106569 RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILITY Brazil Systematic Country Diagnostic June, 2016 RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILITY Brazil Systematic Country Diagnostic June, 2016 BRAZIL Brazil Country Management Unit Latin America & the Caribbean Region International Finance Corporation Multilateral Investment Guarantee Agency Acknowledgements This report was written by a team 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 (Program Leader), Pedro Olinto (Program Leader), Gregor Wolf (Program Leader), Paul Kriss (Program Leader), Paul Procee (Program Leader), 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 (TTLs) 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 (GPs) 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 Team Members Group Team 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 Ernesto Sánchez Triana, Klas Sander, Bernadete Lange, Adriana Resources 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- Governance Santiago da Silva Oliveira Health Nutrition, and Tania Dmytraczenko, Ezaú Pontes, Magnus Lindelow Population IFC Luciana Marchesini, Miguel Angel Rebolledo Dellepiane Jobs Joana Silva, Rafael Prado Proença, Rita Almeida Macroeconomics and Antonio Nucifora, Rafael Barroso, Edith Kikoni, Fabio Bittar, Cornelius Fiscal Management Fleischhaker The World Bank Team Members Group Team MIGA Dan Biller, Jorge Rivas Emmanuel Skoufias, Aude-Sophie Rodella, Martha Viveros, Renata Poverty and Equity Mayer Gukovas, Ali Sharman, Thiago Scot Social Protection and Maria Concepcion Steta Gandara, Claudia Baddini, Anna Fruttero, Labor Renata Mayer Gukovas Mark Dutz, Thomas Kenyon, Paulo Correa, Martha Licetti, Tanja Goodwin, Jean François Arvis, Julie Barbet-Gros, Daria Taglioni, Tom Trade and Farole, Erik van der Marel, Laura Dachner, Roberto Echandi, Doyle Competitiveness Gallegos, the WDR 2016 team, Pluvia Zuniga, Priyam Saraf, Marialisa Motta Georges Bianco Darido, Shomik Mehndiratta, Eric Lancelot, Bianca Transport and ICT Bianchi Alves, Satoshi Ogita, Gregoir Gauthier, Alexandre Takahashi Josef Lloyd Leitmann, Emanuela Monteiro, Catalina Marulanda, Social, Urban, Rural and Andres Villaveces, Alberto Coelho Gomes Costa, Frederico Pedroso, Resilience Nancy Lozano 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 Regional Vice President: Jorge Familiar Country Director: Martin Raiser Task Managers: Roland Clarke and Emmanuel Skoufias IFC Vice President: Snezana Stoiljkovic Regional Director: Irene Arias Task Managers: Eduardo Wallentin and Luciana Marchesini MIGA Vice President: Karin Finkelston Director: Ravi Vish Manager: Dan Biller TABLE OF CONTENTS ACKNOWLEDGEMENTS.............................................................................................................................................iii ABBREVATIONS AND ACRONYMS....................................................................................................................... xiii EXECUTIVE SUMMARY: RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILITY.. xix CHAPTER ONE: BRAZIL’S ACHIEVEMENTS IN POVERTY REDUCTION AND THE PROFILE OF THE POOR AND VULNERABLE............................................................................................................................................1 Introduction.................................................................................................................................................................... 3 1.1 The Determinants of Poverty Reduction and Shared Prosperity - the Analytical Framework of the Systematic Country Diagnostic......................................................................................................................4 1.2 Brazil’s Accomplishments in Poverty Reduction and Shared Prosperity......................................... 9 1.3 The Performance of Labor Markets in Brazil..............................................................................................16 1.4 The Profile of the Bottom 40 and the Poor................................................................................................23 Concluding Remarks................................................................................................................................................ 29 References..................................................................................................................................................................... 31 APPENDIX 1....................................................................................................................................................................32 CHAPTER TWO: BRAZIL’S POLITICAL INSTITUTIONS AND IMPACTS ON RESOURCE ALLOCATION..... 35 Introduction..................................................................................................................................................................37 2.1 Reestablishment of Democracy and the Architecture of Government..........................................37 2.2 Political Fragmentation and the Dynamics of Resource Allocation............................................... 39 2.2.1 Party Fragmentation...............................................................................................................................40 2.2.2 Intergovernmental Fragmentation.................................................................................................. 42 2.3 Brazil’s Public Sector Governance................................................................................................................. 44 2.3.1 Size of the Public Sector......................................................................................................................... 44 2.3.2 Effectiveness of the public sector.......................................................................................................47 2.3.3 Allocation of Resources and Budgetary Process..........................................................................49 2.4 Quality of Policymaking and Implementation........................................................................................ 50 2.4.1 Evolution of Accountability Institutions and the Control of Corruption............................ 51 2.4.2 Increasing Capital Spending and Investment Capacity........................................................... 54 Concluding Remarks.................................................................................................................................................57 References.................................................................................................................................................................... 58 CHAPTER THREE: MACRO POLICY AND FISCAL SPACE................................................................................... 61 Introduction................................................................................................................................................................. 63 3.1 Setting the Stage: The Origins of the ‘Tripod’ ..........................................................................................64 3.2 Reaping the Gains—The ‘Golden Decade’ ................................................................................................ 65 3.2.1 The Foundations—Strong Commodity Prices and Sound Macro Management............. 65 3.2.2 The Consequences – Fiscal Windfall, Credit Expansion and Consumption-based Growth...................................................................................................................................................................68 3.2.3 The limits to Brazil’s growth model even during the Golden Decade................................ 79 3.3 Responding to the Global Financial Crisis - Initial Success but at the Cost of Rising Imbalances .................................................................................................................................................................. 82 3.4 Looking Ahead - The Structural Sources of Brazil’s Macroeconomic Policy Dilemmas .........90 3.4.1 Eroding Fiscal Space because of Budget Rigidities ...................................................................90 3.4.2 The Trade-off between Public Investment and Social Entitlements ................................. 92 3.4.3 Spending Rigidities, Public Savings, and High Interest Rates ...............................................94 Concluding Remarks................................................................................................................................................96 References.................................................................................................................................................................... 