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OECD Economic Surveys: Brazil 2015

Please cite this publication as:
OECD (2015), OECD Economic Surveys: Brazil 2015, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-bra-2015-en.

Metadata, Legal and Rights

ISBN: 978-92-64-24532-7 (epub) - 978-92-64-24527-3 (print) - 978-92-64-24530-3 (pdf)

DOI: http://dx.doi.org/10.1787/eco_surveys-bra-2015-en

Series: OECD Economic Surveys

ISSN: 0376-6438 (print) - 1609-7513 (online)

OECD Economic Surveys: Brazil

ISSN: 1995-3763 (print) - 1999-0820 (online)

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This Survey was prepared in the Economics Department by Jens Arnold, Yuki Murakami (ELS), Matheus Bueno and Sónia Araújo 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 14 September 2015.

The Survey is published on the responsibility of the Secretary-General of the OECD.

Photo credits: Cover ©iStockphoto.com/zxvisual.

Corrigenda to OECD publications may be found on line at: www.oecd.org/about/publishing/corrigenda.htm.

© OECD 2015

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BASIC STATISTICS OF BRAZIL, 2014
(Numbers in parentheses refer to the OECD average)*
LAND, PEOPLE AND ELECTORAL CYCLE
Population (millions) | 199.5 |  | Population density per km² | 23.1 | (34.6)
Under 15 (%) | 23.5 | (18.2) | Life expectancy (years, 2013) | 75.0 | (80.5)
Over 65 (%) | 7.6 | (16.0) | Men | 71.3 | (77.8)
Latest 5-year average growth (%) | 0.9 | (0.6) | Women | 78.6 | (83.0)
|  |  | Lastest general election | Oct. 2014
ECONOMY
Gross domestic product (GDP) |  |  | Value added shares (%) |  |
In current prices (billion USD) | 2,351.9 |  | Primary | 5.6 | (2.4)
In current prices (trillion BRL) | 5.5 |  | Industry including construction | 23.4 | (26.6)
Latest 5-year average real growth (%) | 3.2 | (1.9) | Services | 71.0 | (71.0)
Per capita (current prices, 000 USD PPP) | 16.7 | (39.3) |  |  |

GENERAL GOVERNMENT

Per cent of GDP

Expenditurea, b | 36.7 | (41.9) | Gross financial debta | 58.9 | (110.3)
Revenuea, b | 37.2 | (37.7) | Net financial debta | 34.7 | (68.0)
EXTERNAL ACCOUNTS
Exchange rate (BRL per USD) | 2.348 |  | Main exports (% of total merchandise exports) |
PPP exchange rate (USA = 1) | 1.667 |  | Crude materials, inedible, except fuels | 28.6
In per cent of GDP |  |  | Food and live animals | 22.8
Exports of goods and services | 11.5 | (49.2) | Machinery and transport equipment | 14.7
Imports of goods and services | 14.3 | (46.0) | Main imports (% of total merchandise imports) |
Current account balance | -4.5 | (-0.0) | Machinery and transport equipment | 36.4
Net international investment position | -15.8 |  | Chemicals and related products, n.e.s. | 19.7
|  |  | Mineral fuels, lubricants and related materials | 19.7
LABOUR MARKET, SKILLS AND INNOVATION
Employment rate for 15-64 year olds (%) | 56.9c | (65.7) | Unemployment rate (15 and over) (%) | 6.8c | (7.3)
Men | 68.3c | (73.6) | Youth (age 15-24) (%) | 16.1c | (15.0)
Women | 46.4c | (57.9) | Tertiary educational attainment 25-64 year-olds (%, 2012) | 13.0 | (32.2)
Participation rate for 15-64 year-olds (%) | 61.0c | (0.0) |  |  |
Gross domestic expenditure on R&D (% of GDP, 2012) | 1.2 | (2.4) |  |  |
ENVIRONMENT
Total primary energy supply per capita (toe, 2012) | 1.4 | (4.2) | CO2 emissions from fuel combustion per capita (tonnes, 2012) | 2.2 | (9.7)
Renewables (%, 2012) | 40.7 | (8.6) |  |  |
Fine particulate matter concentration (urban, PM10, μg/m3, 2011) | 48.0 | (28.0) |  |  |
SOCIETY
Income inequality (Gini coefficient, 2012) | 0.526 | (0.315) | Education outcomes (PISA score, 2012) |  |
Relative poverty rate (%, 2013 for Brazil, 2012 for OECD) | 23.6 | (11.1) | Reading | 410 | (497)
Public and private spending (% of GDP) |  |  | Mathematics | 391 | (494)
Health care (2012) | 9.1 | (9.2) | Science | 405 | (501)
Pension (public, 2010) | 8.5 | (9.3) | Share of women in parliament (%, May 2015) | 10.8 | (27.0)
Education (public, 2011) | 5.9 | (5.3) |  |  |
Better life index: www.oecdbetterlifeindex.org
a. 2013 for OECD.
b. 2013.
c. From Labour Force Survey (PNAD Continua), all of Brazil.
* Where the OECD aggregate is not provided in the source database, a simple OECD average of latest available data is calculated where data exists for at least 29 member countries.
Source: Calculations based on data extracted from the databases of the following organisations: OECD, International Energy Agency, Eurostat, World Bank, International Monetary Fund Eurostat and Inter-Parliamentary Union.

Executive summary

Main findings and key recommendations

Bolstering confidence through prudent macro policies

Rising expenditures have led to a primary fiscal deficit

StatLink  http://dx.doi.org/10.1787/888933282524

Brazil has become one of the world’s leading economic powers and has lifted millions of people out of poverty. Macroeconomic stability has been a crucial factor behind this success, but fiscal performance has deteriorated recently and inflation has risen markedly. The fiscal adjustment and the tighter monetary policy now being put in place will help to strengthen confidence. More medium-term constraints, however, are mainly of a structural nature and Brazil should build on its remarkable social and economic progress by implementing the structural reforms needed to sustainably raise living standards for all.

The industrial sector could play a key role for boosting productivity

Labour productivity growth has been slow

StatLink  http://dx.doi.org/10.1787/888933282493

Economic growth will need to come increasingly from productivity, as demographic changes will make raising labour participation increasingly more difficult. The industrial sector, where a few key structural reforms could unleash significant unexploited potential, can play a leading role in this respect. Currently, a fragmented indirect tax system, insufficient infrastructure, weak competitive pressures and low integration into international trade are holding back Brazil’s industry, which has not benefited enough from the global trends that have shaped industrial production elsewhere.

Improving public healthcare is crucial for reducing inequalities and enhancing wellbeing

Life expectancy at birth

StatLink  http://dx.doi.org/10.1787/888933282696

Significant progress has been made in raising health, due in large part to universal public healthcare. However, inequalities in access persist as waiting times for specialised medical services are long and regional disparities in the public system are significant. A complex governance structure involving several levels of government is complicating the efficient provision of healthcare. Stronger efforts to collect performance indicators, more use of service delivery targets and stronger co-ordination mechanisms could lead to significant improvements. As the population ages, significant challenges related to the provision of long-term care services for the elderly should be anticipated now.

Main findings and key recommendations

Macroeconomic policies
The fiscal position has deteriorated and long-term fiscal challenges arise from a rapidly ageing population. | Implement the fiscal adjustment in line with medium-term objectives, including a stabilisation of gross debt.
| Gradually raise the retirement age and index pensions to consumer prices rather than the minimum wage.
Inflation has risen above the tolerance band, which could undermine the credibility of the Central Bank. | To increase policy effectiveness, adjust the directed lending rate in line with the monetary policy rate.
| Establish fixed-term appointments for the Central Bank governor and the members of the Monetary Policy Committee.
Boosting industrial performance
Taxes are high and compliance costs generated by a fragmented system of indirect taxes are large. | Consolidate indirect taxes at the state and federal levels and work towards one value added tax with a broad base, full refunds for input VAT paid and zero-rating for exports.
High trade protection and weak competitive pressures have been holding back productivity gains and the integration of the economy into international trade. | Reduce trade protection steadily by lowering tariffs and scaling back local content requirements.
| Strengthen competition by streamlining regulation on product markets and implementing planned reductions in entry regulations.
Infrastructure bottlenecks drive up transport and logistics costs for industrial companies, in particular with respect to industrial exports. | Improve the technical capacity and planning for infrastructure concessions. Elaborate more detailed tender packages prior to launching tender calls.
Difficulties in hiring high-skilled workers hold back productivity growth. | Further expand the participation in vocational training to alleviate skill shortages for technical workers.
Improving public healthcare services
Public healthcare services are facing severe capacity constraints and are unevenly distributed across the country, often reflected in long waiting times for specialised medical services. | Enhance spending efficiency, including by developing a more explicit definition of what is covered by the public healthcare system. Raise funding for public healthcare. Implement targets for expanding specialised medical services to reduce waiting times.
| Train more doctors and nurses and strengthen incentives to reduce geographic imbalances.
| Improve the collection of performance indicators and enhance the use of benchmarking and incentive-based mechanisms, including pay-for-performance schemes.
| Develop clinical guidelines for the choice of cost-effective drugs, set reference prices for all drugs more in line with international price comparisons and define an exclusive list of reimbursed medicines.
Many healthcare services that are currently provided in hospitals could be provided more cost-efficiently by primary healthcare units and specialised long-term care services. | Shift the emphasis away from hospital care and strengthen primary care services, particularly for patients with chronic conditions.
| Provide more long-term care services, especially home care, under the public healthcare system.

Assessment and recommendations

Macro-economic policies to bolster confidence

Sustaining future growth

Brazil has become one of the world’s leading economic powers. Since the achievement of macroeconomic stability in the mid-1990s, the economy’s growth has outpaced the OECD area and unemployment has been low. Labour market informality has declined and growth has become both more inclusive and more sustainable. Large parts of the population have gained access to better education, and health indicators have improved remarkably. Millions of Brazilians have been lifted out of poverty, and a whole new middle class has emerged. Institutions have strengthened, as reflected by decisive judicial action following recent corruption allegations.

Brazil is now at a turning point. As the tailwinds from high commodity prices have weakened permanently, improving domestic policies will be more important than before. Over the last few years, bottlenecks have emerged, mostly on the supply side of the economy. Resuming the convergence with advanced economies, while continuing to reduce poverty and inequality, requires a three-pronged strategy:

Fiscal and monetary policies will need to stabilise debt and reduce inflation, and, in doing so, to restore the strong reputation for sound policy that has been established over many years.

It is crucial to raise productivity, as weak productivity is the main reason why GDP per capita levels are lower than in OECD countries (Figure 1). The industrial sector will play a leading role in this respect due to its large untapped potential for productivity improvements, and Chapter 1 will discuss policy options to boost the performance of the industrial sector.

The remarkable progress in social policies and public services needs to continue. Despite its huge progress, Brazil performs below OECD countries but similar to or better than other Latin American countries in many areas of the OECD’s Better Life Index, which measures the performance of countries in different areas of material living conditions and quality of life. While Brazil ranks above the OECD average in subjective well-being, work-life balance, and social connections, there is further scope for improvement in areas such as health and education (Figure 2). Chapter 2 will focus on improving healthcare policies; education policies were discussed in the 2013 OECD Economic Survey of Brazil.

Figure 1. Stronger growth will require raising productivity

Labour productivity¹ in thousands of USD at purchasing power parities

1. Labour productivity calculated as real GDP at chained PPPs (in thousands of 2011 USD) divided by employment.

Source: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2013), “The Next Generation of the Penn World Table” available for download at www.ggdc.net/pwt.

StatLink  http://dx.doi.org/10.1787/888933282493

Figure 2. Better life index

Source: OECD (2015), “Better Life Index: Better Life Index 2015”, OECD Social and Welfare Statistics (database).

StatLink  http://dx.doi.org/10.1787/888933282500

Macro-economic policies to bolster confidence

Economic growth stagnated in 2014 and fiscal adjustment and tighter monetary and credit policies are still limiting domestic demand in the short term. The ongoing investigations of corruption and bid-rigging in the national oil company Petrobras have raised governance issues and affected confidence, and will delay the recovery of investment, both from domestic and overseas investors. Petrobras accounts for a significant share of national investment and the company has already announced a slowdown of its investment plans. Recent rating downgrades that entailed the loss of investment grade rating for some Brazilian sovereign bonds with a major rating agency may also weigh on investment and increase the cost of capital for some Brazilian companies. Moderating growth in China will limit export demand and prices for Brazil’s commodity exports will likely remain low, but the ongoing depreciation of the Brazilian real may improve market shares in some areas, including for manufactured goods.

Table 1. Brazil: Macroeconomic indicators
| 2012 | 2013 | 2014 | 2015 | 2016
Real GDP growth | 1.8 | 2.7 | 0.1 | -3.1 | -1.2
Potential GDP growth (OECD estimate) | 3.1 | 2.9 | 2.6 | 2.1 | 1.9
Inflation (average for the year) | 5.8 | 5.9 | 6.4 | 9.1 | 6.7
Inflation (end of period) | 5.6 | 5.8 | 6.5 | 9.4 | 4.9
Unemployment | 5.5 | 5.4 | 4.8 | 6.7 | 7.2
Fiscal balance (per cent of GDP) | -2.3 | -3.1 | -6.2 | -7.4 | -7.2
Primary balance (per cent of GDP) | 2.2 | 1.8 | -0.6 | 0.1 | 0.7
Current account balance (per cent of GDP) | -2.2 | -3.4 | -3.9 | -3.4 | -2.7
Source: OECD projections, OECD Economic Outlook Database, Central Bank, Unemployment: IBGE, Monthly Employment Survey.

With these headwinds, GDP is projected to contract in 2015 and 2016 (Table 1). However, once the fiscal results improve and inflation starts to return to the target, there will be clear growth pay-offs as recovering confidence will support stronger investment and consumption, particularly if coupled with the implementation of structural reforms. Growth is projected to turn positive sometime in 2016, without lifting the annual growth rate for that year into positive territory. During 2017, growth is projected to return gradually towards the economy’s growth potential, which has been curbed by supply-side bottlenecks and low investment in the past.

The labour market has been buoyant despite weak growth, and unemployment in major metropolitan areas has fallen to below 5% in early 2015, from around 11% in 2005, before rising again more recently to 5.9% in August 2015 (Figure 3, Panel A). However, since the beginning of 2013, the employment rate has also fallen and much of the decline in unemployment from there on was the result of labour force participation falling more rapidly than employment. One possible reason for declining labour force participation could be that the rising incomes of low-income households and improved access to educational programmes have allowed youths to stay in education for longer (Cabanas et al., 2014). Indeed, the decline in labour force participation is largely due to the age groups 15-17 and 18-24 (Figure 3, Panel B). This means that a pick-up in unemployment is a risk once these youths leave education, and early signs of this are already apparent in the increase in youths who are neither in education or employment (NEET).

Figure 3. Labour market indicators

1. 12-month moving averages.

Source: IBGE, Monthly Employment Survey.

StatLink  http://dx.doi.org/10.1787/888933282516

Negative risks to the outlook include a failure to implement the reforms, including a credible medium-term fiscal adjustment, possibly due to political divisions between the executive and legislative branches of government or further revenue shortfalls. This could reduce confidence and investment, and may lead to further rating downgrades. Confidence could also suffer if monetary policy fails to deliver significant reductions in inflation. Fallout from the events unfolding at Petrobras could be stronger than expected in the event of further cancellations of planned investment projects, or if the investigations lead to further bankruptcies in upstream activities, including in the construction sector. Although water reservoir levels have recently risen, a small possibility of energy or water rationing in the coming years remains. Such rationing had significantly dented growth in the early 2000s. Volatility on international capital markets could return in the context of monetary policy normalisation in the United States, but Brazil’s high foreign currency reserves of USD 371 billion (25% of GDP) provide a strong cushion. Further currency depreciation could imply difficulties for corporate borrowers, although a significant fraction of corporate debt is hedged against currency risks. A further slowdown of growth in China, the export destination for many of Brazil’s commodity exports, and in Latin America, an important export destination for manufacturing exports, could also reduce growth in Brazil.

Table 2. Basic economic indicators
In per cent
| 2000 | 2010 | 2011 | 2012 | 2013 | 2014
Supply and demand |  |  |  |  |  |
GDP (in current BRL billion) | 1 202.4 | 3 886.8 | 4 374.8 | 4 713.1 | 5 157.6 | 5 521.3
GDP (in current USD billion) | 657.1 | 2 210.3 | 2 613.5 | 2 411.5 | 2 387.9 | 2 345.4
GDP per capita (in current USD) | 7 016.6 | 11 306.1 | 13 239.9 | 12 103.5 | 11 878.0 | 11 566.8
GDP growth rate (real, in per cent) | 4.4 | 7.6 | 3.9 | 1.8 | 2.7 | 0.1
Supply |  |  |  |  |  |
Agriculture | 2.7 | 6.8 | 5.6 | -2.5 | 7.9 | 0.4
Industry | 4.4 | 10.4 | 4.1 | 0.1 | 1.8 | -1.2
Services | 3.8 | 5.8 | 3.4 | 2.4 | 2.5 | 0.7
Demand |  |  |  |  |  |
Private consumption | 4.0 | 6.4 | 4.8 | 3.9 | 2.9 | 0.9
Public consumption | -0.2 | 3.9 | 2.2 | 3.2 | 2.2 | 1.3
Gross fixed investment | 4.8 | 17.8 | 6.6 | -0.6 | 6.1 | -4.4
Exports | 12.9 | 11.7 | 4.8 | 0.5 | 2.1 | -1.1
Imports | 10.8 | 33.6 | 9.4 | 0.7 | 7.6 | -1.0
Public finances (consolidated public sector, in per cent of GDP)
Primary balance | 3.2 | 2.6 | 2.9 | 2.2 | 1.8 | -0.6
Nominal balance | -3.4 | -2.4 | -2.5 | -2.3 | -3.1 | -6.2
Gross debt¹ | … | 51.8 | 51.3 | 54.8 | 53.3 | 58.9
Balance of payments (in USD billion) |  |  |  |  |  |
Current account balance | -24.2 | -47.3 | -52.5 | -54.2 | -81.2 | -91.3
In per cent of GDP | -3.7 | -2.1 | -2.0 | -2.2 | -3.4 | -3.9
Trade balance | -0.7 | 20.1 | 29.8 | 19.4 | 2.3 | -4.0
Exports | 55.1 | 201.9 | 256.0 | 242.6 | 242.0 | 225.1
Imports | -55.8 | -181.8 | -226.2 | -223.2 | -239.7 | -229.1
International reserves (gross) | 33.0 | 288.6 | 352.0 | 373.1 | 358.8 | 363.6
FDI (net inflows) | 32.8 | 48.5 | 66.7 | 65.3 | 64.0 | 62.5
Outstanding external debt | 216.9 | 256.8 | 298.2 | 312.9 | 308.6 | 348.5
In per cent of GDP | 33.0 | 11.6 | 11.4 | 13.0 | 12.9 | 14.9
Exchange rate and prices |  |  |  |  |  |
Exchange rate (BRL per USD, period average) | 1.8 | 1.8 | 1.7 | 2.0 | 2.2 | 2.4
CPI inflation (IPCA, in per cent, end-of-period) | 6.0 | 5.9 | 6.5 | 5.8 | 5.9 | 6.4
Core inflation (in per cent, end-of-period) | 3.9 | 5.6 | 6.8 | 5.8 | 6.1 | 6.4
Labour market |  |  |  |  |  |
Unemployment rate (in per cent)² | … | 6.7 | 6.0 | 5.5 | 5.4 | 4.8
1. General government only. In this table, gross debt does not include treasury bills on the central bank balance sheet not used under repurchase agreements.
2. Monthly Employment Survey (PME/IBGE), new methodology.
Source: IBGE, Central Bank of Brazil, National Treasury, IMF.

Achieving a substantial fiscal adjustment will be seen as a litmus test for improved macro-economic policies. If achieved, the ensuing confidence boost could be more powerful than expected, particularly when coupled with progress on the structural reform agenda. Given the significant scope to improve the business climate, a few key reforms could make a significant difference for productivity and growth, particularly in tradable sectors. A major step towards opening up international trade could unleash the competitive pressures required to raise productivity and reduce the costs of imported intermediate inputs. Recent policy initiatives to reduce barriers to entry as of end-2015 could also strengthen competition significantly. Additional upside risks include a larger than expected demand boost from the 2016 Olympic Games to be held in Rio de Janeiro, and an improvement of economic conditions in Argentina, which would increase the demand for Brazilian manufacturing goods.

Consolidating public finances

Although Brazil has made significant progress in building up a reputation for sound fiscal policy since it passed the fiscal responsibility law in 2000, the credibility of fiscal accounts has been challenged recently. A primary fiscal surplus is necessary to put debt on a declining path, but fiscal results posted a primary deficit for the first time in 2014 (Figure 4). Changes to legal definitions and a series of unusual accounting measures brought this poor result into line with budget rules, but the Supreme Audit Institution has found some of these measures incompatible with the fiscal responsibility law and the constitution (TCU, 2015a, 2015b). In light of improvements in public accounts, such a situation is less likely to occur in the future.

Figure 4. Fiscal balances have deteriorated

1. For the consolidated public sector.

2. Fiscal impulse defined as the change in the structural primary balance.

Source: National Treasury Central Bank, OECD calculations.

StatLink  http://dx.doi.org/10.1787/888933282524

In recent years, significant tax exemptions and increasing financial support to public banks have led to a deterioration of fiscal accounts. Part of the tax exemptions have been revoked since and the government has announced an end to capital transfers from the treasury to public banks in 2015. The deteriorating fiscal balance led to an increase in gross debt from 52% of GDP in 2010 to 59% in 2014. This is lower than in many advanced economies, but it is high in light of the interest rate of over 13% that Brazil pays on its debt. Brazil’s sovereign credit rating was downgraded to below investment grade by one rating agency in September 2015. In the longer term, estimates suggest that population ageing will require additional annual expenditures of 3% of GDP between now and 2030, putting further pressures on long-term fiscal sustainability (Figure 4, Panel B). Risks related to the composition of public debt have decreased over the last years, due to an increasing share of fixed-rate and inflation-linked bonds and a lower share of debt indexed to short-term interest rates or the exchange rate.

In January 2015, a new economic team initiated a fiscal adjustment, and current primary surplus targets are 0.15% of GDP for 2015 and 0.7% for 2016, followed by a gradual increase to 2% by 2018. These targets can be reduced if concession revenues fall short of expectation or if congress fails to approve some of the consolidation measures. Besides plans to raise taxes, the adjustment also includes an end of transfers from the treasury to public-sector banks, which had led to an expansion of directed credit, although the effectiveness of this expansion for raising corporate investment has been questioned (Bonomo et al., 2014). The new targets were defined on the basis of market forecasts for macroeconomic variables. Reaching these targets will require a significantly larger fiscal effort than was originally foreseen due to significant expenditures decided in late 2014 with payment dates in early 2015, which will affect 2015 fiscal accounts. Tax revenues have also fallen short of expectations in 2015. This fiscal consolidation involves trade-offs as it comes at a time of weak growth and there is significant uncertainty about how fiscal multipliers have evolved (IMF, 2015b), but it is necessary to reinforce the credibility of fiscal policy.

Consolidation plans include spending reductions, which often have a more long-lasting impact. The efficiency of social transfers has been improved by reducing distortions leading to frequent job turnover and the scope for abuse has been narrowed by tightening eligibility rules for certain benefits. Fiscal support for electricity distributors, which had emerged as a result of postponed tariff increases and accumulated debts in the energy sector, has been discontinued. These corrections will deliver long-run benefits going beyond their immediate fiscal impact. In the short run, however, Brazil’s rigid fiscal framework is limiting the reduction in current expenditures through built-in delays, earmarking and mandatory spending shares. Partly as a result, the burden of adjustment may once again fall on public investment, as it has in previous consolidation episodes, which is unfortunate given the need to reduce bottlenecks and spur demand. Planned consolidation measures are also on the revenue side, including rolling back several of the earlier tax breaks, a number of which had distortionary effects that may have hurt investment and productivity, and higher fuel taxes.

Debt simulations suggest that these targets will significantly slow down the expansion of gross debt relative to GDP, which could reach almost 70% of GDP by 2025 according to OECD simulations (Figure 5). These simulations assume that transfers to public banks, which averaged 1.9% of GDP per year from 2012 to 2014, will stop as announced. If these continued, the debt to GDP ratio would rise to 92% by 2025, all else equal.

Figure 5. Possible debt trajectories¹

1. The current plans scenario assumes a primary surplus of 0.15% in 2015, 0.7% in 2016, 1.3% in 2017 and 2.0% of GDP from 2018 onwards. The second scenario assumes the announced primary balance targets for 2015-17, and higher primary surpluses thereafter. The first two scenarios assume no further transfers to public banks, while the third assumes a continuation of these transfers as in 2012-14. Macroeconomic assumptions are an average real GDP growth as in Table 1 for 2015-16, 1.7% for 2017 and 2.0% thereafter. Inflation assumptions are as in Table 1 for 2015 and 2016 and 4.5% thereafter. SELIC interest rate assumptions are based on current market expectations for 2015 and 2016, with a 0.5 percentage point decrease every year from 2017 onwards. For 2015-19, the assumed average Selic is 12.6% and for 2020-25 it is 9.8%.

