Brazil: Strengths and challenges in the country of tomorrow

1. Brazil
Strengths and challenges
in the country of tomorrow
Latin American and Caribbean Unit
OECD Development Centre
ESSEC Business School
Paris. November 13, 2014

2. 2
2009

3. 3
Brazil, in the forefront
2009 2014

4. Perspectivas económicas de América Latina
Political divide and slowdown in the short term
Reforms in the long term?2
Brazil, strengths and challenges in the country of tomorrow
3 Strengths

5. 5
Two Brazils
Source: Tuca Viera, Sao Paulo

6. 6
Presidential election reflected these two (twitter) Brazils
Source: FT
Neves 48%
Rouseff 52%

7. … although divide might be exagerated in the short-term,
7
GDP growth (annual %)
Results by state

8. … although divide might be exagerated in the short-term,
8
Source: Jorge Arbache
A political divide more blurred than it seems

9. External environment - Regional slowdown in the short-term…
9
Source: IMF WEO Database, OECD forecasts for OECD 2014, CAF and ECLAC forecasts for LAC 2014
GDP growth (annual %)
-4
-2
0
2
4
6
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Gap OECD Latin America and Caribbean

10. …led by mild recovery in developed economies and lower growth in
key emerging partners
10
Source: OECD (2014) Preliminary Economic Outlook
GDP growth (annual %)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
United States Euro Area Japan China Russia
2014 2015 2016

11. Source: OECD-ECLAC-CAF (2014), based on Bloomberg and CAF projections
11
Price level of selected commodities (Index 100 = 2005)
Downside external risks – I. (Even) Lower commodity prices
0
0.5
1
1.5
2
2.5
3
3.5
4
2005:01 2006:01 2007:01 2008:01 2009:01 2010:01 2011:01 2012:01 2013:01 2014:01 2015:01 2016:01
Soy Copper Oil Gas

12. 12
Source: OECD-ECLAC-CAF (2014), based on IMF, CAF and Thomsom Reuters Datastream
Downside external risks – II. (Faster) Monetary tightening in
developed economies
Monetary policy for advanced economies
(Interest rates)
0
1.5
3
4.5
6
USA Europe UK
12

13. 13
Source: OECD-ECLAC-CAF (2014), based on national sources and data from CEPAL
Domestic risks – Growing current account deficits…
Current account deficits and capital flows (average 2010-13)
-6
-4
-2
0
2
4
6
8
10
12
14
%
Short term capital flows FDI Current account deficit
13

14. 14
Source: CAF estimates based on national sources
…and a more limited fiscal space
Primary structural balance (% of GDP)
-8
-6
-4
-2
0
2
4
6
8
Argentina Bolivia Brazil Colombia Chile Ecuador Panama Paraguay Peru Uruguay Venezuela
2007 2013
14

15. Source: IMF WEO Database, OECD for 2014-2015 OECD projections, and Consensus Forecasts for LAC projections15
GDP growth in selected LAC economies (annual %)
In LAC, significant differences among countries
-4
-3
-2
-1
0
1
2
3
4
5
6
7
Argentina Brazil Chile Colombia Mexico Peru Venezuela LAC OECD
2009-2013 2014 2015

16. Brazil is braced for a significant drop in growth …
16
GDP growth in Brazil (annual %)
Source: OECD (2014) Preliminary Economic Outlook
-1
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%

17. 17
… that will keep the country in the middle income trap
GDP per capita in Latin America vs. selected OECD economies
(1990 USD PPP)
Source: OECD-ECLAC-CAF (2014), using World Development Indicators and Felipe, Abdon and Kumar (2012)
Note: HI (High Income), UMI (Upper Middle Income), LMI (Lower Middle Income), LI (Low Income)
-
5 000
10 000
15 000
20 000
25 000
Chile Uruguay ArgentinaVenezuela C. Rica Mexico Colombia Brazil Peru Dom. Rep. S. Korea Ireland Spain
2013 1980 1950
LI
LMI
UMI
HI

18. Perspectivas económicas de América Latina
Slowdown and political divide in the short term
Reforms in the long term? Socio-economic challenges2
Brazil, strengths and challenges in the country of tomorrow
3 Strengths
Demography and informality
Infrastructure and logistics
Education and skills
Fiscal policy for inclusive growth

19. Rapidly ageing population…
19
Source: Celade (2011)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Pob <15 Pob 15-65 Pob 65>
Pob 65+ (2010)
13.4 millones
(6.9%)
Pob 65+ (2050)
51 millones
(22.9%)

20. … which translates into a shrinking labour force
20 Source: Celade (2011)
Working-age population over Pop +65 (ratio)

21. Especially given the early exit from the labour force
21 Source: Celade (2011)
Share of workers over working-age population (men)

