Brazil:
Growth
Challenges
and
Prospects
Fernando Veloso
FGV/IBRE
Seminar “BRICS: Challenges and Opportunities”
FGV, Rio de Janeiro, June 10, 2015
Evolution of Labor Productivity – Brazil and
China
Source: Conference Board 0 5000 10000 15000 20000 25000 30000 35000 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 o utp ut per wo rker (US $ 2 0 14 ) Brazil China
Evolution of Labor Productivity Relative to US
– Brazil and China
Source: Conference Board 0 5 10 15 20 25 30 35 40 45 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 o ut pu t per wo rk er r el ati ve to US ( %) Brazil China
Questions
Why did Brazilian productivity grow so little since the
early eighties?
Which reforms might have the largest impact on
growth?
What is the role of education in a growth strategy?
What would be the main elements of an effective
Evolution of Sectoral Employment –
Brazil, 1950-2011
Source: GGDC 10.0 20.0 30.0 40.0 50.0 60.0 70.0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 pr o po rti o n o f to ta l em pl o ym ent (%)Evolution of Sectoral Productivity –
Brazil, 1950-2011
Source: GGDC 0 5,000 10,000 15,000 20,000 25,000 30,000 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 sec to ral pr o duc ti vi ty (US $ 2 0 0 5)Structural Transformation
In the initial stages of development, it is possible to obtain
significant productivity gains by transferring workers from
low-productivity activities, such as traditional agriculture, to
high-productivity sectors, such as manufacturing
However, these productivity gains tend to diminish as the
process of structural transformation advances and economic
activities become more complex
Economic growth then becomes increasingly dependent on
productivity increases within sectors, especially services, which
becomes the main sector in terms of employment and value
added
Aggregate and Services Productivity –
Brazil, 1995-2014
Source: FGV/IBRE 25,000 27,000 29,000 31,000 33,000 35,000 37,000 39,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 sec to ral pr o duc ti vi ty (R $ 2 0 09 ) services aggregateAggregate and Sectoral Productivity Growth –
Brazil
Source: FGV/IBRE
Agriculture
Industry
Services
Aggregate
1996-2002
5.7%
-2.0%
-0.7%
0.1%
2003-2006
2.2%
0.1%
0.0%
0.4%
2007-2010
6.1%
0.5%
2.2%
2.7%
Effect of Employment Growth and Favourable
Terms of Trade – Brazil, 2000-2011
Source: PWT 8.0 90 95 100 105 110 115 120 125 130 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 output per worker income per capita income per capita (terms of trade)
Evolution of Terms of Trade
Evolution of Credit (% of GDP)
Formalization and Inequality Decline
The expansion of the service sector increased the
demand for low skilled workers and their relative
wage
This reduced informality and was an important
determinant of the decline in inequality
Hence the expansion of the service sector, especially
in credit-related activities, had an important
economic and social role
Informality Decline
Source: PNAD 30 32 34 36 38 40 42 44 46 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 inf o rm al ity rat e (%)Inequality Decline
Source: PNAD/Ipeadata 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.60 0.61 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 G ini c o ef fi ci entConvergence of Living Standards Growth
To Productivity Growth
Due to the demographic bonus, the decline of the
unemployment rate and favourable terms of trade, living
standards improved faster than productivity in the 2000s
Moreover, the credit expansion contributed for an
increase in consumption above income
In the next years improvements in living standards will
depend on productivity growth due to lower employment
growth, worsening of terms of trade and credit
deceleration
Hence it is crucial to increase productivity growth,
Service Sector
Services are predominantly nontradable and labor
