Country

Development
Challenges
BRAZIL DECEMBER 2022
Editors: JOSÉ LUIZ ROSSI JÚNIOR AND MORGAN DOYLE
 BRAZIL DECEMBER 2022
Editors: JOSÉ LUIZ ROSSI JÚNIOR AND MORGAN DOYLE
Cataloging-in-Publication data provided by the Inter-American Development Bank

Route for sustainable and inclusive growth/ editors José Luiz Rossi Júnior and Morgan Doyle.

p. cm. — (IDB, Monography; 1066)

Bibliographical references are included.

Economic development-Brazil. 2. Sustainable development-Brazil. 3. Infrastructure (Economics)-Bra-

zil. 4. Industrial productivity-Brazil. 5. Technological innovations-Government policy-Brazil. 6. Bra-
zil-Economic policy. 7. Brazil-Social policy. I. Rossi Júnior, José Luiz, editor. II. Morgan Doyle, editor.
IV. Inter-American Development Bank. Country Office in Brazil. V. Series. IDB-MG-1066

JEL Classification: E02; H54; H60; J24; N16; O11; O20; O54

Keywords: Brazil, economic growth, productivity and competitiveness, infrastructure, foreign trade,
private sector, new technologies, public management, investment, economic development, digital
transformation, public spending, regulation, reforms, tax system, tax reform, social security reform,
natural capital, sustainability

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Authors

This document was prepared by José Luiz Rossi Júnior (CSC/CBR) under the supervision of
Morgan Doyle (CSC/CBR) and Virginia Queijo (CSC/CSC). Maria Florencia Attademo-Hirt (CSC/
CSC), Marcos Vinicius Chiliatto (CSC/CSC), Tomás Serebrisky (INE/INE), Mariano Bosch (SCL/
SCL), Philip Keefer (IFD/IFD), Mauricio Moreira (INT/INT), Allen Blackman (CSD/CSD), Gregory
Watson (CSD/CCS), Maria Cristina MacDowell (FMM/CBR), Andre Martinez (IFD/FMM), Ana
Dezolt (IFD/FMM), Patricia Bakaj (IFD/FMM), Vanderleia Radaelli (IFD/CTI), Livia Gomes (SCL/
LMK), Diego Arcia (CSD/HUD), Clementine Tribouillard (CSD/HUD), Marcelo Paz (DSP/SPK),
Adriana Valencia Jaramillo (DSP/SPK), Paula Castillo Martinez (DSP/SPK), Juan Flores (DSP/
SPK), Rodrigo Serrano (IFD/ICS), Mariano Lafuente (IFD/ICS), João Cossi (SCL/EDU), Gregory
Elacqua (SCL/EDU), Maria Cecília Acevedo (DSP/SPK), Octavio Damiani (CSD/RND), Carlos
Echevarria (INE/ENE), Michael Hennessey (IFD/CTI), Daniel Torres (INE/TSP), Ana Esteves (ESG/
CBR), Ana Castro (INE/TSP), Leonardo Shibata (SCL/SPH), Karisa Ribeiro (CSC/CSC), Tiago
Pereira (INE/WSA), Gustavo Mendez (INE/WSA), Barbara Brakarz (CSD/CCS), Orlando Lima (IFD/
CMF), Rafael Cavazzoni (IFD/CMF), Juliana Bettini (CSD/RND), Laisa Dias (SCL/GDI), Ian Mac
Arthur (SCL/SPH), Marcia Rocha (SCL/SPH), Paola Arrunategui (CSC/CBR), Cláudia Veiga (CSC/
CBR), Miguel Baruzze (VPC/FMP), contributed with their knowledge and comments.

THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION RELATING TO ONE OR MORE OF THE TEN

EXCEPTIONS OF THE ACCESS TO INFORMATION POLICY AND WILL INITIALLY BE TREATED AS CONFIDENTIAL

AND MADE AVAILABLE ONLY TO A RESTRICTED GROUP OF INDIVIDUALS WITHIN THE BANK. THE DOCUMENT

WILL BE DISCLOSED AFTER A PERIOD OF TWENTY (20) YEARS.

Index
8EXECUTIVE SUMMARY 8

16
CHAPTER 1: ECONOMIC CONTEXT 16
Economic Trends Prior to the Covid-19 Pandemic 17
The Pandemic’s Impact on the Brazilian Economy 30
The Economic Outlook for 2022-2026 44

46
CHAPTER 2:ROUTE TOWARD SUSTAINABLE AND INCLUSIVE GROWTH 46
PILLAR 1_ Promoting a Resilient Recovery 48
PILLAR 2_ Adopting a new social agenda for inclusive growth 56
PILLAR 3_ Fostering Digital Transformation for Development 64
PILLAR 4_ Incorporating green growth into the country’s development model 72
80
CHAPTER 3: STRATEGIC PILLARS AND DEVELOPMENT PRIORITIES 80
PILLAR 1_ Promoting a Resilient Recovery 82
(1) Support Integration with International Markets 83
(2) Boost the investment in infrastructure 85
(3) Develop Private-Public Partnerships 90
(4) Remove barriers to business growth 92
(5) Strengthen the Fiscal framework 96

PILLAR 2_ Adopting a new social agenda for an inclusive growth 106

(1) Focus public polices for reducing poverty and inequalities 107
(2) Prepare the youth for the future 112
(3) Build strong social protection and labor markets 119
(4) Improve the accessibility, quality, efficiency, and equity of health services 128
(5) Make cities safe and inclusive 132

PILLAR 3_ Fostering the digital transformation for Development 138

(1) Promote innovation to boost growth 139
(2) Build the capacity of citizens to utilize new technologies 141
(3) Develop infrastructure for new technologies 143
(4) Facilitate entrepreneurship for generating a dynamic economy 145
(5) Leverage new technologies to boost productivity 149
(6) Improve the quality of life and inclusion using new technologies 151
(7) Use the technology to improve the efficiency and transparency of the public sector 156

PILLAR 4_ Incorporating green growth into the country´s development model 160
(1) Foster adaptation and climate resilience 161
(2) Build a sustainable, resilient and inclusive infrastructure 166
(3) Promote a sustainable economy: Bioeconomy, Agriculture, Mining and Tourism 189
(4) Channel financial resources for the green economy 198

REFERENCES 204
ANNEX 1 - THE USE OF PARSIMONIOUS PRIORITIZATION METHODOLOGIES 228
ANNEX 2 - KNOWLEDGE GAPS 231
 Country Development Challenges - Brazil

08
Executive
Summary
Brazil was already facing a sluggish economic re-
covery prior to the COVID-19 pandemic. Between
2014 and 2016, the country experienced a deep re-
cession marked by substantial drop in economic ac-
tivity combined with a reversal of recent gains in so-
cial indicators. From 2017 to 2019, GDP growth was
unable to fully recoup the losses incurred during the
recession. In recent decades, Brazil has repeatedly
experienced this pattern, with a sharp decline in
economic activity followed by an anemic recovery.

On the supply side, the accumulation of capital

and labor has been largely responsible for GDP
growth in recent decades, while productivity
growth has been sluggish since the 1980s. Weak
productivity growth makes expansions difficult
to sustain. Together with demographic changes
and insufficient levels of savings and investment,
growth driven by factor accumulation tends to be
both slow and volatile. With the exception of some
sectors; as agriculture and mining, the Brazilian
economy is not able to compete abroad. Brazil is
ranked 59th out of 62 countries in the World Com-
petitiveness Ranking 2022, three positions below
the 56th place it held in 2020. Aggregate labor
productivity has increased only 0.9% per year be-
tween 1995 and 20211. Business environment pose
challenges for companies to expand. According to
the WEF Global Competitiveness Index published
Executive Summary

in 2019, Brazil ranked last out of 141 countries in

terms of the burden of government regulation. It
also ranked near the bottom of the index (124th)
in terms of product market efficiency, due to poor
internal competition and distortive subsidies.

1 FGV-IBRE (2022)

BID — Banco Interamericano de Desenvolvimento 09

 In addition, serious fiscal imbalances continue to However, these measures proved insufficient to
threaten macroeconomic stability and growth in contain the growth of expenditure. Unsustainable
Brazil. From the late 1990s through the mid-2010s, fiscal dynamics are not limited to the federal go-
Brazil ran sizeable primary surpluses. However, vernment, and subnational authorities have also
these surpluses were obtained through repeated faced deteriorating fiscal balances over the last de-
increases in the tax burden and cuts to public in- cade. The rigidity of the budget and the high level
Country Development Challenges - Brazil

vestment without a comprehensive program for li- of public debt impede the public sector to act coun-
miting the growth of expenditure or improving the ter-cyclically to offset negative activity shocks.
quality of public spending. This approach resulted
in a large debt burden, with a significant share of Poverty and inequality impose binding constraints
debt maturing in the short term, as well as interest on growth and development. Brazil is one of the
rates that are higher than in many comparable world’s most unequal countries. Despite modest
emerging market economies. Since 2016, several improvements in recent decades, slow economic
initiatives have attempted to limit the erosion growth and ineffective public policies have kept
of the fiscal balances, including a constitutional poverty and inequality indicators stubbornly high.
amendment to curb the real growth of primary Administrative inefficiency, inadequate public ac-
spending and reforms to the pension system. countability, and the opacity of the policy process

10
 In a post-pandemic world, policies that facili-
contribute to weak productivity growth, high pover-
tate digital transformation and a balanced use
ty rates, and entrenched social inequality.
of Brazil’s abundant natural capital will be vital
to achieving inclusive and sustainable growth.
The pandemic exerted a significant impact in the
Globally, the COVID-19 pandemic accelerated the
country in different dimensions, exacerbating its
digital transformation and a push toward a gree-
structural challenges. Human, economic, social
ner society. New technologies create both chal-
and political questions suffered the impact of the
lenges and opportunities for development: they
pandemic. The pandemic highlighted several
can help countries accelerate economic growth,
shortcomings in Brazilian public policies. The
improve competitiveness, manage resources
weak advance in productivity has been producing
more efficiently, and extend essential services
a slow recovery with a labor market that does not
to the poorest and most-vulnerable households;
have the capacity to create high-quality jobs. Al-
at the same time, they threaten to disrupt labor
though the government has built a comprehensive
markets and displace certain workers. Managing
package of measures to contain the impacts of the
such complex trade-offs will require forward-
pandemic, it resulted in a weakening of the fiscal
-looking policies. In addition, Brazil’s natural as-
situation. In addition, the country has seen an
sets—already an important source of income for
increase in poverty and inequalities given the he-
many households—offer critical opportunities
terogeneous nature of the impact of the pandemic
for economic and social development, especially
and lack of adequate social protection system. FMI
in less-developed regions of the country. Policies
(2022) finds that Brazilian students who faced total
that facilitate digital transformation, and promo-
or partial school closures will experience some of
te a sustainable exploitation of natural capital,
the greatest lifetime income losses in the G-20 at
can mitigate the social costs of necessary reforms
an estimated 9.10% loss in lifetime income. The
to the business and fiscal environments, while
pandemic also brought back the inflationary issue
raising living standards across the country.
and rising interest rates, creating more macro-
economic instability in the country. Finally, the
The actionable recommendations presented in
pandemic has made the country more dependent
this document are organized under four strategic
on commodity trade and increased the country’s
pillars. These are:
trade ties with China, its main trading partner.
I. Promoting a resilient recovery;
II. Adopting a new social agenda for an
Growth is necessary but not sufficient to reduce
inclusive growth;
poverty and inequalities. Persistently high levels
III. Fostering the digital transformation for
of poverty and inequality show that growth in isola-
development; and
tion cannot resolve Brazil’s social problems. A struc-
IV. Incorporating green growth into country’s
tural improvement of social outcomes involves effi-
development model. These strategic pillars
cient and focused public policies, and a more agile,
and their corresponding policy actions are
effective, and fiscally sustainable public sector.
highly interdependent and should not be
Executive Summary

Efficiency gains in the public sector requires that

pursued in isolation.
relevant public policies are designed, implemen-
ted, monitored, assessed, and adjusted according Table 1 summarizes some of the critical policy ac-
to international best practices. Targeting public po- tions, which are discussed in greater detail in chap-
lices in the most vulnerable groups generates more ter 3. The policy recommendations are designed to
advances in reducing poverty and inequalities and enhance growth and social indicators and contribute
accelerates the growth of productivity. to the achievement of Brazil’s development goals.

BID — Banco Interamericano de Desenvolvimento 11

 PILLAR 1. Promoting a Resilient Recovery

SUPPORT INTEGRATION 1. Make progress on trade-policy agenda

WITH REGIONAL AND 2. Accelerate Regional Integration
INTERNATIONAL 3. Improve trade facilitation and logistics for export
MARKETS 4. Strengthen investment- and export-promotion activities

1. Build a National Public Investment System

BOOST INVESTMENT
2. Improve the regulatory and institutional framework for public investment
IN INFRASTRUCTURE
3. Mobilize private capital for long-term financing

DEVELOP 1. Maintain a centralized PPP program

PUBLIC-PRIVATE 2. Streamline the PPP process and enhance its transparency
PARTNERSHIPS 3. Build institutional capacity, especially among subnational governments
(PPPS) 4. Improve the fiscal management of PPPs

1. Improve the regulatory framework

REMOVE BARRIERS 2. Create the conditions to reduce banking spreads
TO BUSINESS 3. Support strengthening of Development Financial Institutions (DFIs)
GROWTH 4. Promote credit, develop capital markets, and crowd in private sources
of finance to encourage investment and expand financial access

1. Strengthen the program evaluation process

2. Reinforce the link between planning, budget and performance at the institutional level
STRENGTHEN THE 3. Adopt a medium-term budget framework
FISCAL FRAMEWORK 4. Revise the tax system
5. Embrace a more cooperative federalism
6. Strengthen accountability and transparency in the public sector
Country Development Challenges - Brazil

12
PILLAR 2. Adopting a new social agenda for an inclusive growth

1. Formulate public policies that promote equity and target the most vulnerable
FOCUS PUBLIC POLICES
2. Improve representation and remove stereotypes
FOR REDUCING POVERTY
3. Reinforce cognitive and socio-emotional skills of students and workers
AND INEQUALITIES
4. Develop training programs

1. Expand the coverage and improve the quality of childcare

2. Enhance the design of cash transfer programs to maximize their benefits for children
PREPARE THE YOUTH
3. Use technology to expand and improve access to quality education
FOR THE FUTURE
4. Implement curricular and high-school reforms
5. Mitigate the impact of the pandemic on students

1. Expand and improve the existing structure of social protection

2. Improve data quality to identify all vulnerable citizens
BUILD STRONG 3. Review and consolidate the Auxilio Brasil program
SOCIAL PROTECTION 4. Develop a comprehensive policy for long-term care
AND LABOR MARKET 5. Consider policy options for reducing informality
6. Strengthen the public employment system
7. Develop qualification and requalification programs

1. Increase public financing in health

IMPROVE THE
2. Improve the efficiency and quality of services
ACCESSIBILITY, QUALITY,
3. Enhance coordination among different levels of government
EFFICIENCY, AND EQUITY
OF HEALTH SERVICES 4. Adopt a healthcare-service delivery model founded on primary care
5. Use innovative health services modalities

1. Prioritize violence prevention

2. Improve the effectiveness of existing policies
3. Restructure the penitentiary system
4. Support integrated programs of neighborhood upgrading
MAKE CITIES SAFE
5. Incentivize private investment in housing development
AND INCLUSIVE
6. Implement land titling and home improvement programs
7. Support innovative models of housing production
8. Develop an integrated urban-renewal program
9. Assess alternatives to traditional housing programs
Executive Summary

BID — Banco Interamericano de Desenvolvimento 13

 PILLAR 3. Fostering the Digital Transformation for Development

1. Enhance the efficiency of public investment in innovation

PROMOTE 2. Create new financial instruments for innovation
INNOVATION TO 3. Utilize public procurement to increase investment in innovation
BOOST GROWTH 4. Support innovation in value chains or clusters
5. Develop capacity for innovation within private firms

1. Organize scholarship programs for digital training

BUILD THE CAPACITY 2. Develop mentorship opportunities, support networks, and role
OF WORKERS models for underrepresented groups in STEM fields
TO UTILIZE NEW 3. Digitally transform education pedagogical practices and management systems
TECHNOLOGIES 4. Create new academic models to align student skills with market demand
5. Incentivize the development of online platforms that match workers with jobs

DEVELOP 1. Promote investment in telecommunications and improve sectoral regulation

INFRASTRUCTURE 2. Enhance the digital ecosystem
FOR NEW 3. Incentivize to the banking sector to finance digital infrastructure
TECHNOLOGIES 4. Promote PPP and concession schemes in rural and underserved areas

1. Leverage new sources of funding for early-stage start-ups

2. Reduce bias in investment
FACILITATE
3. Promote the incubation and acceleration of startups
ENTREPRENEURSHIP FOR
4. Support the pipeline of founders from underrepresented groups
A DYNAMIC ECONOMY
5. Create open innovation financing instruments
6. Increase international cooperation

1. Enact structural reforms to encourage competition and global integration

LEVERAGE NEW
2. Reduce the fiscal burden that limits technological uptake
TECHNOLOGIES
3. Encourage the adoption and utilization of innovative technologies
TO BOOST
PRODUCTIVITY 4. Strengthen industrial segments in which Brazil has comparative advantages
5. Promote the development of sustainable agricultural technologies

1. Support the development of smart cities

2. Encourage the expansion of municipal broadband connectivity
Country Development Challenges - Brazil

IMPROVE THE
3. Assist municipal authorities in developing and implementing data management policies
QUALITY OF LIFE AND
4. Support capacity-building programs related to smart cities
INCLUSION USING
NEW TECHNOLOGIES 5. Boost fintech companies to improve access to financial services
6. Reduce bias in the financial system
7. Enable credit expansion to facilitate inclusion

USE THE TECHNOLOGY 1. Adopt digital technologies to support fiscal policymaking and fiscal management
TO IMPROVE THE 2. Use digital technologies to strengthen expenditure management
EFFICIENCY AND 3. Utilize digital technologies to improve social programs
TRANSPARENCY OF 4. Support the digital transformation of the public sector at subnational level
THE PUBLIC SECTOR

14
PILLAR 4. Incorporating Green growth into the country’s development model

1. Curb deforestation
FOSTER 2. Mitigate transition risks
ADAPTATION 3. Develop a carbon market
AND CLIMATE 4. Propose a green fiscal policy
RESILIENCE 5. Reduce fossil-fuel subsidies
6. Streamline socioemotional and education skills for climate change in the new curriculum

Energy
1. Diversify the electricity matrix
2. Rethink electricity pricing and tariff structures
3. Position the country as a provider of low-carbon energy solutions
4. Follow and support shifts in the power sector

Water, sanitation, drainage and waste management

1. Address institutional and regulatory bottlenecks
2. Accelerate innovation and digital transformation in service delivery
3. Improve quality of drainage projects
BUILD A
SUSTAINABLE,
Transport
RESILIENT AND
1. Invest in the transportation sector
INCLUSIVE
2. Adopt a green growth strategy
INFRASTRUCTURE
3. Support logistics corridors and multimodal transport
4. Enhance resilience in the transport sector
5. Advance the electrification of public and private transport

Green Cities
1. Reduce GHG emissions through sustainable integration
of urban planning and green mobility systems
2. Develop low-carbon cities, setting out goals for urban decarbonization
3. Enhance resiliency in urban environments
4. Reduce atmospheric, water, acoustic, and soil contamination

Bioeconomy
1. Tailor policies to support the bioeconomy
2. Accelerate the productive transformation of the bioeconomy
3. Promote innovation and research to create sustainable business opportunities
4. Incentivize sustainable production methods

Agriculture
PROMOTE
1. Strengthen and promote climate goals and reduce deforestation
SUSTAINABLE
2. Reform the ATER system
ECONOMY:
3. Expand the capacities of producer organizations
BIOECONOMY,
4. Invest in training in rural areas
AGRICULTURE,
5. Strengthen the agricultural health system
MINING AND
TOURISM
Tourism
1. Build institutional capacity to develop and manage sustainable tourism
2. Improve logistics, sanitation, and telecommunications infrastructure
3. Adopt a tourism model based on high service quality and sustainability
4. Improve the use of technology in the tourism sector
5. Reorient tourism to strengthen communities and local businesses
Executive Summary

6. Invest in nature-based solutions

1. Develop technical assistance programs and appropriate regulations for green finance
2. Build a global climate-information architecture
CHANNEL FINANCIAL 3. Analyze the impact of fiscal incentives
RESOURCES FOR THE 4. Establish a pipeline of sustainable projects
GREEN ECONOMY 5. Use credit-enhancement instruments, such as partial guarantees,
to develop a multi-tranche sovereign green bond

BID — Banco Interamericano de Desenvolvimento 15

 Country Development Challenges - Brazil

16
1
Context
Economic
Economic Trends Prior to
the Covid-19 Pandemic
onomic Trends Prior to the Covid-19 Pandemic
1.1. Brazil was already facing a sluggish econo-
mic recovery before the onset of the pandemic.
Between 2014 and 2016, the Brazilian economy
experienced one of the deepest recessions in its
history. This recession marked the end of a decade
of robust economic growth fueled by credit and
consumption. From 2017 to 2019, growth was ane-
mic at an average annual rate of about 1%. While
economic activity was expected to accelerate in
2020, the pandemic swiftly rendered previous fore-
casts obsolete.

1.2. Brazil’s GDP growth has generally been vola-

tile, and over the last decade it reached its lowest
historical average. The growth of the Brazilian
economy has been volatile, especially in recent
decades. After experiencing rapid growth from
the late 1960s through much of the 1970s, a period
known as the “economic miracle,” Brazil proved
unable to sustain this robust expansion. In the
1980s, an external debt crisis caused growth rates
to plunge, resulting in a “lost decade.” Growth mo-
destly accelerated in the 1990s and 2010s, but in the
2010s the country experienced its weakest expan-
Economic Context

sion in over a century, as a deep pandemic-induced

contraction in 2020 pushed the average growth
rate to just 0.28%, far below the level of the “lost
decade.” Even in the absence of the pandemic, eco-
nomic activity would have reached a record low
during the 2010s, as the annual GDP growth rate
averaged just 0.76% between 2010 and 2019.

BID — Banco Interamericano de Desenvolvimento 17

 FIGURE 1.1. GDP real growth (%) 1901-2020

15.00%

10.00%

5.00%

0.00%

-5.00%
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
2017
Source: Ipeadata

1.3. Indicators of aggregate productivity have

Period Average
performed poorly over the last few decades,
Growth
suggesting that the causes of Brazil’s sluggish
growth are deep-seated and persistent.1 Total
1901 - 1910 4.38%
factor productivity (TFP) fell significantly in the
1911 - 1920 4.34% 1980s, 2 dropping at an annual average rate of
0.6% between 1981 and 1990. In the 1990s, TFP
1921 - 1930 4.62% growth turned positive but remained modest,
expanding at an average rate of 0.1% percent per
1931 - 1940 4.48%
year. Several studies have credited trade libera-
lization with boosting productivity during the
1941 - 1950 5.97%
decade. In the early 2000s, TFP remained below
its 1980 level; however, the TFP growth rate ac-
1951 - 1960 7.41%
celerated to an average of 1.5% per year over the
1961 - 1970 6.22% decade. In the 2010s, TFP growth again turned
negative, contracting at average annual rate of
1971 - 1980 8.67% 0.1%. This decline in productivity was particu-
larly acute during the 2014-2016 recession, when
1981 - 1990 1.67%
the TFP growth rate plunged by almost 1.0% per
Country Development Challenges - Brazil

year. In 2019, Brazil’s TFP was only 15% higher

1991 - 2000 2.63%
than it was at the beginning of the 1980s, and the
TFP growth rate remained modest at just 0.3%.
2001 - 2010 3.71%
Despite several government initiatives in the last
2011 - 2020 0.28% decade, productivity growth continues to be mo-
dest in Brazil. 3
Source: Ipeadata

1  here are different methodologies to calculate the evolution of the Total Factor Productivity (TFP). Here it is shown the results available at https://ibre.
T
fgv.br/observatorio-produtividade
2 According to Menezes-Filho, Campos and Komatsu (2014) since the 1980s, agriculture began to show greater productivity growth and productivity of
the manufacturing sector has declined. According to Silva, Menezes-Filho and Komatsu (2016) the fall in productivity in the 1980s was only not larger
because of the increase in structural change in the country.
3 FGV-IBRE (2022)

18
 FIGURE 1.2. The Evolution of Total Factor Productivity in Brazil

4.00%
3.4%
3.00%
2.4%
2.00%
1.3%
1.1%
1.00%
0.3% 0.2% 0.1%
0.00%
-0.4%
-1.00% -0.8% -1.0% -0.6%
-1.1% -1.2%
-1.4%
-2.00% -1.6% -1.8%
-2.4%
-3.00% -2.6%
-3.2%
-4.00%

-5.00% -4.6%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
Source: FGV and Penn World Table

1.4. Gains in productivity have never been the main TABLE 1.1. Growth Accounting – 1948 – 2019
engine of economic growth in Brazil. GDP can be
decomposed into three components: TFP, the capi- Contribution to Growth
tal stock, and the labor force. Table 1.1 shows that
TFP Capital Labor
the evolution of the capital stock has accounted for
the largest share of growth in Brazil in all periods
1948-1962 27% 51% 22%
since 1948, except for 2000-2010. In no period was
productivity growth the primary contributor to 1963-1967 16% 67% 17%
growth. Moreover, declining productivity slowed
economic growth during the 1980s and 2010s. 1968-1973 33% 42% 25%

1.5. Brazil’s growth drivers are approaching 1974-1980 13% 61% 26%

exhaustion. The country’s demographic dividend

ended in 2018, when the working-age population’s 1981-1992 -71% 89% 82%

share in the total population began to decline (Vello-

1993-1999 9% 49% 42%
so et. al., 2020). This trend is expected to continue
over the coming years, increasing the demographic 2000-2010 31% 34% 35%
burden. Meanwhile, the investment-to-GDP and
savings-to-GDP ratios are also diminishing. Sustai- 2010-2019 -14% 85% 29%
ning an annual economic growth rate of 5.1% would
Source: Bonelli and Bacha (2011) and Velloso et. al. (2020)
require investing an estimated 22% of GDP each
year, and each percentage-point increase in the be to implement reforms that spur a substantial and
investment rate would boost the GDP growth rate by sustained increase in productivity growth.
an estimated 0.4% (Bonelli and Bacha, 2011). Howe-
1.6. Low levels of productivity are observed
Economic Context

ver, Brazil’s already low savings and investment

rates are likely to decline further over the coming across all sectors of the Brazilian economy. The
decades. Low productivity growth together with a aggregate productivity of the United States is about
higher global interest rates and financial costs may six times higher than that of Brazil, underscoring
inhibit long-term investment, particularly in key the country’s considerable distance from the tech-
sectors such as infrastructure. In this context, the nological frontier (Ferreira et. al., 2017). Although
only way to generate robust economic growth will Brazil’s agricultural sector has experienced the

BID — Banco Interamericano de Desenvolvimento 19

 FIGURE 1.3. The Evolution of the Investment-to-GDP Ratio and the Savings-to-GDP Ratio
50.00%

45.00%

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Brazil Chile China India Mexico

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Brazil Chile China India Mexico
Source: IMF-WEO

fastest productivity growth rate of any sector over of 5.6% per year, but productivity in the manufactu-
the last two decades, the U.S. agricultural sector ring sector declined by an average of 0.2% per year,
is still about 14 times more productive. The U.S. and the sector’s recent performance has been poor
manufacturing sector is 5.7 times more productive by the standards of comparable countries (Mene-
than its Brazilian counterpart, while the U.S. servi- zes-Filho et al., 2016). Between 2007 and 2018, the
Country Development Challenges - Brazil

ce sector is 5.4 times more productive. productivity of the manufacturing sector plunged
by 14.3%, with declines observed across most sub-
1.7. Slow productivity growth has reduced the sectors, and government subsidies and incentives
manufacturing sector’s share in GDP. Productivity were unable to reverse this trend (Mendonça et al.,
growth rates in Brazil’s three major sectors have 2020). Persistently negative productivity growth
been highly uneven (Veloso et al., 2022). The service reduced the manufacturing sector’s share in GDP
sector accounts for about 70% of total hours worked from 48.0% in 1985 to 21.4% in 2019.
and 73% of all added value, yet its average produc-
tivity growth rate has been anemic at 0.4% per year 1.8. As the economy recovered, employment in-
between 1995 and 2021. Agricultural productivity dicators improved slightly in the years prior to the
grew rapidly over the period, rising by an average pandemic. Reflecting its rigid labor market and

20
 FIGURE 1.4. The Evolution of the Manufacturing Sector’s Productivity across
Countries (2000-2019) and the Sector’s Share in Brazil’s GDP (1947-2019)

230.00

210.00

190.00

170.00

150.00

130.00

110.00

90.00
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
Brazil USA Argentina Germany France

United Kingdom Italy South Korea Mexico Netherlands

50.0%

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%
1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

Source: CNI

slow productivity growth, Brazil has higher levels of 1.9. Brazil has long been among the world’s
unemployment than many comparable countries. most unequal countries. Since well before the
The unemployment rate fell steadily from the late COVID-19 pandemic, Brazil has exhibited high
1990s until the recession of 2014-16, which seve- levels of social and economic inequality. In recent
rely weakened the labor market. Unemployment decades, periods of robust growth have yielded
started to increase in 2014 and peaked at 13.7% in improvements in poverty and inequality, but the-
the first quarter of 2017 before falling from throu- se gains have been limited, uneven, and in some
gh 2019. Between 2017 and 2019, the employment cases temporary. In 2020, the World Inequality Da-
Economic Context

growth was concentrated in occupations normally tabase4 found that households in the top 10% of the
associated with the informal sector. Nominal em- income distribution received 58.6% of all pretax
ployment growth remained sluggish, the quality of income, while those in the bottom 50% received
newly created jobs was low, and the unemployment just 10%. Income inequality in Brazil is both extre-
rate fell only slightly during the period. mely high and broadly persistent over time.

4 https://wid.world/country/brazil/

BID — Banco Interamericano de Desenvolvimento 21

 FIGURE 1.5. The Evolution of the Unemployment Rate, Brazil and Comparators (1991-2019)

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Brazil Chile China Mexico United States
Source: IMF

1.10. The 2014-2016 recession disrupted an month just prior to the pandemic. Moreover, the
improving trend in social indicators, and the pan- extreme poverty rate was 6.5%, implying that 13.69
demic derailed a subsequent recovery. The Gini million people were living on less than R$151 per
coefficient fell from 0.545 in 2018 to 0.543 in 2019, month.5 By contrast, the poverty rate in 2014 was
approaching but not reaching its historical low of 22.8% (45.8 million people), while the extreme po-
0.524 in 2015. According to the Brazilian Institute verty rate was 4.5% (9.0 million people), reflecting
of Geography and Statistics (Instituto Brasileiro de a broad deterioration in poverty indicators over the
Geografia e Estatística, IBGE), the poverty rate was period. Between 2015 and 2019, an additional 5.9
24.7% in 2019, indicating that 51.7 million Brazi- million people fell below the poverty line, a 12.9%
lians were living on less than R$436 (US$ 80.00) per increase in the poor population, while an additional

FIGURE 1.6. Distribution of Income in Brazil (2001-2020) and the Gini Coefficient in Brazil and Comparators (2019)

140.00% 60

120.00%
50

100.00%
40
80.00%
30
60.00%
Country Development Challenges - Brazil

20
40.00%

20.00% 10

0.00% 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

Slovenia
Czechia
Ukraine
Denmark
Norway
Croatia
Armenia
Portugal
Spain
Georgia
Russian Federation
Malawi
Uruguay
United States
Argentina
Costa Rica
Zimbabwe
Brazil
Belarus
Moldova
Belgium
Finland
Kiribati
Kyrgyz Republic
Hungary
Greece
Serbia
Indonesia
China
El Salvador
Bulgaria
Uganda
Paraguay
Panama
Colombia

Top 10% share Middle 40% share

Top 1% share Bottom 50% share

Source: World Inequality and World Bank

5 Poverty status is determined by dividing total household income by the number of household members.

22
4.7 million people fell below the extreme poverty Social), 8.7 million Brazilians fell from the middle
line, a 51.5% increase in the population living in class into poverty between 2014 and 2018.
extreme poverty. The middle class expanded by 35
million people from 2002 to 2012, when it compri- 1.11. Salient gender and racial disparities are evi-
sed 53% of the Brazilian population. However, this 6
dent across several dimensions of poverty and
trend appears to have stalled and reversed in the inequality. The economic activities most common
years since. According to the IADB’s Labor Markets among lower-income households, including do-
and Social Security Information System (Sistema mestic services, agriculture, and construction, em-
de Información de Mercados Laborales y Seguridad ploy the largest shares of Afro-Brazilians (pretos)

TABLE 1.2. Distribution of Household Income per Capita by Demographic Characteristics, Brazil (2019)

HOUSEHOLD INCOME PER CAPITA

Below US$1.90 in 2011 PPP terms Below US$5.50 in 2011 PPP terms

Share Share Distribution Share Distribution

Population Population Population
(%) (%) (%) (%) (%)

Total 209,415,000 100.0 13,689,000 6.5 100.0 51,742,000 24.7 100.0

GENDER

Men 101,054,000 48.3 6,525,000 6.5 47.7 24,883,000 24.6 48.1

Women 108,361,000 51.7 7,163,000 6.6 52.3 26,859,000 24.8 51.9

COLOR OR RACE

Branco
89,373,000 42.7 3,055,000 3.4 22.3 13,168,000 14.7 25.4
(White)

Preto
(Afro-
Brazilian) 117,855,000 56.3 10,499,000 8.9 76.7 38,072,000 32.3 73.6
or Pardo
(Mixed
Race)

SEX AND COLOR OR RACE

Branco
42,222,000 20.2 1,420,000 3.4 10.4 6,298,000 14.9 12.2
Men

Preto and
Pardo 57,790,000 27.6 5,049,000 8.7 36.9 18,358,000 31.8 35.5
Men

Branco
47,151,000 22.5 1,635,000 3.5 11.9 6,870,000 14.6 13.3
Women
Economic Context

Preto and
Pardo 60,065 28.7 5,450 9.1 39.8 19,714 32.8 38.1
Women

Source: IBGE (2020)

6  SAE (2012). Please note that this study exclusively relies on an income criterion to identify the middle class, which it defines as households with per
capita monthly income levels between R$ 291 and R$1,019.

BID — Banco Interamericano de Desenvolvimento 23

 and mixed-race Brazilians (pardos). In 2019, the 1.12. Women’s social and economic inclusion is
average wage among employed Brazilians of Euro- increasing, but numerous challenges remain.
pean descent (brancos) was 73.4% higher than the Brazil’s 1988 Constitution established formal
average for pretos and pardos,7 while men of all eth- legal equality between men and women, and
nicities earned 29.6% more than women. In 2019, subsequent laws and public policies, such as the
the employed branco population received a higher 2012-2015 National Plan for Women, have aimed
hourly wage rate than the preto or pardo population to promote gender equality in practice. Neverthe-
across all education levels, with the largest disparity less, gender disparities persist across Brazilian
observed among those who had completed a supe- society, and additional targeted policies will be
rior degree. The average wage rate for brancos with needed to accelerate progress toward full equality.
a completed superior degree was R$33.90, while the Brazil ranked 93 among 156 countries in the World
average for pretos and pardos with the same degree Economic Forum’s 2021 global gender report. The
was R$23.50, indicating a wage gap of 44.3%. In ad- report found that Brazilian women were underre-
dition, informality was far more common among presented in politics, received lower pay, suffered
preto and pardo workers than their branco coun- more harassment, and were more vulnerable to
terparts. Similar shares of men and women were unemployment than men.
employed informally, but their occupation types
differed. Men were more likely to be unlicensed 1.13. Despite sustained efforts to reduce racial
employees or self-employed workers, while women inequality in Brazil, significant disparities per-
were more likely to be engaged in household labor sist. The Secretary of State for Human Rights
or informal care work, especially caring for depen- introduced affirmative action in 2002, and a new
dent family members. Between 2012 and 2019, the Secretary of Policy for the Promotion of Racial
average income of preto and pardo households was Equality was established in 2003. The government
about half the average for branco households. The also incorporated racial equity perspectives into
IBGE defines 42.7% of the population as brancos sectoral policies to advance the basic rights of the
and 56.3% as pretos or pardos, but in 2019 pretos preto and pardo populations, but these efforts
and pardos accounted for 77% of all households in have achieved limited success. In 1950, the avera-
the bottom income decile, while brancos accounted ge life expectancy at birth was 47.5 years for bran-
for 70.6% of households in the top decile. cos and 40.1 years for pretos, a gap of 7.4 years. By

FIGURE 1.7. World Gender Gap Index, Brazil (2006-2021)

0.70

0.69

0.68
Country Development Challenges - Brazil

0.67

0.66

0.65

0.64

0.63
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2020

2021

Source: World Economic Forum (1=total parity; 0 = total disparity)

7  hese terms are used by the IBGE, which disaggregates economic data across five racial categories: pretos, pardos, brancos, amarelos (people of East
T
Asian descent), and indígenas (people of Amerindian descent). The term “pardo” primarily refers to people of mixed ethnic heritage, but it may also en-
compass certain Asian and Amerindian communities.

24
 TABLE 1.3. Life Expectancy at Birth (1950–2017) and Average Years of Schooling (1976–2008) by Race

Life expectancy at birth (years) Average years of schooling

1950 1960 1980 1991 2008 2017 1976 1986 1998 2008 2012 2020

Branco
47.5 54.7 66.1 70.8 73.1 75.3 4.5 5.4 6.8 8.3 10.6 12.4
(White)

Preto
(Afro- 40.1 44.7 59.4 64.0 67.0 73.0 2.7 3.9 4.7 6.5 9.0 11.3
Brazilian)

Difference 7.4 10.0 6.7 6.8 6.1 2.3 1.8 1.5 2.1 1.8 1.6 1.1

Source: Data from the 1950 and 1980 censuses, as presented in Wood et al. (1988), and Lovell (1999), who adds the 1960 figures; data for 2008 are from LAESER (2010; p.
197/9) and IBGE. PNAD household surveys; the 1976 and 1986 figures are published in Silva and Hasenbalg (2000), and 1988–1998–2008 overlapping series in LAESER (2010)

2017, this gap had narrowed to 2.3 years, as avera- TABLE 1.4. Regional Distribution of People below
the Moderate Poverty Line (US$ 5.50 per day)
ge life expectancies reached 75.3 years for bran-
cos and 73.0 for pretos. The gap in average years North 36.80%
of schooling fluctuated at around 1.5-1.8 between Northeast 40.50%
1976 and 2008, then narrowed to 1.1 in 2020, when
Southeast 16.40%
the branco population averaged 12.4 and the preto
South 12.30%
population averaged 11.3. Education indicators
have improved across all racial groups, and racial Midwest 16.50%

disparities are lowest at the primary level, while Brazil 24.10%

secondary and tertiary completion rates are hi-
Source: PNADC/IBGE (2020)
gher among the branco population.
respectively, compared to just 0.473 in the South.
1.14. Brazil also exhibits vast regional differences In terms of education, in the Northern Region,
in economic and social outcomes. In 2019, the only 4.9% of the municipal networks reached hi-
Northeast accounted for 27.2% of the total popu- ghest level of evaluation compared to 73.9% in the
lation, yet it was home to 56.8% of Brazilians living Southeast (IDEB, 2020). In health, according to the
in extreme poverty.8 Meanwhile, the Southeast Index of social inequalities in health (FIOCRUZ,
was the country’s most populous region, but it 2022) 98% of the municipal in the north region are
accounted for just 20% percent of the extremely in the worst levels of health conditions compared
poor and 27% of the total poor population. At the to 35% in the southeast and only 7% in the south.
state level, Maranhão had the highest poverty rate
at about 20%, followed by Acre (16.1%), Alagoas 1.15. In addition to the complex challenges around
(15.0%), Amazonas (14.4%), and Piaui (14.0%). In productivity growth, poverty, and social inequality
the state of Maranhão about half of the total po- described above, Brazil’s chronic fiscal imbalan-
pulation is poor, while 12 other states, especially ces have long undermined its macroeconomic
stability. After a monetary stabilization plan was
Economic Context

in the North and Northeast, the poor account for

more than 40% of the population. Income inequa- implemented in 1994, the government was able
lity is also significantly higher in the North and to run a significant primary surplus by steadily
Northeast regions. In 2018, the Gini coefficients increasing the tax burden. After the 2008 global
for the North and Northeast were 0.551 and 0.545, financial crisis, falling public revenue and rising

8  As above, the moderate and extreme poverty rates are based on per capita household incomes of US$5.50 and US$1.50 per day, respectively, in 2011 PPP terms.

BID — Banco Interamericano de Desenvolvimento 25

 FIGURE 1.8. Central Government Primary Expenditures, Revenues, and Balances, Brazil (1997-2019 - % of GDP)

26.0% 3.0%

24.0%
2.0%
22.0%
1.0%
20.0%

18.0% 0.0%

16.0%
-1.0%
14.0%
-2.0%
12.0%

10.0% -3.0%
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
Primary Revenue Primary Expenditure Primary Blaancce (right)

Source: National Treasury

expenditures undermined the fiscal balances, and pension and welfare benefits, while public sector
the government has run sizeable primary deficits compensation and professional advance policies
since 2013. Although cyclical forces played an im- affect the wage bill, and revenue earmarks intensify
portant role on the revenue side, structural factors budgetary rigidity. At the federal level, mandatory
on the expenditure side—which had previously expenditures now represent close to 94% of all pri-
been masked by large nonrecurring revenues—dro- mary spending, up from 86% in 1997. As the fiscal
ve the deterioration of the fiscal balances. A rapid rule limits increases in primary spending, rising
demographic transition, combined with generous mandatory expenditures have been accommodated
pension rules, has put persistent upward pressure at the expense of discretionary expenditures, espe-
on social security spending. In addition, the growth cially the public investment budget.
of the public sector wage bill and other mandatory
expenditures related to education, healthcare, and 1.17. In 2019, Congress approved a Constitutional
social services, exacerbated by the expenditure ri- amendment that reformed the pension system to
gidity established by the 1988 Constitution, further safeguard compliance with the fiscal rule. Social
boosted total government spending. security spending represents about 40% of total
federal spending. Without the reform, increased
1.16. In 2016, the government approved a Consti- social security spending would have caused man-
tutional amendment limiting expenditure growth. datory expenditures to breach the fiscal rule. The
Country Development Challenges - Brazil

The Temer administration adopted a gradual appro- Constitutional amendment established a minimum
ach anchored by a long-term strategy to stabilize the retirement age of 62 years for women and 65 years for
debt. The plan centered on capping the growth of men and a minimum contribution time of 20 years.
real primary public spending.9 Demographic pres- At the time of its approval, official projections indi-
sures, institutional rules, and revenue earmarks cated that the reform would generate R$800.3 billion
drive the trajectory of public spending and profou- in fiscal savings over 10 years.10 In 2020, the Treasury
ndly influence Brazil’s fiscal performance. Demo- announced that the actual savings were higher than
graphic aging continues to put upward pressure on anticipated. Whereas the government expected the

9  ccording to the Constitutional amendment, the growth of total primary spending across all branches of government cannot exceed the official infla-
A
tion rate for the previous year. Some transfers are excluded from the rule, but accruals from previous years are not.
10 This calculation already includes the changes performed by the Congress. The original proposal foresaw fiscal savings of R$ 1.2 trillion. The Indepen-
dent Fiscal Institution foresees total savings of R$ 700 billion in 10 years.

26
reform to yield R$3.5 billion in savings in 2020, actual 1.19. Brazil’s subnational public finances are in an
savings were more than twice as high at R$8.5 billion. increasingly tenuous position. The fiscal situation
among Brazilian states and municipalities has de-
1.18. The public debt poses risks to macroecono- teriorated since 2008, leaving subnational govern-
mic stability. After reaching a low of 51.8% of GDP in ments poorly positioned to cope with the economic
2014, Brazil’s gross public debt stock rose steadily to and fiscal impact of the pandemic. Despite the
reach 74% in December of 2019, a high level by the renegotiations of intergovernmental debts under
standards of comparable countries.11 Using the IMF Complementary Law No. 156/2016, expenditure
definition of public debt, Brazil’s debt-to-GDP ratio in growth remained unchanged, particularly current
2019 was among the highest in Latin America and the spending, which is driven by public sector wages,
Caribbean. Brazil’s debt burden is not only large, but pensions, and other benefits.12 State revenues have
its composition and average maturity pose challenges declined in recent years, with total revenue from ta-
for debt management. At the end of 2019, most public xes, contributions, and transfers falling from 12.7%
debt was linked to the basic interest rate (Selic) of of GDP in 2006 to 11.7% in 2019. Taxes and transfers
38.9%, the average maturity was less than four years, both remained broadly unchanged as a share of GDP.
and the amortization schedule implied that 19.2 per- The Tax on the Circulation of Goods and Services
cent of the debt would need to be rolled over within (Imposto sobre Circulação de Mercadorias e Servi-
one year. These factors represent significant risks ços, ICMS) is Brazil’s most important state tax, but it
in the event of a confidence crisis. However, most performed poorly due to a combination of structural
government debt remains held by domestic financial and circumstantial factors. Across the Brazilian eco-
institutions, investment funds, and pension funds, nomy, services have gained ground, while manufac-
mitigating risks related to international capital flows. turing—the main baseof the ICMS—has declined.1314

FIGURE 1.9. Debt-to-GDP Ratios, Brazil and Regional Comparators (2019)

1.2

1.0

0.8

0.6

0.4

0.2

0.0
Paraguay

Guatemala

Peru

Chile

Haiti

Nicaragua

Panama

Honduras

Ecuador

Trindad and Tobago

Colombia

Dominican Republic

Mexico

Guyana

Costa Rica

Bolivia

The Bahamas

Uruguay

El Salvador

Suriname

Aruba

Antigua and Barbuda

Brazil

Belize

Argentina

Jamaica

Barbados

Source: WEO-IMF
Economic Context

11  This debt-to-GDP ratio is the definition of used typically by the Ministry of Finance. The IMF publishes a slightly different definition of debt which inclu-
des the “compromissadas” – public bonds used in monetary policy operations. 
12 In the previous decade, fiscal behavior improved the state balance sheet and debt had a downward trajectory. This was subsequent to the renegotia-
tion of the public debt of the states of the nineties, the fiscal adjustment program and the implementation of the Fiscal Responsibility Law (LRF). See
Piancastelli and Boueri (2008).
13 Afonso e Pinto (2019), The crisis of subnational governments in Brazil: challenges and propositions, Economic-fiscal position document made for the
IDB; and Rossi Júnior, José Luiz; Aguiar, Fernando (2018) : Understanding the evolution of the fiscal situation of the Brazilian states; 2006–2015, Econo-
mics, Elsevier, Amsterdam, Vol. 19, Iss. 1, pp. 105-131;
14 According to Afonso and Pinto (2019), the share of the added value of the manufacturing industry lost around 4 points of GDP between 1996 and 2018.

BID — Banco Interamericano de Desenvolvimento 27

 FIGURE 1.10. State Revenues as a Share of GDP, Brazil (2006-2019)
14%

12.7% 12.7%
13% 12.2% 12.5% 12.3%
11.9% 12.1% 12.1% 11.9%
11.9%
11.6% 11.5% 11.5% 11.7%
12%

11%

10%

9%

8%

7%

6%
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
Tax Revenue Current Transfers Total Revenue
Source: National Treasury

1.20. On the positive side, inflationary risks inflation allowed the National Monetary Council
were successfully controlled, monetary policy (CMN) to lower the band during the period. The
credibility was restored, and interest rates fell central bank reduced the policy rate from an an-
significantly in the years before the pandemic. nualized average of 14.25% in 2016 to 4.5% in 2019.
The enhanced credibility of the central bank,
combined with a sound fiscal framework and weak 1.21. Brazil is developing a credit market. Brazil’s
economic activity, helped reduce inflation. After credit-to-GDP ratio grew from 30% in 2007 to 46.94%
peaking in 2016, the headline inflation rate fell be- at the end of 2019, but it was still well below the
low the target band in 2017, then remained within OECD average of over 100% (World Bank, 2021).
the band in 2018 and 2019. Between 2016 and 2019, From 2007 until the 2014-2016 recession, the cre-
inflationary expectations remained anchored dit-to-GDP ratio increased significantly and conti-
within the target band, and moderate and stable nuously. From the beginning of the 2000s until the

FIGURE 1.11. Inflation Targets, the Policy Rate (Selic), and the Consumer Price Index, Brazil (2015-2019)

12.00%

10.00%

8.00%
Country Development Challenges - Brazil

6.00%

4.00%

2.00%

0.00%
Feb-15
Abr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Abr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Abr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Abr-18
Jun-18
Aug-18
Oct-18
Dec-18
Feb-19
Abr-19
Jun-19
Aug-19
Oct-19
Dec-19

Target Lower Limit Upper Limit IPCA Inflation Selic (rhs)

(1-2-month accumulated)

Source: Central Bank

28
2008 financial crisis, a favorable macroeconomic 1.22. In recent years, rising trade surpluses and
context, changes in credit regulation (especially strong reserve accumulation improved Brazil’s
for personal credit), and financial innovations in external position. Unlike in previous periods,
the private sector supported an increase both in the external accounts were among the Brazilian
earmarked and nonearmarked credit. After 2008, economy’s main strengths prior to the pande-
earmarked credit drove the continued expansion of mic. Since 2001, Brazil has run trade surpluses in
total credit, as the government increased the use of every year except 2014, and in 2017 the trade sur-
public funding to boost the credit supply. Between plus reached a historic high of US$56.0 billion.
the end of 2015 and 2018 the credit-to-GDP ratio fell, Between 2017 and 2019, the trade surplus dete-
but after 2018 the economic recovery reversed this riorated slightly, but Brazil’s external position
trend, driven by an increase in nonearmarked cre- remained solid. In December 2019, foreign
dit. In 2019, 37.4% of the credit was directed to small reserves reached US$356.8 billion, while the
and medium enterprises (SMEs), while 62.6% was external debt stock totaled US$322.9 billion, of
directed to large companies. which US$123.8 billion was public external debt.

FIGURE 1.12. Evolution of the Credit-to-GDP Ratio by Creditor and Credit Type, Brazil (2007-2019)
60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
Apr-07
Aug-07
Dec-07
Aor-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16
Aug-16
Dec-16
Apr-17
Aug-17
Dec-17
Apr-18
Aug-18
Dec-18
Apr-19
Aug-19
Dec-19 Credit operations outstanding - Households Credit operations outstanding - Non-financial corporations

30.00%

28.00%

26.00%

24.00%

22.00%

20.00%

18.00%

16.00%

14.00%
Economic Context

12.00%

10.00%
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
Aug-16
Jan-17
Jun-17

Apr-18
Sep-18
Feb-19
Jul-19
Dec-19
Nov-17

Earmarked credit operations outstanding Nonearmarked credit operations outsanding

Source: Central Bank of Brazil

BID — Banco Interamericano de Desenvolvimento 29

 Consequently, foreign reserves provide substan- with more than 6.0 million confirmed cases and
tial liquidity cover in the near term. 174,000 deaths. The vaccine rollout started slowly
in early 2021 but accelerated during the year. Ca-
1.23. Rising exports to China and a broad incre- ses and deaths both peaked in April 2021 and have
ase in commodity exports drove the growth of since fallen continuously.
the trade surplus. In 2000, China accounted for
just 1.40% of Brazil’s total exports, but by 2019 its 1.25. The pandemic caused a steep decline in
share had risen to 22.25%. China’s increasing pro- economic activity in 2020 followed by a recovery
minence accompanied a major shift in the sectoral in 2021 and 2022. The pandemic interrupted Bra-
composition of Brazilian exports. The manufactu- zil’s expansion, causing an unprecedented drop
ring sector’s share in total exports fell from 83.0% in economic output in the second quarter of 2020.
in 2000 to 57.1% in 2019, while the contribution of Brazil’s GDP contracted by 3.9% in 2020, albeit less
agriculture grew from 8.1% to 19.5% and extracti- severe than the 9% drop forecast in the beginning
ve industries rose from 6.7% to 22.9%. Soybeans, of the pandemic (IMF, 2020). The Brazilian eco-
iron ore, and oil are Brazil’s largest exports. nomy endured subsequent waves of the pandemic
during 2021, but economic activity remained re-
The Pandemic’s Impact on the silient, and growth accelerated as the vaccination
Brazilian Economy15 effort advanced, and restrictions were eased. The
The pandemic, growth and GDP growth rate rebounded reached 4.6% in 2021.
fiscal situation
1.26. The pandemic raised important questions
1.24. The pandemic posed massive humanita-
regarding the distribution of power within Bra-
rian, economic, social, and political challenges.
zil’s federal system. Since the beginning of the
The first case was detected in February 2020, and
pandemic, the federal government has been en-
by September 202216 Brazil had over 34 million
gaged in a series of disputes with the state gover-
confirmed cases and more than 685,000 dea-
nors regarding the power to restrict personal mo-
ths. Sao Paulo has been the most affected state,
bility, impose new rules on business operations,

FIGURE 1.13. GDP Growth Decomposition, Brazil (2014-2022)

6
13

8 4
Contribution for Growth (QoQ)

3 2

-2
YoY %

-7
Country Development Challenges - Brazil

-2
-12
-4
-17

-22 -6
2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
2016-Q3
2016-Q4
2017-Q1
2017-Q2
2017-Q3
2017-Q4
2018-Q1
2018-Q2
2018-Q3
2018-Q4
2019-Q1
2019-Q2
2019-Q3
2019-Q4
2020-Q1
2020-Q2
2020-Q3
2020-Q4
2021-Q1
2021-Q2
2021-Q3
2021-Q4
2022-Q1
2022-Q2

Agribusiness Industry Services Taxes GDP (right)

Source: IBGE

15 The sub-chapter discusses the developments in 2020, 2021 and 2022 up to this moment.
16 September 20th, 2022.

30
and manage the vaccination process. Almost all and governors can impose social distancing,
of Brazil’s 27 governors initially imposed restric- quarantines, and similar measures to combat the
tions on mobility and gatherings, including lock- pandemic and can even decide which services are
downs in some states, but the president favored essential or nonessential. The vaccination rollout
a less stringent approach, citing concerns about gave rise to additional disputes between the fede-
the economic impact of these measures. The Su- ral and subnational authorities regarding the use
preme Court resolved this dispute in favor of sub- of specific vaccines and the implementation of
national governments, determining that mayors vaccination plans.

FIGURE 1.14. COVID-19 Fiscal Response Packages, G-20 Emerging Markets (2020-2021)
10.00% 9.24% 9.33%

8.00%

6.00% 5.01% 5.28% 5.35%

4.09% 4.78%
4.00% 3.51%
2.57%
2.00%
0.65%
0.00%
Mexico Saudi Turkey India China Russia South Argentina Brazil Indonesia
Arabia Africa
Source: IMF

TABLE 1.4. Pandemic Response Measures, Brazil (2020 and 2021)17

2020 2021

Planned Amount Paid Planned Amount Paid

Measure
(R$ billions) (R$ billions) (R$ billions) (R$ billions)

Emergency aid to vulnerable households

322.00 293.11 68.05 60.58
(“Auxilio emergencial”)

Financial assistance to
79.19 78.25 - -
subnational governments

Emergency employment security

51.55 33.50 10.67 7.71
and income support programs

Additional spending by the Ministry

46.33 42.70 32.60 25.77
of Health and other ministries

Credit operations guarantee funds 58.09 58.09 5.0 5.0

Payroll financing 6.81 6.81 - -

Expanded cash-transfer program

0.37 0.37 - -
(“Bolsa Família”)

Vaccine procurement and distribution - - 32.58 21.79

Economic Context

Other programs 40.41 11.19 1.32 0.59

Total 604.75 524.02 150.21 121.44

Source: National Treasury

17 Up to December 31st, 2021.

BID — Banco Interamericano de Desenvolvimento 31

 1.27. The government mounted a sizeable fiscal the total cost of the response to approximately 9.3% of
response designed to counter the impact of the GDP (Table 1.4). When measures with indirect fiscal
pandemic. Policy measures that directly affected effects—such as tax deferrals and debt renegotiation—
the Treasury accounts included: are included, the cost of the government’s response
I. employment security and income support effort reaches R$906.2 billion, or about 12.9% of GDP.
for formal workers and workers in vulnerab-
le situations; 1.28. The COVID-19 pandemic prompted the
II. tax relief, subsidized credit, and official gua- government to temporarily ease the fiscal rules.
rantees to the private sector; and In response to the pandemic-induced economic
III. fiscal assistance to subnational governments shock, the government invoked the escape clause
provided via debt renegotiation and extraor- to allow for exceptional economic policy measures.
dinary transfers. The application of the escape clause was authorized
Brazil’s pandemic response package was among the by Congress, which declared a state of public emer-
largest in emerging markets. The fiscal response in gency until the end of 2020. The state of emergency
2020 totaled R$524.0 billion, or approximately 8.30% suspended various procedural and numerical fiscal
of Brazil’s GDP. In 2021, the government provided rules, relieving the government of its obligation
another R$109.3 billion direct fiscal support, bringing to follow budgetary procedures consistent with

Emergency Aid
The pandemic has put enormous pressure on the social protection system. Brazil’s flagship cash-transfer
program (Bolsa Família) benefits over 40 million people, yet its scope was insufficient to shield househol-
ds from the effects of the pandemic. The government responded by approving an assistance program
for vulnerable households (the “Corona Voucher”), which covered three times as many beneficiaries and
delivered 5.5 times as much in benefits as Bolsa Família. The Emergency aid was the government’s most
expensive pandemic response program, costing R$45 billion per month.