Source: Calculations based on OECD Economic Outlook: Statistics and Projections (database), October, IMF (2015d).

StatLink  http://dx.doi.org/10.1787/888933282538

Beyond the current plans until 2018, further consolidation would reduce the burden of interest expenditures, which currently exceeds 8% of GDP. For comparison, Chile and Mexico spent 0.6% and 2.7% of GDP on interest expenditures in 2014, respectively. Considering future fiscal pressures from population ageing, consolidation may be easier now than in the future and would likely reduce the interest rate paid on public debt. As an example, generating a primary surplus of 3% of GDP after 2018 would reduce public debt to the average of Latin America countries, approximately 50% of GDP, by 2035. Achieving this debt reduction by 2030 would require primary surpluses of 3.4% of GDP.

In the longer term, there is a need for a better targeting of social expenditures. Reforming Brazil’s pension and social assistance system, which costs over 10% of GDP and whose expenditures are increasing rapidly, would be an essential ingredient of a sustainable consolidation. Despite its young population, Brazil already spends more on old-age pensions than many OECD countries (Figure 6, Panel A). Going forward, the same demographic transformation that unfolded over 60 years in the United States will take place in only two decades in Brazil (World Bank, 2011). Projections suggest that social security expenditures will rise from 8.5% of GDP to over 13% by 2040 if the current indexation mechanism remains unchanged (Figure 6, Panel B). This excludes the separate pension system for civil servants. Civil servant pensions amount to 2.2% of GDP, but their long-term fiscal burden will decline due to a successfully implemented reform of 2012.

Figure 6. Population ageing will add to spending pressures

1. IMF estimates of adjustment needs for health and pension expenditures based on long-term debt targets.

2. Social security benefits include urban, rural and social assistance pensions, but exclude pensions for civil servants. The “baseline scenario“ assumes average real GDP growth of 2.0% over 2015-2040, with a frontloaded recovery and average inflation of 4.6%. The number of social security beneficiaries is assumed to grow on average by 3.1%, in line with elderly population growth (age 55+). Minimum pensions are assumed to be indexed to the minimum wage, which is projected according to the current indexation rule based on past consumer prices plus past GDP growth.

3. The “comprehensive pension reform” assumes indexation to CPI instead of minimum wage for minimum pension earners; increase in pension age to 65 for both men and women; and changes in survivor pension eligibility criteria that are assumed to lead to decrease in survivor pension beneficiaries by half.

Source: OECD, Pensions at a Glance, IMF Fiscal Monitor (2014), United Nations World Population Statistics, Ministerio da Previdencia, OECD calculations.

StatLink  http://dx.doi.org/10.1787/888933282545

Several policy measures could contribute to containing pension and social assistance expenditures, but changing the indexation mechanism of minimum benefits will be an inevitable feature of any pension reform that would effectively contain expenditure growth. Currently, the minimum benefit is equal to the minimum wage, and two-thirds of pensioners receive this benefit level. This has led to real increases in the minimum pension of almost 90% over the last 10 years and the net replacement rate (individual net pension benefit divided by net pre-retirement earnings) is currently 91% in Brazil, compared to an OECD average of 63%. The current indexation mechanism has also led to a compression of pension benefits, as higher pensions have been indexed only to prices. This reduces the incentives to contribute more to the system. Given the strong political pressures for further minimum wage increases, keeping the minimum benefit indexed to the minimum wage is likely to result in rapid real pension increases. Extending the current indexation mechanism for minimum pensions to higher pensions, as recently proposed by the legislative branch, would raise pension expenditures even more rapidly, although it would end the compression of pension benefits.

By contrast, preserving the purchasing power of pension and social assistance by indexing current levels in line with the relevant consumer price index for low-income households (INPC) would roughly stabilise pension expenditures at 10.3% of GDP as of 2030. Alternatively, pension benefits could be indexed to an average of consumer price inflation and average wage increases, as for instance in Switzerland, although they would then rise substantially.

A more comprehensive pension reform would also include raising Brazil's low average retirement ages of 55 years for men and 50 years for women, and the recent drop in the participation rate of older workers underlines the need to reduce incentives for early retirement. This could be done by strengthening financial incentives to retire later, for example by offering higher pension payments, and by introducing a binding minimum retirement age. This minimum retirement age could be raised gradually to avoid disruptive costs and increase public acceptance. In OECD countries, men retire on average at age 64 and women at age 63 (OECD 2013a). In the future, the retirement age could be linked to rising life expectancy so as to make adjustment automatic and thereby avoid using up political capital in a routine reform process. Raising retirement ages to the levels of OECD countries would allow stabilising public pension expenditures at slightly below 8% of GDP, close to current levels. Recent proposals made by the legislative branch and later adjusted by the executive branch are likely to lead to lower penalties for early retirement. This would reduce rather than raise effective retirement ages, which can undermine the sustainability of the pension system.

Beyond the pension system, there is scope for further improvements in the efficiency of social programmes. The in-work transfer programme Abono Salarial, which costs 0.3% of GDP, should be re-evaluated. The programme pays formal sector workers who earn monthly labour incomes between one and two times the minimum wage, corresponding to the 56th and the 83rd percentile of the income distribution, a social benefit equal to one monthly minimum wage at the end of the year. Limiting this benefit to individuals who earn the minimum wage, instead of the current range, would save 80% of the money now spent.

These reforms would not compromise the commitment to reduce income inequality. In fact, better targeting of social benefits could accelerate Brazil’s social progress. First, less rapid real increases of transfers whose recipients are situated at the 56th percentile of the income distribution, which is where the minimum wage stands, will hardly increase inequality. Second, part of the savings could be used to expand transfers with a strong inequality impact, like the conditional cash transfer programme Bolsa Familia which currently costs less than 1% of GDP (see Chapter 2 of the 2013 OECD Economic Survey of Brazil). Such a focus on more efficient redistribution instruments would achieve the objective of reducing income inequality at a lower cost, or allow further reductions in inequality. For example, microsimulations using household data suggest that during 2012 and 2013, Brazil could have achieved 63% more in inequality reduction as measured by the GINI coefficient than it actually experienced if benefits had been indexed to inflation rather than to the minimum wage and the resulting savings had been spent as conditional cash transfers to poor households.

On the revenue side, closing a number of loopholes could strengthen revenues and reduce distortions. For example, besides paying out dividends to shareholders, companies have an option to pay them “interest on capital” (juros sobre capital próprio), which is treated as an expense, i.e. not subject to corporate income taxes (CIT). For the shareholder, this is taxed at the same rate of 15% that is levied on dividends. This has regressive effects on income distribution and reduces corporate savings. Applying the standard CIT tax rate instead would generate additional revenues of 0.1% of GDP. In addition, tax rates for independent service providers filing income taxes as a business can be as low as 5%, with no dividend withholding tax applied, compared to the top marginal income tax for labour income of 27.5%. This creates strong incentives to file taxes as a company, and results in unequal tax treatment across different activities. Current plans for moderate increases of inheritance taxes may also be worth pursuing, as inheritance taxes improve the equality of opportunities. At less than 0.1% of GDP, Brazil’s revenue from inheritance taxes is less than half of the OECD average. Further increases in fuel taxes would be warranted from an environmental perspective (see below).

Spending has grown rapidly in recent years. One way to ensure prudent fiscal management for the future could be to adopt an expenditure rule that should include all expenditure items. Since automatic stabilisers operate predominantly through the revenue side, an expenditure rule would not be very pro-cyclical. In the context of Brazil’s rigid budget process which is characterised by large shares of revenues earmarked for specific expenditures and mandatory spending shares for certain policy areas, operating an expenditure rule will not be easy, and will require rethinking some of these rigidities. Still, the alternative of continuous tax increases that have traditionally been used to solve situations of fiscal imbalances in Brazil has reached its limits, and an effective expenditure control may force a discussion of undoing some of the budget rigidities.

An expenditure rule is also an attractive choice because it is easier to calculate, explain to a wider audience, and monitor than a cyclically-adjusted balance rule. The experiences of Peru and the Netherlands with such a rule has been positive (Ayuso-i-Casals, 2012; Carranza et al., 2014; Cordes et al., 2015). Ensuring that the fiscal framework is implemented and that existing discretion is not abused requires clarity about all fiscal and quasi-fiscal operations. Brazil already has a number of institutions with a fiscal monitoring role. For example, the Supreme Auditing Institution has been very effective in scrutinising fiscal accounts ex post. Nonetheless, an independent fiscal institution charged with ex-ante monitoring of compliance with the fiscal rule and transparency requirements may help to avoid major fiscal slippages in the future. To this end, many countries – and recently all European Union countries – have established independent fiscal councils in some form.

Ensuring a return to the inflation target

Although the economy has been growing below potential since mid-2013, inflation and core inflation have been close to the 6.5% upper bound of the tolerance band around the inflation target of 4.5% (Figure 7, Panel A). Significant wage pressures resulting from a tight labour market, expansionary fiscal and credit policies and the existence of formal and informal indexation mechanisms can help explain these developments. Recently, increases in administered prices have accounted for a large share of increases in headline inflation, reflecting difficulties in the electricity sector and adjustments that had been postponed in the past. These effects are likely to decline over time. The Brazilian real has been on a depreciating trend since 2011, both against the US dollar and in effective terms (Figure 7, Panel B). A continued depreciation of the Brazilian real could add to inflationary pressures in the future.

Figure 7. Inflation and exchange rates

1. Shown as a 6-month moving average.

Source: Central Bank.

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The monetary authorities have responded to above-target inflation with several hikes of the policy rate Selic (Figure 8). However, policy inconsistencies have limited the impact of these hikes. In particular, public sector banks continued to drive an expansion of credit with the help of transfers from the treasury, even as tighter monetary policy tried to contain credit growth. With tighter fiscal policy and no further transfers to public banks, monetary policy is likely to become more effective.

Figure 8. Monetary policy

Source: Central Bank.

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Since October 2014, the Central Bank has reaffirmed its commitment to bring inflation back to the 4.5% inflation target by the end of 2016. This is an appropriate objective, but it will require monetary policy to remain vigilant and raise policy rates further in case additional inflationary pressures emerged. In the short term, further adjustments in administered prices and further exchange rate depreciation will also create one-off price pressures, but need not in themselves threaten the inflation target.

While the Central Bank has successfully complied with the rules of the inflation targeting framework so far, the effectiveness of monetary policy could be improved further by strengthening its perceived independence. One way to do this would be to set a fixed term for appointments of the central bank governor and the other members of the monetary policy committee, during which they cannot be dismissed. Most inflation-targeting countries have such a fixed term (Hammond, 2012). The recent decision to narrow the tolerance band to 1.5% around the 4.5% target as of 2017 will enhance the commitment of the Central Bank and should contribute towards a better anchoring of inflation expectations.

Monetary policy effectiveness will also be strengthened by current plans to reduce directed credit volumes and to adjust the interest rate charged for directed credit (TJLP) more frequently in line with the policy rate Selic. So far, the monetary policy rate Selic has affected only the roughly half of outstanding credit that was subject to market conditions. By contrast, the interest rate charged for directed credit is determined by the TJLP, which is set by a national monetary council consisting of the Minister of Finance, Minister of Planning and the Central Bank governor. Over the past 5 years, the TJLP has been very stable, and has not followed changes in the Selic, although it has been adjusted upwards twice in 2015.

The government has undertaken efforts to foster the development of long-term capital market, including a reduced role for the public development bank BNDES. These efforts also include mandatory private co-financing requirements for BNDES loans, as recommended in the 2013 OECD Economic Survey of Brazil. Moreover, long-term infrastructure bonds are playing an increasing role in the financing of infrastructure projects.

Reducing medium-term vulnerabilities

Financial soundness indicators compare well but debt service costs are high

With credit levels of 70% of GDP according to the IMF definition, credit markets are still smaller than in other emerging economies and are still deepening (Figure 9). Banking capitalisation exceeds what is required by international standards, and banks are well provisioned. Brazil has adopted Basel II and 2.5 standards, and the regulations implementing Basel III standards will enter into effect gradually with full implementation by 2019, according to an internationally agreed timeline. A recent assessment conducted by the Basel committee on Banking Supervision concluded that these regulations are compliant with Basel III recommendations. The exposure of the financial system to external shocks has decreased due to the accumulation of foreign exchange reserves and there are strict limitations on foreign-currency funding of banks (Box 1). Non-performing loans have fallen since 2012.

Figure 9. Financial system indicators

Source: Central Bank of Brazil, IMF (2015c), CEIC.

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Box 1. Medium-term uncertainties about the Brazilian economy’s prospects

Uncertainty | Possible outcome
Implementation of reforms | A failure to implement reforms, including a credible medium-term fiscal reform and structural reforms, could reduce confidence and investment.

The state oil company Petrobras

Petrobras accounts for a significant share of national investment and has widespread ramifications with other sectors of the economy. Fallout from the events unfolding at Petrobras could be stronger in the event of further cancellations of planned investment projects, or if the investigations led to further bankruptcies in upstream activities.

External accounts | Financing the current account deficit could become more difficult in the event of a reduction in investor appetite for emerging market assets. This could result in declining foreign direct investment inflows, which currently cover 88% of the current account deficit.
Corporate and household leverage | Difficulties for corporate borrowers could emerge in the case of a deeper recession or in the context of further currency depreciation, although a significant fraction of corporate debt is hedged against currency risk. Strong supervision, however, is limiting risks in the banking sector.

Since the end of 2014 arrears up until 90 days, which are sometimes seen as a leading indicator for default rates, have edged up slightly, particularly in the corporate sector, where leverage is already high by international standards (Figure 10). These developments should be monitored closely by the Central Bank. A rising share of mortgage loans and payroll-deductible loans in household debt has extended average maturities, keeping debt service levels constant despite rising leverage, and improved the quality of banks’ loan portfolios. Still, household debt service levels of around 22% of disposable income are higher than in other countries, owing largely to high interest rates and short maturities (BIS, 2015). The rising arrears in corporate loans, particularly SME loans, and increasing risks in consumer loans should also be closely monitored. Given its sheer size and its widespread ramifications with other sectors of the economy, the financial health of the state-owned oil company Petrobras could also be a source of risk, as the company is highly indebted and has suffered significant losses mainly due to price interventions that kept retail prices below import costs in the past, but also due to corruption.

Figure 10. Corporate leverage is high

Debt-to-equity ratio of the non-financial corporate sector, 2013 or latest available year

Source: IMF Global Stability Report 2014.

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External imbalances have widened

The current account deficit has widened over the past two years to 4.3% of GDP, up from 2.1% in 2011. This is largely due to a steady erosion of the trade balance, which has declined from a surplus of USD 30 billion in 2011 to a USD 4 billion deficit in 2014, as Brazil’s terms of trade have deteriorated significantly. More recently, given the contraction of domestic demand, stronger exports, currency depreciation and a lower oil price, the current account deficit has fallen and the year-to-date trade balance has returned into positive territory in 2015. Foreign direct investment (FDI) inflows are sizeable, but no longer fully covered the current account deficit in 2014. Moreover, the composition of FDI inflows has shifted. In particular, the share of loans to affiliated entities in Brazil, which are considered FDI by the IMF’s Balance of Payment Manual, has risen substantially in 2014. This development, which is common to several emerging market economies, has led to calls of caution because in some cases, such loans cannot be considered as stable as equity FDI, and imply higher vulnerability to external shocks (BIS, 2014; Gruig and Wooldridge, 2015). In fact, the risk sharing characteristics of such loans can be closer to those of portfolio inflows than those of foreign equity (IMF, 2015a). Sixty percent of net capital inflows into Brazil are now made up of portfolio debt and intercompany loans (Figure 11).

Figure 11. External imbalances have widened

In percent of GDP

Source: CEIC, Central Bank of Brazil.

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The high current account deficit and the structural changes in the financial account hint at rising exposure to volatility on international capital markets. As a result, a reduction in investor appetite for emerging market assets could make it more difficult for Brazil to finance its current account deficit, although the flexible exchange rate would act as a shock absorber, and Brazil’s foreign exchange reserves amount to 25% of GDP. Corporate balance sheets are unlikely to suffer much from exchange rate volatility in the short term, given the widespread evidence of hedging in the corporate sector.

Box 2. Main policy recommendations for macroeconomic policies

Key recommendations

Implement the fiscal adjustment in line with medium-term objectives, including a stabilisation of gross debt.

Gradually raise the retirement age and index pensions to consumer prices rather than the minimum wage.

Establish fixed-term appointments for the Central Bank governor and the members of the Monetary Policy Committee.

Adjust the directed lending rate TJLP more frequently in line with the monetary policy rate Selic.

Other recommendations

Adopt an expenditure rule and reduce budget rigidities such as revenue earmarking and fixed expenditure shares. Consolidate fiscal oversight to monitor compliance with the fiscal rule ex-ante.

Sustaining future growth

As Brazil’s population ages, growth will no longer be supported by a rising labour force as it has in the past. As a result, economic growth will have to come increasingly from productivity improvements, partly by reforming some of the policy settings that currently hold back stronger productivity growth. Large scope for achieving productivity gains lies in the industrial sector, where a few key structural reforms could unleash significant unused growth potential (see Chapter 1). There is also scope for productivity improvements in the services sector, even if automation often proves more difficult in services than in industrial activities. The agricultural sector stands out for its strong productivity gains in the past, but pushing agricultural productivity higher may at some point result in rising pressures on environmental resources. The challenge for sustaining growth in the future involves raising productivity while ensuring the responsible use of environmental assets and maintaining the momentum in reducing poverty and inequality.

Boosting industrial performance

Brazil has a large industrial base whose origins can be traced back to at least the 1930s. At that time, significant policy efforts to industrialise what was then a primarily agrarian, commodity-based economy were successful in building up higher value-added activities in the country. By the 1980s, industry had risen to over 30% of GDP and had become highly diversified, including into consumer durables, intermediate and capital goods, partly on the back of import-substitution strategies and strong trade protection. Since then, however, the role of the industrial sector in the economy has declined significantly, at the same time as industrial growth kept on strengthening steadily across many East Asian countries (Figure 12). Even in comparison with other countries in Latin America, the declining role of Brazil’s industrial sector has been remarkable. Unlike in several other emerging market economies where the industrial sector has been a key driver of aggregate GDP growth, real industrial output as a share of GDP in Brazil has been basically flat for 20 years. In fact, most of the recent economic slowdown can be traced back to the subpar performance of the industrial sector. Over the last decade, real annual growth in the industrial sector has averaged only 2%, while overall real GDP growth has averaged 3.4%.

Figure 12. Value added share of industry

In per cent of GDP, current prices

1. The original series for Brazil contains methodological breaks in 1990 and 1995, and was hence reconstructed in line with the methodology suggested by Bonelli and Pessoa (2010) and Bonelli and Pinheiro (2015).

Source: OECD Calculations based on IBGE and IPEADATA for Brazil, World Bank for other countries.

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This weak performance is largely the result of low productivity, which has fallen short of other countries (Figure 13). Global trends that have shaped industrial production have largely bypassed Brazil’s industry. These include a growing fragmentation and optimisation of value chains, which have allowed companies to focus on their core capabilities, and increasing integration into international trade. Globally, intermediate inputs have come to represent a large share of world trade flows as part of the emergence of global value chains. While many countries nowadays use significant amounts of imported goods to produce exports, almost 90% of the value added of Brazil’s exports is domestically produced (OECD, 2015a). Aggregate productivity gains are also increasingly driven by the reallocation of resources towards firms with higher productivity levels, but in Brazil, the functioning of reallocation mechanisms appears weak. As a result of these factors, Brazil has not shared in the productivity gains from these global developments and has failed to become the major industrial power that it could be. Recent years have been particularly difficult for Brazil’s industry, and real industrial output has been declining since late 2013. Still, Brazil hosts many highly competitive industrials in sectors as diverse as food and aircraft.

Figure 13. Industrial performance and integration into global trade

1. In thousands of constant 2005 USD per employee.

Source: World Bank, ILO, IBGE, OECD-WTO Trade in Value Added (TiVA) – July 2015.

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Principal explanations for the low performance of industrial companies are related to both costs and incentive structures. Costs beyond the influence of firms make it harder for them to compete with external competitors both on domestic and export markets, limiting their ability to exploit scale economies. Distorted incentives, including low competitive pressures, mean that firms will not exploit the full potential of internal productivity improvements. They can also impede the functioning of market mechanisms that reallocate resources towards the most productive firms, including new entrants.

Reducing the “Brazil cost”

The high costs of Brazil’s industry as a result of weak policy settings are often referred to as the “Brazil cost”. First among these is a fragmented and inefficient indirect tax system. Where Brazil stands out most are the large compliance costs of indirect taxes (World Bank, 2015; CNI, 2014). A benchmark manufacturing firm requires 2 600 hours per year to comply with taxes, as opposed to 356 in the average Latin American country and 184 in the average OECD country (Figure 14). The largest of Brazil’s 6 indirect taxes, called ICMS, is levied by Brazil’s states and each state applies its own tax code, tax base and tax rates. Brazil applies a mixture of the origin and destination principles to interstate commerce and companies wishing to offer goods and services nationwide are required to comply with each state’s individual tax rules. Credits for interstate transactions are regularly delayed or refused (CNI, 2014). Brazil’s indirect taxes are somewhere in between a sales tax and a value-added tax, because they allow tax credits for intermediate inputs only if the latter are embodied in the final good sold (the so-called “physical credit” principle). The burden of proof regarding how much of an input goes directly into the final product lies with taxpayers, resulting in extensive use of tax accountants and frequent lawsuits over disputes.

Figure 14. Hours required to prepare taxes

For a benchmark manufacturing company, 2014

Source: World Bank (2015), Doing Business 2015 data.

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The ideal way forward would be to consolidate the different indirect taxes into one value-added tax with simple rules. The federal government could lead the way by consolidating its own indirect taxes into a single value added tax with a broad base, full refund for input VAT paid and zero-rating for exports. Once such a tax were established, it might be easier to integrate the state-level ICMS into this system, possibly as state-specific surcharges on the same tax base that preserve current revenues. It is clearly possible to accommodate the desire for different states to tax at different rates, as long as taxation strictly follows the destination principle and tax refunds for interstate transactions are easy. The European Union applies such a system, for example. If that still leaves revenue shortfalls for some states, the central government could create a fund to compensate these losses temporarily.

Infrastructure bottlenecks, resulting from many years of low infrastructure investment, are at the root of high transport and logistics costs for industrial companies, in particular with respect to industrial exports. Against this background, recently announced infrastructure projects including roads, airports, ports and rail are welcome. However, despite a long-standing eagerness to engage private investors in the construction and financing of new infrastructure, and improvements in the mechanism used for concessions and public works that can strengthen competition, progress has been held back by a lack of administrative capacity and technical experience of public institutions involved in infrastructure projects. Tender calls for public works and concessions should be prepared more thoroughly and costs be made more predictable by better specifying physical, legal, environmental and judicial details and risks. Investing more time and resources in the planning phase would reduce renegotiations once a concession has been granted and competition can no longer be harnessed. In many advanced economies, the planning phase of infrastructure projects accounts for almost half of the total time, while in Brazil project planning is often being conducted in parallel with the actual beginning of the works. Strengthening the capacity and independence of relevant regulatory agencies, including in transport, electricity, communications, could also support faster progress in infrastructure. Competition in the construction sector is likely to be strengthened by recent legislative changes that enhanced the scope for foreign participation in public tenders.

Given that most future infrastructure projects are likely to be realised in the form of concessions, it will also be important to take effective measures to prevent collusion among bidders and corruption. Such practices deprive society of the benefits of a truly competitive public procurement by diverting public resources and impede new and more competitive firms from emerging. It would be useful to undertake a thorough assessment of public procurement laws, in particular how their many complexities and exemptions affect integrity and competition in the tendering process. Rules pertaining to conflicts of interests, incompatibilities and impartiality in public procurement could be streamlined and strengthened. Whistleblowing and leniency procedures are presently hampered by concurrent competences and parallel systems for similar offences, which make it difficult to protect whistleblowers effectively. Besides, it would also be useful to improve training for officials in contracting authorities on how to detect collusion.

An important factor behind the low productivity levels of Brazil’s industry is the low qualification level of the labour force, and empirical analysis confirms a strong role for educational achievements in enhancing productivity (Arnold and Flach, 2015). Skill shortages affect particularly the industrial sector, with 65% of industrial companies finding hiring high-skilled workers an obstacle to their productivity and growth (CNI, 2013). The share of students both at the secondary and tertiary levels enrolled in professional and technical degrees in Brazil is low in international comparison and wage premiums of up to 20% for secondary level graduates with technical training over those without reflect Brazil’s dearth of technical skills (CNI, 2013). Brazil is addressing this issue by creating additional vocational training opportunities under the umbrella of the Pronatec programme. Further expanding the participation in vocational training programmes would alleviate the skill shortages faced by industrial (and other) companies and allow stronger productivity gains.

