The economy’s growth potential has declined in recent years and the income gap vis-à-vis advanced economy has widened, mainly due to comparatively weak labour productivity. Following years of falling investment that can explain almost 40% of the decline in labour productivity, Brazil has one of the lowest investment rates among OECD and emerging market economies. As a result, growth is likely to fall substantially below current levels unless new sources of growth are tapped into. Strengthening investment will be one key avenue to maintain solid growth and build on the social progress of the past. The ability of firms to pay better wages without jeopardising their competitiveness will depend crucially on stronger investment and productivity. One area of investment with particularly wide ramifications into other sectors is infrastructure and almost all areas of infrastructure are characterised by quality shortcomings and bottlenecks. Explanations for Brazil's low investment are related to a lack of profitable business opportunities in which the private sector could invest, owing to structural policy settings that act as a drag on the investment climate. Areas where reforms could significantly improve the business climate include red tape and licensing procedures, legal uncertainty, tax compliance costs, labour costs and improvements in workforce skills. Strengthening competition would allow a reallocation of resources to more productive firms and sectors, freeing labour and capital from low-productivity and low-remuneration activities. Financing has also been a constraint and a second important explanation for low investment. Long-term investment lending has so far been dominated by one single public-sector financial institution. Recent policy changes have paved the way for developing private long-term credit markets and tapping into more diverse sources of financing. For infrastructure financing, using a wider array of financial instruments would allow drawing institutional investors, including foreign ones, into financing infrastructure projects in Brazil.

Brazil is less integrated into the world economy than other emerging markets as trade barriers shield enterprises from global opportunities and foreign competition. Stronger integration would improve the ability of Brazilian firms to compete in foreign markets by greater access to intermediate inputs and technology at internationally competitive conditions. This would boost productivity and allow them to pay higher wages. Lowering barriers to trade would also reduce the cost of capital goods, spurring investment and growth and creating new jobs across the economy. Consumers would see their purchasing power increase, with particularly strong effects among low-income households. Ensuring that everyone can benefit from trade will require accompanying policies to help workers cope with the likely reallocation of jobs across firms and sectors. Such policies should focus on protecting workers, rather than jobs, by creating training and education opportunities that allow low-skill individuals to acquire new skills and get ready for new jobs, while protecting their incomes in the transition.