The Emergency aid guaranteed a minimum income for workers facing heightened economic vulnerability.
The original version of the program provided an income transfer of R$600 per month for a period of three
months, which was then extended for another two months. On September 1st, 2020, the benefit was
extended through December, but the payment amount was reduced to R$300. The program was subse-
quently extended through the first four months of 2021.
Country Development Challenges - Brazil

ECONOMIC IMPACT
. Close to 67 million people received the Emergency aid.
. According the Fundação Getulio Vargas (FGV), a leading Brazilian thinktank, the
program boosted the average worker’s income by 24%. Among informal workers,
the program increased monthly income by 50%, from R$1,344 to R$2,016.
. A large share of program benefits accrues to workers in northeastern and northern states and to
less-educated workers nationwide. Women have benefited the most from the increase in income.
. According to estimates from the World Bank, seven million people would have fallen into poverty
without the emergency aid. In the absence of the voucher, the number of Brazilians living
below the poverty line could have risen from 41.8 million in 2019 to 48.8 million in 2020.

32
 achieving its annual fiscal targets. The limits and federal, state, and municipal levels; when manda-
conditions related to credit operations (including tory expenditures subject to the cap reach 95% of
compliance with the “golden rule”) were waived, total primary spending, salary increases for the
and the government was empowered to grant gua- civil service are automatically suspended. Congress
rantees and engage in voluntary tax-transfer opera- also proposed, but did not mandate, the elimination
tions related to the national emergency. of public funds and a progressive reduction in tax
expenditures. All other fiscal rules that had applied
1.29. In 2021, the fiscal rules were altered so that before the crisis were re-imposed in 2021, albeit
pandemic-related expenses would not count with an exemption for pandemic-related spending.
toward the expenditure cap. In 2021, Congress Such spending was generally excluded from the
approved an emergency bill that extended the pay- expenditure cap, though it continued to be recorded
ment of a monthly stipend (“Auxilio emergencial”) in the primary balance. The only exception was the
of R$250 for four months (March-June). Congress monthly stipend, which was excluded both from the
also created fiscal triggers to limit spending at the expenditure cap and from the primary balance.

FIGURE 1.15. The Evolution of the Primary Balance and the Debt Stock, Brazil

27.0 3.00

25.0 1.00

-1.00
23.0
-3.00
% of GDP

21.0
-5.00
19.0
-7.00

17.0 -9.00

15.0 -11.0
Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Sep-17

Dec-17

Mar-18

Jun-18

Sep-18

Dec-18

Mar-19

Jun-19

Sep-19

Dec-19

Mar-20

Jun-20

Sep-20

Dec-20

Mar-21

Jun-21

Sep-21

Dec-21

Primary Balance (right) Primary Revenue Primary Expenditure

90

85

80

75
% of GDP

70

65

60
Economic Context

55

50
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19

Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20

Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21

Dec-21
Nov-19

Nov-20

Nov-21

Net Public Debt General Gov. Gross Debt

Source: National Treasury

BID — Banco Interamericano de Desenvolvimento 33

 1.30. The COVID-19 pandemic impacted the fis- 1.32. Brazil’s debt profile deteriorated during the
cal accounts in 2020. The cumulative 12-month pandemic. The extraordinary pandemic-related
consolidated public sector primary deficit wide- expenditures implemented during 2020 and 2021
ned from R$61.9 billion (0.84% of GDP) in 2019 to were financed primarily via the issuance of Tre-
R$702.9 billion (9.49% of GDP) in 2020. Given the asury bonds.19 Although the federal government
economic slowdown and the deferral of certain tax has been able to fully finance its extraordinary
payments, tax revenue dropped by 6.91% in real ter- expenditures by issuing debt, Treasury data indi-
ms between 2019 and 2020, its sharpest contraction cate that the average maturity of the debt shorte-
since 2009. The gross public debt stock jumped from ned during the pandemic. In January 2020, 19.2%
74.3% of GDP in December 2019 to 88.8% in Decem- of the debt matured in the next 12 months, but by
ber 2020, while the net public debt stock increased the end of the year this share had risen to 28.0%.
from 54.6% of GDP to 63.0% during the same period. In 2021, the Treasury tried to shift the debt-matu-
rity structure by reducing the high concentration
1.31. The fiscal accounts improved in 2021 and of short-term instruments that would be matu-
2022. As revenue growth accelerated and spending ring in 2022, a presidential election year. By the
declined, the cumulative 12-month consolidated end of 2021, the share of debt maturing in the next
public sector primary deficit turned to a surplus of 12 months had fallen to 21.0%.
R$64.7 billion (0.75% of GDP). Growth and inflation
have strongly influenced federal tax collection. The Pandemic and the Labor Market,
The gross public debt stock dropped to 80.3% in Poverty, and Inequality
December 2021, while the net public debt stock fell
1.33. The 2015-16 recession and the COVID-19
to 57.3% of GDP.18 According to the Central Bank
pandemic exposed critical vulnerabilities in Bra-
of Brazil, the reduction in the debt-to-GDP ratio
zil’s social development model and threatened to
in 2021 reflected net debt redemptions during the
reverse recent gains. Since 2015, multiple social
year by the Treasury, combined with a higher no-
indicators have either plateaued or deteriorated,
minal GDP growth rate (reflecting a combination of
while Brazil’s Human Development Index score
faster real growth and elevated inflation).
has stagnated following a decade of improvement.

FIGURE 1.16. Gini Coefficient, Brazil (2012-2021)

0.6700

0.6600

0.6500

0.6400

0.6300
Country Development Challenges - Brazil

0.6200

0.6100

0.6000
2012.Q1

2012.Q3

2013.Q1

2013.Q3

2014.Q1

2014.Q3

2015.Q1

2015.Q3

2016.Q1

2016.Q3

2017.Q1

2017.Q3

2018.Q1

2018.Q3

2019.Q1

2019.Q3

2020.Q1

2020.Q3

2021.Q1

Source: FGV Social – PNAD Continuous

18 The IMF’s World Economic Outlook estimates the gross debt stock at 98.4% of GDP, as the IMF methodology includes bonds on the central bank ba-
lance sheet that are not included in the figures quoted here.
19  lternatively, the authorities could have used the financial surplus calculated in the Balance Sheet of the Union for 2019 or reallocated resources by
A
cancelling federal budget appropriations for 2020.

34
According to FGV Social,20 the Gini coefficient rose income losses incurred during the pandemic. The
from 0.6003 in 2014 to 0.6279 in 2019, spiked to suspension of employment contract was responsib-
0.667 during the height of the pandemic, then fell le for 46.88% of BEm claims, while salary reductions
slightly to 0.640 in the second quarter of 2021 but of 25%, 50%, and 70%, were responsible for 6.37%,
remained well above pre-pandemic levels. 17.25%, and 29.51% of claims, respectively.

1.34. The government adopted two major policies 1.35. Despite the considerable support provided
to directly attenuate the pandemic’s impact on under the PESE and BEm, the pandemic had a
employment: The Emergency Employment Su- deeply negative impact on Brazil’s labor market.
pport Program (Programa Emergencial de Suporte a Following the second wave of the pandemic, the
Empregos, PESE) and the Employment and Income unemployment rate peaked at 14.7% in March
Benefit (Benefício Emprego e Renda, BEm). The PESE 2021, up from 11.2% in January 2020. The General
is a special credit line for small and medium-sized Registry of the Employed and Unemployed (Ca-
enterprises to finance their payroll during the pan- dastro Geral de Empregados e Desempregados,
demic emergency. The credit lines granted under CAGED) indicates that the first two months of the
the program cover an eligible firm’s entire payroll pandemic witnessed the net destruction of over
for a period of two months, though the amount of one million formal jobs. However, net job creation
support is capped at twice the minimum wage per resumed in the second half of 2020, and 2021 saw
employee (or R$2,090). The support provided throu- the net creation of more than 2.7 million formal
gh the PESE totaled R$7.9 billion, and the program jobs. While 13.9 million people were unemployed
benefited 2.64 million employees at 313,695 firms. in 2021, the unemployment rate fell to 11.1%, be-
The BEm is an emergency benefit paid by the federal low its pre-pandemic average.
government to formally employed workers who face
reduced working hours, pay cuts, or the temporary 1.36. The pandemic increased inequalities in the
suspension of their employment contracts. The labor market. The income of the average Brazi-
BEm was extended until July 2021, and while active lian worker—including informal, unemployed,
it compensated more than 22 million workers for and retired or otherwise inactive workers—fell

FIGURE 1.17. The Evolution of the Labor Market

15 3.000.000
2.500.000
14
2.000.000
1.500.000
13
1.000.000
500.000
12
0

11 -500.000
-1.000.000
10 -1.500.000
Economic Context
Feb-18

Jun-18

Aug-18

Apr-18

Oct-18

Dec-18

Feb-19

Apr-19

Jun-19

Aug-19

Oct-19

Dec-19

Feb-20

Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Feb-21

Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Net Formal Employment - 12-month acc. (right) Unemployment (%)

Source: IBGE and Minister of Labor

20 FGV Social (2021). Desigualdade de Impactos Trabalhistas na Pandemia. https://cps.fgv.br/DesigualdadePandemia

BID — Banco Interamericano de Desenvolvimento 35

 FIGURE 1.18. Change in Average Worker Income, Brazil (2019.Q4 – 2021.Q2)

-11.44% Northeast

-14.22% Elderly

-15.57% Married Women

-10.36% Women

-7.17% 10% richest

-8.96% 50% poorest - 10% richest

-21.49% 50% poorest

-9.43% Total

-25.00% -20.00% -15.00% -10.00% -5.00% 0.00%

Source: FGV Social (2021)

by 9.4% between the end of 2019 and the second cially likely to withdraw from the labor market al-
quarter of 2021. However, this decline was not
21
together. Income losses were most severe among
consistent across groups: workers in the bottom those who possessed more than one of these cha-
half of the income distribution experienced an racteristics. For example, women in the bottom
average income loss of 21.5%, while those in the 50% of the income distribution experienced an
top 10% saw their incomes decline by just 7.16%. average 26.2% drop in income, compared to an
Middle-class workers, defined as those between average of just 18.4% for men. Costa et al. (2021)22
the 50th and 10th percentiles of the income dis- show that inequalities in labor-force participa-
tribution, experienced an average income loss of tion, unemployment rates, occupation types, and
8.96%. Income declines were steepest among re- informality rates all widened during the pande-
sidents of the northeast region (-11.4%); women mic. Even when controlling for other personal
(-10.35%), especially married women (- 15.57%), or workplace characteristics, women, pretos and
who were forced to devote more time to domestic pardos, and young people were especially likely
work; and the elderly (-14.22%), who were espe- to lose their jobs or to be unable to find jobs.

FIGURE 1.19. Evolution of Total Employment (2020-2021)

4.0%

0.0%

-4.0%
Country Development Challenges - Brazil

-8.0%

-12.0%

-16.0%
Jan-20

Feb-20

Mar-20

Apr-20

May-20

Jun-20

Jul-20

Aug-20

Sep-20

Oct-20

Dec-20

Jan-21

Fev-21

Mar-21

Apr-21

May-21

Jun-21

Jul-21

Aug-21

Sep-21

Oct-21

Dec-21
Nov-20

Nov-21

Informal Formal Total

Source: Observatorio Laboral COVID-19

21 Source: FGV Social (2021).

22 Costa, J., Barbosa, A. and Hecksher. M. (2021). Desiguldades no mercado de trabalho e pandemia da Covid-19. IPEA Discussion Paper 2684.

36
1.37. Indicators of job quality deteriorated du- versus just 12% among men, and unemployment
ring the pandemic. According to IBGE, while was most prevalent among women with low
employment rates have rebounded, job quality levels of education. Pretos experienced a steep
has declined in the wake of the pandemic. Ave- decline in employment during the pandemic: the
rage income is below pre-pandemic levels, and number of employed pretos dropped by 10.5%
employment growth has been driven by informal between 2019 and 2020, while the number of em-
jobs and low-paying jobs. The share of informal ployed brancos fell by 6.1%. Branco workers were
employment has increased by 10.2% since the also more likely to switch to remote work than
start of the pandemic, and 11.7 million workers are were their preto counterparts. In 2020, about 14%
informally employed. Meanwhile, the number of of employed brancos worked remotely, compared
domestic workers has risen by 9.2% to 5.4 million to just 7% of pretos. A recent study23 found that in
people, the highest level recorded in the ten years the second quarter of 2020 the number of female
that the survey has been administered. Data from entrepreneurs fell by 15%, while the number of
ECLAC (2021) confirm the deterioration of job male entrepreneurs declined by 10%. Overall, the
quality during the pandemic. The share of formal groups most affected by rising unemployment
employment declined, many workers resorted were pretos, women, workers under 34 years old,
to self-employment in the informal sector, and a those with little education, and those employed
large segment of the workforce moved from larger in the informal sector. Moreover, 48% of female-
firms to smaller firms with lower average produc- -owned businesses suspended operations in 2020,
tivity levels. These trends were more pronounced compared to 44% of male-owned businesses. Dif-
for women, older workers, and those with lower ferences in savings among women and men also
education levels. In addition, real earnings fell increased during the pandemic: in 2019, women
by more than 10% from pre-pandemic levels, and saved 17.2% less than men, but by 2021 this gap
the reallocation of labor across sectors will have had widened to 47.6%.
unpredictable consequences.
1.39. The poverty rate fluctuated significantly
1.38. Women and afro-descendants were dis- during the pandemic. According FGV (2021), The
proportionally affected by the pandemic. The poverty rate averaged 10.97% in 2019, reflecting
unemployment rate among women reached 17%, roughly 23.1 million people living below the

FIGURE 1.20. Evolution of the poverty rate

18.00%
16.09%
16.00%

14.00%

12.00% 11.44% 11.18% 11.13% 10.97% 12.98%

10.49% 10.83%
9.89%
10.00% 9.19%
8.17%
9.41%
8.00%

6.00% 4.80% 4.63%

Economic Context

5.83%
4.00% 4.88% 4.86%
2012

2013

2014

2015

2016

2017

2018

2019

2020.M5

2020.M6

2020.M7

2020.M8

2020.M9

2020.M10

2020.M11

2021.M3

2021.M7

Source: FGV Social (2021)

23 IDB, Nubank, and SEBRAE (2021). Available at https://blog.nubank.com.br/data-nubank-empreendedorismo-feminino-contexto/

BID — Banco Interamericano de Desenvolvimento 37

 poverty line. In 2020, the emergency support 1.41. School closures during the pandemic caused
delivered in response to the pandemic reduced major learning losses, which will incur long-term
the poverty rate to 4.63%, or 9.8 million people. economic costs. As schools closed during the pan-
In the first quarter of 2021, as emergency aid was demic, children and young people faced reduced
suspended, the poverty rate shot up to 16.1%, educational opportunities, especially those from
or 34.3 million people. When emergency aid the most vulnerable households. According to IPEA
was restored in mid-2021, the poverty rate fell to (2021),25 about 14% of students from public educa-
12.98%, or 27.7 million people, still well above tional institutions from preschool to graduate scho-
pre-pandemic levels. ECLAC (2021) estimates that ol, or 5.8 million children and young people, lacked
the extreme poverty rate rose from 5.5% in 2019 home access to broadband internet or 3G/4G, which
to 8.0% in 2020, while the moderate poverty rate prevented them from effectively participating in
increased from 19.2% to 24.1%. educational activities during the pandemic. Portela
et. al. (2021)26 present three scenarios for post-pan-
1.40. The impact of the pandemic and housing demic education; in the most pessimistic scenario,
precarity showed a high correlation. The pande- where remote learning proves wholly ineffective,
mic has exacerbated socio/economic/territorial education indicators would revert to their 2016
disparities in Brazilian cities affecting dispro- levels. The study also reveals that the population
portionately more vulnerable communities. It groups most affected by the pandemic were young
particularly affected low-income families do- men and boys; members of the preto, pardo, or indí-
miciled in subnormal clusters. The population gena (indigenous) communities; individuals whose
living in precarious conditions constituted the mothers who did not finish elementary school; and
main social group impacted by the pandemic. residents of the North and Northeast regions. The
Afro-Brazilian and pardos without schooling least affected were women and girls; members of
had 80.35% death rates, against 19.65% of whites the branco community; and individuals whose mo-
with higher education. 24
thers had at least completed high school. IDB (2021)

FIGURE 1.21. Changes in Hospitalization Rates for Selected Conditions, Brazil and Comparators (2020)

Brazil Chile El Salvador Mexico

0.00%

-10.00% -6%
-11%
-13% -15%
-20.00%

-30.00%
-33%
-40.00%
-40% -41% -40%
Country Development Challenges - Brazil

-44% -45%
-50.00%

-60.00% -58%
-63%
-70.00%

Diabetes Mellitus Hypertensive Diseases Ischaemic Heart Diseases

Source: Bernal et al. (2022)

24 PUC Rio de Janeiro 2020. Análise socioeconômica da taxa de letalidade da COVID-19 no Brasil.
25 IPEA (2021). Políticas Sociais: acompanhamento e análise. Nr.28, 2021.
26 Portela, A, Soares, C., Santos, G., Costa,G., Ramos, L., Lima, L. , Ferreira, P. Pandemia de covid-19: o que sabemos sobre os efeitos da interrupção das
aulas sobre os resultados educacionais? FGV EESP CLEAR.

38
shows that the closure of public schools in Sao Paulo financial system and the credit supply. To attenu-
in 2020 reduced expected learning by 72.5% and ate the economic impact of the pandemic, the cen-
more than tripled the dropout rate. FMI (2022) finds tral bank has made efforts to promote the proper
Brazilian students who faced total or partial school functioning of the market without compromising
closures will experience some of the greatest lifeti- the soundness and stability of the national financial
me income losses in the G-20 at an estimated -9.10% system. The central bank eased rules for deposits
loss in lifetime income. and lending to maintain an adequate level of liqui-
dity and credit, ensuring that Brazilian banks have
1.42. The health consequences of the pandemic the necessary resources to lend and refinance debts
extend far beyond COVID-19-related deaths. for the households and firms most affected by the
Many people discontinued or delayed the treat- crisis. Altogether, the announced measures increa-
ment of other diseases, and deferred care will have sed the liquidity of the financial system by R$1,216
negative long-term health implications. In addi- billion, equivalent to 16.7% of GDP.
tion, a share of COVID survivors have experienced
so-called “long COVID,” involving protracted 1.45. The Treasury implemented three major
motor function and respiratory challenges (some programs to increase the credit supply, the
permanent), and rehabilitation needs will conti- PESE (Emergency Program to support jobs), the
nue to put pressure on health services. In addition, National Program to Support Microenterprises
mental health issues increased across all groups, and Small Businesses (PRONAMPE) and PEAC
especially among the most vulnerable. (Emergency Program to access Credit). The PESE
has reached 2.6 million workers at 131,695 compa-
1.43. Food insecurity and undernourishment also nies, but when it was launched it had the potential
increased during the pandemic. According to FAO to reach up to 12.2 million workers at 1.4 million
(2021), the prevalence both of moderate and severe firms. Several factors undermined the PESE’s ef-
food insecurity increased significantly in Brazil fectiveness. First, the program was only available
between 2014–16 and 2018–20.27 The overall rate of to firms that process their payrolls through a bank,
food insecurity increased by close to 5 percentage effectively excluding many SMEs, particularly
points over the period, as the food-insecure popula- those in smaller cities. Second, the requirement
tion rose from 37.5 million in 2014-16 to 49.6 million that a worker’s job be retained for two months was
in 2018-20. A study by the PENSSAN network 28 excessively rigid, as firms were unwilling to sacri-
(2022) shows that 58.7% of households faced some fice the flexibility to lay off workers given the pan-
level of food insecurity in the beginning of 2022, up demic’s uncertain duration. Third, firms often take
from 54% in 2018, implying that 125.2 million Brazi- out loans to cover a portion of the payroll, but the
lians lacked consistent access to adequate food. Of program required that the firm finance the entire
these, 30.7% of the population were either mode- payroll, further constraining its ability to alter its
rately or severely food insecure, while 15.5% of the workforce. Finally, the PESE overlapped with other
population were severely food insecure. government programs designed to assist SMEs,
and its approach may have been more appropriate
The pandemic, liquidity, credit, for larger firms.
inflation and monetary policy
1.46. PEAC and PRONAMPE programs effectively
Economic Context

1.44. The Central Bank of Brazil (BCB), the National

boosted the credit supply. PRONAMPE was a cre-
Treasury, and public banks29 have adopted mea-
dit line with special conditions and government
sures to mitigate the effect of the pandemic on the

27 FAO (2021). Latin America and the Caribbean Regional Overview of Food Security and Nutrition.
28 Rede Brasileira de Pesquisa em Soberania e Segurança Alimentar – Rede PENSSAN (2021). Second National survey of food insecurity in the context
of the Covid-19 pandemic in Brazil.
29 Public banks include BNDES, Banco do Brasil, Caica Economica Federal and development banks.

BID — Banco Interamericano de Desenvolvimento 39

 FIGURE 1.22. Credit to the Economy as a Share of GDP, Brazil (2019-2021)

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
Dec-19

Jan-20

Feb-20

Mar-20

Apr-20

May-20

Jun-20

Jul-20

Aug-20

Sep-20

Oct-20

Dec-20

Jan-21

Feb-21

Mar-21

Apr-21

May-21

Jun-21

Jul-21

Aug-21

Sep-21

Oct-21

Dec-21
Nov-20

Nov-21
Nonearmarked Earmarked

Source: Central Bank

guarantees for Brazilian SMEs that had previously monthly turnover, whichever was higher. The fe-
been current on their taxes before the COVID-19 deral government approved a second line of credit,
pandemic compromised their ability to pay. The the Emergency Credit Access Program (Programa
Treasury provided resources through the Opera- Emergencial de Acesso ao Crédito, PEAC), to fur-
tions Guarantee Fund (Fundo de Garantia de Ope- ther shield SMEs from the impact of the pandemic.
rações, FGO) such that the fund could guarantee Under the supervision of the Ministry of Economy,
up to 85% of commercial lending to SMEs. All loan the program authorized an infusion of R$20 billion
contracts were required to offer a payment term of of federal resources into the FGI managed by the
up to 36 months and a maximum interest rate equi- Brazilian Development Bank (BNDES). The rules of
valent to the basic interest rate (Selic) plus 1.25%, the PEAC are similar to those of PRONAMPE, with
and each loan could be up to 30% of the SME’s the government guaranteeing up to 85% of the
annual gross revenue for 2019. For firms that had total credit risk. BNDES (2022) shows that the PEAC
operated for less than one year, the loan limit was were effective to reduce the mortality of the firms
either 50% of its share capital or 30% of its average and to save jobs during the pandemic.

FIGURE 1.23. Share of Total Credit by Firm Size, Brazil (2020-2021)

70.0%

60.0%
Country Development Challenges - Brazil

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
Jan-20

Feb-20

Mar-20

Apr-20

May-20

Jun-20

Jul-20

Aug-20

Sep-20

Oct-20

Dec-20

Jan-21

Feb-21

Mar-21

Apr-21

May-21

Jun-21

Jul-21

Aug-21

Sep-21

Oct-21

Dec-21
Nov-20

Nov-21

MSME (%) Corporate Company (%)

Source: Central Bank

40
 1.47. Credit concessions increased during the 1.49. Household debt increased during the
crisis. Boosted by the government’s emergency pandemic. According to the central bank, falling
credit programs and the deferment of existing labor income pushed the debt burden of Brazilian
loans, total credit increased from 46.9% of GDP households from 41.4% of the annual wage bill in
in December 2019 to 54.0% at end-2021. Credit to December 2019 to 52.6% in December 2021. A sur-
both firms and households increased during the vey by the National Confederation of Commerce
pandemic. According to the central bank, the go- (Confederação Nacional do Comércio, CNC)
vernment’s credit programs were responsible for indicated that about 12 million Brazilian families
about 80% of the growth of bank lending to the pri- were in debt—the highest level recorded since the
vate sector in 2020. Since 2015, earmarked credit launch of the survey in 2010. The survey also fou-
had been shrinking, while non-earmarked credit nd that 74.6% of households had debts maturing
had markedly expanded, but this pattern changed within the next few months. Among indebted
during the crisis. In 2020, the credit programs for households, 25.6% reported having overdue ac-
SMEs launched during the year caused earmarked counts, while 10.1% reported that they would not
credit to expand by 15.9%, its first annual increase be able to pay their future debt obligations.
since 2015. The growth of earmarked credit slowed
in 2021, but by the end of the year it equaled 21.7% 1.50. Inflation poses a burgeoning challenge.
of GDP, up from 19.8% in December 2019. Although Brazil had faced high rates of inflation in
the past, prices had largely stabilized prior to the
1.48. Notwithstanding the issues with the PESE pandemic. In 2019, the headline inflation rate was
described above, the government’s programs within the target band and medium-term expecta-
were broadly effective in expanding credit for tions were well anchored. In July 2019, the central
smaller firms. Due in part to the credit programs bank began lowering interest rates, and by 2020
launched in response to the pandemic, the total the Selic reached a historic low at an annual ave-
credit balance for SMEs rose by 31.6% in 2020 and rage of 2.00%. In 2020, the central bank adopted a
by another 17.5% in 2021. By contrast, the SME forward guidance framework in which it laid out
credit balance had increased by just 6.7% in 2019. plans to continue monetary easing indefinitely, as
Meanwhile, total credit to large companies expan- “the nature of the crisis probably implies that the
ded by 16.0% in 2020 and by 6.7% in 2021 following disinflationary pressures from reduced demand
a 3.7% contraction in 2019. As a result, the share of may last longer than in previous recessions.” The
SMEs in total credit increased from 37.35% in De- pandemic had the expected initial deflationary
cember 2019 to 42.9% in 2021. impact in 2020, but inflationary concerns mounted

FIGURE 1.24. Inflation and Interest-Rate Dynamics, Brazil (2018-2021)

11

9
% acc. over 12-months

5
Economic Context

1
Feb-18

Apr-18

Jun-18

Aug-18

Oct-18

Dec-18

Feb-19

Apr-19

Jun-19

Aug-19

Oct-19

Dec-19

Feb-20

Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Feb-21

Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Target Lower Limit Upper Limit IPCA Inflation Selic

Source: Central Bank

BID — Banco Interamericano de Desenvolvimento 41

 in 2021 and 2022. A combination of supply-chain a growing trade surplus during the pandemic nar-
bottlenecks and elevated energy and food prices rowed the current-account deficit to 1.75% of GDP
drove the sharp increase in inflation. in December 2021. The initial shock reduced the
trade surplus by weakening exports, but as the
1.51. Monetary policy tightened in 2021 and 2022. pandemic advanced imports fell more sharply
Faced with growing inflationary pressures and than exports, boosting the trade surplus. In 2021,
the drift of expectations above the target band, the rising commodity prices amid a global economic
central bank initiated a monetary tightening cycle recovery, coupled with the delayed effects of a
in 2021. Consumer price inflation has persisted, currency devaluation in 2020, pushed Brazil’s tra-
with services and industrial goods experiencing de balance to record levels.
especially sharp price increases. Meanwhile, vola-
tile CPI components such as energy and food pri- 1.53. The record trade surplus highlights Brazil’s
ces have spiked, reflecting adverse weather con- increasing dependence on commodity exports
ditions and ongoing geopolitical shocks. Together, and the importance of China as a trade partner.
these factors have prompted a significant revision Export growth was driven by the extractive in-
of short-term inflation projections. dustries, especially iron ore and related products,
and by agricultural goods, especially oil and
The Pandemic and the soybeans. In 1997, agriculture and the extrac-
External Accounts tive industries accounted for a combined 18%
of Brazilian exports, but by 2019 this share had
1.52. A record trade surplus drove a substan-
risen to 42.50%. The pandemic accelerated this
tial improvement in the current account during
trend, and agricultural and extractive-industry
the pandemic. Between 2014 and 2017, Brazil’s
exports reached 49.7% of total exports in 2021.
current-account deficit narrowed from a record
Meanwhile, manufactured goods fell from 80% of
4.3% of GDP in 2014 to just 0.48% in 2017, but in
total exports in 1997 to 49.79% in 2021. In parallel
2018 it widened dramatically to 2.69%. However,
to the rising importance of commodities, China

FIGURE 1.25. Evolution of Trade balance (2018 – 2021)

300 70

280 65

260
60
FOB U$ Billion over 12 months

240
U$ Billion over 12 months

55
220
50
Country Development Challenges - Brazil

200
45
180

40
160

140 35

120 30
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19

Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20

Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21

Dec-21
Nov-19

Nov-20

Nov-21

Trade Balance [Right] (US Billion over 12 months) Imports (FOB US Billion over 12 months)
Exports (FOB US Billion over 12 months)

Source: Central Bank and SECEX

42
 FIGURE 1.26. Global Commodity Prices (2019-2022) and Brazilian Exports to China (1997-2021)

550

500

450

400

350

300

250

200

150

100

50
Jan-19

Mar-19

May-19

Jul-19

Sep-19

Nov-19

Jan-20

Mar-20

May-20

Jul-20

Sep-20

Nov-20

Jan-21

Mar-21

May-21

Jul-21

Sep-21

Nov-21

Jan-22
IC-Br Metal Agropecuária Energia

90.00% 35.00%

80.00%
30.00%
70.00%
25.00%
60.00%

50.00% 20.00%

40.00% 15.00%
30.00%
10.00%
20.00%
5.00%
10.00%

0. 00% 0.00%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

Economic Context

China (right) Extractive Agriculture

Other Manufacturing

Source: Central Bank (dec 2005 = 100) – commodities Index. SECEX – exports´ destination.

BID — Banco Interamericano de Desenvolvimento 43

 became Brazil’s main export destination of Brazi- 1.56. Despite recent improvements in the fiscal
lian exports. The share of Brazilian exports going balances, a significant fiscal adjustment is still
to China rose from 2.2% in 1997 to 28.4% in 2019 necessary to stabilize the debt ratio and ulti-
and reached 32.8% in 2021. mately lower debt levels. Given the growth of
economic activity and inflation rates expected in
The Economic Outlook 2022, adjusting Brazil’s fiscal stance to reflect the
for 2022-2026 output cycle will be crucial to shore up fiscal sus-
tainability. Several favorable but temporary con-
1.54. Economic growth will be vital to address
ditions are currently obscuring the government’s
the social and fiscal challenges facing Brazil in
underlying fiscal position, and projections for the
the short and medium term, but downside risks
short and medium term should correct for these
to the growth outlook are significant. To avoid
transitory factors. Fiscal reforms will be crucial
permanent scarring from the pandemic, Brazil
to lower the debt trajectory avoid compromising
needs robust and equitable growth. External risks
key parameters of sustainability. Mandatory ex-
to the growth outlook include new waves of the
penditures and earmarked revenues create con-
pandemic, global monetary tightening, the mou-
siderable downward rigidity in the public budget,
nting fallout from Russia’s invasion of Ukraine,
leaving little scope for fiscal adjustment. Structu-
and slowing economic activity in developed cou-
ral reforms will be necessary to address this issue
ntries. On the domestic front, key risks include
and avoid a low-quality fiscal adjustment that
reform slippages, and weakening fiscal discipli-
penalizes investment and harms the welfare of
ne. Long-term projections suggest that it will be
vulnerable groups.
years before the Brazilian economy fully recovers
from the pandemic. Moderating global growth
1.57. Notwithstanding the challenging outlook
and tightening monetary policy around the world
and significant downside risks, near-term growth
will slow Brazil’s recovery, and over the medium
could pick up if the government possess sufficient
term the GDP growth rate is expected to average
political will and implementation capacity to ad-
no more than 2% per year.
vance much-needed reforms. A credible effort to
address fiscal vulnerabilities could boost confidence
1.55. Macro-fiscal vulnerabilities could thre-
in the Brazilian economy, supporting increased
aten Brazil’s recovery. Delays in articulating a
investment in high-return sectors such as infras-
credible vision for debt sustainability could fuel
tructure, technology, and natural resources. In
uncertainty in domestic markets and heighten
turn, greater investment could promote the efficient
sensitivity to external shocks. The shortening of
mobilization of human capital among workers with
the average maturity of the public debt and the
diverse levels of education and skills, generating
Country Development Challenges - Brazil

behavior of the yield curve during 2022 partly

opportunities for productive engagement across
reflected rising macro-fiscal risk. The sharp rise
Brazilian society. Exploiting emerging opportuni-
in inflationary pressures over the year may fur-
ties in the digital economy while leveraging Brazil’s
ther complicate macroeconomic management,
comparative advantages in traditional sectors will
and monetary tightening could increase the cost
be vital to accelerate growth. Moving forward, the
of debt service. Mounting fiscal and inflationary
government must combine efforts to address urgent
risks combined with a challenging external en-
macro-fiscal vulnerabilities and structural deficien-
vironment, unresolved constraints on structural
cies with measures to maximize the potential of Bra-
productivity, and persistently high levels of po-
zil’s productive factors. Chapter 2 assesses priority
verty and inequality could result in a protracted
policy challenges in each of these areas.
period of anemic growth.

44
TABLE 1.6. Selected Social Indicators

Indicator Period I Period II Period III Period IV

2004–08 2009–13 2014–16 2017-2020

National level

GDP per capita (constant 2015 US$) 7662.95 8828.27 8828.10 8486.94

Poverty
34.52 22.88 18.73 19.87
(% of population below $5.50 a day - 2011 PPP)

Extreme poverty
17.40 9.88 7.83 9.10
(% of population below $3.20 a day - 2011 PPP)

Gini coefficient 0.55 0.53 0.52 0.54

Years of education (individuals of 25+ years) 7.2 7.7 7.9 8.55

Years of education: men (individuals of 25+ years) 7 7.5 7.7 8.35

Years of education: women

7.3 7.9 8.1 8.73
(individuals of 25+ years)

Life expectancy at birth (years) 72.3 73.9 75.0 75.7

Life expectancy at birth: men (years) 68.5 70.2 71.3 72.0

Life expectancy at birth: women (years) 76.1 77.6 78.7 79.4

Unemployment rate (%) 8.60 7.40 8.90 12.69

Unemployment rate: men (%) 6.49 5.71 7.65 11.06

Unemployment rate: women (%) 11.40 9.85 10.54 14.36

Access to improved sanitation (% households) 38.2 40.6 43.9 47.3

Access to improved water (% homes) 78.1 79.5 82.0 84.7

Access to electricity (% of population) 97.6 99.3 99.7 99.8

Educational attainment - High School

32.8 39.0 43.8 46.8
Economic Context

(Individuals 25+ years)

Educational attainment - High School

34.0 40.6 45.7 48.9
(Female 25+ years)

Educational attainment - High School

31.4 37.2 41.7 44.5
(Male 25+ years)

BID — Banco Interamericano de Desenvolvimento 45

 2
Route toward
Sustainable
and Inclusive
Growth
Country Development Challenges - Brazil

46
Chapter 1 identified several structural bottlenecks
that constrain the Brazilian economy, including low
productivity growth and high levels of poverty and
inequality. The COVID-19 pandemic exacerbated these
problems, creating further obstacles to Brazil’s deve-
lopment. The pandemic has shown that Brazil would
benefit from pursuing a new growth model based on
efficiency, resilience, inclusion, and sustainability.
This chapter analyzes the challenges involved in cons-
tructing such a model.

The new growth model should strive to increase the

competitiveness of all economic sectors without gene-
rating macroeconomic imbalances and while impro-
ving the distribution of income and opportunities,
providing adequate social services, and supporting
equal treatment of different social groups. In addi-
FIGURE 2.1. Pillars for Development
tion, the new model should use new technologies and
innovative practices as a growth engine. Finally, the
model should promote the rational use of natural re- Promoting
sources and biodiversity as a comparative advantage a resilient
recovery
to foster growth.

All objectives need to be pursued simultaneously.

Growth alone cannot permanently reduce inequalities Incorporating
Route toward Sustainable and Inclusive Growth

Route toward Adopting a new

and improve inclusion. The digital transformation green growth into social agenda
the country’s
sustainable
and inclusive for inclusive
brings opportunities, but it can lead to an increase in development growth
model growth
inequality if not accompanied by appropriate policies.
At the same time, new technologies allow for more
sustainable methods of production that, if adopted,
can attract investments that will strengthen economic Fostering
the digital
growth. The narrative articulated in this chapter is transformation
for development
structured around four overarching, multi-faceted
pillars, as shown in the figure below.1

1  Zooming in into the specific development bottlenecks through a prioritization exercise is critical to reach an integrated diagnostic and build a narrative
for policy action. Chapter 2 builds upon extensive and rich diagnostics work on Brazil’s development problems that is available in the literature. A key
goal is to systematize existing external knowledge in an integrated way that supports the presentation of policy solutions in chapter 3. As a starting
point, a set of methodologies discussed in the annex are performed.

BID — Banco Interamericano de Desenvolvimento 47

 PILLAR
1
Promoting
a Resilient
Recovery
Country Development Challenges - Brazil

PILLAR RATIONALE
The emergency induced by the COVID-19 pandemic has worsened the structural bottlenecks of
the Brazilian economy. Gaining momentum for medium-term growth is vital to minimizing the
negative impact of the pandemic (IMF, 2021). Pillar 1 considers options to accelerate short-term
growth by tackling structural bottlenecks. An economy more closely integrated with international
markets, featuring better infrastructure and a stronger private sector, will boost growth and
productivity and help reduce poverty and inequalities. Fiscal reforms will also be key to alleviating
the impact of the pandemic on fiscal accounts and offering better social protection while maintaining
macro and socio-economic stability—a necessary condition for more buoyant growth.

48
Key Diagnostics and Prioritization through imports. 5 FDI can also contribute to
productivity, through the availability of greater
2.1. International trade could drive Brazil’s re-
resources to invest in more efficient production
covery. Evidence inside and outside the region
methods, as well as through spillover effects
suggest that the external sector can contribute
such as the acquisition of new technologies and
to productive development.2 Productivity gains
Pillar 1 | Promoting a Resilient Recovery

management models and the encouragement of

can occur, for example, when import competi-
input production by local suppliers.6 Trade libe-
tion stimulates a reorientation towards more
ralization is estimated to account for between
productive firms, 3 or through the availability
32% and 39% of LAC’s cumulative GDP per capita
of imported inputs of higher quality or at lower
growth between 1990 and 2010.7
cost, 4
or through the transfer of technology

2 See IDB (2019) and Mesquita Moreira (2019) for a detailed literature review on this matter.
3 Pavcnik (2002), Melitz (2003).
4 Ethier (1982).
5 Keller (2004).
6 A sectoral analysis performed by Tondl and Fornero (2010) focused on Latin America found that FDI in the manufacturing sector has a positive effect
on the productivity of that sector, but of a smaller magnitude than the direct effect of FDI in most other sectors. However, FDI in manufacturing has
indirect effects on the productivity of other sectors such as agriculture, mining, electricity, and gas and water.
7 Mesquita Moreira, Li and Merchán (2019).

BID — Banco Interamericano de Desenvolvimento 49

 FIGURE 2.1: Trade as a share of GDP (%)

80

60

40

20

0
Brazil Argentina Chile Mexico Paraguay Uruguay Latin America &
Caribbean
Source: IMF

2.2. Brazil is not as integrated internationally as 2.3. Traditional trade barriers are high. Brazil has
other economies in the Region. Exports and im- an average applied most-favored nation (MFN) ta-
ports of goods and services represent 30% of GDP, riff rate of 13.3%, the third-highest in Latin Ame-
which is lower than comparator countries and well rica.8 Although there is a common external tariff
below the average for Latin America and the Cari- (CET) as a part of the Mercosur customs union,
bbean (LAC). Although this can partly be explained exceptions are permitted, and Paraguay applies
by Brazil having the largest economy in the region, an average MFN tariff of 9.6% and Uruguay an
this indicator is 79% for Mexico, LAC’s second-lar- average rate of 10.3%.9
gest economy. Brazil lacks the extensive network
of free trade agreements (FTAs) that many other 2.4. Nontariff barriers and bureaucracy also
economies in the region possess and does not have limit international trade. Brazil is among the
FTAs in place with its three largest export partners: world’s most frequent users of nontariff measu-
China (which accounts for 30% of merchandise ex- res, such as sanitary and technical regulations,
ports); the EU (14%); and the United States (12%). national component policies, and technical

FIGURE 2.2. Tariffs – Simple Average (MFN applied)

16.00%

14.00%

12.00%

10.00%

8.00%
Country Development Challenges - Brazil

6.00%

4.00%

2.00%

0.00%
New Zealand

Peru

USA

European Union

Costa Rica

Colombia

Chile

Russia

Mexico

China

South Africa

Paraguay

Uruguay

Brazil

Argentina

India

Source: UNCTAD (2021)

8 WTO, ITC, and UNCTAD (2021).

9 USITA (2020); WTO, ITC, and UNCTAD (2021).

50
import barriers. According to the World Bank,10 2.7. Brazil’s participation in global value chains is
Brazilian imports have a coverage ratio of 86.42% limited, but the pandemic has created new oppor-
and a frequency ratio of 75.62% for nontariff me- tunities.14 Hollweg and Rocha (2018)15 show that al-
asures—compared to international averages of though Brazil has witnessed high growth in total do-
71.98% and 43.04%, respectively—even though mestic value added embodied in gross exports since
Brazil’s exports have a coverage ratio of 50.04% 1995, it exhibits less international engagement in
and a frequency ratio of 38.71%. The Brazilian global value chains. Similarly, a 2021 report by the
manufacturing sector in particular is protected National Confederation of Industry (Confederação
by nontariff barriers at higher levels than the Nacional da Industria, CNI)16 found that Brazil’s po-
world average (SAE, 2018). sition in global value chains is very fragile, but that
the COVID-19 pandemic has created new opportu-
2.5. Productive complementarity among La- nities for the country. Moreover, in a recent paper
tin-American countries has a role to play in the on the resilience of value chains, McKinsey (2021)
recovery, but intraregional trade has declined estimates that between 16% and 26% of global ex-
over the past few decades. Faria (2020) shows 11
ports (worth between US$2.9 and US$4.6 trillion)
significant potential for integration among Latin could shift away from existing trade partners either
American countries. The study indicates that the to domestic production or to new trade partners,
main sectorial links between Brazil and Latin reflecting the influence both of economic and none-
American countries occur via the service sector, conomic considerations.
and several other sectors hold potential for in-
tegration. Nevertheless, the share of Brazilian 2.8. An integrated economy needs to boost logis-
exports to and imports from Latin America has tics, so Investments in infrastructure can make a
fallen since 1997. That year, Latin America (inclu- crucial contribution to the recovery. Extensive lite-
ding Mercosur) was Brazil’s main export market, rature indicates that infrastructure investments and
accounting for 28% of all its exports. As of 2021,12 improvements in infrastructure services are power-
this share had dropped to 13.1%. ful tools for boosting productivity and growth. IMF
(2020) points out that a synchronized infrastructure
2.6. Several obstacles hinder regional and in- investment push could invigorate growth, limit scar-
ternational integration. High transport costs ring, and address climate goals. Munhoz et. al. (2021)
for exports and imports, weak logistical inte- show that by investing 2% of GDP in transportation
gration among countries, high tariffs on capital infrastructure, Brazil can increase its GDP by 27%.
and intermediate goods in the region’s largest Brichetti et al. (2020) indicate that besides enhancing
economies, sub-regional trade agreements that productivity, improvements in infrastructure servi-
do not address critical issues for the formation ces can reduce poverty and inequality.
of intra-regional chains—such as nontariff bar-
riers, disparate rules of origin, and restrictive 2.9. Infrastructure gaps impose major constraints
Pillar 1 | Promoting a Resilient Recovery

trade regulations. These factors inhibit Brazil’s on economic growth. The low quality of Brazilian
ability to access international value chains infrastructure poses a challenge to productivity
while slowing the growth of intra-regional trade and economic growth. Brazil ranked 59th out of 163
and investment.13 countries in the World Bank’s 2018 Logistics Per-

10 https://wits.worldbank.org/tariff/non-tariff-measures/en/country/BRA
11 Faria, Weslem (2020). Productive complementarity in Latin America? An assessment for 2005 and 2011.
12 Up until September.
13 Moreira et al (2008); Cadestin, C. et al (2016). Another contributing factor is the rise in political and institutional instability in the region’s largest coun-
tries in recent years.
14 Urata and Baek (2022) show that participation in global value chains is an important driver of productivity growth. They find that Japanese firms that
participate in global value chains are more productive than non-participants, and a longer participation strengthens the productivity-enhancing effects.
15 Hollweg, Claire H.; Rocha, Nadia. 2018. GVC Participation and Deep Integration in Brazil. Policy Research Working Paper; No. 8646. World Bank, Wa-
shington, DC. © World Bank.
16 CNI (2021). Reorganização das cadeias globais de valor. Riscos e oportunidades para o Brasil, resultantes da pandemia de COVID-19.

BID — Banco Interamericano de Desenvolvimento 51

 FIGURE 2.3. Investment in infrastructure in Brazil, % of GDP and R$ billion

4.00%

3.00%

2.00%

1.00%

0.00%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
200

180

160
72.9 73.5
140
64 71.9 51.4
120
67.1 42.3 41.4 40.2 36.3 26.2
100

80

60

40 85.3 100.2 103.5 114.0 115.0 104.4 85.8 84.2 93.7 93.2 98.0

20
Country Development Challenges - Brazil

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Infra 2038 report and ABDIB (2021) Private Public

formance Index and did not record any substantial services, and 85th on efficiency of air transporta-
improvements over the last decade. In addition, the tion services (WEF, 2019). The inadequate availabi-
country ranks 78th out of 141 countries on quality of lity and low quality of transportation infrastructure
overall infrastructure, 116th on road quality, 78th is also among the key obstacles to doing business
on railroad density, 104th on efficiency of seaport domestically.17 Furthermore, infrastructure invest-

17 EMIS, 2018.

52
ment in Brazil is low and declining. In the 1970s, 2.11. Enhancing infrastructure investment will
Brazil invested on average 5.42% of its GDP in in- require more efficient governance.20 Efficiency of
frastructure, but in 2020 this share had dropped to a public investment is key for growth,21 but Brazil’s
historical low of 1.55%. Infrastructure investment public investment management systems face chal-
has decreased since 2014, with a more noticeable lenges. According to the latest Public Investment
reduction in public investment. Management Assessment (2018), the efficiency gap
between Brazil and the most efficient countries with
2.10. Several factors stand in the way of boos- comparable levels of public capital stock per capita
ting infrastructure investment. Ineffective long- is 39 percent. The gap is wider than the average
-term planning that lacks an integrated strategic of 27 percent for countries in the Europe and the
vision reduces the efficiency of infrastructure Middle East and 29 percent for countries in Latin

TABLE 2.1. Investment in Infrastructure by sector – 2020

Actual Minimum
Investment Necessary
Sector % of GDP % of GDP
in 2020 Investment
(R$ billions) (R$ billions)

Transport/Logistics 23.0 0.31% 149.0 2.26%

Energy 56.4 0.76% 55.4 0.84%

Telecommunications 31.2 0.42% 50.0 0.76%

Water and Sewage 13.6 0.18% 30.0 0.45%

Total 124.2 1.67% 284.4 4.31%

Source: ABDIB (2021)

investment. Project guidance and screening are America and the Caribbean (LAC). According to the
inadequate, the use of cost-benefit analysis is in- 2018 Public Investment Management Assessment,
consistent, there are no clear criteria for project Brazil’s areas of strength include national planning,
selection, and links between long-term plans and budget comprehensiveness, company regulations,
the annual budget are weak. Regulatory uncer-
18
and monitoring of assets; on the other hand, the key
tainty hinders investment in all sectors, 19 and weaknesses are in the allocation and implementa-
long-term infrastructure financing options are tion phases, especially around project appraisal and
very limited. A study by the Interamerican Develo- selection, protection of investments, funding avai-
pment Bank (2020) found that large infrastructure lability, and project management. Most institutions
projects take, on average, 20% longer than schedu- with investment responsibility were assessed as
Pillar 1 | Promoting a Resilient Recovery

led and costs are generally 80% over budget. Such medium or low on metrics of implementation and
deficiencies in project execution compromise the effectiveness. There is a lack of high-level guidance
search for new investments and for a reduction of about priorities, poor coordination across levels of
the infrastructure gap. government, and no central guidelines on project

18 See World Bank (2018) and SAE (2018), inter alia.

19 Amann & Baer, 2006; Cunha & Rodrigo, 2012; De Paula & Avellar, 2008; and Amann et al., 2016.
20 Infrastructure has a positive effect on economic growth and on the reduction of income inequality. Public investment does not seem to pose equity-
-efficiency tradeoffs, but instead tends to improve both macroeconomic and distributional outcomes (Furceri and Grace Li, 2017). Yet, the economic
and social impact of public investment depends on the efficiency of investment spending (Gupta et al., 2014; IMF, 2014). The growth dividends from
closing the efficiency gap are considerable: an increase of 1% of GDP in public investment raises output by just 0.3% for countries in the bottom quar-
tile of the efficiency distribution, compared to as much as 0.6% for countries in the top quartile (Abiad et al., 2015).
21 IDB (2018).

BID — Banco Interamericano de Desenvolvimento 53

 appraisal and selection. Combined with poor ca- the recovery of credit through judicial means in Bra-
pacity at the subnational level and among certain zil is among the worst in the world: only US$0.11 for
spending ministries, poor project management, every US$1 borrowed is recovered. In Japan, which
and uncertain funding, these weaknesses contribu- has the lowest banking spread in the world, US$0.92
te to suboptimal project execution, cost overruns, is recovered for every US$1 borrowed, and the glo-
delays, and poor-quality infrastructure. bal average is US$0.34 per US$1 borrowed. Other
studies cite additional factors: costs associated with
2.12. Brazil needs to create a business climate provisioning, the high level of non-performing
more favorable to private sector development. Im- loans, taxation, the high operational costs of banks
proving Brazil’s business environment is necessary (including labor costs), and high concentration and
to boost the country’s long-term productivity. The poor competition among banks. The relative impor-
costs stemming from unnecessary bureaucracy tance of each factor depends on the type of credit
strongly discourage companies from expanding in (SMEs, large companies, household, or working
Brazil. The country suffers from relatively burden- capital). As a result, neither banks nor the capital
some regulation, relative to both OECD countries markets meet the long-term financing needs of Bra-
and other large emerging economies. According to zil’s private sector. The banking system offers credit
the WEF Global Competitiveness Index published mainly for short-term financing of households
in 2019, Brazil ranked last out of 141 countries in ter- and businesses. SMEs face especially low liquidity
ms of the burden of government regulation. It also and high costs for long-term financing, and capital
ranked near the bottom of the index (124th) in terms markets are at the early stages in terms of issuance
of product market efficiency, due to poor internal of long-term bonds.
competition and distortive subsidies.
2.14. Access to finance remains one of the most
2.13. High financing costs are a major constraint to significant constraints to the survival, growth,
private sector development, and the financial sys- and productivity of SMEs. In addition to gaps in di-
tem does not play a strong intermediation role. The gitalization and infrastructure, SMEs are affected
Brazilian financial system is among the largest and by a shortage of credit, despite advances during
most sophisticated in Latin America, but the finan- the pandemic thanks to government credit pro-
cing available to Brazilian firms tends to be scarce grams. Notably, the credit supply to SMEs dropped
and expensive. Balassiano and Vidal (2019) show significantly between 2015 and 2019, falling just
that Brazil has the second-highest banking spread under its 2015 level at the start of the pandemic.
in the world, due to a variety of factors. For example, This decline was connected to the economic reces-

FIGURE 2.4. Interest rate spread (lending rate minus deposit rate)

45.00%
40.00%
Country Development Challenges - Brazil

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Brazil World LAC

Source: World Bank, World Development Indicators

54
sion that hit the country during the same period, 2.17. Responding to the country’s social needs
but the drop was more significant for smaller com- post-pandemic, without leaving the fiscal conso-
panies: total credit to SMEs dropped by 31%, while lidation agenda to the side, will rely on improving
credit to large companies fell by just 9%.22 Accor- the quality of public spending. Federal entities at
ding to the SME Finance Forum, Brazil’s SMEs face the three levels of government suffer from high
a finance gap equivalent to 24.7% of GDP, one of personnel expenditure and low savings and invest-
the highest in the world, although BNDES (2021) ment. Governments need to rationalize expenses
shows that the supply of credit to SMEs has a positi- and enhance the efficiency of public resources, in
ve impact on employment. order to increase the economic and social impact
of public spending.
2.15. Shortcomings in public sector governance,
combined with a burdensome State administra- 2.18. Enhancing fiscal transparency is vital to
tion, undermine fiscal sustainability, efficiency, increase the effectiveness of the public sector.
and effectiveness, thus deterring growth and Greater fiscal transparency is necessary to promote
development. Public sector governance in Brazil— sound policy decisions and strengthen accountabi-
understood as the structures, rules, and systems lity for implementation and results. Improved fiscal
shaping government operations and accountabi- transparency—which includes appropriate finan-
lity—can be improved. Shortcomings in the stra- cial and fiscal reporting requirements, the regular
tegic and operational planning, in the definition publication of forecasts and budgets, and effective
of responsibilities, monitoring, and assessment fiscal risk management—allows for a more open
of compliance with goals and standards, pose pro- and informed debate, both within government and
blems given the size of the Brazilian State. with the public. Transparency is fundamental to the
credibility of fiscal policies and a prerequisite for
2.16. Policymaking needs to center on hard building trust in financial markets.24
evidence and results to foster public sector pro-
ductivity. In the coming years, the public sector 2.19. Corruption is also a challenge for growth and
will need to revisit public expenditure more tho- the reduction of poverty and inequalities. Regarding
roughly, including the mandatory budget lines. transparency and integrity, corruption is perceived
In this context, efficiency in the public sector has as one of the most important problems in Brazil.
become a key additional ingredient in this dis- According to Transparency International’s Global
cussion – the World Bank shows that measures to Corruption Barometer, while in Latin America (2019),
improve the efficiency of public expenditure can 85% of the region’s citizens reported corruption as
lead to savings amounting to 8.36% of the GDP. 23
the most serious problem in their governments and
In this context, beyond reforms and a push for effi- 77% of the population had little or no trust in their
ciency in selected areas, Brazil is in need of a more governments, in Brazil, these figures corresponded
fundamental overhaul in its public policymaking to 90% and 72%, respectively. On the other hand, the
Pillar 1 | Promoting a Resilient Recovery

mindset to mainstream evidence-based public Corruption Control Indicator of the World Governan-
policymaking. Greater focus on service delivery, ce Indicators (World Bank), in the 2016-2020 period,
widespread adoption of modern principles for the the average score of the countries of Latin America
design, implementation and monitoring of State and the Caribbean has remained at -0.27 compared to
action, and mechanisms that ensure accountabili- 1.08 for OECD countries. Brazil underperformed the
ty and transparency are all part of a needed packa- regional average, scoring -0.33 in 2019 compared to
ge to support growth and equity. -0.40 in 2015 (i.e. showing improvement).

22  ABDE-Bid. Support for SMEs in the COVID-19 crisis: financing challenges for resilience and recovery. 2021. p.25. <https://publications.iadb.org/
publications/portuguese/document/Apoio-as-MPMEs-na-crise-da-COVID-19-desafios-do-financiamento-para-resiliencia-e-recuperacao.pdf>
23 World Bank (2017).
24 IMF, 2014.

BID — Banco Interamericano de Desenvolvimento 55

 2
PILLAR
Adopting a new
social agenda for
inclusive growth
Country Development Challenges - Brazil

PILLAR RATIONALE
The pandemic widened deep-rooted inequities in the Brazilian economy. The most vulnerable
sections of the population suffered more from the pandemic (Chapter 1). If not addressed, these social
outcomes will have adverse consequences on the country’s long-term growth and social cohesion.
Pillar 1 discussed policies to boost growth and help the economy recover, and therefore reduce poverty
and inequality; yet the historical persistence of poverty and social inequalities indicates that growth
alone cannot reduce them permanently. In addition, poverty and inequalities make productivity
bottlenecks more difficult to tackle. Brazil has not yet created efficient policies to help people achieve
a good standard of living. Therefore, reformulating the social agenda must be a core aspect of the
recovery from the pandemic, with a view to achieving better and long-lasting social outcomes.