22. Informality is high among low-income workers and independents
22 Source: Bosch, Melguizo and Pages (2013)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
Percentageofcontributors
Salaried Non-salaried
Formal jobs in Brazil (ratio of contributors over workers, 2010)

23. Source: OECD (2010), based on household survey data
Note: Percentage of total middle sectors’ workers (0.5 – 1.5 median household adjusted income)
Middle-sector workers by employment category (%)
0.0
0.2
0.4
0.6
0.8
1.0
2002 BOL 2006 BRA 2006 CHL 2006 MEX
Percentage
Formal employees Self Employed (with tertiary education completed)
Non Agricultural Self-employed Non Agricultural Informal Employees
Agricultural Self-employed Agricultural informal employees
Middle-income workers, some in the urban emerging middle class,
are also informal
23

24. Persistent need for social pensions adds to spending pressures
24
Projection of elderly population without an adequate contributory pension
(Share of pop +65, 2050)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
URY
CHL
BRA
CRI
PAN
ARG
ECU
SLV
DOM
COL
VEN
PRY
JAM
NIC
HND
MEX
PER
GTM
BOL
Percentageof65+withoutanadequate
contributorypension
Source: Bosch, Melguizo and Pages (2013)

25. Perspectivas económicas de América Latina
Slowdown and political divide in the short term
Reforms in the long term? Socio-economic challenges2
Brazil, strengths and challenges in the country of tomorrow
3 Strengths
Demography and informality
Infrastructure and logistics
Education and skills
Fiscal policy for inclusive growth

26. Empirical model (Balmaseda et al., 2010)
Explanatory variables
- Per capita income (level and
squared)
- Socio- demographics
(urbanization, density)
- Productive structure
(services and industry vs.
agriculture)
Predicted infrastructure patterns
(Km/area, KW pc, pc lines)
Actual levels (Km/area, KW pc, pc
lines)
Degree of achievement
(Observed levels/
Patterns)
Predicted infrastructure patterns (for each country each year) can be compared to actual
levels, to estimate gaps and identify priorities
Analyzing infrastructure gaps
26

27. Paved roads
In LAC, even the regional leader is below predicted levels in energy and transport
0%
40%
80%
120%
160%
200%
240%
280%
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
LatAm MAX-min LatAm
Asia
Eastern Europe
Observed/predicted infrastructure levels (%)
0%
20%
40%
60%
80%
100%
120%
140%
160%
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
LatAm MAX-MIN LatAm
Asia
Eastern Europe
Electricity Capacity Generation
Source: Balmaseda et al. (2010)
LAC exhibits significant gaps in energy and transport
27

28. Brazil shares these lags (energy & transportation)
28
Patt. Obs. Ratio Patt. Obs. Ratio Patt. Obs. Ratio Patt. Obs.
LatAm 993 887 -11% 952 525 -60% 205 44 -154% 35 11 -113%
Argentina 527 1263 87% 1047 720 -37% 257 28 -221% 23 15 -47%
Brasil 716 837 16% 902 510 -57% 275 32 -215% 24 10 -92%
Chile 801 1045 26% 1154 831 -33% 314 28 -241% 24 3 -195%
Colombia 745 952 25% 755 306 -90% 222 44 -162% 26 4 -181%
Mexico 1426 836 -53% 1049 516 -71% 427 99 -146% 26 21 -22%
Peru 539 648 18% 673 240 -103% 193 19 -231% 24 4 -189%
Venezuela 1118 1052 -6% 1269 822 -43% 277 80 -124% 25 2 -278%
Costa Rica 1545 660 -85% 864 474 -60% 348 329 -6% 27 11 -94%
Dom. Republic 2417 660 -130% 869 577 -41% 342 222 -44% 30 65 79%
Rail lines (Ths. Kms per
1000 Kms area; 2006)
Total telephone lines
(per 1000 people; 2007)
Paved roads (Ths. Kms per
1000 Kms area; 2004)
ECG (Ths. KW per 1000 people;
2006)
Source: Balmaseda et al. (2010)

29. 29
Source: OECD-ECLAC-CAF (2013) based on The Conference Board Total Economy Database, World Bank (LPI) and
COMTRADE
Beyond hard infrastructure – Logistics could boost labour productivity
Logistics and productivity
(Partial correlation, 2012)
ARG
BOL
BRA
CHL
COL
CRIDOM
ECU
GTM
JAM
MEX
PER
URYVEN
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
-1 -0.5 0 0.5 1 1.5
OECD Other countries Latin America
LabourproductivitynotexplainedbyGDPpercapita
Logistics performance not explained by GDP per capita