97 CHAPTER FOUR: THE ORIGINS OF BRAZIL’S PRODUCTIVITY MALAISE.................................................. 99 IIntroduction.............................................................................................................................................................. 101 4.1 Growth, productivity, and structural change in Brazil in the 2000s..............................................103 4.2 Decomposing the infrastructure part of the ‘Custo Brasil’ ............................................................106 4.2.1 Physical Infrastructure, Competition, and Economy-wide Productivity ..........................106 4.2.2 Connectivity: Transport, Logistics, and ICT..................................................................................109 4.2.3 Energy: Electricity, Oil, and Gas.......................................................................................................... 114 4.3 More ‘Custo Brasil’: Trade and Investment Climate Issues ...............................................................117 4.3.1 International Trade Policies and Competition .............................................................................117 4.3.2 Domestic Regulations and Competition........................................................................................121 4.3.3 Attracting Efficiency-seeking Investments..................................................................................124 4.3.4 Access to Finance...................................................................................................................................128 4.4 Productivity Constraints at the Firm Level: The Need for More Business Learning and Innovation...................................................................................................................................................................129 4.4.1 Catch-up Innovation.............................................................................................................................130 4.4.2 The Supply of Inputs to Innovation: R&D, Patents and Scientific Capacity.................... 133 4.4.3 The Demand for Innovation: Management Quality and Competitive Pressures.........136 4.4.4 Innovation, Learning, and International Integration.............................................................. 137 4.4.5 Innovation and Public Support Mechanisms............................................................................ 140 4.5 Productivity Constraints at the Individual Level ..................................................................................143 4.5.1 Public Policies to Improve Skills Levels...........................................................................................143 4.5.2 Labor Market Policies and Incentives for Skill Upgrading .................................................... 146 Concluding Remarks: Toward a Better Mix of Productivity-enhancing Policies............................. 148 References.................................................................................................................................................................. 149 CHAPTER FIVE: PUBLIC SERVICES, TRANSFERS AND THE FUTURE OF PROGRESSIVE SOCIAL POLICIES........................................................................................................................................................................ 155 Introduction................................................................................................................................................................ 157 5.1 Access, Quality, and Equity in Brazil’s Education System....................................................................158 5.2 Improved Health Outcomes but Scope for Efficiency Gains Remain .......................................... 169 5.3 Social Transfers and Social Inclusion: Light and Shadow ..................................................................182 5.3.1 Brazil’s Social Security System: Costly and Not Pro-poor .......................................................182 5.3.2 Social Assistance: Cheap, Expanding and Very Pro-Poor........................................................ 186 5.4 Living Conditions and Access to Infrastructure Services ..................................................................192 5.5 Making Brazil’s Urbanization Process More Inclusive ....................................................................... 194 5.6 Crime and Violence: An Economic and Social Burden Especially for the Poor......................... 199 Concluding Remarks..............................................................................................................................................203 References ................................................................................................................................................................ 204 CHAPTER SIX: CONTINUING ALONG THE GREEN GROWTH PATH........................................................... 211 Introduction................................................................................................................................................................ 213 6.1 Land and its Uses ..............................................................................................................................................214 6.1.1 Opportunities to Increase the Efficiency of Land Use ..............................................................218 6.2 Environmental and Natural Resource Management.........................................................................220 6.2.1 Climate Change......................................................................................................................................220 6.2.2 Urbanization and Environmental Management Challenges .............................................. 221 6.2.3 Rural Development and the Conservation of Biomes...........................................................226 6.2.4 Opportunities to Reconcile Environmental Management and Economic Growth... 232 6.3 Water Resources and Water Infrastructure............................................................................................ 234 6.3.1 Opportunities for More Efficient Water Use ...............................................................................237 6.4 Risk Management and Vulnerabilities .................................................................................................. 240 6.4.1 Managing Risks More Efficiently......................................................................................................241 Concluding Remarks..............................................................................................................................................244 References.................................................................................................................................................................. 245 CHAPTER SEVEN: PRIORITIZATION....................................................................................................................249 Introduction................................................................................................................................................................ 251 The Logic of Prioritization.................................................................................................................................... 252 Critical Data and Knowledge Gaps and Directions for Additional Analysis.....................................259 ANNEX 1: TEAM ENGAGEMENT AND CONSULTATION PROCESS............................................................ 