Brazils growth: What went wrong What to expect now

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Brazils growth What went wrong? What to expect
now?

• Luiz de Mello,
• South America Desk, OECD/ECO
• 16 January 2006

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A dramatic reversal of fortune
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Leading to a widening income gap relative to the
OECD area
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By most measures, growth has been due mainly to
input accumulation since the 1980s
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Growth tracks the expansion in capital-in-use
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Labour supply does not seem to pose a constraint
to growth
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No balanced growth in the 1980s TFP declined
together with an increase in the K/Y ratio
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The relative price of investment soared in the
1980s. The usual culprits?
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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

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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)

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Greatest gains will come from human capital
accumulation