56
Key Diagnostics and Prioritization income distribution by deciles, Afro-descendants
are over-represented at the bottom. 76.7% of those
2.20. Inequality of opportunities cuts across re-
living below the poverty line (less than US$1.90 per
Pillar 2 | Adopting a new social agenda for inclusive growth
gions, gender, and race in Brazil, and persists over
day) are Afro-descendants.1 Inequalities by race
time. Chapter 1 shows that breakdowns by race,
and gender in the labor market are also high. Mo-
gender, and geographical location are fundamental
reover, the intersection of data on gender and race
to the diagnosis of poverty and inequality in the
reveals that women Afro-descendants stand out
country. The results indicate that inequalities are
among the poor: they make up 28.7% of the popula-
structural, given that key differentials, apart for
tion, but 39.8% of the extremely poor and 38.1% of
small fluctuations, remain stable over time (IBGE,
the poor. Households led by Afro-descendant wo-
2020). Women make up half of the Brazilian popu-
men, without a spouse and with children under the
lation, and 56.3% of the total population self-iden-
age of 14, are those with the highest incidence of
tifies as Afro-Brazilian (preto or pardo), but gender
poverty: 24% of them have a per-capita household
and racial disparities in income, education, and ac-
income of less than US$1.90 per day, and 62.4% of
cess to labor markets, public services, and violence
less than US$5.50 per day.
prevention services remain stark. Considering the

1 IBGE (2020).

BID — Banco Interamericano de Desenvolvimento 57

 FIGURE 2.5. Distribution of population across gender and race, according to household income per capita

100.00%
90.00% 18.40%
28.70% 30.60%
80.00% 38.20%
70.00% 19.00%
60.00%
27.60% 29.20%
50.00%
35.50% 32.20%
40.00%
30.00% 22.50% 20.90%
20.00% 13.20%
29.00%
10.00% 20.20% 18.50%
12.10%
0.00%
Total Up to 50% of Between 50% and 150% of Above 150% of
National Median Income National Median Income National Median income

White men White women Afro-Brazilian men Afro-Brazilian women

Source: IBGE (2020)

2.21. Inequality and poverty go hand in hand in rican countries: Brazil spends 6.1% of GDP in edu-
Brazil. The World Social Report (2020) finds that cation, while other Latin American countries and
highly unequal societies are less effective at re- OECD countries spend on average 4.0% and 4.9%,
ducing poverty than those with low levels of ine- respectively; in the health sector, Brazilian govern-
quality. Unequal societies also grow more slowly ment spends 3.9% of GDP, compared to the LAC ave-
and are less successful at sustaining economic rage of 3.4%.2 However, despite advances in social
growth. In Brazil, Barros et. al. (2007) show that indicators in recent decades, Brazil has ample room
the fall in inequality in the 1990s and 2000s had a to improve the quality of social spending.
major effect on the income of the poorest, there-
by reducing poverty in the country. Much like the Effective policies focusing on more vulnerable popula-
Gini coefficient, poverty has instead increased tion would have a significant effect on poverty and ine-
since the 2014–2015 recession. According to the quality. Different social policies during the whole life
IBGE, 10.3% of the population lived on less than cycle of a Brazilian citizen are ineffective to reduce the
US$3.20 per day in 2011, falling to 7.1% in 2014 poverty and inequalities and exerted an acute impact
but increasing again to 9.2% in 2018. Using other on the social mobility of different groups especially wo-
datasets, FGV Social (2021) shows that in 2019 men, afro-descendants and other vulnerable groups.
10.97% of Brazilians, or 23.1 million people, were
living below the poverty line. This ratio increased 2.23. Disparities in early childhood development
to 16.09% in the first quarter of 2021, then fell to have lifelong effects. Portela (2022) identifies key
12.98% in the second quarter of the year. inequalities in early childhood development in
Country Development Challenges - Brazil

Brazil. 85% of the most educated women have ac-

2.22. Social spending in Brazil is high compared to cess to the broadest range of prenatal care, but this
the rest of the region. Spending on health and edu- share plunges to 38% among women with no formal
cation accounts for 28% of the central government’s education. At the other end, 10% of uneducated mo-
primary expenditure. Moreover, it has been rising thers do not have access to any prenatal follow-up,
rapidly over the last two decades, partly reflecting compared with only 1% among women with the
constitutional minimum spending requirements highest educational attainments. The author also
in both sectors. In addition, Brazilian expenditures finds an education chasm between the extremes
in these sectors are higher than in other Latin Ame- of the income distribution, with 75.7% of children

2 Source: OECD data (2019). OECD countries spend on average 6.6% on health.

58
on the lowest income level not attending early chil- -economically disadvantaged students who scored
dhood education, compared with 44% of those on above PISA level two in reading for every ten advan-
the highest income level. There are also differences taged students who scored above this level. The par-
among Brazilian children linked to racial inequali- ticipation of the private sector is low in education,
ty. The share of children outside the early education with the exception for daycares (children with 0-3
system is 60.6% among branco children (the lowest years old), yet private sector can increase the su-
average), versus 68.4% among pretos and pardos, and pply capacity faster and in a more flexible way than
71.8% among indígenas. Finally, only 29.8% of preto expanding with direct public supply. Civil Society
and pardo children under the age of four attend day- plays a key role in Brazilian education not only as a
care, versus 36.2% of branco children. Lack of vacan- strong advocator for quality education but also as
cies near the family residence is the main reported promotor of sound strategic policies and programs,
reason for not attending daycare. leveraging state and municipalities to implement
learning recovery and other programs.
2.24. Education: Despite a high level of spending,
educational outcomes in Brazil are poor and une- 2.25. Social Protection: Focus on formal employ-
qual. The OECD’s 2018 Programme for International ment and the existence of “invisibles”. In recent
Student Assessment (PISA) shows that Brazil is decades, Brazil has created a social protection net
among the countries with the worst educational to protect workers from economic fluctuations,
performance. On a scale of one to ten, approxima- alleviate poverty, and mitigate inequalities. Howe-
tely 43% of Brazilian students were below level two ver, several challenges remain. Importantly, most
(considered the level of minimum proficiency) in existing programs focus on formal workers. Souza
all fields surveyed—reading, mathematics, and et al. (2020) using the 2019 Continuous PNAD data
sciences—compared with an average of 13.4% in estimate the “invisible” population, that is, indi-
OECD countries. On reading, Brazil ranked 57th viduals who are not included in any government
among the 77 countries and regions for which data registry and who were in a vulnerable situation.
was available. In mathematics and sciences, the According to the authors, more than 6 million
country was ranked 70th and 64th (along with Peru people belong to this group, including informal,
and Argentina), respectively, out of 78 nations. unemployed, dismayed and self-employed.
Educational outcomes tend to vary significantly
depending on the socio-economic backgrounds of 2.26. Labor market: Several challenges affect
students. In Brazil, there were only about five socio- the dynamic of employment. The Brazilian labor

FIGURE 2.6. Total Expenditure on Education Pillar 2 | Adopting a new social agenda for inclusive growth

6.50%

6.00%

5.50%

5.00%

4.50%

4.00%

3.50%

3.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

LAC Brazil OECD

Source: World Bank

BID — Banco Interamericano de Desenvolvimento 59

 market is characterized by 2.28. Health: Universalization and concerns
I. high labor informality, that surpassed 47% about quality, efficiency, and equity. Brazil has
by 2019; made significant advances in health indicators
II. stagnant labor productivity; since the creation of the national health system
III. high turnover and low average duration of (Sistema Único de Saúde – SUS) in 1988. Brazil
jobs; and spends 9.6% of its GDP on health, slightly more
IV. unequal employment opportunities, with than the OECD average (8.9%), but the share of
unemployment rates higher for afro-descen- public spending (40.6%) is lower than the OECD
dants and women. average (73.4%). There have been substantial re-
These characteristics could be explained by: ductions in child mortality (11.5 deaths per 1,000
I. workers not having sufficient technical and children born alive in 2020, versus 24.7 in 2003)
socio-emotional skills to perform well in the and maternal mortality (59 deaths per 100,000
job market; live births in 2018, versus 143 in 1990), and the
II. workers have access to inefficient methods country has achieved 100% coverage on childhood
of searching for jobs; and immunization. However, there are acute concerns
III. labor legislation and the regulatory envi- about the efficiency and quality of health servi-
ronment still represent obstacles to crea- ces. Recent studies based on data envelopment
ting quality jobs and the growth of producti- analysis (DEA) and stochastic frontiers reveal that
ve companies. the Brazilian health system has a wide margin of
improvement in terms of efficiency, both relative
2.27. Informality is a significant source of inequa- to other countries and internally (i.e., in terms of
lity. IDB (2020)3 discusses the importance of the performance at the state and municipality level-
labor market in the evolution of inequality in Latin s).4 IDB (2018)5 shows that significant inequities
America. The study shows that the decline in ine- remain in access to primary care, and users of pri-
quality in the early 2000s was driven by two factors: vate insurance have a better experience of primary
I. the expansion of education, and the con- care than public users. The study also indicates the
sequent decrease in the marginal return of need to Improve the service management model,
skills; and including better communication with patients,
II. an increase in domestic demand fueled by better scheduling systems for appointments and
the region’s commodity boom, which favored consultations, and better coordination between
less-skilled workers (Messina and Silva, 2018). levels of care.
Other labor market forces contribute to explain
the evolution of inequality, such as the evolution 2.29. Brazil faces looming demographic trends
of the minimum wage and the degree of infor- that will exacerbate social challenges, espe-
mality in the economy. Notably, informality is cially in health. The share of Brazilians aged 65 or
an important component of labor inequality. older will rise from 10% to 20% of the total popu-
Country Development Challenges - Brazil

Workers in the informal economy in LAC do not lation in 24 years, while the same shift will take 60
have access to contributory retirement, health years in Europe. This exceptionally fast transition
insurance, or a safety net against income losses in will boost spending on health and pensions from
the event of unemployment. In Brazil, the rate of 19% of GDP in 2020 to 40% in 2050. Health expen-
informality is close to 40%. The rate is similar for diture, which is projected to rise to 14% of GDP by
women and men, but higher for preto and pardo 2050, will also be driven by economic growth and
workers than it is for their branco counterparts. technology inflation (Rao et al., 2021).

3 IDB (2020). A crise da Desigualdade. América Latina e Caribe na encruzilhada. Edited by Matias Busso and Julián Messina.
4 IDB (2018). 
5 Guanais, Frederico, Ferdinando Regalia, Ricardo Perez-Cuevas, Milagros Anaya. 2018. Desde el paciente. Experiencias de la Atención Primaria de Sa-
lud en América Latina y Caribe. Washington, DC: BID.

60
 FIGURE 2.7. Projected Spending on Public Health and Pensions, Brazil (% of GDP)

45.00

40.00

35.00

30.00
Share of GDP

25.00

20.00

15.00

10.00

5.0

0.0
Y2020 Y2030 Y2040 Y2050

Pensions Health

Source: calculations based on IADB, Labor Markets and Social Security Information System (SIMS); International Monetary Fund and Rao et al. 2021.

2.30. Citizens’ security has been one of Bra- rate has not followed the same trajectory and cons-
zil’s greatest challenges over recent decades. titutes a major challenge. The number of femicides
With almost 40,000 homicides, and a rate of 18.8 per 100,000 women in Brazil did fall from 1.6 to 1.5
per 100,000 inhabitants, Brazil ranked second
6
between 2016 and 2017, but then went up to 1.7 in
for homicide rate in South America in 2019. 7 2018 and 1.8 in 2019.11 According to the World Health
If robberies and assaults that cause death are Organization (WHO), Brazil is the country with the
added to the above, intentional lethal violent fifth-highest number of femicides in the world. In
crimes (ILVC) affect almost 42,000 people per addition, homicide is the leading cause of death for
year, mainly young people (52%), men (91%), young people between the ages of 15 and 29. In 2018,
and Afro-descendants (74%) from the urban 8
30,873 young people were victims of homicide, re-
peripheries.9 However, Brazil’s homicide rates in presenting a rate of 60.4 homicides per 100,000 young
2018 and 2019 (27.8 and 18.8 deaths per 100,000 people, and 53.3% of the country’s total homicides.
inhabitants, respectively) were the lowest in four Among young people, most victims are men: they
years, following a consistent rise in the number represent 55.6% of victims aged between 15 and 19,
of homicides up until 2017. Finally, despite an 52.3% of those aged between 20 and 24, and 43.7%

Pillar 2 | Adopting a new social agenda for inclusive growth

investment of almost 5.9% of GDP to tackle the of those aged between 25 and 29. In turn, violence
direct and indirect costs of crime, Brazil has is highly concentrated among the Afro-descendant
significant room to enhance the efficiency and population. Young preto men are the most frequent
effectiveness of public spending in this area.10 victims of homicide in the country, and homicide ra-
tes for this category have been rising over the years.12
2.31. Violence in Brazil is disproportionately con- In 2018, 75.7% of all homicide victims were Afro-des-
centrated among certain demographic groups. cendants,13 and Afro-descendant women accounted
Despite the decline in the homicide rate, the femicide for 68% of all women murdered in Brazil.14 Finally,

6 Brazilian Forum on Public Security (FBSP), 2020.

7 United Nations Office on Drugs and Crime (2019).
8  The proportion of Afro-descendants among homicide victims increased from 59% to 72% between 2001 and 2011 (Marques-Garcia Ozemela et al., 2019).
9 FBSP (2020).
10 Institute of Applied Economic Research (IPEA) and FBSP (2019).
11 https://oig.cepal.org/es/paises/7/profile
12 IPEA (2020), “Atlas of Violence”.
13 Ibid.
14 Ibid.

BID — Banco Interamericano de Desenvolvimento 61

 FIGURE 2.8. Trends in the Evolution of Violence, Brazil

68 32

66 31

Murder Rate (100,000 inhabitants)

Murders (per 1,000 inhabitants)

64
30
62
29
60
28
58
27
56
26
54

52 25

50 24
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Murders Murder Rate

Source: Atlas da violência 2020 IPEA-Foro Brasileiro de Segurança Pública

violence against LGBT people has increased by an II. economic and sanitary crisis intensified by
average of 7.7% in the 11 states that keep records of COVID-19.
anti-LGBT crimes. 15

2.33. There are major inequalities in housing,

2.32. Brazilian cities suffer from several structu- especially in cities. In 2019, over 5 million private
ral problems. The deficiency in the application of households were estimated to be part of informal
the existing legal framework associated with eco- settlements (i.e., slums),16 equivalent to 7.8% of
nomic crises that the country has experienced in all households, and 60% above the level recorded
recent decades were the main driver for the struc- in 2010. According to 2019 data from the Joao Pi-
tural problems in Brazilian cities: nheiro Foundation (FJP),17 more than 24 million
I. urban sprawl – with the degradation of cen- urban households were considered qualitatively
tral and heritage areas that have a wide su- inadequate. 18 Access to community equipment
pply of installed urban infrastructure; and social services is also very limited: for exam-
II. social inequities – with the growth of infor- ple, 36% of households in informal more than 2
mal settlements with low habitability patter- km away from health posts with inpatient and
ns affecting mainly certain most vulnerable observation support (IBGE, 2020). In 2019, Brazil’s
strata of the population (women and/or bla- housing deficit affected an estimated 5.8 million
cks/browns); and households (FJP 2020), comprising:
III. deficiency in urban infrastructure – the poor I. precarious households (improvised and rus-
Country Development Challenges - Brazil

conditions of urban infrastructure supply, tic housing);

whether in urban mobility services, or in tho- II. cohabitating households (two or more fami-
se of environmental sanitation and energy. lies living in the same dwelling); and
More recently, other challenges related to urban III. households facing an excessive rent burden
conditions have been: (rent equal to or greater than 30% of hou-
I. low urban resilience in the face of climate sehold income)
change; and

15 FBSP (2020).
16 IBGE 2020. Subnormal clusters 2019: preliminary classification and health information for coping with COVID-19.
17 FJP 2020. New methodology and results of housing deficit and inadequate housing in Brazil.
18 Household inadequacy is also referred to as qualitative housing deficit, i.e., the need for improvements in housing and its surroundings. On the other
hand, the quantitative deficit illustrates the need for production of new units.

62
 FIGURE 2.9. Housing Deficit, Brazil (number of affected households)

6,000,000 5,970,663
5,950,000
5,900,000 5,870,041 5,876,699
5,850,000
5,800,000
5,750,000
5,700,000
5,657,249
5,650,000
5,600,000
5,550,000
5,500,000
2016 2017 2018 2019

Source: Fundação João Pinheiro – FJP

2.34. Urban and Housing inequality by gender and parities intersect. For example, excessive household
race are significant. Households headed by women density and absence of a washing machine are
account for a large and growing share of the housing twice as prevalent among preto or pardo households
deficit (60% in 2019, versus 54.3% in 2016). The stark as among branco households (7% versus 3.6%, and
racial divide in access to water, sanitation, and soli- 44.8% versus 21%, respectively).19 The divide also has
d-waste management infrastructure has important a regional component, with areas in the north and
health implications. In 2018, 12.6% of the preto and northeast emerging as the most vulnerable: among
pardo population lived in households without garba- municipalities with more than 750,000 inhabitants,
ge collection, versus just 6.1% of brancos. Similar ra- Belém (55.5%), Manaus (53.4%), and Salvador
cial disparities were observed in households without (41.8%) have the highest proportion of subnormal
access to piped water (17.9% versus 11.5%) or impro- households; moreover, the highest prevalence of
ved sanitation (42.8% versus 26.5%). Vulnerability infrastructure inadequacy is found in Acre (80.5%),
increases even further when racial and gender dis- Amapá (68.2%), and Pernambuco (70.8%) (FJP, 2020).

FIGURE 2.10. Proportion of the population residing in inadequate households, by race

15.90%
Presence of at least one inadequacy
9.40%

Pillar 2 | Adopting a new social agenda for inclusive growth

5.00%
Excessive burden on rent
4.70%

7.60%
Excessive densification
3.70%
1.70%
External walls built predominantly with non-durable materials
0.80%

3.90%
Household without bathroom
1.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%

Black or Pardos White

Source: IBGE– 2017

19 Source: IBGE 2019. Social Inequalities by Color or Race in Brazil.

BID — Banco Interamericano de Desenvolvimento 63

 3 PILLAR
Fostering the digital
transformation
for Development1
Country Development Challenges - Brazil

PILLAR RATIONALE
The digital transformation is driving profound shifts in business, production models, labor markets,
and people’s lifestyles, and countries well-prepared for it will have a competitive advantage. A resilient
growth, as discussed under pillar 1, should be based on a strong technological component, since
innovation is at the core of productivity improvements. Yet, digital advances carry the risk of deepening
the inequalities discussed under pillar 2, as adjusting to the new environment will depend on the capacity
of individuals, firms, and governments. Pillar 3 analyzes Brazil’s challenges and opportunities in
promoting the digital transformation as a pivotal component of a sustainable, inclusive growth model.
1 The term digital transformation or digital revolution alludes to the effects of massive digitalization in the economy and society. The transfor-
mation is based on the use of digitalized information and knowledge as a factor of production, a productivity engine, and an optimization tool
for business models (OECD, 2020).

64
Key Diagnostics and Prioritization ple’s lives. Over the next decades, the economy will
be ever more user-centric and data-driven.2
2.35. The digital transformation is key to impro-
ving economic, social, and environmental resi-
Pillar 3 | Fostering Digital Transformation for Development
2.36. Brasil is not competitive in the digital realm.
lience. Digital technologies open new avenues for
According to the IMD World Digital Competitive-
strengthening climate action, social programs and
ness ranking, Brazil ranks 52nd out of 64 countries
generating greater transparency and innovation.
on digital competitiveness (51.48 points out of
The use of digital solutions has the potential to im-
100). The ranking analyses countries’ ability to
prove quality of life and help achieve sustainable
adopt and explore digital technologies leading to
development goals. Technologies with exponen-
transformation in government practices, business
tial growth potential, such as cloud services, big
models, and society overall. Digital competiti-
data analytics, blockchain, artificial intelligence,
veness is assessed based on three major criteria:
and 5G are increasingly prevalent, and will incre-
knowledge, technology, and future readiness.
ase the potential impact of public policies on peo-

2  he use of technology will be discussed throughout the text in different subsections. For example, new technologies can make infrastructural sectors
T
grow sustainably, bringing gains in productivity and competitiveness. Key among the benefits from adopting digital technologies is the reduction in the
cost of providing infrastructural services. According to IDB (DIA, 2020), digitalization can reduce infrastructural service delivery costs by up to 15%,
which would increase the GDP of Latin American and Caribbean countries by 6% on average. Such growth has the potential to contribute to an increase
in real incomes, especially among the poorest households. This is also true with respect to several discussions here when the use of new technologies
can improve the quality of life of Brazilian population.

BID — Banco Interamericano de Desenvolvimento 65

 FIGURE 2.11. Countries’ Digital Competitiveness 2021

100
90
80
70
60
50
40
30
20
10
0
United States
Hong Kong
Sweden
Denmark
Singapore
Switzerland
Netherlands
Taiwan
Norway
UAE
Finland
South Korea
Canada
UK
China
Austria
Israel
Germany
Ireland
Australia
Iceland
Luxembourg
New Zealand
France
Estonia
Belgium
Malaysia
Japan
Qatar
Lithuania
Spain
Kazanstan
Czech Republic
Portugal
Slovenia
Saudia Arabia
Latvia
Thailand
Chile
Italy
Poland
Russia
Cyprus
Greece
Hungary
India
Slovak Republic
Turkey
Jordan
Romenia
Brazil
Bulgaria
Indonesia
Ukraine
Croatia
Mexico
Peru
Phillipines
Colombia
South Africa
Argentina
Mongolia
Botswana
Source: IMD

2.37. Boosting innovation is key for completing gap between public and private investment in R&D
the digital transformation. There is robust empi- in Brazil has remained stable since the early 2000s,
rical evidence of a positive relationship between while private investment in innovation has been ex-
innovation and productivity—see Bell and Forbes panding across the world (Chan and de Negri, 2010).
(2012). Brazil’s R&D investment as a proportion of
GDP (1.16%) is very modest compared to other eco- 2.38. Education and talent pose a challenge to
nomies, particularly the most dynamic. According the digital transformation. Brazil came 57th out of
to World Bank data, Israel spent 4.95% of its GDP 131 countries in the 2020 Global Innovation Index
on R&D in 2018, and South Korea spent 4.81%. In in relation to education, but its ranking dropped to
addition, the private sector in Brazil only accounts 85th for tertiary education. Although expenditure
for a small share of the overall investment in inno- on education as a percentage of GDP is a strength
vation. Conversely, the public sector is responsible for Brazil in the ranking (12th place out of 131), the
for about 60% of the total investment in R&D, a level number of graduates in science and engineering is
similar to other countries in Latin America, but far an important weakness (81st position). In the 2019
larger than in Russia (38%) and South Africa (42%). WEF Global Competitiveness Index, Brazil ranked
In Japan and South Korea, the private sector is res- 133rd out of 141 countries on digital skills among
ponsible for about 75% of R&D investments. The the active population.

FIGURE 2.12. Investment in R&D in Brazil (percentage of GDP)

1.40%
Country Development Challenges - Brazil

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Public Investiment Private Investiment Total

Source: MCTI

66
2.39. Existing policies do not address equity 2.41. The digital transformation may broaden
concerns arising from labor market pressures at the gender gap. There is a gender gap in science,
a time of digital transformation. Transformative technology, and innovation activities, placing wo-
technologies are changing the outlook for jobs. Risks men at a disadvantage relative to male peers. The
stemming from automation and digitalization are gap tends to result from gender stereotypes that
expected to affect job opportunities across many begin at an early age, partly due to biases in asses-
occupations and/or tasks. Brazil lacks a robust policy sing the cognitive abilities of boys and girls.5 The
framework for assessing the risks of “computeriza- consequence is educational segregation, which
tion” for jobs, and for pursuing mitigating measures frequently excludes women and poor households
to help workers in the medium term.3 The digital from the benefits of technological innovation.
transformation calls for education systems that Notably, only 30% of graduates in science, tech-
could prepare youngster for their working lives, and nology, engineering, and mathematics (STEM)
labor markets capable of absorbing and recognizing fields in Latin America and the Caribbean are
new ways of organizing work, while addressing ques- women. 6 Concerns about gender equality are
tions about social protection and labor rights. There about not only fairness, but also efficiency. Gender
is a need to implement a more ambitious retooling of diversity sparks new discoveries by broadening
workers, with emphasis on competencies such as in- viewpoints, questions, and areas addressed by
terpersonal skills and problem-solving—in a recent research. The fourth industrial revolution, accele-
study, 67% of companies indicated that a labor force rated by the health and economic crisis associated
with low skills is an obstacle to the growth of their with COVID-19, has made clear the importance
productivity. Technical education remains poorly of developing soft skills and promoting women’s
aligned with the demand of firms.4 involvement in digital areas through an active
policy agenda.7 The implementation of policies en-
2.40. The digital transformation has the potential to couraging women’s access to more productive jobs
make skills-based inequality more acute. IDB (2020) would have a considerable impact on per-capita
finds that technical change is a major force behind the GDP, estimated in a rise of between 15% and 25%.8
increase in wage inequality in developed countries.
Due to technical change, the demand for skills-intensi- 2.42. Connectivity is a challenge for Brazil’s digi-
ve and well-paid occupations is on the rise, to the detri- tal transformation. An OECD report (OECD, 2020)
ment of jobs in the middle of the skills distribution (see about connectivity in Brazil places the penetration
Autor, Katz and Kearney, 2008, for the US; and Goos, and speed of fixed broadband services at half the
Manning and Salomons, 2009, for Europe). Most skill- OECD average (15.5% and 42 Mbps, respectively,
s-intensive occupations cannot be easily replaced by versus 31.4% and 80 Mbps). Mobile data consump-
machines or computers, as they require creativity and tion and average transmission speed are only one- Pillar 3 | Fostering Digital Transformation for Development

the ability to solve abstract problems. Instead, many -quarter of the OECD average (1.25 Gigabytes versus
typical tasks of traditionally well-paid occupations, 4.65 Gigabytes per month and 4.84 Mbps vs. 26.9
such as those in the administrative, metallurgical, Mbps). A study by the IDB estimates an infrastructu-
machine operation, and assembly fields, can be either re gap of around US$21.8 billion for Brazil to achieve
mechanized or performed through simple software. the average broadband penetration of OECD coun-
As the demand for occupations requiring average tries. Approximately 30% of the investment needs
qualifications goes down, so do their relative salaries. identified are in rural areas, making connectivity

3  onger-term trends are already being established. For instance, McKinsey Global Institute (2017, A future that works: automation, employment and
L
productivity) points out that by 2065, more than half of work activities may be automated. Brazil is among the countries with the most potential for au-
tomation—together with China, India, and the US—as 50% of the Brazilian labor force could be directly impacted.
4 O’Connell et al. (2017) show the positive impact of technical education when demand by firms is identified.
5 Bustelo and Vezza, 2020.
6 GDLab, 2020.
7 GDLab, 2020.
8 Bustelo, Flabbi, Piras, Tejada, 2019.

BID — Banco Interamericano de Desenvolvimento 67

 key for the development of a sustainable agricultu- financing of startups has grown almost exponen-
re. Also, the “Crowdsource for Digital Connectivity tially during the past decade, from US$100 million
in Brazil”” (C2DB) project found that as of 2021, 19.7 in 2011 to US$3.5 billion in 2020. During the first half
million people, 26,800 schools, and 6,300 health fa- of 2021, another US$5.2 billion was raised;9 notably,
cilities in Brazil had no broadband coverage. according to KPMG, Brazilian startups raised a re-
cord-setting US$2.7 billion in the second quarter of
2.43. Access to digital technologies is unequal. 2021. The main areas of startup growth are fintech,
For a country with continental dimensions such health, artificial intelligence, and gaming. Still, the-
as Brazil, bringing the internet to regions that are re is ample room for improvement, as Brazil is only
difficult to access should be a policy focus. Regional the world’s 20th-largest market for startups. In ter-
differences, however, are very significant. In July ms of barriers for growth, entrepreneurs mention
2021, the National Telecommunications Agency the regulatory environment, excessive concentra-
(Agência Nacional de Telecomunicações, ANATEL) es- tion in certain regions and cities (25% of Brazilian
timated the density of broadband subscriptions as startups are located in Sao Paulo), and lack of risk
55.7 per 100 households, ranging from 81.4 in Santa capital and market access.
Catarina to 21.5 in Maranhão, and from 71.2 in the
South to 32.0 in the North (ANATEL, 2021). Accor- 2.45. The digital transformation offers an oppor-
ding to ANATEL, Brazil has 101.4 mobile broadband tunity to increase productivity in the ailing ma-
subscriptions per 100 inhabitants, ranging from nufacturing sector. Modern technologies are
116.2 in the Federal District to 82.8 in Maranhão. transforming industrial production, as new trends
There are also inequalities across social groups. The in automation and data management offer the
2020 TIC Domiciles survey found that the rate of in- prospect of efficiency gains. However, the use of
ternet access among households with income levels digital technologies is not widespread in Brazil. In
below four times the minimum wage rose from 14% 2019, only 40% of Brazilian companies reported
in 2019 to 64% in 2020 but remains far below the rate having an IT department. 54% had their own we-
for households with incomes above 10 times the bsite, against the OECD average of 78%. The gap
minimum wage, which is close to 100%. The sur- is even wider for smaller companies. Only 51% of
vey shows that for households without an internet small and medium-sized enterprises (SMEs) have
connection, cost is the biggest challenge (cited by a website, compared with 89% of large firms; and
68% of households), followed by lack of digital skills 36% of SMEs have an IT department, versus 90% of
(50%). In social services for example, 25% of schools large firms (ICT, 2019).
do not have internet access at all, and half of those
do not use it for pedagogical purposes: low speed 2.46. There are several challenges to the digital
seriously compromises pedagogical use. transformation in the Brazilian manufacturing
sector. A 2021 CNI survey of industrial firms re-
2.44. The digital transformation brings several vealed that high implementation costs were the
Country Development Challenges - Brazil

opportunities for the country. The startup ecosys- main internal barrier to the adoption of new tech-
tem can be a pillar of sustainable growth in a digital nologies (cited by 66% of respondents), followed
economy. The startup market in Brazil has grown by the structure and culture of the company
significantly in recent years. According to the Bra- (26%), lack of clarity about returns (25%), and
zilian Startup Association, the number of startups lack of knowledge about technology (25%). The
in Brazil jumped from 4,151 to 14,044 between 2015 survey also found that a lack of skilled workers
and 2021. A survey from Nielsen showed that 54% of (37%), difficulty identifying technologies and
young people under the age of 18 want to start their partners (33%), and a lack of preparedness in the
own businesses in Brazil. Moreover, venture capital market (29%) were the main external barriers to

9 Distrito, 2021.

68
the adoption of new technologies. Finally, Brazil cialized external labor (49%); access to training
has higher import tariffs on ICT equipment than in digital agriculture technologies (47.4%); and
other large emerging economies, and the admi- the cost of hiring service providers (43%). Studies
nistration of tariff exceptions results in high tran- conducted by the Ministry of Communications
saction costs, bureaucratic delays, and reduced and MAPA also suggest that connectivity repre-
business agility.10 sents a fundamental obstacle to the progress
of digitalization in agriculture, as 72% of rural
2.47. The agricultural sector has a great chance establishments in Brazil do not have access to the
of benefiting from digitalization. ICT is increa- Internet. The share of establishments without
singly being applied to improve the management internet access is greater in the North (84%) and
of agricultural production in Brazil, with a focus Northeast (78%), relative to the South (56%),
on: the Internet of things for managing vehicles, Southeast (63%), and Midwest regions (71%). In
equipment, animals, and plants; monitoring sen- addition, 66% of rural areas and 54% of rural es-
sors for machinery and soil; autonomous vehicles tablishments in Brazil receive a poor signal or no
such as tractors, drones, and robots; artificial 3G signal. In the case of 4G technology, the figures
intelligence; big data for data storage, and cloud increase to 74% of rural areas and 61% of rural
computing for data protection. Tools that are wi- establishments. For both technologies, the worst
dely used include: intelligent irrigation systems, coverage is in the North and Midwest regions.
tractors, harvesters, and sprayers for the elec-
tronic control of planting, harvesting, and appli- 2.49. Digital transformation is key to improving
cation of pesticides; weather stations for climate economic, social and environmental sustainabi-
monitoring and forecasting of pests and diseases; lity and resilience of Brazilian cities. Digital tech-
and drones that capture information about pro- nologies open new options to consolidate climate
ductivity levels, pests, and other factors. These action, generate greater transparency and innova-
tools allow detailed control and greater efficiency tion and could reduce 15% of the emissions needed
in the use of inputs (such as pesticides and fertili- by 2030.11 The use of digital solutions in smart cities
zers), more efficient use of water, cost reduction, has the potential to improve the quality of life in-
and better monitoring of weather conditions, as dicators of the population between 10 and 30%,
well as of pests and diseases. The public sector contributing 70% to the achievement of sustaina-
has also made progress, digitizing agricultural ble development goals related to housing, energy,
product and livestock records, the inspection water, urban mobility and civic commitment.12
processes of agricultural products and inputs at Technologies with exponential growth potential,
borders, the analysis of compliance of properties such as cloud services, Big Data, Blockchain, Arti-
with the Forest Code, and monitoring of defores- ficial Intelligence, 5G and others are increasingly Pillar 3 | Fostering Digital Transformation for Development

tation and forest fires. present, and will increase the potential impact
on urban development and people’s lives. Yet, the
2.48. The digitalization of agriculture faces majority of Brazilian cities do not have broadband
major challenges. The main obstacles flagged networks and lack public policies, skills and data
by producers to the use of digital technologies management instruments.
are: lack of internet connectivity in rural areas
(61.4%); the cost of machinery, equipment, and 2.50. Fintech solutions can help promote fi-
applications (58.2%); obtaining qualified and spe- nancial inclusion. According to a 2021 survey, 13

10  See: World Bank (2022) https://wits.worldbank.org/. The relevant policies for ICT-related imports are set forth in the Computer Law and in the rules of
the Manaus Free Trade Zone.
11 Hoja de ruta del Exponential Climate Action https://exponentialroadmap.org/
12  If han estimado mejoras de entre el 10-30% en indicadores de sectores como vivienda, energía, agua, movilidad urbana, compromiso civico, entre
otros (MGI, 2018).
13  Locomotiva (2021). https://www.ilocomotiva.com.br/single-post/2019/09/24/Um-em-cada-tr%C3%AAs-brasileiros-n%C3%A3o-tem-conta-em-
-banco-mostra-pesquisa-Locomotiva.

BID — Banco Interamericano de Desenvolvimento 69

 FIGURE 2.13. Financial Inclusion Indicators, Brazil

Income, richest 60% (% ages 15+)

Income, poorest 40% (% ages 15+)

Secondary education or more (% ages 15+)

Primary education or less (% ages 15+)

Female (% ages 15+)

Male (% ages 15+)

% age 15+

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

2017 2014 2011

Source: FINDEX

approximately 45 million people in Brazil have tomers make the best use of their information and
no access to banking services, totaling more obtain better deals. Although these protocols will
than R$800 billion a year (close to 10% of GDP) in accelerate the market entry of new digital financial
resources. Those without access to banking are and insurance firms, and increase competition
mostly women (59%), pretos and pardos (69%), in the financial sector, certain regulatory issues
people whose income is less than 10 times the remain. In surveys, fintech firms point to the scar-
minimum wage (86%), and those who live in the city of high-value investors and skilled labor as the
northeast of the country (39%). Among these 45 main challenges to their development. Connecting
million people, 58% have primary education or with foreign partners that can bring financial-
less. In this context, many fintech firms have of- -market experience is also difficult for companies
fered services—from loans to digital payments— operating in a largely closed economy.
that promote financial inclusion.
2.52. The public sector can also adapt to the
2.51. Several challenges inhibit the development digital transformation. The crisis generated by
Country Development Challenges - Brazil

of Brazil’s fintech sector. In 2020, Brazilian fintech COVID-19 accelerated the digital transformation
firms grew by 34% in terms of total assets. Invest- of the public sector, as restrictions to social mobi-
ment in this sector amounted to US$939 million lity led to a greater digitalization of services. In a
(the district, 2021). According to the Brazilian survey conducted between October and Decem-
central bank, social distancing measures pushed ber 2020, 41% of the population reported having
about 40 financial institutions to focus on digital adapted without difficulties or few difficulties to
banking, and many financial application services the digital world, and 45% reported having adap-
became operational in 2020. The central bank ted since before the crisis. In a research conduc-
and SUPEP have also been working to improve the ted three months after school’s closure due to the
regulation of the sector. Open banking and open pandemic, 74% of public school students repor-
insurance protocols were developed to help cus- ted they received pedagogical activities remotely

70
from to continue studying. 14 Two of the top ten generate strategic information and support effective
activities carried out online during the second decision making – nevertheless 15% of urban public
half of 2020 related to public services (applying schools and 25% of rural ones still manage their stu-
for social benefits and for documents).15 dents’ data 100% analogically16.

2.53. Despite substantial progress in the digi- 2.54. The digital transformation will have an im-
talization of public services, several challenges pact on fiscal arrangements. A reform of the tax
persist. At the federal level, Brazil was ranked system must be designed to move forward with
among the top 20 countries in the world in the Uni- the digital revolution in a way aligned with inter-
ted Nations online services sub-index (2020) and national standards. Digitalization is eroding the
reached seventh place out of 198 in the World Bank’s basic rules that governed the taxation of profits of
digital government maturity index (2021). More multinational companies in the past century. Lar-
than 86% of federal government procedures (equi- ge companies can generate significant revenue wi-
valent to more than 3,440 procedures) are available thout paying a proportionate amount of tax in the
in fully digital format, and more than 130 million countries where they operate. The OECD estimates
people have had an account on the gov.br portal as that corporate tax evasion costs between US$100
of September 2022. This allows for more timely and billion and US$240 billion per year globally, or
effective delivery of services, such as transfers under approximately 4 to 10 percent of global corporate
the emergency aid program (auxilio emergencial). income tax revenues. Overcoming this challenge
In April 2020, the federal government published its requires coordinating internationally, as well as
Digital Government Strategy, setting out the goal among the various levels of government in Brazil.
of digitizing 100% of its services by 2022. Moreover,
its national cybersecurity strategy, published in 2.55. Digitalization offers opportunities to enhance
February 2020, marked an important regulatory the efficiency of the public sector. Tax forecasting
advance, although coordination, operational, and and financial management can benefit from the
talent challenges remain. At the state level, progress use of larger amounts of data, including for crossing
has been limited and uneven. As of 2019, only 4% of information to create input-output matrices and
state services were digitized, and only 31% of states estimates of economic indicators, better monitoring
reported that the service most used by their citizens taxpayers and analyzing risks, and sharing processes
during the previous year was available in an entirely among different entities. In addition, the LGPD (Lei
digital format. As of 2022, some states had surpassed Geral de Proteção de Dados - Law 13.709/18) regu-
over 60% of digital services while others continued lated the processing of personal data and paved the
below 10%. In the educational sector, the Connected way for greater use of data by tax agencies. Digital
Education Innovation Policy (Piec), sanctioned in technologies also bring opportunities to improve Pillar 3 | Fostering Digital Transformation for Development

2021, was an important step towards digital transfor- the efficiency of public spending, such as: electronic
mation of education. There are still many challenges purchasing systems that allow for greater savings
in terms of coordination and the design of effective and transparency; better assessment of costs for the
strategies for the qualified use of technologies in te- provision of public goods and services; and better fo-
aching and learning. Although 75% of public schools cus on social programs. The digitalization of federal
report to have internet access, only 5% have the ne- government services has allowed for annual savings
cessary quality for pedagogical purposes (1Mbps per of R$3 billion since 2021, and the launch of a national
student). It’s widely known that Educational Infor- public procurement portal was an important step
mation and Management Systems (Siged) are key to towards greater efficiency and transparency.17

14 Data Folha (2020) Educação não-presencial – Onda 1.

15 BID (2021).
16 Educação Já (2022) Tecnologias na Educação: recomendações para a transformação digital da educação pública brasileira.
17 Ministry of Economy.

BID —BID
Banco
— Banco
Interamericano
Interamericano
de Desenvolvimento
de Desenvolvimento 71
 4 PILLAR
Incorporating
green growth into
the country’s
development model
Country Development Challenges - Brazil

PILLAR RATIONALE
The previous pillars discussed ways of boosting growth and reducing social disparities. Pillar 4
analyzes the challenges and opportunities of building a green economy. Accounting for environmental
matters as part of Brazil’s development model can help reduce poverty and inequality, contribute
to the achievement of economic and sectoral goals, stimulate sustainable economic growth,
and make the country more resilient to adverse shocks, such as climate change and ecosystem
destruction. The construction of a green agenda should involve different segments of the Brazilian
society with a view towards a more efficient, resilient, fair, and sustainable economy.

72
Key Diagnostics and Prioritization products, but also regulate natural processes, such
as those that determine the quality and quantity of
2.56. Brazil is one of the most biodiverse coun-
water resources, atmospheric carbon capture, and
tries in the world, but it has not properly utilized
rainfall systems. In addition, Brazil has one of the
its natural capital. Brazil has the world’s second-
world’s largest ocean areas (7,491 km2, 16th in in
-largest forested area, accounting for 13% of the
the world by surface). A new economic model that
global’s forests, and the largest area of tropical
prioritizes the environment is the best option to
forest. The biggest Brazilian forest biomes are
reconcile socio-economic development with the
the Amazon Forest and the Atlantic Forest, which
conservation of Brazil’s forests and biodiversity
are known for their biodiversity. The ecosystem
consistent with the Paris agreement.
services not only supply logging and non-logging

BID — Banco Interamericano de Desenvolvimento 73

 FIGURE 2.14. Amazon Deforestation (thousands of km2)

30.0 29.1
27.8

25.4
25.0

21.6
21.1

20.0 19.0
17.8 18.2 18.2 18.2
17.4 17.3

14.9 14.9
15.0 13.7 13.8
14.3
13.2 12.9 13.0
11.7
11.0 10.9
10.1
10.0
7.5 7.9 7.5
7.0 6.9
6.4 6.2
5.9
4.6 5.0
5.0

0.0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: INPE

2.57. There are substantial gains to be achieved the country experienced a water crisis in 2021,
by building a greener economy. WRI (2020)1 shows there were periods of heavy rainfall that caused
that compared to business-as-usual growth, a rapid disruption in several regions in late 2021 and early
shift to a low-carbon and resilient economy in Brazil 2022. Estimates from ANA – National Agency of
could deliver immediate social and economic be- Water (2019) suggest that by 2035, 73.7 million
nefits. By 2030 this would include a net increase of Brazilians will live in inadequate water safety con-
more than 2 million jobs—four times the number of ditions, because of the high rate of urbanization
current jobs in the country’s oil and gas sector—and (increased demand) and water scarcity in areas
a total GDP gain of US$535 billion (R$2.8 trillion). such as the semi-arid region – Northeast region
The adoption of a green development model would (reduction of supply). The latter region has the
yield benefits from the very first year, and lead to lowest degree of resilience, due to high rainfall
a reduction in GHG emissions exceeding Brazil’s variability and absence of reservoirs or under-
current commitment for 2025 under the Paris agre- ground reserves. This requires prioritized actions
ement. Other benefits include the restoration of 12 to develop integrated water infrastructure.2 This
million hectares or more of degraded pasturelands, requires prioritized actions to develop integrated
US$3.7 billion in additional agricultural production, and redundant water infrastructure. This requires
US$144 million in additional tax revenue from the prioritized actions to develop integrated and re-
Country Development Challenges - Brazil

agricultural sector alone, a 42% reduction in gree- dundant water infrastructure.

nhouse gas in 2025 (compared to 2005 emissions),
and increased access to international financing. 2.59. Fiscal policy also plays a role in the gre-
These benefits, which would immediately help en economy. IDB (2021)3 highlights the value of
boost the economic recovery. cutting economic dependence on fossil fuels by
reducing subsidies, in order to maintain economic
2.58. Brazil has experienced increased frequen- competitiveness and ensure fiscal sustainability.
cy and severity of extreme weather events. While Fiscal policies will have to promote change while

1  omeiro, V. et al. 2020. “A New Economy for a New Era: Elements for Building a More Efficient and Resilient Economy in Brazil. Working Paper. São Paulo,
R
Brasil: WRI Brasil. Available at https://wribrasil.org.br/pt/publicacoes.
2 Available at https://arquivos.ana.gov.br/pnsh/pnsh.pdf
3 IDB (2021). Fiscal policy and Climate Change: Recent experiences of Finance Ministries in Latin America and the Caribbean.

74
mitigating risks to public finances from extreme Mechler, and Stapleton, 2007; United Nations Of-
climate events, and from impending structural fice for Disaster Risk Reduction, 2011).
and technological upheaval.
2.62. There are challenges for building a sus-
2.60.Climate-smart infrastructure investments tainable and resilient infrastructure. Besides
are critical for responsibly increasing produc- the traditional bottlenecks of the infrastruc-
tivity and leveraging Brazil’s natural capital. ture sector, there is a need for governments
Brazil’s natural capital remains underexploited as to improve the strategic frameworks used to
a source of potential growth, and infrastructure identify green investments and apply technical
investment is key to bridging this gap.4 Climate criteria to achieve better project prioritization
change challenges call for concerted efforts to (Cavallo, Powell, and Serebrisky, 2020). With
improve planning, adaptation, and mitigation of respect to the former, it is important that cou-
policies that can impact the environment. Targets ntries develop decarbonization strategies that
to reduce greenhouse gases (GHG) emissions set out the economic benefits of the transition to
globally, along with goals pertaining to finance, low-carbon activities clearly and transparently.
transparency, and other environmental aspects As regards the latter, project selection criteria
are becoming mainstream in policymaking, and should favor sectors that contribute to decarbo-
Brazil must step up its efforts in this regard. WRI nization while generating jobs and improving
(2020) finds that countries such as Brazil tend to equity. In this way, resiliency criteria help to
be more susceptible to risks caused by extreme not only to have a better prioritization, but also
weather events, as they have less resilient infras- as a selection criterion for public investments.
tructure and less advanced mechanisms to pre- In addition, CAPEX costs that tend to be higher
vent and cope with natural disasters. together with high domestic interest rates could
also affect the development of project bonds
2.61. A sustainable and resilient infrastructure with thematic labels.
will help the recovery and reduce losses to the
economy. Together with the decarbonization of 2.63. The development of a bioeconomy could
the economy, investment in a sustainable infras- be a significant component of a green economy.
tructure will aid the recovery by generating jobs. The bioeconomy—i.e., the use of renewable bio-

Pillar 4 | Incorporating green growth into the country’s development model

McKinsey (2020) shows that government spen- logical resources from land and sea to produce
ding on renewable energy can create five more food, materials, and energy—provides an oppor-
jobs per US$1 million invested than spending on tunity to stimulate economic activity in less-de-
fossil fuels. Latin American and Caribbean cou- veloped regions of the country, especially in the
ntries are particularly vulnerable to the impacts Amazon and Caatinga biomes. However, several
of an unpredictable and changing climate, in the studies point out the main challenges to the deve-
form of significant economic damage and human lopment of the bioeconomy in Brazil: a lack of in-
losses. However, there is evidence that climate- novation policies focused on biological products
-resilient investments not only help to avoid or or broader ecological processes; inadequate
minimize future damages but can also generate financial resources targeted to the bioeconomy;
benefits that exceed costs by a ratio of as much as a lack of technical assistance; land-tenure chal-
10:1 (Global Commission on Adaptation, 2019). Si- lenges; difficulties with implementing economic
milarly, returns on investments to protect against tools to internalize the value of environmental
disaster risks exceed US$4 of avoided losses for services; and the absence of traceability and cer-
US$1 invested (Kull, Mechler, and Hochrainer-S- tification standards for the environmental servi-
tigler, 2013; Mechler, 2016; MMC,2015; Moench, ces embedded in natural products.

4 CPI (2018).

BID — Banco Interamericano de Desenvolvimento 75

 2.64. Investing in the bioeconomy can bring In the last 35 years, 64 million hectares throu-
sizeable gains. TNC (2021) shows that the total ghout the country were deforested and converted
value added of the production chain of açai palm to pastureland (Feltran-Barbieri and Féres, 2021).
in the state of Para can increase from R$3.7 billion In last 20 years, Brazil lost 62.8 Mha of tree cover,
in 2019 to R$109.3 billion in 2040. Moreover, WRI meaning a 12% reduction in tree cover, and the
(2021) finds that non-exhaustive extraction acti- release of 34.5Gt of CO₂ emissions (Global Forest
vity, which includes 37 items from 31 native plant Watch, 2021)5.The conversion of native forests to
groups, generates an average revenue of between row crops is also a major driver of ecosystem loss:
US$334-470 per ton (R$1,750-2,460 per ton), and is soy production, for example, contributed to ne-
thus highly competitive. At its lower end, this ave- arly 22 million hectares of forest loss in the Ama-
rage revenue is identical to that derived from char- zon and Cerrado regions between 2006 and 2017
coal production and cattle raising, and higher than (Asher, 2019). These rapid shifts in land-use chan-
that from temporary (indiscriminate) logging and ge are not only a threat to biodiversity and habitat
firewood harvesting. At the upper end, the average loss in globally important ecoregions, but also
revenue from non-exhaustive extraction is almost economically unsustainable. Ecosystem servi-
double that from temporary crops, and 30% higher ces—such as micro-climate stability, soil fertility,
than revenue from cattle raising. water availability, and pollination—underpin the
productivity of agricultural and pasture lands. As
2.65. The development of agriculture is key in a a driving force of ecosystem degradation, Brazil’s
green economy. The agri-food sector (including ranching sector is eroding the natural capital it
agricultural and agro-industrial activities) is one depends on for long-term success. More than half
of the most dynamic in the Brazilian economy. In of Brazil’s 173 million hectares of pastureland are
2019, it accounted for 22% of Brazil’s GDP, 44% of classified as degraded, and nearly a quarter as
total exports, and 37% of national employment severely degraded. This leads to decreased car-
(Vieira Filho and Fishlow, 2017; IA and CEPEA, rying capacity and production per unit area and is
2021). Brazilian agri-food exports are worth a major liability to the sustainability of the sector
approximately US$100 billion annually, and the (Feltran-Barbieri and Féres, 2021).
country is one of the world’s main exporters of
soybeans and their derivatives, coffee, sugar, 2.67. Agricultural intensification has stagnated in
orange juice, meat (beef, pork, and poultry), recent years. The agri-food sector in Brazil contri-
corn, cotton, and bioethanol, among others. Pri- butes approximately 73% of greenhouse gas emis-
mary activities generate 15 million jobs directly, sions (SEEG, 2020). Therefore, production techni-
with family farming accounting for two-thirds of ques that reduce deforestation and emissions are
the total. WRI (2021) points out that the preserva- essential for the country to meet its commitments
tion of competitiveness and production capacity on Nationally Determined Contributions (NDC).
in this sector is strategic for Brazil. At the same time, agriculture faces challenges in
Country Development Challenges - Brazil

adapting to climate change. 95% of losses in Bra-

2.66. Agriculture is associated with deforesta- zilian agriculture are due to droughts or excessive
tion, especially in the Amazon and Cerrado bio- rainfall (Assad, E. et al., 2010), and these effects
mes. The expansion of agricultural activities has can be aggravated by temperature increases and
been commonly associated with illegal defores- changes in rainfall patterns (Hansen et al., 2012).
tation. Agriculture and ranching are the primary The intensification of agricultural activities plays
drivers of ecosystem degradation and deforesta- an important role in avoiding deforestation, given
tion in Brazil, particularly in the Amazon, Atlan- that higher productivity reduces the need for ex-
tic Forest, and Cerrado ecoregions (GFW, 2021). panding land use to increase production. Howe-

5 Brazil ranks 2 out of 197 countries in terms of tree cover loss (in hectares). https://www.climatewatchdata.org/countries/BRA).

76
 TABLE 2.2 Cattle and pasture stocking rates

1996 2006 2017

Cattle Stocking Cattle Stocking Cattle Stocking

herd rate (cattle/ herd rate (cattle/ herd rate (cattle/
(millions) ha) (millions) ha) (millions) ha)

Brazil 153.0 0.86 176.1 1.10 172.7 1.08

North 17.3 0.71 32.5 1.21 34.8 0.94

Northeast 22.8 0.71 25.8 0.84 21.7 0.95

Southeast 36.0 0.95 34.6 1.24 31.5 1.29

South 26.2 1.27 23.6 1.50 23.5 1.59

Midwest 50.8 0.81 59.6 1.00 61.1 0.95

Source: WRI (2021), IBGE, Agricultural Census.

ver, WRI (2021) shows that stocking rates of pastu- agricultural establishments accessed some form
re (cattle per hectare of pasture) have stagnated in of credit, from public or private funds. This share
recent years, and even decreased in the Midwest dropped to 9% in the North and 13% in the Northe-
and North regions over the last decade. ast, both below the national average.

2.68. The modernization of agriculture is an im- 2.69. There is a significant space for expansion
portant step towards a low-carbon economy. of sustainable tourism. Sustainable tourism still
Modernizing the agricultural sector can increase has a low economic impact: there is little supply of
productivity, but more than 85% of rural establish- tourist equipment and services; low domestic and
ments in Brazil lack technical assistance and rural international flow; and few jobs and revenue gene-

Pillar 4 | Incorporating green growth into the country’s development model

extension (ATER). Overcoming this major challen- rated. According to the categorization data of the
ge is the starting point for a production revolution Tourism Regionalization Program in Brazil, which
(IBGE, 2018). There are constraints on access to evaluates these indicators together, in the north
support services by family producers, especially region, only 9% of the tourist municipalities in this
for technical assistance and credit. The latest Agri- region are in categories A and B, therefore, with
cultural Census, conducted in 2017, shows that greater positive economic impact from tourism.
out of approximately 3.9 million family farmers Most are between categories C (22%), D (57%) and
nationwide, only 18% reported receiving ATER. E (12%), which still indicates low economic impact
Lack of technical assistance is aggravated by the of tourism (Mtur, 2019). In the northeast region,
low level of training and schooling of farmers— for there is a greater share of municipalities, 12%, in
example, 16% of producers in the Amazon never categories A (3%) and B (9%) of the, 19% in cate-
attended school (IBGE, 2018). Family farmers are gory C, 57% in category D and 12% in category E.
served primarily by state technical assistance and
rural extension agencies, which historically face 2.70. Building a green economy can attract
financial difficulties. Access to credit is also an im- long-term capital for development. Global Sus-
portant obstacle. According to data from the 2017 tainable Investment Alliance (GSIA) shows that
Agricultural Census, about 15% of Brazilian family in 2020, sustainable investment assets globally

BID — Banco Interamericano de Desenvolvimento 77

 TABLE 2.3. Global sustainable assets, and proportion of sustainable assets relative to total managed assets

2016 2018 2020 2014 2016 2018 2020

Europe 12,040 14,075 12,017 58.8% 52.6% 48.8% 41.6%

United 17.9%
8,723 11,995 17,081 21.6% 25.7% 33.2%
States

Canada 1,086 1,699 2,423 31.3% 37.8% 50.6% 61.8%

Australasia 516 734 906 16.6% 50.6% 63.2% 37.9%

Japan 474 2,180 2,874 3.4% 18.3% 24.3%

Total (US$
22,839 30,683 35,301
billions)
Source: GSIA (2020)

stood at US$35.3 trillion compared to US$22.8 a qualitative rating of ESG factors to be analyzed
trillion in 2016. Such assets already account for in parallel with economic and financial aspects;
more than 50% of total assets professionally ma- incorporating ESG factors into stock prices via a
naged in Canada, almost half in Europe (41.6%), valuation model; developing probability scena-
33.2% in the United States, and 24.3% in Japan rios that include analyses of share price sensitivi-
(GSIA, 2020). According to Bloomberg Intelligen- ty to ESG aspects; adoption of the Corporate Sus-
ce (2021), global ESG assets are on track to exceed tainability Index (CSI) portfolio, as a benchmark
US$53 trillion by 2025, representing more than for responsible investments or as a methodolo-
a third of the US$140.5 trillion in projected total gical basis for analyzing portfolio companies; in-
assets under management. However, Latin Ame- creasing the importance of socio-environmental
rica, including Brazil, lags behind in the growth risk analysis in pension-fund investments.
of sustainable assets.
2.72. Green bonds are growing in Brazil. Green
2.71. The financial sector has a fundamental and thematic bonds are gaining ground, with more
role in nudging the productive sector toward the issuances every year, and the green bond market
green economy. In its capacities as a financial is already the most developed among thematic
intermediator (through credit operations) as bonds. From 2015 (when the first green bond was
well as an institutional investor and insurer, the issued in Brazil) up to June 2021, there were 78 issu-
Country Development Challenges - Brazil

financial sector will play a significant role in the ances of Brazilian green bonds worth a combined
transformation of the economy. The financial in- US$10.3 billion, out of a total across Latin America
dustry should incorporate socio-environmental estimated at about US$26.3 billion.6 The main chal-
analysis, policies, and processes into all layers of lenges in this sector are: achieving transparency
financing, taking into consideration the typology and security in the criteria for the use of bond sale
of customer and their activities. Key action points proceeds; establishing clear impact indicators;
for the financial sector include: monitoring the and having issuances reviewed by recognized
effectiveness of institutions’ socio-environmen- third parties. In this regard, the IDB Green Bonds
tal policies and processes; improving tools for Transparency Platform plays a key role in in pro-
socio-environmental risk analysis; developing moting transparency in this market.