263 External Consultations..........................................................................................................................................265 FIGURES Figure 1: Progress in Poverty and Inequality Reduction in Brazil...................................................... xxviii Figure 2: Sources of Reductions in Poverty, Extreme Poverty and Inequality, 2004-2013..........xxix Figure 3: Wage Inequality Fell After 2003, as the Minimum Wage Increased Sharply................xxx Figure 4: Brazil’s Public Sector is Large (Expenditure as a Percentage of GDP)........................... xxxii Figure 5: Brazil’s Policy Effectiveness is Low Compared to Peers....................................................... xxxii Figure 6: Laying the Foundations – The Plano Real Annual Inflation and Real Interest Rates.... xxxiv Figure 7: The Benefits of Fiscal Stabilization through the Fiscal Responsibility Law............... xxxiv Figure 8: Consumption Driven Growth........................................................................................................xxxv Figure 9: When the Cycle Turned, Imbalances Rose.............................................................................. xxxvi Figure 10: Too Few Productivity Gains from Structural Change, 2000-2013............................. xxxviii Figure 11: Directed Credits Increased Post-crisis But With Limited Impact On Investiment And Productivity....................................................................................................................................................................xl Figure 12: Despite Increasing Public Investments in R&D, Brazil Remains a Mid-tech Economy............... xli Figure 13: Significant Social Progress in Brazil, 2013.................................................................................... xlii Figure 14: Expenditure by Function – 2014 (% of Primary Expenditure)............................................ xliv Figure 15: Brazil is a Leader in Climate Change Mitigation Effort......................................................... xlv Figure 16: With Prosperity Comes Congestion ........................................................................................... xlvi Figure 1.1: Analytical Framework of the SCD...................................................................................................... 7 Figure 1.2: Progress in Poverty Reduction in Brazil......................................................................................... 11 Figure 1.3: Reduction of Moderate Poverty by State From 2001 to 2013............................................... 12 Figure 1.4: The Remarkable Progress in Inequality Reduction in Brazil................................................. 13 Figure 1.5: Brazil’s Income Class Composition in 2004 and 2013............................................................. 14 Figure 1.6: Income Distribution in Brazil (2013).............................................................................................. 15 Figure 1.7: The Evolution of Access to Basic Services in Brazil: 2004 vs. 2013......................................16 Figure 1.8: Employment Trends in Brazil, by Sector, 2002–2013............................................................... 17 Figure 1.9: Share of formal and Informal Jobs, 2001-2013.......................................................................... 17 Figure 1.10: The Real Minimum Salary Increased Substantially Between April 2003 and 2014.....18 Figure 1.11: Decomposition of Changes in Poverty and Inequality in Brazil, 2004-2013..................19 Figure 1.12: Inequality and Skills Premia in Brazil, 1995-2013.................................................................... 20 Figure 1.13: Decomposition of Monthly Income of the Poor and Middle Class in Brazil, 2013...... 21 Figure 1.14: Income Distribution: Whites vs Afrodescendants.................................................................22 Figure 1.15: The Gender and Race Wage Gaps in Brazil: 2004 vs 2013....................................................23 Figure 1.16: Sector of Employment: B40 vs. Top 60 Percent, Brazil (2013)........................................... 24 Figure 1.17: Education and Labor Market Status of ‘Nem-nems’ in B40.............................................. 26 Figure 1.18: Educational Attainment and Labor Market Status of the Poor in Brazil, 2013............27 Figure 1.19: Job Status of the Rural Population in Brazil, by Educational Level, 2002 and 2013.. 28 Figure 1.20: Employability Constraints of the Poor Beyond Skills and Education............................ 29 Figure 2.1: Effective Number of Parties (ENP) in Presidential and Legislative Elections................. 41 Figure 2.2: Effective Number of Parties (Seats) in Legislative Elections (Lower House)................. 41 Figure 2.3: Automatic Non-earmarked Transfers and FPE as Share of Total Transfers to State and Municipalities (Percentage), 2001-2013................................................................................................... 44 Figure 2.4: Current Primary Expenditure and Revenue, Brazil, 2000–2014 (Percent GDP).......... 45 Figure 2.5: General Government Expenditure, Selected Countries Average 2009-2013, (Percent GDP).............................................................................................................................................................. 45 Figure 2.6: Public Employment in Brazil, 2002-2013.................................................................................... 46 Figure 2.7: Benchmark Comparisons, Worldwide Governance Indicators, 2013................................ 48 Figure 3.1: Commodity Prices................................................................................................................................66 Figure 3.2: Real Exchange Rate, 1994-2015, 1994=100.................................................................................66 Figure 3.3: National Consumer Price Index (IPCA) - 12 Month Variation.............................................. 67 Figure 3.4: Real GDP Growth (2003-2014, Percent)...................................................................................... 67 Figure 3.5: Unemployment (2003-2014, Percent).......................................................................................... 67 Figure 3.6: General Government Expenditure, Revenue, Primary Balance and Interest Payments (Percent of GDP).................................................................................................................................................................................71 Figure 3.7: Gross and Net Public Debt (January 2003-June 2015, Percent of GDP)........................... 71 Figure 3.8: Main Areas of Growth in Public Expenditure, 2002-2014....................................................74 Figure 3.9: Composition of Social Transfers 2002-2013 (As a percent of GDP)..................................74 Figure 3.10: Real Interest Rate (Ex-Post)............................................................................................................75 Figure 3.11: Credit Expansion and Financial Sustainability Indicators...................................................75 Household Debt Service as a Share of Household Income (% of wages and benefits before Taxes) ............................................................................................................................................................................ 76 Figure 3.12: Balance of Payments Financing................................................................................................... 78 Figure 3.13: Accumulation of Reserves (Percent GDP, on right-hand Side)......................................... 78 Figure 3.14: Contributions to GDP Growth, 2001-2014............................................................................... 79 Figure 3.15: Contribution of TFP to GDP Growth in Selected Countries 2000-2008......................80 Figure 3.16: Productivity and Wages, 2003-2014 (Index, 2003=100)....................................................... 81 Figure 3.17: Primary and Manufactured Exports January 2006 to July 2014 (Volumes; 1995=100)......81 Figure 3.18: Savings International Comparisons, 2005—2014 Percent of GDP................................. 82 Figure 3.19: Median Forecast for GDP Growth 2 Years Ahead (2005-2015, Percent).......................89 Figure 4.1: Labor Productivity Growth in Selected Countries Average Annual Growth................103 Figure 4.2: Evolution of Productivity by Sector, 2000–2013.................................................................... 104 Figure 4.3: Employment Creation and Productivity, 2000–2013........................................................... 104 Figure 4.4: Monthly Value-Added per Worker in the Service Sector, 2013 (R$, Thousands)........ 105 Figure 4.5: Employment Distribution in the Services Sector, 2013 (Percent).................................... 105 Figure 4.6: Investment in Infrastructure, 2011 (Percent of GDP)...........................................................106 Figure 4.7: Quality of Overall Infrastructure Rank, 2015...........................................................................106 Figure 4.8: Percent of Firms Identifying Transportation as a Major Constraint............................. 