Brazil_Challenges_Strengths

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 2009

3

Brazil, in the forefront

2009 2014

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

Two Brazils

Source: Tuca Viera, Sao Paulo

6

Presidential election reflected these two (twitter) Brazils

Source: FT

Neves 48%

Rouseff 52%

… although divide might be exagerated in the short-term,

7

GDP growth (annual %)

Results by state

… although divide might be exagerated in the short-term,

8 Source: Jorge Arbache

A political divide more blurred than it seems

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


-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

…led by mild recovery in developed economies and lower growth in

key emerging partners

10 Source: OECD (2014) Preliminary Economic Outlook


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

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

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

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

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

Source: IMF WEO Database, OECD for 2014-2015 OECD projections, and Consensus Forecasts for LAC projections 15

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

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

… 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


Slowdown and political divide in the short term

Reforms in the long term? Socio-economic challenges 2


3 Strengths

Demography and informality

Infrastructure and logistics

Education and skills

Fiscal policy for inclusive growth

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%)

… which translates into a shrinking labour force

20 Source: Celade (2011)

Working-age population over Pop +65 (ratio)

Especially given the early exit from the labour force

21 Source: Celade (2011)

Share of workers over working-age population (men)

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

Pe

rce

nta

ge o

f co

ntr

ibu

tors

Salaried Non-salaried

Formal jobs in Brazil (ratio of contributors over workers, 2010)

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

Pe

rce

nta

ge

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

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%U

RY

CH

L

BR

A

CR

I

PA

N

AR

G

EC

U

SL

V

DO

M

CO

L

VE

N

PR

Y

JAM

NIC

HN

D

ME

X

PE

R

GT

M

BO

L

Per

centa

ge

of

65

+ w

itho

ut

an a

deq

uat

e

contr

ibuto

ry p

ensi

on

Source: Bosch, Melguizo and Pages (2013)





3 Strengths





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

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

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

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

ECUGTM

JAMMEX

PERURYVEN

-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

Labo

ur p

rodu

ctiv

ity n

ot e

xpla

ined

by

GD

P p

er c

apita

Logistics performance not explained by GDP per capita

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 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

Ven

ezu

ela

(Bo

l. R

ep. o

f)

Bra

zil

Sub

-Sah

aran

Afr

ica

East

Asi

a an

d P

acif

ic

Lati

n A

mer

ica

and

Car

ibb

ean

Co

sta

Ric

a

Do

min

ican

Rep

.

Per

u

Pan

ama

Mex

ico

Co

lom

bia

Mid

dle

Eas

t an

d N

ort

hA

fric

a Uru

guay

Arg

enti

na

Ch

ile

Sou

th A

sia

OEC

D h

igh

-in

com

ese

lect

ion

Euro

pe

and

Cen

tral

Asi

a

Average Manufacturing sector

na.





3 Strengths





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

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

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

Source: OECD-ECLAC-CAF (20134) using OECD/PISA 2012 data 36

Brazil shows low education performance and equity, despite

spending as much as the OECD

Education performance and equity in education

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

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)





3 Strengths





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

Arg

en

tin

a

Bra

zil

Ch

ile

Co

lom

bia

Me

xic

o

Pe

ru

De

nm

ark

Fin

lan

d

Fra

nce

Ge

rman

y

Gre

ece

Ire

lan

d

Italy

Ne

the

rlan

ds

Po

lan

d

Po

rtu

gal

Sp

ain

Sw

ed

en

Un

ite

d K

ingd

om

Inequality before taxes and transfers Inequality after taxes and transfers

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…

…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 PR

Y

CH

L

GTM SL

V

CR

I

ECU

MEX

BO

L

NIC

CO

L

BR

A

AR

G

PER

Pe

rce

nta

ge o

f w

age

s

Contributions and taxes Vacation Other benefits Firing costs

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

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 SaludSeguridad

SocialOtros

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

0

1

2

3

4

5

6

7Institutions

Infrastructure

MacroeconomicEnvironment

Health and primaryeducation

Higher education andtraining

Goods market efficiency

Labor market efficiency

Financial marketdevelopment

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

…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

Brazil might benefit from revising its productive development policy

47

Source: IDB (2014)


Political divide and slowdown in the short term

Reforms in the long term? 2


3 Strengths: Looking on the bright side

Emerging middle class

Political dynamism

Formality

Growing and relatively solid middle class (& big market)

0

10

20

30

40

50

60

70

80

90

100

Ital

y

Uru

guay

Mex

ico

Ch

ile

Bra

zil

Per

u

Co

sta

Ric

a

Ecu

ado

r

Arg

enti

na

Co

lom

bia

Bo

livia

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

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

(Relatively) high and increasing labour formality

LAC-19, 44.7%

0

10

20

30

40

50

60

70

80

90

100B

OL

PE

R

PR

Y

GT

M

HN

D

NIC

EC

U

SL

V

CO

L

DO

M

ME

X

VE

N

JAM

AR

G

PA

N

BR

A

CH

L

UR

Y

CR

I

Per

centa

ge

Source: Bosch, Melguizo and Pages (2013)

Formal jobs in Latin American (Ratio of contributors over workers, 2010)

51

Brazil, the country of tomorrow and relatively of today

52

Source: Angel Melguizo, Rio de Janeiro

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

Thank you!

www.oecd.org/dev/americas

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Brazil_Challenges_Strengths

Economy & Finance