6 Climate Bonds Initiative. September 2021.

78
2.73. The domestic financial sector is working management practices; and promoting business
to address sustainability issues. Febraban opportunities aligned with sustainable develo-
(2019) finds that the banking sector needs to pment. In 2017, total bank credit to corporate
resolve several issues to develop low-carbon fi- clients reached US$469 billion, of which 27.6%
nance in Brazil. The authorities can support this was directed to sectors of the green economy.
process by facilitating compliance with applica- The share of securities issued by green-economy
ble laws and regulations; reducing legal uncer- players increase from 21.1% of US$33.4 billion to
tainty; improving social and environmental risk 24.3% of US$58.1 billion in 2017.

FIGURE 2.15. Bank lending to the green economy, and issuances of securities to finance the green economy (US$ billion)

140,000 30.00%
129,239

120,000
25.00%

100,000
20.00%
95,175
88,562
80,000
65,287 15.00%
57,540
60,000

10.00%
40,000

5.00%
20,000

00,000 0.00%
2013 2014 2015 2016 2017

Lending (US$ billions) Participation (Total Lending)

14,000

Pillar 4 | Incorporating green growth into the country’s development model

14,125
12,000
10,439
10,000

8,000
7,058
6,048
6,000

4,000

2,533
2,000
1,013 822
0 188 139
0
Debentures Bonds Stocks (IPO) Green Bonds Total

2016 2017

Source: FEBRABAN (2019)

BID — Banco Interamericano de Desenvolvimento 79

 3
Strategic
Pillars and
Development
Priorities
Country Development Challenges - Brazil

80
3.1. This chapter outlines a policy strategy, based from the COVID-19 pandemic should not be inter-
on actionable recommendations, to generate preted as a sustainable growth trajectory, whose
Strategic Pillars and Development Priorities

economic opportunities and foster sustainable achievement will instead require addressing the
growth. Chapters 1 and 2 identified Brazil’s key de- root causes of the country’s challenges. Appro-
velopment challenges and articulated a high-level priate policy solutions will need to balance grow-
policy plan to address them. Chapter 3 offers practi- th and equity, manage tradeoffs between relevant
cal policy recommendations to implement that plan objectives, and ensure that long-term benefits
and close the country’s crucial development gaps. outweigh short-term costs.

3.2. The Brazilian government should focus on 3.3. The rest of the chapter details the four strate-
pragmatic measures that prioritize sustainable gic pillars and presents policy recommendations
and inclusive growth over a temporary uptick designed to address Brazil’s complex develop-
in economic activity. Brazil’s ongoing recovery ment challenges.

BID — Banco Interamericano de Desenvolvimento 81

 1
PILLAR
Promoting
a Resilient
Recovery
Country Development Challenges - Brazil

Recommendations for promoting a resilient recovery are structured

around six priorities: (1) support integration with international markets;
(2) boost investment in infrastructure; (3) foster public-private
partnerships (PPPs); (4) remove barriers to business growth; (5)
enhance access to finance; and (6) implement fiscal reforms to bolster
public finances and enhance the effectiveness of public policies.

82
(1) Support Integration with potential,2 while non-tariff measures and trade-re-
International Markets lated red tape are problematic. Brazil ranks 102nd
The external sector is key to creating the conditions for globally on efficiency of the customs clearance pro-
sustainable growth. The reconfiguration of global value cess: clearance times average two days for import
chains accelerated by the pandemic, and regional inte- shipments that do not require physical inspection,
gration with other LAC markets can help the Brazilian and five days for those requiring inspection.3 The
economy forge stronger international connections. country lacks border cooperation, integration and
regional public goods at the borders.
3.4. International integration is a powerful tool
for growth. The international integration plays an 3.6. Integration with other LAC countries faces se-
important role in resuming the productivity grow- veral hurdles. High transport costs for exports and
th of the economy, reducing production costs and imports; poor logistical integration between coun-
consumer prices, and increasing social welfare, tries; high tariffs on capital goods and intermedia-
especially in the poorest portions of the population. ries in the region’s largest economies; sub-regional
trade agreements that do not address critical issues,
3.5. Brazil lacks a consistent strategy for inter- such as non-tariff barriers, disparate rules of origin,
national integration. Although successive govern- and restrictive trade regulations. These constraints
ments have taken steps towards greater integration, inhibit Brazil’s ability to access international value
these have not matched the more-open trade po- chains, while slowing the growth of intra-regional
licies pursued by similarly developed countries in trade and investment.4 Nearshoring efforts in Brazil
recent decades. Brazil’s trade protection thwarts its face challenges similar to those that inhibit intra-
participation in global trade, competitiveness, and -regional integration. Moreover, the chains most
productivity growth. Notably, Brazil is among the
1
likely to be impacted by ongoing changes involve
few countries in the world that did not significantly sophisticated, high-tech manufacturing. Brazil is
Pillar 1 | Promoting a Resilient Recovery

reduce tariffs over the past 25 years, thus missing the only country in the LAC region where advanced
out on a period of intense liberalization in global manufacturing plays a meaningful role in domestic
trade. Tariffs on capital goods are especially puni- production and, to a lesser extent, exports. Howe-
tive, which bodes poorly for the country’s supply ver, the importance of manufacturing to Brazil’s

1 A vast literature links the evolution of productivity in Brazil to trade openness. Studies based on firm-level data show that the growth of total factor
productivity in Brazilian manufacturing in the second half of the 1990s can be attributed to trade liberalization at the beginning of the decade. The re-
sults suggest that greater exposure of firms to foreign competition, as well as greater access to foreign inputs, led to productivity gains. See Rossi and
Ferreira (2003) and Muendler (2004).
2 In November 2021 the government announced a 10% reduction in import tariffs for approximately 87% of goods and services. This was the first revision
of the Mercosur common tariff in 25 years.
3 World Bank (2018).
4 Moreira et al. 2008); Cadestin, C. et al. (2016). Another relevant factor is the rise in political and institutional instability in the largest countries in the
region in recent years.

BID — Banco Interamericano de Desenvolvimento 83

 FIGURE 3.1. Major Destinations for Brazilian Exports

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
China USA Latin America European Union

Source: SECEX

production and export base has steadily declined, 3.8. Accelerate Regional Integration. Negotiate a
and several major companies have disinvested from full-scope free-trade agreement (FTA) with Mexi-
the country in recent years due to its unsatisfactory co. Promote the harmonization of regional trade
business climate. Seizing the opportunities offered agreements, especially those between Mercosur
by the nearshoring trend requires more-active poli- and the Pacific Alliance. 6 Work with Mercosur
cies to attract FDI, as well greater openness to trade. partners to strength and modernize the bloc.

Policy Recommendations 3.9. Improve trade facilitation and bolster lo-

gistics for exports.7 Brazil should reduce the
3.7. Make progress on the trade policy agenda. To administrative cost of trade by consolidating all
overcome existing barriers to international integra- import processes into the electronic foreign-tra-
tion, Brazil should review its main tools for regula- de single window and simplifying the relevant
ting trade: tariffs, non-tariff measures, mechanisms procedures. Optimizing and automating customs
that restrict trade in services, and trade negotiations. and border processes, and their supporting sys-
Relevant steps include finalizing the Mercosur-EU tems. Enhancing coordination among national
agreement, which may require demonstrating and subnational institutions, as well as with other
greater cooperation on climate change and sustai- countries, within the framework of coordinated
nability matters. Addressing electronic trade as border management (CBM). Reducing clearance
well as cooperation on trade facilitation, customs, times and border inspections for imports, by using
Country Development Challenges - Brazil

sanitary and phytosanitary standards, and technical appropriate data and predictive analytical models
regulations. Reviewing and reducing import tariffs, to improve risk management. Expanding partner-
especially on capital and intermediate goods.5 Pur- ships with the private sector to establish Authori-
suing digital trade agreements to boost growth in the zed Economic Operator (AEO) programs and de-
information and communication technologies (ICT) fining agreements for their mutual recognition.8
sector, especially among small businesses. Implementing the Electronic Transport Document

5 Brazil has lowered import duties on capital goods in recent years (McGeever, 2021; HKTDC Research, 2022).
6 See Blyde, Giordano, Li and Mesquita Moreira (2018) on the expected benefits of convergence towards a pan-regional LAC-FTA.
7  In February 2022, a Protocol to the Agreement on Trade and Economic Cooperation (ATEC) with the US came into force. It includes new commitments
on trade facilitation with respect to the single window, Authorized Economic Operator programs, and electronic documents and payments for traders,
among other areas (Brasil e Estados Unidos colocam em vigor acordo comercial, 2022; Protocol to the ATEC, 2020; Comércio Exterior – O desafio da
competitividade industrial, 2022).
8  Brazil has signed AEO mutual recognition agreements (MRAs) with Bolivia, China, Colombia, Mexico, Peru, and Uruguay, as well as a regional MRA wi-
thin Mercosur (Receta Federal, n.d.).

84
(DT-E) and broadening its scope both in terms of 3.11. Pursue accession to the OECD. The reforms
geographical coverage and the range of stakehol- necessary to ensure Brazil’s accession to the OECD
ders involved. Addressing product-specific bottle- are subject to ongoing negotiations, but they will
necks to exports due to transportation, logistical, inevitably entail addressing some of the country’s
or regulatory factors. Developing port-commu- major challenges. The accession process is a signi-
nity systems (PCS) to standardize and optimize ficant opportunity for Brazil to make its business
port operations. Liaising with private operators to environment more modern, efficient, and trans-
achieve better coordination across ports. parent. According to a recent study by Canuto and
Santos (2021), accession to the OECD can lead to
3.10. Attract foreign investment and promote an additional GDP increase of 0.4% per year. As of
exports. Brazil’s access to global value chains June 2022, Brazil had already complied with over
hinges on boosting foreign direct investment 44% of the instruments needed for accession,
and increasing the international exposure of more than any other non-member country.
domestic firms. Measures to this effect include
Developing an Electronic Single Window for (2) Boost the investment
Investment, to guide foreign and domestic inves- in infrastructure10
tors through all relevant administrative require- Shortcomings in transport and utilities infrastruc-
ments and offer simplified digital channels for ture hinder Brazil’s growth, increase operational
meeting them. Reengineering and automating risk, and burden supply chains with costs and de-
post-incorporation processes for firms (e.g., lays. Inadequate availability and poor quality of
licensing, tax payments), after assessing how infrastructure are among the key barriers to doing
such processes affect investment in sectors with business in the country.
export potential. Bolstering policy advocacy
and investor aftercare, through the Direct Invest- 3.12. Current levels of investment are insufficient
ments Ombudsman and in collaboration with to close Brazil’s infrastructure gap. In 2020, infras-
ApexBrasil. Building investment-attraction and tructural investment in Brazil, expressed as a per-
export-promotion capacity at the subnational centage of GDP, amounted to 0.18% in sanitation,
level—particularly among states in the North and 0.76% in electricity, 0.31% in transport and logis-
Northeast—leaning on enhanced cooperation tics, and 0.42% in telecommunications, for a total
with ApexBrasil. Providing digital tools, such as of 1.67%—well below the minimum annual in-
CA White Labels, to support the development and vestment required in these sectors, equal to 4.31%
internationalization of SMEs. Developing sustai- of GDP. The spending gap was especially large in
nability certifications and improving traceability transport and logistics, which need infrastructural
(e.g., in the livestock industry), in collaboration investment on the order of of 2.26% of GDP (600%
with the private sector. Supporting the develo- more than 2020 levels); and in sanitation, where
pment and refinement of financial instruments the minimum necessary investment amounts to
Pillar 1 | Promoting a Resilient Recovery

in support of exports and investment, such as 0.45% of GDP (150% more than 2020 levels).11
export credit guarantees for SMEs. Support the
implementation of Industry 4.0 technologies, 3.13. Institutional and regulatory challenges
critical to improve the competitiveness of Brazi- hamper investment in infrastructure. The public
lian companies (including SMEs) and to promote sector has limited capacity to structure infrastruc-
their integration into global value chains9. tural projects, leading to shortcomings in project

9 See pillar 3 for details on industry 4.0.

10 Here are analyzed the challenges for the sector. Pillar 4 discusses specific challenges for transport, energy, and water and sanitation. Pillar 3 studies
the telecommunication sector.
11 BNAmericas Intelligence Series. Brazil’s Robust Infrastructure Agenda: A Peak Year for Tenders. February 2022. Achieving universal sanitation services
by 2033 would require investments of US$139 billion and BNAmericas Intelligence Series. Opening the Floodgates to Private Investment in Brazil’s
Water Sector. January 2021.
(https://app.bnamericas.com/report/section/all/content/xeu58ef4o-opening-the-floodgates-to-private-investment-in-brazils-water-sector_

BID — Banco Interamericano de Desenvolvimento 85

 design and overly complex approval processes. the absence of a medium-term budgetary fra-
Overlapping responsibilities between federal, mework (MTBF), infrequent updates, and poor in-
state, and municipal environmental agencies, tegration with both the annual budget and sectoral
combined with procedural issues around licensing investment plans. In addition, Congress typically
and procurement, are frequent sources of delays. 12
introduces multiple amendments to the budget
Moreover, regulatory uncertainty is a concern for that stray from the priorities set out in the PPA.
investors, due in part to the limited autonomy of
13

certain regulators and their vulnerability to inter- 3.16. The methodologies for project appraisal
ference from both political and private interests and selection lack robustness and consistency.
(for example, there is evidence that regulatory Procedures for rigorous project appraisal and se-
agencies have become increasingly politicized lection often do not exist, and when they do, they
over time).14 Finally, coordination across muni- are insufficient and applied inconsistently. The
cipalities is inadequate, affecting investments in costing process is flawed, as it does not account
water and sanitation in particular.15 for the recurrent operation and maintenance
costs of new public assets. No systematic tools
3.14. Reforming public investment manage- are used to assess costs and benefits, estimate
ment (PIM) is crucial to increasing investment value for money, or establish private-sector ben-
in infrastructure. Effective PIM institutions and chmarks to inform a choice between PPPs and
processes improve the quality of public infras- direct government procurement.19
tructure in G-20 countries, 16 and can enhance
the impact of public investment on growth in 3.17. Project implementation is costly and pro-
emerging markets and developing economies.17 ne to delays . Pre-investment studies are often
In Latin America, improved project selection, inadequate, leading to significant delays and cost
optimized infrastructure portfolios, reduced cost overruns in the execution phase. Procurement
overruns and delays, and adequate maintenance laws and regulations are frequently circumven-
can generate substantial efficiency gains, poten- ted, creating more space for corruption. Budget
tially saving more than 1% of GDP per year. 18
sequestration procedures, revenue shortfalls,
and increases in mandatory expenditures can
3.15. Planning within and across levels of gover- all hamper project execution. Maintenance bud-
nment is insufficient and poorly coordinated, gets are generally inadequate, due in part to the
undermining the efficiency of public investment. absence of ex ante assessments. Project mana-
At the federal level, both the Executive Office of the gement capacity is limited, especially at the sub-
President (Casa Civil) and the Ministry of Finance national level, and ex post audits and evaluations
(Ministério da Economia) contribute to defining are not universal, systematic, or risk-based. The
investment priorities and allocating budgetary re- PIM system is vulnerable to undue political in-
sources, but their objectives are often inconsistent fluence, such that many projects do not reflect the
Country Development Challenges - Brazil

or conflicting. The Multiyear Plan (Plano Pluria- government’s stated development priorities, are
nual, PPA) is designed to consolidate investment at high risk of failure, and/or offer benefits that do
planning, but its effectiveness is undermined by not justify their cost.

12 World Bank, 2017

13 Amann et al., 2016.
14 Correa, Melo, Mueller, and Pereira, 2017 in World Bank, 2017.
15 World Bank Group, 2018. As an example, regulation of the transport sector is shared across three federal regulatory agencies - ANTT, ANTAQ and
ANAC. Nevertheless, no entity is responsible for evaluating the consistency of regulation, or for fostering the integration of different modes of trans-
port. The National Council for the Integration of Transport Policies (CONIT) has not delivered the expected outcomes. As result, sectoral planning
lacks coordination and long-term vision.
16 IMF, 2015.
17 Furceri and Grace (2017) find that increased public investment raises output in the short and medium term, and the effects are larger in countries with
more efficient management processes.
18 Serebrisky et al., 2018; IDB, 2018.
19 In recent years, the Ministry of Finance, through the Secretariat for Productivity, has taken steps to introduce cost-benefit analysis.

86
3.18. The PIM system is especially weak at the Policy Recommendations
state and municipal levels. Subnational invest-
ment projects are not well aligned with national 3.21. Build a National Public Investment System.
priorities, and there is no institutional body to National Public Investment Systems (NPIS) enhan-
coordinate actions across levels of government. ce investment allocation both technically and
However, limited planning and management ca- institutionally. On the technical side, NPIS prioritize
pacity at the state and municipal levels is the most investments that offer greater social returns; on
binding constraint on PIM efficiency.20 the institutional side, they implement government
strategy and policies. In countries that adopt inter-
3.19. Access to long-term finance remains a chal- national best practices, technical considerations
lenge. Brazil’s capital markets are among the most limit political discretion over the allocation of public
developed and sophisticated in the LAC region. investment resources. A national investment system
However, only 1.5% of all fixed-income securities, would allow for centralized project evaluation, cle-
from both public and private issuers, have a ma- ar criteria for project selection and prioritization,
turity of more than five years. High interest rates
21
and the integration of cost-benefit analysis into
and a history of inflation have eroded investors’ risk the investment cycle.25 Moreover, a medium-term
appetite, discouraging the issuance of long-term budgetary framework (MTBF) could strengthen the
corporate bonds. Moreover, Brazilian institutional implementation of long-term planning. An NPIS
investors are reluctant to bear the construction risk should aim to achieve five discrete objectives:26
arising from infrastructure projects—which thus I. Improving investment-planning coordination
usually rely on support from BNDES or other public between the federal and subnational govern-
sponsors—and lack expertise in project finance. Fi- ments. The legal and institutional framework
nally, foreign-exchange risk has limited the inflow should include mechanisms to coordinate
of long-term foreign capital, particularly for infras- federal and subnational investment plans,
tructure projects, as hedging options are scarce and and align public investment across sectors.27
prohibitively expensive. Moreover, reforming funding mechanisms
could reduce the fragmentation of federal fi-
3.20. The role of the public sector in infrastruc- nancing. The government should build capa-
ture finance has been evolving, while the private city at both the federal and subnational levels,
sector needs to step up its efforts. Instruments focusing on the skills necessary to formulate
such as incentivized debentures have become medium-term investment plans consistent
more common. 22 However, tapping long-term with their respective financing capabilities.
finance for infrastructural projects remains II. Supporting the strategic prioritization of
a challenge. The Brazilian financial market is public investments and developing a me-
crowded, but most players focus on short-term
23
dium-term portfolio of priority projects. The
lending.24 It is therefore essential to encourage government would benefit from developing
Pillar 1 | Promoting a Resilient Recovery

the private sector, especially institutional inves- a national investment strategy based on
tors, to expand their role in long-term financing. a long-term vision and broad objectives,

20 World Bank, 2017.

21 World Bank (2017)
22 In 2021 there were 27 emissions of debentures incentivadas in the transport and logistics sector, amounting to R$14 billion. Ministerio da Infraestru-
tura, 2022. In June 2022, Brazil’s lower house approved a bill extending tax breaks for infrastructure financing, which is expected to boost the local
capital market. Source: BNAmericas
23 The Brazilian financial system comprises more than 1,500 entities, including public and private banks, cooperatives, credit societies, leasing compa-
nies, and more.
24 Long-term financing by commercial financial institutions accounts for only 8% of the total. BNDES and other government development entities provi-
de the remainder.
25 FGV, 2018.
26 This section is based on ongoing research on public investment management in the Fiscal Management Division, experience from assistance to va-
rious LAC countries, as well as international evidence. Eguino and Saldarriaga (2018); IDB (2018); OCDE (2014); World Bank (2014).
27 Successful examples include the Canadian Regional Federal Councils, and the Council of Australian Governments. See OECD, 2013 and IMF, 2015b.

BID — Banco Interamericano de Desenvolvimento 87

 backed by a prioritized portfolio of major sing bodies, while increased resources, additional
projects. This should go hand in hand with technical staff, and improved management pro-
a new, rigorous process for appraising, se- cesses could enhance their effectiveness. The in-
lecting, and approving proposals for large teraction between licensing agencies and control
public-investment projects; and with the courts (TCU) can be improved.32 Project selection
introduction of guidelines on cost-benefit and prioritization ought to account for science-
analysis, value-for-money analysis, and -based metrics of environmental sustainability,
other pre-investment evaluation tools. Inde- climate resilience, and impact on natural capital.33
pendent institutions should be responsible
for the technical and financial assessments 3.23. Improve the regulatory and institutional fra-
of proposed projects. Budget preparation
28
mework for public investment. The government
should reflect a realistic appraisal of the capi- should insulate regulatory agencies from political
tal budget and make funding more reliable, influence and expand their budgetary and admi-
through multiyear appropriations if possib- nistrative autonomy, while mandating that publi-
le. Finally, a systematic approach is needed c-investment agencies are managed by professio-
to plan, budget for, and execute the mainte- nals holding appropriate technical qualifications.
nance of new assets. 29

III. Strengthening cost management on public 3.24. Mobilize private capital for long-term
projects, through tightened oversight of pro- financing. Support from BNDES, multilateral
curement and budget execution.30 development banks (MDBs), and the Brazilian
IV. Developing ex post monitoring and evalua- government remains instrumental to improving
tion instruments.31 Chile, for example, has the business environment and attracting domes-
successfully introduced mandatory short-, tic and international private investors—althou-
medium- and long-term evaluations to mea- gh with the government acting as a catalyst ra-
sure project outputs and outcomes. ther than a major provider of long-term funding.
V. Building the capacity of the civil service across Areas in which the private sector will require
all aspects of investment management. In par- extensive institutional support include risk
ticular, it is important to enhance the ability mitigation, financial structuring, and advisory
of public officials to adopt and implement services, among others.
sound procurement processes.
3.25. Incentivize banks to offer long-term len-
3.22. Reform the environmental-licensing pro- ding. Lending from commercial banks has tradi-
cess. Environmental-licensing agencies should tionally been the main source of infrastructure
participate in investment projects from the plan- finance globally, but in Brazil it only accounts for
ning phase, and have access to reliable informa- 19% of the total.34 Instruments such as mini-perm
tion about environmental risks. A central agency loans,35 which have been successful in other LAC
Country Development Challenges - Brazil

could coordinate all relevant environmental-licen- countries, 36 can help mobilize bank financing

28 See, e.g., Korea’s specialized agency (PIMAC) and its Analytic Hierarchy Process, a decision-making approach based on multiple criteria (Kim, 2012).
29  everal reforms are underway. For example, to promote private investment, in 2016 the government launched a program to better coordinate and cen-
S
tralize concessions; the Minister of Planning is developing central project-selection guidelines, while the Casa Civil is working on a long-term national in-
vestment plan. The legal framework has been reformed to improve state-owned enterprises governance (Lei 13,303 de 2016). Draft laws aim to improve
the governance of regulatory agencies and update the public financial management system, as well as to establish a national investment bank (Proposta
de Nova Lei de Financas 2085 de 2016). The effective implementation of these initiatives will require developing institutional and managerial capacity.
30 E.g., Korea’s Total Project Cost Management System (Kim, 2017).
31 See Meunier and Welden (2017) for an analysis of ex post evaluation frameworks in Norway and France.
32 McKenney et al., 2016; Watkins et al., 2017
33 The IDB new Environmental and Social policy Framework (ESPF) is an example than can be adhered by the country.
34 OECD (2018)
35 In project finance, a mini-perm is a medium-term bank loan, usually coming due within three to five years, that allows the project to reach financial
and physical completion. This lending structure usually has a back-ended amortization profile, leaving most of the outstanding balance to be repaid
or refinanced by the end of the established term.
36 E.g., Chile, Peru, and Colombia

88
early in the project cycle, during the construction 3.28. Enhance the role of capital markets. Althou-
phase.37 BNDES and MDBs can promote these to- gh Brazil’s capital markets have an important scale
ols by offering guarantee mechanisms to share in advantage over the rest of the LAC region, firms
the completion risk, as well as put options38 that need better incentives to use them for raising debt
can be exercised after the mini-perm loan comes and equity. A stronger institutional framework and
due as a hedge to refinancing risk. 39 A further improved investment environment would bolster
challenge arises from the implementation of the investor confidence and risk appetite, thus increa-
Basel III framework, which measures the risk of sing private-sector participation in long-term finan-
counterparty concentration in a way that might cing. On the demand side, capital-market investors
diminish commercial banks’ appetite for long- still favor low-risk, low-tenor transactions. Credit
-term lending. To mitigate this issue, particularly enhancements, in the form of partial credit guaran-
in project-finance arrangements, the bank’s cou- tees and full wraps of long-term bond issuances,
nterparty risk should be disassociated from the would help bridge the gap between investors and
sponsor of the project-specific special-purpose issuers.42 BNDES and MDBs could offer these solu-
vehicle (SPV) after financial completion. 40
tions, in addition to underwriting bond issuances.
Multilaterals can support FIDCs, and banking disin-
3.26. Encourage institutional investors to increase termediation, for instance, by providing credit lines
their exposure to the private sector. Asset mana- to support subnational development banks to take
gers and private investors in Brazil can invest in lon- junior/subordinated positions in FIPs to support
g-term securities, but as much as 80% of pension- innovation/infrastructure development.
-fund assets are allocated to government bonds, and
only 2% to corporate debt.41 A greater share of these 3.29. Promote long-term finance and guarantee
resources needs to be directed towards long-term mechanisms to support public and private in-
securities issued by the private sector, with help vestments in Infrastructure.43 As project finance
from appropriate risk-mitigating mechanisms and is still a niche in Brazil, entities such as BNDES and
innovative investment structures. MDBs could offer advisory services to investors in
the structuring phase (including for PPP schemes).
3.27. Transform the role of public banks. As their They could also provide risk-mitigating mecha-
direct lending tapers off, public banks should nisms—particularly to cover construction risk—to
chiefly focus on mobilizing private capital. While improve the bankability of projects and reduce
letting the private sector fund commercially via- the need for price adjustments for end-users. In
ble investments, public banks could act as lead addition, investment-fund structures44 could mo-
arranger of syndicated loans, thus helping attract bilize resources for long-term finance and create
domestic and international investors. Public secondary markets for long-term bonds. BNDES
banks can also encourage private-sector lending and MDBs could source experienced asset mana-
through credit-guarantee schemes, risk-sharing gers to lead these initiatives and provide funding
Pillar 1 | Promoting a Resilient Recovery

mechanisms, or by helping match private equity and guarantee mechanisms (including first-loss
funds with available investment opportunities. arrangements) to attract private investors. Finally,

37  After construction is complete and projects have a more stable revenue stream, the loans can be refinanced in the capital markets, attracting institu-
tional investors with lower risk tolerance but a longer-term outlook.
38  The seller of a put option commits to refinancing the project loan after a specific milestone has been reached (i.e., at project completion), thus elimi-
nating refinancing risk for commercial lenders.
39 Allain (2017)
40 Currently, counterparty risk is capped at 25% of bank’s regulatory capital and extends through the life of the financing, including after financial com-
pletion, when the risk from the SPV is usually no longer tied to the risk from the sponsor.
41 S&P Global Ratings (2017)
42  In 2017, IDB Invest approved two renewable energy projects with a full-wrap credit guarantee mechanism for infrastructure debentures in the local
capital market.
43 87% of institutional investor resources worldwide are held in high income countries and 11% in upper middle-income countries (McKinsey Global
Institute, 2016).
44 Investment funds can be structured as debt, equity, mezzanine or guarantees funds.

BID — Banco Interamericano de Desenvolvimento 89

 attracting foreign capital requires measures to mi- 3.31. Issues around governance and risk allocation
tigate foreign-exchange risk. For example, tariffs complicate the PPP process. In addition to facing
for infrastructure projects could be indexed to a the broad challenges common to all infrastructure
basket of foreign currencies, while BNDES could development in Brazil, PPPs and public concessions
offer long-term swap options to investors and en- lack systematic planning and must navigate a com-
sure their liquidity.45 plex, multilevel governance structure. The Infrasco-
pe 2021 study highlighted four key issues for PPP de-
(3) Develop Private-Public velopment in the country: ensuring appropriate risk
Partnerships allocation between public- and private-sector parti-
PPPs can be a powerful tool to engage the private sector in cipants; improving coordination between agencies
national development. PPPs can promote the adoption of involved in project development, oversight, and
new technologies and improved processes while enhan- implementation; enforcing PPP contracts; and con-
cing the efficiency and transparency of Brazilian infras- ducting ex-post evaluations of environmental and
tructure investment and social policies. It is expected social impacts. Brazil lacks clear and standardized
that in 2023 , Brazil will have the opportunity to grant
46
rules for identifying, quantifying, and allocating
the private sector 141 assets, mobilizing almost R$245 risks.48 Project structurers often outsource the defi-
billion in new disbursements, focusing on infrastructure. nition of the project risk matrix to external consul-
tants, and public officials are not always equipped
3.30. Brazil has made a concerted effort to imple- with the technical capacity to evaluate different risk
ment PPPs over the past 20 years.47 Brazil uses matrix proposals. Moreover, the public sector tends
PPPs to direct private investment in public infras- to transfer all risks to private partners, especially
tructure to a greater extent than other countries, for common concessions (i.e., PPPs whose revenue
both in the region and worldwide. In addition, derives solely from user tariffs). This strategy can
Brazil’s market for private participation in infras- significantly increase the total cost of a PPP, particu-
tructure is among the most active in the developing larly when a private partner cannot fully manage a
world. According to data from the World Bank’s risk that is difficult to predict and quantify. Finally,
Private Investment in Infrastructure database, PPP contracts may fail to adequately mirror the risk
between 1993 and 2021, at least 9,280 privately matrix, thus creating ambiguity in execution, poten-
funded projects in energy, transport, and water re- tial conflicts, and a need for renegotiation.
ached financial closure in Brazil. On an annualized
basis, those contract account for up to 21% of all 3.32. Capacity constraints at the subnational level
identified private investment in infrastructure in limit engagement with private partners. Although
the developing world over that timeframe. Yet, PPP a federal PPP law exists, subnational governments
projects have been largely concentrated in energy can create their own PPP institutions, policies, and
and transportation. The new Sanitation Law (Law processes. However, subnational governments
14.206 of 15 July 2020) is generating a sizable pipeli- suffer from institutional and capacity constraints
Country Development Challenges - Brazil

ne of projects with private participation. In health that hamper their ability to identify, appraise, de-
and education, there are fewer projects that tend to sign, execute, and monitor projects, particularly in
be attractive for their financing, including through non-traditional sectors.49 Such shortcomings also
the capital markets, given their smaller invest- create uncertainty, as they increase the likelihood
ment size and operational track record as PPPs. that a project will need renegotiating at a later stage.

45 World Economic Forum, Inter-American Development Bank (2019); Chambers and Partners (2021)
46 PPI, 2022.
47  The IDB defines a PPP as a long-term contract between a private party and a government entity, for providing a public asset or service, in which the
private party bears significant risk and management responsibility, and remuneration is linked to performance. Under Brazilian regulation, projects
can meet this definition under three types of contracts: the concessão comum, a PPP funded exclusively by user tariffs; the concessão adminstrativa,
a PPP funded exclusively through government payments; and the concessão patrocinada, a PPP with mixed funding.
48 IADB (2022); IADB (2017); IADB - Infrascope (2022).
49 EIU, 2017.

90
Subnational governments rarely use transaction Box 1), allows for adequate checks and balances.
advisors, due in part to time and budget constraints, Investment decisions require approval from the
and project-preparation facilities have limited ca- PPI Council, which reports into the Presidency of
pacity, as working capital needs to be provided up the Republic and includes representatives from se-
front then reimbursed through a “success fee.” veral ministries and public institutions, ensuring
that all stakeholders have access to expert techni-
3.33. Political risk reduces the expected profi- cal opinions. Thanks to the PPI, the project pipe-
tability of projects. Political risks threaten the go- line can reflect a long-term strategic vision for in-
vernment’s ability to meet its payment obligations, frastructure investment. Enhanced centralization
either direct or contingent. On projects whose re- of project screening, stronger contract oversight,
venue largely derives from direct public payments, and better mechanisms for project prioritization
the risk that public partners will fail to honor their can further improve the investment portfolio.
obligations discourages private investment. 50

3.37. Streamline the PPP process and enhance

3.34. PPPs create challenges to the effective its transparency. The environmental-licensing
management of aggregate fiscal liabilities. PPPs regime needs reforms to minimize red tape while
can generate both direct and contingent long-term preserving its mission, whereas transparency
fiscal liabilities. Direct liabilities are explicitly and accountability mechanisms require impro-
determined in a PPP contract; contingent liabi- vements to stifle corruption. Project proposals
lities, on the other hand, depend on uncertain must be assessed against the latest technological
future events, and reflect the risks allocated to the standards, to ensure their adequacy over the long
government in a PPP agreement.51 However, the term. Pre-feasibility and feasibility studies, with
controls on PPP liabilities set out in Brazilian law clearly regulated outputs and outcomes, are essen-
only apply to the latter type. Moreover, most sub- tial. Similarly, clarity about the criteria for project
national governments do not record contingent approval, as well as the allocation of responsibili-
liabilities or other balance-sheet impacts arising ties for their assessment, is paramount. Finally, a
from PPPs, thereby undermining federal regula- consistently applied value-for-money analysis is
tions on fiscal commitments. necessary for ensuring efficiency in project deve-
lopment and service delivery, as well as for avoi-
3.35. PPPs can enhance transparency in infras- ding long-term fiscal strains.
tructure development. PPP arrangements focus
on the outputs of infrastructure-based services, 3.38. Build institutional capacity for PPP de-
as opposed to traditionally procured projects that sign and implementation, especially at the
focus on inputs. The financial terms of PPPs can subnational level. Public agencies across all
therefore better reflect the effective cost of the levels of government need training in project
outputs delivered to society, thwarting potential finance and early project analysis to support
Pillar 1 | Promoting a Resilient Recovery

corruption in infrastructural projects. efficient infrastructure PPPs, drawing on global

experience and best practices. The government
Policy Recommendations could further bolster the knowledge base of
public agencies through a national repository
3.36. Maintain a centralized PPP program. The of PPP know-how, including detailed guidelines
framework established in 2016, with the creation covering specific sectors or phases of the project
of the Investment Partnerships Program (PPI) (see cycle. Finally, the federal government should

50  The Brazilian legal framework allows governments to offer guarantees against possible defaults on its contractually determined financial obligations.
These can take the form of: pledges of non-tax revenues; special funds accessed directly by contractors in case of default; insurance or third-party
guarantees; guarantees from international organizations; and guarantees provided by a state-owned company, created for this purpose.
51 The fiscal effects of PPPs are generally harder to measure and monitor than those of traditionally procured projects, because PPPs feature more-sophistica-
ted payment mechanisms, the relevant contracts do not always address contingent liabilities explicitly, and payment triggers can be open to interpretation.

BID — Banco Interamericano de Desenvolvimento 91

 support subnational agencies active in PPPs, venue models. Subnational governments would
along the lines of recent efforts by the Federal then need to establish appropriate enforcement
Economic Fund (Caixa Econômica Federal, CEF) 52
mechanisms, particularly for rules about the ma-
on street lighting and water and sanitation. The nagement of contingent liabilities and other fiscal
institutional capacity for social infrastructure is obligations arising from PPPs.
also limited among subnationals.
(4) Remove barriers
3.39. Mitigate political risk for investors and len- to business growth
ders. Federal PPP projects would benefit from bet- A key step for a resilient growth is to remove the barriers
ter fiscal management of the direct and contingent that inhibit growth of firms. Excessive and burdensome
liabilities they create, so that the risk level of loans regulation, bureaucracy, and high cost of capital are key
to PPP projects ultimately approaches that of sove- challenges for the expansion of the private sector and
reign bonds. This would allow for a drastic reduc- generation of jobs. Improving the regulatory framework
tion in the cost of private capital for many PPPs. through removing unnecessary barriers to competition
The existing Fundo Garantidor de Infraestrutura, can foster productivity and growth. Allowing SMEs to
backed by the Brazilian treasury, could be used in grow boost job creation and economic growth. 54
support of PPP liabilities assumed by the federal
government. In addition, PPP projects at the sub- 3.41. Burdensome regulation degrades the bu-
national level would benefit from a centralized siness environment. Brazil has a highly distortive
system of guarantees, whereby federal revenue approach to market regulation. According to the
transfers to subnational governments would be re- OECD’s product-market regulation indicator, in
directed to creditors in case of subnational default. 2018 Brazil’s markets were more heavily regulated
Such a scheme would also allow for centralized se- than those of any OECD country, albeit less so than
lection of sound projects and enforcement of good in other major emerging economies such as China,
risk-allocation practices. 53
India, and Indonesia. According to the 2019 PMR
indicator, the regulatory framework in Brazil is less
3.40. Improve the fiscal management of PPPs. competition-friendly than in the average OECD
Federally mandated fiscal boundaries and rules country, or in other Latin American economies.
should apply to all PPPs, irrespective of their re- According the 2019 economy wide PMR indicator

FIGURE 3.2. OECD Product-Market Regulation Indicator Scores, Brazil and Comparators, 2018

3.00

2.50

2.00

1.50
Country Development Challenges - Brazil

1.00

0.50

0.00
United Kingdom
Denmark
Spain
Germany
Netherlands
Sweden
Norway
Australia
Lithuania
New Zealand
Latvia
Estonia
Slovenia
Czech Republic
Hungary
Italy
Portugal
Finland
Ireland
Chile
Israel

Iceland
Poland
Slovak Republic
Switzerland
Malta
Greece
France
Mexico
Luxembourg
Belgium
Korea
United States
Canada
Cyprus
Romania
Bulgaria
Colombia
Kazakhstan
Russia
Turkey
Costa Rica
South Africa
Brazil
Argentina
Indonesia
OECD average
Croatia
Austria
Japan

Source: OECD

52 The CEF supports subnational entities in developing PPPs in accordance with Law nº 13,529/2017.
53 The Ministerio de Desenvolvimento Regional is structuring the Fundo de Desenvolvimento da Infraestrutura Regional Sustentável, which can be cri-
tical in addressing regional PPP preparation and guarantee mechanisms to support PPP development in Brazil. See: https://www.gov.br/mdr/pt-br/
ultimas-noticias/mdr-seleciona-administrador-para-o-fundo-de-desenvolvimento-da-infraestrutura-regional-sustentavel;
54 Lack of human capital is also a barrier for businesses in Brazil. This challenge is discussed in pillars 2 and 3.

92
the regulatory framework in Brazil is less competi- the end of 2021,60 well below the OECD average of
tion friendly than its international peers comparing 160.7 percent.61 However, according to the Brazilian
unfavorably with the OECD average and other Latin Association of Financial and Capital Market Institu-
American economies. The regulatory framework tions (ANBIMA), in 2021 Brazilian companies raised
in Brazil creates barriers to competition, generating R$596 billion on the domestic market across stocks,
obstacles to the entry of firms, inhibiting the entry fixed income, and hybrid instruments—60% more
of firms, or restricting activities in professional than in 2020. Fixed income and hybrid instruments
and network sectors. High-quality regulations can accounted for R$467.9 billion, with debenture issu-
stimulate productivity by encouraging the efficient ances alone worth R$253.4 billion (more than twice
allocation of resources and promoting innovation. as much as in 2020), while stock issuances reached
In turn, these measures can reduce prices for con- R$128.1 billion. In addition, with the exception of
sumers, stimulate the creation of jobs, and help the pandemic period, since 2015 earmarked credit
improve living standards (OECD, 2022). has been shrinking, while non-earmarked credit
has been on an upward trajectory. Finally, credit
3.42. Access to finance is critical to social and stimulus programs launched in 2020 to mitigate the
economic development. At the national level, impact of the pandemic have expanded the availabi-
financial access directly impacts economic grow- lity of credit for small companies.
th,55 productivity,56 competitiveness,57 and inno-
vation.58 Brazil’s financial markets have becoming 3.44. Long-term credit is in short supply, parti-
increasingly sophisticated over the past decades, cularly from commercial banks. The BNDES loan
but important challenges persist. 59
portfolio rose from R$220 billion in 2008 to R$314
billion in 2015, before falling to R$64 billion in
3.43. Credit remains scarce in Brazil, but progress 2021.62 Infrastructure loans account for about 40%
has been visible. Total domestic credit to the non- of it. Due to deteriorating fiscal indicators and rising
-financial sector as a share of GDP reached 54% at debt in the wake of the 2014-16 recession, the gover-

FIGURE 3.3. Annual BNDES Disbursements by Sector, 1995-2021

350,000

300,000

250,000

200,000

150,000

100,000

50,000

-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Pillar 1 | Promoting a Resilient Recovery

Agriculture Manufacturing Infrastructure Trade and Services

Source: BNDES

55 Aghion et al. (2005); Bech et al. (2000); Rajan and Zingales (1998).
56 Arizala et al. (2013) and IDB (2010).
57 Galindo et al. (2007) and Manova and Yu (2010)
58 Aghion et al. (2010).
59  Examples of progress in the market include: the launch of the infrastructure bond instrument (2012); the creation of ABGF, the Brazilian Agency of
Guarantees; the strengthening of risk-mitigation instruments, with an innovative fund managed by SEBRAE (FAMPI); and the introduction of Credit
Guarantee Companies (SGC), following the successful example of European cooperative guarantee systems. Between 2005 and 2014, the financial
market attracted more than 50 million clients, making the financial system accessible in 5,569 out of 5,570 Brazilian municipalities (BCB, 2015).
60 Central Bank monetary and credit statistics.
61 World Bank, 2020.
62 BNDES, 2021.

BID — Banco Interamericano de Desenvolvimento 93

 nment has chosen to scale down its direct role in In Japan, which has the lowest banking spread
long-term financing and infrastructure investment. in the world, US$0.92 is recovered for every US$1
As a result, the treasury has been reducing its trans- borrowed, and the global average is US$0.34 per
fers to BNDES; conversely, since 2015 the bank has US$1 borrowed. Other studies cite additional
been repaying federal loans. The Brazilian financial factors: costs associated with provisioning, high
system is crowded, but most players focus on short- levels of non-performing loans, taxation, high
-term lending. Long-term commercial bank finan- operational costs for banks (including labor costs),
cing, when available, only extends up to 10 years, and high concentration and poor competition
whereas infrastructure finance requires average among banks. The relative importance of each
loan maturities of 25 years. factor depends on the type of credit (SMEs, large
companies, household, or working capital). As a
3.45. The Brazilian National Development plays result, neither banks nor the capital markets meet
an important role in expanding credit. The Bra- the long-term financing needs of Brazil’s private
zilian National Development Financial System sector. The banking system offers credit mainly
(NDFS) amounts approximately US$ 400 million for short-term financing of households and busi-
(R$2 trillion) in total credit portfolio, which repre- nesses. SMEs face especially low liquidity and high
sents 45% of Brazil’s credit market – notably in lon- costs for long-term financing, and the market for
ger-term operations (73% of total credit) to sectors long-term bond issuances is yet to fully develop.
such as infrastructure, agriculture, and utilities.
It comprehends a group of 34 institutions and 3.47. Brazil’s banking market is highly concen-
currently has 37.9 million customers, represen- trated. The five largest banks (excluding BNDES)
ting 19% of the national financial system. NDFS’ account for more than 76% of total assets, 77% of
national reach, sector and regional specialization total bank credit to households, 64% of credit to
potentialize their presence and relevance both in firms, and almost all housing credit. Two of the
public and private segments. National commer- top five banks, including the largest one, are state
cial and development banks provide the bulk of owned.63 However, concentration in the banking
financing, whereas subnational Development sector has slightly reduced in recent years.
Financial Institutions (DFIs) and regional federal
banks, despite significantly smaller in size, are 3.48. Micro, small, and medium-sized enterpri-
known for their expertise in working at different ses (MSMEs) are important generators of em-
regions and sectors in Brazil. Therefore, they are ployment and income in the Brazilian economy.
also important players, especially for financing According to the 2018 Annual Social Information
MSMEs and municipalities. Registry (RAIS), private firms with up to 249 em-
ployees (which match the definition of MSMEs)
3.46. Brazil’s financial system is among the lar- account for more than 99.8% of all companies,
gest and most sophisticated in Latin America, 58.0% of formal jobs, and 44.3% of formal salary
Country Development Challenges - Brazil

but the financing available to firms is scarce and payments in the country. This data demonstrates
expensive. Balassiano and Vidal (2019) show that the major role of MSMEs in creating employment
Brazil has the second-highest banking spread in and income, across sectors and regions.64
the world, due to a variety of factors. For example,
the recovery of credit through judicial means 3.49. MSMEs have limited access to finance. This
in Brazil is among the lowest in the world: only issue stems from two key factors:
US$0.11 for every US$1 borrowed is recovered. I. the features of the Brazilian financial sys-

63 Central Bank of Brazil, 2020.

64 Netto, Maria; Viturino, Cristiane; Porto, Rodrigo P. Apoio às MPMEs na crise da Covid-19: desafios do financiamento para resiliência e recuperação.
BID e ABDE, junho de 2021. Ver: https://publications.iadb.org/pt/apoio-mpmes-na-crise-da-covid-19-desafios-do-financiamento-para-resiliencia-
-e-recuperacao.

94
 tem, which is highly concentrated,65 relati- Policy Recommendations
vely inefficient, and generally offers expensi-
ve services;66 and 3.51. Improve the regulatory framework. Adopting
II. the perception among financial institutions a simple, transparent regulatory framework and
that lending to SMEs is risky, due to: ensuring compliance would reduce regulatory risk
a. the poor availability and reliability of busi- and improve the business climate. Eliminating re-
ness information for credit assessments; dundant responsibilities between regulatory agen-
b. the small scale of SME transactions, which rai- cies would reduce compliance costs and bolster
ses the cost of serving this market segment; and business confidence. The efficiency of regulatory
c. the dearth of assets that SMEs can offer as agencies would also benefit from stronger inde-
collateral. 67
pendence and financial autonomy, and from staff
The resulting scarcity of credit limits production recruitment based on technical qualifications.
capacity and innovation, and can even trigger
business closures and job losses. Furthermore, 3.52. Simplify regulation and leverage techno-
the stunted development of SMEs discourages logy to streamline administrative processes.
the creation of new firms and limits the dyna- Stronger oversight of, and transparency in, the
mism of the economy. regulatory process would help contain the prolife-
ration of regulatory requirements and ensure that
3.50. Information asymmetry constrains ac- their benefits justify their cost. At the same time,
cess to credit for MSMEs. Small entrepreneurs relevant authorities should solicit input from the
frequently complain of “excessive red tape” public when contemplating regulatory changes.70
when seeking bank credit—i.e., requests for Moreover, new technologies could help reduce de-
information, documentation, and guarantees lays, consolidate services, and reduce the need for
that they struggle to meet. It is then common in-person visits to government offices.
for SMEs to seek non-bank financing (including
self-financing), or credit lines more flexible but 3.53. Create the enabling conditions for lower
less suited to their needs. On the other hand, banking spreads. Encouraging more private par-
financial institutions must contend with high ticipation in long-term finance will require lower
rates of default and business mortality. For com- real interest rates on government bonds,71 as well
parison, in 2019 the average default rates among as fewer issuances. This would prompt institutio-
micro (10.0%), small (8.3%), and medium-sized nal investors, such as pension funds, to look away
companies (5.9%) were substantially higher than from traditional government debt and allocate
among large companies (3.3%). 68
In addition, resources in other areas.
according to the Brazilian Institute of Geography
and Statistics (IBGE), 69 almost half of all SMEs 3.54. Support the BC# Agenda. The ‘Competitive-
survive only four years since being established, ness Dimension’ of the Central Bank’s BC# agenda
Pillar 1 | Promoting a Resilient Recovery

due to difficulties in achieving productivity gains seeks to promote adequate pricing of financial
and accessing credit. services through competitive access to market.

65  igh concentration in the financial system tends to increase interest rates because of limited competition. It has also been argued that, given the
H
positive relationship between concentration and bank fragility, increased competition reduces a country’s likelihood of suffering a systemic banking
crisis. Boyd and De Nicolo, The Theory of Bank Risk Taking and Competition Revisited, 2005
66 The cost of finance for SMEs in Brazil (34.7%) is considerably higher than in Mexico (9.1%), Chile (4.3%), and Colombia (3.9%).
67 Barboza, R., et al., O BNDES e as micro, pequenas e médias empresas, BNDES, Textos para discussão No. 146, 2019.
68 Netto, Maria; Viturino, Cristiane; Porto, Rodrigo P. Apoio às MPMEs na crise da Covid-19: desafios do financiamento para resiliência e recuperação.
BID e ABDE, junho de 2021. Ver: https://publications.iadb.org/pt/apoio-mpmes-na-crise-da-covid-19-desafios-do-financiamento-para-resiliencia-
-e-recuperacao
69 IBGE. Demografia das empresas. Disponível em: https://www.ibge.gov.br/estatisticas/economicas/servicos/9068-demografia-das-empresas.
html?=&t=o-que-e. Consulta em 4/5/2020.
70 OECD/Korea Development Institute (2017), Improving Regulatory Governance: Trends, Practices and the Way Forward, OECD Publishing, Paris.
71 Private assets must offer a premium return over public bonds, to reflect added credit and liquidity risk. However, interest rates on public bonds in Bra-
zil have historically been high, limiting financing opportunities for the private sector.

BID — Banco Interamericano de Desenvolvimento 95

 The agenda included the rollout of the PIX instan- the new framework for guarantees (Novo Marco
t-payment system, the implementation of open de Garantias), which is currently before Congress,
banking, improvements to the regime on guaran- would mark a step in the right direction.
tees, and the introduction of a regulatory sandbox.
The ‘Inclusion Dimension’ of the agenda focuses on (5) Strengthen the Fiscal framework
non-discriminatory access to market for all—small Current public policies do not ensure equal access to
and large businesses, entrepreneurs, investors, and opportunities or economic growth. Without appro-
borrowers, both domestic and foreign—through the priate policies in place, inequalities concentrate poli-
promotion of digital platforms, simplified procedu- tical influence among those who are already better off,
res, and reduced red tape. The Central Bank is also thus preserving or even widening opportunity gaps.
supporting the shift from public to private sources Such biases erode trust in the ability of governments to
of financing in the credit market. address the needs of the majority. In turn, lack of trust
can affect economic performance and policy effective-
3.55. Support strengthening of Development ness, hurting growth and social cohesion.
Financial Institutions (DFIs). Boosting their ins-
titutional capacity is an opportunity to leverage 3.57. A large share of public spending is conducted
and potentialize their action. DFIs can strengthen without a systematic analysis of its impact. As an
their governance, and internal capacities. The example, in 2019 tax expenditures totaled R$320.9
Digital transformation can reduce their cost and billion (4.33% of GDP), an amount higher than the
lead to higher productivity amplifying the supply total expenditure on education and health. Tax
of credit, notably for MSMEs. Develop guarantee expenditures comprise tax breaks and credit or fi-
funds that already exist in the country and identify nancial subsidies and include myriad benefits such
alternatives for expanding their reach aiming to as the Manaus free trade zone (8.49% of total tax
reduce risks and consequently increase volume of expenditure, or R$26.4 billion), the Simples tax rule
resources available for new investments, mainly for SMEs (23.1%, or R$71.9 billion), income tax de-
riskier ones that would benefit the most from a ro- ductions for health and education expenses (9.84%,
bust guarantee arrangement in place. Support the or R$30.5 billion), agriculture and agroindustry
readiness of DFIs to attract international resources incentives (9.88%, or R$30.7 billion) and other pro-
for a sustainable transition in Brazil. grams. According to IPEA (2018)72, out of four large
government programs that disbursed R$173 billion
3.56. Promote credit, develop capital markets, and in subsidies, none has reached its objectives.73
crowd in private sources of finance to encourage
investment and expand financial access. Improved 3.58. The rigidity of the budget hinders impro-
financial infrastructure and guarantee systems for vements to the social protection system. Budget
SMEs are especially important to promote competi- rigidity limits the efficiency and effectiveness of
tion and expand financial inclusion. Building credi- public policy. Mandatory expenditure represents
Country Development Challenges - Brazil

ble information-sharing systems in bond and equity around 94% of the federal government’s total
markets could reduce information asymmetry. primary spending. The growth of mandatory ex-
Moreover, the authorities should identify, promote, penditure has been compressing the fiscal space
and develop pooling and digital-economy instru- available to finance discretionary expenses, a cate-
ments to expand access to bond markets, especially gory that includes public investment and any other
for SMEs. Credit guarantees, backed by appropriate social policy not classified as mandatory. Given its
risk-mitigation mechanisms, are key to supporting importance to economic development, the coun-
viable and efficient SMEs. Approve and implement try´s fiscal framework would benefit from being

72 IPEA (2018).
73  he programs assessed were: Payroll exemption, PSI (Program for Sustaining Investment), PROFROTA, and PROUCA (Program for one computer per student).
T

96
 FIGURE 3.4. Tax Expenditure
25.00% 400,000
23.61%
22.38% 22.67% 22.64% 22.74%
22.25%
21.74% 21.47% 350,000
20.30%
20.00%
18.32% 300,000
17.38% 17.29% 17.52%
16.24%
250,000
15.00%

200,000

10.00%
150,000

100,000
4.19% 4.45% 4.50% 4.28% 4.37% 4.43% 4.33% 4.31% 4.28%
5.00% 3.82% 3.65% 3.60% 3.49% 3.77%
50,000

0.00% 0,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
% of Tax Collection % of GDP Tax Expenditure (R$ Million) - right

Source: Receita Federal do Brasil – 2020 and 2021 (projections)

reevaluated, with the aim of strengthening the be reviewed. Its scale stems from high salaries and
credibility of fiscal policy, ensuring a sustainable aggregate benefits, rather than from an excessive
trajectory of the public debt, and granting more number of employees.74 This pattern is especially
flexibility and fiscal space to public investments visible in the federal government, whose employe-
and programs that reduce social inequalities. es are generally better paid than both subnational
government and private sector workers. Containing
3.59. The general government’s wage bill is high such expenditure can benefit public accounts, as well
by international standards. Among the mandatory as improve public service delivery75 and overall pro-
spending items, the public sector wage bill should ductivity.76 According to a study from the World Bank

FIGURE 3.5. Evolution of Mandatory Expenditure (% of GDP)

25.00% 24.6%

20.00%

17.3% 17.7% 17.6% 17.5%

15.2% 15.6%
15.00% 14.3% 14.9% 14.6% 14.7% 15.0% 17.3% 17.2%

10.00%
Pillar 1 | Promoting a Resilient Recovery

5.00%
3.3% 2.5%
2.3% 2.1% 2.1% 2.3% 2.3% 2.1% 2.3% 2.2%
1.8% 1.8% 1.5% 1.4%

0.00%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Mandatory Discretionary

Source: National Treasury

74 World Bank (2018).

75 For example, by implementing periodic evaluations of public servants and increasing flexibility in their allocation.
76 Cavalcanti and Santos (2021).

BID — Banco Interamericano de Desenvolvimento 97

 FIGURE 3.6. Total spending on personnel (% of GDP) and distribution of salaries within the Federal government

New Zealand
United States
Kenya
Nepal
Russia
Czech Republic
Louxemborg
Israel
Lithuania
Serbia
Polonia
Bielorrussia
Austria
Letonia
Malta
Greece
Kirgistan
San Marino
Belgium
Canada
Sweden
Brazil
Timor
Norway
South Africa
Kiribati
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Above R$20,000 Between R$10,000 Between R$5,000 Between R$3,000 Below R$3,000
and R$20,000 and R$10,000 and R$5,000

Source: IMF and World Bank (2019) using data from SIAFI.