110 Figure 4.9: Quality of Roads Rank, 2015........................................................................................................... 110 Figure 4.10: Quality of Railroad Infrastructure Rank, 2015........................................................................ 111 Figure 4.11: Quality of Port Infrastructure Rank, 2015.................................................................................. 111 Figure 4.12: Mobile Cellular Basket, 2013 (PPP, US$ per Month)..............................................................113 Figure 4.13: Fixed Broadband Internet Subscribers, 2013 (Per 100 People).........................................113 Figure 4.14: Exports of Goods and Services, Average 2005–2014 (Percent GDP)............................. 118 Figure 4.15: Trade (Exports + Imports), Average 2005–2014 (Percent GDP)....................................... 118 Figure 4.16: Simple Average MFN Tariff, 2013 (Percent)............................................................................. 118 Figure 4.17: Average Tariff, Capital Goods, (Percent)................................................................................... 118 Figure 4.18: Doing Business 2016 Ranking, Trading Across Borders (1=best)................................... 120 Figure 4.19: Logistics Performance Index Customs Rank (1=best)....................................................... 120 Figure 4.20: Ease of Doing Business Rank, 2016........................................................................................... 122 Figure 4.21: Starting a Business, Time (Days) 2016...................................................................................... 122 Figure 4.22: Paying Taxes, Rank 2016................................................................................................................. 122 Figure 4.23:Paying Taxes, Hours per Year, 2016............................................................................................. 122 Figure 4.24: Barriers to Trade and Investment.............................................................................................124 Figure 4.25: Brazil - FDI to GDP............................................................................................................................ 125 Figure 4.26: Average FDI, 2010–2014. Percentage of GDP........................................................................ 125 Figure 4.27: Length of Proceedings for the Enforcement of Foreign Arbitral Awards..................126 Figure 4.28: Time to Litigate a Contract Dispute (Days)...........................................................................126 Figure 4.29: Ict Goods Exports 2011–2013 (Percent of Total Goods Exports)..................................... 127 Figure 4.30: High-technology Exports 2011–2013 (Percent of Total Goods Exports)...................... 127 Figure 4.31: Innovation Rank................................................................................................................................130 Figure 4.32: Capacity for Innovation Rank......................................................................................................130 Figure 4.33: The Nature of Technological Innovation in Brazilian Firms.............................................131 Figure 4.34: Finance as Most Important Reported Obstacle to Innovate, 2011.................................131 Figure 4.35: Cooperation in Innovation With Other Firms or Institutions by Size 2008–2010........ 132 Figure 4.36: Cooperation in Innovation with other Firms or Institutions By R&D Status, 2008–2010................................................................................................................................................................... 132 Figure 4.37: Quality of Scientific Research Institutions, Rank.................................................................134 Figure 4.38: Company Spending on R&D Rank............................................................................................134 Figure 4.39:Average Management Score by Country, Manufacturing............................................... 137 Figure 4.40: Share of Founders/Family Firms............................................................................................... 137 Figure 4.41: Firms with Technology Licensing from Foreign Companies per Ownership Origin (Percent) ...................................................................................................................................................................................138 Figure 4.42: Percent of Firms with International Quality Certification by Exporting Status.....139 Figure 4.43: Graduates in Engineering and Science (As Share of Total Tertiary Graduates) 2012........145 Figure 5.1: School Completion and Student Mathematics Performance..........................................160 Figure 5.2: Average Years of Schooling and Net Enrollment Rate: 2007 vs. 2013............................ 161 Figure 5.3: Education Years Attained and Race: 2001 vs. 2012.................................................................162 Figure 5.4: Repetition and Dropout Rates: Public vs. Private, 2013........................................................163 Figure 5.5: Quality of Education Measured by Brazilian IDEB, Upper Secondary, 2013................. 164 Figure 5.6: Spending per Student on Early Child Education Across Brazilian States, 2013......... 164 Figure 5.7: Access to Tertiary Education and Enrollment in Private Higher Education, 2007 vs. 2013...................................................................................................................................................................... 167 Figure 5.8: Under-Five Mortality Rates, 1995–2012......................................................................................170 Figure 5.9: Expansion of the Family Health Strategy by Income Quintiles........................................171 Figure 5.10: Yearly Rate of Decline in Maternal Mortality Ratio, 1990–2008................................... 172 Figure 5.11: Rising Share of the Population over Age 65 Years in Brazil, Western Europe, and the BRICS...................................................................................................................................................................... 174 Figure 5.12: Brazilians’ Opinion About the Country’s Main Problems.................................................. 177 Figure 5.13: Health Expenditure Per Capita by Source, 2001–11 (PPP in Constant International US$)....178 Figure 5.14: Actual and Expected Public Health Expenditure as a Share of GDP............................179 Figure 5.15: RPPS State Pension Deficits, 2013 (as a Percentage of Tax Revenues)......................... 184 Figure 5.16: Spending on the Main Components of RGPS Pension System: 1998–2013 (Percentage of GDP)................................................................................................................................................185 Figure 5.17: Demographic Patterns and Projections for Brazil............................................................... 186 Figure 5.18: Social Pensions Spending as Percent of GDP........................................................................187 Figure 5.19: Disability Benefits as Percent of GDP...................................................................................... 188 Figure 5.20: Bolsa Familia Beneficiaries and Spending, 2004–2014.................................................... 189 Figure 5.21: Evolution of Social Assistance Spending as Percentage of GDP.................................... 191 Figure 5.22: Composition of Social Assistance Spending in 2014.......................................................... 191 Figure 5.23: Access to Piped Water Service.....................................................................................................192 Figure 5.24: Access to Toilet Connected to Sewage Network.................................................................193 Figure 5.25: Access to Electricity........................................................................................................................ 194 Figure 6.1: Land Use in Brazil, 1970–2006....................................................................................................... 215 Figure 6.2: Variation in the Productivity of Land in Agricluture: Brazil, 2006...................................216 Figure 6.3: City Size Analysis in Brazil , Projections to 2030.................................................................... 