Unleashing Brazil’s Growth

IMF Blog, November 27, 2013

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Since the early 2000s, Brazil’s economy has grown at a robust clip, with growth in 2010 reaching 7.5 percent—its strongest in a quarter of a century.
A key pillar of this success has been sound economic policies and the adoption of far-reaching social programs, which resulted in a substantial decline in poverty.
In the last couple of years Brazil’s growth slowed down; although other emerging market economies experienced a similar slowdown, the growth outturns in Brazil were particularly disappointing.
Measures taken to stimulate the economy did not produce a sustained recovery because unleashing sustained growth requires changing the composition of demand towards investment and increasing productivity rather than stimulating domestic demand alone.

Inadequate infrastructure and imbalances in demand are hampering Brazil’s growth process.
During 2011-13 private consumption was strongly supported by:
- very low unemployment,
- broad gains in real wages (partly owing to large increases in minimum wages),
- buoyant credit expansion.
Investment has been disappointingly weak.
While global uncertainties played a role (especially in 2011), the main factors behind sluggish investment have been home-grown, including the steady loss of competitiveness.

Solidify Brazil’s macroeconomic policy framework.
Adopt measures and reforms geared at increasing the economy’s productive potential and improving competitiveness.
Monetary policy:
- The tightening of monetary conditions initiated by Brazil’s central bank in April is a step in the right direction; it has helped lower inflation expectations and contain inertia.
Fiscal policy:
- Sustained fiscal consolidation through adherence to a fiscal primary surplus of about 3 percent of GDP would:
- keep domestic demand in check,
- lower public indebtedness,
- bolster a recovery in confidence and investment.
Structural policies:
- The government’s renewed focus on policies to alleviate constraints on the economy’s productive capacity, in particular infrastructure concessions to the private sector, is welcome.

Staff projects that Brazil will grow by about 2½ percent this year and next.
- Although higher than the growth rate of 2012, this performance will keep Brazil below its potential growth.
Risks to the outlook:
- The recovery could prove more unbalanced—excessively dependent on consumption—and sluggish.
- The factors underlying weak investment and supply constraints may be more severe than anticipated.
- Investor confidence may not be restored.
Policy guidance if downside risks materialize:
- The response should not be further demand stimulus, which would:
- exacerbate domestic demand imbalances,
- widen the external current account deficit,
- reignite inflationary pressures,
- weaken confidence.
External risks:
- Stemming from Brazil’s reliance on foreign savings and its highly integrated financial markets.
- Mitigating factors: the flexible exchange rate, strong monetary policy framework and large holdings of international reserves.

Goal: get the Brazilian economy close to potential growth—currently estimated at about 3½ percent.
Priority policy actions:
- Enhance productivity.
- Step up investment, including in infrastructure.
- Complement infrastructure efforts with:
- an overhaul of the minimum wage indexation mechanism,
- reforms to keep labor costs in check and prevent further erosion in competitiveness,
- lowering and simplifying taxes,
- improving business conditions to lower the "custo Brasil".

IMF blog post by Martin Kaufman and Mercedes García-Escribano, November 27, 2013.

A arrancada do crescimento no Brasil-- Por Martin Kaufman e Mercedes García-Escribano
- A arrancada do crescimento no Brasil-- Por Martin Kaufman e Mercedes García-Escribano (Markdown version)
- A arrancada do crescimento no Brasil-- Por Martin Kaufman e Mercedes García-Escribano (PDF)