
“Brazil reduced deforestation by an impressive 82 percent in the decade leading up to 2014. But since then it has been rising again. When used sustainably, natural assets like the Amazon can bring significant opportunities and potential to spur economic growth and social inclusion in what are currently economically lagging regions. Brazil can seize these opportunities in ways that promote green growth and well-being.” [IDN-InDepthNews – 11 March 2018]
Image credit: OECD.
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