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Brazil experienced a strong rebound in 2021-2022 after negative growth in 2014-2019 and the drastic impact of COVID-19. Its GDP grew on average by 3.3 percent per year in real terms in 2001-14, propelled by the international commodities boom and the domestic expansion of social programs, among others. Falling commodity prices, political turmoil, and unaddressed structural challenges led to an economic recession, with real GDP growth falling to an average of -0.3 percent between 2014 and 2019 and -3.3 percent in 2020 due to the COVID-19 pandemic. Growth rebounded to 5.0 percent in 2021 and 2.9 percent in 2022, propelled by a strong fiscal stimulus, a successful vaccination campaign, a favorable commodity market, and demand for services.

Growth remains solid in 2023, expected to reach 2.6 percent, driven by agriculture, and boosted by households and government consumption. CPI-inflation slowed to 4.6 percent in August 2023 – within the target range - after a peak of 12.1 percent in April 2022. This enabled the Brazilian Central Bank to lower the policy interest rate to 12.75 percent in September (from a high of 13.75), with further decreases expected. The current account deficit stood at 2.5 percent of GDP in the 12 months to July 2023, financed mainly by net FDI inflows at 2.4 percent of GDP. International reserves stood at 17.1 percent of GDP (US$ 345.5 bn) in July 2023. After improvements in 2022, fiscal balances showed some signs of deterioration in 2023 as revenues moderated and social transfers increased. As of July 2023, the 12-month primary deficit of the non-financial public sector reached 0.8 percent of GDP, from a surplus of 1.3 percent of GDP in 2022. Public debt increased to 74.1 percent of GDP as of July 2023. In the medium term, the budgetary outlook is expected to be anchored by the new fiscal framework, which sets out to maintain a primary surplus from 2024 and stabilize debt by 2026.

Yet several structural challenges persist, and Brazil’s growth trajectory is far below its peers. Productivity remained stagnant in manufacturing and many services sectors, where over 90 percent of the workforce is employed, even though large-scale agriculture growth helped promote food security and poverty reduction among parts of the rural population. Recurrent and rigid public spending still crowds out critical investments across sectors.  Brazil’s growth is expected to hover between 1.3 and 2.4 percent in the next four years, well below China, India, and Turkey.

Poverty rates remained stagnant between 2014 and 2022. Poverty was cut in half (with 27 million of Brazilians lifted out of poverty) from 2001 to 2012 thanks to economic growth, increased labor formalization and the expansion of social policies, but the crisis that started in 2014 led to stagnant income growth among the poorest and little progress in poverty reduction. Brazil implemented a bold set of emergency measures during the COVID-19 pandemic to help protect the most vulnerable populations, in large part through the expansion of the Bolsa Família (BF) program, and increased job opportunities arose as part of the economic recovery. Overall, poverty is projected at 24.3 percent in 2022, on par with 2014 levels, after peaking at 28.4 percent in 2021.

The 2023 poverty outlook looks promising, but faster job creation and stronger investments in human capital are needed to reduce striking inequalities. A real increase in minimum wages, a major overhaul of the Bolsa Família, and the planned introduction of additional benefits for families with children are expected to drive poverty further down in 2023. Yet Brazil remains one of the most unequal countries in the world, with a Gini coefficient of 0.53 in 2021 and the wealthiest one percent owning almost half of the country's household wealth. Inequalities are striking across regions, particularly between the poorer northern and the richer southern regions, but also within cities and between rural and urban areas. Female-headed households, Afro-Brazilians, and indigenous populations are overrepresented among the poor, as they face worse labor market outcomes and enduring wage gaps (even within comparable sectors and levels of skills). Today, nearly half of Brazil’s children, the country’s future workforce, are growing up in poor households.

The Brazil 2023 Systematic Country Diagnostic (SCD) update identified four development challenges:

The first is to create opportunities for all Brazilians through a focus on productivity-led growth and a competitive economy. Currently, Brazil's productivity levels in manufacturing and services are still below several Latin American countries, and economic growth has been tepid, decoupling from country peers. Brazil’s growth model continues to rely on factor accumulation, i.e., the expansion of labor, capital, and land. This model delivers only limited growth as demographic tailwinds are fading, low domestic savings constrain capital formation, and land accumulation manifests in deforestation. Brazil needs higher savings and investment rates. But as an upper middle-income country, it particularly needs to boost its growth in total factor productivity (TFP): TFP has been falling by 0.8 percent between 2014 and 2022, especially in the non-commodities sectors.

