MercoPress. South Atlantic News Agency

Brazil's growth potential limited by structural distortions

Brazil has made great advances in growth and productivity performance and stability but macroeconomic and structural distortions remain preventing the country from reaping the full benefits of stabilization in terms of potential growth points out a report from the Organization for Economic Cooperation and Development released Friday.

OECD which is made up of 32 of the world's leading economies including Brazil as observer considers the Brazilian economy growth of 2.3% in 2005 and an average 2.5% since 1995, as insufficient.

This is almost half the 5% promised by President Lula da Silva when he took office in 2003 and which he has insisted is the goal for the next four years.

"Additional structural reform will therefore be needed to lift the economy's growth potential over the medium to longer-term, so as to narrow Brazil's income gap relative to the OECD area, which has widened", points out the report released in Rio do Janeiro.

According to the report per capita income in Brazil was equivalent to 41% of rich countries in 1980, but that has plummeted to 28% last year.

Three policy challenges are identified in this survey: to consolidate macroeconomic adjustment, to boost innovation in the business sector and to improve formal labor utilization.

"The Brazil report does not establish an ideal growth rate or a magic number, it merely points out that is the country is to increase the per capita income, it must elevate the potential growth rate", said Luiz de Mello Deputy chief of OECD South America's Economics Department.

However growth must be compatible with macroeconomic equilibrium and stable inflation, added de Mello warning about growth promotion by itself is not the solution.

Brazil's "overarching macroeconomic challenge is to continue to reduce the public debt overhang while improving the quality of fiscal adjustment, which has so far been underpinned by revenue hikes, rather than a retrenchment of expenditure commitments", insists the survey.

To do so, measures will need to be taken to arrest the increase in current spending, especially on pensions, paving the way for subsequently removing distortions and reducing the tax burden over the medium to longer term, once the debt-to-GDP ratio has been reduced in a sustainable manner.

The OECD reports underlines that the favorable domestic macroeconomic environment, with falling inflation and improving growth prospects, appears propitious for reform towards the gradual phasing out of directed credit and a reduction in compulsory reserve requirements.

In innovation policy Brazil's main challenge is to encourage the business sector to engage in productivity-enhancing innovative activities. At 1% of GDP, R&D spending (both public and private) is comparatively low by OECD standards and is carried out predominantly by the government.

To be successful in boosting business innovation, policies will need to be complemented by measures aimed at tackling the shortage of skills in the labor force which is among the most important deterrents to innovation in Brazil, particularly against the backdrop of a widening gap in tertiary educational attainment with respect to the OECD area.

"The labor market is placing an increasing premium on skills, making it particularly difficult for the less educated to find a job. Labor informality is pervasive and turnover high, especially for the less educated, discouraging investment in labor training and the acquisition of job-related skills, and perpetuating income disparities".

The main policy challenge is to improve labor utilization by reducing informality and fostering human capital accumulation on and off the job, highlights the survey.

The Brazilian Finance minister Secretary General Bernard Appy said there were "a clear convergence" between what OEDC proposed and the government's goals.

"Like OEDC we're moving towards a more economic growth policy with an expansion of government investment and a reduction in taxing.

The OEDC report coincides with the government announcement that the Brazilian economy growth forecast for 2006 has been lowered from 4% to 3.1%. A Central Bank survey among Brazil's leading corporations indicates less optimism: 2.9% expansion this year.