30. 30
Source: OECD-ECLAC-CAF (2013) based on UN COMTRADE data
Note: Logistics-intensive sectors include mining, forestry and logging, wood manufacturing, paper publishing and printing
Time-sensitive sectors include agriculture, fisheries, food and drink manufacturing, clothing and horticulture. LAC-18
Brazil’s exports more sensitive to logistics than OECD
Time-sensitive, logistics-intensive exports, 2010
(%)
0
10
20
30
40
50
60
70
80
90
100
Logistics-intensive Time-sensitive

31. 31
Source: World Bank Enterprise Survey
Note: Data not available for the manufacturing industry in Panama. LAC27
The logistics gap stems from costly customs procedures
Days needed to clear direct exports through customs
0
2
4
6
8
10
12
14
16
18
20
Venezuela(Bol.Rep.of)
Brazil
Sub-SaharanAfrica
EastAsiaandPacific
LatinAmericaand
Caribbean
CostaRica
DominicanRep.
Peru
Panama
Mexico
Colombia
MiddleEastandNorth
Africa
Uruguay
Argentina
Chile
SouthAsia
OECDhigh-income
selection
EuropeandCentralAsia
Average Manufacturing sector
na.

32. Perspectivas económicas de América Latina
Slowdown and political divide in the short term
Reforms in the long term? Socio-economic challenges2
Brazil, strengths and challenges in the country of tomorrow
3 Strengths
Demography and informality
Infrastructure and logistics
Education and skills
Fiscal policy for inclusive growth

33. 33
Source: World Bank Enterprise Survey (2012)
Proportion of firms that consider the lack of labour force with the adequate skills a
significant restriction to growth (% formal firms)
Large skills gap in Latin America …

34. 34
Source: Manpower (2014)
Talent shortage in Latin America (% firms)
… more so in Brazil
0
10
20
30
40
50
60
70
80
PER BRA ARG PAN COL CRI GTM MEX

35. Like other LAC countries, a large gap exists in access due to
socioeconomic factors
35
0
10
20
30
40
50
60
70
80
90
100
Quintil 1 Quintil 2 Quintil 3 Quintil 4 Quintil 5
Brasil América Latina
Net enrolment in secondary schooling, by quintile (%, 2011)
Source: Source: OECD-ECLAC-CAF (20134) using CEDLAS data
Q1 Q2 Q3 Q4 Q5
Brazil Latin America

36. Source: OECD-ECLAC-CAF (20134) using OECD/PISA 2012 data36
Brazil shows low education performance and equity, despite
spending as much as the OECD
Education performance and equity in education

37. 37 Source: OECD-ECLAC-CAF (20134) using OECD/PISA 2012 data
Socioeconomic background and quality of resources in the school
(2012, value between 0=no impact and 1=full impact)
Challenges from the distribution of educational resources

38. Improving equity - Access to early education will benefit
future performance
38
Effect of pre-school education over secondary education performance
(2012, PISA score)
Source: OECD-ECLAC-CAF (20134) using OECD/PISA 2012 data
PISA 2012 differential with and without access to pre-primary school (% change)

39. Perspectivas económicas de América Latina
Slowdown and political divide in the short term
Reforms in the long term? Socio-economic challenges2
Brazil, strengths and challenges in the country of tomorrow
3 Strengths
Demography and informality
Infrastructure and logistics
Education and skills
Fiscal policy for inclusive growth

40. Fiscal policy does little to reduce income inequality, due to weaker
cash transfers and income taxes
40
Source: OECD (2008)
Inequality in Latin America and the OECD
(Gini index before and after taxes and public spending)
0
10
20
30
40
50
60
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Poland
Portugal
Spain
Sweden
UnitedKingdom
Inequality before taxes and transfers Inequality after taxes and transfers

41. 41
Tax revenues (% GDP, 2012)
Source: OECD-ECLAC-CIAT (2014),
0 10 20 30 40
OECD (34)
LAC (18)
Guatemala
Dominican Republic
Venezuela
El Salvador
Honduras
Paraguay
Peru
Panama
Nicaragua
Colombia
Mexico
Ecuador
Chile
Costa Rica
Bolivia
Uruguay
Brazil
Argentina
Brazil collects more taxes than the OECD average…

42. …which adds to other non-wage labour costs
42
Non-wage labour costs in LAC (% wages)
Source: Pages (2010)
0
10
20
30
40
50
60
70
JAM
TTO
VEN
PRY
CHL
GTM
SLV
CRI
ECU
MEX
BOL
NIC
COL
BRA
ARG
PER
Percentageofwages
Contributions and taxes Vacation Other benefits Firing costs