The second development challenge is to develop a people-centric strategy that increases the income-generating capacity of the poor. With a fifth of the population in chronic poverty before the pandemic, the COVID-19 crisis further exposed the vulnerability of Brazilian households to shocks. The gains of earlier years in households’ income-generating capacity have not been reproduced. In 2019, one-fifth of Brazilians were classified as chronically poor due to their lack of basic assets to leverage their income. While access to education improved, quality remains a concern, as the average student has low performance in both national and international assessments. The pandemic further worsened learning outcomes and inequality due to school closures and higher dropout rates, which will have long-lasting consequences on the future productivity of children.

The SCD update estimated that it may take up to 13 years to recover the losses caused by the pandemic in human capital. Access to relevant skills for the job market, especially in science, engineering, and technology fields, is limited, and there are gender gaps in these areas. Higher education enrollment is highly dependent on family income, reinforcing inequality. There are still gaps in basic access to health services and sanitation. Land tenure is unequally distributed, with high insecurity affecting low-income individuals. While financial inclusion has improved, certain groups still struggle to access financial assets.

The third challenge is to unlock the country’s potential as a green economy. Brazil faces significant, recurring, and increasing losses from climate-related events: in 2019, reported losses were over BRL 22 billion, almost twice the long-term average of BRL 13.3 billion. Droughts are the costliest hazard, followed by flash floods, riverine floods and wildfires. These events impact agribusiness (the agriculture sector loses on average the equivalent of 1percent of agricultural GDP annually as the consequence of extreme climate events), the energy sector (substantially relying on hydro energy), and rural areas, but also disproportionately affect the rural poor who have few options to protect themselves from natural hazards and the urban poor, particularly those living in informal settlements.

Brazil's greenhouse gas emissions profile differs from other countries, with land use change / deforestation (52 percent) and agriculture (24 percent) being the primary contributors. The third-largest emissions source, and the primary one when focusing on urban areas, is the energy sector, with transportation responsible for 45% of emissions within this sector. This is predominantly a result of the substantial dependence on road transportation and vehicles running on fossil fuels. Decarbonizing the transportation sector is important to reduce demand on fossil fuels in the country.

Brazil made progress in reducing deforestation in 2004-2012, but deforestation rates have been steadily increasing since 2014 reaching 11,568 km2 in 2022. In 2023, public policies in support of the environmental protection agenda have been reinstated and have already shown positive results. The Amazon rainforest alone, about 60 percent of which lies in Brazil, delivers ecosystem services valued at a minimum of USD317 billion a year to Brazil and the world. Deforestation puts these services at risk, especially if a tipping point is triggered and results in the permanent dieback of the Amazon. Modernization of land registration practices and incentives for more sustainable land use are crucial to address the country’s environmental needs.

The fourth key development challenge is to finance the country’s inclusive growth through a sustainable framework that relies on more efficient spending, better taxes, and a sound fiscal framework. Structural fiscal reforms, including addressing persistent structural spending issues and improving the tax system, will be critical for the country to find ways of creating space to support a new inclusive growth model. Factors such as public sector pay and pensions, and increased demand for social protection spending, continue to strain public finances. Managing the public service wage and pension bill is crucial, with the federal government wage premium and state pension deficits being sources of concern. Human resources challenges include wage disparities, fragmented and rigid structures, and inadequate performance management. The country's tax system, highly reliant on consumption of goods and services, offers opportunities for more progressive taxation and increased efficiency. The intergovernmental transfer system needs revamping to address horizontal gaps between states. Several state and municipal governments are facing a fiscal crisis, yet states and municipalities are responsible for the front-end provision of basic services to the population, such as education and health. Comprehensive administrative reform is needed, focusing on fiscal aspects, governance, and the quality of public service delivery.

Last Updated: Oct 09, 2023

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