(2020), there are sizeable inequalities between civil social intervention due to resource constraints, bud-
servants and the rest of society. For example, 54% of getary rigidities, poor incentives, and the structural
public sector workers at all levels are among the 20% evolution of the tax base for the major sales tax (Im-
of Brazilians with the highest incomes. Moreover, posto sobre Circulação de Mercadorias e Serviços, ICMS)
Country Development Challenges - Brazil

the wage premium in the public sector (i.e., the gain and other taxes. Moreover, the current transfer sys-
compared to workers with similar characteristics and tem does not adequately address territorial, social,
roles in the private sector), amounts to 97% for federal economic, and fiscal disparities at the subnational
government employees, and to 36% for state govern- level. On the other hand, uniform spending obliga-
ment employees. Notably, federal civil servants enjoy tions (e.g., those deriving from constitutional rights
a 35.7% salary premium over workers employed in to health and education) at the local level distort the
similar roles by the country’s 500 largest companies. allocation of resources. Cooperation among sub-
national governments should be reinforced, as it is
3.60. Tackling post-pandemic social challenges currently insufficient and constrains the efficiency
will require reforms to Brazil’s fiscal federalism. The of the public sector. The legal framework regula-
Brazilian federalism framework limits the scope for ting interactions among subnational governments

98
and with the federal government does not induce thcare, and social assistance further complicate the
cooperation. For instance, the framework allows fiscal federalism framework.78
tax-break competition between subnational gover-
nments striving to attract businesses, leading to the 3.61. The limited fiscal space highlights the need to
so-called “fiscal war” among Brazilian states, which strengthen fiscal risk management. Brazil needs to
has increased aggregate exemptions far beyond so- improve the governance processes and management
cially optimal levels. A disorderly decentralization 77
of contingent liabilities and precatorios. Following
of administrative functions and financial flows has the digitalization of judicial processes and greater
distorted the allocation of resources across levels of productivity of the Judiciary branch, the value of the
government. As a result, subnational governments lawsuit stock against the FG increased 296% from
(SNGs) do not receive sufficient funding to provide 2014 to June 2021, reaching R$ 2.22 trillion (25% of
the public services for which they are responsible. GDP). Annual expenses with judicial losses present
SNGs collectively account for 44.1% of total public an upward trajectory: from BRL 20.7 billion in 2014 to
spending, equivalent to about 24% of GDP—close BRL 54.7 billion in 2021, equivalent to 46% of discre-
to the OECD average of 33% of GDP. However, SNGs tionary spending. The amount for 2022 was calculated
collect just 11% of GDP in revenue, creating major at BRL 89.1 billion, but a Constitutional Amendment
vertical imbalances and dependence on intergo- limited the payment, postponing part of this expense
vernmental transfers. Overlapping expenditure to the following years. This provided short-term relief,
responsibilities among federal, state, and municipal but without dealing with the structural bottlenecks
governments in key areas such as education, heal- that led to the disorderly growth of precatorios.

FIGURE 3.7. Tax Complexity Index

0.600

0.500

0.400

0.300

0.200

0.100
Pillar 1 | Promoting a Resilient Recovery

0.000
Singapore
Switzerland
New Zealand
Bulgaria
Taiwan
Norway
Japan
Sweden
Hungary
Netherlands
Australia
Korea, Republic
Ireland
Germany
Turkey
Thailand
Mexico
Argentina
India
France
Slovakia
Greece
Vietnam
Portugal
United States
Ukraine
Philippines
Brazil
Indonesia

Source: taxcomplexity.org

77 Ter-Minassian, T. (2015).
78 For example, a recent 35% reduction in the tax on industrial products (IPI) will cost the federal government R$7.6 billion in lost revenue in 2022, and
R$10.2 billion in 2023. Considering that receipts from this tax are shared with subnational entities, the IFI (Instituição Fiscal Independente) estimates
that states, municipalities, and regional funds will lose R$11.1 billion between April and December 2022, and R$14.8 billion in 2023.

BID — Banco Interamericano de Desenvolvimento 99

 3.62. A tax reform will boost growth and reduce zil’s total tax collection, versus 60% in the USA, 67%
inequalities. The Brazilian tax system is obsolete, in Denmark, and 40% on average in OECD countries.
unfair, and costly to comply with. The Brazilian
taxpayer spends an excessive amount of time and 3.63. Brazil ranks better than regional peers on
money to comply with ever-changing tax rules, as transparency, but standards are inconsistent
well as fulfilling ancillary obligations. The tax system across levels of government. In the 2019 OECD
drives foreign investment away from the country OURdata Index—measuring government efforts
and does not adequately redistribute wealth to those to enable and encourage open data in three areas:
most in need. Brazilians spend 1,501 hours a year on availability, accessibility, and support for data reu-
average attempting to comply with tax obligations, se—Brazil received a score of 0.63, better than the
causing Brazil to rank lowest in overall tax efficiency LAC average of 0.43 and the OECD average of 0.60.
according to the OECD. This complexity generates Meanwhile, the International Budget Partnership’s
an enormous volume of litigation between taxpayers (IBP) 2021 Open Budget Survey assessed public
and the tax authorities, thus raising costs for compa- access to central government budget information,
nies, producing legal uncertainty, and discouraging formal opportunities for citizens to take part in the
investments. Messias et al. (2020)79 show that the national budget process, and the role of oversight
sums at stake in tax-related proceedings in Brazil rea- bodies, such as the legislative branch and external
ched R$5.4 trillion in 2020, or 75% of GDP. Finally, the auditors. This survey assigned Brazil a score of 80,
current tax system has a regressive impact, as it taxes better than the LAC average of 51 and the OECD ave-
consumption more than income or wealth. Notably, rage of 66. On financial integrity, Brazil performed
income and wealth taxes only account for 22% of Bra- better than the LAC average, but worse than the

FIGURE 3.8. Corruption indicators

Citizen’s Perception of Corruption % of citizens who consider that corruption is

BRA LAC

Major Problem Minor Problem %NA

Corruption Perception Index Scale from 0(most corrupt) to 100(no corruption)

100

90

80

70

60
Country Development Challenges - Brazil

50

40

30

20

10

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

LAC BRA OCDE

Source: Our World in data

79 Lorreine Silva Messias, Larissa Luzia Longo, Carla Mendes Novo e Breno Vasconcelos (2020). Contencioso tributário no Brasil.

100
OECD average. Brazil’s freedom of information law and Evaluation Council (CMAP), established in
(Law 12,527/2011, Lei de Acesso à Informação – LAI) 2019, is tasked with evaluating policies financed
aims to reduce the cost of accessing public informa- through direct expenditures and tax subsidies.
tion, and the control of government officials over it, After concluding its evaluation, the CMAP offers
while allowing for monitoring of the government; recommendations to policy managers. In addition,
however, compliance at the municipal level remains constitutional amendment 109 mandates evalua-
very low and overall results have been very mo- tion of public policies for the entire public adminis-
dest.80 On the fiscal side, despite progress since the tration, at the federal and subnational levels. Howe-
enactment of the Fiscal Responsibility Law (Com- ver, governance issues still hamper systematic
plementary Law 101/2000), data on tax benefits re- feedback from evaluations into the budget process.
mains opaque, particularly at the subnational level. In addition, valuable tools to guide budget alloca-
tion and improve policy design, such as ex ante
3.64. Recent reforms have enhanced public procu- evaluations, have not been implemented. Finally,
rement processes, but further progress is possible. states and municipalities remain a step behind:
Law 14,133/2021 aims to make public procurement they lack consistent mechanisms to evaluate poli-
more efficient and transparent. Enacted in April cies and resources, leaving room for budget choices
2021, the law granted a two-year adjustment period that are more political than technical.
to the public administration before it fully comes
into force in 2023. Among other reforms, the law 3.66. Reinforce the link between planning, budget
created the National Public Procurement Portal and performance at the institutional level.82 In a re-
(PNCP) to consolidate various categories of data, sults-focused budgeting framework (encompassing
for the benefit of public bodies across all levels of programming, approval, execution, and accounta-
government. The PNCP encompasses annual con- bility), the government does not focus on inputs, but
tracting plans, electronic standardization catalogs, on outcomes for citizens. Policy results are analy-
accreditation and pre-qualification notices, direct zed through performance indicators and systema-
contracting and tender notices, price registration tic evaluations, then used as input for determining
minutes, contracts and additive terms, and elec- resource allocation in the following fiscal year. This
tronic invoices. Brazil should continue to promote approach favors efficacy and efficiency in public
innovation, inclusion, and transparency in public spending, offers flexibility, admits gradual adjust-
procurement, drawing on international experience ments, and generates more transparent results.
and the vast literature in this field. In addition to
81
Effective implementation is based on four pillars:
fiscal, economic, and service delivery impacts, a I. functioning performance-information systems;
well-designed public procurement system can pro- II. institutionalized production of credible and re-
mote secondary policy objectives, such as contri- levant information to orient budget allocation;
buting to a greener economy and increasing oppor- III. mechanisms to foster effective employee
tunities for SMEs, women, or marginalized groups. performance, such as institutional and per-
Pillar 1 | Promoting a Resilient Recovery

sonal incentives;
Policy Recommendations IV. robust capacity of executing agencies, and a
resulting decentralization of public resource
3.65. Strengthen program evaluation. The federal management.
government has been working to improve public The budget process in Brazil is currently pro-
policy evaluation. The Public Policy Monitoring gram-based (per Decree-Law No. 200/67).83

80 Batista, Rocha, and Santos (2020).

81  azekas (2014) describes innovative uses of big-data analytics to identify high-level corruption. Brunetti and Weber (2003) show a positive rela-
F
tionship between administrative quality and transparency in public procurement. Basheska (2011) argues that increasing income levels and stan-
dards of living can decrease incentives for fraud. Piga (2014) shows that strengthening the monitoring of terms and performance in public contracts
can increase transparency and promote efficiency.
82 IADB (2014); IADB (2015); IADB (2007).
83 IADB (2014); IPEA (2022).

BID — Banco Interamericano de Desenvolvimento 101

 3.67. Strengthen the functions of the Governan- 3.68. Evaluate and rationalize tax expenditu-
ce Center. The Governance center (CoG) in Brazil res. Brazil needs a legal standard to clearly defi-
would benefit from a limited and well-commu- ne tax expenditures and estimate both their total
nicated number of shared goals to mobilize and cost (in terms of forgone revenue) and the bud-
challenge the public administration effectively. The getary resources necessary to compensate for
CoG in Brazil could mitigate the effects of the frag- them. Mechanisms for monitoring and evalua-
mentation of government actions and programs by ting tax benefits could help guide ministries in
carrying out functional reviews and taking measu- estimating the efficiency and effectiveness of
res to promote continuity through change, including tax expenditures, and in cutting down on special
reducing staff turnover. The planning process would regimes and exemptions that generate distor-
benefit from prioritization mechanisms to make tions across economic sectors while costing an
sure the government is acting on the most important estimated 4% of GDP per year. 85 A broad reduc-
issues, in a coherent manner and armed with the tion in tax expenditures could enhance equity
most relevant evidence. The CoG’s ability to foster and efficiency. The federal government has sub-
outcome-oriented strategic planning could also be mitted to Congress a plan for a gradual reduction
improved through better alignment and integration of tax benefits (PL 3203/2021) to 2% of GDP by
of the different planning systems across govern- 2029, but its approval and implementation will
ment. The Brazilian government could benefit from be opposed by interest groups.
the Budget Execution Board bringing the outputs
of the planning function into the strategic phase of 3.69. Adopt a Medium-Term Budget Framework. 86
the budget and from designing and implementing Brazil’s budget laws provide for a multi-year plan
a spending review framework to assess the perfor- (Plano Plurianual – PPA) that is meant to guide the
mance of existing expenditure against the relevant annual budgets, but in practice, key elements for a
policy objectives. Developing and harmonizing sound medium-term fiscal planning are missing:
monitoring tools and working routines within Casa I. the budget process is fragmented and focu-
Civil, aimed at the implementation of cross-cutting sed on the short term;
government priorities, developing explicit quality II. there are no medium-term fiscal goals;
assurance and control mechanisms and promoting III. planning and budgeting are not based on
the use of evaluation results through a commu- realistic assessments of medium-term finan-
nication strategy can enhance the robustness of cial constraints; and
the evaluation system. The government should IV. the management of fiscal risks is limited.
continue to institutionalize key processes, enhance A Medium-Term Budget Framework (MTBF)
multi-level co-ordination and professionalize core could boost the credibility of fiscal policy, identi-
capabilities. In doing so, the government should fying fiscal risks related to expenditures and reve-
pursue an evidence-driven communication approa- nues and permitting timely action to comply with
ch as part of its whole-of-government strategy to bet- fiscal rules. An MTBF linked to evaluations of
Country Development Challenges - Brazil

ter respond to the needs of different audiences and public policies could facilitate compliance with
show its contribution and impact on broader policy the spending rule introduced by Constitutional
objectives. It will also be important to communicate Amendment 95 of 2016, laying the groundwork
participation opportunities to establish an open for more rigorous and strategic budgetary deci-
and meaningful dialogue with the public across the sions. Most OECD countries have successfully
distinct stages of the policy-making process, in parti- adopted MTBFs, and in the last two decades seve-
cular with vulnerable groups. 84
ral developing countries (including in LAC) have

84 OECD (2022). Centre of Government Review of Brazil: Toward an Integrated and Structured Centre of Government.
85 Ministry of the Economy.
86 FMI (2019); Salto and Pellegrini (2020); Tollini (2018).

102
 Establishing a Medium-Term Budget Framework
The authorities can strengthen medium-term fiscal sustainability and improve budget planning within
and across levels of government by adopting modern budgetary procedures. Key objectives include:
I. incorporating an MTBF into the Multiyear Plan;
II. including multiyear expenditure estimates for new spending in the annual Law on Budgetary
Guidelines (Lei de Diretrizes Orçamentárias, LDO) in accordance with the expenditure rule;
III. prohibiting in-year approvals of additional appropriations that would impact
the primary balance, except during public emergencies; and
IV. limiting the accumulation of unpaid expenditure obligations.1

THE AUTHORITIES CAN ACHIEVE THESE GOALS BY:

Creating a medium-term macro-fiscal framework to be updated

annually. This document would complement the LDO annex on fiscal targets
and would be fully integrated into the budget-programming process.

Transforming the LDO annex on priorities and goals so that it is no longer a dispersed list of
spending initiatives and short-term production goals unconnected to policy objectives. Instead, the
annex should incorporate a medium-term perspective and align spending with government priorities.

Transforming the LDO annex on expenditures from a document on expenditure

rigidity to an evaluation instrument designed to make spending more flexible.

Strengthening the spending limits communicated to sectoral agencies by

defining them more precisely and transforming them into medium-term instruments
covering a minimum period of three years, rather than a single year.

Producing an annually updated medium-term baseline forecast of expenditures

and service delivery in accordance with existing policies. This forecast would allow
policymakers to consider the fiscal cost of existing policies and the tradeoffs involved
in resource allocation before making decisions about new policy initiatives.

Formally incorporating ex ante and ex post monitoring and evaluation

procedures into budget programming, which would help identify opportunities
to increase budget flexibility, among other advantages.

Strengthening preproposals and proposals by sectoral agencies and budget units

by including the results of expenditure evaluations, enabling a more strategic medium-term
reallocation of resources that reflects government priorities and budget constraints.
Pillar 1 | Promoting a Resilient Recovery

Introducing an annually updated MBTF that reconciles the restrictions and medium-term guidelines
defined by the central government with the medium-term proposals of sectoral agencies and budget units.

Transforming the Budget Execution Board into a formal Fiscal Committee

responsible for making key decisions within the executive branch regarding macro-
fiscal management, budgetary controls, and public policy evaluations.

1 Moreno (2018) and Fortis, F.; Gasparini, C. & Rossi, J. (2017).

BID — Banco Interamericano de Desenvolvimento 103

 used them to reform the budget process.87 As of 3.71. Revise the tax system. Reducing the number
2008, more than two-thirds of countries worldwi- of taxes, sharing information between tax autho-
de had implemented MTBFs, albeit with a high rities, and adopting automatic, universal taxation
degree of heterogeneity.88 The available evidence systems with less room for exceptions and special
suggests that countries with strong MTBFs tend regimes could enhance the efficiency of tax collec-
to more effectively achieve their fiscal goals. 89 tion and encourage compliance. A simpler tax sys-
The Brazilian government would need to reform tem would also improve the business environment
the current budget process to accommodate an and increase competitiveness, with positive effects
MTBF encompassing macro-fiscal program- on tax collection. The tax system should also be-
ming, planning, and monitoring and evaluation. come more progressive, relying more on direct
taxes. The total tax burden in Brazil (33.8% of GDP)
3.70. Reform the civil service. Such a reform is comparable to the levels of OECD countries, but
would be an opportunity to recognize good civil consumption taxes—rather than the more-pro-
servants and improve public services, while ad- gressive income taxes—have a greater weight. Con-
dressing critical issues such as pay policy in the sumption taxes in Brazil were equivalent to 14.2%
public sector. Changes in how the civil service is of GDP in 2019, versus the OECD average of 10.9%;
managed can help improve strategic workforce conversely, taxes on income and capital gains were
planning, increase productivity, and identify the equivalent to 7.4% of GDP, versus the OECD avera-
best-performing workers. The recently launched ge of 11.5%.91 As a result, poor households in Brazil
merit-based selection system for public mana- contribute proportionally more to tax collection
gers, aligned with the practices adopted in OECD than wealthier ones.92
countries, including Chile, should be expanded
(Programa Líderes que Transformam). The federal 3.72. Embrace a more cooperative model of fede-
government would benefit from adopting a per- ralism. Better coordination among levels of gover-
formance-based framework, to promote a results- nment and safeguards to subnational autonomy are
-oriented culture in public institutions. Moreover, key to institutional progress. Creating a council of
civil service reform can generate substantial states to discuss shared fiscal issues would facilitate
savings. IPEA modelled the fiscal impacts over the relationships with the federal government. Such
period 2020-2039 from measures that rationalize council could be led by state governors (who may
public personnel expenditure, such as: chair it on a rotating basis), hold regular meetings,
I. a two-year freeze on salaries (Complemen- and have a lean secretariat based in the federal ca-
tary Law 173/2020); pital. Overlaps in expenditure responsibilities need
II. a slowdown in the replacement of retired pu- to be reduced, especially to improve the governance
blic servants, supported by the digital trans- and funding of metropolitan areas93 and encoura-
formation; ging less judicialization of budget questions.
III. a reduction in the starting salaries of new
Country Development Challenges - Brazil

hires; and 3.73. Review inter-governmental transfers. Tax

IV. longer intervals for career advancement. reform proposals need to take a federative appro-
Ten-year projections show that the aggregate fis- ach, outlining a revision of inter-governmental
cal impact would be sizable under each scenario, transfers that accounts for their redistributive
with potential savings of up to 11% of GDP. 90
effects, and allows for adequate funding of regio-

87 IDB, 2009.
88 World Bank, 2013.
89 Ibid.
90 IPEA (2020).
91 OECD et al (2021). Revenue Statistics in Latin America and the Caribbean.
92 IPEA (2021); IPEA (2011).
93 Slack, 2017; Martinez-Vazquez and Muñoz.

104
nal development. Inter-governmental transfers be recorded following international statistical
must incentivize the efficient allocation of public best practice. The national public procurement
resources, promote sound fiscal management, and network’s 94 technological platform should re-
stimulate local revenue mobilization. The FPE and gularly identify, analyze, and disseminate good
FPM need reforms to fulfill their mission of redu- management practices, publicize research on
cing regional inequalities and vertical imbalances. public procurement, and certify public officials
in procurement skills. Subnational governments
3.74. Enhance fiscal transparency. Fiscal repor- should develop their own strategic plans for im-
ting should be extended to all state-owned com- proving public procurement. Across levels of go-
panies and public banks, to produce an overview vernment, adopting innovative technologies can
of the fiscal performance of the entire public enhance the efficiency, effectiveness, and trans-
sector. Public balance sheets should fully reflect parency of public procurement. Governments
the market value of government infrastructure, should promote public procurement focused on
underground assets, as well as the benefits and en- gender and race.
titlements of all public officials. The key elements
of fiscal policy and sources of fiscal risk (e.g., the 3.76. Enhance the fiscal risk management. The
performance of public banks) should be disclosed measures include
to the public in greater detail. The government can I. improving the management of lawsuits and
enhance transparency in the relationship between court settlements to avoid new precatorios;
the central bank and the treasury, by separately II. integrating the information flow between
reporting their transactions and balance sheets the Executive and Judiciary branches over
and clearly defining their policy objectives and the various fragmented judicial processes;
fiscal outlays. Moreover, digital tools can help to III. modernizing the economic and financial
better control public expenditure: according to modeling and assessment of fiscal risks; and
the Federal Court of Accounts (TCU), the highest IV. increasing transparency.
federal audit institution, the use of data analytics
to oversee the public sector’s payroll has already 3.77. Improve the governance of State-Owned
generated annual savings of nearly US$80 million Enterprises. The Brazilian government directly
since 2015.1. The use of digital tools could therefo- owns 46 companies, with total assets of R$5.3
re by extended to the States’ and Municipal Courts trillion (70% of GDP). 95 These state-owned en-
of Accounts, which oversee public expenditure at terprises (SOEs) are active across a wide range of
the subnational level. Finally, a continued focus on sectors, from data processing and airport manage-
financial integrity and transparency standards— ment to oil and gas, banking, and electricity. Their
such as those recommended by FATF—will contri- missions are not strictly profit-based and encom-
bute to Brazil’s financial strength and stability. pass socio-economic goals as well. In fact, certain
SOEs operate at a loss, supported by periodic con-
Pillar 1 | Promoting a Resilient Recovery

3.75. Reinforce the integrity of fiscal statistics. A tributions from the federal government. Impro-
permanent interinstitutional committee should vements in the efficiency of SOEs will not only be-
be set up to harmonize classifications used in nefit the government’s financial position, but also
macroeconomic statistics, while macroeconomic enhance the provision of key services and goods,
data sets need periodic consistency checks. The and help Brazil close its socioeconomic gaps. In
major tax aggregates should be reconciled within the near future, meeting Brazil’s public policy ob-
and between fiscal reports, and transactions be- jectives will require management and governance
tween the central bank and the treasury should reforms that also cover subnational SOEs.

94 www.compraspublicasbrasil.gov.br.
95 Ministry of Economy (2021).

BID — Banco Interamericano de Desenvolvimento 105

 2
PILLAR
Adopting a new
social agenda for
inclusive growth
Country Development Challenges - Brazil

Recommendations on a new social agenda for inclusive growth fall under five
policy areas: (1) Focus public policies to reduce poverty and inequalities;
(2) Prepare the youth for the future; (3) Build strong social protection
and labor markets; (4) Improve the accessibility, quality, efficiency, and
equity of health services; and (5) Make cities safe and inclusive.

106
 FIGURE 3.9. Government Effectiveness Index - Brazil
0.1

-0.1

-0.2

-0.3

-0.4

-0.5
1996 1998 2000 2002 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: World Bank

3.78. Brazil suffers from a shortage of trust in pu- dants and other vulnerable groups. The evidence indi-
blic institutions, and from ineffective government cates that the country should formulate public policies
policy. On the World Bank’s Government Effecti- that effectively promote equity and target these groups.
veness Index, Brazil is below the LAC median. Not Besides enhance opportunities, targeting social policies
only is the absolute level of effectiveness proble- would boost growth and enhance productivity growth. Pillar 2 | Adopting a new social agenda for inclusive growth

matic, but it has been falling in recent years. Brazil

faces problems with the perception of the quality 3.79. Inequality affects productivity growth. The-
of public services, the quality of the civil service re are important productivity gains from racially
and its independence from political pressure, the diverse teams and office environments. Diverse
quality of policy formulation and implementation, companies have 2.3 times higher cash flow per
and the credibility of the government’s commit- employee, and companies with high racial and eth-
ment to its own policies. nic diversity are 35% more likely to have financial
returns above their respective national industry
(1) Focus public polices for reducing medians. As for gender, a World Bank study finds
poverty and inequalities that promoting gender equality can make a subs-
The discussion in chapter 1 showed that growth and the tantial impact on long-run growth in Brazil, due to
actual social policies were not able to consistently reduce gains in women’s time allocation and bargaining
social inequalities especially for women, afro-descen- power. An “equal work, equal pay” policy, ensuring

BID — Banco Interamericano de Desenvolvimento 107

 that women earn a wage fully reflective of their of white and black or brown children ages 6 to 10
marginal contribution to market production, in primary education school (96.5% and 95.8%,
could add up to 0.2 percentage points to the coun- respectively), however the rate of completion of se-
try’s annual growth rate. Hsieh, Hurst, Jones and condary school for the black or brown population
Klenow (2019) show that between 20% and 40% of (61.8%), continues to be lower than the rate for the
productivity growth in the US over the past 50 years white population (76.8%), despite progress in re-
can be attributed to better talent allocation, with cent years. Furthermore, the proportion of white
the fall of barriers (reduced hidden bias, decrimi- youth ages 18 to 24 who were in or had completed
nalization, and the introduction of affirmative ac- higher education (36.1%) was almost double that
tion) to the participation of marginalized women observed among black or brown youth (18.3%). In
and groups in some areas. The gains in allocative turn, the dropout rate is 6 percentage points higher
efficiency were accompanied by greater diversity, in Afro-Brazilian youth ages 18 to 24 than in their
with no conflict between meritocracy and diversi- non-black non-indigenous peers. A larger gap
ty. In a study of 31 Latin American countries, Woo- can be found in formality rates as Afro-Brazilians
-Mora (2022) shows that higher levels of income are majority among informal workers. In turn,
inequality between racial groups are associated Afro-Brazilians earn about 60% of the income of
with worse economic development outcomes. the white population and are less likely to hold a
leadership position in their workplaces. Unde-
3.80. Tapping the potential of female labor and remployment rate among Afro-Brazilians (64%) is
entrepreneurship can boost productivity . Citi- almost twice the rate among white workers (34%)3.
group estimates that closing the gender gap could
boost global GDP by US$2 trillion while creating up 3.82. Despite recent progress, being black, in-
to 433 million jobs, and that the return from every digenous, or LGBT entails a greater likelihood of
US$1 invested in women-owned start-ups ($0.78) poverty. Brancos earn 66% more than other ethnic
is more than twice as high as that generated by groups, while non-brancos are 60% more likely to
men-owned start-ups ($0.31).1 Yet, venture capital lack access to basic sanitation, and more than twi-
invested in female-owned start-ups is a fraction of ce as likely to be illiterate (OECD, 2020). Preto wo-
that flowing to male-owned start-ups. A study of men are the group with the highest unemployment
start-up investments in Brazil across sectors shows rate, at 20.1%, compared with 12.9% for both preto
systematic gaps in the number and average ticket men and branco women, and 9.1% for branco men
value of investments between male- and female- (UNDP, 2022). Discrimination also limits equal
-owned companies. In the health sector, for instan- access to opportunities in education, work, and
ce, women-led start-ups were only involved in 25% housing for LGBT people4 (UNDP, 2021).5
of all deals, with an average ticket value eight times
lower than that for men-led start-ups.2 3.83. Gender biases undervalue female human
capital. Gender bias and prevailing social norms
Country Development Challenges - Brazil

3.81. There are important disparities between contribute to the gap in female labor force partici-
white and afro-descendant population. Black pation. For example, 14% of working-age women
(preto) and brown (pardo) population in Brazil has who are out of the labor force report domestic
higher illiteracy rates (9.1%) than the white popu- work and care responsibilities as their main rea-
lation (3.9%) (IBGE, 2021). There was no signifi- son for not seeking employment, versus just 1%
cant difference in 2018 between the proportions of men. Underemployment is also higher among

1 Citigroup. Women Entrepreneurs: Catalyzing Growth, Innovation, and Equality. Citi GPS: Global Perspectives & Solutions, 2022
2 Female Founders Report 2021: Liderança feminina e empreendimentos no ecossistema brasileiro de inovação
3 IBGE. Síntese de Indicadores Sociais, 2021
4 There is a lack of information on the issue -- the first-time Brazil has researched sexual orientation was the National Health Survey (PNS), 2019.
5 There are some difficulties in the identification of indigenous and pardos even though the data is collected (please see https://brasil.mongabay.
com/2021/06/nao-sou-pardo-sou-indigena-mobilizacao-indigena-para-autodeclaracao-no-censo-de-2022/ for reference).

108
working women (52%) than among working men levels of education. At the end of middle school and
(47%). The average salary of women in formal high school, the national averages for mathematics
jobs is 20% lower than that of men, even though were, respectively, 24.4% and 10.3%, versus 14.4%
women have higher levels of education (12 years of and 4.6% among Afro-Brazilian students, 13.5%
schooling on average, versus 10 for men). Among 6
and 4.9% among poor students, and 13.6% and 4.3%
the employees of the largest Brazilian companies, among students in the North region. Overall, branco
women earn 23% less than men of comparable students outperform Afro-Brazilian students by
education, age, and experience.7 approximately 10% (SAEB, 2019).

3.84. The Afro-Brazilian population lags on seve- 3.86. Unconscious biases greatly contribute to
ral indicators of education and employment. The inequality in education. According to the OECD’s
illiteracy rate for the Afro-Brazilian population PISA study (2018), Brazil has the highest rate of per-
(preto or pardo) is higher than for the white popu- ceived student discrimination in South American
lation (branco) (9.1% versus 3.9%; IBGE, 2021). As countries for which data was available, and is only
of 2018, the share of children aged 6 to 10 enrolled behind Panama in Latin America. 80% of Brazilian
in primary education was similar among brancos students had teachers who reported a need for pro-
(96.5%) and pretos or pardos (95.8%), but the rate of fessional development to help them work in multi-
completion of secondary school among pretos and lingual, multicultural environments—the highest
pardos (61.8%) remained lower than among brancos percentage among all countries evaluated by PISA.
(76.8%), despite progress in recent years. Further- Empirical evidence suggests that teachers have
more, the proportion of brancos aged 18 to 24 who negative biases toward Afro-Brazilian students
were attending or had completed higher education when assigning grades in mathematics (Botelho,
(36.1%) was almost double that of pretos and pardos Madeira, & Rangel, 2015), and that textbooks often
(18.3%). In turn, the dropout rate among Afro-Bra- display gender and racial biases (World Bank, for-
zilians aged 18 to 24 is 6 percentage points higher thcoming).9 Stereotypes and biases also contribute
than among their non-black, non-indigenous peers. to gender differences in STEM interest and acade-
In the labor market, the formal employment rate mic outcomes (Master and Meltzoff, 2020).
of Afro-Brazilians is 12% lower than that of brancos,
their underemployment rate is almost twice as high 3.87. Structural inequalities prevent vulnerable
(64% versus 34%), their average income is about groups from accessing good jobs. Certain vul-
60% lower, and they are less likely to hold leadership nerable groups such as women, the poor, and the
positions in their workplaces.8 young are at a disadvantage in the labor market.
Women have a higher school attendance rate than
3.85. Inequality is visible at all levels of educa- men, but may lack specific skills that the job market Pillar 2 | Adopting a new social agenda for inclusive growth

tion. In primary school, 23.4% of poor students demands. In addition, women have traditionally
and 29.4% of students in the North region have been the primary providers of family and domestic
sufficient levels of literacy, compared with a na- care in Brazil: on average, they dedicate 18.1 hours
tional average of 45%. In primary school, 32.7% of per week to housework, almost twice as long as men
Afro-Brazilian students, 29.7% of poor students, (10.5 hours). These factors contribute to a lower
and 33.9% of students in the North region have suffi- employment rate (45.3%, versus 65.7% for men),
cient levels of learning in mathematics, versus a na- and female wages equivalent to 76% of men’s wages.
tional average of 51.5% Inequality persists at higher Afro-Brazilians, on the other hand, face structural

6 IDB. SCL Data Indicators calculated from Pesquisa Nacional por Amostras de Domicílio Contínua PNADC 2020
7 Lins de Oliveira, C. & Morrison, J. Raça e Gênero nas Grandes Empresas: Um perfil da força de trabalho do brasil. Nota técnica – BID, 2021
8 IBGE. Síntese de Indicadores Sociais, 2021
9 This issue is not unique to Brazil. A review of textbooks in Chile identified greater prominence of male figures and stereotyped gender roles. Speci-
fically, male figures appear in leadership roles, take risks, and display self-sufficiency or ambition, while female figures focus on caregiving roles in
private contexts, and are not involved in politics or science (Covacevich, 2014).

BID — Banco Interamericano de Desenvolvimento 109

 inequalities since childhood and through their which 484 had targeted educational policies. The
working lives.10 For example, an analysis of the lack of targeted programs and materials creates
2,000 largest companies in Brazil revealed that bran- a disconnect with the needs of minority students,
co men filled 61% of director-level roles, versus 11% fostering disengagement, underperformance,
for Afro-descendant men, and less than 5% for Afro- and potential dropout.
-descendant women. Moreover, branco employees
filled almost 80% of management positions, even 3.90. Prevent unconscious biases to reduce ra-
though Afro-descendants made up 53% of the total cial inequality. This requires:
workforce. Finally, young people have a typically a
11
I. conducting more research into the biases
fragile status in the labor market. Lack of experien- prevalent in Brazil;
ce and skills is a barrier for the young, who spend II. updating teacher training programs, highli-
more time searching for jobs than older jobseekers ghting common biases and how to avoid
(Cunningham, 2016). Moreover, young people who them; and
entered the job market during the economic crises III. updating textbooks and academic materials,
of recent years can suffer their impact for decades. which shape the perceptions and expecta-
tions of both teachers and students.
Policy recommendations
3.91. Reinforce cognitive and socio-emotional
3.88. Promote universal access to high-quality and technical skills. Strengthening socio-emotio-
preschool education. This strategy can prevent nal skills increases high-school graduation rates
the development of skills gaps in early years, par- and other important outcomes (Jackson et al.,
ticularly among children from disadvantaged ba- 2020). Some examples of effective practices, such
ckgrounds. A recent study (Friedman-Krauss and as the school-based group counseling program
Barnett, 2020) in two US cities (Boston, Massachu- ‘Becoming a Man’ developed in the US, focus on
setts, and Tulsa, Oklahoma) found that when black emotional support to black youth to maximize
and white children had universal access to high- their engagement and opportunities, while mini-
-quality preschool with highly trained teachers, mizing potential conflict with authority figures.
low student-teacher ratios, and well-equipped in-
door and outdoor facilities, racial gaps in reading 3.92. Develop training job programs. Apprenti-
at entry to kindergarten were virtually eliminated, ceship programs for Afro-descendant youth may
and gaps in mathematics were cut in half. promote job placement. Youth employment rates
have fallen more sharply than those of older age
3.89. Address the educational needs of minority groups (ILO, 2020), while Afro-descendants expe-
groups. Brazil has a sizable rural, indigenous, rience higher unemployment rates overall (World
and quilombola population, but the education
12
Bank, 2018). An apprenticeship program that targe-
system often fails to offer specific programs for it. ted Afro-Uruguayans may serve as a useful model:
Country Development Challenges - Brazil

According to the 2021 Education Yearbook, 4,426 participating in it increased access to formal jobs by
Brazilian municipalities reported being home to 5% on average one year after completion, with stron-
students who lived in rural areas, but only 2,570 ger effects among the most vulnerable youth (MI-
had specific educational practices and materials DES, 2016). Training programs to reduce discrimi-
for them. Similarly, indigenous students were natory behavior against Afro-descendants and other
present in 420 municipalities, but only 279 had traditionally marginalized groups are becoming
specific programs for them; while quilombola more common in both the private and public sectors,
students were present in 658 municipalities, of but evidence of their effectiveness is still lacking. On

10 Instituto Brasileiro de Geografia e Estatística (IBGE) - PNAD Contínua

11 Lins de Oliveira, C. & Morrison, J. Raça e Gênero nas Grandes Empresas: Um perfil da força de trabalho do brasil. Nota técnica – BID, 2021
12 This term refers to Afro-Brazilian residents of quilombo settlements, first established by escaped slaves.

110
Improving Affirmative Action in
Brazil’s Higher Education System
Several studies of Brazil’s higher education quota system have shown significant improvements in educational
and labor-market outcomes among preto and pardo students. Studies of specific universities have found
that the policy has had a positive impact on college completion and earnings, particularly among male
beneficiaries.1 Despite public concerns that students entering universities would not be able to compete with
other students, Campos et al. (2016) found that there is no statistical difference between dropout rates among
students admitted through the quota system and those accepted from the general pool of applicants.

Affirmative action has helped expand access to colleges and universities. From 2000 to 2010, higher education
enrollment rates among pretos and pardos increased by 273%.2 In 2012, Brazil’s flagship national affirmative
action policy was signed into law: Lei nº 12.711 reserves 50 percent of federal university seats for students
from the nation’s public high schools and requires that these spots be filled in a manner that reflects the local
racial and ethnic composition of the state.3 Brazil has the most extensive university-level affirmative action
program in Latin America, and all 128 federal public universities have formal affirmative action programs.4

The available evidence suggests that students admitted through affirmative action programs have enjoyed
considerable academic success. A study by the Universidade de Campinas (UNICAMP) reported that students
admitted through affirmative action outperformed students from higher socioeconomic and educational backgrounds
due to “educational resilience.”5 Moreover, affirmative-action students scored 87% higher on an educational
performance index than their general-admission counterparts. At the Universidade Federal da Bahia, students
admitted through the quota system performed no differently from other students on their entrance exams across
most fields, and in some, such as law, they outperformed general-admissions students.6 Similar results have been
found at a wide range of universities, including the Universidade de Brasilia,7 the Universidade Estadual do Norte
Fluminense,8 the Universidade Estadual do Rio de Janeiro,9 and the Universidade Federal do Espirito Santo.10

Most pretos and pardos are first-generation college students, and information asymmetries may limit their
awareness of educational opportunities and subsequent career paths. Better reporting by the Ministry of Education’s
Programa Universidade para Todos (ProUni) could ease these constraints. For example, requiring individual
ProUni universities to publicly report racially disaggregated job-placement statistics by field of study would help
disadvantaged students make more informed decisions about their choice of university and field of study. An interactive
digital platform would be the most effective format in which to communicate this information to its target audience.

A more complete understanding of these programs is essential to further refine and expand affirmative action.
For example, studies have found that Brazil’s public universities are an important driver both of social mobility and
gender equity among pretos and pardos.11 However, because these studies have examined dynamics within specific
federal universities and found different gender patterns in long-run earnings, a broader analysis of the labor-

Pillar 2 | Adopting a new social agenda for inclusive growth

market effects of affirmative action will be necessary to identify the drivers of gender inequality across fields.

1 Francis and Tannuri-Pianto (2012; 2018)

2 Census 2000 and 2010.
3 A public sector complement to this law was signed in 2014, Lei nº 12.990, placing a 20 percent quota on federal positions requiring civil service exams
(concursos públicos).
4  http://www.seppir.gov.br/central-de-conteudos/noticias/2016/03-marco/em-3-anos-150-mil-negros-ingressaram-em-universidades-por-meio-de-
-cotas. https://g1.globo.com/bahia/noticia/sancionada-ha-cinco-anos-lei-federal-de-cotas-muda-a-cara-do-ensino-superior-era-muito-limitado.ghtml
5 Tanya Hernandez, 2013– https://www.americasquarterly.org/affirmative-action-in-the-americas
6 Teles dos Santos and Mascarenhas Queiroz, 2016.
7 Velloso, J., & Cardoso, C. B. (2011). Five years of quotas: the probability of enrolling blacks at the University of Brasília. Brazilian Journal of Pedagogical
Studies, v. 92, n. 231, 221-245.
8 Shirlena Campos de Souza Amaral, Marcelo Pereira de Mello, Cotas para Negros e Carentes na Educação Pública Superior: Analise do Caso UENF, de
2004 a 2010, , em InterScience Place v. 1, n. 22 (2012).
9 Machado, Elielma Ayres. Ação afirmativa, reserva de vagas e cotas na Universidade do Estado do Rio de Janeiro (2002-2012). Coleção Estudos Afir-
mativos, v.2, Rio de Janeiro, FLACSO, 2013; and Peria, Michele. Ação afirmativa: um estudo sobre a reserva de vagas para negros nas universidades
públicas brasileiras. O caso do Estado do Rio de Janeiro. Dissertação de Mestrado. 2004
10 Furtado, W. (2011) The practice of inclusion in the university: representations from professors and students. Ph.D. Thesis, FEESP.
11 Duryea et al., 2019

BID — Banco Interamericano de Desenvolvimento 111

 the other hand, empirical evidence shows that work son’s life, with positive effects that range from better
training and courses for the unemployed have pro- grades in school and higher probability of comple-
moted paid female work in LAC (Bando, 2019), and ting high school, to lower probability of unemploy-
raised the female employment rate in Peru, Chile, ment and higher average monthly income in adul-
Argentina, and Colombia (Valdivia 2015; Kaplan et al. thood (Heckman et al., 2010; Heckman et al. 2013).
2015; Aedo and Nuñez 2004; Ñopo et al. 2007; Gonza- There is also evidence of effects on health, including
lez-Velosa et al. 2012; Urzúa and Puentes 2010). lower blood pressure and reduced chances of hospi-
talization more than 20 years after early childhood
3.93. Build affordable childcare and eldercare su- interventions (Conti et al., 2016). Conversely, Cunha
pport to increase female participation in the labor et al. (2006) show that inequalities experienced in
force. Programs focusing on affordable care servi- early childhood tend to persist throughout life.
ces have had a positive impact on female labor force
participation and number of hours worked by you- 3.96. Infant and maternal health have vastly impro-
ng mothers. An IDB-financed public childcare pro- ved over the last 30 years, but significant socio-e-
gram in Rio de Janeiro in 2008 led to a 27% increase conomic disparities remain. Brazil has experienced
in mothers’ employment, while finding that direct significant reductions in child mortality (from 47.1
transfers to mothers via vouchers were more cost-e- deaths per 1,000 live births in 1990, to 12.2 in 2020)
ffective than the public provision of childcare.13 and maternal mortality (from 143 deaths per 100,000
live births in 1990, to 58 in 2019).15 In addition, the na-
3.94. Incentivize the private sector to boost fe- tional immunization program, Programa Nacional de
male participation in the workforce and reduce Imunização (PNI), achieved more than 95% coverage
discrimination towards minority groups. The for essential vaccines in 2003,16 a rate comparable to
private sector could play a key role, partnering high-income countries. However, infant mortality
with academia to update job specifications and rates vary widely: from 7.7 deaths per 1,000 live bir-
skills demanded so to better reflect labor market ths among children of mothers with more than 12 ye-
needs, and encouraging female participation in ars of schooling, to 101.9 (almost 13 times as many)
STEM programs, where Brazilian women remain among children of mothers with no education.
underrepresented. Inequalities begin during gestation: 72% of mothers
have at least seven prenatal care appointments, but
(2) Prepare the youth for the future only 38% of mothers with no education have any
Brazil needs improvement in how it forms the human appointment at all (FGV, 2019).
capital of its youth, to foster thoughtful, productive,
and engaged citizens. The development and acquisi- 3.97. The number of children attending childcare
tion of multidimensional skills and capabilities, which has more than doubled since 2007, but supply is
can occur at multiple times in life, are key to a more insufficient, and quality is low. Pre-pandemic data
developed and inclusive country.14 showed that more than one in four children under
Country Development Challenges - Brazil

the age of three attended a childcare center, but

EARLY CHILDHOOD DEVELOPMENT (ECD) demand is not fully covered, and access is unequal
across income levels, races, and regions (Cruz et
3.95. Early Childhood Development: A persistent al, 2022; FGV, 2022). Figure 3.10 shows major dis-
effect in the life. Several studies have shown the im- parities in access to childcare by income: 75.7% of
portance of early childhood development in a per- children under the age of four in the lowest (first)

13 Mateo Diaz, M. & Rodriguez-Chamussy, L. Childcare and women’s labor participation: evidence for Latin America and the Caribbean. Technical Note – IDB, 2013
14 Cunha and Heckman 2007, Cunha et al. 2010.
15  Coordenação-Geral de Informações e Análises, Ministério da Saúde. http://svs.aids.gov.br/dantps/acesso-a-informacao/acoes-e-programas/bus-
ca-ativa/indicadores-de-saude/mortalidade/. In 2020, the Maternal Mortality Ratio reversed a downward trend and reached 74.7.
16  Brasil Ministério da Saúde. Programa Nacional de Imunizações - 30 anos/Ministério da Saúde, Secretaria de Vigilância em Saúde – Brasília 2003. ht-
tps://bvsms.saude.gov.br/bvs/publicacoes/livro_30_anos_pni.pdf (accessed January 10, 2021).

112
 FIGURE 3.10. Proportion of children between 0 and 3 years old that do not have access to childcare by income

10º 44.0%

9º 47.9%

8º 50.7%
Decile of Family Income per Capita

7º 49.9%

6º 54.6%

5º 58.6%

4º 60.8%

3º 68.4%

2º 71.9%

1º 75.7%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Source: PNADC/IBGE

decile of the income distribution did not attend such as better school performance, behavior, and
preschool in 2019, versus 44% of those in the hi- salary (Gertler et al, 2014). However, the high cost of
ghest (10th) decile (FGV, 2022). 36.2% of branco home-visiting programs entails challenges in sca-
children under the age of four attend daycare, ver- ling them while maintaining quality, consistency,
sus 29.8% of preto or pardo children. Lack of vacan- and effective supervision; for example, the PCF was
cies near the family residence is the main reported meant to carry out 24 visits per family per year, but
reason for not attending daycare. Although the only achieved around 10. Blended approaches, such
supply of childcare centers has expanded in every as those evaluated by the IDB in Boa Vista, Brazil
region, the North and Center-West regions still (Brentani, et al 2022) and other countries during the
have, respectively, only 3.1 and 3 centers for per pandemic, have shown promising results.
1,000 children. Finally, the quality of child-adult Pillar 2 | Adopting a new social agenda for inclusive growth

classroom interactions in childcare, as measured 3.99. Brazil has been a pioneer of conditional cash
by the CLASS instrument, is very low (Bartholo et transfer programs for families with children. The
al, 2022; Cruz-Aguayo et al 2016). social protection program Auxilio Brasil (and the for-
mer Programa Bolsa Família) have sought to reduce
3.98. Programs to support child development at poverty by providing a minimum level of income to
home have expanded but maintaining quality at low-income families. It is important to mention that
scale is a challenge. The federal program Programa the control of students’ presence at schools must
Criança Feliz (PCF) has become the world’s most continue to be monitored to receive the benefit. Du-
extensive home-visiting program. In its early years, ring school closure, the control of that variable was
PCF expanded coverage rapidly and faced quality weakened and now must be enforced. In addition,
challenges, but home visits were found to be effecti- the Programa Brasil Carinhoso (PBC2, later replaced
ve at improving parenting practices and home envi- by the Auxílio Criança Cidadã) provided income as
ronments, obtaining long-term results for children well as support on various aspects of child develo-

BID — Banco Interamericano de Desenvolvimento 113

 pment, such as education and health. According to EDUCATION
official data, the PBC2 program has reached at least
2.8 million children. Yet, there is a lack of consistent 3.103. Brazil has expanded access to education.
evidence on child development outcomes to help Since the enactment of the 1988 Constitution, Bra-
assess and inform public policies. zil has increased its investment in education as a
percentage of GDP. Access to school has improved
Policy recommendations significantly at all levels: daycare (DC), preschool
(PS), elementary school (ES), middle school (MS),
3.100. Expand childcare coverage and improve its and high school (HS). The enrollment rate among
quality, through enhanced supervision and trai- children between the ages of 6 and 14 has reached
ning of caregivers and better infrastructure and 99.4% (Education Yearbook, 2021).
equipment. Relevant measures include improving
the quality of interactions to foster child develop- 3.104. Enrollment rates have still room for growth.
ment and investing in teacher/caregiver training Enrollment rates for DC (37.0%) and PS (94.1%)
programs and supervision protocols. remain below the National Education Plan’s (PNE)
targets (50% and 100%, respectively, by 2024). Ac-
3.101. Enhance the PCF. It is important to validate cess is also unequal across regions: in the North,
the approaches and materials used by home-visi- enrollment rates reach 18.7% for DC and 88.2%
tors, and how they adjust to different socio-cultu- for PS, versus 44.0% and 95.2% in the Southeast.
ral contexts. Various aspects of child visits (e.g., Moreover, as of 2020, only 12.9% of students were
frequency, use of technology, emphasis on group enrolled in full-time education, which was offered
or individual visits) could be revisited drawing on by 29.5% of schools (versus 2024 targets of 25% and
lessons learned from the pandemic. The PCF may 50%, respectively). Raising the rates of children in
consider strategies to train and retain visitors, while DC, PS, and full-time education requires not only
it is essential to strengthen the supervision, monito- more seats available, but also recreational, sani-
ring, and evaluation of the program. Finally, greater tary, and food facilities.
efficiency calls for better information systems and
coordination across government departments. 3.105. Supporting infrastructure is poor. Despite
recent progress, many schools lack basic material
3.102. Improve the design and implementation of resources and infrastructure. In 2017, between 3%
cash transfer programs, to maximize their impact and 6% of schools lacked water, power, or sewage
on young children. Experience from the LAC region facilities, and over 65% lacked a canteen. Over 10%
shows that conditional cash transfers improve he- of schools reported that their ceilings, floors, doors,
alth, cognitive, and language development levels in classrooms, and bathrooms were in poor condition.
children in the short term, and even more so when Moreover, green spaces and playgrounds are only
they reach the poorest households (Lopez Boo and available in 25% of schools. The quality of school in-
Country Development Challenges - Brazil

Creamer, 2019). However, recent evidence from frastructure is worst in the North and Northeast, and
the US (Noble et al., 2021) shows that adjusting the generally poorer in public than in private schools. 17
quantum of transfers or removing conditions might
be as effective to attain better child development ou- 3.106. The quality of education is low, and ine-
tcomes, while lessening the burden of monitoring. quality is high. The quality of MS and HS teaching
These options—including changes to the value, co- is poor, and Brazil was among the worst perfor-
verage, and conditions of cash transfer programs— mers in the 2018 PISA test. On a scale of one to ten,
are worth exploring, especially considering fiscal approximately 43% of Brazilian students were
constraints after the pandemic. below level two (considered the level of minimum

17 OECD (2021b), Education in Brazil: An International Perspective, OECD Publishing, Paris, https://doi.org/10.1787/60a667f7-en.

114
proficiency) in all fields surveyed—reading, ma- need updating. It is unclear how states will make
thematics, and sciences—compared with an avera- the necessary adjustments, especially with regard
ge of 13.4% in OECD countries. On reading, Brazil to hiring teachers and adapting educational con-
ranked 57th among the 77 countries and regions tent. As of 2022, no state has completed all five ac-
for which data was available. In mathematics and tions considered essential to implementing the HS
sciences, the country was ranked 70th and 64th reform. On the contrary, about 60% of states have
respectively, out of 78 nations. Furthermore, ine- not completed any of them (Portela, 2022).
quality is glaring: poorer, Afro-Brazilian, and rural
students, as well as students in the North region, 3.110. Monitoring is still a challenge. The federal go-
underperform significantly. vernment conducts no formal monitoring of DC and
PS, hampering quality evaluation. Since 2011, the
3.107. The pandemic has exacerbated pre-exis- share of students who achieved adequate learning
ting challenges. After most schools closed for in ES has increased by around 50% (from 40.0% to
almost a year, learning attainments will suffer, espe- 61.1% in Portuguese, and from 36.3% to 51.5% in ma-
cially among the most vulnerable students. In Sao thematics). As of 2016, the share of students in the 3rd
Paulo in 2020, students learned an estimated 28% grade with sufficient literacy was 45.0%, which will
of what they would learn in a typical year, and the likely cause learning challenges in the future. In MS,
high-school dropout rate soared by 247% (Lichand there was significant improvement in the rates of stu-
et al., 2021). The economic damage from disruption dents with adequate learning: from 27.0% to 41.4% in
to education may reach R$700billion, or approxima- Portuguese, and from 16.9% to 24.4% in mathemati-
tely US$140 billion (Paes de Barros, R., 2020). cs. In HS, rates for Portuguese moved from 29.2% to
37.1%, and in mathematics they remained at 10.3%.
3.108. The uptake of technical and professio- Only 3% of teachers had to take a test, and 43% had
nal courses (TPC) is inadequate. Although TPC their performance evaluated for promotion (SAEB).
enrollments have increased in recent years, they
remain low relative to other countries. The pro- 3.111. Dropout and repetition are major issues. In
portion of students attending technical vocational 2020, only 69.4% of people aged 19 had completed HS,
education at secondary level, relative to the num- and the rate was even lower among Afro-Brazilians
ber of students enrolled in general high school, is (61.4%), the poor (58.8%), and those enrolled in the
only 11% in Brazil, versus 47% in the EU, 42% in the North region (58.8%) (Education Yearbook, 2021).18
OECD, 27% in Colombia, and 16% in Chile. The main causes for repetition and dropout are:19
I. academic hardship,
3.109. Brazil has recently launched two major re- II. need to work,
forms, but states and municipalities are not ready III. lack of support from relatives, Pillar 2 | Adopting a new social agenda for inclusive growth

to implement them. The new national curriculum IV. pregnancy, and

(BNCC) will include 21st-century skills, such as so- V. lack of interest in finishing school.20
cio-emotional and digital skills. Meanwhile, the HS
reform will make the HS curriculum more flexible, 3.112. Poor inter-governmental coordination
allowing students to choose between academic or thwarts the efficiency of public education spen-
technical streams. Both reforms also aim to close ding. Brazil’s National Basic Education Guidelines
the gap between schools and the labor market and (Lei de Diretrizes e Bases da Educação Básica, LDBs)
are so structural that most teaching practices will mandate that municipalities have sole responsi-

18 This year was not an exception. The results are similar over the years.
19 https://periodicos.ifsul.edu.br/index.php/educarmais/article/view/1823
20  According to a 2010 study, Brazilian students expressed the belief that if HS education increased their job opportunities, they would have a sufficient
incentive to graduate (Fernandes, 2010). This is consistent with evidence that access to technical education can increase motivation and engage-
ment (e.g., Shernoff et al., 2003; Carbonaro, 2005); reduce dropout rates (Kemple and Willner, 2008; Kemple and Snipes, 2000; Hall, 2012); and incre-
ase the probability of graduation (e.g., Polidano and Tabasso, 2014; Dougherty, 2018). Additionally, internships and training with potential employers
can improve chances of finding a job (Fazio et al., 2016; Novella and Perez-Davila, 2017) and, therefore, increase the likelihood of graduation.

BID — Banco Interamericano de Desenvolvimento 115

 bility for delivering early childhood services, the low performers: 83.1% of the undergraduates stu-
states for secondary education, and the federal dying to become teachers had the lowest average
government for tertiary education. In practice, scores in the standardized university admission
however, there are significant overlaps. In São exams. In addition, most undergraduate courses
Paulo, for instance, the state runs daycare facilities in teaching are offered by private institutions, and
and public universities, and many municipalities about one-third are unregulated distance-learning
provide secondary and tertiary education. Pri- programs. Teacher recruiting procedures (concur-
mary education is the only level for which the LDBs sos) are not designed to recognize differences in
prescribe shared delivery between municipalities quality between undergraduate programs, and they
and states, which has resulted in a multitude of ar- fail to systematically recruit the best teachers.22 Lo-
rangements across the country. In most cases, the cal governments do not offer newly hired teachers’
overlaps encourage state and municipal schools to supervision and training during their mandatory
compete for student enrollment, undermining the probationary periods, and on-the-job training is
efficiency of public education spending. limited in scope and quality. Furthermore, career
advancement is not meritocratic, and salary struc-
3.113. Recent efforts to direct more resources to tures are rigid. Raises are limited and allocated on
education and foster equality may fall short of the the basis of academic qualifications and years of ex-
intended results, due to inadequate institutional perience, not classroom performance. A handful of
capacity among the poorer states and municipa- states introduced merit-based payment programs,
lities. Changes to the functioning of the Basic Edu- but most suspended them afterwards.
cation Development Fund (FUNDEB) will:
I. raise the amounts that the federal govern- 3.115. School staffing can be disconnected
ment will transfer to poorer municipalities from actual needs. Expenditure decisions are
and states; and not based on data, contributing to inefficiency
II. require states and municipalities to perform in the management of the educational labor
specific tasks and achieve certain results to force. In private schools, teacher hiring is clo-
access additional resources. sely aligned with demand, but public-school
As an example, states will have to pass a law allowing systems have hired more teachers as enrollment
for part of their ICMS tax to be transferred to muni- figures declined. In addition, local governments
cipalities, based on the latter’s performance in the struggle with teacher shortages in remote and
National Basic Education Evaluation System (SAEB). disadvantaged schools. Finally, schools serving
Municipalities that perform better or improve the the most vulnerable students are more likely to
most will receive more resources, which is expected to have underpaid, inexperienced, temporary, and
increase their engagement.21 However, poorer states uncredentialed teachers, compared with schools
and municipalities have the least institutional capaci- that serve higher-income students.
ty to perform required tasks or achieve targets. In the
Country Development Challenges - Brazil

absence of support for them, inequality will persist. Policy Recommendations

3.114. Schools struggle to attract, support, and 3.116. Use technology to expand and improve
motivate qualified teachers. Teaching is often access to quality education: digitally transform
deemed an unattractive career option, and the education pedagogical practices and mana-
hiring process does not effectively select the best gement systems. Online learning can extend
candidates. Only 5% of high school students report school time, or make it possible to offer courses
being interested in a teaching career, while under- that would not otherwise be available in remote
graduate courses for teacher training admit many or sparsely populated regions.

21 This approach has been implemented in Ceará, the state that has been most successful at improving literacy rates in all its municipalities.
22 Elacqua et al., 2018.

