Conjoncture

Investment, productivity gains & potential growth

ECO CONJONCTURE  
N°8  
27 October 2020  
BRAZIL: INVESTMENT, PRODUCTIVITY GAINS & POTENTIAL GROWTH  
Salim Hammad  
Amidst low investment and stagnant productivity, Brazil has primarily relied on favorable demographics (labor accumulation) to grow. In  
the face of rapid population ageing and a decline in fertility rates however, Brazil’s demographic dividend has been gradually fading. Brazil  
will have to alter its pattern of growth and find avenues to stimulate capital investments and improve total factor productivity if its economy  
is to achieve higher medium-term growth prospects (ie. lift potential growth). The administration has embraced this challenge through an  
ambitious structural reform agenda anchored on two complimentary pillars: enhancing the business environment and transforming the role  
of the state in the economy. The disruption caused by the Covid-19 pandemic has however slowed down the pace of reform and heightened  
uncertainty over the path of the economy in coming years. This begs the question of the reasonable timeframe within which productivity-  
enhancing private investment can become an alternative and durable engine of growth.  
2
9 10  
MATERIALIZE?  
IMPLICATIONS OF DURABLY AN AMBITIOUS STRUCTURAL WILL THE REFORM AGENDA  
WEAK INVESTMENT LEVELS REFORM AGENDA  
FOR POTENTIAL OUTPUT  
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BRAZIL: INVESTMENT, PRODUCTIVITY GAINS & POTENTIAL GROWTH  
Amidst low investment and stagnant productivity, Brazil has primarily relied on favorable demographics (labor  
accumulation) to grow. In the face of rapid population ageing and a decline in fertility rates however, Brazil’s  
demographic dividend has been gradually fading. Brazil will have to alter its pattern of growth and find avenues  
to stimulate capital investments and improve total factor productivity if its economy is to achieve higher medium-  
term growth prospects (i.e. lift potential growth). The administration has embraced this challenge through an  
ambitious structural reform agenda anchored on two complimentary pillars: enhancing the business environment  
and transforming the role of the state in the economy. The disruption caused by the Covid-19 pandemic has however  
slowed down the pace of reform and heightened uncertainty over the path of the economy in coming years. This begs  
the question of the reasonable timeframe within which productivity-enhancing private investment can become an  
alternative and durable engine of growth.  
This is the second of two articles devoted to the issue of investment in machinery and equipment around as well as infrastructure (factories,  
Brazil. In a previous Conjoncture article, entitled “Investment in times electricity grids, etc.) 2/the size of its labor force but also 3/how capital  
of fiscal adjustment” (August 2020), we investigated some of the im- and labor are bundled together to produce goods and services. The  
pediments that weigh on investment in Brazil.  
quality of capital (the quality of roads for instance), the quality of  
the labor force (i.e. human capital accumulation) as well as capacity  
utilization rates are in this framework all captured in TFP.  
In this article, we look at Brazil through the spectrum of three supply-  
side drivers of medium-term growth: investment in physical capital,  
demography and productivity. In particular we try to show why given How does Brazil fare across these three drivers of potential output?  
Brazil’s demographic transition, lifting impediments to investment  
Following, we alternate between theoretical considerations and Bra-  
will be so crucial to addressing Brazil’s productivity challenge. We  
zil’s experience to illustrate the weakening trend of potential output  
then turn our attention to aspects of the administration’s ambitious  
estimates over the past decade or so (Chart 1). It helps to also unders-  
structural reform agenda, in particular its focus on mobilizing supply-  
tand why lifting impediments to private investment and implementing  
side solutions to help increase investment incentives. We conclude by  
policies that stimulate productivity may now be more important than  
offering some remarks regarding potential downside risks to reform  
ever if the country wants to be in a position to raise its medium-term  
implementation, trying to internalize both challenges that predated  
growth prospects.  
Covid-19 and others that have arisen since.  
1
- Investment and capital stock accumulation: some theoretical  
considerations. What happens to output if we add one extra unit of  
capital (input) holding TFP and the quantity of labor constant? The  
extra amount that the economy can produce with one extra unit of  
capital (called the marginal product of capital) is a function of a  
Implications of durably weak investment levels for  
potential output  
Drivers of potential output: assessing the Brazilian coefficient alpha (α), in diagram 1, which value is restricted between 0  
experience.  
and 1 and is referred to as the output elasticity of capital. For instance  
if α = 0.4 then for every 1% increase in capital, output would increase  
Decomposing the drivers of potential output and assessing them  
in the Brazilian context is helpful to understand why given Brazil’s  
demographic transition, raising investment will be of paramount  
importance if the country is to sustain higher levels of growth in the  
medium-term.  