intensive
There is evidence of convergence in manufacturing
(Rodrik, 2013a); convergence is faster in machines and
equipments than in textiles and garment
Differences in productivity among countries are due in
large part to differences in services productivity (Duarte
and Restuccia, 2010)
Services are particularly dependent on quality of
education and institutions (Rodrik, 2013b)
Evolution of Services Productivity
– Brazil, China and South Korea
Source: GGDC 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ser vi ces pr o duc ti vi ty (US $ 20 0 5 )
Distribution of Schooling in the Service Sector
-– Brazil, China and South Korea
Source: Social Economic Accounts (WIOD)
Low Skilled
Medium
Skilled
High Skilled
Brazil
33.0%
43.7%
23.3%
China
30.7%
53.8%
15.5%
Proportion of Youth Below Basic Proficiency Level
-PISA 2012 (%)
Source: OECD (2012)
Reading
Mathematics
Science
Brazil
49.2
67.1
53.7
Shanghai - China
2.9
3.8
2.7
South Korea
7.6
9.1
6.6
Finland
11.3
12.3
7.7
United States
16.6
25.8
18.1
Chile
33.0
51.5
34.5
Mexico
41.1
54.7
47.0
Argentina
53.6
66.5
50.9
Human Capital Index – World Economic Forum 2015
Source: World Economic Forum (2015)
Overall Index
Under 15 Age Group
Brazil
78
95
China
64
55
South Korea
30
20
Finland
1
1
United States
17
40
Chile
45
53
Mexico
58
72
Argentina
48
58
India
100
67
Russia
26
44
South Africa
92
88
Evolution of Distance to Frontier - Doing
Business 2015
45 50 55 60 65 70 75 2009 2010 2011 2012 2013 2014 di sta nc e to f ro nti er (%)Evolution of Distance to Frontier – Paying Taxes –
Doing Business 2015
0 10 20 30 40 50 60 70 80 90 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 di sta nc e to f ro nti er -pa yi ng ta xes ( %)Doing Business 2015 Ranking
Doing Business Ranking
Brazil
120
Argentina
124
Chile
41
Mexico
39
Colombia
34
Peru
35
China
90
India
142
Russia
62
South Africa
43
United States
7
Doing Business 2015 Ranking– Complexity and Cost of
Regulatory Processes
Starting a
Business
Dealing with
Construction
Permits
Getting
Electricity
Registering
Property
Paying Taxes
Trading
Across
Borders
Brazil
167
174
19
138
177
123
Argentina
146
181
104
119
170
128
Chile
59
62
49
45
29
40
Mexico
67
108
116
110
105
44
Colombia
84
61
92
42
146
93
Peru
89
87
86
26
57
55
China
128
179
124
37
120
98
India
158
184
137
121
156
126
Russia
34
156
143
12
49
155
South Africa
61
32
158
97
19
100
United States
46
41
61
29
47
16
Doing Business 2015 Ranking – Quality of Legal
Institutions
Getting Credit
Protecting Minority
Investors
Enforcing Contracts
Resolving Insolvency
Brazil
89
35
118
55
Argentina
71
62
63
83
Chile
71
56
64
73
Mexico
12
62
57
27
Colombia
2
10
168
30
Peru
12
40
100
76
China
71
132
35
53
India
36
7
186
137
Russia
61
100
14
65
South Africa
52
17
46
39
United States
2
25
41
4
Relationship Between Income per Capita and
Distance to Frontier - Doing Business 2015
20 30 40 50 60 70 80 90 100 0 20000 40000 60000 80000 100000 120000 140000 di sta nc e to f ro nti er (%)
income per capita (US$)
Relationship Between Income per Capita and
Distance to Frontier – Paying Taxes – Doing Business
2015
0 20 40 60 80 100 120 0 20000 40000 60000 80000 100000 120000 140000 di sta nc e to f ro nti er -pa yi ng ta xes ( %)income per capita (US$)
Main Obstacles to Doing Business – Brazil - Global
Competitiveness Report 2014-2015 (%)
0 5 10 15 20 25 Tax r eg ul at io ns R es tr ic ti ve lab o r re gul at io ns In ad equa te s upp ly o f inf ras tr uc tur e Tax r at es In ef fi ci ent go ve rnm ent bur eauc racy C o rr upt io n In ad equa te ly educ at ed wo rkf o rc e A cc es s to f ina n ci ng P o lic y ins ta bi lity In fl ati o n In suf fi ci ent cap aci ty to in no vat e C ri m e an d the ft P o o r wo rk ethi c in na ti ona l l ab o r fo rc e For ei gn c ur re nc y re gul at ions P oo r pub lic he al th G o ver nm ent ins ta bi lity/ co upsMain Obstacles to Doing Business – Brazil and