Improving the incentives for stronger productivity growth

Poorly designed policies also affect the incentives that drive the behaviour of industrial companies. For example, the difficulties in claiming tax credits for intermediate inputs in the indirect tax system distort the organisation of the value chain towards excessive vertical integration. Corporate taxes based on company turnover, such as those put in place in 2014 together with payroll tax deductions, have the same effect as taxes paid on externally sourced inputs cannot be deducted from the tax base. This reduces the possibilities to achieve productivity gains by sourcing intermediate goods and services from potentially more efficient external providers and to mimic the fragmentation of the value chain that has become common in most leading industrial countries.

A key challenge for improving incentives in the industrial sector is to strengthen competition. Competition is what ultimately creates incentives to adopt the most efficient production technologies and reach global best practice, to introduce new innovative products and to orientate existing products better to customer needs. Brazil’s innovation policies are not much different from those used in other countries. In fact, public support for business innovation has increased steadily over the years, both through direct support measures and through R&D tax credits. But what really pushes firms to innovate in the first place is not the availability of public support, but the competitive pressures they face in their markets. For example, the Information Technology Law of 1991 allocates tax breaks worth BRL 4 billion per year to domestic electronics producers, but evidence suggests that this has failed to stimulate R&D or raise productivity in the sector (Kannebley and Porto, 2012). A lack of competition on many product markets, evidenced by high levels of concentration and rigid industry structures, seems to be one of the principal reasons behind the low innovation performance of Brazilian industrial firms (Pinheiro, 2013; IEDI, 2011; IEDI, 2014). Empirical evidence shows that Brazilian firms that were exposed to competition in foreign markets displayed higher product innovation efforts at home (de Araújo, 2005).

Competition is also the driving force behind productivity-enhancing industry dynamics, allowing strong performers to grow at the expense of firms with lower productivity, which implies entry and exit of firms. Evidence suggests that these reallocation mechanisms do not work well in Brazil’s industrial sector, and it is often the less productive firms within a sector that enjoy large and even increasing market shares (Chapter 1). Regulatory barriers to entrepreneurship, including administrative burdens on start-ups and other entry barriers may be part of the explanation. Brazil’s rules and procedures for firm entry have long been significantly more restrictive than in OECD countries, and lack transparency and simplicity, according to the OECD Product Market Regulation indicators (Figure 15). Comparative analysis by the World Bank has confirmed this picture, as Brazil ranks at 167 out of 185 economies surveyed (World Bank, 2015). In fact, starting a business has so far required 12 procedures in Brazil and takes 83 days, while the same can be done in Chile, Mexico and Colombia in less than 11 days.

Figure 15. Regulatory barriers to entrepreneurship are high

Indicator scaled from 0 (least restrictive) to 6 (most restrictive), 2013

Source: OECD Product Market Regulation Indicators, 2013, available at www.oecd.org/eco/pmr .

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Recent government initiatives aim to reduce these administrative burdens significantly. A pilot reform project that permits the opening of a company in less than one hour was started in the capital district of Brasilia in mid-2015. These rules allow the beginning of operations while awaiting the formal license in the case of low-risk activities, which include about 90% of all activities. A nationwide rollout of these simplified rules is scheduled to be completed by the end of 2015. Already as of February 2015, closing a company can be done in only 1 hour, whereas before administrative burdens to closing a company were almost prohibitive. These reforms, if implemented as planned, are likely to result in significant productivity improvements, as empirical analysis using a large firm-level data set suggests that high administrative burdens for entry are associated with lower firm productivity across Brazilian states (Arnold and Flach, 2015). Developing deeper capital markets could also improve the prospects for the entry of new and innovative firms with high productivity potential.

It is important to design industrial policies in a way that they do not create obstacles to new entry, the post-entry growth of successful firms, including on the expense of incumbents, or the exit of less productive firms, which is essential for releasing the resources that more successful firms need to grow to an efficient scale. Policies meant to support the industrial sector have often had a tendency to bolster the status quo rather than to allow the best businesses and industries to thrive. Going forward, aggregate productivity growth could be best supported by allowing the natural selection of firms to happen and ensuring that policies are neutral with respect to the treatment of incumbents and entrants, and with respect to sectors of activity. While a few countries have had success with targeted industrial support policies, this has only been the case where such policies were designed to generate learning effects, which implies that they should be temporary and have a clear schedule for withdrawal (Rodrik, 2004, 2008).

More firm turnover could in principle imply adjustment costs for employees who have to find a new job, but in Brazil, most job turnovers currently take place at the initiative of employees, including due to incentives built into the unemployment insurance scheme. In manufacturing, over 50% of employees change jobs within one year (DIEESE, 2014). A rise in firm turnover rates is therefore unlikely to make much difference for Brazil’s already high job turnover rate among low-paid workers.

Brazil’s industry also remains significantly more shielded from international competition than that of many other countries, including in Latin America. Although tariffs have come down, Brazil’s average tariff of 10% is twice the level of Colombia’s or other BRIICS countries (Figure 16). Local content requirements linked to public procurement, tax reductions or financing from public banks have added to shielding domestic producers from foreign competition, and model simulations suggest that these have led to significant reductions in imports and exports (Stone et al., 2015). In addition to reducing competition, trade barriers on inputs make intermediate inputs or capital goods more expensive, thus reducing competitiveness. Although a tariff exemption scheme for capital goods is in place, it is applicable only if no equivalent domestic product exists, and Brazil has a sizeable capital goods industry. Intermediate input tariffs can also curb productivity by limiting the access to more varieties and to high quality intermediate inputs (Grossman and Helpman, 1991; Amiti and Konings, 2007).

Figure 16. Applied tariff rates in international comparison

Weighted average, trade in manufactured goods

Source: World Integrated Trade Solution Database (WITS).

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High levels of trade protection weaken competition and incentives to improve productivity, even though they have not prevented the gradual decline of the industrial sector in favour of non-tradable services. In this regard, the intermediate choice of having substantially higher tariffs than its foreign competitors while still exposing its industrial sector to some foreign competition has been a particularly unfavourable combination and has prevented Brazil from reaping the full benefits of trade. The way forward is to embrace international trade more fully by reducing effective trade protection. Brazil’s advances in the area of trade facilitation are a step into this direction, but cannot replace reductions in trade protection including tariffs and local content restrictions, which should proceed gradually according to a pre-announced schedule. A major trade liberalisation involves trade-offs as it would lead to resource allocations between sectors, including job losses in some sectors and job creation in others. However, model simulations suggest that the overall employment would rise by more than 1% (Araújo and Flaig, 2015). As most of these new jobs would be for unskilled workers, trade liberalisation in Brazil would raise the returns to unskilled labour relative to capital and disproportionately help the poor (Harrison et al., 2014).

Producer services have also become an important intermediate input into manufacturing activities, representing 65% of manufacturing value added in industrial countries (CNI, 2014). Empirical research has demonstrated the significant role that services inputs can play for manufacturing productivity (Arnold et al., 2011; 2015). Cost-effective and innovative services, including from abroad, are therefore highly relevant for productivity, the competiveness of the Brazilian industrial sector and the integration into global value chains. Brazil’s regulations are more restrictive than the OECD average according to the OECD’s Services Trade Restrictiveness Index, particularly so in the area of logistics, legal services, architecture and engineering services, telecoms, banking, insurance, air and rail transport and courier services. Across all sectors, the scope for using imported producer services is further limited by the taxation of many imported producer services under the CIDE tax, with effective tax rates between 40% and 50%.

Box 3. Key policy recommendations for improving the business climate and boosting industrial performance

Consolidate indirect taxes at the state and federal levels and work towards one value added tax with a broad base, full refunds for input VAT paid and zero-rating for exports.

Reduce the level of trade protection steadily by lowering tariffs and scaling back local content requirements.

Strengthen competition by streamlining regulation on product markets and implementing planned reductions in entry regulations.

Improve the technical capacity and planning for infrastructure concessions and elaborate more detailed tender packages prior to launching tender calls.

Further expand the participation in vocational training to alleviate skill shortages for technical workers.

Improving the carbon footprint of the economy

Brazil has made remarkable progress in reducing greenhouse gas emissions, which is one of the key challenges for making growth sustainable from an environmental perspective. From a peak in 2004, greenhouse gas emissions have declined by more than half, owing largely to declining deforestation rates (Figure 17, Panel A). Better monitoring coupled with stricter law enforcement, enlarging protected areas and strengthening incentive-based measures such as rewards for forest preservation have reduced deforestation in the Amazon region by 75% from its 1996-2005 average, and the 80% reduction target set for 2020 is likely to be reached. Brazil should build on these impressive advances and continue its efforts to reduce deforestation. Still, an area of nearly 5 000 km2 was deforested in 2014, and necessary further reductions may become increasingly difficult and costly as they tend to take place in more remote areas and on a smaller scale (Godar, 2014). In absolute numbers, Brazil is currently the world’s sixth-largest emitter. Although relative to GDP emissions have decreased significantly (Figure 17, Panel B), they are above the OECD average, while emissions per capita are below it.

Figure 17. Greenhouse gas emissions by sector of origin

1. Including emissions from land use, land-use change and forestry (LULUCF).

Source: IEA (2015), Government of Brazil (2014).

StatLink  http://dx.doi.org/10.1787/888933282655

The emission reductions due to slower deforestation have been partly offset by rising emissions from agriculture and energy, including energy used for transportation. Direct emissions in agriculture are largely the result of enteric fermentation and organic waste from cattle. Farming is the second main reason as strong adoption of chemical fertilizers has been used by farmers to expand grains production. Improving soil fertility by proper nutrition selection, less tillage and the application of organic substrates can help increase the productivity of the sector and has significant mitigation potential (McKinsey 2013, FAO, 2013). Brazil’s Low Carbon Agriculture Plan (Plano ABC) aims to reduce GHG emissions from farming.

Brazil has been a leader in clean energy production. Renewable sources account for 41% of total primary energy supply, well above the world average of 13%. More than three quarters of the country’s electricity comes from hydropower and the use of wind energy is also expanding. A vast majority of cars in Brazil can use ethanol, a substitute for petrol.

But in the transport sector, a rising demand for cars from a growing middle class and a strong reliance on road transport for cargo are increasing emissions. Moving some cargo off the roads would reduce transport emissions, and could be facilitated by strengthening regulatory frameworks in railroads and cabotage (Chapter 1). However, the use of ethanol has fallen short of its potential due to implicit subsidies for petrol. These have vanished, but in case of future oil price increases, regular adjustments of petrol prices would be required to avoid a resurgence of these implicit subsidies. The 2012 zero-rating of the petrol and diesel tax CIDE has recently been undone, but excise taxes on gasoline and Diesel fuel are still far below international averages and could be raised further (Figure 18). The potential negative effects on consumption are likely to be mitigated by the possibility for private vehicle owners to switch to ethanol, which leads to less carbon emissions. There may also be scope for raising the efficiency of energy use beyond the transport sector. More details on Brazil’s environmental performance can be found in OECD (2015b).

Figure 18. Fuel excise taxes are low in international comparison¹

1. The chart considers only specific excise taxes, not broad-based consumption taxes, which are higher in Brazil than in other countries.

Source: OECD (2015c).

StatLink  http://dx.doi.org/10.1787/888933282666

Box 4. Main policy recommendations for improving the use of environmental resources

Consider further increases in fuel taxes.

Avoid a resurgence of implicit petrol subsidies in case of future oil price increases by adjusting petrol prices regularly.

Making growth more inclusive and improving well-being

Brazil has made substantial efforts to achieve more inclusive growth and its progress on several dimensions of well-being has been remarkable, although high inequalities with respect to income and other well-being indicators remain. Over the last two decades, income inequality and poverty have fallen substantially (Figure 19). Moreover, labour market informality has declined, life expectancy has risen by 6 years and the average time spent in education has risen from 6 to 9 years.

Figure 19. Poverty and income inequality in international comparison and over time

1. Poverty is defined as the percentage of the population with per capita income below a poverty line. Absolute poverty refers the poverty line of USD 2 a day, as set out in the Millennium Development Goals of the United Nations. The absolute poverty number for 2013 is estimated based on IPEA data. Relative poverty refers the line at 50% of the median income. The Gini coefficient measures the inequality of income distribution on a scale between 0 and 1 with higher values representing more income inequality.

2. The last available year is 2012 for most countries.

Source: IBGE; OECD, “Income Distribution”, OECD Social Expenditure Statistics (database), except for non-OECD countries for which the source is World Bank (2013a): Argentina, Brazil, China, Colombia, Costa Rica, Indonesia, India, Paraguay, Peru, Russian Federation, South Africa, Uruguay.

StatLink  http://dx.doi.org/10.1787/888933282670

Social transfers, in particular the conditional cash transfer programme Bolsa Familia, have effectively contributed to reducing poverty, but earnings opportunities have also improved significantly for low-income households. A new Brazilian middle class has emerged as income growth has been particularly rapid at the lower end of the income distribution. Improved public services, particularly in the areas of education and health, have been instrumental for making growth more inclusive, as Brazilians have moved into better-paid and less precarious jobs and enjoyed better health. Improving these public services further will remain crucial for making growth more inclusive in the future.

Education is the key to a better income distribution in the long run

As discussed in the 2013 OECD Economic Survey of Brazil, Brazil has made significant advances in access to education and educational attainment has been rising, especially among the young and people from low-income backgrounds. This has resulted in better competencies, reflected in better results in the OECD’s PISA study (Figure 20). Nonetheless, Brazil’s level of human capital still lags significantly behind OECD standards, particularly in upper secondary and tertiary education. A high number of drop-outs exacerbates inequalities. Often the causes of unsatisfactory performance in the school system can be traced back to students’ failure to acquire essential skills during their early childhood, which could be addressed by further expanding early childhood education (ECE). ECE tends to improve student competencies significantly and has been found to add more to reading outcomes than one additional year of formal schooling (OECD, 2012a). While 37% of 3-year olds are enrolled in ECE programmes in Brazil, the OECD average at that age is 70%, and a number of countries (Belgium, France, Spain, United Kingdom, Italy) reach almost full coverage (OECD, 2014a). Also important are remedial interventions in basic education to assist children who are at risk of falling behind. Similarly in secondary education, early detection and tailored support with tutoring classes should be pursued to reduce drop-out rates.

Figure 20. PISA scores on reading and mathematics

Average of scores in reading and in mathematics

Source: OECD Programme for International Student Assessment (PISA), 2012.

StatLink  http://dx.doi.org/10.1787/888933282688

Having expanded access, the next important challenge is to improve the quality of education. Offering longer school days would be one way to achieve this. Many schools still schedule up to three daily shifts to compensate for a shortage of class rooms, reducing the time that children can spend in schools. Moving towards universal full-day schooling would require building more physical school infrastructure (World Bank, 2012b). There are also ways to improve governance mechanisms, and some Brazilian states have illustrated how good governance and well-designed policies can result in rapid progress. Successful regional experiences have included incentive mechanisms such as performance-based pay for teachers and principals, and even the distribution of tax revenues across municipalities has been tied to educational outcomes, creating a healthy competition of municipalities for improving their schools. Teacher quality can also be raised by supporting continuous improvement through more in-service teacher training, an area where a number of states have made significant investments. It is important for Brazil to take stock of these experiences, evaluate them systematically and expand successful local initiatives nationwide.

Improving public healthcare services

Access to quality healthcare is an important dimension of reducing inequalities and Brazil has made significant progress in population health over recent decades. The development of publicly provided primary care and specific interventions (vaccination and prevention campaigns, maternal and child health services) have played a major role in raising Brazilians’ health (Gragnolati et al., 2013). Conditionalities attached to cash transfer benefits have also strengthened the incentives for vaccinations and health-check-ups for children and pregnant women. Life expectancy at birth has increased by nearly 15 years between 1970 and 2013, although countries like Chile and Korea managed to achieve greater improvements from a similar starting point (Figure 21).

Figure 21. Selected health indicators

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en.

StatLink  http://dx.doi.org/10.1787/888933282696

The backbone of Brazil’s success is the Unified Health System (Sistema Único de Saúde; SUS) that entitles every Brazilian citizen to free healthcare at the primary, secondary and tertiary level. The SUS is a decentralised system and the responsibility for service delivery lies with states and municipalities, which receive transfers from the central government. Since its establishment in 1989, health service delivery has been significantly expanded and 48% of the population access primary health care through so-called Basic Health Units (Ministério da Saúde, 2015).

Current challenges for the SUS include improving funding and the efficiency with which current resources are used, and raising the quality of healthcare. Even though funding has expanded over the years, severe capacity constraints are visible, often reflected in long waiting times for specialised medical services. In addition, access to prescription drugs is a challenge for many. More than half of Brazilians could not obtain drugs at public facilities and half the patients who decided not to purchase a prescription drug did so for lack of financial resources (Boing et al., 2013). Brazil’s average total per capita expenditures of USD 1 471 at PPP are less than a third of the OECD average at purchasing power parity (Figure 22). More importantly, the average number masks stark differences in health expenditures between those who use only publicly funded healthcare and the 25% of Brazilians who subscribe to private insurance plans to get better quality care (Victora et al., 2011). Per capita health expenditures for those with private insurance (USD 2 678 at PPP) are similar to the levels of Spain, Portugal or Slovenia, while healthcare spending is similar to the level of Mexico or Turkey for the remainder of the population (USD 1 028 at PPP).

In part, current capacity constraints for medical services are related to an underlying tension between the constitutional entitlement to coverage for all primary, secondary and tertiary care and the fact that resources for public healthcare are limited. A more explicit definition of what is or is not covered, in conjunction with a clarification of the decision-making process and assessment criteria upon which such decisions are based, may lead to a more efficient allocation of resources. This in turn could alleviate capacity constraints for those healthcare services that are considered priority. The current practice to give priority to SUS patients without private health insurance is also a way to ensure the best use of existing resources.

Figure 22. Per capita expenditures on health

In 2013 USD at purchasing power parities

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en; WHO Global Health Expenditure Database.

StatLink  http://dx.doi.org/10.1787/888933282705

Going forward, new challenges are emerging as the causes of illness and death increasingly resemble those of high-income countries with ageing populations. Non-communicable diseases such as diabetes, circulatory diseases, cancer and chronic respiratory diseases are significant challenges today (Figure 23). Cancer mortality rates have risen, unlike in many other countries. At the same time, communicable diseases are still relevant (Schmidt et al., 2011).

Figure 23. Non-communicable diseases are a significant challenge

Source: OECD Health Statistics 2013, http://dx.doi.org/10.1787/health-data-en.

StatLink  http://dx.doi.org/10.1787/888933282712

Besides efficiency enhancements, improving public healthcare is likely to require more public funding in the future, and as Brazil’s population ages, additional spending pressures are likely to emerge. OECD projections of health and long-term care expenditure suggest that public spending on health could rise from the current 4.7% to 12% of GDP by 2060 (de la Maisonneuve and Martins, 2013).

However, in light of the current fiscal situation, there are a limited ways to find new resources. One way to free resources and to improve the allocation of health-related spending would be by phasing out the current tax deductibility of private health expenditures, which has regressive distribution effects, as only households with higher incomes (about 10% of the working-age population) pay income taxes from which to deduct these expenses (Castro, 2014). This tax break costs about 0.3% of GDP, equivalent to 7% of public health expenditures. Similarly, employer contributions to private health plans should be taxed as ordinary income under the PIT. But adding these resources to the SUS may not be sufficient. Exploiting efficiency gains and improving resource allocation will be necessary and are possible, as other countries manage to achieve better health outcomes with similar resources. Empirical analysis based on data envelopment analysis suggests that with current health expenditures, Brazil could achieve significant improvements in health outcomes by raising the efficiency of health spending (see Chapter 2). This could help meet the three main challenges facing the SUS: facilitating access to all, improving the governance of the system and preparing for population ageing.

Making the public system more cost-efficient

More remains to be done to develop outpatient care. Hospitals currently account for 70% of federal public healthcare spending, compared to an average of 40% in the OECD. International experience has shown that many services can be provided at lower costs outside of hospitals. Although the SUS has managed to reduce the role of hospitals as the “usual source of care” and increased the reliance on primary care facilities, more than half of emergency room visits could have been treated in primary care (TCU, 2013; Machinko, 2011; Machinko et al., 2004).

Payment mechanisms are key instruments for increasing efficiency, but the current payment mechanism in Brazil provides little in terms of incentives for hospitals to do so. Public SUS hospitals rely on line-item budgets calculated on the basis of historical trends, which could be replaced by alternative payment mechanisms. One option would be to move towards global budgets that are linked to performance or outputs. These can be coupled with diagnosis-related group (DRG) payment systems, used in 14 out of 34 OECD countries, for which international evidence suggests that they can reduce the length of hospitalisation without much impact on health outcomes (Busse and Quentin, 2011).

Further progress could also be achieved in reducing the cost of drugs. Brazil’s regulatory body should set reference prices for all drugs more in line with international price comparisons, update them regularly and develop clinical guidelines for the use of cost-effective drugs, as international evidence suggests that the associated cost-savings can be substantial. Based on these guidelines, Brazil should define an exclusive list of reimbursed medicines to end the current practice of patients suing the state to cover their drug expenses with no regard to their cost-effectiveness. Court orders issued on the basis of the constitutional guarantee that health is the duty of the state have led to growing costs for the SUS, and are problematic both on efficiency and equity grounds, as wealthier and more educated patients may find it easier to rely on the judicial system to pursue their claims. Brazil’s National Health Surveillance Agency (ANVISA) may be well-placed to take a leading role in developing these guidelines and setting reference prices. There is also scope to increase the use of generic drugs, which is lower than in OECD countries, by strengthening financial incentives for those prescribing, buying or selling drugs (OECD, 2013c).

Facilitating access to all

Since its establishment in 1989, the SUS has invested heavily in the expansion of its network of public facilities at the primary level. However, despite the wide network of so-called Basic Health Units that provide primary care services, long waiting times are frequent for specialised medical services, and delays and difficulties to access treatment were considered the main problem by 55% of survey respondents in 2012 (Figure 24). This is part of the reason why so many Brazilians choose to pay for private health insurance.

Figure 24. Perceived main problem of the public healthcare system

Source: CNI, 2012.

StatLink  http://dx.doi.org/10.1787/888933282721

A general scarcity of doctors and their uneven distribution across the country are partly to blame for this, and would suggest a need for scaling up recent efforts to expand training capacity and incentives to move to underserved areas (Figure 25). These efforts have included the “More Doctors” programme that managed to increase the number of primary doctors by 18 000. Beyond primary care, difficulties in quality and access rise with the complexity of care in the public system. To address this issue, Brazil could set up explicit targets for expanding capacity. In some countries, regulations on maximum waiting times have been helpful in this context. For example, England introduced a target regime ratcheted to 18 weeks which has led to a significant reduction in waiting times. Waiting time targets used in Denmark and Finland in certain segments of the health sector have also improved satisfaction among patients (Siciliani et al., 2013).

Figure 25. Practising medical staff per population and geographic imbalances

1. Data include not only doctors or nurses providing direct care to patients, but also those working in the health sector as managers, educators, researchers etc, which can add another 5-10% of doctors.

2. Data refer to all doctors or nurses licensed to practice. This results in a significant over-estimation of the number of practising doctors in Portugal.

Source: OECD Health Statistics 2015, Conselho Federal de Medicina (2013): Pesquisa Demográfica Médica no Brasil.

StatLink  http://dx.doi.org/10.1787/888933282734

The level of out-of-pocket spending on drugs remains high in Brazil despite a federal programme to subsidise or give out essential drugs in public pharmacies (Farmácia Popular) has been in place since 2004. The number of participating pharmacies has increased significantly over the years, although geographical disparities are stark, with 84% of municipalities covered in the South and Southeast but only 29% in the North. More should be done to improve access to medicines in poorer areas, which may require more funding. Access to prescription drugs could be improved by making the public drug procurement process more efficient (Emmerick et al., 2015; Boing et al., 2013). A recent audit conducted by the Supreme Auditing Institution revealed that a majority of hospital units lacked drugs due to malfunctions in purchasing, inventory control, distribution and consumption of these materials (TCU, 2013).

Improving the governance of the public health system

The governance of the SUS is complex as it includes an intricate web of consensus-building mechanisms at all levels of government, and with civil society. This was meant to serve as a system of checks and balances, but it has also resulted in a system of shared responsibilities that is hard to manage and monitor. To improve the governance of the system, further progress could be made in three directions, including ensuring better co-ordination, improving performance monitoring, and strengthening incentives.