3
by 0.4% holding all else constant . This analytical framework helps to  
see how new investment plays a critical role in increasing output by  
expanding the current productive capital stock of an economy.  
The caveat here is that some depreciation of capital will take place over  
time such that to have a positive impact on output, new investments  
will have to be sufficiently large so as to both cover the depreciation of  
the existing capital stock while allowing to further expand it.  
Potential output corresponds to the highest level of output that an  
1
economy could sustain in the long run with stable inflation . It is  
typically used to estimate the medium to longer-term growth prospects  
of an economy. Effective (observed) output usually fluctuates above or Besides, there are some positive compounding benefits to expanding  
below potential output giving rise to a positive or negative “output capital in infrastructure as countries which achieve higher levels of  
gap”— depending on the over or under use of a country’s productive infrastructure tend to attract more investment, especially through  
4
capacity.  
foreign direct investment (FDI) .  
As diagram 1 shows, a country’s potential output can be expressed  
as a function of the economy’s productive stock of capital, potential  
2
employment and potential total factor productivity (TFP) . In other  
words, the quantity of output that an economy could produce if it were  
working at its full potential depends on the 1/ available quantity of  
3
The restriction imposed to the elasticity is derived from the usual hypothesis of a  
constant return-to-scale production function. This means that the output elasticity of labor  
1- α) has to be 0.6 meaning that when employment increases by 1% (ie by adding 1%  
(
1
It is not in that sense the absolute maximum level of output that an economy could  
more workers to the economy) output increases by 0.6% holding all else constant. This also  
means that when both the capital stock and labor are increased by 1%, output increases by  
1%. To get the contribution to output growth of each factor of production one can take the  
factor’s growth rate times its growth elasticity.  
produce which would strain productive capacities, put upward pressure on wages (as the  
demand for labor exceeds supply) and generate inflation. Instead potential output is con-  
sistent with a level of unemployment referred to as NAIRU, or non-accelerating inflation  
rate of unemployment. The level of employment at potential output is therefore often  
referred to as full employment.  
4 For instance an efficient network of roads and railroads by reducing transportation and  
logistics costs can help to increase the expected return on investment of a project which  
requires to frequently move merchandise around a country.  
2
We use a Cobb-Douglas production function as a growth accounting framework.  
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HOW INVESTMENT, DEMOGRAPHY AND PRODUCTIVITY AFFECT POTENTIAL GROWTH  
DIAGRAM 1  
SOURCE: IMF, OECD, WORLD BANK, VOXEU, BNP PARIBAS  
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Investment and capital stock accumulation: the Brazilian experience. But this assumes that newer technology is accessible locally which  
Investment in physical capital has played an important role in driving may not be the case. It however can be facilitated through trade  
growth over period 1970-2016 with the investment rate amounting liberalization. When capital investments have a high import content,  
5
to 20% of GDP on average over the period . However, the toll on the it favors the transfer and adaptation of new technology into domestic  
private sector of the 2015-16 recession and the post-recession fiscal production processes. These knowledge transfers can change the  
adjustment has contributed to significantly weaken Brazil’s investment structure and organization of production helping to better bundle a  
rate. The ratio of investment to GDP dropped to 14.7% in 2017 from country’s factors of production in ways that increase TFP above and  
2
0.9% in 2013. After bottoming out in 2017, the investment rate has beyond that which is brought along by the sole effects of technological  
since been very slow to rebound. To make matters worse, revisions progress. That is, even if the stock of capital stays constant, new ways of  
to GDP and balance of payments figures in 2019 showed that the in- organizing production can increase the efficiency with which a country  
vestment and savings rates (Chart 2) were in fact lower than figures uses its existing stock of capital. There are of course other avenues  
previously suggested, by 0.5 percentage point (pp) of GDP (15.5%) and through which productivity growth can be achieved (not our focus  
2
pp of GDP (12.1%) respectively (cf Conjoncture – August 2020).  
here) such as increasing investments in human capital (to improve the  
quality of the labor force), but also improving the efficiency of existing  
Brazil’s structurally low investment rate has had adverse effects on  
capital stock accumulation. In its economic survey the OECD (2018)  
9
educational investments .  
