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McKinsey Quarterly

Five priorities for Brazil's economy

To enter the ranks of the world's leading economies, Brazil must remove entrenched barriers to productivity.

The world’s fifth-most-populous nation needs a long-term vision for its economy, as well as a commitment at all levels of government to implement measures that could lead to a dramatic increase in productivity. We believe that such measures could in time lift the country’s GDP-per-capita growth from less than 1 percent a year to a sustained rate of around 7 percent.

Brazil has no time to lose. Its economic growth has stalled during the past 25 years, in stark contrast to the strong recent performance of the other three “BRIC” countries: Russia, India, and China. While macroeconomic conditions have improved substantially in Brazil during the past few years, they will not on their own be sufficient to tackle the root cause of the country’s lackluster economic performance—the slow increase in labor productivity, which is the primary determinant of national wealth. In 2004 Brazil’s productivity per hour worked was only 18 percent of the US level.

When we mapped barriers to the growth of productivity in key sectors of the economy, we found that structural barriers create only about one-third of Brazil’s gap with the United States. The first structural barrier is Brazil’s modest per capita income, which favors lower-value-added products and services. The second is the low cost of labor, which is cheaper than capital and therefore discourages the use of machinery that would improve productivity. These structural limitations will fade if Brazil can achieve strong and sustained economic growth. But for this to happen, the government must tackle four nonstructural obstacles, which are responsible for the remaining two-thirds of the productivity gap: a huge informal economy (and inappropriate regulations that make it costly for companies to enter the formal economy), macroeconomic instability, inefficient public services, and an inadequate infrastructure.

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