Better co-ordination could be achieved by giving a stronger focus on the development of regional networks as a way to ease the tension between municipalities’ strong autonomy on one hand and limited capacity and scale on the other. For example, certain diagnostic services, such as for cancer, can be less costly if managed by a regional centre rather than individual hospitals. Although a 2006 federal regulation laid the grounds for regional networks, the implementation has been limited and no clear consensus has emerged yet as to their best design (La Forgia and Couttolenc, 2008; dos Santos and Giovanella, 2014; Vargas et al., 2014). States could play a stronger role in co-ordinating regional health services. The experience of Denmark and Japan, for example, can provide guidance for finding the right balance between national guidance and regional planning (OECD, 2013b; OECD, 2015d).

Significant efficiency improvements could result from better performance monitoring. Monitoring performance and benchmarking across regions have been a challenge due to the absence of sufficiently detailed and comparable indicators on health outcomes and costs at the local level. Improving the collection of comprehensive performance indicators at the local level would be a first essential step. The availability of more comprehensive indicators for health outcomes, including at the level of individual healthcare units and hospitals, would allow the replication of the federally-funded incentive schemes that have proven highly successful in the area of education.

The perception of better quality in the private sector is likely related to better incentives. This suggests that tools that are used in the private sector could be applied more widely in the public sector to create the right incentives, particularly with respect to strengthening care co-ordination, fostering the accreditation of healthcare providers and providing adequate performance incentives. Strengthened co-ordination could avoid duplication of services and unnecessary hospital stays. The gradual rollout of Brazil’s National Health Card that began in 1999 is a step in this direction and should be continued (OECD, 2010). Licensing and accreditation of hospitals and physicians are tools to improve the quality of healthcare services. Regarding medical staff, pay-for-performance schemes have been used successfully in hospitals in several OECD countries. In Brazil, the use of such schemes has been limited to pilot projects, mainly in the private sector. Providing incentives for state and municipal governments to improve performance could significantly affect the quality of healthcare services.

As Brazil’s population ages, the share of older people is set to rise strongly over the next decades. The proportion of people 65 and over is projected to increase to 23% by 2050, from currently 7% (OECD, 2015e). The majority of elderly people requiring long-term care services are currently supported by informal carers like families and friends, or through hospitals in the critical cases. Long-term care services are less costly and better alternatives to long hospital stays. They also relieve stress on families and allow them to keep working. Pilot projects for long-term care have started in developing countries including Thailand. Brazil has initiated a federal programme that provides home care as a substitute to existing health care services, called “Melhor em casa” (Better at home). The scale of the programme is small at present, but the programme can serve a useful starting point.

Box 5. Main policy recommendations for health policies

Key recommendations

Enhance spending efficiency, including by developing a more explicit definition of what is covered by the public healthcare system, and raise funding for public healthcare.

Implement targets for expanding specialised medical services to reduce waiting times.

Train more doctors and nurses and strengthen incentives to reduce geographic imbalances.

Improve the collection of performance indicators and enhance the use of benchmarking and incentive-based mechanisms, including pay-for-performance schemes.

Develop clinical guidelines for the choice of cost-effective drugs, set reference prices for all drugs more in line with international price comparisons and define an exclusive list of reimbursed medicines.

Shift the emphasis away from hospital care and strengthen primary care services, particularly for patients with chronic conditions.

Provide more long-term care services under the SUS, with a particular focus on expanding formal home care services.

Other recommendations

Gradually phase out the tax deductibility of private healthcare expenses to free more resources for the SUS.

Strengthen the role of regional health networks through stronger leadership at the state level, including with respect to financing mechanisms and budget allocation.

Provide stronger incentives for accreditation of hospitals and strengthen the licensing process, including enforcement mechanisms.

Introduce output and performance targets into payment mechanisms for public and private SUS hospitals.

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Annex

Progress in main structural reforms

This table reviews action taken on recommendations from preceding Surveys. Recommendations that are new in this Survey are listed in the relevant chapters.

Past recommendations | Actions taken and current assessment
A. Consolidating confidence in macroeconomic policies
Further tighten monetary policy as needed to bring back inflation to the 4.5% inflation target, which would also help to bolster policy credibility. | Monetary policy has been tightened since October 2014 and inflation expectations for 2016 are starting to converge towards the 4.5% target. The tolerance band will be reduced by 0.5 percentage points as of 2017, potentially increasing credibility of inflation targeting.
Solidify the credibility of monetary policy by establishing fixed-term appointments for its governor and the members of the Monetary Policy Committee, and by keeping communication on monetary policy to the Central Bank. | No action taken regarding Central Bank independence, but communication on monetary policy has been kept to the Central Bank lately.
Redesign the fiscal rule to take account of the business cycle, for example by adopting an expenditure rule. Consolidate fiscal oversight to monitor compliance with the fiscal rule ex-ante. Increase clarity by limiting quasi-fiscal operations. | No action taken on redesigning the fiscal rule and on consolidating fiscal oversight. Quasi-fiscal operations have been sizeable until the end of 2014, but have been significantly reduced since.
Reduce the fiscal burden of the pension system by severing the automatic link between pension benefits and the minimum wage and by raising effective retirement ages. | No action taken. A recently passed law will reduce penalties for early retirement in the short run.
B. Boosting productivity and cost competitiveness

Move forward on new infrastructure projects and concessions as planned.

A new concession plan amounting to 200 billion BRL (3.6% of GDP) was announced, including roads, railroads, airports and ports. Nominal expenditures in the infrastructure programme PAC2 grew 21% in real terms in 2014 relative to the previous year, but have almost halved in the first 5 months of 2015.

Continue efforts to consolidate indirect taxes into a single value added tax and reduce the use of turnover taxes. | No action taken on a single value added tax. A partial reversal of payroll tax breaks is underway, which will reduce the use of turnover taxes.
To protect the purchasing power of the minimum wage while allowing a gradual reduction relative to the median wage, index annual minimum wage increases to the consumer price index for low-income households plus only part of productivity gains for some time, in replacement of the current rule. | No action taken. The current minimum wage indexation to inflation and GDP growth of the second previous year has been extended until 2019.

Gradually phase out financial support to BNDES, and focus BNDES lending on the financing of infrastructure, small and medium enterprises and innovation. In the transition, continue efforts to facilitate the development of private long-term capital markets, including by requiring private co–financing of BNDES loans.

Budget transfers to BNDES stopped as of 2015, the interest rate differential between subsidised lending rates and market rates has been narrowed and parts of future BNDES loans will require private co-financing.

Reduce tariff protection, and phase out local content requirements and targeted support to specific sectors. | No action taken.
C. Improving the responsible use of resources
Remove implicit price support for fossil fuel by adjusting petrol prices in line with import costs, which would, among other things, promote the use of ethanol. | The implicit price subsidy has disappeared through a combination of higher domestic prices and a lower oil price. Fossil fuel taxes have been raised.
Strictly enforce the new forest code and enhance incentive-based measures, such as rewarding forest preservation, to further reduce deforestation. | A rural environmental cadastre has been set up in order to implement incentive-based measures as foreseen in the new forest code. Over half the lands that need to be registered have been registered by now.
D. Maintaining the momentum of reducing poverty and inequality
Scale up early childhood education and early detection and tutoring classes to reduce drop-outs and grade repetition in secondary schools. Continue expanding in-service teacher training and strengthen performance incentives. | The number of childcare centres and enrolment in early childhood education have increased during 2012-14. By contrast, the number of teachers with tertiary education has fallen, both in absolute terms and relative to the number of teachers.
Build more schools where needed to ensure full-day schooling nationwide. | The number of schools up to secondary education decreased. Average hours spent in school remained stable from 2012 to 2014.
Increase resources for Bolsa Familia and other programmes within the Brasil sem Miseria framework. Raise the level of benefits paid by Bolsa Familia. | Bolsa Família benefits levels and eligibility thresholds were raised slightly in 2014. Average benefit levels and total expenditures with the program increased around 18% from 2012 to 2014 in real terms.
Strengthen the progressivity of labour taxation by reviewing the rate schedule, exemption thresholds and the cap on social security contributions. | Personal income tax rates have not changed but brackets were adjusted in 2015. This will lead to some “cold progression”, with effective rates on very high incomes rising, but not for lower incomes.

Thematic chapters

Chapter 1.

Raising industrial performance

Brazil’s economic growth will depend increasingly on productivity, as the scope for increasing labour participation has diminished. The industrial sector, where a few key structural reforms could unleash significant unexploited potential, can play a leading role in this respect. Industrial productivity has been low and stagnating, as weak policy settings have been responsible for high costs and incentive structures that have not been conducive to productivity gains. Taxes are high and compliance costs generated by a fragmented system of indirect taxes are a key driver of costs. Infrastructure bottlenecks, due to many years of low infrastructure investment, drive up transport and logistics costs for industrial companies, in particular with respect to industrial exports. Labour costs and difficulties in contract enforcement have also been concerns for industrial firms. Partly as a result of weak competitive pressures and high trade protection, Brazil has not benefited from the productivity gains associated with global trends that have shaped industrial production elsewhere, including a growing fragmentation of the value chain, the rising integration of the economy into international trade and a fluid reallocation of resources across firms. Innovation performance has also been held back by a lack of competition. The costs and benefits of targeted policy interventions for specific sectors are hard to ascertain in the absence of systematic and regular policy evaluations, which would allow a better focus on the more effective policy measures.

Brazil has traditionally had a large industrial sector

Brazil has a sizeable and diversified industrial sector that accounts for almost a quarter of domestic value added (Figure 1.1, Panel A). The origins of Brazil’s industry can be traced back to at least the 1930s. At that time, significant policy efforts to industrialise what was then a primarily agrarian, commodity-based economy were successful in building up higher value-added activities in the country (see Box 1.1 for more details on the origins and development of Brazil’s industry).

Figure 1.1. Brazil’s industry is increasingly diversified

Source: CEIC, IBGE.

StatLink  http://dx.doi.org/10.1787/888933282742

Box 1.1. Brazil’s industrial sector in historical perspective

Although some industrial activities can trace back their origins to even earlier periods, the Great Depression marked a turning point for industrialisation in Brazil. With global terms of trade turning against commodity exporters, Brazil experienced a sharp decline in the capacity to import industrial goods, exacerbated by World War II supply restrictions, which created strong incentives for developing a domestic industry. As a result, domestic industrial production began to grow at yearly rates of more than 10% during much of the 1930s and the industry share of output rose from 17% to 26% between 1930 and 1950 (Baer and Villela, 1973; Pinheiro et al., 2004).

Industry growth was strongly supported by deliberate industrialisation strategies based on trade barriers, currency controls and strong direct interventions into the economy, including through ownership of commercial enterprises, public monopolies, entry restrictions in a number of sectors, directed credit allocation and a plethora of norms, regulations, and incentives aimed at directing private investment and activities (Pinheiro et al., 2004; Fishlow, 2013). Foreign direct investment also played a strong role in the industrialisation process, but was overwhelmingly geared towards the domestic market. From 1930 until the beginning of the 60s, this strategy delivered industrial output growth rates of over 8% per annum, while overall GDP grew at over 6% (Baer and Villela, 1973, Pinheiro et al., 2004).

A few years after the military coup of 1964, a series of structural reforms initiated a period often referred to as “the economic miracle”, when industrial growth reached two digits rates until mid-1970s (Fishlow, 2013). By 1978, industry had risen to 37% of GDP, a higher share than in the United States, and had become highly diversified, including into consumer durables, intermediate and capital goods (World Bank, 1980). Underneath the surface, however, a number of imbalances became increasingly evident and sporadic adjustments had not sufficed to resolve them (Abreu and Verner, 1997). The economy had remained essentially closed, infrastructure was deficient and industry was uncompetitive in international comparison. During the 1980s, Brazil’s industry performed poorly not only vis-à-vis its own past, but also compared with other Latin American countries (Pinheiro et al., 2004). Starting in 1988, trade reforms that cut the average import tariff from 55% down to 13% generated some improvements in the productivity of the manufacturing sector, including through facilitating imports of capital goods (Pinheiro et al., 2004). But in the context of an increasingly integrated world economy, these reforms left Brazil’s industry in an intermediate position where it was somewhat exposed to international competition, but significantly less so than industry in other countries. Against the background of an overvalued real exchange rate, industrial output declined significantly in the mid-1990s.

Besides a strong mining sector, Brazil hosts large manufacturing activities including food, oil refining, automobiles, aircraft, chemicals and metallurgy. Most manufactured consumer goods, intermediate goods and even many investment goods are produced domestically. Over the last years, manufacturing has become more diversified, with several smaller industries recording strong growth rates (Figure 1.1, Panel B).

Since the late 1970s, the role of the industrial sector in the economy has declined significantly. Part of this may be related to a gradual, albeit highly incomplete trade opening, which initiated a natural adjustment in those sectors where decades of industrialisation through import substitution had not raised competitiveness to global levels (Pinheiro et al., 2004). Part of this may also be related to the increasingly blurred boundaries between industry and services, with some activities that were previously recorded as manufacturing now being recorded as services. Still, the services activities that have expanded strongly in Brazil include many low-skilled services that are unlikely to have been performed by manufacturing firms in the past, such as services to households, transport, maintenance and repair or real estate services.

The early decline of industrial activity in Brazil contrasts with developments in many Asian economies, where industrial growth kept on strengthening steadily and where very dynamic industrial activities emerged. Even in Latin America as a whole, the decline of the industrial has been much less pronounced than in Brazil. Today, the share of industry in value added is smaller in Brazil than in many other countries with similar income levels. As a result, the sector structure of Brazil’s economy today bears more resemblance with high-income economies where the industrial sector tends to be smaller than in countries with similar income levels to Brazil, which is considered a middle income country (Figure 1.2). In the same vein, Brazil’s high share of the services sector in value added – above 70% – is more typical for a high-income country than for a country of Brazil’s income level.

Figure 1.2. Brazil’s industrial sector is small for a middle income country

Share of industry in value added in middle income countries, in per cent, 2012

Source: World Bank.

StatLink  http://dx.doi.org/10.1787/888933282758

Industry performance has been weak recently

In several other emerging market economies the industrial sector has been a key driver of aggregate GDP growth, but real industrial output in Brazil has been almost flat over the past years (Figure 1.3, Panel A). In fact, most of the recent economic slowdown can be traced back to the subpar performance of the manufacturing sector (Figure 1.3, Panel B), while both services and agriculture and also other industrial activities including the construction, mining or utility sectors have performed stronger. Over the last decade, annual growth of real value added in the total economy averaged 3.6% per year, while in the industrial sector it was only 2.6%, and 1.3% in manufacturing.

Figure 1.3. Industry growth is lagging behind other countries and sectors

Seasonally adjusted index, Jan. 2004 = 100

Source: IBGE, OECD, Main Economic Indicators.

StatLink  http://dx.doi.org/10.1787/888933282766

The key reason for the poor growth of Brazil’s industry is weak productivity performance. This is particularly the case in the manufacturing sector, where labour productivity has been low and stagnant over the last decade, even as other countries have seen significant gains (Figure 1.4). Alternative estimates of labour productivity by Barbosa Filho (2014) suggest that labour productivity growth was slightly higher at around 1.8% per annum over the period 2002 to 2012 when accounting for the trend decline in hours worked. However, such estimates are not available systematically for many countries. Nonetheless, even with these hour-adjusted labour productivity figures Brazil would still remain in the bottom quarter of the countries of the Figure. The hour-adjusted estimates also confirm that labour productivity growth has slowed down significantly in the most recent period 2010-13.

Figure 1.4. Manufacturing productivity is low and stagnant

Labour productivity in thousands of constant 2005 USD per employee

Source: World Bank, ILO, IBGE.

StatLink  http://dx.doi.org/10.1787/888933282777

Brazil has made significant policy efforts to support its industrial sector. The 2011 Greater Brazil Plan (Plano Brasil Maior) set out a number of policy objectives for strengthening the industrial sector, but their achievement has been incomplete, particularly with respect to key objectives such as raising the investment rate and quantitative objectives for export growth and R&D. Policy measures have focused on remedial actions that were relatively easy to implement, such as tax breaks and increasing support payments including subsidised credit. Overall, public expenditures on direct or indirect subsidies to companies have amounted to over BRL 320 billion in 2014.

Despite these efforts, the industrial sector continues to stagnate in terms of output and productivity. This suggests that the time has now come to review policies supporting the industrial sector, and most importantly, to address the longstanding structural issues that are holding back Brazil’s industry, including taxes, trade protection and infrastructure.

Why industrial development can be a policy concern

As countries grow richer, the structure of their economies tends to shift from industry towards services. On the demand side, this is typically related to changing demand patterns as households spend a larger share of their incomes on non-tradable services as their incomes rise. On the supply side, higher productivity growth in many industrial sectors has resulted in decreasing employment shares (Pilat et al., 2006). Moreover, many economies have seen the emergence of skill-intensive services sectors, reflecting rising human capital, while industrial activities that are intensive in low-paid labour have often relocated to other countries. In many cases, it has been the newly emerging, high-skilled service activities that are co-ordinating lower-skilled manufacturing activities in other countries, which has made the boundaries between manufacturing and services more blurred.

Many countries of different levels of income nonetheless attach particular importance to maintaining a strong industrial base (De Backer et al., 2015; Fontagné et al., 2014). This may be due to the high potential for productivity improvements in the industrial sector, which often exceed productivity gains in services where automation can be more difficult. In many OECD countries, the manufacturing sector continues to make a significant contribution to aggregate productivity performance, even though its share in total value added and employment has become smaller (Pilat et al., 2006; De Backer et al., 2015). Moreover, manufacturing jobs are often considered high-quality jobs and the strong concentration of research and development activities in manufacturing may provide jobs for the highly qualified in the vicinity of industrial activities. More generally, industrial activities are considered to have strong linkages with other parts of the economy and foster employment growth in other sectors. Finally, the tradable nature of industrial goods is often associated with a beneficial effect for the current account.

In Brazil, it is less clear to what extent the declining weight of Brazil’s industry mirrors the move into high value-added services that some OECD countries have experienced. Service activities that have expanded strongly in Brazil as industry contracted include many low-skilled services such as services to households, transport, maintenance and repair or real estate services. Instead, some have argued that weak policy settings have been holding back the industrial sector, and that structural reforms could unleash much of the sector’s potential.

Policies to improve the performance of the industrial sector

The descriptive evidence presented in the previous section suggests that there is significant scope for productivity improvements in Brazil’s industry. Policy reforms have an important role to play in this context, as several challenges of Brazil’s industry have their roots in weak policy settings. Some of the underlying issues like high production costs in international comparison do not affect the industrial sector exclusively, but industry is a part of the economy where the effects are very strongly felt, as even with only a partial exposure to international trade, industrial companies have less room for passing on high costs to consumers. Besides costs, policies also affect incentives. Weak competitive forces, for example, reduce the incentives for the elimination of slack in production or for innovation. Finally, targeted policies have also played a role in Brazil’s policy mix. The following sections will make some concrete recommendations and suggest how structural policy reforms could support the performance of Brazil’s industry, with respect to lowering costs, improving incentives and the role of targeted policies.

Reducing high costs

Brazil’s high cost of production has become widely known under the term “Brazil cost”. This has often been related to taxes, infrastructure bottlenecks, labour costs and complicated regulatory procedures. Costs beyond the influence of firms make it harder for them to compete. One channel through which high costs in Brazil’s industry reduce productivity is that they reduce returns to investment, and hence slow down the accumulation of capital. Data on fixed capital accumulation are not available for the industrial sector separately, but a comparison of aggregate investment rates across countries illustrates Brazil’s generally low levels of investment (Figure 1.5, Panel A). In international comparison, investment rates are higher not only in Asia, but also in Latin America where typical investment rates range between 22% and 25% of GDP, compared to less than 20% of GDP in Brazil in 2014.

An analysis of balance-sheet data reveals that the decline in investment in Brazil’s major manufacturing firms between 2010 and 2014 coincided with falling corporate incomes and hence returns on investment (Figure 1.5). Lower incomes may reduce expected profits and also sources of funding, as retained profits account for over 40% of investment funding for Brazilian companies, reflecting the difficulties that companies face in credit and capital markets. Given that prices of industrial goods, both domestically produced and imported, did not decline, rising costs must be at the origin of the narrowing income margins in manufacturing. This is particularly the case for labour costs (see below).

Figure 1.5. Investment is low in international comparison

Investment in per cent of GDP, 2010-2013

Source: World Bank (2011c), CEMEC (2015), Rocca and Modesto Santos (2015).

StatLink  http://dx.doi.org/10.1787/888933282781

Reforming Brazil’s onerous indirect tax system

Brazil’s tax system is a major cost for industrial companies, both because of the level of taxes and compliance costs. Although the general tax level of 35% of GDP is already high in international comparison, industry is taxed more heavily than other sectors, with estimates suggesting taxes on industrial companies amount to 45% of industrial GDP (FIRJAN, 2014). Estimates by the consultancy company Ernest and Young suggest that the tax system affects investment incentives in the industrial sector much stronger than in other emerging market economies, putting Brazil at a considerable disadvantage (CNI, 2014a). For example, a large investment in a new steel plant would face a more than three times higher tax burden in Brazil than in Australia or Mexico, and around 15 times higher than in the United Kingdom (CNI, 2014a).

When measuring the time requirement to comply with taxes for a benchmark manufacturing company in 183 jurisdictions across the world, the World Bank finds that Brazil comes out a distant last, with 2 600 hours required, as opposed to 356 in the average Latin American country or 184 in the average OECD country (Figure 1.6). Tax departments of companies are consequently huge in international comparison, adding substantially to fixed costs. Some estimates suggest that for the whole economy, tax compliance costs alone amount to 0.43% of GDP (Appy, 2013), while other estimates have calculated that tax compliance costs for industrial companies are 2.6% of consumer prices (Coelho, 2015).

Figure 1.6. Hours required to prepare taxes

For a benchmark manufacturing company, 2014

Source: World Bank (2015). Doing Business 2015 data.

StatLink  http://dx.doi.org/10.1787/888933282626

In the current context of fiscal consolidation, the most realistic way to provide a significant tax relief to industrial companies will be by making the tax system more efficient and easier to comply with. Scope for simplification exists primarily in the area of indirect taxation. Brazil has 6 different kinds of indirect taxes, which generate more than half of public revenues. The industrial sector stands to gain particularly from a comprehensive indirect tax reform, as it is heavily affected by indirect taxes. At present, about a third of indirect tax revenues comes from manufacturing firms, which account for only 13% of value added, according to industry estimates (Coelho, 2015).

The largest indirect tax, raising revenues of around 8% of GDP, is the ICMS, which is levied by Brazil’s states, with each state applying its own tax code, tax base and tax rates. The ICMS applies a mixture of the origin and destination principles to interstate commerce and companies wishing to offer goods and services nationwide are required to comply with each state’s individual tax rules. Like other indirect taxes in Brazil, the ICMS is somewhere in between a sales tax and a value-added tax, since refunds for input VAT paid are only granted for part of firms’ inputs. Credits for interstate transactions are regularly delayed or refused, and the average delay for a reimbursement on investment expenditures, for example, is 46 months (CNI, 2014a). This is one element of the high compliance costs.

Another reason why compliance costs are high relates to the imprecise definition of tax credits for inputs, which gives rise to litigation. Credits for intermediate inputs follow the so-called “physical credit” principle, by which tax credits are granted only for inputs embodied in the final good sold. This rules out tax credits for overhead expenses, and therefore breaks the usual “neutrality” of a well-designed VAT. The “physical credit” principle drives up compliance costs as companies need to prove that every input for which they want to claim a credit goes directly into the final product. A practical example is that industrial companies often hire tax accountants to identify how the electricity used by the company is divided between the part that powers the machines and the part that lights the companies’ offices, with the former being deductible and the latter not. Lawsuits over disputes are common and use up resources that could be employed more productively. The ICMS tax base is narrowed by the exclusion of many services, which are instead subject to a municipal service tax called ISS, which does not allow any credit for inputs, making it effectively a sales tax and not a VAT.

For several years now, the central government has discussed plans to harmonise the state-level ICMS. The challenge, however, is to find a political consensus among the states, some of which are threatened by revenue shortfalls in the case of a reform. In light of the political difficulties involved, the strategy has shifted towards a gradual approach. So far, progress has been made in the unification of ICMS rates for imports. This has ended an unproductive tax competition among states to attract import shipments, which were taxed according to the port of arrival into the country.

Another large indirect tax is a set of federal “contributions”, including those known as PIS/Pasep, and Cofins. Together these contributions account for 7.5% of GDP in revenues. Tax credits for intermediate inputs are also subject to the “physical credit” principle, as in the case of the ICMS. In addition, PIS/Cofins is often applied on the value of a good including ICMS tax already paid on it, thus making the two taxes cumulative.

A special sales tax called IPI is levied on certain industrial products. The IPI has been used for temporarily protecting Brazilian producers in specific sectors, for example the automobile sector, against international competition since 2011 by charging differential rates according to the share of local content. Finally, another special tax called CIDE has been levied on select goods and services, most notably on fuels, imports of services and financial transactions including remittances abroad. CIDE contributes to the very high taxation of imported services, for which effective tax rates range between 40% and 50%. This contrasts with the lower tax burden on domestically produced services relative to goods and cuts Brazilians producers off from potentially productivity-enhancing inputs.