notes that investment in recent years “has hardly exceeded the Raising productivity has important developmental benefits. Gains in  
depreciation of the existing capital stock, meaning that growth of the productivity, since they lower costs of production, can translate into  
6
10  
productive capital stock has stalled if not declined” . This trend appears lower prices and higher wages helping to increase standards of living .  
to be particularly concerning in the specific case of infrastructure  
In fact, the World Bank notes that “productivity growth is the primary  
source of improvements in standards of living which in turn is the  
where investment levels were at some point “not sufficient to offset  
depreciation estimated at ~3% of GDP per annum” according to work  
main driver of poverty reduction." 11  
7
by the World Bank . According to the same study, "total investment in  
Total factor productivity: the Brazilian experience. Contrary to other  
rapidly growing emerging markets (e.g. India and China), average  
TFP growth in Brazil has been broadly stagnant for the past 30 years  
infrastructure has been less than 2.5 percent of GDP annually at least  
since 2000” with the situation only getting worse since the recession  
with 1/ the fiscal adjustment (as public sector infrastructure investment  
accounts typically for slightly more than 50% of total investment)  
and 2/ the gradual scaling back of development bank BNDES’ role as  
12  
Charts 3 and 4) . The contribution of TFP to GDP growth has also been  
(
very limited over the years (Chart 7) and has essentially acted as a drag  
on growth (i.e. negative contribution) over the past decade — reflecting  
amongst others things, stagnant or falling labour productivity (Charts  
8
the main provider of infrastructure financing . Not surprisingly, the  
contraction of public investment in the absence of private investment  
has had detrimental knock-on effects on the quality of infrastructure.  
5
and 6). This implies that much of the economic and social progress  
that Brazil has made (in terms of inequality and poverty reduction)  
- Total factor productivity: theoretical considerations. Expanding the in recent decades, was achieved in the absence of major productivity  
13 14  
2
capital stock through new fixed investments, by increasing the amount growth . A study by BCG in 2013 showed that over the period 2001-  
of capital (K) per worker (L) (a process referred to as capital deepening) 2011 74% of the increase in GDP had rested on the number of people  
can also help to increase output by way of increasing labor productivity working while labor productivity gains only accounted for 26%. The  
(
Chart 9). For instance as a fixed pool of farmers is equipped with study also noted how “the low level of investment coupled with the  
irrigation systems and machines to plant seeds, they are able to growth of the employed population has led to a stagnant level of  
produce more output per unit of time worked. There is however a stock of capital per employee.” Brazil’s weak performance in terms of  
caveat here as these productivity gains are not infinite; as more capital productivity growth can been traced back to many underlying causes  
is added to a fixed supply of labor, the marginal output of the capital to –many of which also help explain persistent levels of underinvestment  
labor ratio goes down. Therefore capital deepening, is not a sufficient (cf. Conjoncture August 2020). Widespread policy and market distortions  
condition to guarantee long term increases in output. A crucial element have undermined competition, sustained the survival rate of low  
1
5
is technological progress which is typically supported by investments productivity firms and led to a suboptimal allocation of resources .  
in research and development.  
In the presence of technical change, when new investments are made in  
9
A typical illustration of weak investment efficiency: Brazil spends ~ 5% of its GDP on  
machinery and equipment, the latter embody newer technology helping  
to boost capital productivity (as machines become more efficient). In  
turn this helps to prop up labor productivity through capital deepening.  
The bottom line is that investment in physical capital in the presence  
of technological progress fosters TFP growth.  
education but has comparative less to show for it when compared to OECD countries.  
10 It is often typical in development circles to rewrite the production function on a per  
capita basis which then models income per worker (as an approximation of standard of  
living). In this context, growth of income per worker would be expressed as a function  
of both total factor productivity (TFP) and growth of the capital to labor ratio (ie capital  
deepening)  
11 World Bank (2020a), Lasting Scars of the Covid-19 Pandemic, Chapter 3, June Issue of  
Global Economic Prospects. See also World Bank (2020b), Slow Growth, Policy Challenges.  
January issue of Global Economic Prospects.  
12 Biljanovska, N., & Sandri, M. D. (2018), Structural reform priorities for Brazil, IMF Work-  
ing paper. WP/18/224. International Monetary Fund.  
13 World Bank. (2018), Brazil: Towards a fair adjustment and inclusive growth. Public  
Policy Notes.  
