Productivity and Growth in Brazil

Fernando Veloso

Since the mid-1990s, Brazil has made progress in achieving macroeconomic stability and implemented reforms in product and input markets. However, productivity growth has been disappointing, lagging behind developed and emerging economies. Demographic dividends are nearly exhausted, with Brazil being one of the fastest aging societies in the world. This implies that in the next decades improvements in living standards will crucially depend on an acceleration of productivity growth.

At the heart of Brazil’s low and stagnant productivity is a business environment that discourages competition and induces misallocation of resources. Alongside important reforms, such as trade liberalization in the 1990s and improvements in credit collateral and bankruptcy procedures in the 2000s, several competitive distortions were created in the last two decades. In particular, credit subsidies, tax exemptions and local content requirements were introduced to benefit specific sectors and firms, distorting labor and capital markets rather than fostering competition.

As a result, the development model based on state intervention and import-substitution that prevailed from the 1930s until the 1980s is still present to a large extent. Instead of a level playing field, the business environment favors incumbents and hampers entry. The lack of competition in both domestic and external markets in turn reduces efficiency and undermines productivity growth.

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