Systematic Country Diagnostic
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Report Nº: 101431-BR Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Pictures by Filipo Tardim/Disponível sob licença CC BY-SA 4.0 (Brazilian Congress) Eduardo Issa/Programa ARPA/Divulgação (Amazonia) Report No: 101431-BR Brazil Systematic Country Diagnostic Retaking the Path to Inclusion, Growth and Sustainability May 6, 2016 Brazil Country Management Unit Latin America & the Caribbean Region International Finance Corporation Multilateral Investment Guarantee Agency ACKNOWLEDGEMENTS The team is co-led by Roland Clarke (Program Leader), and Emmanuel Skoufias (Lead Economist). We would like to thank the members of the Brazil Systematic Country Diagnostic (SCD) core team: Magnus Lindelow, Pedro Olinto, Gregor Wolf, Paul Kriss, Paul Procee (Program Leaders), Mark Dutz (Lead Economist), Antonio Nucifora (Lead Economist), Boris Utria (Country Operations Advisor), Candyce Rocha (Senior Communications Officer), Hector Gomez Ang (Country Manager, IFC), and Eduardo Wallentin (Senior Manager, IFC). The core team worked under the strategic guidance of two Country Directors (Deborah Wetzel and Martin Raiser) for which we are most grateful. The task team leaders and the core team have relied extensively on the knowledge and inputs provided by colleagues from the Brazil Country Team from all the different Global Practices and the International Finance Corporation (IFC) and we are all truly thankful for the help and support provided. The table below identifies the team members from the various GPs, who contributed their time, knowledge, and experience on Brazil for the preparation of this SCD: The World Bank Group Team Team Members Agriculture Diego Arias, Fatima Amazonas Climate Change Christophe de Gouvello Barbara Bruns, Rita Almeida, Michael Drabble, Leandro Costa, André Education Loureiro Energy and Extractives Christophe de Gouvello Environment and Natural Resources Ernesto Sánchez Triana, Klas Sander, Bernadete Lange, Adriana Moreira Heinz Rudolph, Mark Dutz, Leyla Castillo, Bujana Perolli, Shanthi Finance and Markets Divakaran, Ceyla Pazarbasioglu Gender Miriam Muller, Renata Mayer Gukovas, Aude-Sophie Rodella Lorena Viñuela, Laura Zoratto, Etel Patricia Bereslawski, Miguel-Santiago Governance da Silva Oliveira Health Nutrition, and Population Tania Dmytraczenko, Ezaú Pontes, Magnus Lindelow IFC Luciana Marchesini, Miguel Angel Rebolledo Dellepiane Jobs Joana Silva, Rafael Prado Proença, Rita Almeida Macroeconomics and Fiscal Antonio Nucifora, Rafael Barroso, Edith Kikoni, Fabio Bittar, Cornelius Management Fleischhaker MIGA Dan Biller, Jorge Rivas Emmanuel Skoufias, Aude-Sophie Rodella, Martha Viveros, Renata Mayer Poverty and Equity Gukovas, Ali Sharman, Thiago Scot Maria Concepcion Steta Gandara, Claudia Baddini, Anna Fruttero, Renata Social Protection and Labor Mayer Gukovas Mark Dutz, Tom Kenyon, Paulo Correa, Martha Licetti, Tanja Goodwin, Jean François Arvis, Julie Barbet-Gros, Daria Taglioni, Tom Farole, Erik van Trade and Competitiveness der Marel, Laura Dachner, Roberto Echandi, Doyle Gallegos, the WDR 2016 team, Pluvia Zuniga, Priyam Saraf, Marialisa Motta Georges Bianco Darido, Shomik Mehndiratta, Eric Lancelot, Bianca Bianchi Transport and ICT Alves, Satoshi Ogita, Gregoir Gauthier, Alexandre Takahashi Josef Lloyd Leitmann, Emanuela Monteiro, Catalina Marulanda, Andres Social, Urban, Rural and Villaveces, Alberto Coelho Gomes Costa, Frederico Pedroso, Nancy Lozano Resilience Gracia Water Martin Gambrill, Thadeu Abicalil, Erwin de Nys The team is also very grateful to Flavia Nahmias and Mônica Porcidonio, for preparing the document, the bibliography and the logistics of the SCD. In addition, the following people have provided substantive inputs and guidance: Augusto de la Torre (Chief Economist) and peer reviewers: Indermit Gil (Director, DECDP), Bert Hofman (Country Director, EACCF), and Ana L. Revenga (Senior Director, GPVDR). IBRD IFC MIGA Regional Vice President: Jorge Vice President: Snezana Vice President: Karin Finkelston Familiar Stoiljkovic Director: Ravi Vish Country Director: Martin Raiser Regional Director: Irene Arias Manager: Dan Biller Task Managers: Roland Clarke Task Managers: Eduardo and Emmanuel Skoufias Wallentin and Luciana Marchesini Table of Contents ACKNOWLEDGEMENTS .................................................................................................................... iv ABBREVATIONS AND ACRONYMS ............................................................................................... xii OVERVIEW ................................................................................................................................ XV CHAPTER ONE: BRAZIL’S ACHIEVEMENTS IN POVERTY REDUCTION AND THE PROFILE OF THE POOR AND VULNERABLE ................................................................................................................ 