14 Ukon, M., Bezerra, J., Cheng, S., Aguiar, M., Xavier, A., & Corre, J. L. (2013), Brazil: Con-  
fronting the productivity challenge, Boston Consulting Group (BCG).  
15 Qian, R., Araújo, J. T., & Nucifora, A. (2018). Brazil’s Productivity Dynamics. World Bank  
document. The author also offer a sectoral decomposition (ie. agriculture, industry and  
services) of productivity and its dynamics over time. See also World Bank (2018).  
5
Spilimbergo, A., Srinivasan, K., & Walutowy, M. F. (Eds.), Brazil: Boom, bust, and the road  
to recovery, International Monetary Fund, 2018.  
6
7
OECD (2018), OECD economic survey: Brazil 2018.  
OECD (2018) and World Bank (2016), Brazil Systematic Country Diagnostic: Retaking the  
Path to Inclusion, Growth and Sustainability, World Bank Group.  
8
Data by the Brazilian Central Bank show that in 2015, BNDES accounted for 53% of out-  
standing infrastructure loans. Other public banks accounted for 28%, while the remaining  
financing was provided by private lenders (domestics and foreign). See also OECD (2018)  
for further detail.  
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CONTRIBUTIONS TO ESTIMATES OF POTENTIAL GROWTH (%)  
AVERAGE RATE OF TFP GROWTH SINCE 1980 HAS BEEN CLOSE TO 0  
Working-age population (pp)  
Participation and employment (pp)  
TFP (pp)  
Capital per worker (pp)  
Potential growth (y/y, LHS)  
TFP, yearly growth rate (constant national prices)  
7
6
5
4
3
2
1
0
1
2
8
TFP, average growth rate over period 1980-2017  
6
4
2
0
-
-
-
-
2
4
6
8
-
-
-
10  
1
980  
1985  
1990  
1995 2000  
2005  
2010  
2015  
CHART 1  
SOURCE: OECD  
CHART 4  
SOURCE: SOURCE: PENN WORLD TABLES, BNP PARIBAS  
LARGE EMERGING MARKETS : LABOUR PRODUCTIVITY  
IN THOUSANDS OF USD AT PPP / PERSON EMPLOYED  
INVESTMENT AND SAVINGS (% OF GDP)  
Brazil - investment rate  
Brazil - savings rate  
Emerging markets - investment rate  
Emerging markets - savings rate  
Latam - investment rate  
Latam - savings rate  
Brazil  
China  
India  
60  
50  
Indonesia  
Chile  
South Africa  
Mexico  
Russia*  
40  
30  
20  
10  
40  
30  
20  
10  
0
01  
03  
05  
07  
09  
11  
13  
15  
17  
19  
50  
55 60 65 70 75 80 85 90 95 00 05 10 15  
*
time series for Russia start in 1990  
CHART 2  
SOURCE: IBGE, IMF  
CHART 5  
SOURCE: OECD, PENN WORLD TABLES  
TOTAL FACTOR PRODUCTIVITY (INDEX BASE =1954)  
BRAZIL : STAGNATING LABOUR PRODUCTIVITY  
TFP at constant national prices  
TFP level at current PPPs  
Output per hour worked in 2019 USD (LHS)  
190  
180  
170  
160  
150  
140  
130  
120  
110  
100  
Output per employed person in 2019 USD (RHS)  
19  
18  
17  
16  
15  
14  
13  
12  
34 000  
32 000  
30 000  
28 000  
26 000  
24 000  
22 000  
20 000  
9
0
54  
58 62 66 70 74 78 82 86 90 94 98 02 06 10 14  
SOURCE: PENN WORLD TABLES, BNP PARIBAS  
CHART 3  
CHART 6  
SOURCE: CONFERENCE BOARD  
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High trade barriers (high effective tariffs and non-trade barriers) and per woman to less than 2 according to data from the United Nations  
low trade openness (Chart 11), in distorting access to foreign inputs and (Chart 14). This drop constitutes the fastest decrease in fertility rates  
technologies have also been identified as major constraints productivity across Latin America over that period.  
1
6
improvements . The high cost of doing business has also entertained a  
vicious cycle between low investment and low productivity.  
