Brazil's key resource potential lies in education: OECD
"The shortage of human capital is the single most important obstacle to productivity growth," the Organization for Economic Cooperation and Development said in a survey of the Brazilian economy.
"There is widespread agreement that the gains to be made from faster human capital accumulation are enormous." Poor education indicators were more a problem of educational quality rather than of funding.
Brazil has a recent history of boom and bust, and the OECD said the potential for growth without overheating was now "rather low" at about 3.0-3.5 percent per year.
In the OECD area of leading industrialized countries, potential growth was about 2.5 percent but was expected to rise to 3.0-3.5 percent. Brazil had to pursue reforms to do about five points better, implying growth of 8.0 percent, to catch up in the next quarter of a century, the report said.
The OECD also found that "the reduction of trade barriers seems to have played a crucial role in boosting productivity", and a big privatization programmed had also helped. The economy had grown by 2.3 percent last year after 4.9 percent growth in 2004 and 0.5-percent growth in 2003. Praising recent reforms in Brazil for stabilizing inflation, strengthening the currency and reducing debt, the OECD said that "prospects are good for a broad-based recovery." But the report highlighted three areas where vigorous action was needed:
1- The "overarching" challenge was to "continue to reduce the public debt overhang" while improving public finances by spending controls instead of mainly by tax increases so far. Pension reform was particularly important.
2- A "key policy challenge is to boost innovation in the business sector" because, although innovation performance was improving fast, it was too low and driven mainly by the state and universities.
3- The quality of education had to be improved because while funding was up to OECD levels it was not feeding through fast enough into qualification of the workforce.
Education was one way of reducing a high and damaging undeclared labor market, the report stressed, citing one calculation that undeclared labor accounted for 37.0 percent of the workforce in 1999. And it urged the creation of a "national skills certification system".
The so-called "Brazilian miracle" in the 1960s and 1970s had boosted gross domestic product by about 7.5 percent per year, but the driving policies had been unsustainable and growth fell to about 2.5 percent from 1980 to 2005, with spurts followed by slumps. "The result is that the gap in Brazil's per capita income relative to the OECD area (of leading industrialized countries) has widened from about 60 percent in 1980 to almost 70 percent since 2000.
"To close this gap in a quarter of a century" growth would have to "outpace that of the OECD area by nearly five percentage points per year, a tall order to be sure, but one that provides one indication of the magnitude of the efforts needed".
The OECD said that overall "faster sustainable growth will require concerted policy action on many fronts". Unless outstanding structural problems were tackled, Brazil would be prevented from "reaping the full benefits of macroeconomic stabilization".
The OECD observed that "income inequality, which is high in Brazil, is coming down as a result of rising earnings" and support for the poor.
Praising reduction of the foreign debt from 36.0 percent of output in 2000 to 21.2 percent in 2005, partly by means of buying back and re-issuing debt, the OECD said that efforts to reduce floating-rate debt securities should be accelerated.
It also praised operational autonomy of the central bank and perceptions on financial markets that the government was committed to a monetary framework and that the flexible exchange-rate regime was established.
However, steps should begin to remove credit controls and to reduce compulsory reserve requirements for banks so that returns for long-term savers would improve. This would also boost capital for innovation.