116
3.117. Enhance student performance. Targeted certain pathways require, schools will have to offer
measures may include: at least five hours of classes per day, instead of four
I. in-person and online tutoring programs, to hours.24 The implementation of the reform still
help students who struggle the most; faces a number of challenges:
II. behavioral nudges to suggest activities for I. lack of teachers for certain subjects, espe-
families and students; and cially in remote or scarcely populated areas;
III. lowering barriers to staying in school, by II. lack of laboratories, especially for technical
promoting family support or providing fi- education; and
nancial assistance through conditional cash III. schools located in remote or scarcely popula-
transfers and scholarships. ted areas will not be able to offer all pathways.
Additionally, the curriculum update will only be
3.118. Implement the BNCC curriculum reform. successful if schools are effectively connected with
The BNCC will better prepare students for an ever- labor markets (Busso et al, 2012). This curriculum
-changing labor market, and for building positive reform, opens an opportunity to streamline socio-
relationships with future colleagues. According to the emotional and education skills for climate change
2018 PISA, 48% of students in Brazil reported that their in the new curriculum.
schoolmates co-operated with each other (versus the
OECD average of 62%) while 57% reported that they 3.120. Enhance teaching effectiveness. The fede-
competed with each other (versus the OECD average ral government should comprehensively reform
of 50%). Moreover, Brazil was ranked below average teacher-management policies to recruit, support,
on all the digital skills assessed. Updating student
23
and motivate the best candidates. Brazil’s demo-
skills requires a deep revision of educational systems graphic transition will reduce the demand for new
and tools, such as instructional materials, teacher teachers, providing an opportunity for the federal
training, evaluation processes, laboratories, and equi- government to create more rigorous undergraduate
pment. Programs to develop 21st-century skills can teaching programs (as has been the case in Chile,
also take place outside the classroom or in extra-hours Colombia, and Ecuador). More meritocratic career
activities (Mateo Diaz and Rucci, 2019). Blended and paths, in which promotions do not rely chiefly on
technological learning tools are gaining ground, but years of tenure and academic degrees, would make
evidence of their effectiveness remains sparse. teaching more attractive to high-quality candida-
tes. Local governments should also overhaul their
3.119. Advance in the HS reform. The HS reform recruitment and assignment processes to attract
aims to make curricula more engaging and flexi- applicants well suited to the teaching profession,
ble, and to better connect students with profes- and to create incentives for teachers to work in
sional opportunities. Students in the 10th grade hard-to-staff schools. Governments can take advan- Pillar 2 | Adopting a new social agenda for inclusive growth

(the first grade of HS, when students are typically tage of existing instruments to design cost-effective
between the ages of 15 and 16) will be able to choo- programs to support newly hired teachers.25 Active
se one pathway among Mathematics, Languages, teachers’ salaries make up 71% of the public educa-
Natural Science, Human Science, and Professional tion budget, but these resources can be allocated in
Education. To allow for the additional time that a more effective and equitable way.26 37% of prin-

23  razil’s results on digital skills relative to the OECD average were as follows: 20.2% of students in Brazil have good task-oriented internet browsing
B
skills (OECD average: 31.7%); students use digital devices in school activities for an average of 30.5 minutes per week (OECD average: 40.7 minutes
per week); 41.9% of students in Brazil learned in school how to use keywords in online search engines (OECD average: 55.9%); 57.0% of students in
Brazil learned in school how to compare web pages and decide what information is most relevant for schoolwork (OECD average: 62.6%); and 52.0%
of students in Brazil learned in school how to decide whether to trust information from the internet (OECD average: 69.3%).
24 The federal government is also encouraging states to increase the share of students in full-time education, which requires more than seven hours a
day in school. The Ministry of Education is providing states with additional resources for infrastructure upgrades, as well as additional transfers for
each student enrolled in full-time education.
25 For example, the city of Manaus, in the state of Amazonas, provides mentoring and support to incoming teachers during their probationary period to
improve their teaching skills. High-quality on-the-job training for tenured teachers, coupled with systematic teacher evaluation, also have the poten-
tial to improve teacher effectiveness.
26 IDB’s experience in Ecuador and Peru shows that upgrades to online systems can improve allocation to hard-to-staff schools, and narrow the gap in
teacher quality between poor and rich schools.

BID — Banco Interamericano de Desenvolvimento 117

 cipals reported having assigned their most-senior dropout (Lichand, 2021);
teachers to classrooms with better-performing IV. financial support to keep students in school,
students (SAEB), a trend that perpetuates inequali- at least until the academic and financial con-
ties. Student allocation can also be improved: only texts improve (Pereira, Vitor; 2016); and
61% of HS principals reported having enough in- V. support to education departments to im-
formation to analyze demand for new classrooms, prove sanitary conditions in schools, so that
and 50% of them reported adopting a first-come, students can safely return to the classroom.
first-served rule to allocate students (SAEB). Lack
of control allows school principals to keep classes 3.123. Increase the use of technology to improve
below their optimal capacity, increasing personnel education management. New technologies can
costs. Furthermore, student transportation is not integrate information systems and build statisti-
optimized to try and reduce the cost or time of stu- cal capacity among local governments, enabling
dent travel, especially in rural areas. them to improve the efficiency and equity of
education expenditures. Improve data collec-
3.121. Improve the selection of school principals tion, create an integrated intelligence platform,
and monitoring practices. According to the 2021 and foster a sector-wide culture of performance
Education Yearbook, 49% of school principals monitoring and expenditure evaluation.29 Infor-
were appointed without a competitive selection mation technology can also enable states and mu-
process. Moreover, evaluation instruments and nicipalities to predict where new infrastructure
data are key to improving educational practices will be most effective and to better attend to the
and processes, but they are not usually available. needs of new teachers. Finally, distance-learning
For example, the federal government does not technologies can help the school system reach
offer evaluation tools for daycare, and only 23% students in remote rural areas.
of municipalities perform their own evaluation
(SAEB). Only 45% of secretaries use their result at 3.124. Improve the institutional capacity and pro-
SAEB to define targets for the following year, and cesses of states and municipalities. Brazil should:
only 7% use them to reassign or dismiss school I. support education departments to identify
principals (SAEB). Data is poorly used, without potential process improvements, espe-
adopting artificial intelligence tools or respecting cially using the IDB’s SIGED Framework
citizens’ privacy (Cabrol et al, 2020). Finally, there and allowing for interoperability among
is little coordination between education depart- social departments;
ments and other social departments, hampering II. strengthen the innovation ecosystems, and
improvements in efficiency. support education departments to acquire
innovation from external sources;
3.122. Mitigate the impact of the pandemic. The III. promote the use of responsible and effective
Country Development Challenges - Brazil

loss of learning and rise in inequality due to school artificial intelligence, to enhance efficiency
closures call for action, notably: without perpetuating biases;
I. remediation programs and online tutoring
27 28
IV. support governments to reform teacher re-
to help students who suffered the most; cruitment and attract better candidates; and
II. emotional support for students and teachers V. encourage education departments to evalua-
returning to school; te the performance of students and school
III. early warning systems and behavioral nu- staff, and to offer incentives to high-perfor-
dges to increase engagement and prevent ming principals and teachers.

27 The most widespread such program is Teaching at the Right Level (TaRL), which has been implemented under various models with different impacts.
28 Online tutoring programs obtained important results in improving outcomes for the most vulnerable students (Almeyda, 2022).
29 Monitoring and analysis of data have helped the state of Pernambuco identify and manage inefficiencies in the school system (e.g., teacher absen-
teeism and underutilization), and reallocate resources to programs with a greater impact on learning.

118
3.125. Support private-sector participation to ad- (3) Build strong social protection
dress key challenges. The operational experience and labor markets
in health PPPs and other modalities of private-sec- Strong social protection and labor systems help people
tor service delivery could offer ideas to address the find jobs, become more productive, cope with shocks, and
needs of the education system. Adequate infras- invest in the health and education of their children; at the
tructure to support learning will be particularly same time, they support an aging population. Jobs are
important, as students return to school while the critical to reducing poverty and promoting prosperity.
COVID-19 pandemic continues. 30
In a healthy labor market, people have the right skills to

TABLE 3.1. Social Protection Net in Brazil

Formal Government
Program Target
Workers Only Financed

Bolsa-Familia (Auxilio Brasil) No Yes

Bolsa Verde No Yes

BPC No Yes
Low Income
Abono Salarial Yes Yes

Salário-Familia Yes No

Garantia-Safra Yes Yes

Salário Mínimo Yes No

13 Salário Yes No

Vale transporte Yes No

Pillar 2 | Adopting a new social agenda for inclusive growth

Férias Yes No

Seguro-Desemprego Yes Yes All workers

FGTS Yes No

Licenca Maternidade e Paternidade Yes No

Auxílio-Doença Yes Yes

Auxílio-Acidente Yes Yes

Source: Souza et. al. (2020)

30 OECD, 2021

BID — Banco Interamericano de Desenvolvimento 119

 secure good jobs, the right protection against risks arising responsibilities to each level of government. The
from a volatile economy, and the right mechanisms to PNAS created the Single System of Social Assistance
transition smoothly and safely from one job to another. (Sistema Único de Assistência Social, SUAS), defining
its service portfolio and the configuration of territo-
SOCIAL PROTECTION rial networks. SUAS services are organized into:
I. Basic Social Protection, which is preventati-
3.126. The social protection system in Brazil is ve in nature and delivered through the Social
extensive, but fails to adequately cover informal Assistance Reference Centers (CRAS); and
workers. In recent decades, Brazil has created II. Special Social Protection, to remediate bre-
a social protection net to protect workers from aches of social rights, offered through the
economic fluctuations, alleviate poverty, and mi- Specialized Reference Centers for Social As-
tigate inequalities. However, several challenges sistance (CREAS).
remain. Most existing programs focus on formal The SUAS network covers all municipalities in Bra-
workers: according to Souza et al. (2016), 75% zil through 8,488 CRAS and 2,794 CREAS, reaching
of the public resources available for social pro- approximately 57 million people. One of the main
tection programs in 2014 were limited to formal functions of the CRAS is to coordinate beneficiary
workers, although these only make up 45% of the management in the Cadastro Único (CadU), the
employed workforce. Another problem is a lack single registry of beneficiaries designed by the cen-
of joint planning, whereby although each pro- tral government. In addition, the CRAS manages
gram in the protection network has a rationale in the enrollment of families into conditional cash
isolation, there are overlaps and gaps at the sys- transfer programs (Bolsa Familia (BF), and its repla-
temic level (Barros et al., 2021; Souza et al., 2020). cement Auxilio Brasil since its introduction in 2021).
While those with the highest incomes benefit However, the effectiveness of SUAS has been limited
from the protection network for formal workers, by institutional constraints, a lack of financing for
and the most-vulnerable families receive assis- service delivery, the absence of clear protocols
tance from the government’s income transfer and guidelines, and coordination challenges. The
programs, a third group is marginalized in terms SUAS’ annual budget has significantly reduced in
of social protection: low-income workers who recent years, from approximately US$570 million to
spend most of their productive lives in informali- US$175 million between 2019 and 2021.
ty. Although these workers make an income that
takes them above the poverty line, their key issue 3.128. Non-contributory transfers seek to pro-
is its instability. Any fluctuation in the economy, vide a minimum income to people who do not
including health crises, directly affects informal participate in contributory benefit schemes. The
workers. Chapter 1 showed how this became main non-contributory programs are: Auxílio
Country Development Challenges - Brazil

apparent during the pandemic, with increases in Brasil (AB), a conditional cash transfer program;
poverty and inequality and the subsequent suc- Benefício de Prestação Continuada (BPC), a trans-
cess of emergency aid (auxilio emergencial). fer benefiting those with disabilities or insufficient
income from work or pensions, and who do not
3.127.The budget for social programs has been have other resources; and a rural pension, recently
shrinking. To reduce duplication and inefficiencies modified by the pension reform. Additionally, the
and improve the coverage and effectiveness of SUAS—operated by subnational governments with
social assistance for the most vulnerable, in 2004 partial funding from the federal government—of-
Brazil instituted the National Social Assistance Poli- fers various support services to poor households
cy (PNAS), which established clear principles for so- and individuals. To mitigate the shock from the
cial protection, defined its typologies, and assigned pandemic, the federal government adopted emer-

120
gency responses including the expansion of AB fits, called “financial benefits”, focusing on
coverage, and temporary transfers equal to about families in extreme poverty and those with
half the minimum wage.31 children under the age of three; and
II. six benefit mechanisms to “incentivize indi-
3.129. The pandemic has revealed the existen- vidual effort and productive emancipation.”
ce of “invisibles”. In response to the social crisis AB sets a minimum value of R$400 for each financial
resulting from the pandemic, in March 2020 the benefit to families, so that the minimum AB transfer
government designated 1.2 million additional fa- is around twice as large as the average BF transfer.
milies as beneficiaries of the BF program. Addi- In addition, raises to the poverty and extreme
tionally, in April 2020 the government started im- poverty lines may increase the number of benefi-
plementing the Emergency Assistance (Auxilio ciary families from around 14.5 million to over 17
Emergencial, AE) program for informal workers, million. The AB budget is expected to jump by 174%,
the self-employed, and the unemployed. The AE from R$35 billion (as in the 2021 BF budget) to R$96
was designed as a temporary program, granting billion in 2022, and to reach 1.1% of GDP.
R$600 per month per person (equivalent to 57.4% 3.131. The AB program introduces novel su-
of the minimum wage, or three times the value pplementary benefits, but some of them could
of the average BF transfer) to up to two people in be difficult to implement. Such benefits include
the same family. For families in which a woman the School Athletic Benefit, the Beginning Junior
was the sole breadwinner, the monthly value of Scientist Scholarship, the Child Citizen Benefit,
the benefit was extended to R$1,200. The CadU, the Rural Productive Inclusion Benefit, and the
which included almost 28.5 million families Urban Productive Inclusion Benefit, which can be
(30% of the country’s population) as of March granted to members of families who receive the
2020, was the main platform for identifying core AB benefits. The supplemental Child Citizen
AE beneficiaries. However, additional digital Benefit provides families with a voucher to cover
mechanisms were developed so that families private day-care costs; however, the modest value
outside the CadU, and who declared that their in- of the voucher, and a lack of established screening
come had been affected by the pandemic, could and supervision mechanisms, may increase the
apply for AE. More than 68 million people bene- risk of engaging low-quality providers. The Rural
fited from AE (60% identified by the CadU, and Productive Inclusion Benefit includes a require-
the rest through digital tools), at a cost of more ment for beneficiaries to offer food donations in
than US$52 billion. A large body of independent return, which could however be unfeasible, due

Pillar 2 | Adopting a new social agenda for inclusive growth

evaluations credits the AE with ensuring that to insufficient surplus production among family
the level of poverty did not worsen—or even de- farmers and to high costs from logistics, warehou-
clined—during 2020, and with particular success sing, and perishable losses.
in protecting Afro-Brazilian women.32
3.132. Support is available for persons with di-
3.130.The new parameters of the conditional sabilities, but major gaps remain. Approximately
cash transfer program Auxílio Brasil (AB), which 16% of the Brazilian population has a disability
replaced Bolsa Familia in 2021, may generate new (above the average of 13% in Latin America), and
distortions and increase fiscal pressure. The AB the percentage rises to about 25% among those
program is organized around two benefit types: aged over 60. People with disabilities face greater
I. a set of three direct income-transfer bene- economic vulnerability due to fewer income-ge-

31 The average value of a BF transfer, before AB, was around R$220.

32 For example, Costa, E. e Acioli, M. (2021). “Estudo de avaliação do Programa de Auxílio Emergencial: Uma Análise sobre Focalização e eficácia a nível
municipal”. Brazilian Journal of Development. Nassif-Pirez, L., Cardoso, L., y Matos de Oliveira, A. (2021). “Gender and race in the spotlight during the CO-
VID-19 pandemic: the impact of the Emergency Benefit on poverty and extreme poverty in Brazil”. Levy Economics Institute of Bard College Policy Note.

BID — Banco Interamericano de Desenvolvimento 121

 nerating opportunities and higher health and their coordination, ensuring protection for worke-
support costs in their households. Moreover, those rs while fostering productivity (which has been
with motor disabilities suffer from a limited supply stagnant for years), and expanding protection for
of adapted infrastructure and transport; for exam- informal workers. These improvements require
ple, according to the IBGE’s 2017 MUNIC survey, four key steps:
only 11.7% of the municipalities assessed had a I. an effective use of municipal quotas, based
fully adapted bus fleet. The main support program on estimates of families in extreme poverty;
for people with disabilities living in poverty in II. more frequent re-registration, and intensifi-
Brazil is the BPC, which reaches 2.2 million people cation of home visits to achieve better quality
with a monthly monetary transfer equal to one mi- of CadU information;
nimum wage. It is estimated that almost 1 million III. use of all CadU information, and not just
people await a medical examination to determine declared income, to assess vulnerability; and
their eligibility for this benefit. The BPC, which IV. greater engagement on the part of Municipal
also grants a non-contributory pension to older Councils of Social Assistance (CMAS) (Barros
adults living in poverty, has a budget correspon- et al., 2021).
ding to 0.8% of GDP. In addition, people with di-
sabilities suffer from several challenges related to 3.135. Improve data quality to better identify the
education, income and labor force participation. vulnerable population. Data on formal workers,
available from the Annual Report of Social Infor-
3.133. Brazil has a rapidly aging society. As of 2020, mation (Relação Annual de Informações Sociais,
10.5% of those aged over 65 in Brazil were estimated RAIS), is updated annually, but the same is not true
to be in a situation of functional dependency—i.e., for CadU data. Camargo et al. (2022) estimate that
in which they struggle to carry out basic activities of as of 2019, the CadU featured up-to-date informa-
daily life (Aranco, Ibarrarán, and Stampini, 2022). tion for slightly over half of those registered. The
Based on a conservative assumption in which the AE program boosted registration, but how this
dependency rate by age group remains constant data will be updated and used to improve the focus
over time, the incidence of dependency is expected of the program remains to be seen. The pandemic
to increase to 12.4% in 2050. This implies that the revealed the need to expand the protection ne-
number of dependent older adults will triple in the twork, reaching groups not covered by worker pro-
next three decades, going from 2.1 million to 6.4 tection programs—especially informal workers.
million people. The main reason for this accele-
rated growth is the increase in the longevity of the 3.136. Encourage the debate on social protection
population and, in particular, the rise in the propor- for informal workers. The current debate focuses
tion of people aged 80 and over. Between 2020 and on two main proposals: bringing informal workers
Country Development Challenges - Brazil

2050, the percentage of adults aged 65 and over will into formality, placing them in the same protec-
increase from 9.6% to 22.7%, while that of adults tion network as formal workers; or develop dedi-
aged 80 and over will go from 2% to 7%. The supply cated assistance programs, such as AE. Botelho et
of services for the elderly varies across the country al. (2020) propose the creation of a so-called Social
but is often limited in both coverage and quality. Responsibility program, while other approaches
call for a protection program for individual micro-
Policy Recommendations entrepreneurs or a universal basic income.

3.134. Expand and improve the existing structure 3.137. Review and consolidate adjustments to the
of social protection. It is necessary to improve conditional cash transfer program AB. Studies on
the focus of social protection programs, enhance the implementation, modeling, and impact of the

122
new transfer scheme could provide a useful basis ple who are functionally dependent and in need
for design and operational modifications. Many of long-term care are elderly, live in the commu-
subnational governments also maintain comple- nity, and are supported by informal caregivers
mentary conditional cash transfer programs, who- (family or friends, mostly women). Maintaining
se features and applicability must be reassessed in their quality of life requires access to long-term,
light of the new federal transfer system. Finally, a comprehensive care from interdisciplinary teams,
stable financing source for AB will need to be de- with the aim of reversing or slowing down the pace
termined, considering the current fiscal situation of loss of functional capacity, ensuring dignity and
and expenditure ceiling. well-being, and providing guidance and support
to caregivers. However, such services are scarce
3.138. Enhance the effectiveness of the SUAS. in Brazil, imposing a major burden on caregiving
The SUAS would benefit from a research agenda families and limiting the chances of healthy aging
to guide necessary reforms that go beyond those for those with reduced functional capacity. A sys-
regarding the CadU, with a particular focus on tematic, in-depth review of day-services models
the human resources available to the CRAS and available in Brazil and internationally would be a
CREAS services. Improving quality of service also first step toward designing a better socio-sanitary
requires evidence-based protocols and guidelines, (i.e. shared between health and social assistance)
as well as incentives to greater coordination, es- community-based service for elderly people in a
pecially between health, educational, and labor situation of functional dependence.
services. The adoption of information systems for
monitoring, and the rigorous use of data for the MIGRATION
follow-up and evaluation of social policies, can
lead to a more-efficient use of financial resources 3.141. The inflow of Venezuelan refugees and mi-
in an increasingly restricted fiscal context. grants into Brazil is a humanitarian crisis that fur-
ther presents development challenges. Between
3.139. Prioritize the social inclusion and auto- 2013 and 2019, over 260,000 Venezuelans applied
nomy of people with disabilities (PWDs). A natio- for refugee or residency status in Brazil, with the
nal certification system could ensure the consis- vast majority entering through Roraima.33 As of
tency of eligibility criteria and the accessibility of May 5th, 2022, there were approximately 345.000
programs that promote the autonomy of PWDs, Venezuelan migrants settled in Brazil.34 Overall
from enrollment to graduation. For those who are analysis suggests that although legal constraints
functionally dependent, access to qualified care are minimal and work permits are relatively easy Pillar 2 | Adopting a new social agenda for inclusive growth

services should be encouraged as an alternative or to obtain, Venezuelan refugees and migrants in

complement to unpaid family care, which gene- Brazil face challenges integrating into the edu-
rally falls on the women of the household. Finally, cation system, social protection programs, and
more research is needed to expand the currently the formal labor market. They are 53 percent less
limited knowledge about the situation of PWDs in likely to be in school, 64 percent less likely to be
Brazil, the existing services for them, and the po- formally employed, and 30 percent less likely to
tential cost of extending their reach. access social assistance programs as compared to
their native counterparts.35 Venezuelan students
3.140. Develop a comprehensive long-term care are more likely to be enrolled in grades lower than
policy for the functionally dependent. Most peo- their Brazilian age cohorts. They are also more

33 The Economy of Roraima and the Venezuelan Flow (2020), UNHCR.

34 https://www.r4v.info/es/document/r4v-america-latina-y-el-caribe-refugiados-y-migrantes-venezolanos-en-la-region-mayo-2022.
35 Integration of Venezuelan Refugees and Migrants in Brazil (2021), World Bank and UNHCR.

BID — Banco Interamericano de Desenvolvimento 123

 likely to attend overcrowded schools. Working-age sector by 7.1 million. The social-distancing mea-
Venezuelans face professional downgrading and sures made necessary by the health crisis entailed
are more likely to be in short-term jobs characteri- that the informal sector was the most affected and
zed by lower wages and longer hours and the situa- could not function as a cushion as during previous
tion is even worse for women. economic crises. Moreover, the drop in the partici-
pation rate was unprecedented: from an average of
Policy Recommendations 62.9% between 2012 and 2019, it fell to 57.3% in the
second quarter of 2020.
3.142. Adopt strategies to improve socioecono-
mic integration of migrants. The strategies include 3.145.These challenges are even more intense
the improvement in school capacity, the provision for specific population groups such as women,
of language training to migrants arriving in the Afro-descendants, and young people. Subgroups
country and specially at schools, the facilitation on of the population face an even more fragile sce-
the accreditation of Venezuelan education degrees nario, the unemployment rate is higher for Afro-
or the certification of competencies, the streng- -descendants, for women, and for the youth of 18
thening in labor market insertion policies, inclu- to 24 years old37. In the case of young people, this
ding job intermediation, training, raising aware- distance is now more significant than before 2015:
ness of the legal rights, and providing assistance before, the youth unemployment rate was 7.6 per-
with documentation and Supporting voluntary re- centage points above the average of the workforce,
location programs to places with favorable em- and since then, this difference has been around
ployment opportunities and labor force scarcity. 13.0 percentage points. Furthermore, it is essential
to note that the unemployment rate is just one of
LABOR MARKETS many indicators of how vulnerable certain groups
are in the Brazilian labor market. However, there
3.143. The state of the Brazilian labor market are also significant gaps in the participation rate,
has been deteriorating since 2015. An economic wages, and the quality of the jobs they occupy.
slowdown worsened unemployment, which rose
from an average of 7.2% between 2012 and 2014, to 3.146. Brazil’s labor market has been suffering
13.9% in 2017.36 Improvements in formalization from structural issues for decades. Brazil’s labor
also came to a halt. From around 56% in the 1990s, productivity has been stagnant for decades and
the informality rate plunged below 44% in 2014 but is currently only equivalent to 23% of US levels—
then started growing again, exceeding 47% in 2019 much lower than in countries such as Israel (66%),
(Veloso, Peruchetti and Barbosa-Filho, 2022). Ove- South Korea (63%,) and LAC peers such as Chile
rall, immediately before the COVID pandemic, the (42%), Mexico (35%), Uruguay (36%), and Colom-
Country Development Challenges - Brazil

Brazilian labor market was already showing signs bia (26%). Low productivity growth affects the
of stress, with growing numbers of unemployed prospects for sustainable long-term growth and
and informal workers. the creation of quality jobs. Notably, the growth in
formalization experienced between the 1990s and
3.144. The pandemic has added major challen- 2014 (see paragraph 3.158) was not accompanied
ges, with about 11.3 million jobs lost and more by structural gains in productivity.
people leaving the workforce. The pandemic has
reduced the number of people employed in the 3.147. Informality excludes workers from social
formal sector by 4.2 million, and in the informal security networks. In Brazil, informal workers

36 Instituto Brasileiro de Geografia e Estatística (IBGE) - PNAD Contínua

37 Instituto Brasileiro de Geografia e Estatística (IBGE) - PNAD Contínua

124
 FIGURE 3.11. Proportion of the labor force in the informality – 2012-2019

50.0%

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
2012 2013 2014 2015 2016 2017 2018 2019

Total White Black and Pardos

Source: IBGE

can make independent pension contributions, but it offers perverse incentives for both workers and
monetary and non-tangible costs affect pension employers to sever potentially productive work
coverage. Only 65% ​​of the employed population relationships. High turnover also disincentivizes
in Brazil is covered by a pension system, ranging employers and employees from investing in trai-
from 79% of employees (formal and informal, in ning and education, further affecting productivity.
the public or private sector), to 40% of domestic
workers and 31% of the self-employed (IPEA, 3.149. A rapidly aging population puts pressure
2021). As a result, 16% of the elderly population has on the pension system. Brazil implemented a me-
no coverage—a proportion that would be 4 percen- aningful pension reform in 2019 which, according
tage points higher in the absence of the BPC, which to estimates from the Ministry of Economy, will Pillar 2 | Adopting a new social agenda for inclusive growth

grants the low-income elderly the monthly equiva- save around R$855.7 billion over 10 years (about
lent of a minimum wage. While this protection is 9.8% of GDP in R$ of 2019). However, population
commendable, it may also incentivize informality, aging is accelerating across LAC, and Brazil is no
although data on the matter is inconclusive. different: the period for people aged 65 and over to
grow from 10% to 20% of the total population will
3.148. The labor market features high turnover be just 25 years in Brazil, versus around 75 years in
and short average job tenure. The average tenure the UK, 67 in France, and 53 in Germany (Bosch,
of employment in Brazil is around five years, the Pagés, and Ripani, 2018). This rapid shift will also
second-lowest after the US among 22 countries stress the sustainability of the social security sys-
assessed by the OECD (Silva and Almeida, 2015). tem, at both the federal and subnational levels.
While labor regulation in the US is flexible, the
case of Brazil is different: Brazilian legislation is 3.150. Students and workers lack technical and
relatively rigid but, despite the 2017 Labor Reform, socio-emotional skills that the job market expects.

BID — Banco Interamericano de Desenvolvimento 125

 The slow growth of labor productivity in Brazil in pport mechanisms and active labor market pro-
recent years has been accompanied by a significant grams (ALMPs) (Amarante, Arim and Dean, 2011;
rise in the level of education among the population. Gerard and Gonzaga, 2013; González-Rozada and
Average years of schooling rose from 6.1 in 2001 to Pinto, 2011; Medina, Núñez, and Tamayo, 2013;
7.9 in 2013, a growth of 28% (or 2% per year on ave- Huneeus, Leiva, and Micco, 2012). Workers and
rage) (Ferreira, Menezes-Filho, and Komatsu, 2017). companies could benefit from formal job-search
Yet, as in other LAC countries, there is a discon- methods that have positive impacts on wages and
nect between the skills taught in school and those productivity, are cost-effective (Card, Kluve, and
demanded for entry-level jobs (Accenture, 2018; Weber, 2015, 2010), shorten the duration of unem-
Bassi et al, 2012). Even when the country invested in ployment, and increase the rehiring rate (Davis
extensive education and professional training pro- and Michaelides, 2013; Forslund et al., 2011).
grams, it failed to achieve results in employability. A
notable example is Pronatec, one of the largest pro- 3.152. Labor legislation and the regulatory envi-
fessional qualification programs in history. Betwe- ronment stifle the creation of quality jobs and the
en 2011 and 2016, it served 9.7 million people, with growth of productive companies. Brazil imple-
expenditures of R$38.5 billion.38 However, evalua- mented a labor reform in 2017, whose key points
tions of the program showed no positive effects on included: the abolition of taxes to fund unions,
employability or remuneration (Barbosa-Filho, which had the effect of reducing the unions’ in-
Porto and Liberato, 2015). On the other hand, a spe- fluence; the potential allocation of legal costs to
cific program variant which received input from the workers in case of defeat in employment disputes;
private sector enhanced employability by between and more flexibility in hiring policies. However,
8% and 16% (O’Connell et al., 2017). The Brazilian employers still perceive general non-wage costs,
Apprenticeship Law suffers from poor compliance, as well as wage costs for low-skilled workers, as
as companies do not consider hiring young appren- high. This tends to harm formalization, particu-
tices a worthy investment. larly at times of economic stagnation. In addition,
the reform did not address the overlap in benefit
3.151. The systems available to jobseekers are entitlements that arises only in the event of dis-
inefficient. The use of public employment systems missal—e.g., FGTS39 and unemployment insuran-
(PESs) is low in Brazil and in LAC in general. In ce—and which creates perverse incentives, such as
the region, only 30% of workers seek jobs throu- dismissals encouraged by the workers themselves
gh formal employment services, which are often (although this issue loses relevance when the labor
targeted to informal workers (Alaimo et al., 2015). market is less favorable). Finally, the reform did
In Brazil, between 2012 and 2017, only 3.9% and not promote greater connection between active
3.4% of the unemployed used the SINE (the coun- and passive labor market policies.
Country Development Challenges - Brazil

try’s PES) as the primary method for finding a job

(Moretto et al., 2018), while more recent data yields Policy Recommendations
an even lower percentage (around 2% in Q2 2021).
SINE service stations also offer access to unem- 3.153. Bolster the technical and socio-emotional
ployment insurance, but the two programs are skills of students and workers. It is essential to
not coordinated, nor do they liaise with training create incentives for employers to invest in training
programs. Regional studies, which include Brazil, that is relevant to their actual demand for skills, and
show limited coordination between income-su- which can increase productivity and formality. The

38 Carta do FGV-IBRE Instituto Brasileiro de Economia.

39 Severance Indemnity Fund, or Fundo de Garantia do Tempo e Serviço.

126
current policy focus on job-readiness and digital a globalized market, remote work, and more flexi-
and soft skills is timely, as is support for curricula ble labor relations—can erode the effectiveness of
and learning approaches aligned with labor market a strategy to promote formalization through subsi-
demands. Public-private partnerships can help dies or exemptions (Harris and Krueger, 2015; Har-
identify firms’ needs and skills gaps and build a fee- ris, 2018; World Bank, 2019; Boeri et al., 2020).
dback ecosystem (Bos and Rucci, 2020). In addition,
government-led programs can be coordinated with 3.155. Invest in the Public Employment System
results-based incentives for private investment. to better match jobseekers with vacancies. The
Modular and stackable training courses, combined SINE has been undergoing structural changes
with certification systems, may allow people to (IGD-Sine-Barbosa Filho, Ferreira and Araújo,
improve their employability. The 2017 High School 2020), paving the way for payments conditional
Reform is a step in the right direction, as it seeks to on worker placement. However, there is room for
expand the offer of technical education and define a improvement, especially on three fronts:
more-flexible curricular organization. I. the use of technological and AI-based tools
for matching purposes;
3.154. Consider policy options to reduce informali- II. coordination with unemployment insurance
ty. Barros et al. (2021) point out that high costs of for- and training programs; and
mal employment strongly affect employers’ willing- III. accessibility of physical facilities and staff
ness to hire, maintain, and dismiss a worker in the training.
formal sector. Some of these costs are directly rela- AI-based tools may improve matching quality
ted to a worker’s remuneration (such as 13th salary and provide tailored advice to jobseekers, while
or paid leave), while others are more indirect conse- combining big data with traditional sources of
quences of labor legislation. Thus, a well-designed information may help anticipate labor market ne-
reduction of such indirect costs can increase de- eds and new tasks, occupations, and sectors, such
mand for formal work, without changing incentives those connected to the green transition. Better
for workers. Certain studies show that a reduction coordination with unemployment insurance and
in employment charges results in an increase in for- training programs would increase employability,
mal pay, a fall in the informality rate, and a potential provided that training programs are effective and
increase in total employment (Gruber, 1997; Fer- relevant to market demand. Finally, it is vital that
nández and Villar, 2017). For Brazil, Ulyssea (2018) SINE’s facilities are accessible to people with disabi-
estimates that eliminating employer contributions lities or special conditions, and that its staff has the
would cause a fall in the number of informal firms know-how to use technological tools and data and Pillar 2 | Adopting a new social agenda for inclusive growth

and workers and, consequently, an increase in provide adequate guidance to groups with specific
wages. On the other hand, Pagés (2017) argues that needs—for example, women who are returning to
policies promoting formalization through subsidies the job market, young people, and other groups tra-
or exemptions from social security contributions ditionally discriminated in the job market.
usually have a limited impact in terms of formal
job creation, while incurring high costs in terms of 3.156. Develop qualification and requalification
forgone tax revenue. Moreover, Corseuil et al. (2016) programs. New technologies can help qualifi-
find that the Individual Microentrepreneur (MEI) cation providers to identify skills in demand in
law had no impact on the formalization of compa- the private sector, train professionals for careers
nies but increased the likelihood of contribution to in technology, offer labor intermediation, and
social security. Finally, ongoing structural changes make data interoperable. For example, data from
in the labor market—expansion of the gig economy, SINE could be cross-referenced with the CadU

BID — Banco Interamericano de Desenvolvimento 127

 to actively search for the unemployed and those HEALTH
too discouraged to seek employment. Moreover,
interoperable data would allow service centers for 3.159. Brazil’s total health expenditure is com-
the vulnerable population (CRAS) to provide basic parable to other countries with universal health
guidance services and coordinate with SINE. systems, but unlike in most of them, it is driven by
private spending. In 2019, Brazil spent the equiva-
3.157. Consider incentives to hiring. By reducing lent of 9.6% of its GDP on health, in line with OECD
labor costs, hiring credits can spur job creation, countries with universal health systems such as
and are more effective in a recession if applied the UK (10.2%), Spain (9.1%), Australia (9.4%), and
broadly rather than solely to disadvantaged groups Canada (10.8%) (IBGE, 2022; OECD, 2021). Howe-
(Neumark, 2013). Evidence from the LAC region ver, while public expenditures make up 70% of
also suggests that they can increase employability the total health expenditure in the OECD, in Brazil
and formality among certain vulnerable groups they only add up to 48%, making it the only country
(Novella and Valencia, 2019; Galasso, Ravallion with a universal health system where private spen-
and Salvia, 2004), particularly when there are cons- ding on health is higher than public spending. This
traints to the downward adjustment of wages in relatively low public health expenditure hinders
scenarios of low labor demand (Pagés, 2017). the achievement of an effective system offering
universal coverage of all health needs (Rocha,
3.158. Monitor and adjust the pension system. Furtado and Spinola, 2019; Fiocruz, 2012). An
Despite the Pension Reform of 2019, the accele- immediate consequence of low public spending
rating rate of demographic ageing requires conti- is that the quality of healthcare services is subopti-
nuous monitoring and adjustments. It is essential mal. Recent studies have found that around 65% of
for Brazil to make federal and state-level pension the deaths of children under the age of 5 could have
systems more sustainable and equitable over time. been prevented, and that more than two-thirds of
A major step toward this outcome is determining the preventable deaths were due to the poor qua-
the objectives of the pension system explicitly, lity of care offered to women (during pregnancy
based on the system’s actual capacity and the cove- and while giving birth) and newborns (Kale et
rage and quality of healthcare and long term-care al., 2019; Saltarelli et al., 2019; Malta et al., 2019).
programs. This exercise would help federal and Moreover, in municipalities with subpar primary
state programs define appropriate parameters and health care services, the number of preventable
quantify the necessary funding, while shedding hospitalizations is 21% higher than in better-per-
light on and helping remove existing inequities— forming municipalities (Castro et al., 2020).
such as long vesting periods, or pension formulas
Country Development Challenges - Brazil

that benefit high earners. 3.160. Brazil has one of the most complex health-
-service delivery models in the region. Providing
(4) Improve the accessibility, access to quality health services requires coordi-
quality, efficiency, and equity nating responsibilities at the municipal, state, and
of health services federal levels. The federal government contributes
A significant share of the population faces barriers to 43.2% of the health budget, the 27 states contribute
accessing healthcare, with increased risk of poor health 25.7%, and the country’s more than 5,500 muni-
outcomes and health disparities. Healthcare is a right cipalities contribute the remaining 31.1%. 40Mu-
of all citizens, but its quality raises several concerns. nicipalities are responsible for delivering many

40 Source: Massuda et. al. (2022).

128
frontline health services, but their technical and countries, including outpatient surgery, home care,
operational capacity is often low. and intermediate care, as well as innovative mana-
gement practices designed to improve governance.
3.161. The COVID-19 pandemic highlighted co-
ordination flaws in the health sector. Brazil is one 3.163. Access to primary care remains limited.
of the countries that have suffered most from the Brazil’s primary healthcare approach (the Family
COVID-19 pandemic, ranking second globally in Health Strategy—ESF) promoted a rapid expansion
cumulative deaths (Johns Hopkins Coronavirus of coverage, reaching 63% of the population (or
Resource Center). The pandemic overwhelmed more than 133 million people). It was associated
the Unified Health System (SUS), exacerbating with improvements in access, financial protec-
existing difficulties and capacity constraints, as tion, quality of services, and health system effi-
well as regional inequalities. The decentralization ciency, with positive impacts on health outcomes
of the SUS implied the need for strong coordina- (Macinko and Mendonça, 2018), mirroring results
tion from the federal government, but it contri- obtained in other countries (Starfield, Shi and
buted to challenges in the response to the crisis. Macinko, 2005). However, the Brazilian health
COVID-19 overran the health systems in all five re- system does not effectively meet the demand for
gions of the country, but hospital admissions and primary-care services.41 About 30 % of hospitali-
mortality were considerably higher in the North zations are for primary care-sensitive conditions,
and Northeast regions at the outset of the pande- implying that almost a third of hospitalizations
mic (for example, 31% of patients aged under 60 could have been resolved at a less complex level
died in hospitals in the Northeast, versus 15% in of care. The potential savings from aligning the
the South) (ISGlobal, 2021). supply of primary-care services with demand have
been estimated at 0.1% of GDP, or 3.1% of total pu-
3.162. Brazil devotes a large share of resources to blic health spending. However, concerns about the
relatively inefficient hospital-based services. In quality of primary care and its resolutive capacity
Brazil, hospital services account for half of public remain unaddressed, and there is evidence that
health spending, well above the OECD average of the provision of patient-centered care could be
40%. Numerous studies have used data-envelop- improved, especially in terms of access to doctors
ment analysis to reveal potential efficiency impro- and facilities, communication with facilities, coor-
vements in the hospital system, identifying small dinated care, and guidance on disease prevention
operational scale and low utilization of installed and health promotion. Pillar 2 | Adopting a new social agenda for inclusive growth

capacity as key sources of inefficiency. Most of the

country’s more than 5,500 hospitals have fewer 3.164. Brazil bears multiple burdens of disease:
than 50 beds, and 80% have fewer than 100 beds. infectious diseases and conditions related to
By contrast, the optimal size to achieve economies Maternal, Newborn and Child Health (MNCH),
of scale is estimated at between 150 and 250 beds. widespread Non-Communicable Diseases
In addition, the overall bed occupancy rate is only (NCDs), and as well as physical injuries, mental
35%, well below both international standards and health conditions, and new communicable dise-
the prevailing rates in the private sector. Finally, ases. Brazil has succeeded in reducing infant mor-
the Brazilian health sector has limited experience tality—from 117 per 1,000 live births in 1960 (Bar-
with methods of service provision that have redu- reto, 2013) to 12.4 in 2019 (Proadess, n.d.)—mainly
ced hospitalization rates and hospital stays in other due to a reduction in post-neonatal mortality, whi-

41  he ESF covers only 62.5% of the population, and between 35% and 55% in large municipalities that joined the program late. In many such municipa-
T
lities, the population tends to seek medical attention in the emergency services of hospitals, a resource-intensive and expensive modality of care.

BID — Banco Interamericano de Desenvolvimento 129

 ch is more a function of overall living conditions lation between cases in pregnant women and the
and less of the healthcare provided. Infectious birth of children with microcephaly.
diseases, on the other hand, present a complex pic-
ture: there are diseases that are controlled (small- 3.166. Health care spending is expected to rise
pox and polio) or nearly controlled (human rabies, substantially. The drivers of increased heal-
congenital rubella syndrome, diphtheria, whoo- thcare spending are manifold: on the demand
ping cough, tetanus, Chagas disease, and typhoid side, population aging and the epidemiological
fever); diseases whose control measures have been transition result in more people living longer and
partially successful (viral hepatitis, schistosomia- requiring more expensive healthcare resources;
sis, leishmaniasis, Hansen’s disease, tuberculosis, on the supply side, new technologies (which often
malaria, and AIDS); and diseases that are not con- do not replace pre-existing ones) also push costs
trolled, such as dengue fever (Barreto, 2013). up (Rocha, Furtado and Spinola, 2019). One study
estimates that total health expenditure will rise
3.165. With an aging population, the proportion from 9.1% of GDP in 2015 to 11% in 2030, 12.2% in
of deaths from NCDs is expected to increase. In 2045, and 12.8% in 2060 (Rocha, Furtado and Spi-
2019, NCDs were already responsible for 76% of nola, 2019), while another forecast increases to
all deaths and for the loss of 71% of all Disability- 10.94% of GDP in 2030, 12.43% in 2040, and 13.8%
-Adjusted Life Years in Brazil (GBD, 2019), while a in 2050 (Rao et al., 2022).
quarter of all deaths by NCDs could be considered
premature.42 A handful of risk factors contribute Policy Recommendation
to the prevalence of NCDs: smoking, alcohol abu-
se, obesity, high cholesterol, low intake of fruit 3.167. Increase the share of public financing from
and vegetables, and physical inactivity (Barreto, general revenues to reinforce Universal Health Co-
2013; Brasil, 2022). A telephone survey in the first verage (UHC) and improve the efficiency and qua-
quarter of 2022 43
found that 12% of respondents lity of services. International experience indicates
smoked, 21% abused alcohol, 53% were overwei- that public financing helps countries achieve UHC
ght, and 58% were physically inactive (Hallal et. (Atun et al., 2015; Barroy H. et al., 2017; Cotlear et
al, 2022). Fatal physical injuries—the third major al., 2015; Jowett and Kutzin, 2015; Kutzin, 2012; Sa-
cause of death— are mostly connected to road vedoff et al., 2012), better health outcomes (Bokhari
accidents, while the risk of death from violence et al., 2007; Moreno-Serra & Smith, 2015; Xu et al.,
is highest for young black men (Barreto, 2013). 2018), and greater equity in access to health services
The prevalence of mental health conditions has (Xu et al., 2018). Changes in payment modalities for
been soaring, especially for depression: the sha- healthcare providers could help make better use of
Country Development Challenges - Brazil

re of those who reported having had a previous the resources available. Currently, most providers
diagnosis of depression was 7.6% in 2013 (IBGE, are paid through a conventional fee-for-service ar-
2020), versus 13.5% in 2022 (Hallal et. al, 2022). rangement, but several other options are available:
New communicable diseases have also emerged, I. negotiating service volumes within a bud-
and Brazil was particularly affected by epidemics get cap;
of H1N1 in 2009, Zika in 2015, and COVID-19. No- II. paying the equivalent of the average cost of tre-
tably, Zika outbreaks in Brazil revealed the corre- ating a given disease (e.g., through DRGs)44; or

42 In Brazil, a death from NCD is considered premature when it occurs under the age of 70. IDB calculations based on data from Ministério da Saúde, Sis-
tema de Informações sobre Mortalidade (SIM), https://datasus.saude.gov.br/mortalidade-desde-1996-pela-cid-10
43 The COVITEL survey interviewed 9,000 adults (aged 18 or older) in all regions of Brazil. It follows similar procedures to VIGITEL, the annual survey
conducted by the Ministry of Health since 2006 to monitor the prevalence of NCDs and relevant risk factors. The COVITEL was conducted by Vital
Strategies and the Federal University of Pelotas (UFPel).
44 Diagnosis Related Groups, see Ghazaryan et al., 2021.

130
 III. capitation—i.e., paying a risk-adjusted fee nology and the use of ICT in the health sector can
per person, regardless of the services requi- increase efficiency by facilitating remote reco-
red in a given year. very monitoring and at-home treatment. Fur-
Many OECD countries use capitated payments for thermore, complementary health services, such
primary care and DRGs for hospital inpatient care. as long-term intermediate care for chronic or su-
Experience from LAC countries has also shown bacute patients, can reduce the overall intensity
that linking payment to performance can help of health-resource use, and release hospital beds
improve efficiency and quality.45 Finally, a Health for sophisticated forms of acute care. Finally,
Technology Assessment (HTA) may help achieve consolidating supplier incentives in payment
more cost-effective services (Castelli et al., 2020), systems, integrating private actors into health-
since it analyzes evidence of the effectiveness of -service provision, carefully managing critical
medical procedures, medications, and devices inputs, monitoring drivers of sectoral spending
against their respective costs. The IDB has deve- (e.g., human resources, medicines, and tech-
loped technical and operational knowledge to su- nologies), and adopting new management tech-
pport efforts toward greater efficiency. 46
niques can further enhance efficiency. Finally,
consolidating supplier incentives in payment
3.168. Enhance coordination through a digital systems, integrating private actors into infras-
health strategy. The Ministry of Health (MoH) tructure and healthcare-service provision-inclu-
established the concept of a national platform ding through PPPs, carefully managing critical
for innovation, information, and digital transfor- inputs, monitoring drivers of sectoral spending
mation, called the National Health Data Network (e.g., human resources, medicines, and techno-
(RNDS, by its acronyms in Portuguese), which logies), and adopting new management techni-
will enable the integration of health data from all ques can further enhance efficiency.
health services in the country (public and private)
based on international interoperability standards. 3.170. Reorganize health-service delivery around
The RNDS will make it possible to obtain a large primary care.47 The health sector should continue
amount of health data, while seeking to incentivize shifting from a traditional model, focused on hos-
and facilitate the implementation of an Electronic pital-based care for acute conditions, to a curative
Health Record (EHR) in the states and municipa- approach for proactively managing chronic con-
lities. EHR systems offer known benefits, such as ditions. This transition can benefit from placing

Pillar 2 | Adopting a new social agenda for inclusive growth

making information more complete, secure, and greater reliance on the country’s primary-care pla-
accessible in real time, and improving the quality tform, emphasizing health promotion and disease
and efficiency of care (Nelson et al., 2020). prevention, and creating integrated care networks
with stronger referral and counter-referral me-
3.169. Improve the efficiency of hospital servi- chanisms. Currently, municipalities are responsi-
ces. Brazil’s hospital system comprises nume- ble for 61% of Primary Health care (PHC) funding
rous small institutions that cannot leverage eco- (Massuda et al., 2022). Increased contributions
nomies of scale. Moreover, a substantial share from the federal and state governments could su-
of hospital services could be provided through pport expanded PHC coverage and the reduction
other means. Recent advances in medical tech- of inequities in access and quality (Massuda et al.,

45  .g., Argentina’s Plan Suman and various programs under the Mesoamerica Health Initiative. Finance literature has also encouraged the purchase of
E
healthcare services based on health needs or performance, to improve health-system performance (Bernal & Martinez, 2020; Celhay et al., 2019;
Klasa et al., 2018; Gertler et al., 2014; Smith, 2012; Diogene & Figueras, 2010; WHO, 2010).
46 https://criteria.iadb.org/en
47 Several studies have demonstrated the association between ESF and a reduction in avoidable hospitalizations for primary care-sensitive conditions,
including chronic conditions.

BID — Banco Interamericano de Desenvolvimento 131

 2022; OCDE, 2021). Health outcomes are especially CITIZEN SECURITY
enhanced when PHC is the gateway to and coor-
dinator of care, as well as the most resolutive and 3.172. Brazil is a violent country. Brazil’s homi-
cost-effective level of care, within an integrated cide rate was the second-highest in LAC in 2018
health network. It is important to improve the (27.4 per 100,000 inhabitants), but it fell by 19.5%
governance of health networks, and to incentivize between 2018 and 2021, in a context of falling GDP
states and municipalities (e.g., through federal per capita (-25%) set against rising employment
transfers) to strengthen their regional health coor- (+15.9%). The robbery rate, not including vehicle
dination. Several studies point out that integrated theft, reached 469.6 per 100,000 inhabitants in
health networks can improve system accessibility, 2020, down 25% from 2019. Police data suggests
reduce care fragmentation, avoid duplication of that COVID-19 had an impact on property crimes
infrastructure, reduce production costs, and bet- such as extortion, theft, and robbery, which de-
ter respond to people’s needs and expectations. creased by 41.6% in Rio de Janeiro following stay-
The health sector should also better integrate with -at-home orders in 2020. The mobility reduction
the social sector, as social conditions have a major from lockdowns was associated with reductions
impact on health (CSDH, 2008). Thus, information in robberies and police lethality. The cost of cri-
exchange and mutual support on joint or com- me and violence in Brazil was estimated at 3.78%
plementary actions are essential to the success of of GDP, or US$124.3 billion in purchasing power
both the health and social sectors. equivalent, which makes up 53% of the total cost
of crime in LAC.
3.171. Utilize innovative health-service modali-
ties. Reducing hospitalizations and shortening the 3.173. Victimization rates are highest among
average hospital stay could yield considerable cost Afro-Brazilians. 91.3% of homicide victims are
savings. International experience has shown that men, and 76.2% are Afro-descendants. Six states
outpatient surgery, home care, and intermediate- accounted for 50% of homicides in 2021. Consi-
-care hospitals that use semi-intensive bed models dering total homicides between 2007 and 2017, 15
can effectively reduce hospitalization costs. cities (0.27% of all cities in Brazil) accounted for
25% of all homicides, and 95 cities (1.7% of all ci-
(5) Make cities safe and inclusive ties) accounted for 50% of all homicides. A study
Equitable, inclusive, and just cities are key to develo- of six Brazilian cities found that on average, 25%
pment. Violence, inadequate housing, socio-spatial of crimes were concentrated in 0.8% of streets,
segregation, insecurity of tenure, homelessness, and and 50% of crimes took place in 2.5% of streets.
urban sprawl are growing phenomena that threaten A meta-analysis published in 2016 identified
Country Development Challenges - Brazil

the equity and sustainability of Brazilian cities.48 Brazil as the country with the highest estimated
Governments should support comprehensive commu- incidence of child abuse and neglect, based on
nity urbanization programs (neighborhood requa- findings from a child trauma questionnaire disse-
lification, disaster risk management, land regulari- minated in 28 countries. 34,918 children and ado-
zation) and social inclusion efforts (construction of lescents suffered a violent death in Brazil betwe-
quality equipment, improved access to social services en 2016 and 2020. In the same five-year period,
in vulnerable areas, promotion of housing impro- the annual violent death rate for children under
vements and local economic development through the age of five rose by 27% in the 18 Brazilian sta-
employment- and income-generating initiatives) to tes for which data is available. Women are also
improve the quality of life in cities. affected by violence. Between 2016 and 2020, the

48 Cities for adequate housing. (www.ciitesforhousing.org).

132
annual number of femicides increased by 45%. In 3.177. The penitentiary system is overcrowded.
2021, 81% of murdered women lost their lives at Prison population grew from 230,000 in 2000 to a
the hands of their partner or ex-partner. peak of 820,000 in 2021. In the latter year, about
28% of inmates were in pre-trial detention. Nota-
3.174. Institutional capacity gaps thwart the bly, the overall occupancy rate in the penitentiary
country’s ability to address violence and crime. system is 146.8%.
State and municipal governments have limited
capacity to design and deliver social prevention Policy Recommendations
and policing initiatives tailored for areas with high
levels of crime. Institutions have a shortage of up- 3.178. Prioritize prevention. Targeted and evi-
-to-date knowledge of crime-prevention science, dence-based preventative interventions are
specialized officers able to design and implement more cost-effective than remedial interventions.
evidence-based prevention initiatives, and finan- Examples from international experience include
cial resources to fund high-quality prevention pro- focused deterrence strategies,49 violence-inter-
grams. 95% of municipalities have not developed a ruption programs, 50 and results-based public
federally required public-safety plan. security policies.51 The country can benefit from
the accumulated scientific knowledge of effective
3.175. Police work lacks a strong preventative practices to reduce violence and crime, such as
approach. Police forces in Brazil are often per- social crime prevention, situational prevention
ceived as reactive and repressive, while showing through urban management, and improvements
limited capabilities to conduct criminal investiga- to the deterrent capacity of police. There is also
tions—which are critical to preventing impunity. evidence of working models that reduce the case-
For example, only 44% of all homicides nationwide load of the justice system and increase the partici-
in 2018 were solved. pation of those involved in cases. Finally, reliable
information is available on prison management
3.176. The judicial system is highly congested. and intervention practices that significantly re-
The average congestion rate (i.e., the proportion duce recidivism. In general, effective practices
of pending cases relative to total cases) was 74% for the reduction of violence and crime are highly
between 2021 and 2022, while the net congestion focused and proactive, intensive in the use of
rate averaged 70% over the same period. On ave- knowledge and technology, and deployed in the

Pillar 2 | Adopting a new social agenda for inclusive growth

rage, 641 days elapse between the beginning of a framework of results-oriented programs, under
case and its first judgement (974 days at the state strict monitoring and quality-assurance sys-
level, and 696 days at the federal level). In the tems.52 All these elements are atypical in Brazil’s
2021 Rule of Law Index, Brazil’s criminal justice national violence prevention practices, which are
system falls behind both the world and regional normally based on the provision of low-intensity,
averages in the categories termed “due process of general social services for vulnerable popula-
law”, “timely and effective adjudication”, and “ef- tions, with a wide scope and universal coverage.
fective investigations”. According to the Latino-
barómetro 2021 survey, 23% of Brazilian citizens 3.179. Increase police effectiveness. Reinfor-
have no trust in the justice system. cing the Homicide Divisions within state-level

49 Braga, Weisburd and Turchan (2018).

50 Delgado, Sheyla A., et al (2017).
51 Silveira Neto, R. et al (2014).
52 Practices that can help reduce violence and crime include: hot-spot policing, problem-oriented policing, procedural justice practices, nurse-family
partnerships for young and vulnerable mothers, socio-emotional learning programs delivered in school, drug courts for criminal offenders with a his-
tory of drug abuse, motivational interviewing and cognitive behavioral therapy for offenders to be released from prison.

BID — Banco Interamericano de Desenvolvimento 133

 Civil Police forces, and/or adopting problem- institutional ecosystem on violence and crime
-oriented policing or intelligence-led policing prevention. Brazil has a National Public Security,
strategies, could reduce impunity by raising the Prison and Drugs Information System (SINESP),
clearance rate for homicides.53 Police training which has room for improvement on data stan-
could be improved through the elaboration and dardization, collection, and analysis. Better
dissemination of investigative principles for integration of police databases would improve cri-
violent crimes, along with standard protocols for minal investigation processes. The IADB has been
collaboration between public security agencies working on the development of digital platforms to
and criminal-justice institutions. explore criminal and social information available
online, as well of an online repository of best prac-
3.180. Restructure the penitentiary system. The tices for crime reduction. These tools and their
penitentiary system must be reformed to cope future updates will assist local governments to
with organized crime and corruption in prisons, develop data-driven diagnostics and evidence-ba-
while creating more vacancies in the system and sed plans to prevent crime. Dedicated software can
implementing alternative-sentencing policies. help optimize police patrolling routes in criminal
The number of inmates who are awaiting sen- hotspots, drawing on existing geographical data
tencing should be reduced, and prison sentences on crime. Digitization can also reduce the time to
should prioritize serious and violent crimes. judgment in court cases.

