However, Brazil has also been making progress in this area. Despite low average growth rates, the income of the bottom quintile of the population grew by more than 6 percent annually in the 2000s, owing largely to cost-effective social policies. Provided that the government continues to pursue a comprehensive poverty-reduction strategy — including improved access to healthcare, financial services and education — Brazil’s overall productivity should improve in the coming years.
Even so, Brazil has a long way to go. For starters, anemic investment in traditional infrastructure since the 1980s has become an increasingly heavy drag on TFP, contributing to waste and inefficiency in existing production systems. This could be addressed by fine-tuning the division of labor in infrastructure investment and management between the public and private sectors, with the goal of crowding in the latter.
Of course, Brazil should also address the value-added issue that affects all middle-income economies, which implies the need to improve the private sector’s operating environment. As it stands, key features of that environment — including high work-hour requisites to pay taxes and cumbersome bureaucratic requirements — make the cost of doing business in Brazil incompatible with complex production chains, while undermining productivity by wasting human and material resources.
Finally, in order to support improvements in the delivery of services, Brazil should launch a broad-based review of public expenditure. Public spending beyond what is needed to finance the government’s basic functions comprises a major share of Brazil’s GDP. Cutting spending that is not aimed at eliminating the exclusion and infrastructure growth traps would enable Brazil’s government to increase investment in the areas that need it most or reduce the tax burden on the private sector.
Brazil is well positioned to escape the middle-income trap. It is up to its leaders to make the most of that opportunity.
Otaviano Canuto is a former vice president of the World Bank.
Copyright: Project Syndicate