222 Figure 6.4: Increase in Registered Vehicles in Brazil Between 2000 and 2015............................... 223 Figure 6.5: Air Pollution Exposure in Selected Cities (2010)................................................................... 224 Figure 6.6: Deforestation in Legal Amazon Between 2004 and 2014 (Thousands Km2)............. 227 Figure 6.7: GHG Emissions– Brazil – 1990-2013 (CO2eq)...........................................................................230 Figure 6.8: Water Use in Brazil: 2013................................................................................................................ 234 TABLES Table 1: Profile of Brazil’s Poor (Extreme and Moderate), B40 and Top 60 percent (2013).............32 Table 2.1: Party Systems Indicators.....................................................................................................................40 Table 2.2: Comparative Governance Indicators 2013................................................................................... 48 Table 3.1: Key Macroeconomic Indicators........................................................................................................69 Table 3.2: General Government – Selected Fiscal Indicators: 2000-2014 (Percentage of GDP)...72 Table 3.3: Evolution of Federal Government Primary Expenditures, 1991–2014............................... 92 Table 4.1: Infrastructure Investment in Brazil, Public and Private, 1971–2014...................................107 Table 5.1: Evidence on Technical Inefficiency in Brazil................................................................................ 181 Table 6.1: Water and Sewage Coverage, 2013 (percentage).................................................................... 225 BOXES Box 1.1: The indigenous peoples in Brazil .........................................................................................................25 Box 3.1: High Interest Rates and Household Debt in Brazil...................................................................... 76 Box 3.2: Credit Market Segmentation, the Role of State Banks and High Real Interest Rates... 84 Box 3.3: Inequitable Taxes with High Compliance Costs .......................................................................... 93 Box 3.4: Possible Explanations for High Interest Rates in Brazil............................................................ 95 Box 4.1: Embrapa and Frontier Innovation..................................................................................................... 135 Box 4.2: Lessons from Impact Evaluations..................................................................................................... 141 Box 5.1: Innovations in Alternative Ways to Deliver Early Childhood Development in Brazil... 168 Box 6.1: Economic Vulnerability in the São Paulo-Santos Transportation Corridor.......................241 ABBREVATIONS AND ACRONYMS ABC Low Carbon Agriculture Agricultura de Baixo Carbono AEPS Annual Statistics for Social Security Anuário Estatístico da Previdência Social ALMP Active Labour Market Policies Políticas de Emprego National Technological Development Apoio ao Desenvolvimento Tecnológico ADTEN Support Program da Empresa Nacional ANVISA National Sanitary Control Agency Agência Nacional de Vigilância Sanitária ARM Agricultural Risk Management Gestão do Risco Agrícola Amazon Regional Protected Areas ARPA Programa Áreas Protegidas da Amazônia Program National Bank for Social and Economic Banco Nacional de Desenvolvimento BNDES Development Econômico e Social BPC Non-Contributory Pension Benefício de Prestação Continuada BSM Brazil without Poverty Brasil Sem Miséria BUI Single Ticket Bilhete Único Intermunicipal B40 Bottom 40 Percent BRICS Brazil, Russia, India, China, South Africa Brasil, Rússia, Índia, China, África do Sul Administrative Council for Economic Conselho Administrativo de Defesa CADE Defense Econômica CAR Rural Environmental Registry Cadastro Ambiental Rural CGE Computable General Equilibrium Modelo de Equilíbrio Geral Computável Center for Distributive, Labor and Social Centro de Estudos Distributivos Sociais e CEDLAS Studies do Trabalho CMN National Monetary Council Conselho Monetário Nacional CNI National Council of Industry Confederação Nacional da Indústria CPF Country Partnership Framework Estratégia de Parceria de País Inter-Union Department of Statistics and Departamento Intersindical de Estatística DIEESE Socioeconomic Studies e Estudos Socioeconômicos DRM Disaster Risk Management Gestão do Risco de Desastres ECD Early Childhood Development Desenvolvimento Infantil National Strategy on Science, Technology Estratégia Nacional de Ciência, Tecnologia ENCTI and Innovation e Inovação Brazilian Agricultural Research Empresa Brasileira de Pesquisa EMBRAPA Corporation Agropecuária ENP Effective Number of Parties Número Efetivo de Partidos FDI Foreign Direct Investment Investimento Estrangeiro Direto FGV Getúlio Vargas Foundation Fundação Getulio Vargas FIES Financing of Higher Education Students Fundo de Financiamento Estudantil Scientific and Technological Development Fundo para Desenvolvimento Científico e FNDCT Fund Tecnológico FPE State Participation Fund Fundo de Participação dos Estados FPM Municipal Participation Fund Fundo de Participação dos Municípios Fundo de Manutenção e Fund for Maintenance, Development Desenvolvimento da Educação Básica FUNDEB of Basic Education and Valuation of e de Valorização dos Profissionais da Educational Personnel Educação Fund for the Maintenance and Fundo de Manutenção e FUNDEF Development of Elementary Schools Desenvolvimento do Ensino Fundamental GDP Gross Domestic Product Produto Interno Bruto GHG Greenhouses Gases Gases de Efeito Estufa GVC Global Value Chains Cadeias Globais de Valor HTA Health Technology Assessment Avaliação de Tecnologias de Saúde Imposto sobre Operações Relativas à Tax on Goods Circulation, Communication Circulação de Mercadorias e Serviços de ICMS and Inter-municipal and Inter-state Transporte Intermunicipal e Interestadual e Transportation Services de Comunicação Information and Communications ICT Tecnologia da Informação e Comunicação Technology Sindicato Internacional de ITU International Telecommunications Union Telecomunicações Institute for Health Metrics and IHME Instituto de Métrica e Avaliação de Saúde Evaluation Center for Research on Innovation, Núcleo de Pesquisas em Inovação, Gestão INGTEC Technology Management and Tecnológica e Competitividade Competitiveness INESC Institute for Socioeconomic Studies Instituto de Estudos Socioeconômicos Brazilian Institute of Geography and Instituto Brasileiro de Geografia e IBGE Statistics Estatística Banco Interamericano de IDB Inter-American Development Bank Desenvolvimento Índice de Desenvolvimento da Educação IDEB Basic Education Development Index Básica IMF International Monetary Fund Fundo Monetário Internacional National Institute of Colonization and Instituto Nacional de Colonização e INCRA Agrarian Reform Reforma Agrária National Institute of Studies and INEP Instituto Nacional de Estudos e Pesquisas Research INPE Instituto Nacional de Pesquisas Espaciais National Institute For Space Research Índice Nacional de Preços ao Consumidor IPCA National Consumer Price Index Amplo IPEA Institute of Applied Economic Research Instituto de Pesquisa Econômica Aplicada LAC Latin America and Caribbean América Latina e Caribe LCR Local Content Requirements Exigência de Conteúdo Local LDO Budget Guideline Law Lei de Diretrizes Orçamentárias LPI Logistics Performance Index Índice de Desempenho Logístico LpT Lights for All Luz para Todos Uso da Terra, Mudanças de Uso da Terra e LULUCF Land Use, Land Use Change and Forests Florestas Ministry of Agriculture, Livestock and Ministério da Agricultura, Pecuária e MAPA Food Supply Abastecimento MDA Ministry of Agrarian Reform Ministério do Desenvolvimento Agrário MCMV My House, My Life Minha Casa Minha Vida Ministry of Science, Technology and Ministério da Ciência, Tecnologia e MCTI Innovation Inovação MDA Ministry of Agrarian Development Ministério do Desenvolvimento Agrário Ministries of Trade, Commerce and Ministério do Desenvolvimento, Indústria MDIC Industry e Comércio Ministry of Social Development and Fight Ministério do Desenvolvimento Social e MDS Against Hunger Combate à Fome MEC Ministry of Education Ministério da Educação MMA Ministry of Environment Ministério do Meio Ambiente M&E Monitoring and Evaluation Monitoramento e Avaliação MI Ministry of National Integration Ministério da Integração Nacional Ministério da Previdência e Assistência