Challenges ahead for the Brazilian economy in 2019

. Dec 12, 2018
Challenges ahead for the Brazilian economy in 2019

President-elect Jair Bolsonaro takes office on January 1st with a mission to bring the Brazilian economy out of its four-year slump. Even if the recession is over, the economic crisis remains a reality for millions of Brazilians. The country has become poorer and even more unequal, and about a quarter of millennials are neither studying nor working. The challenges are many, and here we will talk about the main issues future President Bolsonaro’s administration must address.

We highlight what University of Brasília economics professor Roberto Ellery calls Brazil’s three main bottlenecks: “lack of productivity (long-term), poor investments (mid-term), and the need to address fiscal issues (short term).” Each of these challenges will be broken down separately:

Productivity issues

“In the long run, high levels of productivity are the engine for any economy that wants to become developed,” writes Professor Ellery. In that regard, Brazil is far from having an acceptable performance. The chart below shows how productivity levels have evolved in different countries since 1970.

While it may seem unfair to compare Brazil to South Korea or the U.S.—the world’s most powerful economy—these two countries offer some perspective on what it takes to be a top economy. Even when we compare Brazil to other similar countries, the results remain negative. Brazil’s productivity evolution curve has remained flat since 1970. While Mexico has done far worse, Brazil has been outperformed by Colombia, a country with a GDP 6 times smaller and which underwent a state of constant urban warfare until very recently.

Challenges ahead for the Brazilian economy in 2019

The chart below compares Brazil’s productivity with that of high average income countries—a group to which Brazil belongs, according to the World Bank. Only Thailand and China have lower levels of productivity than Brazil. “With such poor results, there’s no crackdown on corruption or price controlling policies capable of allowing the country to offer first-world work conditions, healthcare, and education,” writes Professor Ellery.

Challenges ahead for the Brazilian economy in 2019

But while Chinese productivity levels are low, they have been consistently growing. Since 1995, Chinese worker productivity is up by 2 percent. Meanwhile, Brazil’s productivity growth has been negative over the same period. When compared to richer emerging economies, Brazil has only been better than South Africa.

While the productivity issue is undisputed, how to fix it is far from consensual. Winner of the Nobel Prize in Economics Edward Prescott believes that most problems tied to workers’ low performance can be explained by a country’s resistance to adopting new technologies and by not efficiently using the ones available. Such resistance would be connected to the policies adopted by companies and the state. The good news is that policies can be quickly changed, providing there is the political will to do so.


Between 2000 and 2017, the annual average for public investment in Brazil was of only 1.92 percent of the GDP, the 2nd-lowest in a group of 42 countries according to a study by think tank Fundação Getulio Vargas. Among the selected countries, only Costa Rica had worse numbers, investing an average of 1.87 percent of its GDP every year. The study used data from the OECD.

“It is not something that has been observed only in the past couple of years. It is a structural problem that has gone on for decades,” says researcher Manoel Pires. He cites the recent collapse of a bridge on one of the busiest expressways in São Paulo, or the viaduct collapse in Brasília in February as proof of the need for more investments in infrastructure.

“When Brazil invests, it does it poorly. We build stadiums that are not used, refineries that never get finished, hydroelectric plants that harm the environment. Also, [the government] finances groups such as Eike Batista’s or Oi Telecom,” says Roberto Ellery. With subsidized loans that helped groups close to power to form monopolies, the National Development Bank (BNDES) spent about BRL 150 billion between 2003 and 2016. Meanwhile, half of the population doesn’t have access to proper sanitation systems.

In 2010, public investments peaked at 2.7 percent of the GDP. However, fiscal problems have dried up that well. Mr. Pires, a former senior officer at the Ministry of Finance, says that the private sector will have to lead the infrastructure recovery, as most states and the federal government face cash flow problems.

Fiscal issues

The most urgent issue pressing Brazil’s economy is its fiscal unbalance. The chart below shows that the country is on pace to reach a 95 percent debt-to-GDP ratio by 2022, which is inconceivable for an emerging country. While many mention Spain or Japan to argue that higher debt levels are not necessarily a bad thing, the truth is that these countries can borrow money at much lower interest rates than Brazil is able.

Challenges ahead for the Brazilian economy in 2019

Among emerging countries (as considered by the International Monetary Fund), only Ukraine and Sri Lanka have worse debt-to-GDP ratios than Brazil.

President Michel Temer’s administration did approve a federal spending cap but failed to pass major reforms that would curb expenses on pensions and end the privileges enjoyed by federal civil servants and ex-military men. President-elect Jair Bolsonaro has shown signs that have sparked doubts around his true commitment to a pension reform, would could unsettle investors even more.

Without a reform, Ipea projects that the organic growth of the current expenses will make it impossible for not only Mr. Bolsonaro, but also Brazil’s future presidents, to comply with the spending cap approved by Congress in 2016.

As a candidate, Mr. Bolsonaro insisted in saying he doesn’t know the first thing about the economy. As president, he will have no excuse for failure.

Gustavo Ribeiro

An award-winning journalist, Gustavo has extensive experience covering Brazilian politics and international affairs. He has been featured across Brazilian and French media outlets and founded The Brazilian Report in 2017. He holds a master’s degree in Political Science and Latin American studies from Panthéon-Sorbonne University in Paris.

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