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  • Report N: 101431-BR

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  • Pictures by

    Filipo Tardim/Disponvel sob licena CC BY-SA 4.0 (Brazilian Congress)

    Eduardo Issa/Programa ARPA/Divulgao (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

    Education Barbara Bruns, Rita Almeida, Michael Drabble, Leandro Costa, Andr

    Loureiro

    Energy and Extractives Christophe de Gouvello

    Environment and Natural

    Resources Ernesto Snchez Triana, Klas Sander, Bernadete Lange, Adriana Moreira

    Finance and Markets Heinz Rudolph, Mark Dutz, Leyla Castillo, Bujana Perolli, Shanthi

    Divakaran, Ceyla Pazarbasioglu

    Gender Miriam Muller, Renata Mayer Gukovas, Aude-Sophie Rodella

    Governance Lorena Viuela, Laura Zoratto, Etel Patricia Bereslawski, Miguel-Santiago

    da Silva Oliveira

    Health Nutrition, and Population Tania Dmytraczenko, Eza Pontes, Magnus Lindelow

    IFC Luciana Marchesini, Miguel Angel Rebolledo Dellepiane

    Jobs Joana Silva, Rafael Prado Proena, Rita Almeida

    Macroeconomics and Fiscal

    Management

    Antonio Nucifora, Rafael Barroso, Edith Kikoni, Fabio Bittar, Cornelius

    Fleischhaker

    MIGA Dan Biller, Jorge Rivas

    Poverty and Equity Emmanuel Skoufias, Aude-Sophie Rodella, Martha Viveros, Renata Mayer

    Gukovas, Ali Sharman, Thiago Scot

    Social Protection and Labor Maria Concepcion Steta Gandara, Claudia Baddini, Anna Fruttero, Renata

    Mayer Gukovas

    Trade and Competitiveness

    Mark Dutz, Tom Kenyon, Paulo Correa, Martha Licetti, Tanja Goodwin,

    Jean Franois Arvis, Julie Barbet-Gros, Daria Taglioni, Tom Farole, Erik van

    der Marel, Laura Dachner, Roberto Echandi, Doyle Gallegos, the WDR 2016 team, Pluvia Zuniga, Priyam Saraf, Marialisa Motta

    Transport and ICT Georges Bianco Darido, Shomik Mehndiratta, Eric Lancelot, Bianca Bianchi

    Alves, Satoshi Ogita, Gregoir Gauthier, Alexandre Takahashi

    Social, Urban, Rural and

    Resilience

    Josef Lloyd Leitmann, Emanuela Monteiro, Catalina Marulanda, Andres

    Villaveces, Alberto Coelho Gomes Costa, Frederico Pedroso, Nancy Lozano

    Gracia

    Water Martin Gambrill, Thadeu Abicalil, Erwin de Nys

    The team is also very grateful to Flavia Nahmias and Mnica 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 Familiar Country Director: Martin Raiser Task Managers: Roland Clarke and Emmanuel Skoufias

    Vice President: Snezana Stoiljkovic Regional Director: Irene Arias Task Managers: Eduardo Wallentin and Luciana Marchesini

    Vice President: Karin Finkelston Director: Ravi Vish Manager: Dan Biller

  • Table of Contents

    ACKNOWLEDGEMENTS .................................................................................................................... iv

    ABBREVATIONS AND ACRONYMS ............................................................................................... xii

    OVERVIEW ................................................................................................................................ XV

    CHAPTER ONE: BRAZILS 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 Brazils 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: BRAZILS 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 Brazils 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 GainsThe Golden Decade ..................................................................................... 46

    3.2.1 The FoundationsStrong 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 Brazils 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 Brazils Macroeconomic Policy Dilemmas ............... 64