MPAS Ministry of Social Security Social O&M Operation and Maintenance Operação e Manutenção Organization for Economic Cooperation Organização para Cooperação Econômica OECD and Development e Desenvolvimento PAC Accelerated Growth Program Programa de Aceleração de Crescimento PADIN Child Development Program Programa de Desenvolvimento Infantil PBF Family Benefit Program Programa Bolsa Família PIM Better Infancy Program Primeira Infância Melhor Program for International Student Programa para Avaliação Internacional de PISA Assessment Alunos PINTEC Technological Innovation Research Pesquisa de Inovação Tecnológica Procedure of the Private Enterprise Procedimento de Manifestação de PMI Expression of Interest Interesse da Iniciativa Privada Pesquisa Nacional de Amostra de PNAD National Household Sample Survey Domicílios PNE National Plan for Exports Plano Nacional de Exportações PNE National Plan for Education Plano Nacional de Educação PPA Multi-Year Plan Plano Plurianual PPP Public Private Partnership Parceria Público-Privada PPV Pact for Life Pacto pela Vida National Program for Access to Technical Programa Nacional de Acesso ao Ensino PRONATEC Education and Employment Técnico e Emprego PROUNI University for All Program Programa Universidade para Todos PSR Rural Social Security Previdência Social Rural RDC Special Procurement Regime Regime Diferenciado de Contratações RGPS Pension system for private sector workers Regime Geral de Previdência Social RPPS Pension system for public sector workers Regimes Próprios de Previdência Social R&D Research And Development Pesquisa e Desenvolvimento SAE Secretariat for Strategic Affairs Secretaria de Assuntos Estratégicos SCD Systematic Country Diagnostic Diagnóstico Estratégico de País SELIC Benchmark Interest Rate Serviço Especial de Liquidação e Custódia National System of Vocational Education Sistema Nacional de Educação SISTEC and Information Technology Profissional e Tecnologia da Informação SME Small and Medium Enterprise Pequenas e Médias Empresas STF Supreme Court Supremo Tribunal Federal SUS Unified Health System Sistema Único de Saúde TEC Technical Education Educação Técnica TCU Federal Court of Accounts Tribunal de Contas da União TFP Total Factor Productivity Produtividade Total dos Fatores TJLP Long-Term Interest Rate Taxa de Juros de Longo Prazo Technical and Vocational Education and TVET Educação Técnica e Formação Profissional Training United Nations Educational, Scientific Organização das Nações Unidas para a UNESCO and Cultural Organization Educação, a Ciência e a Cultura United Nations Industrial Development Organização das Nações Unidas para o UNIDO Organization Desenvolvimento Industrial United Nations Office on Drugs and Escritório das Nações Unidas sobre UNODC Crime Drogas e Crime UPP Police Pacification Units Unidades de Polícia Pacificadora WBG World Bank Group Grupo Banco Mundial WGI Worldwide Governance Indicators Indicadores Mundiais de Governança WHO World Health Organizations Organizações Mundial da Saúde WEF World Economic Forum Fórum Econômico Mundial WEO World Economic Outlook Panorama Econômico Mundial Executive Summary Retaking the Path to Inclusion, Growth and Sustainability RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILTY 1. Brazil is a vast country and its development prospects matter globally. A continental power, Brazil is the fifth largest country on earth (in both land area and population). It covers a vast territory containing the world’s largest rainforest (the Amazon) substantial freshwater resources, valuable agricultural land, and multiple minerals, metals and other natural capital. Its size gives it systemic importance from the environmental point of view as the lung of the earth and also has important consequences for the structure of the economy and political institutions. As with most large economies, it is relatively closed. This tendency has been strengthened by a historical focus on the domestic market as the driver of development. Another implication of Brazil’s size is a relatively high degree of decentralization in a federative structure, which increased further with the return to democracy in the mid-1980s. 2. Brazil’s prospects have attracted particular interest also because it historically was and remains today one of the world’s most unequal societies. Dating back to the original allocation of land during colonial times and more recently to the distribution of economic opportunities and access to basic social services, deep and persistent inequalities have characterized Brazil’s development path. The country’s size and historically high inequality have given debates about inclusive development paths particular resonance both in Brazil and well beyond the country’s borders. A continuously rising state footprint following re- democratization and strong ‘welfarist’ tradition in public policy have been consequences of policy makers’ efforts to address Brazil’s legacy of sharp socioeconomic inequalities. 3. Until the late-1990s, little progress was made in reducing income inequalities in Brazil, but in the past decade Brazil’s socioeconomic progress has been remarkable and internationally noted. From 2003, the country has become recognized for its success in reducing poverty and inequality and its ability to create jobs. Innovative and effective policies to reduce poverty and ensure the inclusion of previously excluded groups have lifted millions of people out of poverty. Nevertheless, even today, in Brazil 5 percent of the population receives 30 percent of the income generated (together with Colombia the highest proportion for any country in Latin America). 4. Brazil has also been assuming global responsibilities. It has been successful in pursuing economic prosperity while protecting its unique natural patrimony. Brazil has become one of the most important emerging new donors, with extensive engagements particularly in Sub- Saharan Africa, and a leading player in international climate negotiations. Brazil’s development path over the past decade has shown that growth with shared prosperity, but balanced with respect for the environment, is possible. Brazilians are rightly proud of these internationally recognized achievements. xxi EXECUTIVE SUMMARY 5. However, the mood in Brazil has recently turned pessimistic. The shifts in the global economy following the world recession of 2008-2009, rising economic imbalances as the post- crisis stimulus was maintained too long, and in particular the end of the commodity super- cycle after 2011, have severely impacted Brazilian growth prospects, and, in 2015, the country entered recession. Falling government revenues accompanied by increasing expenditure pressures have led to a significant fiscal deficit, denting investor confidence. Administered price increases and one of the largest depreciations among emerging market currencies have driven up inflation, forcing the Central Bank to raise interest rates. 6. The bleak short-term economic outlook raises the risk that social and environmental achievements may not be sustained. Rising unemployment is likely to put pressure on lower- income households, rising inflation is eating into the real value of social transfers, while fiscal pressures accentuate spending trade-offs in the public sector. Economic difficulties also have the potential to sharpen conflicts over land and other natural resources, putting Brazil’s environmental achievements at risk. They may provoke an increase in urban crime and violence with negative social as well as economic consequences. 7. More fundamentally, the changed economic circumstances have exposed shortcomings in Brazil’s development model, epitomized by the struggle to achieve a sustainable fiscal policy. This report argues that the desire for a more inclusive state, after the return to democracy, led to a bias in favor of a large and increasing role for the public sector. Fiscal policy has been constrained by hardwired spending commitments and its sustainability risks being undermined by a burgeoning social security system, which provides substantial benefits to the non-poor. These commitments were affordable during a period of extraordinarily high commodity prices and relatively strong consumption-driven growth. They look unsustainable in the light of the recent shift in Brazil’s terms of trade and the country’s weak underlying growth potential, reflected in the poor track record of productivity growth and lagging performance on a range of indicators of external competitiveness. 