At the same time, Brazil’s population has been ageing rapidly (Charts  
5 and 16). As (Canuto et al., 2018) put it : "while the French took  
1
3
1
- Labor force growth: some theoretical considerations. In Diagram almost 150 years to go from 10% to 20% of persons over 60 in their  
, potential employment (L) represents the fraction of the labor force population, and the British took 65 years, Brazilians will do it in only  
2
0
that would be working if the economy were operating at full potential. 25 years—between 2010 and 2035" . The number of Brazilians above  
In other words, it represents the number of workers employed that the age of 60 is estimated to be currently growing by around 4% a  
would be consistent with an economy that is neither overheating nor year. According to IBGE, current demographic trends indicate that the  
operating under capacity. It is expressed as a function of the potential ratio of [15-64] year old to 65+ year old (ie old age dependency ratio)  
1
7
employment rate (1-NAIRU) times the potential size of the labor force . will increase in the range of 25 to 30 % in 2040 from 12.5% in 2015.  
This means that the burden of supporting old age dependents for the  
Ultimately how potential employment varies will primarily depend  
working age population will increase twofold at a minimum over the  
on the underlying dynamics of the labor force. In turn the size and  
next 20 years. By 2060, IBGE anticipates that Brazilians aged 65+ will  
growth of the labor force will depend on 1/ demographic factors most  
make up about ¼ of the Brazilian population vs. 9.2% in 2018.  
notably population growth (which is more predictable) but also on 2/  
changes in the participation rate (less predictable). Population growth Many of these demographic changes have also taken place much  
1
8
will reflect the stage of demographic transition that a country finds faster than expected. For instance IBGE originally expected that the  
itself in. Typically the stage of the transition will depend on some working age population (15 to 64) would reach its highest proportion  
combination of increase (decrease) of both fertility rates and death in 2023 before gradually coming down as the dependent part of the  
rates. When both fertility rates and death rates decrease a country’s population (youth and elderly) started to make up a growing share  
population starts ageing. Over time, a country’s working age population of the population. The squeezing process of the active part of the  
grows more slowly before reaching a tipping point beyond which it population has instead started 5 years earlier than expected in 2018.  
starts to decline. At this point, older people make up a larger share It is now projected to drop from its peak of 69.46% in 2018 to 67.5%  
2
1
of the working age population. But an ageing working age population in 2030, 65.8% in 2040, 62.7% in 2050 and slightly over 60% in 2060 .  
mechanically affects the profile of the labor force since, as people get  
After taking population ageing into account, IBGE estimates that the  
older, their propensity to participate in the labor force goes down. Since  
labor force will grow by 0.9% in the next decade but will gradually  
the labor force depends on both the size of the working age population  
converge to zero by 2035. The bottom line is that given where Brazil  
and the labor force participation rate, if the participation rate decreases  
currently finds itself in terms of its demographic transition it can no  
so will the labor force. This in turn lowers potential employment and  
longer count on the expansion of its employed labor force to grow its  
thus potential output.  
economy.  
Labor force growth: the Brazilian experience. There was a time up  
to the 1960s were the Brazilian population grew by close to 3% per  
Putting it altogether: what’s the damage?  
year (Chart 13). Relatively high population growth helped drive output As it stands the combination of stagnant TFP growth, a weak investment  
growth just by virtue of having a growing pool of active workers (“the rate and slower growth in the working age population has resulted in  
demographic bonus”).  
Brazilian’s potential growth rate being constrained at a relatively low  
level with most estimates hovering in the range of 1.5% to 2.5% prior to  
the Covid-19 pandemic (versus 3.5 to 4.5% prior to the financial crisis  
in 2008.)  
However, that bonus has been gradually fading. Between 1972 and  
19  
982 demography accounted for half of economic growth . That is for  
1
an average real GDP growth of 6% a year, 3 pp was accounted for by  
labor accumulation. This contribution weakened over time. Between What would it take then to double Brazil’s medium-term growth rate?  