1 Introduction.............................................................................................................................................. 1 1.1 The Determinants of Poverty Reduction and Shared Prosperity - the Analytical Framework of the Systematic Country Diagnostic ............................................................................................................... 2 1.2 Brazil’s Accomplishments in Poverty Reduction and Shared Prosperity ..................................... 6 1.3 The Performance of Labor Markets in Brazil ............................................................................. 11 1.4 The Profile of the Bottom 40 and the Poor ................................................................................. 16 Concluding Remarks ............................................................................................................................. 21 APPENDIX 1......................................................................................................................................... 24 CHAPTER TWO: BRAZIL’S POLITICAL INSTITUTIONS AND IMPACTS ON RESOURCE ALLOCATION ....................................................................................................................................................... 25 Introduction............................................................................................................................................ 25 2.1 Reestablishment of Democracy and the Architecture of Government ............................................ 25 2.2 Political Fragmentation and the Dynamics of Resource Allocation ................................................ 27 2.2.1 Party Fragmentation ............................................................................................................ 27 2.2.2 Intergovernmental Fragmentation ........................................................................................... 29 2.3 Brazil’s Public Sector Governance .................................................................................................. 31 2.3.1 Size of the Public Sector .......................................................................................................... 31 2.3.2 Effectiveness of the public sector ............................................................................................ 32 2.3.3 Allocation of Resources and Budgetary Process ..................................................................... 34 2.4 Quality of Policymaking and Implementation ................................................................................. 35 2.4.1 Evolution of Accountability Institutions and the Control of Corruption ................................. 36 2.4.2 Increasing Capital Spending and Investment Capacity ........................................................... 38 Concluding Remarks ............................................................................................................................. 40 CHAPTER THREE: MACRO POLICY AND FISCAL SPACE ............................................................. 44 Introduction............................................................................................................................................ 44 3.1 Setting the Stage: The Origins of the ‘Tripod’ ................................................................................ 45 3.2 Reaping the Gains—The ‘Golden Decade’ ..................................................................................... 46 3.2.1 The Foundations—Strong Commodity Prices and Sound Macro Management ...................... 46 3.2.2 The Consequences – Fiscal Windfall, Credit Expansion and Consumption-based Growth .... 48 3.2.3 The limits to Brazil’s growth model even during the Golden Decade .................................... 56 3.3 Responding to the Global Financial Crisis - Initial Success but at the Cost of Rising Imbalances . 59 3.4 Looking Ahead - The Structural Sources of Brazil’s Macroeconomic Policy Dilemmas ............... 64 3.4.1 Eroding Fiscal Space because of Budget Rigidities ................................................................ 64 3.4.2 The Trade-off between Public Investment and Social Entitlements ........................................ 65 3.4.3 Spending Rigidities, Public Savings, and High Interest Rates ................................................ 67 Concluding Remarks ............................................................................................................................. 68 CHAPTER FOUR: THE ORIGINS OF BRAZIL’S PRODUCTIVITY MALAISE ..................................