8. Against this background, some Brazilians are now asking whether the gains of the past decade might have been an illusion, created by the commodity boom, but unsustainable in today’s less forgiving international environment. The answer provided in this Systematic Country Diagnostic (SCD) is a qualified ‘no’. There is no reason why the recent socioeconomic gains should be reversed; indeed, they might well be extended with the right policies. This will however require substantial shifts in Brazil’s growth model and its fiscal policies, as well as reforms and adjustments in successful policy dimensions such as, for instance, environmental and agricultural policies or social assistance programs. Brazil’s recent history contains several episodes of crises that gave rise to important economic and institutional reforms, which xxii RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILTY alleviated previously binding constraints to further economic and social progress. It also contains several examples of creative policy design overcoming implementation bottlenecks, often through the careful collection of evidence and rigorous monitoring and evaluation (M&E). Another reason to be optimistic is that Brazil’s policy makers today operate in an environment of much stronger accountability because of the increasing role of independent control institutions, the growing strength of non-government actors and the rising aspirations and expectations of the new middle class. 9. Brazil thus finds itself at an important juncture and, to a certain extent, the policy course set today will determine whether the country can sustain the gains of the past and return to a path of solid, inclusive and environmentally sustainable growth. This SCD offers a contribution to the debate about Brazil’s future development. It abstains from formulating specific policy recommendations and rather focuses on highlighting the way in which Brazil’s development challenges and opportunities are closely interlinked. The causal chains identified by the analysis lead to a set of broad priorities, which can serve as background for discussion of concrete reform plans and policies, as well as their feasibility in a complex and fluid political environment. The remainder of this overview first presents the main causal chains traced in this SCD and explains the structure of the report, before providing a chapter-by-chapter summary of the main argument. The determinants of poverty reduction and shared prosperity—the narrative of this SCD 10. The basic argument of this SCD is that Brazil needs to adjust its fiscal policy and its growth model if the country is to sustain the socioeconomic gains made over the past decade. The story of Brazil’s recent achievements is fundamentally a story of buoyant labor markets, declining wage inequality and progressive social policies, all supported by the boom in commodity prices that began around the turn of the millennium. It coincided with the successful macroeconomic stabilization Brazil achieved in the late 1990s, thus allowing the country to take full advantage of high commodity prices and abundant international liquidity. The improvement in the terms of trade facilitated rapid consumption growth without jeopardizing external balances. This in turn swelled public coffers thanks to a tax system built largely around indirect, consumption-linked taxes, and financed a substantial expansion in social transfers and improvements in access to a range of public services. Consumption-based growth and real exchange rate appreciation favored the domestic services industry, which accounted for the bulk of new employment creation disproportionately benefiting less-skilled workers. Rising formalization, improved social safety nets, and large increases in the minimum wage combined to push up the relative earnings of the less skilled and thus contributed to xxiii EXECUTIVE SUMMARY falling earnings inequality. Abundant liquidity facilitated access to credit, including among households, thus further reinforcing the consumption-based growth dynamics. 11. By late 2015, the factors that drove socioeconomic progress in the past decade had mostly gone into reverse. International commodity prices have trended down since late 2012, with oil prices recently following suit, global liquidity conditions have tightened since May 2013 and December 2015 saw the first US Federal Funds Rate increase since 2006. Brazil, as most emerging markets, faces a much bleaker international outlook than at most times since the early 2000s. Strong fiscal and financial buffers allowed the country to react to the 2008-2009 global recession with countercyclical fiscal and monetary policies, but in the light of headwinds from the commodity and financial markets and weak underlying growth potential, such measures have failed to stem the gradual deceleration of Brazil’s economy since 2012 to face outright recession in 2015. Indeed, the maintenance of countercyclical policies in the light of the declining growth potential created growing macroeconomic imbalances during 2013 and 2014. As a result, the authorities were forced to correct policy; monetary policy tightened in 2013 and a difficult fiscal adjustment is now under way. 12. With the changed economic outlook, two fundamental weaknesses of Brazil’s economy have come to the fore. First, Brazil has struggled for several decades to generate strong and sustained productivity growth. This weakness is reflected, for instance, in the gradual decline of Brazil’s manufacturing capacity, the small share of high technology products in its own export basket, the bias in employment creation toward relatively low productivity services such as catering and home care, and consequently in the low rate of aggregate growth in gross domestic product (GDP) per worker and in total factor productivity. It is also mirrored in the wide dispersion of productivity levels across firms within industries, suggestive of substantial allocative inefficiencies. The underlying causes of Brazil’s productivity malaise are complex. They include a high cost of finance and doing business, the poor state of the country’s physical infrastructure, limits to competition resulting from domestic regulation as well as relatively high tariff and non-tariff barriers against exports, and muted incentives for innovation, including technology adaptation, due to a myriad of distortive or ineffective government interventions. Another structural constraint to higher productivity growth may lie with the inadequate skills of the labor force, despite the very substantial progress Brazil has made in providing greater access to education. 13. Stronger productivity growth alone will not generate inclusive growth. The hallmark of Brazil’s progress in shared prosperity over the past decade was the extent to which economic growth was reflected in fast job creation and declining earnings inequality. While improvements in the business and regulatory environment and greater public and private xxiv RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILTY investment will clearly be critical to relaunch economic growth, how this growth translates into the creation of a sufficient number of good jobs for Brazil’s bottom 40 percent (B40) will be equally important. This SCD consequently pays significant attention to the dynamics of Brazil’s labor markets and to the opportunities available to the B40 and the assets at their disposal to avail of such opportunities. Without a return to growth and the adoption of a more sustainable, less commodity and less consumption-dependent growth model, improvements in living standards for the B40 will remain elusive. However, while growth is a necessary condition for shared prosperity, it is not sufficient. Policies that enhance economic opportunities, build human capital and resilience, and recognize the assets of the poor (including their claim over natural resources and land rights) deserve particular attention. 