Remarks by Angel Gurría
Brasília, Brazil -Tuesday 28 February 2018
(As prepared for delivery)
Dear Minister Meirelles, Governor Goldfajn, Colleagues of the press, Ladies and Gentlemen,
I am delighted to be back in Brasília to present the OECD’s 2018 Economic Survey of Brazil. Let me begin by thanking the Ministry of Finance and Minister Meirelles for their support in the preparation of this Survey, and the Central Bank Governor Goldfajn for hosting us today.
The OECD is proud to have Brazil as a Key Partner. Our partnership has flourished since 1996 when Brazil joined its first OECD Committee – the Steel Committee. Since then, we have forged a mutually beneficial partnership that is improving people’s lives across Brazil and around the world. And OECD-Brazil co-operation has come a long way in the last twenty years. I am particularly delighted that Brazil has requested to join the OECD as a member and deepen its engagement even further in the years to come.
We are releasing this Survey at a critical moment for the global economy. The OECD’s latest Economic Outlook confirms that a modest upswing is underway. We project global growth to improve slightly from 3.6% last year to around 3.7% this year. But the growth is expected to decelerate in 2019 and downside risks remain, with indebtedness of households and corporations reaching record levels in many advanced and emerging economies. Protectionism is yet another downside risk to the world’s economy.
In this context, it is encouraging to see that Brazil’s economy is gathering speed, emerging from a long and deep recession. Economic growth is set to reach 2.2% this year and 2.4% in 2019. The determination of the Central Bank to fight against inflation has clearly paid off. Inflation has declined and closed the year 2017 below 3%, down from a peak of 11% in 2016.
Since the turn of the millennium, macroeconomic stability, favourable demographic trends and external conditions have allowed an expansion of private and public consumption, with solid employment and wage growth.
A buoyant labour market coupled with improving access to education and extensive transfer programmes allowed millions of Brazilians to move into better jobs and attain better living standards. Since 2003, 25 million Brazilians have escaped poverty.
These are very positive achievements. Looking ahead, however, both the external environment and demographic developments will not provide the same support as in the past. Against this background, Brazil faces big challenges.
One big challenge is sustaining inclusive growth. Brazil is still one of the countries with the highest levels of inequality in the world. The richest half of the population earns 90% of total household incomes, while the bottom half earns only 10%. Severe inequalities continue to hit women, racial minorities and youths hardest. While inequalities have remained high, fiscal accounts have deteriorated significantly. The overall budget deficit is almost 8% of GDP. Gross public debt has increased by approximately 20 percentage points of GDP over the last 3 years and stands at almost 75% of GDP.
Without a demographic bonus to rely on, stronger investment and productivity are key for future growth. However, Brazil has one of the lowest investment rates among OECD and emerging market economies. Stronger investment could help raise productivity and therefore the scope for future wage increases. Public spending has crowded out private investment, which has hindered financial flows into areas like infrastructure. Only 13.5% of the total road network in Brazil is paved and 8% has dual-carriage, with the rail network remaining underdeveloped. Because of shortcomings like these, transport costs to export soy from Brazil to China are approximately three times the cost from the United States. Better infrastructure would also help Brazil seize the opportunities of global integration.
Another key challenge is to strengthen Brazil’s integration into the global economy. Currently, Brazil is less integrated into global trade than other emerging markets. Exports and imports account for less than a quarter of GDP, which is far less than other emerging market economies in the region such as Chile and Mexico, where they represent more than 60% of GDP.
The final challenge I’ll mention is the importance of protecting Brazil’s incredible natural resources like the Amazon rainforest. Brazil reduced deforestation by an impressive 82% in the decade leading up to 2014. But since then it has been rising again. When used sustainably, natural assets like the Amazon can bring significant opportunities and potential to spur economic growth and social inclusion in what are currently economically lagging regions. Brazil can seize these opportunities in ways that pomote green growth and well-being.
Brazil needs to keep promoting structural reforms for a more resilient, inclusive and sustainable growth. The OECD Economic Survey of Brazil 2018 makes a number of recommendations to advance in this direction. Let me share some of them with you.
To promote growth that is more inclusive while achieving fiscal targets, Brazil should pursue a comprehensive reform of social benefits. This could include aligning Brazil’s pension rules with those practiced in OECD countries. For example, in OECD countries people retire on average at the age of 66, while the effective retirement age in Brazil is 56 for men and 53 for women. Establishing a formal minimum retirement age and indexing pensions to consumer prices would improve the sustainability of the system. Without reform, pension expenditure will more than double, which would lead to unsustainable fiscal dynamics.
Improving the effectiveness of public spending will also be crucial for fostering inclusive growth. At present a large and rising share of social benefits is paid to households that are not poor, which reduces their impact on inequality and poverty. Shifting more resources towards transfers such as the globally renowned Bolsa Família would benefit the worse off. Currently Bolsa Família only represents 0.5% of GDP out of the 15% of GDP that Brazil spends on social transfers.
To further unlock growth, create jobs, promote competition, increase productivity and raise investment returns, Brazil should simplify taxes, reduce administrative burdens and barriers to entry and streamline licensing. Better use of public-private partnerships and technical capacity from the the national development bank (BNDES) could help improve infrastructure.
But this should never come at the expense of Brazil’s remarkable biodiversity. The return of deforestation and rising energy-related and agricultural emissions calls for higher fossil fuels taxes and stronger enforcement and environmental protection. Tapping more extensively into green finance could also allow the financing of investments that generate environmental benefits.
Brazil will also benefit from a broader and deeper integration into the world economy and global value chains. To achieve this, the OECD recommends lowering tariffs and scaling back local content requirements. This would boost productivity and jobs, including for those with lower skills. Consumers would also benefit from more competitive prices. This would have particularly strong effects among low-income households, since tariffs are particularly high on food, clothing and home appliances.
Greater integration will, of course, bring some short-term adjustment costs. Ensuring that everyone can benefit from trade will require accompanying policies to help workers cope with the likely reallocation of jobs across firms and sectors. Such policies should focus on protecting workers, rather than jobs. Creating training and education opportunities while protecting their incomes in the transition would allow low-skill individuals to acquire new skills and get ready for new jobs.
Last but not least, the pervasive dimensions of corrupt practices exposed by recent allegations have also revealed significant challenges in economic governance which require action. These events also show the steady strengthening of Brazil’s institutions. Its independent judiciary has not shied away from pursuing senior figures. By continuing to strengthen its institutional framework Brazil can distance itself from the past and reduce future vulnerabilities as well as strengthen inclusive growth.
Ladies and Gentlemen,
The Brazilian photographer and environmentalist, Sebastião Salgado, who is an old friend of the OECD, summarises his mission as “Let’s build Paradise again”. Paradise is a tall order, but it’s the right level of ambition. And where better to build paradise than in Brazil, with outstanding natural beauty, incredible culture, wonderful people and great potential for inclusive and sustainable growth.
Together, with powerful tools like our Economic Survey and our Inclusive Growth initiative, we can get Brazil a step closer to Paradise, one policy at a time. Thank you.