This Survey was prepared in the Economics Department by Jens Arnold and Joao Jalles under the supervision of Pierre Beynet. Research assistance was provided by Anne Legendre and secretarial assistance by Sylvie Ricordeau.The Survey was discussed at a meeting of the Economic and Development Review Committee on 19 September 2013.The Survey is published on the responsibility of the Secretary-General of the OECD.

Brazil has moved up the ranks of the world’s largest economies while achieving much more inclusive growth than in the past. Stable and predictable macroeconomic policies underpinned these gains. More recently, demand has been supported by macroeconomic stimulus, which has encouraged the expansion of the non-tradable sector, while manufacturing is suffering from declining competitiveness, and supply-side constraints appear to be biting. Inflation has remained high and has been allowed to drift momentarily above the tolerance band, and monetary policy credibility risked being undermined by political statements about the future trajectory of interest rates. The Central Bank started a tightening cycle in April of 2013. The fiscal rule has also been undermined, as the inflexible fiscal target – defined in terms of a primary surplus – has required unusual but legal measures to account for cyclical weakness and meet the target, reducing clarity. Fiscal challenges in the longer term are rising as the population will start to age fast in a decade from now and pension expenditures are already rising.

Brazil has moved up the ranks of the world’s largest economies. Growth has been stronger than in the OECD, but has fallen short of other BRIICS except for South Africa (). Perhaps even more importantly, Brazil has achieved a significantly more inclusive growth than in the past. Labour market informality has receded, unemployment is at a record low of 5.3% (August 2013), and poverty and inequality have fallen substantially.

As Brazil’s current demographic bonus is set to fade out, future growth will need to come increasingly from productivity improvements, which have so far contributed less to economic growth than in other regions of the world. Productivity growth has also been uneven across firms and, unlike in several Asian economies, flexibility to allocate resources to the most productive firms within sectors, is limited. Structural reforms could raise productivity and competitiveness in several areas. Reducing infrastructure bottlenecks could reduce the cost of transport and improve productivity. A high tax burden, exacerbated by an onerous and fragmented tax system and unnecessarily high administrative burdens, puts Brazilian producers at a disadvantage. A tight labour market, continuing skill shortage and stimulus policies that fuelled consumption growth have implied strong wage increases. Investment financing at longer maturities continues to be scarce due to a lack of both private participation and competition in long-term credit markets, owing to an uneven playing field dominated by the national development bank. The exposure of Brazilian firms to foreign competition has remained below that of many other emerging economies, which has limited incentives to improve efficiency and increased downstream production costs.

Brazil has made remarkable progress in reducing poverty and inequality. This reduction is explained by strong growth but also by effective social policies. Besides growth, public services and cash transfers have played the biggest role, the latter notably through the successful Bolsa Familia programme. Among public services, improved access to education has played a major role, allowing more Brazilians to move into better-paid jobs. However, shortages in physical school infrastructure are limiting the hours of instruction that students receive. The high drop-out rate needs to be reduced through early interventions such as expanding early-childhood education, by reducing grade-repetition and through more tailored support for those at risk. The quality of teaching could also be raised through more in-service teacher training and stronger performance incentives for teachers. Performance of public services devoted to health and transports has been mixed. Public health services are widely available but suffer from underfunding and training places for medical staff need to be expanded. The public urban transport system suffers from a shortage of investment which is urgently needed to upgrade capacity. Regarding cash transfers, the success of Bolsa Familia and new programmes put in place under the umbrella of the Brasil sem Miseria programme is remarkable but transfer payments remain too heavily focused on pension benefits. Giving more priority to Bolsa Familia and Brasil sem Miseria while limiting the real growth of pension expenditures in the future would improve the effectiveness of social expenditures for reducing poverty and inequality.