Compliance costs and the efficiency of the tax system could be greatly improved by consolidating indirect taxes. One possible starting point would be for the federal government to lead the way by consolidating its indirect taxes into a single value added tax with a broad base and the same rate applied across sectors, while ensuring full deductibility of inputs so that only the value added at each stage of production is taxed.

Once federal indirect taxes have been consolidated, it may be easier to integrate the state-level ICMS and the services tax ISS into this system, possibly as a state-specific surcharge on the same tax base. In principle, it is possible to accommodate the desire for different states to tax at different rates, once taxation strictly follows the destination principle and tax credits are refunded swiftly for interstate transactions. Such a system is applied in the European Union, for example, where different member states apply different tax rates but consumers are normally subject to VAT in the country of residence. Even though fiscal space is very limited at present, the potential benefits that Brazil’s industry could reap from an indirect tax reform could justify temporarily compensating states that suffer revenue losses from a move towards the destination principle, if that is necessary to reach a consensus.

The central government tried to use reductions in states’ debts with the central government as a negotiation tool for getting states to agree to an ICMS reform in the past, but this has not led to finding an agreement. An opportunity for reopening discussions on this issue may now emerge as states will have to review their policies of granting ICMS tax exemptions to large investors, following a Supreme Court decision that these agreements violate the constitution, and even agreements made with investors in the past will have to be revisited. This will have implications for some states’ ICMS revenues, and could be an opportunity to reach a consensus on a wider tax reform.

Reducing infrastructure bottlenecks in roads, railroads, ports and airports

Brazilian industry is suffering from high costs of transport and logistics. For domestically oriented producers, this reduces the possibilities to exploit economies of scale, while exporters are put at a comparative disadvantage. Evidence about bottlenecks still abounds in many infrastructure areas. Three decades of neglect of infrastructure investment have left a strong mark, and compared to its significant needs in the area of infrastructure, Brazil still invests too little. Recent official estimates put total infrastructure investments at 4.5% of GDP, which is still less than Chile, whose infrastructure stock is much better (Frischtak, 2013).

For example, measures of infrastructure quality elaborated by the World Economic Forum suggest that Brazil’s 15 largest trading partners score on average twice as high as Brazil with respect to the quality of roads, railways and ports (Figure 1.7). They also have an almost 5 times higher road density and more than 10 times more rail tracks per square km, although such comparisons may be difficult due to differences in geography.

Figure 1.7. Brazil's infrastructure relative to its major trading partners

Normalised to 1 for the value of Brazil

Source: World Economic Forum, World Bank, FIESP.

StatLink  http://dx.doi.org/10.1787/888933282794

Low levels of public investment are the key explanation behind this pattern. Political pressures to spend on current expenditures have systematically crowded out general government investment, and fiscal consolidation episodes have traditionally been implemented to the detriment of public investment, over which the executive branch has more discretion. The current fiscal consolidation plans are no exception to this long-standing pattern. Against this background, private participation in infrastructure through concessions has been a successful way to complement public works. Although not all infrastructure needs are amenable to private concessions, the improvements in road, rail, port and airport infrastructure that are most relevant for industrial companies can be well-served by private providers under concessions. Concessions have been making steady progress under the two editions of the Accelerated Growth Pact (PAC), and particularly since 2013 with the resumption of the Logistics Investment Programme PIL, a second stage of which was been launched in 2015. This new stage contains planned investments of BRL 70 billion to be invested by 2018, and another BRL 130 billion in subsequent years.

In the roads sector, concessions have been auctioned for 4 400 road kilometres and another 7000 road kilometres are to be auctioned in 2015 and 2016. Airport concessions have also made progress. In 2012 and 2013, 5 airports accounting for around 45% of air passenger traffic have been auctioned as private concessions, and another 4 concessions are planned. Railways and ports have seen less progress than roads and airports, in particular with respect to the participation of private capital. New regulatory frameworks have been set up in both sectors, allowing for more private participation and competition, and progress is likely to accelerate under the new stage of the PIL, with BRL 86 billion of new investments planned in railways and BRL 37 billion in ports. More than 150 port terminals have been designated for private operation, and after a series of legal disputes involving the Supreme Court of Auditors precluded the conclusion of the tenders in 2014, they are now planned for 2015. The new law is likely to put an end to frequent regulatory changes and provide a more stable legal environment that may favour private investment.

One area of logistics that has not received much attention is cabotage, i.e. the shipment of goods by sea between domestic ports. Cabotage shipments require the same documentation as an international ones, which currently amount to 44 different documents. These complicated regulatory procedures could be streamlined to reduce the cost of this mode of transport. Given that the bulk of Brazil’s population lives close to the coast and that distances are large, cabotage could be a cost-efficient means of transporting industrial goods. Currently, it is overwhelmingly used for shipping mineral oils and metal ores, especially to servicing off-shore oil platforms. Improving port infrastructure would also be crucial for cabotage, together with reduced administrative burdens.

The concession scheme has overall been a good choice and delivered adequate results in several infrastructure areas. Current bottlenecks tend to be concentrated in technical skills of the public institutions involved in infrastructure projects, at different levels of government. In many cases, insufficient planning has resulted in significant regulatory uncertainty, cost overruns and delays. Tenders for public works and concessions should be better prepared and tender calls should include more details on physical, legal, environmental and judicial details regarding infrastructure projects, so as to make costs more predictable. This would imply dedicating more time and resources to the planning phase, which has often been cut short against the perception of urgency in delivering progress.

In many advanced economies, the planning phase of infrastructure projects account for almost half of the total time, while in Brazil project planning is often being conducted in parallel with the actual beginning of the works. Renegotiations after a concession tender also reduce the scope for obtaining value for money through the auction process. Additional ways to reduce regulatory uncertainty include strengthening the independence and capacity of regulatory agencies, and reconsidering strict rules that force the public sector to rely on the cheapest available consulting firm for the preparation of the tender packages, as these rules do not balance quality against price. Regulatory risk should be eliminated by designing reliable rules and sticking to them, rather than compensating companies financially for the regulatory risk, as has happened in the past.

Cost reductions in the implementation of infrastructure projects could also be achieved by strengthening the competition in the construction sector, which is dominated by five large domestic companies. Recent revelations in the context of the Petrobras scandal have included evidence of corruption and collusion related to Petrobras contracts. Many of the domestic companies involved in this scandal are also carrying out the lion’s share of Brazil’s infrastructure concessions, although recent changes in the concession framework can strengthen competition by allowing greater scope for foreign participation in public tenders. In fact, the financial difficulties that some domestic construction companies are currently facing as a result of the Petrobras corruption scandal may even render greater foreign participation necessary in order to avoid excessive delays in the completion of infrastructure projects.

Reining in labour costs

A combination of low productivity growth and rising wages has led to a deterioration of cost competitiveness for manufactured products over the past decade. In domestic currency, unit labour costs in manufacturing have increased significantly faster than import prices. However, unit labour costs in dollars, relative to Brazil’s trading partners, have come down as of 2012, reducing a large differential that had built up since 2004 (Figure 1.8). The recent depreciation of the real has accelerated this process as of 2014. Still, other countries that had similar levels of hourly labour costs to Brazil in 2004 have experienced less pronounced losses of competitiveness than Brazil over the past decade.

Figure 1.8. Manufacturing competitiveness has declined

1. Jan 2004 = 100, 3-months moving averages.

2. Unit labour costs relative to those of trading partners, weighted by trade flows.

Source: Funcex, BEA, Conference board.

StatLink  http://dx.doi.org/10.1787/888933282804

Recently, wage pressures have been strong in the context of a tight labour market, and wage increases have exceeded productivity growth. One possible driver of wage pressures may have been Brazil’s federal minimum wage, which has increased by 80% in real terms over the past decade, and which is considered a reference point for higher wages as well. Minimum wages are subject to an automatic indexing rule based on the previous year’s inflation and GDP growth two years back. As growth recovers, the current rule would once again lead to significant wage pressures from the federal minimum wage, and industrial competitiveness would be strengthened by reconsidering the current rule.

The labour costs of industrial companies are also driven up by strict labour market regulations that dictate very detailed aspects of labour relationships and that have been designed decades ago. Given how outdated many of these rules are, there is often a strong consensus between workers and employers to disregard some of these rules in collective agreements, such as those governing the fractioning of annual leave or the duration of the lunch break. Since such agreements can be challenged in courts, there are significant costs related to legal uncertainty for employers. Firm-level evidence from Brazil exploiting regional differences in the enforcement of labour regulations, suggests a link between both labour cost increases and labour regulations on the one hand, and productivity on the other (Arnold and Flach, 2015). The analysis shows that firms in sectors where labour turnover is stronger are particularly affected by stringent enforcement of labour laws, resulting in lower productivity levels.

Improving skills of the workforce

An important factor behind the low productivity levels of Brazil’s industry is the low qualification level of the labour force. Empirical analysis confirms a strong role for educational achievements in enhancing productivity (Arnold and Flach, 2015). Skill shortages affect particularly the industrial sector, with 65% of industrial companies finding hiring high-skilled workers an obstacle to their productivity and growth (CNI, 2013).

According to company surveys, the most pressing skill shortages faced by industrial companies concern technical workers. Up to 90% of them had problems finding operators and technicians for the production line (CNI, 2013). Participation in technical and vocational education programmes is low. The share of students both at the secondary and tertiary levels enrolled in professional and technical degrees in Brazil is low in international comparison (Figure 1.9). Wage premiums of up to 20% for secondary level graduates with technical training over those without reflect Brazil’s dearth of technical skills (CNI, 2013). Brazil is addressing this issue by creating additional vocational training opportunities under the umbrella of the Pronatec programme. While this is a step into the right direction, there have been repeated delays in the ambitious expansion plans.

Figure 1.9. The share of students enrolled in professional and technical degrees is low

Note: Technical/vocational enrolment in secondary education (ISCED 2 and 3) as % of total secondary enrolment (ISCED 2 and 3) is the percentage of all lower and upper secondary students enrolled in technical/vocational education programs including teacher training, expressed as a percentage of the total number of students who are enrolled in lower and upper secondary education. Enrolment in technical tertiary education is the enrolment at ISCED level 5B programmes as a percentage of total enrolment in tertiary education. The content of tertiary ISCED level 5B programmes is practically oriented/occupationally specific and is mainly designed for participants to acquire the practical skills needed for employment in a particular occupation or trade or class of occupations or trades – the successful completion of which usually provides the participants with a labor-market relevant qualification.

Source: UNESCO Institute for Statistics. Data for 2012.

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Beyond the scarcity of technical training, the quality of basic education remains a concern. The ability to adapt to different economic and technological settings and to benefit from in-job training opportunities hinges on a good basic education. Half of the industrial companies reporting difficulties with the implementation of in-company training point to the poor quality of basic education and skills of the employees as the major hurdle (CNI, 2013; 2014b).

Brazil’s education system has expanded massively, leading to significant improvements in access to education, particularly for people from less privileged backgrounds. At the same time, however, the quality of education has not followed suit, and remains an important challenge for the education system. Regular school assessments are slowly showing improvements, but Brazilian schools still have a long way to go. The experiences of some of Brazil’s states show that progress is possible with well-designed policies and good governance. Educational outcomes have improved in the relatively poor north-eastern state of Ceará, for example, based on an effective mix of increasing resources and introducing incentive mechanisms (OECD, 2011, Boekle-Giuffrida, 2012). Practices included an early extension of compulsory schooling to nine years, production and distribution of structured course materials to all schools and performance-based pay for teachers and principals. The state of Ceará has even tied the distribution of indirect tax revenues across municipalities to educational outcomes, which created competition of municipalities for improving their schools. In all cases, incentive-based measures were coupled with periodic evaluations based on student test scores. It is likely that many of these local experiences could be successfully expanded nationwide.

Higher skill levels are also scarce in Brazil. For example, 61% of industrial companies express severe difficulties in hiring engineers. Currently, only 10% of the population have a post-secondary degree, compared to 15% in Mexico, 25% in Chile or 30% in the average OECD country. This explains why the industrial sector faces a shortage of higher skilled workers, even though the share of tertiary students enrolled in engineering and manufacturing-related disciplines is similar to European countries. In the engineering, medicine, mathematics, physics, chemistry, economics and social sciences sectors, exceptionally strong salary growth reflected strong labour demand (Menezes Filho, 2012).

Improving contract enforcement and the efficiency of the judicial system

The costs of doing business in Brazil are also pushed up by the difficulties to enforce contracts through the judicial system. Industrial companies regularly rely on the court system to enforce contracts or settle disputes. Lengthy and cumbersome procedures of dealing with courts can substantially add to firms’ costs and reduce their productivity. Enforcing a standard debt contract takes 731 days in Brazil, compared to 230 in Korea, 338 in Mexico, 426 in Peru or 480 in Chile (Figure 1.10). Empirical evidence suggests that higher enforcement costs hamper firm productivity, and this effect becomes particularly pronounced when focusing young firms that have been in business for less than 5 years (Arnold and Flach, 2015). Strengthening contract enforcement through the court system or other forms of arbitration and ensuring sufficiently quick decisions to make contract enforcement easier would improve productivity.

Figure 1.10. The court system is slow to resolve commercial disputes

Time required to enforce a contract (in days)

Source: World Bank (2015), Doing Business 2015 data.

StatLink  http://dx.doi.org/10.1787/888933282821

Strengthening competition and improving the incentives for stronger productivity growth

Policy reforms could not only reduce costs but also improve the incentives for industrial companies to improve their productivity, particularly by strengthening competition. Competition is the driving force behind industry dynamics, as competition allows high performing firms to grow at the expense of weaker ones and will induce inefficient producers to exit the market, freeing up resources for more productive firms. Competition also creates incentives to improve efficiency, reach global best practice and innovate. Finally, competition disciplines management, as poorly managed firms may be driven out of the market by better-managed competitors.

Evidence of low levels of competition in Brazilian industry

More than half of Brazil’s industrial sectors are concentrated or highly concentrated, according to a criterion set up by the US Federal Trade Commission. Applying the same definition of concentration to Brazil, India, China, Germany and the United States, Brazil’s and India’s manufacturing industries stand out with a significantly larger share of highly concentrated sectors and a significantly lower share of unconcentrated sectors than the other countries (Figure 1.11). High concentration ratios are often indicative of low competitive pressures, although competitive pressures may also come from potential new entrants, if it is easily possible for new firms to enter and gain market shares.

Figure 1.11. Many industries are highly concentrated

Classification of manufacturing sectors¹ by degree of concentration

1. Brazil: 289 sectors in 2005; China: 526 sectors in 2002; Germany: 213 sectors in 2001; India: 393 sectors in 2002; United States: 453 sectors in 2002.

Source: Dougherty, S.M, R. Herd and T. Chalaux (2009), “What is Holding Back Productivity Growth in India? Recent Microevidence”, OECD Journal: Economic Studies, Rocha, F. (2010), “Dinâmica da concentração de mercado na indústria Brasileira, 1996-2003”, Econ. soc., Dez. 2010, Vol. 19, No. 3, p. 477-498 and IBGE – Pesquisa Industrial Anual.

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However, start-up rates in Brazil’s manufacturing sector are low in international comparison, and the incidence of new firm entry has been on a constant decline over the last 15 years (Calvino et al., 2015). This reflects a significant unexploited potential for the overall productivity growth of Brazilian manufacturing. Aggregate productivity developments in an industry reflect not only what happens within existing firms, but also the reallocation of resources across firms with different productivity levels. In fact, these reallocations can often account for a larger share of aggregate productivity growth in manufacturing than developments within individual firms (Bartelsman et al., 2008; Foster et al., 2001; Olley and Pakes, 1996). In Brazil’s manufacturing sector, as in other countries, some of those few firms that manage to enter the market tend to have particularly strong productivity and employment growth (Calvino et al., 2015). More generally, those Brazilian manufacturing firms with strong productivity growth are on average significantly younger and smaller than others (De Negri and Ferreira, 2015, Criscuolo et al., 2014).

In Brazil’s manufacturing sector, reallocation mechanisms, including the entry-exit mechanism, have significant potential for improvement, which may be another indication of low competitive pressures (Andrews and Cingano, 2014). A quantitative measure of how much the allocation of resources across firms contributes to aggregate productivity is the decomposition suggested by Olley and Pakes (1996). In this decomposition, the covariance term measures allocative efficiency, or the extent to which firms with greater efficiency have a greater market share. A comparison with a number of European economies for which a similar analysis has been undertaken suggests that allocative efficiency is low in Brazil (Figure 1.12, Panel A). Over time, the allocative efficiency in Brazilian manufacturing has declined towards zero in the second half of the 2000s (Figure 1.12, Panel B).

Figure 1.12. Allocative efficiency in manufacturing is low and has declined

Covariance term from an Olley and Pakes decomposition¹

1. The decomposition is based on labour productivity. Panel B is depicted as 3-year moving averages. Data cover 1998-2009, depending on the country.

Source: OECD calculations based on Arnold, Nicoletti and Scarpetta (2008), Gomes and Ribeiro (2015).

How to read this figure: In a given year, the aggregate level of productivity in the industrial sector can be decomposed as the sum of the simple average of firm-level productivity plus a covariance term that reflects allocative efficiency, or the extent to which firms with greater efficiency have a greater market share. If there were no systematic relationship between productivity and the size of firms, the covariance term would be zero, and the higher it is, the larger is the market share held by more productive firms.

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Another approach to looking at resource reallocation in a more dynamic manner is to relate the initial productivity levels of firms, relative to their peers in the same industry, to their growth over 5 years to come. Figure 1.13 divides firms within industrial sectors into quartiles of the productivity distribution, with firms in higher quartiles being more productive. For example, the top quartile represents the 25% most productive firms in each industry. If more productive firms can attract more resources and grow at the expense of others, as should be the case when markets perform well, then one would expect stronger growth for higher quartiles of the productivity distribution. This is the case in the United Kingdom and to a somewhat lesser degree also for France and Italy. In Brazil, however, there is no evidence that more productive firms grow faster than others. Instead, low-productivity firms manage to attract the largest amount of resources and grow fastest.

Figure 1.13. The link between productivity and employment growth based within manufacturing sectors

Source: Arnold, Nicoletti and Scarpetta (2008) for France, Italy, Spain and the UK. For Brazil, the analysis has been reproduced using the same methodology.

How to read this chart: The bars represent quartiles of firms within an industry ordered by productivity levels relative to the industry average. The height of the bars measures annual employment growth, relative to the average of the country and sector. A bar higher than 0 means that employment growth in a set of firms was above average. Data cover 1998-2009, depending on the country.

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The persistence and continuous growth of low-productivity firms is also confirmed by internationally comparable surveys of management quality, which suggest that Brazil’s manufacturing sector hosts a significant fraction of firms whose quality of management lags behind practices in other countries (Bloom et al., 2014). In particular, the distribution of management quality across firms is characterised by a fat left tail of firms that are very poorly managed (Figure 1.14). Empirical research suggests that many of these would probably have been driven out of the market if competitive pressures were stronger (Bloom et al., 2014). The quality of management plays a crucial role for productivity, as better-managed firms can avoid losing time on non-productive tasks and employ more efficient production technologies or better intermediate inputs (Andrews and Westmore, 2015). Exploiting the potential to optimise the organisation of the value chain, including across companies and countries, is also related to the quality of management.

Figure 1.14. Distribution of management quality in Brazil vs. the United States¹

1. Estimated density. The management quality scores are constructed in a consistent manner on the basis of manager surveys from over 11 300 manufacturing firms across 34 countries.

Source: Bloom et al. (2014).

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Opening up to international trade

One way of exposing Brazilian industrial companies to greater competition would be through a significant trade liberalisation. Brazil’s industrial sector remains substantially more shielded from international competition than that of many other countries, not only in Asia but also in Latin America (Figure 1.15). With an average tariff for manufacturing imports of above 10%, tariff protection is more than twice as high as in Colombia, and more than six times higher than in the United States, and Brazil’s tariffs have been rising since 2008. A tariff exemption scheme for capital goods is in place, but it is applicable only if no equivalent domestic product exists, and Brazil has a sizeable capital goods industry.

Figure 1.15. Applied tariff rates in international comparison

Weighted average, trade in manufactured goods

Source: World Integrated Trade Solution Database (WITS).

StatLink  http://dx.doi.org/10.1787/888933282643

In addition to border tariffs, other policy measures also have the effect of shielding domestic industry from foreign competition, including local content restrictions in public procurement, in the oil sector and in capital good purchases that receive financing from the public development bank BNDES. Over the last three years, Brazil has also relied on sector-specific exemptions from indirect taxes that were limited to domestically produced manufactured goods, for example in the automobile and electronics sectors.

History holds many examples of the strong impact that competitive pressures from imports can have on productivity. For example, when Great Lakes iron ore producers in the United States started facing import competition from foreign producers, they initiated cost-cutting measures that resulted in a 50% increase in labour productivity within the first two years, and a doubling over five years (Schmitz, 2005). Again in the United States, the liberalisation of the telecommunications equipment industry between 1974 and 1987 substantially strengthened competition among producers and led to sharp increases in productivity (Olley and Pakes, 1996). Much of these gains came from the downsizing and exit of less productive plants, while more productive plants, many of which were new entrants, experienced above average growth. Rising Chinese import penetration led to increases in research and development and productivity gains in many OECD economies, including by reallocating employment between firms towards more innovative and technologically advanced firms (Bloom et al., 2011). Overall, the evidence suggests that the productivity benefits from stronger competition are sizeable and can materialise rapidly.

Brazil’s remaining trade protection has created an industry that is significantly less integrated into the global economy than the industrial sectors of many other countries. Brazil’s total export and imports account for only about a quarter of GDP, less than half the average of Argentina, Chile, Colombia, Mexico, Peru and Venezuela. Even when accounting for the size of Brazil’s domestic market and its geographical situation, or in comparison to other BRICS countries, this is low (Figure 1.16, Panel A). Globally, intermediate inputs have come to represent a large share of world trade flows as part of the emergence of global value chains. While many countries nowadays use significant amounts of imported goods to produce exports, almost 90% of the value added of Brazil’s exports is domestically produced (Figure 1.16, Panel B). Brazil’s motor vehicle and auto parts industry, for example, has had a strong emphasis on local content, and the third-lowest foreign value added content in gross exports among the 62 countries in the OECD-WTO Trade in Value Added database. It is currently facing severe challenges, while its aircraft industry has been very successful on the basis of using imported parts (Box 1.2).

Figure 1.16. International trade and integration into global value chains are low

Source: World Bank, OECD-WTO Trade in Value Added (TiVA) – May 2013.

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Box 1.2. A tale of two industries – automobiles and aerospace

Brazil is the world’s seventh largest automobile producer, and the industry is heavily protected from foreign competition. As a result, Brazil’s car manufacturers are excessively focused on the domestic market. Only 15% of the production is exported, many of which to equally protected Argentina where Brazilian producers enjoy tariff preferences, and Brazil ranks only 21st in automotive exports. While many foreign producers have set up production plants in Brazil in light of the country’s rising middle class and the resulting domestic market prospects, most of them have not integrated their Brazilian plants into global value chains. Productivity has fallen sharply behind Mexican car manufacturers, who are fully integrated into global production chains and have achieved remarkable gains in global market share. For example, Mexican plants produce 53 cars per worker and year, as opposed to 27 in Brazil, although the cars produced in Mexico are on average smaller models.

A very different story can be told about Brazil’s aircraft industry. Given that production volumes of airplanes are much smaller than for automobiles, economies of scale mandate that firms in this industry naturally focus on the global market. Embraer, originally created in 1969 as a state-owned company, was privatized in 1994 and has become one of the top global players in the industry since. Its initial strategy was largely based on buying almost all components internationally for a final assembly in Brazil, although over time it has started to produce parts itself. As a result of its roots, Embraer has always been strongly integrated into global production chains, and imports still account for 70% of its value added.

Current policies create disincentives for using imported intermediate inputs or capital goods, both of which can be crucial for productivity growth (Grossman and Helpman, 1991; Amiti and Konings, 2007). The taxation of imported producer services under the CIDE tax, with effective tax rates between 40% and 50%, makes this particularly pronounced for inputs from producer services. Difficulties in obtaining tax credits for intermediate inputs in indirect taxes, such as the “physical credit” system, distort incentives towards excessive vertical integration of firms, and also stand in the way of stronger trade in intermediate inputs.