3.181. Improve the governance of the justice URBAN AND HOUSING

system. A Ministry of Public Safety should be
permanently established, with the capacity to 3.183. Brazil is one of the most populous and
coordinate a national public safety policy—lar- urbanized countries in the world . Urban areas
gely financed by the federal government—on are home to 85% of Brazil’s estimated 211 million
violence prevention, police management, cri- inhabitants (IBGE, 2020), account for 90% of GDP,
minal intelligence, drug policy, gun control, and and are the main centers of innovation. Accor-
private security surveillance. The government ding to URBANET, Brazil has 31 medium-sized
should create a National Public Safety School cities with populations between 300,000 and 1
and a National Institute of Public Safety Studies million, 19 cities of between 1 and 5 million peo-
at the Ministry of Public Safety. The System of ple, and two mega-cities (Rio de Janeiro and São
Public Security needs to be fully regulated and Paulo) of more than 10 million people each.
implemented, along with the National System of
Monitoring and Evaluation of Public Safety and 3.184. Brazil’s urbanization did not go hand in
Country Development Challenges - Brazil

Social Defense Policies, while the government hand with progress in urban planning. The coun-
should create a National Intelligence Council. try’s accelerated urbanization is a relatively recent
The National Council of Justice is promoting or- phenomenon, set in motion by internal migrations
ganizational change and digital modernization, over the past century. Only after the Constitution
to increase the efficiency and effectiveness of of 1988 were specific urban planning laws appro-
the judicial system. ved. In 2001, the Statute of Cities (Law No. 10,257)
required all cities with a population of more than
3.182. Promote the digital transformation in 20,000 to develop comprehensive master plans.
citizen security. The digital transformation can
reinforce the effectiveness and efficiency of the 3.185. Brazil has a sizeable housing deficit. In

53 Coupe, R.T. (2014).

134
2019, Brazil’s housing deficit affected an estimated part of informal settlements (i.e., slums), equi-
5.8 million households (FJP, 2020), comprising: valent to 7.8% of all households, and 60% above
I. precarious households (improvised and rus- the level recorded in 2010. According to 2019 data
tic housing); from the Joao Pinheiro Foundation (FJP), more
II. cohabitating households (two or more fami- than 24 million urban households were conside-
lies living in the same dwelling); and red qualitatively inadequate, because they pre-
III. households facing an excessive rent burden sented one or more of the following:
(rent equal to or greater than 30% of hou- I. shortcomings in urban infrastructure, such
sehold income). as: deficiencies in access to water (10.7 million
Households headed by women account for a large households), sewage (4.9 million), garbage col-
and growing share of the housing deficit (60% in lection (550,000), and electricity (400,000);
2019, versus 54.3% in 2016). Furthermore, there is II. building deficiencies, such as: inadequate
a clear connection between housing precarious- water storage (9 million); excessive density
ness and socio-economic profile: in 2019, 72% of (more than three residents per room) (1.8
families with incomes of up to one minimum wage million); deficient roofing (1 million) or flo-
lived in precarious housing. oring (69,000); the absence of an exclusive
bathroom (360,000); and
3.186. In recent years, public policy on housing III. inadequate property titles (3.5 million).
has focused on large-scale construction. The Access to community equipment and social ser-
“Minha Casa Minha Vida” program, replaced vices is also very limited: for example, 36% of
in 2021 by the “Casa Verde e Amarela” program, households in informal settlements are more than
allowed the construction of new housing units, but 2 km away from health posts with inpatient and
mostly far from employment centers and servi- observation support (IBGE, 2020).
ces, thereby contributing to a costly urban spread
in terms of infrastructure and transport needs. 3.188. Housing inequality by income and race is
Inadequate social interventions also caused a lack significant. Almost 2 out of every 3 households
of sustainability of the investment, as evidenced with incomes up to three minimum wages live in
by high physical degradation and lack of appro- inadequate housing (FJP 2020). The stark racial di-
priation by residents (notably, the default rate vide in access to water, sanitation, and solid-waste
on certain contracts under “Minha Casa Minha management infrastructure has important health

Pillar 2 | Adopting a new social agenda for inclusive growth

Vida” reached 44.20% in April 2020). On the other implications. In 2018, 12.5% of the preto and pardo
hand, the “Minha Casa Minha Vida” program was population lived in households without garbage
a significant source of jobs, directly employing collection, versus just 6% of brancos. Similar racial
3.5 million workers over a decade (equivalent to disparities were observed in households without
390,000 jobs per year on average); and achieved access to piped water (17.9% versus 11.5%) or im-
remarkable progress in gender equity. Between proved sanitation (42.8% versus 26.5%). Vulnera-
2011 and 2014, 823,100 low-income households bility increases even further when racial and gen-
benefitted from the program, 77% of which were der disparities intersect. For example, excessive
headed by women. 54
household density and absence of a washing ma-
chine are twice as prevalent among preto or pardo
3.187. Urban segregation is acute. In 2019, over 5 households as among branco households (7% ver-
million private households were estimated to be sus 3.6%, and 44.8% versus 21%, respectively).55

54  hoice Institute 2019. Living far away: the MCMV program and the expansion of MRI; Valor Investe 2020. MCMV on with default and avalanche of
C
lawsuits; Choice Institute 2020. Dehydrated after a decade, MCMV is a challenge for government.
55 IBGE 2019. Social Inequalities by Color or Race in Brazil.

BID — Banco Interamericano de Desenvolvimento 135

 3.189. The divide also has a regional component, 2019, Brazilian public spaces obtained an avera-
with areas in the North and Northeast emerging as ge score of 5.71, well below the minimum score
the most vulnerable. Among municipalities with indicating that walking is safe and comfortable
more than 750,000 inhabitants, Belém (55.5%), Ma- (8). Street commerce is another challenge, in the
naus (53.4%), and Salvador (41.8%) have the highest absence of initiatives to combine orderly mana-
proportion of subnormal households; moreover, gement of urban spaces with decent working con-
the highest prevalence of infrastructure inadequa- ditions.57 This problem is even more pronounced
cy is found in Acre (80.5%), Amapá (68.2%), and in the North region.
Pernambuco (70.8%) (FJP, 2020).
Policy Recommendations
3.190. Public policy has struggled to reverse the
degradation of urban centers, including in his- 3.192.Suppor t integrated programs of nei-
torical areas. Physical degradation of infrastruc- ghborhood upgrades to tackle the qualitative
ture in city centers is also associated with social housing deficit, climate change, improve di-
vulnerability, such as high prevalence of prostitu- saster risk management, and foster socio-e-
tion, drug use, or homelessness. A large stock of conomic development. The paradigm for slum
vacant properties (7.9 million across the country, upgrades must shift from infrastructure-orien-
of which 80% in urban areas) offers an opportu- ted to welfare-oriented interventions. Placing
nity to improve cities and mitigate the housing socio-economic impacts and demand-driven
deficit.56 However, certain urban renewal efforts participation at the center of neighborhood im-
have fostered gentrification and social exclusion provement programs ensures empowerment,
(such as in the emblematic case of Pelourinho in maintenance, and long-term sustainability.
Salvador) or focused on commercial and leisure Infrastructure considerations must account for
developments to the expense of housing. climate change, complex challenges around
micro and macro drainage, access to water and
3.191. The quality of public spaces is poor. One sanitation, pavements, public lighting, and di-
indicator of this issue is urban violence: in Brazil, saster risk management.
a woman experiences harassment on the street
every 1.5 seconds, highlighting the poor safety of 3.193. Implement programs for land titling and
many public spaces; in 2020, 60% of the deaths of home improvements. Land titling in informal
LGBT people occurred in public spaces, of which neighborhoods increases property values and
72% at night. Despite advances in legislation, household incomes. Formal deeds double the
urban projects still fall short on lighting and visi- value of land 58 and prompt a rise in household
Country Development Challenges - Brazil

bility, urban signage, mixed use to promote living income of between 20% and 32%,59 as formality
space, as well as the availability of surveillance of tenure is a prerequisite to access many forms
and emergency services. A second indicator is of social assistance. Microloans for home impro-
the poor accessibility of public spaces to certain vements do not require the house to be pledged as
users, such as children and the elderly, people collateral, but safety of tenure plays an important
with disabilities, their families and caregivers. role in the investment choices of families. Home
In evaluations of accessibility and walkability in improvement programs may consider a variety of

56 Source: Pesquisa Nacional por Amostra de Domicílios (PNAD) 2015/FJP 2015. Déficit Habitacional no Brasil.
57  loria Institute 2021. Watches of Violence; Gay Group of Bahia 2021. Observatory of Violent Deaths of LGBT in Brazil in 2020; Mobilize 2019. Calçadas
G
do Brasil - Final Report, campaign 2019.
58 BM 2007. Social and Economic Impacts of Land Titling Programmes in Urban and Peri-Urban Areas: A Review of the Literature.
59 IPEA 2011. Direitos de propriedade e bem-estar: avaliação do impacto do programa de regularização na Quinta do Caju.

136
funding options, from full subsidies for the most but also to improve functionality (e.g., through
vulnerable, to affordable micro-loans for families street width adjustments, urban furniture, and
with a minimum capacity to pay. 60
other design features) to guarantee accessibility
and walkability to all. Historical heritage areas
3.194. Support innovative tools to increase hou- present specific challenges, as their public spaces
sing supply and tackle the quantitative housing are typically not inclusive and planning regula-
deficit, urban decay, and urban poverty. The tions are stricter.
production of new housing units should shift from
the highly subsidized model prevalent over the 3.196. Analyze alternative housing policies to
last 20 years (such as the ‘Minha Casa Minha Vida’ complement traditional programs. Building
Program) to a more diversified, sustainable appro- new housing units is not the only means of
ach.61 Potential options include: addressing the housing deficit. 63 Investments
I. support for social rental programs aimed at in housing programs and the regularization of
families who cannot afford to buy, or at tho- informal settlements have not fully addressed
se in temporary situations (students, young social exclusion and urban inequality in Brazil.
couples, highly mobile professionals); The experience of other LAC countries suggests
II. promotion of subsidized rental housing that the government could augment its efforts to
(“housing as a social service”) for the most manage the housing deficit by: (i) strengthening
vulnerable, such as dependent elderly and the rental sector, (ii) directly supporting incre-
homeless people (see, for example, the Hou- mental housing improvements, (iii) directly
sing First projects for homeless people); 62
providing serviced land, and (iv) incentivizing
III. retrofit programs to convert vacant or degraded private investment.64
units into housing, with or without use shift.
At a more structural level, broader access to 3.197. Create financial mechanisms to incenti-
affordable mortgage loans, achieved through vize private investment. Incentive mechanisms
regulatory reforms and strategies to attract the for housebuilding often involve the strategic use
private sector down-market, may increase the of urban-planning instruments and tax benefits.
supply of housing to low- and medium-to-low- The government should consider revising land-
-income families. -use and occupancy laws, reducing interest rates,
extending mortgage maturities, or developing

Pillar 2 | Adopting a new social agenda for inclusive growth

3.195. Develop integrated urban renewal pro- other solutions tailored to local circumstances.
grams with high-quality public spaces and so- LAC experience shows that private-sector-driven
cially oriented interventions. To contain urban solutions are not always inclusive, and in some
violence, especially against women and LGBT cases public resources are best-used to assist
persons, public spaces need a greater focus on low-income households in constructing their
lighting and visibility, urban signage, mixed-use own housing.65 Guarantees in promoting access
to promote lively areas, and the availability of to credit to finance housing improvements for
emergency services. A new paradigm for public the low-income population may also play a role in
spaces should seek not only to reduce insecurity attracting private investment.

60 Access to affordable micro-credit for home improvement will be a focus of the forthcoming HUD/IDB ‘ProMorar Brazil’s program.
61  abitação de interesse social no Brasil: construindo novas oportunidades: panorama 2020 e foco em desafios prioritários, IDB 2021; How to improve
H
access to housing for the low-income population?, IDB 2021
62 The municipality of Recife is implementing a pilot of the Housing First project, with IBD support.
63 See World Bank (2002), IDB (2012), and World Bank (2016), inter alia.
64 Rojas, 2018.
65 Ibid.

BID — Banco Interamericano de Desenvolvimento 137

 3PILLAR
Fostering the digital
transformation
for Development
Country Development Challenges - Brazil

Recommendations to prepare Brazil for the digital transformation fall under

seven policy areas: (1) Promote innovation to boost growth; (2) Build the
capacity of workers to utilize new technologies; (3) Develop adequate
infrastructure for new technologies; (4) Facilitate entrepreneurship for a
dynamic economy; (5) Leverage new technologies to boost productivity, (6)
Improve quality of life and inclusion through new technologies, and (7) Use new
technologies to improve the efficiency and transparency of the public sector.

138
(1) Promote innovation 3.199. Public and private investments are ne-
to boost growth cessary to boost innovation. Public investments
Investment in innovation is riskier and takes longer in research and development are often useful
than other types of investment. Innovation hinges on catalysts for private-sector investments in innova-
intangible components (R&D, design, know-how) and tion, as they can favorably adjust the risk-reward
entails an indivisible sunk cost (a project’s fixed costs do calculation that firms consider before financing
not depend on the size of the market, and if it does not innovation projects. Although investment on R&D
succeed, the outcomes cannot be easily transferred to as a proportion of GDP in Brazil (1.21% in 2019)
other sectors). Furthermore, the novelty of innovative is higher than in all other LAC countries, it still
projects and appropriability issues exacerbate infor- significantly lags developed countries (2.47% on
mation asymmetries between innovators and external average in the OECD in 2019). Furthermore, public
financers, compounding challenges in access to finance. expenditure on R&D in Brazil has been declining
steadily from 0.70% of GDP in 2015 to 0.61% in
3.198. Brazil is declining in the international 2018. Private investment in R&D as a percentage of
rankings related to innovation. In the Global In- GDP also decreased,2 from 0.58% to 0.47% of GDP
novation Index (GII)1, Brazil’s ranking declined between 2014 and 2018. Pillar 3 | Fostering Digital Transformation for Development

from 47th out of 131 economies in 2011 to 57th out

of 131 economies in 2021, placing it fourth among 3.200. The country is not efficient at converting in-
countries from the Latin American and Caribbean vestments into scientific publications and patents.
Region. The main weaknesses identified in the GII In 2018, Brazil produced 3.76 citable documents per
included: indicators related to market sophistica- US$ million in R&D expenditures mainly financed
tion; difficulty with access to credit for financing by the government—about half as many as in China,
innovation; lack of coordination between the public and 75% of those produced in the US. In terms of
and private sectors; low levels of private investment patent applications per US$ million spent, Brazil
in innovation and knowledge sharing; quality of hu- only reached approximately 20% of the US level, and
man capital and technological infrastructure. trailed regional peers such as Mexico and Argentina.

1  he Global Innovation Index (2020) is structured in seven pillars: (i) Institutions, (ii) Human capital and research, (iii) Infrastructure, (iv) Market deve-
T
lopment, (v) Business development, (vi) Production of knowledge and technology, and (vii) Creative production. Available at: https://www.wipo.int/
edocs/pubdocs/en/wipo_pub_gii_2020.pdf
2 PINTEC, 2020.

BID — Banco Interamericano de Desenvolvimento 139

 3.201. Firms struggle to access resources for Policy Recommendations
financing innovation. According to the 2017 Inno-
vation Survey (PINTEC), 89% of firms surveyed fi- 3.203. Enhance the efficiency of public invest-
nanced research, development, and other innova- ment in innovation. Public sector investments
tive activity (R&D+i) with their own resources, and in innovation must be efficient and well-coor-
only 7% reported using public resources; in the dinated to ensure that they crowd-in the private
2014 edition of the same survey, 84% of firms had sector. Public policies aimed at fostering science,
reported using their own resources, while 15% had innovation, and technology in manufacturing
reported using public resources. The companies should consolidate the fragmented initiatives
that reported not investing in innovation, despite currently sponsored by the federal, state, and
having tried to do so, indicated the three main bar- municipal governments (some of which have
riers as: the excessive risk of innovation, high cost, insufficient budgets) to gain scale and better
and lack of financing. Financial issues were cited address the needs of companies (particularly
much more often than those concerning the lack SMEs). Current programs to support research and
of qualified personnel, the regulatory framework, innovation in new and early-stage firms often en-
or difficulty cooperating with other actors. tail reporting requirements and response times
that are not compatible with the speed necessary
3.202. R&D collaboration between the pu- to innovate. Even firms that successfully comple-
blic and private sectors is very limited. Public te innovative projects often face time-consuming
research institutes face binding regulatory requirements, as they grow and seek new sources
constraints, including extensive bureaucracy of support to further develop their products.
and overly complex hiring and procurement pro-
cedures. Brazil also has a very little in the way 3.204. Create new financial instruments for inno-
of shared research infrastructure, where the vation. Startups and established companies need
private and public sector can work together. better access to private finance for innovation and
Intellectual property (IP) issues further hinder technology adoption. New dedicated instruments,
cooperation, as a slow and burdensome patent based on blending and other recent trends in inno-
processes and weak IP protections deter private vation finance, could offer more agile underwriting
investment in innovation. In terms of co-author- and execution. In the case of investments for the
ship of scientific articles between university and bioeconomy and sustainable development in the
industry researchers, number of patents filed by Amazon region, for example, loans for innovation
university researchers, and revenue from IP li- can be blended with donations to increase their at-
censing as a proportion of university R&D expen- tractiveness or packaged together with conditional
diture, Brazil significantly lags the US. Regarding loans to startups as recovery grants.
co-authorship of scientific articles, university
researchers in Brazil tend to have significantly 3.205. Use public procurement to increase invest-
Country Development Challenges - Brazil

fewer private industry researchers with whom ment in innovation. Thanks to New Framework for
they can collaborate (approximately 60,000 startups (the Marco Legal das Startups) and other
versus almost 960,000 in the US as of 2014). Mo- improvements in regulation, public procurement—
reover, most co-authored scientific articles from which is worth approximately 20% of GDP—can bet-
Brazilian universities involve foreign companies, ter be used to finance innovative solutions, poten-
with relatively few Brazilian firms participating. tially more effective and efficient than traditional
Regarding patents, most Brazilian universities purchases, facilitating the access of startups to the
still have relatively unsophisticated support public procurement process.
systems for requesting them; researchers must
often address legal and contractual issues them- 3.206. Support innovation in specific value
selves, which tends to disincentivize patenting. chains or clusters to achieve coordination and

140
scale. Focused programs can enhance the produc- 3.209. Improve technological transfer services
tivity of existing industries, with complementary within universities. Researchers currently need
investments in public and club goods, quality cer- to independently manage the legal and contrac-
tifications, and sector-specific talent upgrade pro- tual aspects of patents and IP, dedicating much
grams for MSMEs. Additionally, reforms should of their scarce research time is to administrative
foster clusters and collaborative platforms that processes. Thus, better support could incentivize
bring together startups, academia, manufacturing researchers to pursue patents, licensing, or com-
firms, and investors, such as those present in tech- mercialization of IP.
nology hubs including São Paulo, Campinas, Flo-
rianópolis, Recife, Curitiba, Belo Horizonte, São (2) Build the capacity of citizens
Carlos, Porto Alegre, São José dos Campos, Santa to utilize new technologies
Rita do Sapucaí, Piracicaba. Brazilian workers lack basic digital literacy skills neces-
sary to use technology in their daily work and life. This is
3.207. Develop firm-level capacity for innovation. both a cause and a consequence of well-known weaknes-
Policies designed to support productivity grow- ses in basic education. It is a limit to productivity grow-
th, facilitate technological adaptation, promote th, since the labor force cannot swiftly adjust to chan-
infrastructure investment, and as well as provide ging business models or adopt modern technologies,
advisory, extension, and technical services, inno- further compounding long-standing skills mismatches
vation vouchers, financial prototypes, and testing between school curricula and labor demand.3
and commercialization support can increase firms’
capacity for innovation. Foreign investment can ge- 3.210. Brazil needs to strengthen its digital talent.
nerate positive technological spillover and enable Brazil ranked 51st out of 63 countries in the Global
firms to move into more sophisticated global value Digital Competitiveness Index,4 and 82nd out of 108
chains. Technical training and engineering courses countries in the Coursera Global Skills Report.5 In
should be aligned with market needs and reflect the the former report, Brazil ranked last in the “Talent”
latest technological developments. sub-category, and scored especially poorly on “Di-
gital/Technological skills” (60th out of 63) and “Fo-
3.208. Strengthen research capacity within the reign highly skilled personnel” (59th out of 63).6 In
private sector. Ensuring that industry can collabo- the latter report, Brazil scored relatively well in the
rate with, and absorb knowledge from, academia “Technology” pillar (57th out of 108) but less well in
requires long-term efforts to increase the number the “Data Science” (84th out of 108) and “Business”
of researchers (which is significantly lower than in pillars (93rd out of 108).7
the US and other developed economies), by offe-
ring incentives to pursue STEM careers, advanced 3.211. Most Brazilian workers are not ready to Pillar 3 | Fostering Digital Transformation for Development

degrees, PhDs, and other research-oriented paths. benefit from, or contribute to, the new digital eco-
In the nearer term, appropriate incentives within nomy. In the World Economic Forum’s 2020 Global
universities could encourage more academic rese- Competitiveness Report, Brazil ranked only above
archers to form startups and spin-offs in their areas Greece on the metric termed “update education
of expertise, or to undertake periodic work assign- curricula and expand investments in the skills nee-
ments within industry. In geographical clusters, or ded for jobs in markets of tomorrow”, with a score
APLs, research institutes focusing on the areas of of 39.5 points out of 100. In addition, in a context of
interest to those clusters could strengthen the pipe- limited competition, entrepreneurs will typically
line of qualified researchers available to industry. display a weak drive to implement innovative solu-

3 IDB (2017).
4 IMD World Digital Competitiveness Ranking, 2021.
5 Global Skills Report, Coursera, 2021.
6 IMD World Digital Competitiveness Ranking, 2021
7 Global Skills Report, Coursera, 2021.

BID — Banco Interamericano de Desenvolvimento 141

 tions. Overall, the requirements for excelling in the tion. The lower-skilled could instead experience
digital economy have added a new layer to the exis- wage pressure, given the larger supply of workers
ting skills deficiencies in the Brazilian labor market. with similar skills, and face a greater risk of se-
eing their tasks automated.
3.212. The supply of IT professionals is insuffi-
cient to meet labor market demand. Enrolment 3.215. Diversity is a challenge. The Brazilian
in STEM courses in Brazil only slightly outpaced digital economy features sizable gender and race
the overall growth in higher education enrolment gaps. 37% of professionals in the digital sector are
between 2010 and 2019. After rising between
8
women, versus 63% of men, and only 30% of those
2010 and 2015, the number of STEM graduates has employed in the industry identify themselves as
been declining since. A study by Softex in 2021 Afro-Brazilian or indigenous.9 The proportion of
found that the supply of IT professionals was not women enrolled in STEM fields in higher educa-
sufficient to meet industry demand, potentially tion has only increased marginally in recent years,
leading to as many as 400,000 unfilled vacancies from 28% in 2010 to 30% in 2019, despite women
in IT by the end of 2022. The Softex study also es- making up 57% of all higher education students in
timated that labor shortages in the IT sector could the country. Gender imbalances vary across STEM
cost the industry as much as R$167 billion in lost fields, with women accounting for 66% of students
revenue over the period 2021-2025, with negative in architecture and related disciplines, 50% in phy-
implications for productivity. BRASSCOM expects sical and life sciences, but only 14% in computer
that 420,000 new jobs will be created by 2024 that science and mathematics.
require varied technological skills.
Policy recommendations
3.213. Growing demand makes training the
workforce a priority. INEP data shows that only 3.216. Offer scholarships for short digital trai-
46,000 people complete technology-related ning programs, such as coding bootcamps. In
training in Brazil every year. Such training still the context of growing demand for digital skills
occurs, for the most part, through undergraduate and the long duration of traditional education
courses that are not tied to specific vacancies, but in science and technology, shorter and usually
rather offer extensive knowledge that qualifies fee-paying courses in digital skills (often referred
graduates to fill several potential vacancies. This to as coding bootcamps) have become available.
type of training forms professionals who are Given the high number of providers, the overall
adaptable and can seize a variety of job opportu- effectiveness of such programs, and labor market
nities, but takes a long time (higher education and demand, promoting access and providing in-
technical courses last between two and six years) formation for those with potential could help
and cannot solve short-term deficits. accelerate the digital transformation. As coding
bootcamp providers note that applicants are not
Country Development Challenges - Brazil

3.214. Low-skilled workers are at greater risk always ready for their programs, short remedial
of being displaced by automation. The techno- programs could be devised to better prepare par-
logy available as of 2017 could feasibly automate ticipants. Moreover, female participation could
50.7% of total employee time in Brazil that year be encouraged. In areas with reliable internet
(MGI, 2017). Even though demand for workers at connectivity such programs could be integrated
all levels is expected to increase as the economy into school curricula, while successful digital
grows, fueled by productivity gains enabled by literacy programs for older users (such as those
technological progress (MGI, 2018), high-skilled developed in Australia or Israel) could be adapted
workers are likely to reap the gains of automa- to the Brazilian context.

8 Brazilian Higher Education and STEM Fields, IDRC, 2021.

9 BRAVA - Como o Brasil pode fomentar um ecossistema de profissionais digitais?

142
3.217. Develop mentorship opportunities, support 3.221. The telecommunications infrastructure
networks, and role models for women interested gap is wide. Brazil ranked 4th out of 26 countries
in STEM careers. Counterintuitively, the evidence in LAC on digital infrastructure in the IDB’s 2020
suggests that the proportion of women pursuing Broadband Development Index (IDB, 2021). Howe-
STEM careers is lower in countries with higher ver, investments are heavily concentrated in major
levels of gender equality. While the mechanism urban centers while rural connectivity remains a
underlying this paradox is not fully understood, challenge, particularly in remote inland areas, the
targeted initiatives focusing on mentorships and Amazon, and the Northeast. The “Crowdsource
networks can be beneficial in all contexts. for Digital Connectivity in Brazil” (C2DB) project
found that as of 2021, 19.7 million people, 26,800
3.218. Create new academic models better alig- schools, and 6,300 health facilities in Brazil had no
ned with the private sector’s skills requirements. broadband coverage.11
This step would also help advance the country’s
gender and diversity agenda, since Brazilian wo- 3.222. Internet coverage in Brazil has significantly
men are traditionally underrepresented in techni- expanded over the past decade. Between 2013
cal careers. Facilitating the adoption of vocational and 2018 the proportion of the country’s popula-
content in secondary education could also help tion with access to internet grew from 50% to 72%.
prepare youths for a changing economic environ- Nevertheless, this figure still lags OECD averages,
ment (OECD, 2020). and masks a very low access (below 50%) among
Brazilians with lower educational levels. Moreover,
3.219. Incentivize the development and utilization the proliferation of mobile internet subscriptions,
of online platforms that match workers with jobs. which tripled between 2012 and 2018, accounts for
An MGI study estimates that such platforms, which much of the increase in internet coverage during
also enable independent work, have the potential that period, while fixed-broadband subscriptions
to help 21 million Brazilians (about 14.2% of the (42% of households) and access to computers/lap-
working-age population) find jobs aligned with tops/tablets (40% of households) grew more slowly,
their skillsets, and could thus add US$69 billion to limiting the productive potential of the internet
the country’s GDP (MGI, 2018). for many users. At the household level, survey res-
pondents cited cost as the main obstacle to internet
3.220. Promote digital literacy programs for senior connectivity; however, at the individual level, cost
citizens and vulnerable populations. This is key to was only the third most-cited obstacle (48% of res-
decreasing the digital divide in key populations. Gi- pondents), after lack of computer skills (74%), and
ven that the digital gap is focused on citizens over 60 lack of interest (64%).
years of age, people with low formal schooling and Pillar 3 | Fostering Digital Transformation for Development

income below two minimum wages per month in- 3.223. Disparities in access persist across the
vest in improving their digital skills to enhance their country. Brazil’s vast size, complex topography,
use of public and private digital services. and unequal distribution of population and in-
come across regions have deepened the digital
(3) Develop infrastructure divide. Increasing the penetration of fixed and
for new technologies mobile broadband by 10% would require invest-
Closing the ICT infrastructure gap can have a major im- ments of US$10.7 billion, while closing the gap
pact. A 10% increase in broadband access penetration with OECD countries would require US$21.8
in Brazil would lead to a 0.77% increase in GDP while billion (IDB, 2021). Private operators have room
benefiting all parts of the country, from high-income to grow, but they face financial pressure from re-
urban areas to low-income rural areas. 10
latively low margins (partly driven by the impact

10 Institute of Applied Economic Research. Assessing the Effect of Telecommunications Investments on GDP. 2017
11 IDB-Anatel C2DB Project.

BID — Banco Interamericano de Desenvolvimento 143

 of the pandemic) and the high cost of deploying vity gap but suffer from limited access to credit.
5G networks (FitchSolutions, 2021). Filling the According to Anatel, regional ISPs account for
investment gap in Brazil’s telecommunications 37% of the fixed-broadband market in the coun-
sector could result in a 6.5% increase in GDP, a try. However, they struggle to access credit, and
5.3% increase in productivity and the generation therefore to invest into network expansion. 12
of 2.9 million direct jobs. Such shortage of credit can be explained by di-
fficulties in evaluating the network assets that
3.224. There are also quality and affordability regional ISPs could pledge as collateral.
problems. Brazil ranks 17th out of 26 LAC coun-
tries on penetration of mobile telephony (96.8 Policy recommendations
subscriptions per 100 inhabitants, versus the LAC
average of 108.9) but features a competitive market 3.226. Promote investment in telecommunica-
with several established operators. The country tions infrastructure by improving the regulatory
ranks better on broadband services—sixth on framework for private-sector involvement. It
mobile broadband, with 89.7 subscriptions per is critical to strengthen PPPs and concession
100 inhabitants versus 64.2 in LAC; and eighth on schemes and to offer incentives (tax- and/or spec-
fixed broadband, with 17.1 subscriptions per 100 trum-related) to private operators to deploy ad-
inhabitants versus 13.6 in LAC (ITU, 2020). Internet vanced networks in rural and underserved areas.
bandwidth per user is much slower than the LAC Complementary regulation should encourage the
average (29.2 Gbit/s versus 113.8, respectively). utilization of shared-infrastructure models and
Affordability issues constrain the utilization of “green networks”. Tenders for assigning radioe-
ICT, especially among those on low incomes. lectric spectrum licenses for mobile communica-
Brazil’s average tariffs for mobile telephony, fixed tions could envision investment commitments by
broadband, and mobile broadband correspond operators in underserved areas, instead of or in
to 1.4%, 2.5% and 1.4% of monthly average GNI addition to payments for the licenses.
per capita, respectively. Although these figures
are lower than the LAC averages (3.5%, 9.0%, 3.227. Encourage the affordable supply of value-
and 2.6%, respectively; ITU, 2021), they may not -added ICT services. Policies should encourage
adequately reflect affordability constraints, given the migration to advanced networks, including
the country’s large income disparities. Instead, 4.5G/LTE-A, 5G, and fiber-to-the-home; the de-
IDB’s 2020 Broadband Development Index (IDBA) ployment of submarine cables, which would
presents accessibility indices which measure the increase available bandwidth and push down who-
affordability of fixed and mobile broadband for lesale broadband prices; and the development of
the 40% of the population on the lowest incomes satellite networks (to connect remote areas where
(the higher the score, the lower the affordability). distance and vegetation do not allow for fiber-opti-
IDBA’s accessibility indices for fixed and mobile cs expansion), tower sites,13 and data centers.
Country Development Challenges - Brazil

broadband in Brazil are 14.48% and 5.04%, com-

pared with OECD averages of 2.38% and 2.17%, 3.228. Strengthen the digital ecosystem. Relevant
respectively (IDBA, 2021). These findings show steps include reducing information asymmetries
that affordability is a major barrier to accessing through data-based assessments of connectivity
ICT services for low-income segments of the popu- gaps; creating a secondary market and new regula-
lation and hinders digital inclusion. tions for spectrum, to ensure an efficient allocation
of monetary incentives and spectrum resources;
3.225. Regional internet service providers (ISP) and modernizing the regulatory framework to
play a key role in narrowing the digital connecti- bring it in line with technological developments.

12 https://teletime.com.br/05/06/2020/ao-bndes-mctic-pede-politica-de-credito-para-pequenas-de-telecom-e-radiodifusao/
13  here were 60,518 tower sites in Brazil in 2019; 31% were owned by the four largest mobile operators, and 69% by tower companies (TowerExchange, 2019).
T

144
 Digital Infrastructure and Education
Access to digital information systems and connected devices is an increasingly important element of
education quality. In Brazil, 25% of schools lack internet access. Among the schools that have internet
connections, only 77.9% have high-speed internet, and just 50% use their internet connections for
educational purposes. The government has provided funds to expand internet access among schools,
but one-quarter of schools that received these resources were unable to find an appropriate local
internet service provider.1 Some students can also access educational content at home, though often
only via smartphone, which diminishes the quality of the experience. In Brazil, 82.7% of households
have internet access, among which 99.5% use smartphones while just 45.1% use computers.2

Among the countries that administered the 2018 PISA, Brazil had one of the largest disparities in internet
access between students from vulnerable schools and students from privileged schools. Socioeconomic
gaps also overlap with regional inequalities: in the less-developed north, only 55% of schools have access
to high-speed internet. In addition, restrictions on access to school-owned devices, slow download
speeds, and frequent technical problems further undermine the quality of internet-enabled education.

To improve in-person and online access to educational materials and services, the government will need
to increase investment in sustainable, resilient, and accessible school-based internet infrastructure. The
authorities most also help education departments establish public-private partnerships for internet-
enabled education services, work to expand access to connected devices at home, especially among
the most vulnerable students, and incentivize schools to provide high-quality online learning.

1 MegaEdu
2 PNAD/IBGE

3.229. Incentivize private-sector lending to share of all firms in Brazil but were responsible for the
telecoms operators for network development. majority of net job creation. 15
The Fundo de Universalização dos Serviços de
Telecomunicações (FUST) could offer low-cost, 3.230. Brazil has one of the most dynamic inno-
long-term guarantees to banking partners for vation ecosystems in the region. Between 2011
lending in support of infrastructure investment and 2021, funding for startups in the country in-
by regional ISPs. Such guarantees could unlock an creased by a multiple of 64, from US$0.1 billion to
estimated US$2 billion of investment in broadban- US$9.4 billion16—implying a compounded annual
d-network expansion over the next five years. growth rate of approximately 52%, and accoun- Pillar 3 | Fostering Digital Transformation for Development

ting for around 60% of all startup funding in LAC.

(4) Facilitate entrepreneurship Through the end of 2021, Brazil was also the base
for generating a dynamic economy of more than half of all firms in LAC that had attai-
Entrepreneurship is essential to productivity growth ned unicorn status—i.e., a company valuation of at
in Brazil. Young, fast-growing, and innovative bu- least US$1 billion. However, 2021 saw the largest
sinesses are a key driver of both productivity growth year-on-year growth in startup funding in Brazil
and job creation, especially among SMEs and under- for the decade, up 166% from 2020; a dip in early
served populations, and can help address key social numbers for 2022 suggests that the levels achie-
and environmental challenges. Between 2008 and
14
ved in 2021 may be unsustainable. Moreover, the
2011, fast-growing companies comprised just a small growth rate in startup funding over the last decade

14 IDB, 2016.
15 https://endeavor.org.br/as-empresas-que-geraram-quase-50-dos-novos-empregos/.
16 Report Retrospectiva 2021, Distrito.

BID — Banco Interamericano de Desenvolvimento 145

 FIGURE 3.12. Capital commitments to start-ups in Brazil
900 10,000

800 9,000

8,000
700

7,000
600

6,000
500
5,000
400
4,000
300
3,000

200
2,000

100 1,000

0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Number (left axis) Value (US$ million)

Private Equity 174.6

Series G 1150.0

Series F 412.0

Series E 694.5

Series D 1180.0

Series C 2040.0

Series B 1920.0

Series A 1470.0

Sedd 320.0

Pre-Sedd 47.2

Angel 9.5
0.0 500.0 1000.0 1500.0 2000.0 2500.0

Source: Distrito

was slightly below the LAC average (approximately fold during that period) drove the rise in overall
Country Development Challenges - Brazil

60%), and masked certain persisting challenges in funding. In 2021, the five largest investments made
the startup ecosystem. up approximately 27% of all investments for the
year; and in 2020, 60% of all investments concen-
3.231. Startup investments are highly concentra- trated on just 10 firms. Pre-seed, seed, and angel
ted on a small number of firms, sectors, and geo- rounds only totaled approximately US$236 million
graphical areas, and in late stages of the funding in 2021, less than 2.5% of total startup funding,
cycle. Although startup investments increased with seed-stage funding representing a smaller
by a factor of 64 in Brazil between 2011 and 2021, proportion of total funding in 2021 (US$199 million
the number of funding rounds only increased by out of US$9.4 billion) than it did in 2016. The most-
a factor of nine, suggesting that larger individual -funded sectors in 2021 were financial technology
rounds (whose average size grew around seven- (fintech), retail technology (retailtech), and real

146
estate, which combined for 65% of all startup fun- community relies on referrals and introductions,
ding. 17 Health and education were fifth and sixth, and networks of non-white founders that could pro-
respectively, in the investment ranking, although vide them are still nascent. Moreover, 71% of inves-
they account for the largest share of startups tors lack non-white founders on their teams, which
(11.5% and 9.4% respectively). Finally, funding may create a bias that explains why 76% of investors
was largely concentrated in startups within the have the perception that they rarely, if ever, receive
Sao Paulo ecosystem, which hosts most of the 20 pitches from non-white entrepreneurs.
Brazilian firms that had unicorn status as of mid-
2021. 3.6% of startups are in the North and 13.4% 3.234. The regulatory changes introduced by the
in the Northeast, but the two regions received only Marco Legal das Startups need to be implemen-
0.3% and 4.7% of investments, respectively. In ted and reinforced. The Marco Legal das Startups
summary, although startup funding in Brazil has became effective in August 2021, modernizing the
grown considerably over the past decade, it has regulatory environment for startups. The law cre-
largely benefitted a small number of Sao Paulo-ba- ated the conditions to simplify startup financing,
sed fintech, retailtech, and real estate firms in the including through new instruments and sources of
late phases of their funding cycles. financing; as well as to use public procurement as a
potentially powerful source of funding for startups
3.232. Gender gaps stand out in the startup with innovative solutions to challenges of public
market. Early trends in opportunities for fema- interest. However, although the new law facilitates
le-led startups have not been promising. In 2020, the participation of startups in public procurement,
female founders represented only 4.7% of all fou- many startups remain unaware of the full extent of
nders of digital startups in the country,18 implying the opportunities available and are not actively posi-
low levels of representativeness, diversity, and tioning themselves to seize them.
opportunity within an ecosystem of 363 incuba-
tors and 57 accelerators.19 Venture capital firms 3.235. Limited access to credit and sector-spe-
in the country are primarily led by men—74% of cific constraints inhibit investment. Financing
them do not have any female founders or board is especially scarce in less-mature fields (e.g.,
members, and only 3% count women among their agricultural technology, life sciences, the creative
founders. 20
Furthermore, in private equity and economy), where the ticket size of late-seed capital
venture capital firms, the participation of women (typically between US$500,000 and US$1.5 million)
in management and senior roles is significantly is too large for non-institutional investors, such as
lower than in other sectors of the economy. Even angel investors and accelerators. Moreover, the
when startups led by female founders succeed in seed stage presents large and often difficult-to-me-
raising venture capital, they receive lower invest- asure risks, discouraging risk-averse institutional Pillar 3 | Fostering Digital Transformation for Development

ments than those with male founders. 21

investors who prefer mature venture capital and
private equity segments in more developed fields
3.233. Significant efforts are also needed to make (e.g., financial technology and e-commerce). High
the startup ecosystem more inclusive in terms of interest rates are also a key challenge for Brazilian
race. Although they are the majority of the popu- startups: as self-funding does not always allow for
lation, non-white Brazilians account for only 27% rapid growth, and the search for external invest-
of startup founders. Non-white founders also stru- ments is extremely competitive, many entrepre-
ggle to benefit from the abundance of investment neurs take out credit on a personal basis at an inte-
sources in the country, since access to the funding rest that can reach 400% or more per year.

17 Ibid, 2021.
18 Female Founders Report, B2Mamy, Endeavor y Distrito, 2021.
19 Anprotec, 2019.
20 Female Founders Report, B2Mamy, Endeavor y Distrito, 2021.
21 Ibid, 2021.

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 3.236. Mentorship opportunities and business to the mix of instruments available to startups,
networks are poorly developed, slowing down granting entrepreneurs more choice when addres-
startup development. Many promising entre- sing their financing needs.
preneurs lack the business-oriented mentorship
necessary to face the foundational challenges of 3.239. Diversify investments to foster develop-
early-stage firms, when they are striving to prove ment. New and existing financing instruments
their concept in the market and acquire their first could prioritize sectors and regions that are not
clients. Technology startups often require speciali- already well funded but offer potential for sustai-
zed support, due to their initial cash-flow volatility nable development—such as the bioeconomy. Mo-
and the intangible nature of their assets. Early-sta- reover, fostering greater geographical diversity in
ge capital funds can provide hands-on support and funding could help develop local solutions for the
mentorship to boost initial sales, enhance marke- Amazon and the social and economic challenges
ting strategies, strengthen governance structures, of the North and Northeast.
and improve resource planning. However, less-
-mature fields often lack a robust network of ac- 3.240. Support the incubation and acceleration of
celerators, investors, and mentors, compounding startups. Efforts in this area are especially relevant
the challenges faced by entrepreneurs. after the phasing out of the Startup Brasil program,
and the migration along the startup value chain
3.237. Brazil’s innovation ecosystem remains re- of many established incubators and accelerators.
latively disconnected from the rest of the region. Startups have been receiving less mentorship and
Weak regional connectivity limits the potential for guidance on issues ranging from operational mana-
co-investment and synergy gains among startups. gement to modalities and timing of funding.
While regional startups, especially from Argentina,
have flourished in Brazil (e.g., Mercado Livre), Bra- 3.241. Strengthen the pipeline of founders from
zilian startups have room to further integrate into underrepresented groups. Specifically, programs
the regional market and yield substantial gains. Glo- could be developed to support women and afro-
bally, the Brazilian ecosystem does have ties with -Brazilian founders in their startup journeys. Such
the US and Israel but has few other extra-regional programs could include the establishment of ne-
connections. International venture capital and pri- tworks, mentorship, and funding support targeted
vate equity firms are active in Brazil, but Brazilian to these groups.
entrepreneurs have little exposure to other ecosys-
tems, which may impact their competitiveness and 3.242. Raise awareness of the benefits of new le-
potential for global expansion. gal frameworks. For example, success stories from
the first startups that participate in public procure-
Policy Recommendations ment can be disseminated to increase knowledge of
available opportunities.
Country Development Challenges - Brazil

3.238. Leverage new sources and instruments of

financing to better support early-stage startups. 3.243. Create open innovation financing instru-
Although Brazil has a well-developed network of ments. Open innovation financing instruments
angel investors, their involvement in early-stage could enable the public sector to engage the ser-
startups has been very low in recent years. Ma- vices of startups. These contractual forms tend to
tch-funding arrangements could help crowd-in have low implementation costs and strong econo-
additional resources for early-stage startups from mic and social impacts. Creating open databases
angel investors—as well as from crowdfunding, could serve as a starting point for open innovation
which has grown significantly as a source of finan- programs in strategic areas such as smart-city tech-
cing for startups worldwide. Moreover, venture nologies, health, education, mobility, security, and
debt and blended finance solutions could be added public-sector transparency.

148
3.244. Facilitate linkages and provide support reliance on imports.24 Brazil has become incre-
services. Platforms, mentoring networks, and asingly reliant on commodities, natural resour-
collaborative workspaces can strengthen the inno- ce-based manufacturing, and low-productivity
vation ecosystem. These services are a vital comple- services . Manufacturing value-added in 2020
ment to traditional intermediary institutions such amounted to US$141.2 billion, a 4.3% decline sin-
as incubators and accelerators. ce 2019 in constant 2015 US$ (WB, 2022). Notably,
Brazil’s manufacturing value-added in 2020 ac-
3.245. Reduce legal and administrative barriers. counted for 1.05% of the world’s total, the lowest
While startups would benefit from general impro- share since 1997, and down from 1.37% in 2019
vements in the business climate, reducing the cost and 1.43% in 2018. Five segments drive Brazilian
of opening and closing businesses would have an manufacturing: processed food and beverages;
especially positive impact. chemicals and chemical products; coke, refined
petroleum products, and nuclear fuel; motor
3.246. Increase international cooperation. Gre- vehicles, trailers, and semitrailers; and machi-
ater international cooperation would enable LAC nery and equipment (UNIDO, 2022).
countries to learn from each other and share best
practices, while opening up markets and facilita- 3.248. Industry 4.0 technologies have the po-
ting the development of transnational enterprises. tential to address major weaknesses in Brazilian
The LAC startup community is young, but already manufacturing, including high production costs
displays greater communication and coordination and poor logistics integration. Wages in Brazilian
than more traditional sectors. Regional coopera- manufacturing are about 50% higher than the LAC
tion could also help close funding gaps and attract average, and the cost of both container imports and
new sources of investment. exports are above the regional average. Automation
could replace an estimated 66.0% of labor-hours
(5) Leverage new technologies to in manufacturing in LAC and an estimated 50.7%
boost productivity in Brazil.25 In the McKinsey Digital Manufacturing
New technologies can reduce productivity gaps in the Global Expert Survey 2018, about 73% of surveyed
Brazilian economy and enable firms to streamline ope- Brazilian CEOs and entrepreneurs consider Indus-
rations, optimize processes, increase efficiency, reduce try 4.0 to be a high priority.
downtime, and anticipate problems. Agriculture can
also benefit from new technologies to become more sus- 3.249. Brazil’s policy framework does not facilita-
tainable and productive. te technological uptake. Key challenges include:
low levels of public investment in R&D; limited in-
3.247. Brazil’s manufacturing sector has been tegration of ICT into government operations; and Pillar 3 | Fostering Digital Transformation for Development

shrinking over time. Until 2015 Brazil ranked the limited role that digital technologies play in the
among the world’s 10 largest industrial pro- government’s overall development strategy.26
ducers, but uncertainty, supply bottlenecks,
demand restrictions, and rising inflationary pres- 3.250. Underutilized digital technologies and
sures have been hampering industrial production high implementation costs constrain techno-
since (OECD, 2021c and CNI, 2021). The decline logical uptake in the manufacturing sector. As
of manufacturing is undermining Brazil’s com- of 2016, only 58% of domestic companies were
petitiveness, 22 reducing the share of industrial aware of the importance of digital technologies
products in its total exports, and increasing its
23
to industrial competitiveness, and less than half

22 Brazil fell from 48th in the World Economic Forum’s Global Competitiveness Ranking in 2012, to 81st in 2016.
23 From 54% in 2003, to 36% in 2016.
24 From 15% in 2003, to 26% in 2016 (CNI, 2016).
25 McKinsey Global Institute, 2017.
26 World Economic Forum and INSEAD, 2016.

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 reported using them. Lack of awareness was par- 3.252. Technology can increase agricultural pro-
ticularly acute among SMEs and low-technology ductivity. A wave of innovation based on digital
firms. Overall, the share of Brazilian manufac-
27
applications, automation, biotechnology, and the
turers that use Industry 4.0 technologies is lower rapidly growing field of agricultural technology has
than the OECD average. Barriers to adoption in- created new opportunities for agricultural produc-
clude: high implementation costs, unclear retur- tivity growth.32 Brazil is home to an estimated 200
ns on investment, shortages of skilled workers, agricultural technology firms—a number that has
insufficient digital infrastructure, difficulty in quadrupled over the last two year—many of which
identifying suitable technologies and partners, are incubated in universities.
and lack of adequate financing (CNI, 2016). In
addition, 66% of Brazilian companies cite high 3.253. Agricultural technology firms face sig-
implementation costs as a key barrier to adopting nificant challenges. Despite the growth in their
digital technologies . 28
number, agricultural technology firms make up just
2% of Brazil’s startups, and more than 70% of them
3.251. Poor adoption by MSMEs drives the gap are based in the Southeast. Many technological
between Brazil and developed countries in the innovations they build on originated from research
use of digital technologies by firms. 29
Brazilian carried out either by the Brazilian Agricultural Re-
MSMEs do not typically use advanced digital tech- search Corporation (Empresa Brasileira de Pesquisa
nologies based on big data, artificial intelligence, Agropecuária, EMBRAPA), or by public universities.
or the internet of things. Despite the acceleration Despite rising levels of funding and a growing num-
in digital transformation precipitated by the ber of acceleration programs, an estimated 80% of
pandemic, a survey of over 2,000 micro and small agricultural technology firms have difficulty attrac-
firms in Brazil in 2021 showed that approximately ting investment, and 42% are self-financed. Many of
one-third of them could be classified as Interme- the technologies they develop can be used by farms
diate (30%) or Advanced (3%) in terms of digital of all sizes, but weak extension services and poor
maturity, while the vast majority were at Beginner internet connectivity in rural areas slow down the
or Basic level. 81% of the firms surveyed used di-
30
uptake of innovation.
gital technologies to engage clients (mainly throu-
gh social media or a website), but the majority re- Policy recommendations
ported not using cloud computing (56%) or cyber
security tools (57%), and only 23% reported using 3.254. Carry out structural reforms that encou-
data to inform business decisions. High costs rage competition and global integration. Greater
emerged as the most significant barrier to the digi- trade openness can incentivize the adoption of
tal transformation, cited by 38% of firms, followed efficient technologies not only by export-driven sec-
by: difficulty in finding qualified human resources tors, but also by the more domestically oriented ma-
(14%), difficulty in determining priority invest- nufacturing sector (Rodrik et al, 2017). Industry 4.0
Country Development Challenges - Brazil

ments (13%), lack of a digitization strategy within technologies can especially benefit the aircraft and
the firm (11%), and lack of basic technology use auto industries, while the subsectors with the hi-
within the firm upon which to construct the digital ghest export potential are expected to include paper
transformation (10%). According to IDC (2020), products, motor vehicles and parts, ferrous metals,
fostering digitalization of Brazilian SMEs could machinery, electricity, and chemicals (INTRACEN,
add US$9 billion to the country’s GDP by 2024.31 2022). Deeper integration into the global economy

27 CNI, 2016.
28 Ibid.
29 OECD Reviews of Digital Transformation: Going Digital in Brazil, OECD, 2020.
30 Maturidade Digital das MPEs Brasileiras, ABDI, 2021.
31 IDC (2020). 2020 Small Business Digital transformation – A Snapshot of Eight of the World’s Leading Markets.
32 Vitón et al., 2017

150
and rising domestic competition (achievable, for with countries at more advanced stages of the digi-
example, by using public procurement to target tal transformation. The public sector should scale
domestically generated innovation) could boost up existing programs to support startups and early-
Brazil’s productivity and, together with upskilling -stage SMEs in ICT, and offer training and subsidies
initiatives, facilitate the shift of jobs towards more to encourage the use of ICT by firms and househol-
productive firms and activities. Boosting incentives ds. Accelerating the adoption of e-government tech-
for training institutions to focus on employabili- nologies could also catalyze technological uptake in
ty can also help to better align skills supply with the private sector.
market demand (OECD, 2020).
3.258. Promote the development of sustainable
3.255. Accelerate the digital transformation with agricultural technologies. Creating more oppor-
efforts tailored to the digital maturity of each firm. tunities for interaction between private firms
A tool for assessing the digital maturity of firms, and public agencies, as well as the incubators and
adapted to the Brazilian context, could be applied accelerators that bring ideas to fruition, can encou-
to thousands of MSMEs, and allow for the design of rage innovative solutions. sustainable agricultural
initiatives proportionate to their level of maturity. technologies have the potential to significantly
The most mature SMEs could benefit from vouchers contribute to Brazil’s food security (per the criteria
for digital extension services relevant to their sec- presented in IDBG’s Food Security Sector Fra-
tors and objectives, while less digitally mature firms mework Document). In the context of the Russian
could receive free or subsidized online training cou- invasion of Ukraine, indicated that Brazil is heavily
rses or services targeted to their needs. dependent on agricultural inputs (i.e., fertilizers)
imported from the conflict zone, which represents
3.256. Reduce the fiscal burden on technology short-medium risks to the production of food for do-
uptake. Reforms to boost the digital transformation mestic consumption. This dependency can be redu-
in manufacturing should facilitate the adoption ced through the deployment of new technologies.
or adaptation of foreign technology by local firms.
However, high taxes and import tariffs on ICT and (6) Improve the quality of life and
advanced equipment undermine transformation inclusion using new technologies34
efforts by firms. Moreover, the OECD recommends New technologies can help improve the provision of
reducing the special tax on royalties and adminis- public services and develop new services. Fintechs, in
trative and technical services provided by non-re- particular, offer major opportunities to increase finan-
sidents (CIDE), as well as simplifying the taxation cial inclusion, including through electronic payments,
of goods and services arising from new business loans, and other digital services.
models enabled by digitization (OECD, 2020). Pillar 3 | Fostering Digital Transformation for Development

SMART CITIES
3.257. Enable the adoption of Industry 4.0 tech-
nologies. The government should promote an 3.259. Most Brazilian cities do not have a munici-
enabling environment by investing in collaborative pal broadband network. Municipal broadband ne-
infrastructure, including specialized laboratories tworks contribute to the development of intelligent
for R&D, and encouraging entrepreneurship.33 De- cities. They allow for the installation of IoT sensors
monstration platforms could boost technological and the collection of data to monitor real-time
dissemination and encourage partnerships among events in public spaces, make informed decisions,
key stakeholders. Innovation policies should reflect and provide innovative services to citizens. Good
the importance of “leapfrogging” to close the gap connectivity, digital devices, and digital skills

33  or instance, Piracicaba, a small city in the state of São Paulo, has become a leading agtech center thanks to the cooperation of local industry players
F
with universities, including ESALQ of São Paulo University (ranked seventh in the world for Agriculture Sciences by US News & World Report). 18% of
all agtech startups in Brazil were created in the city. (Startup Genome, 2018).
34 Throughout the text we discuss the use of new technologies in different areas as health, education, citizen security, fiscal management among other sectors.

BID — Banco Interamericano de Desenvolvimento 151

 enhance government transactions, health services, tices on data protection and cybersecurity, and the
education, and payments, thus increasing civic en- establishment of dedicated teams within municipa-
gagement and participation. 35
lities to manage and analyze urban data.