43. 43
Source: OECD-ECLAC-CIAT (2014)
0 20 40 60 80 100
Bolivia (E.P.)
Peru
Chile
Ecuador
Argentina
Colombia
Venezuela (R.B.)
Brasil
México
7.7
12.2
3.3
3.1
14.7
2.8
4.4
9.8
2.2
%GDP
PEMEX
Fiscal revenues from non-renewable resources
(billion USD and % GDP)
…plus commodities revenues

44. Looking backwards or forward? Challenges in expenditure
composition (pensions vs education)
44
Source: Bosch, Pages and Melguizo (2013)
Gasto Social en la región. Como % del PIB 2009
País Total Educación Salud
Seguridad
Social
Otros
Argentina /a 27.78 6.68 6.21 12.87 2.02
Bolivia /b 18.42 8.01 3.21 5.73 1.47
Brasil /a 27.06 5.88 5.21 14.07 1.90
Chile /c 16.73 4.69 4.07 7.52 0.45
Colombia /c 14.45 3.07 1.92 8.55 0.91
Costa Rica /d 22.44 7.02 6.64 6.43 2.35
Ecuador /c 9.35 5.42 1.77 1.71 0.45
El Salvador /b 13.01 3.85 4.09 4.33 0.74
Guatemala /e 8.07 3.47 1.40 1.18 2.02
Honduras /c 12.22 8.01 3.50 0.71 0.00
Jamaica /c 10.67 6.57 2.68 0.54 0.88
México /f 11.22 3.92 2.81 2.99 1.50
Panamá /c 10.53 3.96 2.23 1.58 2.76
Paraguay /g 11.01 4.66 2.28 3.86 0.21
Perú 10.01 3.19 1.60 3.31 1.91
República Dominicana /c 7.73 2.44 1.40 2.19 1.70
Uruguay /a 23.32 5.15 4.92 11.57 1.68

45. 0
1
2
3
4
5
6
7
Institutions
Infrastructure
Macroeconomic
Environment
Health and primary
education
Higher education and
training
Goods market efficiency
Labor market efficiency
Financial market
development
Technological readiness
Market size
Business sophistication
Innovation
OECD ex-LAC LAC ex-BRA Brazil
This bias partly explains weak competitiveness…
45
Global Competitiveness Index
Source: WEF
Competitiveness is severely impaired on skills, infrastructure and innovation

46. …which can also be traced to heavy state regulation and interventions
46
OECD indicator on product market regulation (2013)
Source: OECD
Note: The OECD PMR are a set of indicators that measure the degree to which policies promote or inhibit competition in areas of
the product market where competition is viable. The indicators cover formal regulations in the following areas: state control of
business enterprises; legal and administrative barriers to entrepreneurship; barriers to international trade and investment
* Data for 2008.
0
0.5
1
1.5
2
2.5
3
3.5

47. Brazil might benefit from revising its productive development policy
47
Source: IDB (2014)

48. Perspectivas económicas de América Latina
Political divide and slowdown in the short term
Reforms in the long term?2
Brazil, strengths and challenges in the country of tomorrow
3 Strengths: Looking on the bright side
Emerging middle class
Political dynamism
Formality

49. Growing and relatively solid middle class (& big market)
0
10
20
30
40
50
60
70
80
90
100
Italy
Uruguay
Mexico
Chile
Brazil
Peru
CostaRica
Ecuador
Argentina
Colombia
Bolivia
Disadvantaged Middle sectors Affluent
Source: OECD (2010)
Middle sectors in Latin America ands selected OECD countries
(Share of the population earning between 50% and 150% of median income)
49

50. Political dynamism and vibrant society
Narrow margin may be good for Brazilian democracy:
“In history, sometimes, tight results have produced stronger and faster
changes than wide victories (…) I am well aware that I am returning to
the presidency in order to achieve the greatest changes that Brazilian
society demands.”
Victory speech, President Roussef, Oct 26, 2014
Source: Jorge Arbache
50

51. (Relatively) high and increasing labour formality
LAC-19, 44.7%
0
10
20
30
40
50
60
70
80
90
100 BOL
PER
PRY
GTM
HND
NIC
ECU
SLV
COL
DOM
MEX
VEN
JAM
ARG
PAN
BRA
CHL
URY
CRI
Percentage
Source: Bosch, Melguizo and Pages (2013)
Formal jobs in Latin American
(Ratio of contributors over workers, 2010)
51

52. Brazil, the country of tomorrow and relatively of today
52
Source: Angel Melguizo, Rio de Janeiro

53. Main references
OECD-ECLAC-CIAT Latin American Economic Outlook (series)
OECD Brazil Economic Survey (series)
OECD – ECLAC – CIAT Revenue Statistics in LAC (series)
IDB Development in the Americas (series)
Bosch, M., A. Melguizo & C. Pages (2013), Better Pensions, Better Jobs, IDB
53

54. Thank you!
www.oecd.org/dev/americas