Despite higher trade protection than in other countries, import competition has still left a strong mark on the industrial sector. Rising import competition and a general decline in competitiveness have been associated with a gradual structural shift of the economy from industry to non-tradable services. In contrast to services sectors where price increases have been outpacing overall headline inflation, industry could not pass on the rising costs of doing business in Brazil to consumers due to competition from imports. In a nutshell, at present Brazil is sufficiently open for the industrial sector to suffer from declining competitiveness, but not open enough to reap the full benefits of trade. In this regard, Brazil’s current intermediate choice of having substantially higher tariffs than its foreign competitors while still exposing its industrial sector to some amount of foreign competition has been a particularly unfavourable combination. In a number of countries some degree of trade protection has initially supported the development of the industrial sector (World Bank, 1993, Amsden, 1989). But countries that have managed to move from being a middle-income country to a high-income country on the basis of the industrial sector (Korea, Taiwan, Israel, Hong Kong, Singapore) have invariably done so by eventually integrating fully into the world economy. Where trade protection has been supportive of industrial development, it has been used to trigger learning effects, which required a clear understanding that protection would be temporary, for example in the case of Korea (Amsden, 1989). Temporary protection with a clear time line for fading it out encourages firms to upgrade their technologies or fall victim to foreign competition once protection is removed. By contrast, protection and specific support measures in Brazil have largely been used to preserve the status quo, including the current set of companies.

Trade protection is also keeping Brazil’s industry from reaping its full export potential. Industrial exports have lost weight in Brazil’s export mix and Brazil has lost world market shares in several industrial sector including petroleum products, footwear, motor vehicles and machinery (Figure 1.17). While manufactured products accounted for 61% of exports in 1993, this share had dropped to 55% in 2003 and to 40% in 2013. Still, Brazil has managed to improve its market share in a number of industrial sectors over the last decade, including aircraft (part of “other transport equipment”), chemicals and metal products.

Figure 1.17. Change in Brazil’s export market share

In per cent, 2003-13¹

1. Industry sectors based on ISIC Rev. 3 classification. Only sectors that account for more than 1% of Brazil’s exports are shown.

Source: OECD (2014), International Trade by Commodity Statistics (ITCS database), July.

StatLink  http://dx.doi.org/10.1787/888933282883

While a major trade liberalisation involves trade-offs, model simulations suggest that Brazil stands to gain considerably from opening up to international trade and that much of the benefits would accrue to low-income households. Simulations on the basis of the OECD Metro general equilibrium model suggest that reducing tariffs to the lower range of tariffs practised in OECD countries, for example, would boost exports by 12% (Araújo and Flaig, 2015). These gains would be mostly concentrated in manufacturing sectors, including motor vehicles and parts, transport equipment and electronic equipment. Employment would rise by 1 million or 1.1%, and most of these new jobs would be for unskilled workers. Other model results find that trade liberalisation in Brazil would raise the returns to unskilled labour relative to capital and disproportionately help the poor (Harrison et al., 2014).

The export performance of Brazil’s industry is particularly affected by tariffs on intermediate inputs. Information on intra- and intersectoral input-output linkages of Brazilian industry by can be used to illustrate the large potential of reductions in import tariffs for raising Brazilian industrial exports (Johansson and Olaberria, 2014). For instance, estimates suggest that a reduction of tariffs on electronics, a sector that relies heavily on imported inputs from the same industry, to the median level in the sample of countries included in the analysis (equivalent to a reduction by approximately 7.5 percentage points) would increase Brazil’s electronics exports by 26% (Figure 1.18). Similarly, reducing import tariffs on textiles is expected to raise exports of clothing by over 20% because the clothing industry sources intensively from the textiles sector. Other illustrative examples from this research are presented in Figure 1.18.

Figure 1.18. Estimated effects of tariff reductions on exports

In per cent of 2010 export volumes

Source: Johannsson and Olaberria (2014).

StatLink  http://dx.doi.org/10.1787/888933282898

Given the strong potential of trade liberalisation for raising the productivity and exports of its industry, the case for Brazil to embrace international trade more fully is strong. This could be implemented by a gradual and pre-announced reduction of both tariff and non-tariff protection, including local content rules, so as to give industrial companies time to adapt to the changing environment and minimise adjustment costs. The pace of opening up vis-à-vis different trading partners could be used as a negotiating tool to achieve better market access for Brazilian exporters in return, thus strengthening Brazil's leverage in the negotiation of new bilateral trade agreements. Other Latin American countries like Chile, Colombia, Mexico and Peru have actively promoted integration with large markets such as Japan, China and the United States through bilateral agreements. Brazil’s recent initiatives to start negotiations with Mexico, the European Union and the United States are a welcome step, and should be pursued further.

A complementary agenda to strengthen competitive pressures from imports and promote export growth is the reduction of trade frictions through trade facilitation measures, including easing border formalities and reducing shipment costs. For example, Brazilian companies face a cost of USD 2 322 for exporting or importing a container, while firms in Singapore, Malaysia, Indonesia and Thailand can do this for less than USD 600 (Figure 1.19). Brazil’s customs formalities also take considerably more time than in other countries. Recent estimates put the tariff-equivalent of customs delays in Brazil at 14.2%, which is higher than the average import tariff (Ferraz, 2015).

Figure 1.19. Cost of exporting and importing a container (twenty-foot equivalent unit)

In USD per container, 2014

Source: World Bank (2015). Doing Business 2015 data.

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Brazil has made significant progress in trade facilitation through the establishment of a Single Window for trade-related administrative procedures, called Portal Único. The significant efforts put into this reform are expected to reduce the time required to get merchandise through customs from 13 to 8 days in the case of exports by 2017, and from 17 to 10 days for imports (World Economic Forum, 2015; Ministry of Industry and Commerce, 2015). Estimates suggest that this will boost trade in industrial goods significantly already by 2017, with an order of magnitude of over 10% for exports and over 16% for imports (Ferraz, 2015). Efforts in trade facilitation should be continued further. While Brazil outperforms an average of Latin American countries in the OECD Trade Facilitation Indicators, it is still significantly behind best practice in all areas, especially with respect to the co-operation between various border agencies of the country, the electronic exchange of data, automated border procedures and the simplification and international harmonisation of trade documents.

Strengthening domestic competition

Domestic competition is largely shaped by regulatory policies affecting product markets. Significant administrative burdens hamper competition in many areas, particularly competitive pressures emanating from new entry. Although there is not one single method of measuring administrative burdens, the widely used World Bank Doing Business indicators imply that entrepreneurs wishing to start a business face many more administrative hurdles than in other economies. Starting a business requires 12 procedures in Brazil and takes 83 days, while Chile, Colombia and Mexico require fewer procedures that can be accomplished in less than 11 days (Figure 1.20). With this result, Brazil ranks at 167 out of 185 economies surveyed for starting a business.

Figure 1.20. Ease of starting a business

Days required to start a business, 2014

Source: World Bank (2015). Doing Business 2015 data.

StatLink  http://dx.doi.org/10.1787/888933282917

Recent government initiatives are aiming to reduce these administrative burdens significantly. A pilot reform project that allows opening a company in less than one hour has been started in the capital district of Brasilia in mid-2015. These rules allow the beginning of operations while awaiting the formal license in the case of low-risk activities, which include about 90% of all activities. A nationwide rollout of these simplified rules is scheduled to be completed by the end of 2015. Already as of February 2015, closing a company can be done in only 1 hour, whereas before administrative burdens to closing a company were almost prohibitive. These reforms – if implemented as planned – are likely to entail significant productivity improvements. Portugal has recently made positive experiences with applying a silence-is-consent rule in areas without major safety or environmental concerns. Brazil could apply easier administrative procedures more widely, to make sure its regulations do not unnecessarily hinder competition. The OECD’s Competition Assessment Toolkit (OECD, 2010) can assist the government by providing a flexible methodology not only for identifying but also for revising policies that unduly restrict competition.

Empirical results from firm-level analysis suggest that easing these administrative burdens is likely to improve the productivity of Brazilian firms as the number of procedures required for starting a business and the associated delays are negatively associated with firm-level productivity (Arnold and Flach, 2015). These findings are confirmed by cross-country panel regressions that control for other time-invariant differences across countries and for time effects (Ferreira Mation, 2014). Their work suggests that Brazil’s labour productivity could be 11% higher if its business climate were to improve to the level of Chile’s, for example. The prospects for the entry of new and innovative firms could also improve with the development of deeper capital markets.

Brazil’s industrial sector would also benefit from more competition in upstream non-manufacturing sectors, as access to cost-effective and innovative services inputs can play an important role for manufacturing productivity (Arnold et al., 2011; 2015). As measured by the OECD Product Market Regulation (PMR) indicators, regulations that curb competition are more restrictive in Brazil than in the average OECD country, but less so than in the average of the BRIICS countries. Brazil scores 2.54 on a scale of 0 to 6 in 2013, similar to the average values of China, India, Russia and South Africa, but significantly higher than the OECD average of 1.51.

Innovation policies

Innovation and investment in knowledge-based capital are other important ways for industrial companies to increase their productivity. However, Brazil’s industry is characterised by a weak innovation performance. On widely used innovation indicators, such as patents and trademarks applications filed by Brazilian companies, Brazil’s performance is among the lowest in BRICS, Latin American and OECD countries (Figure 1.21) and it has declined further since 2013. The generally weak innovation performance contrasts with punctual cases of success that show what Brazilian industrials are capable of doing. Brazil has some of the world’s largest R&D-investing firms and is at the vanguard of high-technology sectors as deep-water oil extraction and aircraft industry. More recently, environmental, bio and nano-technologies have also seen a few success cases (OECD, 2014).

Figure 1.21. Patents and trademarks

Average number per million population, 2009-11¹

1. Triadic patent families are defined as patents applied for at the European Patent Office (EPO), the Japan Patent Office (JPO) and the United States Patent and Trademark Office (USPTO) to protect a same invention. Trademarks abroad correspond to the number of applications filed at in the United States, European Union and Japan, corrected the relative average propensity of other countries to file in those three offices.

Source: OECD (2013), OECD Science, Technology and Industry Scoreboard 2013.

StatLink  http://dx.doi.org/10.1787/888933282926

Brazil’s innovation performance is the result of low investment in science and innovation. Expenditures in research and development (R&D) amount to 1.2% of GDP, which is about half of the OECD average of 2.4% of GDP. Given that Brazil’s R&D expenditures are highly concentrated in the public sector, the gap vis-à-vis OECD countries is more pronounced when focusing on business expenditures in R&D (Figure 1.22). These are arguably closer to market demands, and hence more likely to feed into commercial results, but they represent around a third of the OECD average relative to GDP, and have been stagnant over the last decade.

Figure 1.22. Business enterprise expenditure on R&D

Per cent of GDP¹

1. 2011 instead of 2012 for Australia, Iceland, New Zealand and Mexico. 2003 instead of 2002 for Luxembourg, New Zealand and Sweden. 2004 instead of 2002 for Switzerland.

Source: OECD , Main Science and Technology Indicators (database), for Brazil Ministry of Science and Technology.

StatLink  http://dx.doi.org/10.1787/888933282931

A lack of competition on product markets seems to be one of the principle reasons behind the low innovation performance (Pinheiro, 2013; IEDI, 2011; IEDI, 2014). This is consistent with cross-country analysis showing that well-functioning product, labour and capital markets are related to higher expected returns from innovation and patenting (Andrews et al., 2014). Empirical evidence shows that Brazilian firms that were exposed to competition in foreign markets, for instance, displayed higher product innovation efforts at home (de Araújo, 2005).

Competitive pressures should lead to more investment in innovation, and entry or the threat of entry has been found to stimulate innovation by incumbent firms (Aghion et al., 2005; Aghion and Bessonova, 2006).When the incentive to get a competitive edge over others is missing because competitive pressures are low, firms will not consider innovation a priority, and a marginal reduction in the costs of innovation due to public support is unlikely to change that. Even when firms can access effective public support for innovation, there will always remain significant costs and risks involved for an innovating firm. What really pushes firms to innovate in the first place is not the availability of public support, but the competitive pressures that firms face in their market. Where competition does not drive less efficient firms out of the market to free their resources, much of the public support for research and development will be absorbed in prices and wages rather than in the quantity of R&D (Acemoglu et al., 2013). This may explain why innovation outcomes are low in Brazil, despite innovation policies are not much different from those used in other countries. In fact, public support for business innovation has increased steadily over the years, both through direct support measures and through R&D tax credits. Brazil provides a wide array of direct support measures, most of which is channelled through the dedicated public support agency FINEP, which offers direct R&D subsidies through tenders, provides low-interest loans for R&D projects and funds partnerships between business and universities. Between 2001 and 2010, FINEPs budget has increased by a factor of five in real terms. In addition, the national development BNDES provides additional innovation funding amounting to around a third of FINEPs resources in 2010 (Araújo, 2012). FINEP and BNDES also provide support to seed and venture capital funds that support start-up companies.

The direct support system has been criticised for excessive bureaucracy, which keeps some innovating firms from accessing the available support channels, and tends to be too slow for firms that need to make urgent investment decisions. From an organisational perspective, there may also be scope for raising the efficiency of support programmes by addressing overlapping responsibilities among institutions, a lack of clear mandates, and the lack of systematic cost-benefit analysis (Araújo, 2012). In the future, all available direct support measures should subjected to systematic and regular evaluations, and the authorities should assess the scope for making the application process easier and faster, while continuing to ensure the quality of the supported projects.

In addition to direct support measures, Brazil also uses tax benefits to support R&D indirectly, and these benefits more than doubled in real terms since a new law came into effect in 2005. Many R&D expenditures can be deducted from corporate tax liabilities at 160% of the CIT rate – with additional benefits to reward employing researchers or obtaining a patent. Moreover, capital goods used for R&D can be fully depreciated for corporate taxes purposes in the first year of investment.

R&D tax credits are a widely used measure to support innovation activities in OECD countries, but unless they are carefully designed, they risk favouring incumbents and becoming an implicit entry barrier, simply because new entrants typically lack taxable profits for a significant number of years. Some OECD countries allow tax credits to be converted into cash refunds (Australia, Canada, Denmark, Norway, or the United Kingdom) or have extended loss-carry forward provisions indefinitely (Australia, Belgium, Ireland, United Kingdom). Brazil, in contrast, does not allow refunds of R&D tax credits or losses to be carried forward. In this setting, loss-making firms do not benefit from R&D tax credits and recent entrants are likely to face significant disadvantages vis-à-vis incumbents, particularly in a context of scarce and expensive credit (Figure 1.23). In addition, these tax credits are only available for those firms filing tax return under one specific tax regime (“lucro real”), which is typically only chosen by large and established companies. Brazil should allow refunds of R&D tax credits or alternatively introduce long carry-forward periods, and make these benefits available regardless of the tax regime under which firms file tax returns.

Figure 1.23. R&D tax credits favour profit-making companies

Tax subsidy rates on R&D expenditures, 2013¹

1. The tax subsidy rate is calculated as 1 minus the B-index, a measure of the before-tax income needed to break even on USD 1 of R&D outlays (Warda, 2001). It is based on responses from national finance/tax/innovation authorities and R&D statistical agencies to the OECD questionnaire on R&D tax incentives and also draws on other publicly available information. Benchmark tax data information, including statutory corporate income tax rates, is obtained from the OECD Tax Database, basic (non-targeted) corporate income tax rates, May 2013.

2. Different tax subsidy rates are available for small and medium enterprises in these countries.

Source: OECD, R&D Tax Incentives Indicators; based on the 2013 OECD-NESTI data collection on tax incentives support for R&D expenditures.

StatLink  http://dx.doi.org/10.1787/888933282947

Co-ordination policies and sector-specific policies to support industrial performance

Policies discussed so far are crucial for industrial companies because they affect the fundamental framework conditions for their business. But there are also other policies that may matter for the industrial sector. Brazil, like other emerging market economies, has made use of targeted policy measures, with the objective of overcoming co-ordination failures or granting specific support to certain activities. Industrial development is a complex process in which a series of market failures occur, including imperfect information, externalities, learning effects and difficulties in access to finance. Public policy can in principle help to overcome some of these market failures, but whether or not this is a successful strategy depends largely on how exactly such policies are implemented.

History offers a few important examples where targeted support policies have been successful, with Korea being the most widely-cited, but not the only one (Amsden, 1989; Wade, 1990). In fact, many countries that have by now retreated from targeted support policies benefited from them sometime in history, although that does not necessarily mean that the same policies could be applied successfully nowadays. But history has also highlighted the risks and the potentially high costs associated with such policies, and in many cases, particularly in Latin America, these specific interventions have caused more damage than benefit. While policies that improve the business climate for all activities have benefits that are certain, more selective policies can end up wasting resources, if they are based on tax incentives or direct public support, or create distortions that reduce rather than enhance long-run efficiency, if the policies are based on trade barriers, taxes, local content rules or other regulatory privileges for specific sectors.

Despite a growing awareness of these risks, the policy debate, which had become almost uniformly opposed to any kind of targeted (often called “vertical”) intervention since the 1980s, has recently become more open to discussing the scope for “new-style” industrial policies that go beyond improving the business climate (Stiglitz et al., 2013; Rodrik, 2004, 2008, IDB, 2014; Fontagné et al., 2014, Warwick, 2013). These policies are not the same as the interventionist stances of the 1950s to 1970s, which involved massive interventions into relative prices, but are more focused on “soft” interventions that aim to address co-ordination challenges. Such interventions have included regulation to enforce higher quality standards where complying with such standards can open up new export opportunities, financial support for innovative projects that can generate externalities, research grants to organised producer groups or local research centres, and supporting collaboration between business associations and universities in the areas of education and research (Harrison, 2009). Governments have also provided support for firms to get organised in industry associations to address common constraints to exporting, such as transport or quality certification issues. Colombia’s flower growers’ association has been a powerful example of how such associations can solve co-ordination problems. It is also an example of a policy intervention that is temporary yet has sustainable effects, because once such an association has been set up, producers often develop a sense of mutual trust and value the collaboration, even in cases where such joint efforts might not have emerged naturally.

These “soft” industrial policies have also included support for the development of clusters of related activities to exploit possible positive local external effects, for example by increasing the supply of skilled workers with specific skills, encouraging technology adoption, and improving specific local infrastructure. Going one step further, policies have even been used to induce agglomeration by setting up industrial parks and creating temporary incentives to attract new companies to these parks. Setting up industrial clusters is challenging, and there are many cases in Latin America where such parks suffered from a lack of public investment and a clear strategic vision and hence produced little in terms of results (Rodrigues-Pose and Hardy, 2012, 2014).

Strikingly, empirical evaluations of the costs and benefits of such policies are scant. In Brazil, a series of industrial clusters (Arranjos Produtivos Locais) for small and medium enterprises have received public support in the state of São Paulo since 2004. These are co-ordinated by the state of São Paulo, the Federation of Industries of that state and the local SME promotion agency, with financing from the Inter-American Development Bank. Empirical evidence suggests that these policies have increased exports by participant firms, which may be the result of productivity improvements, but no evidence exists on how these improvements compare to the cost of the programme (Figal Garone et al., 2012). This makes it hard to judge to what extent cluster support policies have represented good value for money. Evidence from other countries has not been able to confirm that over the long term clusters are able to generate strong and sustainable impacts in terms of innovation, productivity or employment (Uyarra and Ramlogan, 2012, Warwick and Nolan, 2014). Empirical evidence from France, for example, suggests that cluster policies have a tendency to assist firms in relative decline and have had no robust effects on either productivity or export performance (Martin et al., 2011).

Targeted productive development policies can also go beyond overcoming co-ordination failure and give specific financial support to certain domestic producers through tax benefits, local content rules or tariff protection. Compared to the soft type of industrial policies mentioned above, these kinds of policies are even riskier as they can provide more scope for policy capture and rent-seeking activities. Moreover, the policy space for such interventions is clearly restricted nowadays, as many of the development policies that have been applied by Korea or other East Asian economies, most notably export subsidies, would nowadays be incompatible with WTO rules, although fiscal incentives are not.

Brazil is using specific support policies in several areas. Tariffs and local content rules are deliberate distortions of domestic prices towards domestic producers, in industries ranging from motor vehicles and parts to information technology or wind turbines. Local content rules may result in particularly strong price distortions, as they can make imports prohibitively expensive. Brazil’s informatics policy, for example, required foreign companies in the computer and information technology business to become minority partners in joint ventures with Brazilian firms and move production activities to Brazil in order to sell in the domestic markets. Only very few major companies did so. On the whole, the policy has not enabled Brazilian-made computers or communication equipment to become globally competitive. The resulting price distortions may well have slowed down economic growth more generally, given the widespread use of information and communication technology throughout the economy (IDB, 2014).

Tax breaks for specific sectors can also distort relative prices across activities in the domestic markets. The Information Technology Law of 1991 allocates tax breaks worth BRL 4 billion per year to domestic electronics producers, but evidence suggests that it has failed to stimulate R&D or raise productivity in the sector (Kannebley and Porto, 2012). Tax benefits related to the Manaus Free Trade Zone located in the state of Amazonas, far away from major consumer markets, cost BRL 25 billion per year, but no systematic analysis of the economic benefits of this tax expenditure has been made.

Given the risks involved with this particular kind of policies, they should be applied sparingly where there is a strong case that the supported activities will be able to thrive without support after some time. Institutional capacities and the incidence of rent-seeking and corruption in each country should also be factored in when deciding how much risk to take. Most importantly, regular systematic evaluations of existing policies should play a stronger role than they do at present. A more rigorous cost-benefit analysis may help Brazil to identify those specific support policies that are worth maintaining and those that are not.

Important caveats apply to the design of all targeted policies, which are generally meant to generate benefits over time, such as learning effects. They will only be effective in generating learning effects if their temporary nature is made clear from the very outset, ideally with a clearly defined phase-out schedule for specific support measures. This principle is crucial for creating the incentives for firms to become more efficient, but it has often been neglected in Brazil. Looking at the international experiences, the temporary nature of support is what has often drawn a line between the structural upgrading achieved in East Asia and the creation of uncompetitive industries that remained dependent on public support. The political economy of withdrawing public support can easily become complicated if the temporary nature of the measure was not made clear from the beginning. Korea’s industrial policy contained not only a clear timeline for phase-out, but also intermediate performance targets on variables such as exports, productivity growth, and R&D spending, and these targets were enforced by penalties and loss of benefits for firms who failed to meet the targets.

An important aspect of temporary support is also the recognition that policies that bet on specific activities can always bet on the wrong ones. Engaging in targeted interventions reflects a judgement that this risk is worth taking and it is therefore important for such policies to contain well-defined mechanisms for identifying wrong bets, so as to pull the plug early enough when things do not work out as planned (Rodrik, 2008; Fontagné et al., 2014). This includes a definition of what kind of effects are expected over a given timeline. The benchmark of success should go beyond the mere (and automatic) expansion of a supported industry and focus on more sustainable features like advances in productivity or innovation. Regular policy evaluations are important policy instruments in this context. Examples of failed industrial policies are almost invariably ones that dragged on for a long time, even after it had become clear that the expected benefits were unlikely to materialise.

Box 1.3. Summary of policy recommendations for raising industrial performance

Taxes

Consolidate indirect taxes at the state and federal levels into one value added tax with a broad base, full refunds for input VAT paid full deductibility of inputs and an exemption zero-rating for exports.

Reducing infrastructure bottlenecks

Improve the technical capacity and planning for infrastructure concessions at all levels of government. Elaborate more detailed tender packages prior to launching tender calls.

Ensure that tender packages include an evaluation of possible problems in obtaining an environmental license.

Reduce remaining barriers for the participation of foreign construction companies in public infrastructure tenders.

Reining in labour costs

Modernise labour regulations, eliminate some of the unnecessary details governing labour relationships and allow those details to be governed by legally binding agreements between employers and employees, which will be respected in courts.

Improving contract enforcement and the efficiency of the judicial system

Enhance the efficiency of the court system to speed up decisions in civil cases and make contract enforcement easier.

Opening up to international trade

Reduce the level of trade protection according to a pre-announced schedule, by lowering tariffs and scaling back local content requirements.

Build on the recent progress in trade facilitation by further reducing administrative requirements for importing and exporting.

Strengthening domestic competition

Streamline regulation on product markets and implement planned reductions in entry regulations to facilitate new firm entry.

Improving skills

Further expand the participation in vocational training to alleviate skill shortages for technical workers.

Take stock and evaluate successful local experiences with incentive-based reforms of the education system and consider expanding some of them nationwide, including performance-based pay for teachers and principals and linking the distribution of tax revenues across municipalities to school performance.

Innovation policies

Evaluate direct R&D support measures systematically and regularly evaluations, and assess the scope for making the application process easier and faster.

Make tax credits for research and development (R&D) fully refundable for loss-making firms or introduce the possibility of carrying losses forward for several years.

Co-ordination policies and sector-specific policies to support industrial performance

Implement regular evaluations of the costs and benefits of targeted support policies, and ensure the discontinuation of those that are not delivering the expected results.

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Chapter 2.

