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Brazil’s growth: What went wrong? What to expect now?

Brazil’s growth: What went wrong? What to expect now?. Luiz de Mello, South America Desk, OECD/ECO 16 January 2006. A dramatic reversal of fortune. Leading to a widening income gap relative to the OECD area. By most measures, growth has been due mainly to input accumulation since the 1980s.

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Brazil’s growth: What went wrong? What to expect now?

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  1. Brazil’s growth: What went wrong? What to expect now? Luiz de Mello, South America Desk, OECD/ECO 16 January 2006

  2. A dramatic reversal of fortune

  3. Leading to a widening income gap relative to the OECD area

  4. By most measures, growth has been due mainly to input accumulation since the 1980s

  5. Growth tracks the expansion in capital-in-use

  6. Labour supply does not seem to pose a constraint to growth

  7. No balanced growth in the 1980s: TFP declined together with an increase in the K/Y ratio

  8. The relative price of investment soared in the 1980s. The usual culprits?

  9. A clear role for policy • Rising price of investment • Real devaluation, substitution of imported K goods for domestic ones, structure of K goods market, distortions (trade barriers, tax system, etc.)? • Forces making temporary shocks more protracted • Rodrik (1999); Kehoe Prescott (2002) • Most estimates put potential GDP growth at between 2.5% and 3.5%

  10. Prospects: The upside • Macro adjustment since mid-1990s: Fiscal and monetary institutions have anchored expectations • Inflation targeting and well-defined fiscal reaction function, but quality of fiscal adjustment needs to improve • External adjustment: strong export performance, better vulnerability indicators • Micro institutions on the mend: FDI, PMR and EPL are in line with emerging markets in the OECD area (2005 Survey of Brazil)

  11. Greatest gains will come from human capital accumulation

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