22  
002 and 2012 for an average growth rate of 3.6% it now accounted According to calculations by local bank Bradesco , to see potential GDP  
2
for 1.5 pp. This weakening contribution of labor to growth is reflective growth in the range of 3%, the labor force would need to grow above  
of slower population growth which has affected the potential pool of the population’s growth rate, and the investment rate would need to  
active workers in the population. Since 2000, the population’s rate of rise to 21% of GDP, all with a TFP growth of at least 1% (cf. table 1)  
growth has slowed from 1.4% per year to 0.8% in 2018 (Chart 13). In  
fifty years, fertility rates have dropped from an average of 6 children  
Given that the labor force is projected to slow to 0.9% per year over  
the next decade the 3% potential GDP growth scenario may seem  
improbable unless significant increases in investment and TFP growth  
1
6 See Qian et al (2018) ; OECD (2018) ; Moreira, M. M. (2004), Brazil’s Trade Liberalization  
23  
are made . According to calculations by the IMF, raising Brazil’s growth  
and Growth: Has it Failed? (Vol. 24). Bid-intal and Lisboa, M. B., Menezes Filho, N. A., &  
Schor, A. (2010), The effects of trade liberalization on productivity growth in Brazil: compe-  
tition or technology? Revista Brasileira de Economia, 64(3), 277-289.  
potential permanently to 4.4 % would require a boost of TFP growth to  
2
4
2.5%, a rate last achieved over 50 years ago .  
1
7 Which is equivalent to the working age population times trend labor force participation  
rate where 1/ the working age population is typically defined as population aged 15 to 65  
but definition varies across countries) and is comprised of the number of active people (ie.  
20 Canuto, O., & Dos Santos, T. R., (2018), Economic effects of the Brazilian constitution,  
Novos estudos CEBRAP, 37(3), 417-426.  
21 Fernando Jasper (2018).  
(
employed + unemployed) + number of inactive people (ie. students + retirees + discour-  
aged workers + institutionalized people). Note that inactive people are part of the working  
age population but not part of the labor force ; and 2/ Labor force participation rate is =  
number of people in the labor force / number of people in the working age population  
22 Pereira R.R., de Angelis T.C., Zerbinatti A., D ’A tri F., (2020), Required scenarios to  
increase potential GDP growth, Bradesco Depec Highlight.  
23 According to Bradesco, even under a scenario where GDP grows at 3% as of 2021, and  
real gross fixed capital formation grows at 6% per year, the investment rate would only  
reach 20% of GDP in the second half of the decade.  
1
8 There are 4 or 5 stages depending on demographic transition model used.  
1
9 Jasper Fernando (2018), What now, Brazil? The demographic bonus is over – five years  
early, Gazeta do Povo  
24 Spilimbergo et al. (2018).  
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CONTRIBUTIONS TO OBSERVED GDP GROWTH (%)  
RATE OF CHANGE OF CAPITAL STOCK ACCUMULATION  
Capital stock at current PPPs (in mil. 2011 USD, lhs)  
Capital stock at constant 2011 national prices (in mil. 2011 USD, rhs)  
y/y, %  
y/y, % 5  
Labor quality (pp)  
Capital (pp)  
Real GDP growth (y/y, LHS)  
Labor quantity (pp)  
TFP (pp)  
7
5
3
1
1
3
5
7
2
0
5
4
3
2
1
0
1
-
-
-
-
10  
5
0
1988  
1992  
1996  
2000  
2004  
2008  
2012  
2016  
CHART 7  
SOURCE: CONFERENCE BOARD  
CHART 10  
SOURCE: WORLD PENN, BNP PARIBAS  
BRAZIL'S REAL GDP GROWTH HAS UNDERPERFORMED WORLD GROWTH  
GDP PER CAPITA VS TRADE OPENNESS  
Brazil  
China  
India  
World  
1
1
1
40000  
20000  
00000  
y/y, %  
4
1
1
1
2
0
8
6
4
2
0
2
4
6
Singapore  
8
0000  
60000  
4
0000  
0000  
0
Brazil  
-
-
-
2
Vietnam  
0
50  
100  
150  
200  
250  
(
Exports+Imports)/GDP (%)  
CHART 8  
SOURCE: IMF  
CHART 11  
SOURCE: WORLD BANK  
CAPITAL DEEPENING VS LABOUR PRODUCTIVITY - 2017 (LOG SCALE)  