Improving public health services

Brazil has made remarkable progress in health over the last decades and improved access to healthcare has reduced inequalities. The backbone of Brazil’s success is the public Unified Health System (SUS), which entitles every Brazilian citizen to integrated healthcare free of charge. The SUS is facing severe capacity constraints, leading to long waiting times for specialised medical services, and access to medicines and specialist care can be difficult, particularly in poorer areas. A complex governance structure involving several levels of government is complicating an efficient provision of healthcare provision. To facilitate access to health care, Brazil should train more doctors and nurses, especially in family medicine, and strengthen incentives for them to move into underserved areas. Explicit targets for expanding capacity to reduce waiting times could also help to ease difficulties in access. Improving the governance of the system requires strengthening the role of regional networks and a better co-ordination of health care services, especially beyond primary care. Improving performance indicators and strengthening incentives to meet targets could lead to efficiency improvements at all levels of care. As Brazil's population ages, public health spending is set to increase and the associated challenges could best be anticipated by providing more home-based long-term care services for the elderly under the SUS.

Improvements in health outcomes have been impressive but new challenges are emerging

Providing universal access to quality healthcare is an important element of reducing inequalities, improving well-being and also fostering growth in the long-term. Low-income households will typically find it difficult to invest in health, which may reduce the earning opportunities over their working life and hence exacerbate disparities in income and well-being. An unexpected need for treatment of illness may exceed the household’s financial means and lead to unnecessary permanent health damage, or it may crowd out consumption and other high-return investments of the household, such as education. Poor health status will also negatively affect labour input, hurting growth.

With the development of publicly provided health care services and specific interventions, particularly in the area of primary care (vaccination campaigns, maternal and child health services), Brazil has made great strides to address inequality gaps in access to health and improve population health over recent decades but new challenges are arising.

Brazil's population health has markedly improved over recent decades

Key indicators of health outcomes for the whole population have shown significant improvement over the last decades. Brazil’s life expectancy at birth increased by nearly 15 years between 1970 and 2013 (Figure 2.1, Panel A), although countries like Chile and Korea managed to achieve even greater improvements from a similar starting point. Life expectancy gains are is equivalent to an increase of more than 6 months per calendar year for the last four decades (Barreto, 2011). Between 1970 and 2013, owing to better socio-economic conditions and a more effective health system, infant mortality dropped sharply from 114 per 1000 live births in 1970 to 12.3 per 1000 live births in 2013. This improvement reflects better access to healthcare, immunisations, micronutrient supplementation and the promotion of breast-feeding. However, it still remains well above OECD countries (Figure 2.1, Panel C). Compared to the average across OECD countries, Brazil also has a higher incidence of low birth weight infants leading to a greater risk of illness, hospitalisation and even death (Figure 2.1, Panel D).

Figure 2.1. Selected health indicators

1. Data for Brazil refer to 2012 and were provided by the Ministry of Health.

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en.

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Many of the health-related Millennium Development Goals set in 2000 by the United Nations have already been achieved (Table 2.1). Targets such as cutting by half the number of underweight children and by two thirds the mortality rate of children younger than 5 years old were met in 2007 and 2011, respectively. Furthermore, Brazil has had great success in controlling vaccine-preventable diseases, diarrhoea, respiratory infections, HIV/AIDS and tuberculosis (Kleinert and Horton, 2011; Victora et al., 2011).

Table 2.1. Brazil's progress towards health-related Millenium Goals set by the United Nations
MDG | Target | Progress and achievement | Remaining challenge
Eradicate extreme poverty and hunger | Reduce the incidence of underweight children below the age of 5 by half. | Achieved. The underweight prevalence in children under five was reduced from 4.5% in 1996 to 2.2% in 2007. |
Reduce child mortality | Reduce mortality of under-five-year old by two thirds. | Achieved. The under five-mortality rate was reduced from 58.0 per 1 000 live births in 1990 to 15.6 per 1 000 live births in 2011. | High inequality: mortality rate among children of poor families and indigenous origins are significantly above average.
Improve maternal health | Reduce maternal mortality by three quarters. Provide access to universal reproductive health. | Model estimates suggest that the rate of maternal mortality declined from 120 per 100 000 deaths in 1990 to 69 in 2013. In 2011, 97% of pregnant women received pre-natal consultation at least once. Over 60% received it more than 7 times. |
Combat HIV, AIDS, malaria, tuberculosis and other diseases |  | Low prevalence (< 0.5%) of HIV, which has been stable since 2000; almost complete eradication of some vaccine-preventable diseases (polio, measles, and diphtheria), diarrhoea, and Chagas’ disease; partial success in controlling malaria, hepatitis A and B, tuberculosis and schistosomiasis. | Dengue fever needs to be controlled more effectively. Additional resources have been mobilised.
Source: Millennium Development Goal Indicators (2014), http://mdgs.un.org/unsd/mdg/Default.aspx; UNDP (2014), “Objetivos de desenvolvimento do milénio (2014), Victora et al. (2011), Ministério da Saúde (2012), WHO data repository (2015).

While there has been some progress in improving maternal health, challenges remain in this area, and Brazil is likely to miss its 2015 target (Table 2.1). Maternal deaths remain more than eight times higher than high-income countries (57.4 deaths per 100 000 live births in Brazil in 2012, as opposed to 6.7 deaths per 100 000 live births on average in OECD) but also higher than in other emerging or Latin American countries (Figure 2.1, Panel E). This is despite a near universal use of antenatal care and delivery in healthcare facilities (Victora, 2011).

New health challenges are arising

New challenges are emerging as the patterns of illness and mortality now resemble more those of high-income countries. Non-communicable diseases have become a major population health concern and policy issue, with hypertension, obesity and diabetes becoming more common. 60% of all deaths were due to cardiovascular diseases, diabetes, cancer and chronic respiratory diseases, and all non-communicable diseases taken together accounted for more than 96% of all deaths in 2013 (OECD, 2015a). This is a significant change from the 1980’s when it was infectious diseases that accounted for the majority of deaths in the country. Among non-communicable diseases, cardiovascular diseases continue to be the leading cause of mortality in the country, despite recent declines. Mortality rates due to lung, breast and colorectal cancers have been increasing over the years, especially among men, in contrast to the declining trend seen among OECD countries.

Changes in living habits, including diet and a lack of physical activity, are partly responsible for a rising prevalence of diabetes and hypertension. For instance, the consumption of sugar and packaged foods is increasing in Brazil (Bartsch et al., 2015). More than one-third of Brazilians over 15 years old is overweight and about 17% of the adult population are now obese (Figure 2.2, Panels C and D), according to self-reported measures of height and weight. Overweight and obesity are known to be associated with various non-communicable diseases including heart disease, stroke, type II diabetes, and some types of cancer (OECD, 2010a). This phenomenon tends to affect the poorest, especially in richer countries, and hence increases inequality (OECD, 2010a). In 2011, about 10% of adults in Brazil suffered from diabetes (compared to about 7% of people in the OECD) and an estimated 40-50% of those 40 years and over were hypertensive. People with diabetes are at a greater risk of suffering cardiovascular diseases such as a heart attack or a stroke.

Figure 2.2. Non-communicable diseases are becoming more significant

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en.

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The authorities should consider developing stronger policies to reduce the harm of unhealthy food. A first option would be to raise the awareness of the benefits of a better diet and more physical exercise, either in schools or by providing through the primary care system (OECD, 2010a). Designing an appropriate labelling system for food would help in that respect. If the consumption of some products is considered too harmful to wait for a progressive change of habits, introducing specific taxes, for example on fat or sugar could be considered. Recent guidelines by the World Health Organisation emphasised the benefits of reduced sugar consumption. This would require a strong consensus, though, as enforcement can be complex and expensive (OECD, 2013c). Such taxes are likely to be regressive based on current consumption patterns, but people with low incomes are likely to benefit most from them in health terms, once consumption patterns change. Denmark failed to maintain such a tax, although Hungary’s experience seems to be working well so far. In any case, a careful analysis should precede new taxes on food as these may have unintended consequences on health, for example if they lead to a higher consumption of substitute products that are not necessarily more healthy (OECD, 2013c).

Brazil’s health system has been instrumental in improving outcomes but cost pressures are emerging

The unified health system has been the backbone of success

The 1988 Constitution laid the foundation for publicly provided healthcare by stating that health care is a fundamental right and the duty of the state. This led to the establishment of the publicly-funded Unified Health System (Sistema Único de Saúde; SUS) in 1990. Until the establishment of the SUS, specific intervention programmes and health coverage for different groups of population were provided by different social security institutions – mainly for formal public and private workers. Philanthropic organisations provided services to the rest of the population, causing a significant gap in access to health between the wealthy and formal workers on one hand, and informal workers on the other (Gragnolati et al., 2013).

The SUS has become the backbone of the Brazilian health system and is now one of the largest public health systems in the world. Every Brazilian citizen is entitled to receive universal, free and comprehensive healthcare, from primary care to highly specialised tertiary care, and 71% of Brazilians are users of the SUS. Primary care, as stated by SUS, is expected to be the initial contact point for patients having new health needs, although it does not work as a “gatekeeper”. Primary care provides a wide range of health care services including family medicine and pharmaceutical services, but also internal medicine, paediatrics, obstetrics, gynaecology and preventive health services. More specialised outpatient consultations are provided by the so-called “secondary care”, which includes diagnostics and laboratory tests in hospitals or specialised ambulatory services. The secondary care also includes emergency and mental care. Tertiary care requires referrals by primary or secondary care and involves specialised in-patient treatment in hospitals and clinics.

The SUS management is highly decentralised and involves the federal government, states and municipalities. Legislation transferred part of the responsibility for the management and financing of health care to the country’s 27 states (including the federal district of Brasilia) and more than 5 000 municipal governments. Although the Ministry of Health continues to define national health policies and priorities and also run some specific programmes across different levels of government, responsibility for service provision is split between states and municipalities, usually according to the level of complexity. In most cases, primary and secondary care is the responsibility of municipal governments, while the states operate hospitals and other tertiary care, although a number of large cities provide the whole range of publicly-financed healthcare (Nahas, n.d.). In addition, the federal Ministry of Health and Ministry of Education operate a few hospitals, some of which affiliated to universities. Interaction between different levels of government are based on negotiation and agreements, with no specific hierarchy.

The financing of healthcare has become a mix of public and private funds

Public healthcare services are financed through taxes and contributions. Some taxes collected at the federal and state levels are transferred to municipal governments which in turn allocate funds to health facilities, resulting in a fairly complex web of financing flows (Figure 2.3). A Constitutional Amendment of 2000 requires states and municipalities to allocate a minimum of 12% and 15% of their total budget to health, respectively.

Figure 2.3. Overall financing flows of health system in Brazil

Source: Ministry of Health and Fiocruz.

In addition to publicly financed healthcare services, a parallel system of private healthcare is financed by businesses and individuals through optional private health insurance plans. These private plans cover a wide range of health services for their beneficiaries, including those that are provided by the SUS. Those with private insurance are still eligible for receiving public healthcare, even though many of them do not use it. This has resulted in a two-tier system, with large differences in quality, availability of services and patterns of delivery between SUS and private providers (Victora et al., 2011). About 26% of the population hold private health insurance, up from 18% in 2000.

Total health expenditure is high as a share of GDP and set to increase further

For an emerging economy, Brazil spends a relatively large proportion of GDP on health, almost 10% in 2013. This is about the same as the OECD average (Figure 2.4, Panel A). However, only about half of that health spending is financed by the government, significantly less than in other countries that have recently achieved universal health coverage such as Turkey, Korea, Thailand or Colombia. These countries have a share of public health spending between 70 and 75%, similar to the OECD average of 71% (Gragnolati, Lindelow and Couttolenc, 2013). Although public spending on health rose gradually from 2.9% of GDP in 1998 to 4.4% of GDP in 2013, private spending increased as well, from 3.9% in 1995 to 4.7% in 2013 (Figure 2.4, Panel B). Private spending contains both health insurance premiums and out-of-pocket spending, which is mostly for drugs.

Figure 2.4. Health expenditure

Source: OECD Health Statistics 2015, WHO Global Health Expenditure Database, 2015.

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On a per-capita basis, Brazil’s total health expenditures of USD 1 471 at PPP are less than a third of the OECD average (Figure 2.4, Panel C). More importantly, the average expenditure in Brazil masks stark differences between those who use only publicly funded healthcare and the 26% of Brazilians who subscribe to complementary private insurance plans. Per capita health expenditures for those with private insurance (USD 2 678 at PPP) are similar to levels in Spain, Portugal or Slovenia, while for the remainder of the population (USD 1 028 at PPP), they are similar to the level in Mexico or Turkey.

The fact that so many Brazilians opt for private health insurance plans in order to access better quality healthcare suggests that more needs to be done in the future to improve publicly funded healthcare, and this will likely imply higher public health expenditures. However, the current tight fiscal situation imposes limits on finding additional resources for the health sector in the short-run. One way to free resources and to improve the allocation of health-related spending would be by phasing out the current tax deductibility of private health expenditures, which has regressive distribution effects, as only about 10% of the working-age population pays income taxes from which to deduct these expenses (Castro, 2014). The implicit tax subsidy costs about 0.3% of GDP or 7% of public health expenditures. The resulting savings could be invested into the SUS.

As Brazil’s population ages, additional spending pressures are likely to emerge unless costs can be contained. OECD projections of health and long-term care expenditure suggest that public spending on health could rise from the current 4.7% to 12% of GDP by 2060 (de la Maisonneuve and Martins, 2013). There is substantial scope, however, for containing costs and improving the efficiency of health-related expenditures. In comparison to other countries, the efficiency of health expenditure in Brazil appears to be low. International comparisons based on data envelopment analysis indicate Brazil could gain more than 5 years of health-adjusted life expectancy, a commonly used health indicator, through efficiency improvements, while maintaining current per-capita health expenditures (Figure 2.5, see also Box 2.1 for details on the methodology).

Figure 2.5. Potential gains in health-adjusted life expectancy

Source: OECD calculations based on World Bank and WHO data.

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Box 2.1. Measuring the efficiency of the health system

Quantitative measurement of health system efficiency, defined as the capacity to achieve the most output with the fewest inputs, can provide an idea of how much scope for improvement there is. The data envelopment analysis (DEA) technique allows this quantification by constructing an empirical efficiency frontier using different countries’ health sectors performance and then measuring efficiency by evaluating how distant a given country is from this frontier.

The model specification used in this analysis draws on OECD (2010b) and defines health sector performance as transforming two inputs – health care spending per capita and a composite indicator reflecting socio-economic and lifestyles factors (GDP per capita, educational attainment, air pollution and alcohol and tobacco consumption) – into a main output, health adjusted life expectancy. Potential efficiency gains are then estimated by evaluating how much improvement in health-adjusted life expectancy a country can achieve if it were to reach the efficiency frontier, while maintaining the same levels of inputs, i.e. health expenditure per capita and socio-economic and lifestyle conditions. A graphical illustration of this principle is provided in Figure 2.6 for the simple case of a one-input and one-output efficiency frontier and technical details are provided in the Annex to this chapter.

Figure 2.6. Graphical illustration of potential efficiency gains

Improving access to public healthcare

Despite the impressive expansion of the SUS, however, difficulties of accessing care remain a key issue. Parts of the SUS are facing severe capacity constraints due to a shortage of health professionals and lack of funding that make access to medical services difficult. In part, this is related to an underlying tension between the constitutional entitlement to coverage for all primary, secondary and tertiary care and the fact that resources for public healthcare are limited, which puts limits on the state’s capacity to honour the constitutional entitlement. A more explicit definition of what is or is not covered, in conjunction with a clarification of the decision-making process and assessment criteria upon which such decisions are based, may lead to a more efficient allocation of resources. This in turn could alleviate capacity constraints for those healthcare services that are considered priority. The current practice to give priority to SUS patients without private health insurance is also a way to ensure best use ofexisting resources.

Enhancing access to primary care has been a great success in Brazil

Since its establishment in 1989, the SUS has invested heavily in the expansion of its network of public facilities at the primary level. Moreover, the type of health services offered at the primary level has been significantly expanded. This has been associated with rising spending on primary care over the years, both in real terms and relative to overall public health expenditures (Figure 2.7). Forty-eight percent of the population access primary care through so-called Basic Health Units (Ministério da Saúde, 2015; IBGE, 2015).

Figure 2.7. Expenditure on primary care in real value and relative terms, 2002–10

Source: Couttolenc and Dmytraczenko (2013).

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In these units, multi-professional teams are responsible for monitoring families located in a defined geographical area, with each team being responsible for monitoring a maximum of 4 000 inhabitants (Couttolenc and Dmytraczenko, 2013). Basic health units are the primary place of work for family health teams which consist of at least a family doctor, a nurse, a nursing assistant, a few community health agents and, in some cases, a dentist. In addition, community agents are assigned to approximately 150 households which they visit at least once a month and collect individual and household level data (Macinko & Harris, 2015). During these visits, they provide information about health promotion, chronic disease management and identify health risks. Currently, there are 257 000 community agents across 5 428 municipalities, covering 132 million Brazilians (CNM, 2013). The effectiveness of primary care, particularly with respect to avoiding unnecessary hospital care, is supported by a national list of ambulatory treatments that provides guidelines for primary healthcare staff (Rehem et al., 2012).

Primary care services include a comprehensive list of services that are covered based on health conditions, clinical and nonclinical procedures, and target groups, selected elements of which are shown in Table 2.2 (see Annex A2.1 for a complete list). The list of services covered has been adapted to changes in population health. For example, treatment and control of hypertension and diabetes have been added in the primary care services. Decisions over new healthcare services to be covered are negotiated between the federal Ministry of Health and state and municipal health secretariats.

Table 2.2. Selected elements of the benefits package covered by SUS and primary care services

Inpatient services

Birth delivery

Emergency services incl. ambulance services and associated diagnostic services

Hospitalisation in general and specialist hospitals, incl. intensive care

Emergency and elective surgery incl. transplants and laser eye surgery

Outpatient services

Public health, immunizations

Primary care contacts with doctors, nurses, social assistants

Specialist contacts incl. oncology, cardiology and dialysis

Pharmaceuticals for outpatient services (restricted list)

Clinical laboratory tests for outpatient services

Basic diagnostic image for outpatient services – basic (x rays and ultrasound)

Other diagnostic imaging for outpatient services – e.g. MRI, cat scan

Other services

Dental care

Mental health problems incl. substance abuse, mental handicaps and children

Prosthetics and orthotics

Treatment of Aids and hepatitis

Home-care services

Source: Couttolenc and Dmytraczenko (2013), Ministry of Health.

Further improvements in access are needed

However, despite the wide network of primary care services, long waiting times for specialised medical services are frequent, and delays and difficulties in access to timely treatment were considered the main problem by 55% of survey respondents in 2012 (Figure 2.8). This is part of the reason why so many Brazilians choose to pay for private health insurance.

Figure 2.8. Perceived main problem of the public healthcare system

Source: CNI, 2012.

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Difficulties in access are also pervasive in other areas of the public healthcare system, and they often increase with the complexity of care. The performance of medium to high complexity procedures is generally lower outside the relatively wealthy South and South-East regions. Basic health infrastructure is often poor in other regions, and there is a shortage of health professionals in public hospitals. A recent audit revealed that more than two-thirds of SUS-financed hospital care lack sufficient beds, suffer from inadequate equipment and hospital infrastructure and experience high absenteeism among health professionals (TCU, 2013). This may strengthen the case for refocussing care in the public system more decisively through a better-defined benefit package.

Specialist care and diagnostic services are offered free-of-charge under the SUS, but in reality, capacity constraints and long waiting times imply that many people have to seek care in the private sector, concentrated in larger municipalities and in urban centres. Furthermore, over 20% of the costs of treatment in private healthcare facilities is not covered by any insurance, and has to be paid out-of-pocket (CNI, 2012). These out-of-pocket expenditures hit particularly low-income households hard and exacerbate inequalities as poorer households effectively have lower quality healthcare (Boinget al., 2014). Moreover, the ensuing delays in specialist care can aggravate health problems and create needs for more expensive care or the use of emergency departments at a later date (Comfort et al., 2013). Implementing targets for expanding capacity to reduce waiting times could help improve access.

A number of OECD countries have also been facing problems with waiting times in various areas of healthcare, particularly elective surgery, outpatient speciality care and cancer care. To address these issues, countries have implemented a variety of policies, among which setting up explicit targets and enforcing them has delivered positive results. For example, England introduced a target regime ratcheted to 18 weeks which has led to a significant reduction in inpatient waiting times. Portugal has defined levels of clinical priority as a guiding tool to set the maximum waiting times. Waiting time targets used in Denmark and Finland in certain segments of the health sector have also improved satisfaction among patients (Siciliani et al. 2013).

Bridging the gap in human resources for health

Compared to OECD countries, Brazil lacks both doctors and nurses (Figure 2.9, Panels A and B). This is particularly acute with respect to specialised medical services. Practicing physicians are unevenly distributed across the country, with the relatively wealthy South and South East, in addition to the Federal District (Brasilia), being better served than the poorer states in the North and North East (Figure 2.9, Panel C). Furthermore, disparities are even more pronounced with respect to SUS physicians Figure 2.9, Panel C). Approximately 700 local authority areas have no doctors. The national average is 2 per thousand inhabitants, while only the Federal District, Rio de Janeiro and São Paulo have more than 2.5, which is the ratio recommended by the Ministry of Health (Figure 2.9, Panel C).

Figure 2.9. Practising medical staff per population and geographic imbalances

1. Data include not only doctors or nurses providing direct care to patients, but also those working in the health sector as managers, educators, researchers etc, which can add another 5-10% of doctors.

2. Data refer to all doctors or nurses licensed to practice. This results in a significant over-estimation of the number of practising doctors in Portugal.

Source: OECD Health Statistics 2015, CFM (2013), Pesquisa Demográfica Médica no Brasil.

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The uneven distribution of doctors is not unique to Brazil, however. In fact, 28 out of 31 OECD countries that responded to an OECD survey in 2012 were facing the same challenge. Of these, 21 countries reported having incentives in place to foster better geographic distribution of physicians, 5 countries restricting choice of location to practice and 15 countries expanding the provider role of non-physicians, mainly nurses (OECD, 2012). Many countries also have difficulties attracting physicians into remote areas, reflecting the relative unattractiveness as places to live and work, the mode of employment and insufficient payment, and lack of professional prestige. One way forward that has proven to be effective, even more so than financial incentives, is to train more health workers from rural and underserved areas, as these are more likely to return to the area where they grew up.

For the SUS, hiring personnel in the public sector entails several constraints. Municipalities need to abide by civil service employment rules, such as a 60% ceiling of staff expenses in municipal budgets in the Fiscal Responsibility Law. The public system also requires municipalities to hire most health professionals as civil servants on long-term contracts with limited remuneration flexibility. Municipalities define salaries and there is limited scope for variation across specialisation, geographic location, or performance (Araújo et al., 2014). The SUS has nonetheless found ways to hire medical personnel on temporary contracts, and the expansion of health programmes has relied heavily on short-term contracts. In 2010, 59% of municipal spending on primary care staff was through such contracts (Couttolenc and Dmytraczenko, 2013). However, these arrangements have been challenged legally and politically, including due to the resulting unstable jobs with high turnover.

Such contracting arrangements are not particularly effective for attracting more doctors, especially into primary care in remote areas. Allowing more flexible hours could make these positions more attractive. In contrast to Brazil, primary care physicians are self-employed in 23 out of 33 OECD countries, and a majority of countries allow dual practices, although subject to some restrictions and regulations (OECD, 2012). Offering extra bonuses for physicians who work more than the standard working time (or during weekends and/or public holidays), as implemented in England, could also help to recruit more primary care physicians.

In Bahia, both the state and municipalities attempted to ease recruitment by centralising the hiring of health professionals in order to support more stable employment, including career plans and mobility within the state. The idea was that a state foundation would contract health professionals (doctors, nurses and dentists for primary care) on behalf of the participating municipalities. The result, however, fell short of expectations due to long delays, high administrative costs, few participating municipalities and contract defaults.

As a measure to address the acute shortage of medical professionals, the federal government introduced the “More Doctors” (Mais Médicos) programme in 2013. This programme involves expanding medical training, but also recruiting domestic and foreign medical professionals into remote and underserved areas. Approximately 18 000 doctors, many of which from Cuba, have been recruited through the programme. The foreign doctors are under contractual agreement with the Brazilian government and can stay on beyond their initial contract, in which case they have three years to pass the revalidation exam for licensing in Brazil. Brazilian doctors are also given financial incentives and training opportunities to practice in underserved areas. While addressing Brazil’s shortfall of doctors will first and foremost require training more doctors, which is also envisaged under the “More doctors” programme, additional recruitments through this programme has been able to provide some relief. The programme also includes targets for raising the number of available training places.

Additional ways to reduce capacity constraints could include expanding the role of non-physicians such as nurses, a wider use of tele-medicine and targeting future and existing physicians with incentives or limited choice of practice locations. Regarding tele-medicine, 2600 basic health units have been equipped with communication terminals allowing health professionals to seek remote advice. This programme, currently operating in 22 out of 27 states, could be expanded nationwide. Education policies in selection of medical students or establishing medical schools in rural areas, in connection with a restricted choice of practice location, have been successful strategies in OECD countries (Ono et al., 2014).

