São Paulo – Brazil must keep promoting economic reform in order to move past its recent progress. The assessment was given by the Organization for Economic Cooperation and Development (OECD), which issued an Economic Survey of Brazil this Wednesday (26).
According to an OECD statement, the Brazilian economy has recovered swiftly from the international financial crisis, but further reforms are required to boost long-term growth, foster investment and reduce poverty even further.
The OECD estimates that Brazilian growth should slowdown to at least 4% in the next two years, below trend rates of 4.5% but well above the average for OECD countries. The organization comprises some of the richest countries in the world. Brazil, however, is not a member.
The main macroeconomic challenge facing the country right now, to the OECD, is curbing inflation without exerting pressure on the exchange rate. To the organization, the use of different tools for reducing exchange rate volatility is understandable, given the uncertainty surrounding the world economy.
In another survey issued this Wednesday, the OECD and the United Nations Conference for Trade and Development (Unctad) mention the raised Tax on Financial Operations (IOF) for exchange rate derivatives contracts among the measures taken over the last few months by G20 countries and which have impacted investment. The Brazilian government increased the tax to curb speculation.
Although it deems this type of measure as acceptable, the OECD advises the country to centre its efforts on “fiscal consolidation,” that is, seeking responsible long term fiscal policies. The organization opposes measures meant to fully offset the appreciation of the Brazilan real, because some of the Brazilian currency appreciation is a result of international growth and inflation differentials.
The report praises the spending cuts announced by the government early this year and the setting of primary surplus targets for the next three years through the multiannual plan. It also hails (the federal income transfer program)Bolsa Família and states that it must be maintained and expanded.
The survey also highlights the importance of boosting the FDI-to-GDP (foreign domestic investment to gross domestic product) ratio. In Brazil, the ratio revolves around 18%, is lower than in other countries, and has long been below the rate advised by multilateral agencies, which is 25%. According to the OECD, the country must prioritize infrastructure spending and protect these from eventual cuts. This is considered crucial to long-term growth and social inclusion.
The organization also advises on a social security reform, the strengthening of the long-term financial market – which provides an incentive to investment –, lowering of the tax burden, and adoption of policies to lower interest rates.
G20
In the joint publication issued by the OECD and the Unctad on G20 member countries, whose summit will take place in Cannes, France in early November, the two organizations claim that the world’s 20 leading economies have not adopted significant protectionist measures during the period surveyed, from April 29 to October 6, with regard to investment. Most policies adopted aim to eliminate restrictions on international capital flows and to provide investors with greater transparency.
According to the study, the G20 countries have lifted virtually all of the incentive policies implemented during the international financial crisis. Still, the new economic turmoil caused by the European debt crisis may pressure these countries into new similar actions. The two organizations believe that short-term measures to address the negative scenario must be coupled with long-term ones to encourage productive investment.
“Ensuring that any future crisis response measures are as transparent and non-discriminatory as possible will help limit damage to the functioning of global capital markets,” the publication claims. To the OECD and the Unctad, G20 governments must join forces to strengthen multilateral cooperation and find global solutions to the economic issues and hazards.
“The forthcoming G20 summit in Cannes and the 8th Ministerial Conference of the World Trade Organization (WTO) in December could send a strong signal about the need to keep markets open, resist protectionism, and preserve and strengthen the global trading system so that it continues performing this vital function in the future,” the document states.
*Translated by Gabriel Pomerancblum