REAL GDP PER CAPITA GROWTH (%)  
12  
12  
1
1.5  
10  
8
6
11  
4
2
10.5  
1
0
0
BRA  
-
-
-
-
2
4
6
8
9.5  
9
10  
10.5  
11  
11.5  
12  
12.5  
13  
13.5  
Capital per worker (K/L)  
CHART 9  
SOURCE: CONFERENCE BOARD, BNP PARIBAS  
CHART 12  
SOURCE: WORLD BANK  
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POPULATION GROWTH (%)  
POPULATION IS AGEING RAPIDLY (OLD AGE DEPENDENCY RATIO)  
4
5%  
Brazil  
Indonesia  
India  
South Africa  
Ratio between population aged  
3
9%  
3.5  
3.0  
2.5  
2.0  
1.5  
1.0  
0.5  
40%  
1
5-64 years old and 65+  
3
3
2
2
1
5%  
0%  
5%  
0%  
5%  
2
8.7%  
21.5%  
1
5.3%  
11.5%  
2010  
8
.7%  
10%  
5
%
%
0
2000  
2020(f)  
2030(f)  
2040(f)  
2050(f)  
SOURCE: IBGE  
CHART 13  
SOURCE: CONFERENCE BOARD  
CHART 16  
DROP IN FERTILITY RATES  
TOTAL DEPENDENCY RATIOS (CHILD+ELDERLY POPULATION)  
Brazil  
World  
Constant Fertility  
Constant Mortality  
High Fertility  
Instant Replacement Fertility  
Low Fertility  
Medium Fertility  
No Change (Constant Fertility & Constant Mortality)  
Zero Migration  
World  
Upper Middle Income Countries  
Middle Income Countries  
High Income Countries  
More Developed Regions  
Less Developed Regions  
Low Income Countries  
100  
100  
90  
80  
70  
60  
50  
40  
%
6.5  
5.5  
4.5  
3.5  
2.5  
1.5  
0.5  
90  
80  
70  
60  
50  
40  
CHART 14  
SOURCE: UN WORLD POPULATION PROSPECTS  
CHART 17  
SOURCE: UN WORLD POPULATION PROSPECTS  
LIFE EXPECTANCY (ASSUMING MEDIUM FERTILITY)  
LABOR PARTICIPATION RATE  
Total labor force participation rate (RHS, %)  
65+  
Total  
Women  
Men  
years  
1
00%  
65  
95  
90  
85  
80  
75  
70  
65  
60  
55  
50  
45  
6
0-64  
9
8
7
6
5
4
3
2
1
0%  
0%  
0%  
0%  
0%  
0%  
0%  
0%  
0%  
55-59  
64  
50-54  
45-49  
40-44  
63  
62  
61  
60  
59  
3
3
5-39  
0-34  
25-29  
20-24  
1
5-19  
0%  
CHART 15  
SOURCE: UN WORLD POPULATION PROSPECTS  
CHART 18  
SOURCE: ILO  
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9
POTENTIAL GROWTH ESTIMATES UNDER VARIOUS ASSUMPTIONS  
TFP growth (0%)  
Investment rate (% GDP)  
5%  
9%  
1%  
3%  
TFP growth (1%)  
Labor force growth (%)  
0.5% 1.0%  
0.5% 0.8%  
Labor force growth (%)  
0.0%  
0.2%  
0.7%  
1.0%  
1.3%  
1.5%  
1.1%  
1.7%  
1.9%  
2.2%  
Investment rate (% GDP)  
0.0%  
1.2%  
1.8%  
2.0%  
2.3%  
0.5%  
1.5%  
2.1%  
2.4%  
2.6%  
1.0%  
1.8%  
2.4%  
2.7%  
2.9%  
1.5%  
2.1%  
2.7%  
3.0%  
3.3%  
1
15%  
19%  
21%  
23%  
Potential  
growth  
Potential  
growth  
1
1.1%  
1.3%  
1.6%  
1.4%  
1.6%  
1.9%  
2
2
TABLE 1  
SOURCE: BRADESCO  
Where to go from here?  
Flipping the policy mix around has forced authorities to rethink the  
The conclusion that stems out of these simulations is that for Brazil to  
elevate its growth potential, quickly it stands most to gain from increa-  
role of the Brazilian state in society. This has translated into the Mais  
2
7
2
5
Brazil Plan . The plan – which lays out a transformation of the role  
of the state – is organized around a Federative Pact thought of as a  
sing TFP. To do that Brazil will need amongst others :  
to increase capital deepening (ie increasing the ratio of capital to  
labor) which will ultimately depend on the ability to raise private  
investment (given the constraints that weigh on public invest-  
ment)  
2
8
new institutional framework for fiscal policy . The pact is supposed  
to 1/help guide the fiscal adjustment at all levels of government and  
strengthen local governments (cf. Box 2), but also 2/accelerate the  
withdrawal of the state from many businesses (cf. Box 1).  
to integrate new technologies in its productive apparatus (which  
also comes with increased investment but could be further bols-  
tered by increased trade openness)  
PRIVATIZATIONS  
to make progress on its returns to education (invest in human  
capital more efficiently to increase the quality of the labor force).  