Latin America - World Bank Enterprise Surveys
(%)
0 5 10 15 20 25 30 35 A cc es s to f ina nc e A cc es s to lan d B us ines s lic en si ng an d per m its C o rr upt io n C o ur ts S ys te m C ri m e, thef t an d di so rder C us to m s an d tr ad e re gul at io ns El ec tr ic it y In ad equa te ly educ at ed wo rkf o rc e La bo r reg ul at io ns P o liti cal ins ta bi lity P ra cti ces o f th e inf o rm al s ec to r Tax ad m ini str at io n Tax r at es Tr an spo rta ti o nMain Obstacles to Doing Business–
Manufacturing and Services – Brazil –
World Bank Enterprise Surveys (%)
0 5 10 15 20 25 30 35 40 A cc es s to f ina nc e A cc es s to lan d B us ines s lic en si ng an d per m its C o rr upt io n C o ur ts S ys te m C ri m e, thef t an d di so rder C us to m s an d tr ad e re gul at io ns El ec tr ic it y In ad equa te ly educ at ed wo rkf o rc e La bo r reg ul at io ns P o liti ca l i ns ta bi lity P ra cti ces o f th e inf o rm al s ec to r Tax ad m ini str at io n Tax r at es Tr an spo rta ti o n Industry Services
Low Degree of Openness
0 20 40 60 80 100 120 140 160 180 200 0 10000 20000 30000 40000 50000 60000 (exp o rts +i m po rts )/ G D P (%)GDP per Capita (US$)
Primary Expenditure of Federal
Government (% of GDP)
Subsidies
Social Expend+ INSS
Total
1991
0.3
5.5
11.0
1994
0.3
7.4
13.9
1998
0.3
8.3
15.0
2002
0.2
8.7
15.7
2006
0.4
10.2
17.0
2010
0.3
10.6
17.4
2014
1.0
12.3
20.1
Var
0.7
6.8
9.1
Var per year
0.03
0.30
0.39
Challenges of Transition to High Income
Growth decelerations at the middle income level are associated
with the difficulty in making the transition to a new development
model that adapts the economy and its institutions to the new
challenges and opportunities
Brazil made significant progress in the last two decades, but the
transition to a new development model is still incomplete in
several dimensions, including:
- Unfavourable business environment
- Low quality of education
- Deficient infrastructure
Growth Strategies
Growth Strategy for China - “China 2030: Building a
Modern, Harmonious, and Creative High-Income Society”
(DRC/World Bank, 2012)
Growth Strategy for United Kingdom– “Investing for
Prosperity: Skills, Infrastructure and Innovation” (Report of
the LSE Growth Comission, 2013)
Growth Strategy for Brazil (I)
Reduce macroeconomic risk: high inflation, nominal
and primary deficit, high debt/GDP ratio
Reduce regulatory risk: frequent rule changes in
regulated sectors
Correct distortions to relative prices: electricity,
Business Confidence Index - Brazil
Source: FGV/IBRE 60.0 65.0 70.0 75.0 80.0 85.0 90.0 95.0 41 7 6 0 41 7 9 1 41 8 2 1 41 8 5 2 41 8 8 3 41 9 1 3 41 9 4 4 41 9 7 4 42 0 0 5 42 0 3 6 42 0 6 4 42 0 9 5 42 1 2 5GDP Projections – Brazil, 2015
Sectors
2015
Agriculture
2.5%
Industry
-3.4%
Services
-1.1%
GDP
-1.8%
Source: FGV/IBREGrowth Strategy for Brazil (II)
Improve business environment
Improve quality of education
Take into account complementarities between
reforms, productivity and education
Complementarity Between Reforms and
Productivity
Informal firms are small and much less productive than
formal firms, especially in comparison with the larger
ones
Empirical evidence shows that most of formal firms have
never been informal (La Porta and Shleifer, 2014)
This is consistent with the modest results of several
policies of firm formalization (Bruhn and McKenzie, 2013;
Barbosa Filho, Ulyssea and Veloso, 2015)
Complementarity Between Reforms and
Education
Recent evidence suggests that the effect of reforms
depend upon the entrepreneur´s education level
A reform of the registry system in Mexico increased
formalization only among informal
microentrepreneurs with characteristics similar to
formal entrepreneurs, including the education level
(Bruhn, 2013)
Schooling Distribution of Formal and Informal
Entrepreneurs (%) - Brazil
Source: PNAD