Enhancing access to medicine

The level of out-of-pocket spending on drugs is high in Brazil. In fact, 80% of the total pharmaceutical spending was out of pocket expenditure in 2009 (McKinsey & Company, 2011). Access to medication has been a particular challenge for two groups of the population: SUS patients whose prescription expenses are not fully covered; and low-income households with private health insurance plans that do not cover outpatient medications. Only 45.3% of SUS patients had access to all drugs free of charge, according to the 2008 Household Survey PNAD. Half of the patients who decided not to purchase a prescription drug did so for a lack of financial resources (Carvalho et al., 2005; Organizacão Pan-Americana da Saúde, 2005; Bertoldi et al., 2009; Boing et al., 2013).

The government has taken measures to provide access to a selected list of 113 medicines, covering conditions including diabetes, hypertensions, contraception, rhinitis, asthma, Parkinson’s disease, osteoporosis and glaucoma (Emmerick et al., 2015). In addition, people suffering from diseases that require high-cost medicines receive these at no charge. A federal programme to subsidise or give out essential drugs in public pharmacies (Farmácia Popular) has been in place since 2004 (Emmerick et al., 2015). In partnership with municipalities and states, the supervision of the production, purchase and disbursement of drugs is done by a public health agency (Oswaldo Cruz Foundation). A partnership with private pharmacies that can sell the same drugs at subsidised prices has been introduced in 2006 (Aqui Tem Farmácia Popular). The cost of the drugs is subsidised at up to 90% when purchased in private pharmacies (Portal de Saúde, 2015). The number of participating pharmacies, both public and private, has increased significantly over the years (Figure 2.10). 63% of municipalities had at least one public or private facility in 2012, although geographical disparities are stark, with 84% of municipalities covered in the South and South-East but only 29% in the North. More should be done to improve access to medicines in poorer areas, which may require more funding.

Figure 2.10. Number of “Farmácia Popular” facilities in public and private sectors, thousands, 2004-13

Source: Emmerick et al., 2015.

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Shortcomings in the public drug procurement process regularly lead to public or associated private pharmacies running out of stock for drugs covered by the SUS (Emmerick et al., 2015; Boing et al., 2013). A recent audit revealed that a majority of hospital units lacked drugs due to malfunctions in purchasing, inventory control, distribution and consumption of these materials (TCU, 2013). Although the government centralises the procurement process for medicine through an electronic procurement system, systematic shortcomings in the bidding process have been identified, leading to drug shortages and discontinuation or delays in health care delivery and procedures (TCU, 2013). There is also scope to improve the management of local stocks, as well as the distribution and delivery system.

Improving the governance of the public health system

The governance of SUS is complex as it includes an intricate web of consensus-building mechanisms at all levels of government, including 27 states and more than 5 500 municipalities, together with the civil society. This was meant to serve as a system of checks and balances and functions through both bottom-up and top-down decisions, implying successive rounds of negotiation. But it has also resulted in a system of shared responsibilities that is hard to manage and monitor. To improve the governance of the system, further progress could be made in three directions: i) ensuring better co-ordination, ii) improving performance monitoring, and iii) adopting better tools to get the right incentives.

Better co-ordinating a highly decentralised system

The strong decentralisation of management and service delivery has delegated much of the responsibilities for service delivery to the municipal level, where administrative capacity is often weak, particularly for small municipalities (Gragnolati, 2013). Examples of this limited management capacity include the shortage of medicine in public facilities mentioned in the previous section, but a lack of planning and inefficient allocations of resources have been documented more widely (TCU, 2013). Against this background, rethinking and strengthening some of the co-ordination mechanisms and incentives that drive this decentralised system would likely improve the efficiency of healthcare delivery.

Better co-ordination could be achieved through a stronger focus on the development of regional networks. Such networks can co-ordinate healthcare delivery across various local governments to share knowledge and exploit economies of scale. Many municipal hospitals operate below an efficient scale and resource pooling among smaller municipalities could reduce costs and improve quality. Certain diagnostic laboratory and radiologic services including those for cancer, but also emergency medical services, could be provided at lower cost if managed by a regional centre rather than by individual hospitals.

Regional integrated healthcare networks exist in Brazil and are being promoted, and the Health Pact of 2006 has expanded the scope for municipalities to engage in regional networks. One of the objectives behind these networks was to ensure that all regions are enjoying access to key medical services. However, to date, the implementation is limited and no clear consensus has emerged yet as to which is the best design of such regional networks (La Forgia and Couttolenc, 2008; dos Santos and Giovanella, 2014; Vargas et al., 2014). In addition, there is a lack of tools to finance the network and more guidance from states, which could play a stronger role in co-ordinating regional networks, would be useful. Another practical problem is that the functions and roles within these networks are often highly politicised (Vargas et al., 2014). Against this background, there may be a case for re-centralising certain health responsibilities or services. This is what Denmark, though different in size and income from Brazil, did in 2008 in the context of a broader administrative reform (Vargas et al., 2014; OECD, 2013).

Co-ordination of healthcare services provided to individual patients can avoid duplication of healthcare services and unnecessary hospital stays and direct patients to the most appropriate kind of care for their condition. In the public sector, the different levels of governments and other public health institutions have several databases, but at the moment, there is no unique patient identifier that could be used to follow an individual. The gradual rollout of Brazil’s National Health Card that began in 1999 is a step in this direction and should be continued (OECD, 2010c). Co-ordination of care is particularly important for chronic conditions and for the elderly who may have difficulty explaining their health status and navigating through the different levels of healthcare. The use of a unique patient identifier is a precondition for linking clinical datasets across different systems to better monitor quality of care.

Improving performance monitoring through data and quality indicators

Better performance monitoring and more use of benchmarking in management decisions would strengthen accountability and improve governance in the health sector. The different levels of government and various programmes make it difficult to track financial flows and to evaluate the efficiency of service provision. One indication of how difficult it is to monitor financial flows is that, despite evidence of underfunding, the Ministry of Health has not fully utilised the resources allocated to the SUS between 2003 and 2014 (Conselho Federal de Medicina e Contas Abertas, 2014). Moreover, it is only recently that the country can monitor spending of public (and some private) hospitals (La Forgia and Couttolenc, 2008; Chi and Hewlett, 2014).

Brazil already collects some performance indicators, although the set of indicators could be expanded, particularly with respect to outcome indicators. In 2011, the federal government started the National Programme for Access and Quality Improvement in Primary Care (PMAQ) which collects 47 indicators on health procedures performed in the areas of women’s health, child health, diabetes, oral and mental health (Ministry of Health, 2012). Indicators on diabetes, for example, focus on process indicators such as the number of diabetes patients registered, the number of average treatment by diabetic patient, the number of follow-ups. While process indicators are important, PMAQ could be expanded to collect indicators on patients’ health outcomes would allow a better performance evaluation. For example, Israel’s Community Healthcare (QICH) programme collects outcome indicators in six clinical areas. The indicators have been used successfully to identify possible areas of improvement in preventive diagnostic and therapeutic primary services (OECD, 2012). Improving computer literacy skills of primary care staff may facilitate a more systematic collection of performance indicators.

Beyond primary care, there are only a few initiatives to collect performance indicators. The regulatory agency for private health plans, has introduced quality indicators for private hospitals (ANS, 2015). In OECD countries, the collection of health care quality indicators is not limited to primary care. Regularly collected indicators include avoidable hospital admissions, prescribing patterns in primary care, mortality following heart attacks and strokes, surgical complications, and unplanned hospital readmissions with mental disorders (OECD, 2015a). Collecting such indicators could benefit performance monitoring in Brazil’s public hospitals. Beyond this, a systematic collection of comprehensive standardised comparable performance indicators at the local level, including at the level of individual healthcare units and hospitals, would allow identifying areas where there is scope for efficiency gains and better health outcomes.

Setting up a dashboard with comparable indicators on health outcomes would allow the replication of the successful federal-led-financial incentive scheme in the education sector (OECD, 2011a). Like healthcare, primary and secondary education also falls into the remit of local governments and has been facing similar capacity challenges. Significant advances in education have been related to additional federal funding provided to local governments in reward for performance improvements. In education, these can be measured objectively through a set of nationwide student competency tests that allow almost every school in the country to be benchmarked against others.

Better tools to give the right incentives to provide higher quality care

In the eyes of patients, private sector healthcare providers seem to be doing a better job at providing high quality care relative to the public sector. More than 60% of the respondents of a large-scale survey perceived the quality of public healthcare services as bad or very bad (Figure 2.11, Panel A). Patients grade private hospitals and health services significantly above public healthcare services in surveys, and this difference persists across all areas of healthcare (Figure 2.11, Panel B). Recent survey evidence suggests that in primary healthcare alone, patient satisfaction is significantly higher.

Figure 2.11. Perceived quality of public healthcare service in Brazil

Source: Confederação Nacional da Indústria, 2012.

StatLink  http://dx.doi.org/10.1787/888933282991

The perception of better quality in the private sector, to the extent it reflects quality, is likely related to better incentives. This suggests that tools that are used in the private sector could be applied more widely in the public sector to create the right incentives for providing quality healthcare. Such tools could include adequate financial incentives for state and municipal governments to influence the behaviour of care providers, including through financial incentives for care providers. A more widespread use of assurance mechanisms such as accreditation or standards could also be useful. 

Introducing more financial incentives for good performance could strengthen the willingness of care providers to enhance quality. Evidence suggests that pay-for-performance schemes can deliver quality improvements, particularly when combined with strong monitoring mechanisms, notably to avoid that providers neglect areas that are not incentivised (OECD, 2015a). Pay-for-performance schemes have been used successfully in several countries, such as in Sweden and the United-States (OECD, 2015b). These schemes seem notably effective in forcing providers to report data better.

In Brazil, the use of such schemes is limited to the private sector or small scale projects, but they have generally worked well. Some private hospitals have adopted quality monitoring mechanisms. One successful example comes from the State of Minas Gerais. Unimed-Belo Horizonte (UBH), the biggest private non-profit health service operator in the state, has provided financial rewards for its healthcare facilities if they seek accreditation. After four years of implementation, seven providers have become accredited and satisfaction ratings by both patients and physicians have improved (Borem et al.). UBH also gives financial incentives to physicians. Health outcomes have improved, rates of hospital admissions fallen and there is also evidence of better disease management for people living with chronic conditions such as diabetes (Borem et al.). The State Foundation for Family Health Care in the state of Bahia is also offering performance incentives in the form of a 25-50% bonus to its staff if they meet the objectives set by the FESF. Compliance with these objectives is monitored by a Primary Care Monitoring System.

Accreditation of hospitals is another way to ensure high quality care. Accreditation programmes can encourage hospitals to meet quality benchmarks and compete against their peers and monitor their quality in different aspects including input, process and outcomes of care (La Forgia and Couttolenc, 2008). In Brazil, the National Accreditation Organisation (ONA) is a nongovernmental, non-profit organization that accredits health care organisations. The organisation’s auditing mechanism and criteria are based on existing international programmes such as the Joint Commission of Healthcare Organization. However, only 228 out of 6 667 public and private hospitals in Brazil were accredited, with most of them earning only lower-level accreditations (Ministério da Saúde, 2015; ONA, 2015; Figueiredo, 2015). One way to improve the number of hospitals participating in the accreditation program is to link accreditation with payment, or to impose participation in voluntary accreditation programmes as a pre-condition for dealing with the public sector, as is done in many OECD countries.

Imposing quality standards can also improve the quality of care when coupled with appropriate monitoring and enforcement mechanisms, but enforcement mechanisms have been lenient in Brazil. A recent report inspecting 71 emergency departments in São Paulo found that half of them lacked sufficient medical staff and equipment and/or were not following appropriate procedures (Cremesp, 2013). It is unclear how and by whom disciplinary actions should have been imposed to ensure compliance with existing quality standards. There are limited enforcement mechanisms, such as fining or closure, available when hospitals have been deemed of insufficient quality or unsafe in an audit. Many OECD countries use quality control mechanisms as a pre-condition for dealing with the public sector. Efforts should be made at the central government level to ensure all public and private hospitals meet the existing minimum standards and comply with the provisions of their license.

Regarding medical staff, there is a compulsory recurrent mechanism for registration and re-licensing of physicians, but it does not require re-certifying their competence. In contrast, several other countries, including the Netherlands and the UK, require both general practitioners and specialists to undergo re-certification every five years. Oversight for physicians in Brazil is generally lenient, and doctors who fail to comply with quality standards rarely face disciplinary action (CFM, n.d.).

Making the public health system more cost-efficient

Reducing hospital costs

Hospitals currently account for 70% of federal public healthcare spending, compared to an average of 40% in the OECD. International experience has shown that many services can be provided at lower costs outside of hospitals. The SUS has helped to reduce the role of hospitals as the “usual source of care” and increased the reliance on primary care facilities from 42% to 57% of the population. Still, more than half of emergency room visits could have been treated in primary care, suggesting that more remains to be done to develop outpatient care (TCU, 2013).

Payment mechanisms are key instruments for increasing efficiency, but the current payment mechanism in Brazil provides little in terms of incentives for hospitals to do so. Current payment mechanism for public SUS hospitals rely on line-item budgets calculated on the basis of historical trends with an adjustment based on government tax revenues during the fiscal year. In addition, there is an expenditure ceiling set for each hospital. The SUS should consider replacing line-item budgeting with alternative payment mechanisms.

One option would be to move towards global budgets that are linked to performance or outputs. In tax-funded health systems like Brazil’s, global budgets are often applied to set the caps in hospitals budgets (Busse and Quentin, 2011). These can be coupled with activity-based payment mechanisms such as Diagnosis-Related Groups (DRGs), used in 14 out of 34 OECD countries, to encourage efficiency while controlling the overall budgets (OECD, 2015b). DRGs typically reduce the length of hospital stays and improve transparency (OECD, 2015b). Brazil could consider developing the current “Authorization for Hospitalization” (Autorização de Internação Hospitalar) to become the basis for a Brazilian DRG mechanism for reallocation of funding (La Forgia and Couttolenc, 2008). However, introducing such payment mechanisms would require collecting more information on costs, volumes, outcomes and patient characteristics at the hospital level.

Besides public hospitals, local governments can contract out all or part of the service delivery to private hospitals operating on a not-for-profit basis and the SUS has agreements with many private hospitals to treat SUS patients. In fact, private sector hospitals currently account for 65% of SUS beds and admissions. These private SUS hospitals are paid according to service-specific payment schedules based on historic agreements, and these schedules are significantly different from the payment mechanisms for public SUS hospitals. This leads to awkward incentives as private SUS hospital payment rates for high-complexity procedures are below cost while low-complexity procedures are reimbursed above costs. As a result, private SUS hospitals have incentives to provide low-quality services to SUS patients and transfer complex cases to public facilities (La Forgia and Couttolenc, 2008). This could be addressed by aligning payment mechanisms for private SUS hospitals with those for public sector hospitals. In both cases, payment mechanisms should have clear output or performance targets, and specify details of the service mix, volumes and outcome targets.

Add-on payments have been frequently used by the Federal Government to address some acute problems in health care services. For example, recognising the inadequate access to hospital care, the government has announced per-diem incentive payments for acute in-patient care for stroke patients (Ministério da Saúde, 2014). However, these add-on payments are not regularly linked to quality improvements, although doing so may provide significant opportunities for raising the quality of care.

Promoting cost effective and rational use of drugs

Pharmaceuticals account for approximately 12% of the total central healthcare budget. This includes two kinds of expenditures on drugs. For one, a selected list of 113 medicines are provided free of charge through select pharmacies. Beyond this, however, the constitutional guarantee that “health is the duty of the state” is frequently used by patients who ask judges to issue court orders to municipal health managers to purchase specific drugs that their doctors have prescribed but that are not on the list. Such judicial action is growing substantially. In 2011, there were more than 240 000 such lawsuits (Perlingeiro and Newdick, 2014). These have created substantial costs for the health system (Figure 2.12).

Figure 2.12. Federal expenditure on drugs to comply with judicial decisions, 2005-11

Growing costs to comply with pharmaceutical judicial decisions in Brazil

Source: TCU, 2014.

StatLink  http://dx.doi.org/10.1787/888933283003

This situation is problematic both on efficiency and distributional grounds. Court orders require the federal and state to take immediate actions to cover any drugs, with no regard to their cost-effectiveness and often results in purchasing at full prices instead of negotiated prices, which implies unexploited opportunities to reduce costs. They also create equity concerns as wealthier and more educated patients may find it easier to rely on the judicial system to pursue their claims. Court orders have no implications beyond the individual case and do not mean that the drug is added to the list of medicines provided by the state.

Instead of the current situation, a regulatory body in Brazil should define clear rules for medicines that will be reimbursed by the state, with the understanding that drugs that are not approved by this body would not qualify for the state’s constitutional obligation to provide healthcare. Faced with a similar challenge, Colombia has grouped drugs into a positive and a negative list to prevent such judicial cases. However, this requires a robust and fast administrative process to update the negative list.

Further cost reductions can be achieved by using Brazil’s regulatory body to set reference prices for all drugs more in line with international price comparisons, update them regularly, carry out health technology assessments and develop clinical guidelines for the use of cost-effective drugs. International experience suggests that the associated savings can be substantial. Brazil’s National Health Surveillance Agency (ANVISA), together with the National Commission on Technology Incorporation for SUS (CONITEC) are well-placed to perform this task. Its current partnership with the UK’s National Institute for Health and Clinical Excellence (NICE) may be helpful in this context.

There is also scope to increase the use of generic drugs. Brazil has promoted the use of generic drugs, including through compulsory licenses for patented drugs (Luo et al., 2014; Victora et al., 2011; Homedes and Ugalde, 2006). A prominent example has been antiretroviral treatment for HIV/AIDS patients, which is available free-of-charge (Victora, et al., 2011). However, compared to OECD countries, the share of generics remains low at about 30%, compared to over 80% in Germany or the United Kingdom, for example (OECD, 2015a). Financial incentives for those prescribing, buying or selling generics could be strengthened. In France, physicians and pharmacists receive bonuses for high rates of generic prescription. In Switzerland, a higher co-payment is imposed to purchase branded drugs (OECD, 2015a).

Anticipating population ageing

The share of older people is set to rise strongly over the next decades. The proportion of people 65 and over is projected to increase to 27% by 2050, from 15% today (OECD, 2015a). Similarly, the share of people 80 years and over is projected to increase to 6% by 2050, from currently only 1%. This will create challenges for the health system, as the probability of using health and long-term care increases with age, and gets very high when people reach the age of 80 (OECD/EU, 2013). Evidence suggests that the additional years of life that Brazilians are now enjoying are not necessarily free of morbidity. For example, a recent study in São Paulo found that the life expectancy of people aged 60-64 years old increased by two years from 2000 to 2010, but healthy life expectancy did not improve at all (ILC, 2013).

Brazil’s health system has done little to prepare for this challenge. Formal home care and long-term care facilities, whose expansion has been a key policy response to the ageing challenge in other countries, are underdeveloped. The majority of Brazil’s elderly people requiring long-term care services are supported by informal carers like families and friends, as is the case in many other countries as well, but in many OECD countries, different formal care options are available to complement informal care. Although long-term care recipients often prefer to be looked after by families and friends, this way of giving care has an economic cost as it often reduces labour market participation of relatives and friends. It may also have an emotional cost, as evidenced by a higher chance of developing mental illness of people who give care.

Demand for formal long-term care services is undoubtedly going to rise and pressures to spend more in this area will mount. Declining family size and rising female participation in the formal labour market are likely to make informal caregivers less available in the future, thus strengthening the need for paid care. In addition, technological change is providing new possibilities for long-term care services at home but this may also require more formal home-care arrangements (OECD, 2011b).

The expansion of formal home care is likely to play a particularly important role going forward, as it is less costly than institutional care and closer to the currently predominant model of informal home care. In nearly all OECD countries, between half and three quarters of all formal long-term care is provided in home-care settings. More and more OECD countries have started providing long-term care services as less costly and better alternatives to long hospital stays, and pilot projects have also been started in developing countries including Thailand.

Brazil has initiated a federal programme that provides home care as a substitute to existing health care services, called “Melhor em casa” (Better at home). The scale of the programme is small, with an initial target set by the federal government to have 1 000 home care teams and 400 support staff in place by 2014 (Ministério da Saúde, n.d.). This programme, although not uniquely geared towards the elderly, can serve a useful starting point, but its funding needs would rise over time. There will also be a need to train more health professionals for the particular needs of older people as geriatric knowledge is still scarce among health care professionals.

Institutional long-term care services, such as in a nursing home and palliative care, are equally scarce in Brazil. There are only 218 public care institutions available for 20 million older Brazilians and 71% of all municipalities did not have long-term care institutions in 2011.

Besides formal care options, supporting those who provide informal care may be a cost-effective option. Increasingly OECD countries implement policies to support carers, for example through improved options for care leave or the introduction of targeted carer allowances. Several OECD countries also cover their pension contributions. Many OECD countries have introduced public schemes, such as counselling and training for easing stress and anxiety, cash payment to compensate their time and work, and flexible working hours to help assist informal carers keep their jobs (OECD, 2011b).

Public funding for formal long-term care can have a strong effect on inequality, as the costs of care can be very high compared to the incomes of the elderly. Even for elderly people in the higher income quintiles, long-term care can account for up to 70% of disposable income and this proportion can go up to 200% if for the less affluent (OECD, 2011b). This may be one of the reasons why the bulk of formal long-term care is publicly funded in OECD countries (OECD, 2011b). It is particularly high in Scandinavian countries and the Netherlands, which allocate over 3% of GDP to long-term care.

Brazil has already taken steps to alleviate the burden of healthcare costs for the elderly. The 2003 Statute of the Older Person grants preferential treatment to older people in the SUS and made medication for certain chronic conditions available free of charge. Providing more formal long-term care through the SUS will promote equity, improve the quality of life for the elderly and avoid further strains on capacity in hospitals, where the provision of long-term care is far more expensive than through explicit long-term care options.

Box 2.2. Main policy recommendations for improving public health services

Easing access to public health care

Enhance spending efficiency, including by developing a more explicit definition of what is covered by the public healthcare system, and raise funding for public healthcare.

Implement targets for expanding specialised medical services to reduce waiting times.

Gradually phase out the tax deductibility of private healthcare expenses to free more resources for the SUS.

Train more doctors and nurses and strengthen incentives to reduce geographic imbalances.

Improving governance

Strengthen the role of regional health networks through stronger leadership at the state level, including with respect to financing mechanisms and budget allocation.

Improve the collection of performance indicators and enhance the use of benchmarking and incentive-based mechanisms, including pay-for-performance schemes.

Provide stronger incentives for accreditation of hospitals. Strengthen the licensing process, including enforcement mechanisms.

Improve the co-ordination of healthcare services and the exchange of information by linking databases across healthcare providers.

Making public health care more cost efficient

Shift the emphasis away from hospital care and strengthen primary care services, particularly for patients with chronic conditions.

Introduce output and performance targets into payment mechanisms for public and private SUS hospitals.

Develop clinical guidelines for the choice of cost-effective drugs, set reference prices for all drugs and define an exclusive list of reimbursed medicines.

Anticipating population ageing

Provide more long-term care services under the SUS, with a particular focus on expanding formal home care services.

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Annex A2.1.

Benefits package covered by SUS and primary care services

Primary care services for outpatients

Immunisation for children, adolescents, pregnant women

Medical, nursing, dental and multi-professional care

Referral to specialised outpatient services as necessary

Dispensing of drugs and medications, in accordance with the National Essential Medications Registry/RENAME for primary care

Taking of samples for laboratory examination

Home visits

Consultations for homeless people (in certain cities)

Hospital care/admission

Admission to general hospitals, public hospitals or hospitals licensed by the SUS

Admission to specialised hospitals

Admission to intensive therapy units (UTI) – neonatal, pediatric and adults – in SUS hospitals

Admission for childbirth

Emergency and elective surgery

Emergency services

Emergency Care Unit

First Aid

Mobile emergency service and ambulances

Diagnostic support services: clinical tests and imaging including X-rays, ultrasound, MRI.

Specialised care

Oncological care

Renal replacement therapy

Cardiological care, including high-complexity surgery and dispensing of specialised drugs prescribed by SUS physicians

Organ transplants

Cataract surgery

Provision of prostheses and orthotics for cardiac, orthopedic and other surgical procedures

National blood and haemo-derivatives Programme

Other high-complexity services

Other services

Specialised dental Centre, including supply of dental prostheses.

Mental health: Psychosocial care centre including for users of alcohol and other drugs; for mental disorders and for children

Specialised rehabilitation centre for physical and intellectual deficiencies

AIDS and Hepatitis care

Health promotion and disease prevention including fitness and anti-smoking programmes, violence prevention units, healthy foods and nutrition programme.

Source: Ministry of Health.

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