Summary
  • Brazil’s GDP is poised to decline by close to 7% in 2015-2016. Per-capita GDP in 2016 is likely to shrink by more than 10% as compared to three years ago
  • A double malaise has been ailing the Brazilian economy: given an “anemia” of productivity increases, an appetite for public spending without prioritization has led to a condition of fiscal “obesity”
  • We further approach why market reactions to the Brazilian government’s proposal of crisis response have been positive.
Brazil’s GDP is poised to decline by close to 7% in 2015-2016. Per-capita GDP in 2016 is likely to shrink by more than 10% as compared to three years ago. We argue here that a double malaise has been ailing the Brazilian economy: Given an “anemia” of productivity increases, an appetite for public spending without prioritization has led to a condition of fiscal “obesity.” We further approach why market reactions to the Brazilian government’s proposal of crisis response have been positive.
 
Brazil has been suffering from anemic productivity growth
Brazil has been suffering from anemic productivity growth (Canuto, 2016a). This is a major challenge because in the long run, sustained productivity increases are necessary to underpin inclusive economic growth. Without them, increases in real labor earnings tend to conflict with global competitiveness, collecting taxes in order to fund government expenditures on infrastructure and social policies becomes a heavy burden, returns to private investment becomes harder to achieve, and ultimately citizens will have less access to high-quality goods and services at affordable prices.
The focus on urgent fiscal reforms adopted by the new government, as we approach later – public spending cap, social security reform (Canuto, 2016b) – must be accompanied by action on the productivity front.
Brazil’s recent social and economic progress was achieved without major productivity growth. Both minimum and average wages rose a lot faster than labor productivity, and employment moved toward sectors with few opportunities for productivity growth (Chart 1).