Since the mid-1990s, Brazil has enjoyed improved economic and financial stability largely owing to a strengthening of its macroeconomic framework. Social progress has also been impressive, with a marked fall in poverty and inequality. Increasing attention has been devoted to environmental sustainability. In order to quickly catch up with the group of high-income countries the overriding need is to achieve strong and sustainable growth. This will require continued good macroeconomic, social and environmental policies and structural reforms designed to boost savings and investment and foster infrastructure development. Higher international uncertainties and cross-country interdependence, rapid population ageing and a greater reliance on oil revenues will call for policymakers to expand their tool kit to respond to this challenge.

Brazil has achieved remarkable progress since the mid-1990s, largely owing to a strengthening of public institutions, in particular the inflation targeting framework coupled with exchange rate flexibility and the Fiscal Responsibility Law. Improvement in the social area has also been impressive, with a remarkable fall in poverty and inequality. Most product markets have been opened up, and labour market informality has receded. The country is now reaping the benefits of economic stability and increasing resilience, which, together with a timely macroeconomic policy response combining monetary easing, some fiscal stimulus and credit expansion, allowed Brazil to withstand the 2008-09 global financial crisis well. Real GDP growth of 7.5% in 2010 was the highest since 1986 and the fifth-best performance amongst the G20 countries (Table 1). This robust growth is estimated to have removed all remaining slack from the economy.

The macro-policy framework, established in the late 1990s and based on inflation targeting, a flexible exchange rate and rules-based fiscal policy, has worked well. Inflation, public debt and vulnerability to exchange-rate risks have come down markedly, and Brazil had the fiscal space to use counter-cyclical measures to cushion the 2008-09 downturn. Looking forward, sound stabilisation policies will help the country to achieve strong economic performance in a new environment in which population will age at a rapid pace, heavy reliance on oil resources will increase revenue volatility and uncertainties regarding the external environment are higher, possibly permanently.

Low investment rates are limiting Brazil’s future potential growth rate. At the same time, its saving rate is also well below international averages, and a shortage of domestic saving appears to be a major barrier to higher investment rates. Public-sector saving is negative due to high levels of expenditures, in particular pension entitlements. In addition to being costly, the pension system redistributes income to individuals with relatively low saving propensities, thereby reducing private saving as well. In order to control pension expenses in the future, useful parametric pension system reforms would include introducing a general minimum retirement age, raising the earliest possible retirement age, strengthening the penalties for early retirement and replacing the indexation of minimum pension benefits to the minimum wage by a more moderate adjustment.

Brazil under-invested in infrastructure for over three decades, and infrastructure investment rates have come up only slowly since 2007. Infrastructure needs are sizeable in almost all sectors. It is likely that at its current stage of development the country will benefit from large pay-offs from infrastructure spending. Against this background, the Brazilian authorities have put in place a large infrastructure plan named Growth Acceleration Programme (Programa de aceleração do crescimento, PAC). This programme has been rightly protected from the fiscal cuts announced earlier this year. Nevertheless some changes to the policy and regulatory framework could be introduced to make public investment more cost-efficient and to foster private participation.

Over the past decade Brazil has managed to achieve economic stability, and more recently its economy proved very resilient in response to the global economic crisis. The key challenge for the country is now to continue to grow at a fast pace to close its income gap with the OECD countries, while choosing a development pattern that is consistent with long-term sustainability concerns both socially – in terms of ensuring all Brazilians benefits from gains in living standards – and in terms of protecting the environment.