These advancements ultimately depend on the adoption of an ambi-  
tious structural reform agenda in particular to better allocate private  
and public resources.  
The Economy Ministry intends to privatize 138 of the  
approximate 400+ state owned enterprises in Brazil  
In 2019, it sold off 35 state assets (BRL 91 bn in auctions and  
BRL 442 bn in future investments). Some of the projects were  
inherited from the Temer Administration. Prior to Covid-19,  
the privatization agenda for 2020 was focused on selling 8  
Petrobras refineries (USD10bn), ending the monopoly in  
postal services and privatizing Electrobras, Latin America’s  
largest power utility company (on hold now).  
An ambitious structural reform agenda  
Greater investment is one avenue through which productivity  
improvements can be made. Enduring weaknesses in the business  
environment however have constrained progress in improving private  
sector competitiveness and acted as impediments to an expansion of  
private investment. But so has a low savings rate which has suffered,  
amongst other things, from a weak public sector fiscal position (cf.  
Conjoncture August 2020).  
The government also plans to sell minority stakes in some  
5
7 companies including (Tim, Vivo, Itau Unibanco, Santander,  
Embraer) according to ex-Privatization secretary Salim Mattar.  
In this section, we look at the government’s agenda for reducing  
investment barriers and lifting long-standing obstacles to growth.  
Transforming the role of the state and creating a better climate for  
businesses are two central pieces of the government’s ambitious  
reform agenda. We will address the first point succinctly and focus  
instead on the second.  
In December 2019, BNDES, the state development bank raised  
approximately BRL 4 bn after selling its shares in 3 companies  
(
car leasing company Unidas, energy company Light and meat  
producer Marfrig). BNDES originally planned to sell it stakes  
in at least 4 companies in 2020 including the world’s largest  
meat producing and processing company JBS and oil giant  
Petrobras. It hoped to raise BRL 40 bn.  
Transforming the role of the state  
The economic agenda (pre Covid-19) has first and foremost been  
focused on changing the policy mix away from a combination of  
loose fiscal policy and tight monetary policy” which Minister Guedes’  
BOX 1  
SOURCE: THE BRAZILIAN REPORT  
identifies as the main historical driver behind high inflation, double  
digit interest rates, and years of fiscal instability which have seen  
2
6
expenditures rise to close to 50% of GDP from 18% 40 years ago .  
2
5 See World Bank (2020b) for a more exhaustive list of policies that can lift productivity.  
27 Plano Mais Brazil – Transformaçao do Estado (ppt presentation in Portuguese, Ministry  
2
6 Guedes Paulo (2019). Speech at the Peterson Institute: Minister Guedes Discusses  
of the Economy)  
Brazil’s Economic Agenda. 26th November 2019.  
28 Guedes (2019).  
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1
0
THE MAIS BRAZIL PLAN AND THE FEDERATIVE PACT: TRANSFORMING THE ROLE OF THE BRAZILIAN STATE  
The Mais Brazil plan and Federative Pact are central pieces of the government’s reform agenda. They can essentially be organized around a  
few principles, objectives and reforms that tie up a lot of the government’s current or prospective initiatives.  
Responsibalize” the state:  
Make sure that all levels of government are fiscally aware and accountable. Increase checks and balances to ensure financial  
responsibility:  
-
Fiscal Council of the Republic: creation of an oversight body composed of the President, heads of the lower house and Senate, chief  
justice of the Supreme Court, state governors, mayors, Federal accounts courts. The goal is to meet every 3 months and report on the  
state of the Union, progress in terms of fiscal adjustment in particular monitor public spending.  
Integrate fiscal rules at all levels of government to guarantee fiscal sustainability.  
-
Fiscal Responsibility Law, Spending cap and Golden Rule (which forbids to issue debt to pay for current expenditures).  
Shrink and simplify the state: “the size of the government is too big and the quality of expenditure is too low.” (Minister Guedes – PIIE speech)  
Control the growth of spending, in particular mandatory spending (which at different levels of government often accounts for more  
than 90% of total spending) to promote fiscal sustainability, rein in the trajectory of public debt, and create space for public investment  
down the line:  
-
Pension and social security reform: 65% of total spending accounts for social security and retirements payments. 70% of expenditure  
growth over the past 20 years has co