14. The second weakness in Brazil’s economic model is related to the sustainability of public spending commitments in the light of the economy’s underlying growth potential. Brazil’s public sector has continuously grown since the introduction of democracy in the mid-1980s. Fundamentally, this is related with spending commitments that were enshrined in Brazil’s 1988 Constitution and with the nature of the country’s fragmented politics, where access to government funds is a key incentive for building and sustaining political coalitions. The large claim of Brazil’s public sector on the country’s limited domestic savings has traditionally been a source of both macroeconomic instability, which Brazil finally overcame with the Plano Real and the fiscal adjustment of 1999, and a relatively high cost of capital, which remains a problem until today. In light of buoyant revenue performance, fiscal constraints lost some of their salience during the first decade of the 2000s but the substantial expansion of public spending after 2008 and the collapse in revenues since the sharp economic downturn in 2014–2015 have exposed Brazil’s underlying budget rigidities. Without fiscal adjustment, it seems, the country may be stuck with weak investor confidence, high interest rates in the light of concerns over macroeconomic imbalances, and as a result little impetus for a return to investment-driven growth. At the same time, the necessary fiscal adjustment is fraught with important distributional consequences, which may affect Brazil’s future prospects for continued inclusive economic development. 15. Addressing fiscal trade-offs will be critical for the ability of the public sector to redistribute resources (income and services) to the poor, within a sustainable fiscal and macroeconomic framework. The analysis in this SCD highlights that some of the largest public expenditure items in the social sphere benefit mostly the better-off, public pensions being an obvious example. In other areas, including health care or general education, there is ample scope for greater efficiency. Many budget subsidies to various economic sectors may even be harmful, by distorting competition, or may be wasted in poorly planned and executed investment projects. By reforming social security, reducing waste, abolishing inefficient subsidies, and reallocating resources to xxv EXECUTIVE SUMMARY those services mostly benefiting the B40, the necessary fiscal adjustment can be made consistent with further social progress. In this regard, particular attention should be placed on safeguarding and even expanding programs and services that protect the most vulnerable, such as women, Afrodescendants, and indigenous peoples, many of whom still suffer discrimination and are particularly subject to violence and insecurity, despite considerable government efforts in recent years, which have begun to bear fruit. 16. Beyond the structural conditions for future job creation and the quality of Brazil’s inevitable fiscal adjustment, the prospects of the B40 are also intrinsically linked with the country’s vast natural assets and its leadership in the global environmental agenda. Many of the poor and vulnerable depend on the natural environment for their livelihoods, such as small- scale agricultural producers, as indigenous communities whose lifestyles are dependent on the preservation of Brazil’s natural habitats, as well as urban dwellers exposed to pollution, water scarcity or power shortages, and the risks of natural disasters. The high population density and large numbers of poor in urban areas characterize the vulnerability to natural hazards in the country, largely driven by the suboptimal land use and planning that characterizes Brazilian cities. With much fewer means to protect or insure themselves against environmental risks, the poor and B40 are particularly affected by the degree to which government policy and regulation manages to balance the needs of economic development with the objective of environmental sustainability. This SCD shows that there is significant scope to reduce the burden of existing regulation and improve their environmental impact, for instance in the management of land and water resources. Indeed, Brazil has the opportunity to position itself as a leader in exploring green growth paths for emerging markets through innovative policy design. This has the potential to create new economic opportunities for the B40 and greatly increase their resilience against climate-related and other natural shocks. 17. The reforms required to preserve Brazil’s socioeconomic achievements and return the country to a sustainable growth path are challenging. Brazil rightly looks back at its recent progress in social inclusion with pride. Some in the country see a direct association with an expansive public sector and fear that regulatory reforms and spending cuts may unwind many of these gains. The analysis of this SCD points in a different direction. Brazil’s political institutions have required compromises that have swelled government commitments even at the cost of significant inefficiencies. In times of tight fiscal constraints, it may be time to review some of these compromises and generate a new consensus in favor of a more efficient, while still inclusive, economic and social model. Brazil’s own history suggests that a new policy consensus has emerged at times of crisis and allowed the country to overcome past institutional constraints to better public sector governance. In the late 1990s, repeated bouts of high inflation finally convinced the political class to establish a new set of institutions – xxvi RETAKING THE PATH TO INCLUSION, GROWTH AND SUSTAINABILTY the macroeconomic tripod and the fiscal responsibility law – that guaranteed macroeconomic stability for the next 15 years. Likewise today, poor macroeconomic prospects, the decreasing public tolerance of the ‘old ways’ of political deal making, as well as growing pressure for improvements in the quality of services may create incentives for policy makers to align behind a coherent economic strategy and overcome the vested interests that have blocked reform to date. Brazil’s political establishment has already demonstrated leadership and vision in declaring ambitious climate objectives – a national consensus seems to be forming in favor of a future green growth model. All this is reason to be optimistic. 18. The structure of the SCD follows the argument in the previous paragraphs. Chapter 1 summarizes Brazil’s achievements in reducing poverty and boosting incomes of the B40, drawing up a profile of the poor and vulnerable, their main assets, access to markets and public services and susceptibility to various economic risks, as well as the effectiveness of government transfers. Chapter 2 looks at Brazil’s political institutions to get at the root of the country’s fiscal challenges. Chapter 3 examines the consequences of these fiscal challenges for macroeconomic management and traces the evolution of Brazil’s macroeconomic policy framework since the days of high inflation in the late 1980s. Chapter 4 deals with the structural reforms needed to raise the level and types of private investment required to increase productivity growth and competitiveness, with a particular focus on the role of infrastructure. Chapter 5 reviews the scope for efficiency enhancing and socially progressive reallocations of government expenditures. It also analyzes why some vertical government policies, such as the Programa Bolsa Família (PBF) conditional cash transfer (CCT) program, have been so successful, while others—in infrastructure, or in the area of education—have had a more mixed record. Chapter 6 looks at the challenges for improved environmental and natural resource management, and outlines the contours of a future green growth strategy for Brazil. Chapter 7 concludes the SCD and draws out the main constraints to Brazil’s development. In the remainder of this overview, we summarize the responses to the key questions in each chapter. Who are the poor and bottom 40 percent in Brazil and how did they fare? 19. Between 2001 and 2013, 24.6 million Brazilians have escaped poverty, although Brazil remains one of the most unequal countries in the world. The reduction in poverty is an achievement of regional significance, representing almost 50 percent of the reduction in poverty in the whole Latin American and Caribbean (LAC) region (Figure 1). Brazil also experienced a rapid decline in inequality over the past decade, with the Gini coefficient of household incomes falling from 0.59 to 0.53. To a large extent, it was due to a policy of social inclusion in the context of a booming economy, fueled by favorable external conditions. Brazil’s achievements were also of historical significance, in that it was the first time in the history of Brazil that a sustained xxvii EXECUTIVE SUMMARY reduction in poverty and inequality had been achieved. Nevertheless, even after the reduction in poverty and inequality, Brazil remains one of the most unequal countries in the world, with a Gini coefficient higher than in most countries except Colombia and Honduras in Latin America and Caribbean and a few countries in sub-Saharan Africa. Figure 1: Progress in Poverty and Inequality Reduction in Brazil Gini Coefficient Extreme Poverty Rate (