3.260. Brazilian cities lack public policies, skills, 3.264. Build capacity among public officials on
and tools for data management. The digital trans- matters related to smart cities, data manage-
formation of cities has led to a major increase in ment, and urban development. Smart cities are
the generation of urban data. In 2020, data analysis a novel and multi-faceted field, and the relevant
supported decision-making and the elaboration of technologies evolve rapidly. Therefore, public of-
public policies to respond to the health emergency ficials need access to capacity-building programs
caused by the COVID-19 pandemic. Despite wides- in areas such as digital technologies, data manage-
pread enthusiasm for digital solutions based on big ment, and data privacy, as well as in the intersec-
data, cities are lagging in the adoption of data-analy- tion of urban development with big data, artificial
sis tools to respond to urban challenges and support intelligence, machine learning, Geographic Infor-
evidence-based policies. The systematic collection, mation Systems (GIS), and cloud computing.
preparation, and analysis of big data from urban
environments require specialized knowledge, te- FINANCIAL INCLUSION
chnological tools, and professional experience. As
an additional challenge, many valuable city-level 3.265. Financial inclusion in Brazil remains a chal-
databases include personal information on citizens, lenge. The estimated finance gap for MSMEs in
which must be managed with extreme care to pro- the formal sector is equivalent to 27% of GDP, and
tect their human rights and privacy. rises to 49% when including the informal sector
(SME Finance Forum, 2018). Similarly, households
Policy Recommendations in Brazil have less access to many types of financial
services than those in comparator countries. As of
3.261. Develop policies and projects in support of 2017, only 9% of Brazilian families reported having
smart cities. Brazilian cities can draw on best practi- had a loan in the previous year, and only 5% had a
ces and digital technologies (such as IoT devices, 5G mortgage loan—below the averages for LAC (12%
networks, and big data solutions) to respond to cur- and 7%, respectively) and the OECD (17% and 27%,
rent and future urban challenges, improve the quali- respectively). In addition, an estimated 45 million
ty and efficiency of public management, and pursue Brazilians—more than 20% of the population—have
an inclusive and sustainable urban development. no access to financial services, but make annual
transactions worth approximately US$200 billion
3.262. Expand municipal broadband connecti- (EIU, 2021). Although Brazil has the largest network
vity. Cities would benefit from connected public of credit unions in LAC (847 entities managing more
buildings and Wi-Fi connectivity in public spaces, than US$65 billion in assets), they only reach 8% of
Country Development Challenges - Brazil

and from fostering opportunities to enhance the the population, one of the lowest penetration rates
supply and accessibility of public services throu- in the region (WOCCU, 2020).
gh digital channels.
3.266. Lack of finance is widespread into diffe-
3.263. Assist municipal authorities in developing rent groups in Brazil (gender, regional, and size
and implementing data management policies for of companies considered). Access to credit for
urban planning. Priority areas include: a strategy women in Brazil (7%) is also lower than in LAC-26
for open and secure data, the digitization of urban (11%) and the OECD (15%), and similar gaps exist
services, the sharing of knowledge and best prac- in access to credit for the poor and those living in

35  In LAC, online procedures are 98% cheaper and 74% faster than face-to-face procedures, significantly improving service delivery and inclusivity of
access. Roseth et al. (2018)

152
rural areas (Global Findex Database, 2017). Regar- electronic payments, loans, and other digital ser-
ding the response to COVID-19, a survey carried vices—and more than 35% cater to underserved
out by SEBRAE shows that companies owned or segments, including MSMEs and households.
led by afrodescendants are having more difficul- However, only 31% of fintechs in Brazil have a spe-
ties than those owned or led by white population cific focus on financial inclusion, less than in Chile
in terms of resuming sales at the level prior to (32%), Mexico (32%), Peru (39%), and Colombia
the pandemic. According to the survey, 70% of (42%). In this context, the pandemic and ensuing
afrodescendants entrepreneurs are earning less social-distancing measures have accelerated the
than pre-COVID-19 times; this figure is 60% in adoption of digital financial tools, for which Brazi-
the case of white entrepreneurs36. Finally, moni- lians are well positioned thanks the high penetra-
toring carried out by SEBRAE shows that women tion of mobile phones in the country.38
entrepreneurs who are afrodescendants are the
most affected by the commercial restrictions of 3.269. The Brazilian fintech market is the most de-
the pandemic and the group that has presented the veloped in the region. Brazil hosts 31% of all finte-
most rejections when applying for a loan. Afrodes- chs in LAC, followed by Mexico (21%) and Colombia
cendants’ women had the highest proportion of (11%). The main challenges for the Brazilian fintech
negative credit request (25%), compared to 17% of sector are scalability and access to finance. Only
white women37. The North and Northeast regions 55% of Brazilian fintechs have received cross-bor-
account for 36% of the country’s population, but der investment, a smaller share than in Argentina
for only 11% of loans and 18% of savings deposits (61%), Mexico (63%), and Chile (72%)39.
(Fitch Solutions, 2020).
3.270. Policy focusses on the payments sector
3.267. Several barriers hinder the insertion of has made it attractive to Brazilian fintechs, and
Brazilian population in the financial markets. Struc- the PIX payment system has been a success. The
tural challenges of financial inclusion derive from payments space has undergone major change in
supply barriers, difficulty to access the financial recent years and witnessed the highest number
system, the lack of banking infrastructure, risk per- of fintech entrants,40 authorized on the basis of
ception by financial institutions, guarantee requi- the regulatory framework that the Central Bank
rements, relatively low knowledge about existing of Brazil (CBB) implemented in the early 2010s.41
financial products, and their suitability. More recently, the CBB promoted the launch of
PIX, a fast-payment system that allows for free
3.268. Fintechs can be a tool for enhancing finan- payments between individuals and low charges
cial inclusion. By increasing the use of digital tech- for merchants. In little over a year since becoming
nologies, fintechs find several innovative ways to active in November 2020, PIX has signed up 67% of Pillar 3 | Fostering Digital Transformation for Development

improve customer service, raise capital, facilitate adults in Brazil.42 The mandatory participation of
electronic payments and analyze large volumes of large banks in the scheme, and the central bank’s
data. Thus, they manage to be more agile compa- dual role as infrastructure provider and rule setter,
red to traditional financial institutions, and adapt have been key ingredients of its success. PIX is an
more quickly to the needs of the market (Hoder, example of a centralized payment system that ge-
Wagner, Sguerra & Bertol, 2016). More than 60% nerates financial inclusion and formalization and
of fintech companies in LAC provide financial reaches segments of the population that were not
services to households or companies—such as served by the traditional financial system.

36 Sebrae (2020).
37 EBC. Brazilian Communications Company.
38 Economist Intelligence Unit (2021)
39 IDB (2022). https://publications.iadb.org/es/fintech-en-america-latina-y-el-caribe-un-ecosistema-consolidado-para-la-recuperacion
40 Fintechlab (2020). Radar Fintechlab 2020.
41 As an example, see. BCB (2013). Circular n. 3.682.
42 Duarte et al. (2022). “Central banks, the monetary system and public payment infrastructures: lessons from Brazil’s Pix”. BIS Bulletin, n. 52.

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 Financial Inclusion with a Gender
and Diversity Perspective
In Brazil, multidimensional inequalities affect access to finance and the use of credit products and
services. Women, indigenas, pretos, pardos, persons with disabilities, and members of sexual
and gender minorities face unique barriers that inhibit their participation in financial markets,
with negative implications for their economic empowerment and social wellbeing.

Gender-disaggregated financial data are relatively scarce in Brazil. However, female-owned businesses
are marginally more concentrated in the commercial sector than are their male-owned counterparts
(36.6% versus 34.6%).1 While 6.6% of male entrepreneurs report having requested loans to open or
expand a business, the same is true for just 2.9% of women.2 In the last quarter of 2020, 58% of all
credit to micro-entrepreneurs was allocated to men, while 42% was allocated to women.3

Gender differences also affect the amount of financing obtained. In 2019, 70% of women were able to
obtain loans through the financial system, compared to 60% of men, yet loans to men were in significantly
greater amounts.4 Over half of all loans to men exceeded R$30,000, and 30% exceeded R$60,000,
whilst most loans to women were for amounts under R$30,000, and 29% were under R$10,000.5

Similar patterns are evident across other disadvantaged groups. While no racially disaggregated information
is available on microenterprise ownership at the national level, a 2017 IDB report6 found that in two Brazilian
cities the share of microentrepreneurs with unsatisfied demand for credit was 44.6% among pretos, 35.1%
among pardos, and 29.4% among brancos. Additional surveys found that firms owned or led by pretos and
pardos had more difficulty than firms owned or led by brancos in returning their sales to pre-pandemic
levels. As a result, 70% of preto and pardo entrepreneurs are earning less than they were before COVID-19,
versus about 60% of branco entrepreneurs.7 Female preto and pardo entrepreneurs were most severely
affected by the commercial restrictions imposed during the pandemic, and this group had the highest
rate of rejected loan applications at 25%, compared to a rate of 17 percent among branco women.8

Indigenas face especially severe credit constraints, as their households and businesses are often located
in remote areas far from banking infrastructure. Many indigena communities suffer from elevated poverty
rates and face information gaps and other challenges that limit their access to the financial system.9
Brazil’s Securities and Exchange Commission (CVM) has partnered with the OECD10 to pilot initiatives
aimed at expanding financial education and entrepreneurship among indigena communities by leveraging
new technologies to overcome constraints and maximize positive social and environmental impacts.

Access to finance among persons with disabilities and members of sexual and gender minorities is less
well studied but expanding the reach of financial services among these groups represents an opportunity
to reinforce social resilience and address sources of exclusion and vulnerability. In 2010, about 24% of the
Brazilian population reported some degree of physical or cognitive disability.11 An estimated 13.6 million
Brazilians are members of the LGBT community, the highest number in the LAC region, with an estimated
spending power totaling US$107,000 million in 2018 (5.35% of GDP)12. These segments of the population face
Country Development Challenges - Brazil

barriers to financial inclusion due to an elevated risk perception by financial institutions, higher guarantee
requirements, and limited knowledge about existing financial products and their suitability. Alleviating
these challenges could greatly expand financial access among two large, underserved communities.

1 Pesquisa Nacional por Amostras de Domicílio Contínua (PNADC) del Instituto Brasileiro de Geografia e Estadísticas (IBGE), 2019
2 Global Findex 2017
3 Central Bank of Brazil, series 26968 and 26969
4 For a discussion about access to credit and gender for SMEs see IDB (2022). Caracterização das MPMES brasileiras e os entraves do acesso ao credi-
to sob a perspectiva de gênero.
5 Sebrae. 2019. Pesquisa “O Financiamento dos Pequenos Negócios”.
6 BID, 2017, Acesso ao crédito produtivo pelos microempreendedores afrodescendentes. All racial affiliations were self-identified.
7 Servicio Brasileño de Apoyo a la Micro y Pequeña Empresa (Sebrae). 2020.
8 EBC. Brazilian Communications Company.
9 Fundación Microfinanzas BBVA
10 CVM and OECD
11 IBGE, 2010 census
12 https://www.larepublica.co/globoeconomia/la-comunidad-lgbt-movio-el-ano-pasado-us-253-000-millones-en-america-latina-2878418

154
3.271. The Brazilian venture capital ecosystem 3.273. Financial regulators have been proactive
has been supporting the fintech sector. The im- and well-coordinated in adopting mechanis-
pressive performance of the Brazilian venture ca- ms to foster innovation. The CBB, the CVM, and
pital (VC) ecosystem in recent years has showca- Superintendence of Private Insurance (SUSEP)
sed the opportunities for technology investment have all created regulatory sandboxes for testing
in the country. 43 VC investments in Brazil have innovative services and solutions.53 Furthermore,
been the highest in the region, followed by Mexi- the CBB has developed an industry sandbox called
co, Colombia, Chile, and Argentina.44 In the first LIFT Lab,54 jointly with Fenasbac; as well as the
half of 2021, Brazilian startups received a combi- Laboratório de Inovações Financeiras, a partnership
ned US$5.2 billion of investments. Local venture between BID, ABDE, CVM and GIZ.55
capital tends to focus on early-stage firms, and
average ticket size tends to be small. According to Policy recommendations
the Brazilian Association of Venture Capital, VC
investments in Brazil in 2020 covered a variety of 3.274. Increase financial inclusion. The banking
sectors, including fintech and insuretech (23%) sector can take a more prominent role in micro-
healthtech (health technology) (11%), adtech and credit. However, banks will need institutional
martech (advertising and marketing technology) support on funding, risk mitigation, and capacity
(10%), and software (9%).45 building to assess and manage risks. Partner-
ships with smaller banks and credit unions could
3.272. Fintech regulation extends beyond pay- support better regional distribution of financial
ments. Crowdfunding, regulated by the Securi- services, particularly in the North and Northeast.
ties and Exchange Commission of Brazil (CVM) A faster and broader expansion of fintech com-
since 2017, and fintech credit, regulated by the
46
panies should help close the gap in access for the
CBB since 2018,47 have grown significantly48 and unbanked. Digital banks are a natural fit for under-
evolved into important sources of funding for served segments of the population and young cus-
SMEs. The CVM has also defined the applicability tomers, with amplified effects on financial inclu-
of regulations on general investment advice and sion, and offer potential to expand SME lending.
asset management to providers of automated Finally, financial institutions will need support,
investment-management services (so-called ro- through guaranteed schemes as well as capital and
bo-advisors).49 Furthermore, Brazil is a leader in quasi-capital instruments.
the implementation of open finance, with relative
success in terms of customer adoption. 50 Con- 3.275. Improve access to credit for SMEs owned
gress is considering a legislative proposal about by women and Afro-Brazilians. Globally, the rate
regulation of virtual-asset service providers, 51 of participation in entrepreneurship for women Pillar 3 | Fostering Digital Transformation for Development

who operate in the cryptocurrency space, while is equal to 80% of the rate for men; 56 in Brazil,
the CBB is studying the implementation of a cen- however, less than 5% of start-ups in innovative
tral bank digital currency (CBDC). 52
sectors were founded exclusively by women,

43 Polymath Ventures (2020)

44 Association for Private Capital Investment in Latin America (2021)
45 Brazilian Association of Venture Capital (2021)
46 CVM (2017). Instrução n. 588.
47 CMN (2018). Resolução n. 4.656.
48 CVM (2022). Crowdfunding de Investimento: Evolução do Mercado 2021.
49 CVM (2021b). Resolução n. 19; CVM (2021a). Resolução n. 21.
50 Open Banking Brasil (2022). Dados e estatísticas de desempenho e disponibilidade do Open Banking.
51 Brasil (2021). Projeto de Lei 4401/2021.
52 BCB (2021). BC apresenta diretrizes para o potencial desenvolvimento do real em formato digital.
53 See IDB (2022). FintechRegMap.
54 https://www.liftlab.com.br/
55 https://labinovacaofinanceira.com/
56 Citigroup. Women Entrepreneurs: Catalyzing Growth, Innovation, and Equality. Citi GPS: Global Perspectives & Solutions, 2022

BID — Banco Interamericano de Desenvolvimento 155

 while 90% were founded exclusively by men.57 they target, from income and availability of colla-
Lack of incentives and difficult access to finance teral to financial literacy.
are major barriers to female participation in the
innovation ecosystem, despite evidence that wo- 3.278. Regulation can improve on several fronts.
men-led businesses can be more profitable than Regulatory progress has already enhanced finan-
those led by men when they enjoy equal access cial inclusion, but much remains to be done to
to finance. 58
Affirmative-action programs in the ensure financial stability and asses the effects of
financial sector can improve access to credit for recent reforms. First, it is important for the BCB
women and Afro-Brazilians to start or expand a to determine the impacts on competition and
business. This requires better and more-inclusi- transparency from the implementation of PIX,
ve risk assessment policies, as well as a greater and from the central bank’s dual role in it. On the
share of women in decision-making positions other hand, the development of a CBDC should
at investment companies. Increasing diversity be accompanied by an assessment of its effects
among investors also has a positive effect on por- on payments system, credit channels, and other
tfolio diversity. Women-led SMEs need support to financial infrastructure. The implementation
overcome other structural bottlenecks that affect of regulatory sandboxes has proved successful
them disproportionately, such as in access to ne- relative to similar initiatives in peer countries,
tworking channels. but there is room to evaluate the institutional
capacity of the three relevant regulators, while
3.276.Support fintech companies to expand considering the consolidation of some of their
access to services for the unbanked. Supporting activities. Moreover, although fintech might fall
access to finance for fintech companies active in within the remit of more than one regulator, the
digital payments and loans, insurance, and crowd- growth of the ecosystem would benefit from an
funding can help mitigate their funding challenges integrated innovation hub to foster regulatory
and promote financial inclusion. dialogue with innovative players. Cryptoasset
regulation should maintain a forward-looking
3.277. Reduce bias in the financial system. This stance, while taking into account the industrial
goal can be pursued through improvement in four organization of the sector, its extra-territorial
major areas: nature, and the ensuing limitations to regulatory
I. devising institutional guidelines or action implementation and enforcement. Finally, bet-
plans on gender and diversity, incorporating ter regulation of digital onboarding could foster
a gender perspective on investment; financial inclusion.
II. disaggregating data by gender and other
diversity factors, to better guide financial (7) Use the technology to improve
product design; the efficiency and transparency
III. developing training and knowledge-sharing of the public sector
Country Development Challenges - Brazil

campaigns on gender and diversity concepts, Digital technology has enabled innovations in fiscal
and the main barriers for diverse groups, and policy that are gradually supplanting traditional
IV. designing new financial products suited to the strategies and practices, both globally and in the LAC
needs of women and diverse groups to foster region. Technology has transformed tax inspections
their access to credit and markets, improve pro- and audits, public expenditure targeting, public pro-
ductivity, and enhance technical knowledge. curement management, integrated public financial
Such instruments should consider financial and management, public investment prioritization and
non-financial needs and features of the groups execution, and fiscal transparency.59

57 Female Founders Report 2021: Liderança feminine e empreendimentos no ecossistema brasileiro de inovação
58 Citigroup. Women Entrepreneurs: Catalyzing Growth, Innovation, and Equality. Citi GPS: Global Perspectives & Solutions, 2022
59 Gupta, et al., 2017

156
3.279. Digitalization of public services can lead to Argentina, the Identification System for Tax and
substantial savings for the government and so- Social Information (Sistema de ldentificación de
ciety. IDB (2022) study with the municipality of Sao Información Tributaria y Social, SINTyS) uses cloud
Paulo found that after the digitalization, the cost computing to record and update data on individu-
of public service citizens and firms was reduced, als and businesses in real time, enabling the gover-
on average, by 74%. In the case of the public admi- nment to more efficiently target spending, reduce
nistration, the unitary cost of a digital service after tax evasion, and control informality. The SINTyS
digitalization was 40% lower. After one year of the generated approximately US$120 million in fiscal
implementation of the digitalization program, the savings between 2014 and 2015.67
return on investment was R$27 per 1 R$.60
3.282. Digital technologies can make the public
3.280. Digital technologies could increase indi- sector more transparent. According to the OECD
rect tax collection globally by an estimated 2% of (2014), e-government technologies can foster more
GDP per year. In the future, digital tools could help open and inclusive government processes, encou-
reveal and tax the wealth hidden in tax heavens, rage the engagement of citizens, the private sector,
which is estimated to amount to 10% of global and civil society in the policy process and in the
GDP. A recent study revealed that electronic
61
design and implementation of public services, and
invoicing has increased tax collection in five of create a data-driven culture in the public sector.
the seven LAC countries that have implemented
it, including countrywide in Argentina, Ecuador, 3.283. Digital technologies can reduce the length,
Mexico, and Uruguay, as well as in the Brazilian complexity, and cost of administrative procedu-
state of São Paulo.62 In Brazil, the Electronic Fiscal res. E-government technologies allow for process
Invoice (Nota Fiscal Electrônica) has reduced the automation, simplification, and remote access,
VAT evasion rate from 32% to 25%, while promo- generating efficiency gains in both the public and
ting private-sector development and reducing in- private sectors. Computerized administrative pro-
formality.63 Halving the “digitization gap” between cesses and digital recordkeeping can reduce cor-
advanced and developing countries could increase ruption, improve transparency, increase the accu-
VAT collection in the latter group by about 1.7% racy of public records, and facilitate data analysis.
of GDP. Worldwide, big data analytics could help
recover approximately 20% of the public revenue 3.284. The federal government has made pro-
lost to tax evasion. 64
gress on digitization. At the federal level, Brazil
was ranked among the top 20 countries in the
3.281. Digital technologies can enhance pu- world in the United Nations online services sub-
blic expenditure efficiency. The introduction of -index (UN, 2020), 68 and reached seventh place Pillar 3 | Fostering Digital Transformation for Development

e-procurement systems in India and Indonesia out of 198 in the World Bank’s digital government
has improved the quality of roads and increased maturity index, which measures progress on
compliance with project-execution timelines. 65
the digital government agenda (World Bank,
Similarly, the use of e-procurement systems in 2021).69 The Digital Government Strategy (EGD),
Paraguay has reduced the final prices of goods published in April 2020, set out a goal of digitizing
purchased by the government by about 20%.66 In 100% of federal government services by the end

60 IDB, 2022 – Benefçios Econômicos da transformação Digital de Serviços Públicos – o caso da Cidade de São Paulo.
61 FMI, 2018; Slemrod et al., 2017; Pomeranz, 2015; Almunia and López Rodríguez, 2018; Best et al., 2015.
62 Barreix y Zambrano, 2018.
63 Cunningham, Davis, and Dohrmann, 2018.
64 Ibid.
65 Lewis-Faupel et al., 2016.
66 DNCP, undated.
67 Pessino, 2017.
68 United Nations (2020).
69 World Bank (2021).

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 of 2022. As of May 2022, over 75% of such services Porto Alegre, and Belo Horizonte stood out for
were available in digital format, and more than their advances. To promote the municipal digital
118 million Brazilians (56% of the population) transition, in April 2022 the federal government,
had registered on the government’s digital ser- with support from the IDB, launched a digital
vices platform Gov.Br. The Secretariat of Digital government platform for municipalities, with a
Government within the Ministry of Economy self-diagnostic tool and a module to structure in-
reported annual savings of R$4.5 billion between vestment projects.75
2019 and 2021 from the digitization of govern-
ment procedures.70 3.287. Cybersecurity is a concern. In February
2020 the federal government published its Na-
3.285. The pandemic has accelerated the di- tional Cybersecurity Strategy, which marked an
gital transformation of state governments, but important regulatory advance. However, the 2020
progress has been uneven. In 2019, only 4% of Cybersecurity Report found that coordination,
state services were digitized, and only 31% of operational, and talent challenges remain in both
states reported that the service most frequently the public and private sectors. Moreover, most
used by their citizens during the previous year state governments do not have a cybersecurity
was available in an entirely digital format. 71 As strategy or cyber-emergency response centers
of 2022, digital services account for 61% of all (CERT). According to an IBM study, cyberattacks
state services in Rio Grande do Sul, 25% in Bahia cost Brazilian companies an average of R$5.88
and Sao Paulo, and 7% in Alagoas and Ceará. The million per year.
Group for Digital Transformation of state gover-
nments, established in 2019, created an index Policy Recommendations
measuring digital-services maturity at state
level, which in 2021 ranked 11 states as “regular” 3.288. Adopt digital technologies to support
or “poor”.72 An IDB study conducted with GTD in fiscal policymaking and management. On the
September 2020 found that: 40% of states had a revenue side, digital technologies have the po-
digital transformation strategy approved or in tential to reduce tax fraud and evasion, and to
design; 20% had a dedicated cybersecurity team; simplify and facilitate tax compliance. Digital te-
25% had an interoperability platform; 25% had a chnologies can compile detailed and reliable in-
cloud service contracting strategy; and 27% used formation about taxpayers and their transactions
artificial intelligence.73 more quickly, at a lower cost, and in a format
that is more conducive to analysis than would be
3.286. Municipalities are lagging on digitization. possible using traditional forms of tax adminis-
During the pandemic, a national survey found tration.76 Various OECD and LAC countries alre-
Country Development Challenges - Brazil

that the digital services offered by Brazilian mu- ady use data science and artificial intelligence to
nicipalities were the least known by the public. obtain real-time financial and tax information,
Moreover, there was no rigorous analysis of pro- establish transactional relationships, and iden-
gress in digital government at the municipal le- tify and estimate risks of tax fraud.77 Electronic
vel. That said, municipalities such as São Paulo,74 invoices and other electronic fiscal documents

70 www.gov.br
71 CETIC (2020).
72 ABEP (2021)
73 IDB (2021a)
74 IDB (2022)
75 https://plataforma.rede.gov.br/
76 OCDE 2016; Seco and Muñoz 2018.
77 E.g., the UK’s Connect system collects and analyzes data from over 40 databases and sources of information, including social networks.

158
could allow Brazil’s tax administration to prepare 3.291. Utilize digital technologies to enhance
pre-filled returns for VAT, as it already does for public procurement. Big data analytics and data
income tax. 78 Mobile connectivity can let tax- science have increased the efficiency of public
payers make inquiries and complete transactions procurement in the states of Rio Grande do Sul and
with the tax administration and prepare, fill, Amazonas, which use information from electronic
and monitor their tax returns, as well as support invoices to set reference prices in public tenders.
the work of tax inspectors on the ground. Appli- This strategy has accelerated the procurement
cation program interface (API) technologies process and saved approximately 23% on the value
can help businesses connect their information of purchases in Amazonas alone. In addition, block-
management systems directly to the tax admi- chain technology could improve the efficiency, se-
nistration, adding flexibility and reducing com- curity, and transparency of transactions at various
pliance costs. Blockchain technology can reduce stages of public procurement.81
tax fraud along territorial frontiers, increase the
efficiency of the customs administration, and im- 3.292. Promote digital technologies to improve
prove payroll taxation.79 social programs. Digital biometric identification
can improve the targeting of social programs and
3.289. Use digital technologies to strengthen reduce leakages, by facilitating beneficiary cross-
expenditure management. Applications that -checking and verification by multiple agencies.82
make greater use of the public financial informa- Integrated beneficiary databases can be used to co-
tion generated by the Integrated Financial Ad- ordinate multidimensional interventions tailored
ministration System for the Federal Government to individual households.
(Sistema Integrado de Administração Financeira
do Governo Federal, SIAF) could enhance the effi- 3.293. Support digital transformation at the sub-
ciency of budget preparation, execution, and au- national level. The Brasil Mais Digital Program has
diting. Big dta analytics could improve public in- already approved support operations in the states
vestment planning and prioritization, by helping of Ceará, Alagoas, and Sao Paulo, and is in advanced
better to align policy priorities with the demands talks with other states including Mato Grosso, Bahia,
and needs of the population. and Paraiba. Municipalities will benefit from the im-
plementation of the Rede Gov Br Platform, and from
3.290. Draw on digital technologies to improve partnerships with national and/or regional develop-
public financial management. Big data analytics ment banks. The latter institutions have the potential

Pillar 3 | Fostering Digital Transformation for Development

could generate valuable information to guide to finance the relatively small projects that are usu-
budget allocation, optimize cash management, ally key to the digital agenda of municipalities, but
and improve financial programming. Increasing which the IDB is not best placed to support directly.
the use of SIAF data, and integrating it into ex-
penditure and statistical databases, could enable 3.294. Strengthen national cybersecurity policy
agencies to use automated diagnostics, visuali- and operations. This entails reviewing their go-
zations, and forecasts to improve financial plan- vernance and coordination model, emphasizing
ning, strengthen cash and debt management, and digital education, and building capacity at both the
enhance fiscal risk assessments. 80
federal and subnational levels of government.

78 E.g., Chile’s Internal Revenue Service uses Form 29 to improve fiscal control and facilitate tax compliance for more than 700,000 taxpayers.
79 Ainsworth and Viitasaari, 2017. A blockchain-based system has been proposed to strengthen VAT collection in the EU, and a similar system could be
applied in Brazil. Singapore has partnered with IBM to apply blockchain to the customs service.
80 E.g., Singapore’s FI@Gov system is based on a similar principle.
81 In the US, the General Services Administration and Federal Acquisition Service piloted the blockchain-based FASt Lane system to buy materials and
IT services, reducing processing times by about 90%. In Mexico, procurement data is published under Open Contracting Data Standards.
82 In India, the implementation of payments via smartcards using biometric identification and authentication reduced leakages by about 40%, expan-
ded access to social programs by 17%, and made payments timelier and more predictable (Muralidharan, Niehaus, and Sukhtankar, 2016).

BID — Banco Interamericano de Desenvolvimento 159

 4 PILLAR
Incorporating
green growth into
the country’s
development model
Country Development Challenges - Brazil

Recommendations for placing green growth at the center of Brazil’s

development model fall under four policy areas: (1) Foster adaptation
and climate resilience; (2) Build sustainable, resilient, and inclusive
infrastructure; (3) Promote sustainability in the bioeconomy, agriculture
and tourism; and (4) Channel financial resources to the green economy.

160
(1) Foster adaptation 3.296. Brazil is home to unique ecosystems with
and climate resilience global significance that will be adversely affec-
Brazil can promote socio-economic prosperity in ted by climate change, including the Amazon,
parallel with the conservation and sustainable use of the Cerrado, and the Pantanal. The deforestation
its natural assets. Climate change is a developmental of the Cerrado savannah causes local warming
challenge—not just an environmental one—which jeo- due to the resulting increase in energy balance
pardizes the achievement of key development goals and and evapotranspiration. Historical land-cover
the viability of infrastructural assets essential to future change, and climate change have had a strong
prosperity. Increasingly frequent and severe extreme impact on biodiversity in this region, causing the
events, and the acceleration in slow-onset trends—such extinction of 657 plant species. Lower rainfall in
as rises in temperatures and sea levels, and glacier re- the Cerrado has affected the main water supply
treat—will take a toll on development and compromise reserve for major cities in central Brazil, leading
socio-economic progress. Adaptation and climate re- to a water crisis in 2016/17 and hampering hydro-
silience are the only possible strategies to protect assets power generation (IPCC, 2022). In the Brazilian

Pillar 4 | Incorporating green growth into the country’s development model

from current and expected climate risks. Amazon, deforestation to clear agricultural land
is the main cause of tree mortality. Almost half
3.295. Brazil’s current climate targets and poli- the surface of the Amazon has experienced ex-
cies are inconsistent with the Paris Agreement’s treme dryness during the warm phases of the El
goal of limiting temperature increase to 1.5ºC Niño-Southern Oscillation (ENSO), 2 which can
above pre-industrial levels. Deforestation, agri- contribute to large forest fires. Diminished vege-
culture, and the energy sector are the main drivers tation cover following wildfires, combined with
of Brazil’s greenhouse gases (GHG) emissions. The 1
tree mortality, can reduce long-term water infil-
country submitted its Nationally Determined Con- tration, increase soil erosion and flash flooding,
tribution (NDC) in 2022, committing to reducing and release sediments that degrade drinking-
GHG emissions by 37% from 2005 levels by 2025, -water quality. Higher temperatures and lower
but it has not finalized its Long-Term Strategy. Bra- rainfall are expected to deepen the water deficit
zil’s climate commitments and policies are in line in the Pantanal wetland, which houses the largest
with the Paris Agreement, yet the implement has floodplains on the planet. The projected impacts
not been satisfactory. of climate change include profound changes in

1 Climate Action Tracker. 2022.

2 The ENSO is a recurring climate pattern involving changes in the temperature of waters in the central and eastern tropical Pacific Ocean.

BID — Banco Interamericano de Desenvolvimento 161

 the dynamics of annual flooding for the swamp 3.298. Deforestation is the main hazard for a green
wetland, severely affecting biodiversity, ecosys- economy. According to data from the Institute for
tem services such as flood protection, and water Space Research (INPE), the number of deforesta-
security (IPCC, 2022). tion alerts in Brazil in the first five months of 2022
was the highest since 2016. In the same period, a
3.297. The effects of climate change will be most surface 2,744.41 km² was placed under deforesta-
severe on the agriculture, forestry, and energy tion alert. The surface deforested in 2022 is already
sectors. Key specialty crops, such as coffee and equivalent to 21% of the total recorded in 2021. At
cocoa, are drought-sensitive and rain-dependent, current pace, an estimated 15,000 km² of forest will
and therefore vulnerable to higher temperatures be destroyed in 2022—a historical record.
and changes in rainfall patterns. Reduced water
availability is likely to slash yields, while the 3.299. Watershed degradation threatens the cou-
map of areas suitable for agriculture is expected ntry’s water and energy security. Degradation of
to change due to diminished soil moisture. The the Atlantic Forest in southeast Brazil—largely dri-
livestock industry is also highly vulnerable to the ven by urbanization, cattle raising, and agricultu-
impact of rising temperatures on animals, and of re—has led to decreased water quality and irregular
reduced water availability for them (World Bank, flow patterns in the region’s rivers, jeopardizing wa-
2021; Muñoz Castillo, et al., 2020). The expected ter supply for about 70% of Brazil’s population (Cal-
decrease in rainfall and change in seasonal rain- mon, Oliveira, and Biderman 2019). Furthermore,
fall patterns are likely to shrink the potential for loss and degradation of the Amazon contribute to
hydropower generation, while increasing the po- droughts in the most populous areas of Brazil, as
tential loss of revenue from overbuilt and under- “flying rivers” of moisture originating from the fo-
fed hydropower facilities. Soaring evaporation rest are disrupted due to changing landscapes (Ma-
from water storage facilities will also increase rengo et al., 2018). These trends also affect Brazil’s
production costs. For example, following drought energy security: deforestation and climate change
events in 2016 and 2017, hydropower plants on the decrease dry-season hydropower throughout the
São Francisco River operated at average capacity nation’s largest dam network by an estimated 7%
of only 23% and 17%, respectively (IPCC, 2022). (Arias et al. 2020). As about two-thirds of Brazil’s

FIGURE 3.13. Deforestation (Thousands of km2) – January – May 2022

3,000
2,744
2,543
2,500

2,037
2,000
Country Development Challenges - Brazil

1,723
1,491 1,511
1,500

1,000
723

500

0
2016 2017 2018 2019 2020 2021 2022

Deforestation (Thousands Km2)

Source: INPE

162
electricity derives from hydropower, this is a major affect future demand for fossil fuels produced in
risk to future energy supply (EIA, 2021). Latin America and the Caribbean and may increa-
se the risks of stranded assets assets—which inclu-
3.300. The transition to a green economy will af- de resources left in the ground or physical assets
fect the fossil fuel industry and the related tax re- that are devalued or retired before the end of their
venue. The energy transition, spurred by the Paris expected useful life—on the energy and other fos-
Agreement and technological change, is expected sil fuel-related sectors. Economic losses are likely
to affect future demand for fossil fuels produced to arise in the financial sector as the economic sys-
in LAC, and may increase the risk of stranded as- tem transitions away from fossil fuels. In the Latin
sets—i.e., natural resources left in the ground, or America and Caribbean region estimates by the
physical assets devalued or retired before the end IDB suggest that about 66% to 81% of the proven,
of their expected useful life. In Brazil, the oil and probable, and possible oil reserves cannot be ex-
gas production chain accounted for R$304 billion ploited if the world is to meet the Paris Agreement
(about 4.1% of GDP) in tax revenue in 2019, and for targets. Such reduction would lead to a drop in tax
more than R$2 trillion (US$425.5 billion) between revenues of USD 1.3 trillion to USD 2.6 trillion by
2009 and 2021.3 IDB estimates suggest that between 2035. In the region, the most affected countries
66% and 81% of the proven, probable, and possible by far would be Venezuela, Brazil and Mexico. 7 In
oil reserves in LAC cannot be exploited if the world addition, regulatory and market trends emerging
is to meet the Paris Agreement targets. This would from a low-carbon transition could also impact di-
reduce tax revenues in the region by between rectly and indirectly several economic sectors. For
US$1.3 trillion and US$2.6 trillion by 2035, affec- instance, the European Union´s potential banning
ting Venezuela, Brazil, and Mexico the most.4 of the import of deforestation-linked commodities
could put Brazil at the edge of this risk as the coun-
3.301. Brazil can be a leader in the carbon market. try is currently a key exporter of agricultural and
Brazil could become a leader in carbon off-setting livestock products to the EU and worldwide.
and CO2 removal, thanks to its 50 million hectares
of available reforestable land. Between 2020 and 3.303. Green jobs: A risk and an opportunity. The
2030, the voluntary carbon market could grow by green transition also contains a social dimension
a factor of 50, making forest conservation and re- in terms of employment. According to Internatio-

Pillar 4 | Incorporating green growth into the country’s development model

forestation very profitable to Brazil.5 However, re- nal Labour Office (ILO), a growing number of gre-
gulation in this area is still nascent and Brazil lacks en jobs will be created as the world moves toward
a clear tax regime for the carbon market, whereby a low-carbon and more sustainable economy. ILO
firms may purchase, sell, and intermediate emis- (2022) shows that 2.3 million people have in recent
sion rights subject to differentiated tax treatment.6 years found new jobs in the renewable energy sec-
tor alone, and the potential for job growth in the
3.302. There are risks in the transition for a green sector is huge. Employment in alternative energies
economy. The recent conflict between Russia and may rise to 2.1 million in wind and 6.3 million in
Ukraine show that the energy transition process, solar power by 2030. Yet, the positive impact on the
associated with implementation of the Paris Agre- creation of jobs may dominate, some workers will
ement and technological change, is expected to lose their jobs as workers in the fossil fuel industry

3 Instituto Brasileiro de Petróleo e Gás -IBP (2022). Arrecadação com participações governamentais e tributos. URL: https://www.ibp.org.br/observa-
torio-do-setor/arrecadacao-com-participacoes-governamentais-e-tributos/#:~:text=Entre%202009%20e%202021%2C%20o,de%2070%25%20
do%20montante%20total.
4 Solano-Rodríguez et al (2019). Implication of climate targets on oil production and fiscal revenues in Latin American and the Caribbean. URL: https://
publications.iadb.org/publications/english/document/Implications_of_Climate_Targets_on_Oil_Production_and_Fiscal_Revenues_in_Latin_Ameri-
ca_and_the_Caribbean_en.pdf
5 FAPESP. 2022.
6 International Bar Association. 2022.
7 Solano-Rodríguez et al (2019). Implication of climate targets on oil production and fiscal revenues in Latin American and the Caribbean.URL: https://
publications.iadb.org/publications/english/document/Implications_of_Climate_Targets_on_Oil_Production_and_Fiscal_Revenues_in_Latin_Ameri-
ca_and_the_Caribbean_en.pdf

BID — Banco Interamericano de Desenvolvimento 163

 or packaging. Policies should be adopted to reduce 3.307. Mitigate risks from the green transition. It
the impact on workers during the transition to a is critical that energy, climate, and fiscal plans are
greener economy. aligned in support of an orderly transition that is
consistent with the green growth agenda. Such tran-
3.304. Government subsidies artificially depress sition requires a considerable adjustment of public
energy prices in LAC. Governments in the region investment in favor of climate mitigation and adap-
spend 1% of GDP per year subsidizing energy con- tation actions, as well as changes in the behavior of
sumption, through tax subsidies and direct expen- consumers, companies, and governments leading
ditures. Low prices for fossil fuels can hinder the
8
to the partial or total abandonment of technolo-
adoption of electric vehicles, renewable energy, gies and goods with the highest carbon footprint.
and energy-efficiency measures by households Promote job training for easing the transition from
and businesses. Rate reductions or direct transfers emission-intensive industries to greener jobs.
to contain the price of fossil fuels do not account
for the costs and externalities from burning them. 3.308. Develop the carbon market. Brazil should
Finally, energy subsidies are an inefficient way better define its position and legislation on carbon
to deliver social protection. On average, for every trade. The government should strengthen institu-
US$10 spent on energy subsidies across LAC, only tional and legal frameworks for forest protection,
US$1 reaches the poorest 20% of households9. while promoting green-power certifications and
carbon pricing. A growing number of firms in
Policy Recommendations Brazil are showing an interest in certifying that
the power they use comes from renewable ener-
3.305. Curb deforestation rates. The government gy sources: 5 million “International standard RE
needs to enact a coherent set of incentives, based Certificates” were issued in 2020, and the number
on a careful and transparent assessment of poten- could reach 20 million in 2022. Approving the
tial policy trade-offs, as well as negotiation and carbon market regulation set out in Bill No. 528 of
agreement with all stakeholders on feasible mutu- 2021, which has been under discussion in the Hou-
al commitments. Exclusive reliance on command- se of Representatives since 2021, would be a step
-and-control policy instruments could give way to in the right direction. The Bill aims to regulate the
a more nuanced framework, combining voluntary Brazilian market for reducing Emissions predicted
or market-led action, economic incentives (e.g., by the law that established the National Climate
extension, directed credit, and subsidies), and en- Change Policy (Law 12.187/09).
forcement on forest protection.
3.309. Adopt a green taxation system. Taxation
3.306. Prioritize land repurposing. The public can be a powerful instrument for protecting the
sector could partner with key agro-industry environment and promoting sustainability. Cer-
players (anchor companies, input suppliers, tain states have adopted environmental criteria to
Country Development Challenges - Brazil

agricultural cooperatives and processing compa- transfer revenue from the consumption tax (ICMS)
nies, off-takers), agriculture- and climate-focu- to municipalities.10 In turn, municipalities can in-
sed funds, and agricultural technology firms to troduce environmental criteria in the calculation
provide the know-how and financial resources of the Generic Value Plan11 by considering diffe-
to promote the reforestation and repurposing of rentiated tax rates or benefits for soil usage. Other
land, in an economically appealing and environ- valuable measures include conducting ex ante
mentally sustainable manner. assessments of the economic, redistributive, and

8 IMF (2015).
9 IADB (2017).
10 Oliveira and Valim (2018)
11 Planta Genérica de Valores: A legal instrument setting the financial value of land and buildings, on which property taxes are levied.

164
environmental impacts of additional tax benefits framework;
for climate change mitigation, as well as research III. green markers for the budget;
of relevant design options (coverage, eligibility, IV. inclusion of environmental criteria in public
calibration, cost, funding, and impact-assessment investment management; and
methodology). Brazil pioneered ecological fiscal V. green public procurement.13
transfer mechanisms through the adoption of the
ICMS Ecological12 (an ecological value-added tax), 3.311. Reduce fossil fuel subsidies. Energy subsi-
but it can do more to reconcile taxation with the dies are inefficient at protecting the welfare of poor
objectives of environmental legislation. One item households but increases in energy price increases
ripe for improvement is the Rural Property Tax can have a major impact on them, highlighting the
(Imposto sobre a Propriedade Territorial Rural, ITR), importance of evaluating potential compensatory
which is set too low, relies on self-declaration, and transfers. A proposed carbon-tax agenda for Brazil
presents monitoring challenges. These inefficien- could include the assessment of economic, redis-
cies have a significant impact in the Amazon, where tributive, and environmental impacts from higher
deforesting public land and keeping properties in effective rates on carbon, as well as design options
an unproductive state are practices commonly used for carbon taxation (coverage, sectorial and social
to facilitate land transactions. On the expenditure compensatory measures, tax rate, use of collected
side, public budgeting needs measures to mitigate resources, and evaluation methodology).
and adapt to climate change. Public investment ma-
nagement and private investment promotion ought 3.312. Foster private investment in mitigation,
to prioritize sustainable infrastructure projects, adaptation, and nature-based solutions. “Nature
through instruments such as debêntures incentiva- positive” investments (e.g., developing rewards for
das. Moreover, public procurement should include ecosystem services at the national and sub-national
environmental requirements. levels) can help reverse nature loss and promote
its protection and regeneration, while supporting
3.310. Propose a green fiscal policy. Public fi- indigenous people, gender equality, and diversity.
nances would benefit from having mechanisms in Scaling up climate-smart agriculture, zero-carbon
place to diversify risks and to build financial buf- farming, and supply-chain decarbonization can
fers, as well as from broader governance and risk bring environmental as well as financial gains, from

Pillar 4 | Incorporating green growth into the country’s development model

management capacity within the remit of finance trading in carbon credits and payments for envi-
ministries. Fiscal policy should address the distri- ronmental services. Boosting nature finance (e.g.,
butional impacts of the ecological transition on the the Conservation Trust Funds, and the Amazon
affected economic sectors and workers, through Bioeconomy Initiative Funds), combined with the
fiscal, public investment, and spending manage- development of markets for blue and green bonds,
ment tools. Finally, fiscal policy can establish in- private green-finance initiatives, and voluntary car-
centive frameworks, propose public investments, bon markets, can catalyze the flow of private funds
and implement regulatory reforms that reduce to the bioeconomy (IETA-IDB, 2021). Natural capital
barriers to private investment in the green eco- can develop into a new asset class on the capital
nomy. Other fiscal policies to mitigate the impacts markets and be converted into financial capital,
of climate change include: such as through debt-for-climate swap schemes.
I. building a strategic fiscal planning for clima-
te change; 3.313. Support Development Financial Institu-
II. incorporating the assessment of extreme cli- tions (DFIs) in managing climate risks. DFIs and
mate events and transition risks in the fiscal subnational DFIs should mainstream climate

12  dopted in a number of states, ICMS Ecological compensates municipalities for land‐use restrictions and opportunity costs imposed by protected
A
areas (May, Gebara, Conti, and Lima, 2012).
13 IADB (2021).

BID — Banco Interamericano de Desenvolvimento 165

 risks and sustainability into their operations by 3.316. Brazil’s infrastructure investments do not
supporting the development of green, social and typically incorporate sustainability principles, or
sustainable frameworks, carbon emission calcu- climate change mitigation and adaptation mea-
lators and other relevant tools to support a green/ sures. This is due to the long-term complexity of
sustainable transition. infrastructure investments, their interconnec-
tedness, social impacts, externalities, and policy
(2) Build a sustainable, resilient challenges. The issue is more acute for city-level
and inclusive infrastructure investments. The mobilization of resources for
Low-carbon, resilient infrastructure offers a US$ 1.3 structuring low-carbon infrastructure interven-
trillion opportunity for green investments in Brazil tions (financial feasibility assessments, as well
across climate-smart transportation, water and was- as technical, environmental, and social pre-in-
te management, buildings, and energy efficiency.14 vestment studies) can push resource-strapped
However, high income inequality makes it essential municipalities to focus on sustainable, low-car-
that the affordability of infrastructural services for bon infrastructure, which enhances productivity
end-users is at the top of the policymaking agenda. and economic growth rates while strengthening
By building a sustainable infrastructure the country resilience against climate risks. Sustainable,
can shape a carbon lock-in, create climate resilience, low-carbon, and inclusive infrastructure is also
protect and enhance natural capital, and promote essential to achieving a wide range of sustainable
inclusion and equity. development goals. 17

3.314. Resilient infrastructure is crucial for Bra- 3.317. Disparities in access to affordable in-
zil. Brazilians are increasingly vulnerable to the frastructure perpetuate poverty and inequality.
impacts of climate change, in the form of extreme Expanding access to low-cost, high-quality public
events such as floods, droughts, heat waves, and services poses a major challenge in Brazil and
rainstorms. The cost of responding to such events many other developing countries. The latest Deve-
has been estimated at US$34 billion between 1995 lopment in the Americas report (DIA, 2020) cited
and 2017. In this context, the construction of
15
the need to move beyond the “era of structures and
climate-resilient and sustainable infrastructure concrete” and towards the “service era.” The report
is more relevant than ever with the potential to posits that infrastructure should be seen not only
create more than two million jobs. through a lens of investment in physical assets,
but also through one of user-centered service
3.315. Climate and resilient infrastructure repre- delivery. In this regard, affordability is a key chal-
sent an opportunity for Brazil. There is an oppor- lenge. Expenses on infrastructural services make
tunity to drive future investment with climate up an important share of the income of Brazilian
smart and sustainability considerations. As clima- families. According to the latest IBGE Household
te and sustainability become priority topics in the Budget Survey (POF) for 2017–2018, 5.6% of the
Country Development Challenges - Brazil

policy agenda, the country can take advantage of average monthly household income is allocated
this momentum to enhance the structuring and to spending on electricity, domestic gas, water and
financing of infrastructure assets. In Brazil, invest- sewage, and urban transportation. However, this
ment opportunities in sustainable infrastructure percentage is almost twice as high for the low-in-
amount to up to US$660 billion over the next 20 ye- come population, reaching 10.6% for families with
ars and could create over two million jobs.16 an average monthly income of up to R$1,908.

14 https://www.climatebonds.net/resources/press-releases/2021/07/potencial-de-investimento-verde-no-brasil-chega-us-13-trilh%C3%A3o
15 Ibid.
16 Carbon Trust, 2020. Sustainable investment Opportunities in Brazil.
17 One example would be the attempt of the BNDES to mainstream sustainability elements in their PPP pipeline.

166
 FIGURE 3.14. Participation of Infrastructure Service Expenses on the Average Monthly and Family Income

12

10

8
%

0
Brazil North Northeast Southeast South Midwest

General Average Families with Earnings below R$1,908

Source: Family Budget Survey - IBGE (2017-2018)

Note: Infrastructure service expenses include spending on electricity, domestic gas, water and sewage, and urban transportation.

ENERGY 3.319. Taxes and charges make up about half the

cost of electricity for end-users. 49.1% of electricity
3.318. The availability of energy on the best pos- tariff costs derive from nine different taxes and 10
sible terms of quality, security, opportunity, and sectoral charges. The largest tax is the ICMS18 at state
price is fundamental to sustainable economic level, which accounts for 21% of the national average
development. However, electricity in Brazil is ex- electricity bill, while federal taxes (IRPJ, PIS, COFINS
pensive, affecting economic competitiveness and and CSLL)19 add up to approximately 15% of the bill.
job creation compared to peers. The largest sectoral charge (10% of the bill) is the so-

FIGURE 3.15. Evolution of electricity tariff in Brazil (MWh)

110

Pillar 4 | Incorporating green growth into the country’s development model

100

90
Electricity tariff (U$$/MWh)

80

70

60

50

40

30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Historical series (year)
Source: ANEEL

18 Imposto de Circulação de Mercadorias e Serviços (Tax on the Circulation of Goods and Services
19 IRPJ, Imposto da Renda das Pessoas Jurídicas; PIS, Programa de Integração Social; COFINS, Contribuição para Financiamento da Seguridade Social;
e CSLL, Contribuição Social sobre o Lucro Líquido

BID — Banco Interamericano de Desenvolvimento 167

 -called CDE (Energy Development Account),20 which has accelerated in recent years. Climate change and
was recently adjusted by 34% and will raise R$32 ecosystem degradation impact Brazil’s energy secu-
billion in 2022, with an average tariff impact of 4%. 21
rity: impacts of deforestation and climate change
have been modeled to decrease dry season hydro-
3.320. Brazil’s electricity production relies heavily power throughout the nation’s largest dam network
on hydropower generation, which is vulnerable to by 7% (Arias et al. 2020). As about two-thirds of Bra-
climate change. In 2000, hydropower accounted for zil’s electricity supply is sourced from hydropower,
83% of Brazil’s installed capacity and 87% of electri- this represents a major challenge for sustaining
city production; as of 2021, it still represented about future energy supply (EIA 2021).
63% of both installed power and gross electricity
production, well above other renewable sources. 3.321. Limited exchange capacity between the
Generation from wind (9.2%), biomass (9%), and so- four subsystems (North, Northeast, Southeast/
lar (3%) remains significantly below its potential,
22
Midwest, and South) within the National Integra-
although the growth in production from variable re- ted System (Sistema Interligado Nacional, SIN)
newable energy resources (mainly wind and solar) complicates the distribution and optimization

FIGURE 3.16. Historical evolution of electricity installed capacity by source (%)

2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Historical series (year)

2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Country Development Challenges - Brazil

1993
1992
1991
1990
0 50 100 150 200
Installed capacity (GW)
Hydro Thermo Wind Solar Nuclear

Source: Energy Dossier 2022. Brazil a focus on electricity sector (IDB, 2022)

20  he CDE funds various public programs and policies, including: the Tariff Discounts, the Fuel Consumption Account, the Electric Energy Social Tariff,
T
the Light for All Program, and purchases of National Mineral Coal. CDE beneficiaries range from low-income rural consumers to renewable-energy
producers, small distributors, electrification cooperatives, and producers of mineral coal.
21 Evolution of the electricity tariffs and formulation of public policies (Instituto Acende Brasil - PwC, 2020)
22 Statistical Yearbook of Electricity 2021 (EPE, 2022)

168
of electricity from renewable energy sources.23 these costs are transferred to other consumers
Interconnection between subsystems could opti- through tariff increases.
mize the use of energy resources available in the
SIN. It would assist in managing seasonal patterns 3.323.The advance of the renewable energy
across hydrographic basins, as well as intraday faces own unique challenges. Wind is the most
adjustments between variable renewable sour- competitive source of non-hydropower renewable
ces such as wind and solar. In addition to making energy in Brazil, but delays in the construction
supply more secure, better interconnection of transmission lines affect generation capacity.
would have a positive impact on price formation, Solar is growing in Brazil and not yet competiti-
allowing for the export of surplus energy from ve with other renewable sources, although the
lower-cost to higher-cost subsystems. Despite rapidly falling cost of solar generation creates
efforts to increase transmission capacity between an opportunity to expand capacity.27 The annual
the SIN subsystems, the drought of 2021 and en-
24
internal rates of return for some biogas and hy-
suing drop in hydropower generation highlighted droelectric projects can be higher than solar PV.
its persisting limitations. 25 28
Brazil’s strict local-content rules discourage
investment in solar equipment. Due to high taxes
3.322. Brazil should analyze the expansion of dis- and production costs, Brazilian solar panels are
tributed generation. In 2020, for the first time, solar 40% more expensive than those imported from
distributed generation (DG) surpassed the growth China. The use of the network by DG has been a
of all centralized sources (large-scale power plants). source of concern, given that while distributors
Solar photovoltaic distributed generation is leading have fixed and variable costs incorporated in their
the growth of the energy matrix in Brazil. Solar PV tariffs, distributed generators use the network
is leading the way in terms of capacity and number without paying the same fees and these costs are
of facilities. In addition, solar DG has led to the crea- transferred to other consumers, increasing their
tion of 328,000 jobs in the past 10 years. The gover- 26
tariffs. The high availability of renewable sources,
nment’s Energy Research Company (EPE) expects the extremely favorable credit compensation mo-
installed DG capacity to hit 37GW by 2031, or 7% of del to DG, and a legal framework for DG published
the national load. According to EPE, this would be in 2022 (although uncertain in terms of long-term
divided among 4 million generating units, where remuneration), has encouraged DG expansion.

Pillar 4 | Incorporating green growth into the country’s development model

solar energy will be responsible for 91.3%, followed However, there are some hurdles to overcome, in-
by thermal (7.4%), wind (0.9%) and hydroelectri- cluding more clarity on long term remuneration,
city (0.5%). Yet, this expansion has been causing a qualified personnel and risks on supply chain avai-
dispute between distributors and DG. Besides the lability and logistics.29
high final electricity tariffs, the high availability of
renewable sources, and a solid legal framework, the 3.324. The Brazilian electricity system is poorly di-
extremely favorable credit compensation model to gitized. This issue hampers the efficiency gains that
DG has encourage its expansion. According to the digitization allows for, such as: lower O&M costs;
distributors, while they have to pay for fixed and enhanced power plants and network efficiency;
variable costs incorporated in their tariffs, while the reduced unplanned outages and downtime; exten-
distributed generator continues to use the network, ded operational lifetime of assets; smart demand

23  ecent water scarcity, especially in the Southeast and South regions, has prompted a greater need for electricity exchange between subsystems,
R
and for the use of thermal resources to balance generation and demand in each subsystem. Therefore, transmission reinforcements are necessary to
expand interconnection capacity between subsystems (PDE-2031. EPE, 2022).
24 Installed transmission capacity has been gradually increasing in Brazil over the years, reaching around 160,000 km in 2020.
25 This situation shows, for example, the necessity to reduce the restrictions on the flow of hydraulic and/or renewable surpluses that occur mainly in
the transition between the wet and dry periods of the North Region, when there is a possibility of high availability of water resources, concomitant
with high factors of renewable capacity in the Northeast Region (PDE-2031. EPE, 2022)
26 https://app.bnamericas.com/report/section/all/content/xxzvjrr1r-geracao-distribuida-no-brasil
27 EPE (2017). By 2026, it is expected that deployment costs will fall by 30% to 40% from their 2017 levels.
28 https://app.bnamericas.com/report/section/all/content/xxzvjrr1r-geracao-distribuida-no-brasil
29 Source: BnAmericas https://app.bnamericas.com/report/section/all/content/xxzvjrr1r-geracao-distribuida-no-brasil

BID — Banco Interamericano de Desenvolvimento 169

 response; greater integration of variable renewable 3.325. Around 850,000 consumers, concentra-
energy resources, new technologies (e.g., electro- ted in the North, use radial electrical systems not
mobility and energy storage), and small-scale connected to the SIN and supplied by thermal
distributed electricity. The International Energy power plants. The supply of electricity to these
Agency (IEA) estimates that digitization could save
30
isolated consumers is costly and has significant
around 5% of O&M costs, improve power plants socio-environmental implications. The subsidy
and network efficiency by up to 5%, and extend the to thermal generation for isolated systems, which
operational lifetime of assets by five years. Although grew by 41.1% from 2021 to 2022, currently amou-
Brazil is a leader in LAC in innovation in the power nts to R$12 billion and is the largest component of
sector, its progress has focused exclusively on ge- the CDE charge. Moreover, while average power
neration, with the adoption of advanced analytics, loss in the SIN is approximately 19%, it amounts to
drones, and other technologies.31 Conversely, elec- 30% in isolated systems—a rate that has increased
tricity transmission and distribution are less digiti- by more than 5% over the last six years.33
zed in Brazil than in most peer countries. However,
the COVID-19 pandemic helped to accelerate the 3.326. Agriculture and cattle ranching account
digital transformation in power distribution com- for 72% of Brazil’s GHG emissions. The energy sec-
panies. It is expected that the market will continue tor is responsible for 76% of global GHG emissions,
to move towards digital channels for customer but only for 19% in Brazil, largely because renewable
service, grid optimization, and business models sources make up 44% of the country’s energy matrix.
for leveraging distributed renewable energy (RE).
In customer service, digital channels were used 3.327. The power sector can help reduce emis-
for billing, payments, and mobile applications. sions across the economy. Considering its rela-
Upcoming changes in electricity regulations shall tively advantage from its cleaner energy matrix,
also drive greater adoption of storage solutions, the Brazil’s power sector can contribute significantly
emergence of energy service providers and aggre- to reducing emissions in other sectors, such as
gators, and the creation of new business models.32 transportation, and to achieving the decarboniza-

FIGURE 3.17. Brazilian Energy matrix vs GHG Emissions in Brazil

Energy Matrix (Brazil-2019) Greenhouse Gas Emissions (Brazil-2019)

2% 1%

5% 4%
7%
Oil 5%
 hanges in land use
C
Bioenergy 34% 44% and forests
Hydro power 12%
Farming and
Natural Gas 294 2,176
Country Development Challenges - Brazil

19% Agriculture
Other renewable MM toe MM t CO2e
Energy
Coal
Industrial processes
Nuclear 12%
Waste
Other non-renewable

27% 28%

Source: Observatorio do Clima (climate observatory). 20215 / Observatorio do Clima (climate observatory) – Energy Transition Program (CEBRI-EPE-IDB), 2021

30 Digitization & Energy (IEA, 2017)

31 Gap Analysis and Opportunities for Innovation in the Energy Sector in LAC (IDB, 2020)
32 “CCEE, Frost & Sullivan, July 2021.
33 Power losses and quality indicators (e.g., frequency and duration of interruptions) are correlated. High energy losses affect the quality of supply, and
therefore the economic development of isolated areas.

170
tion objectives to which the country has commit- 3.331. Rethink electrical pricing and tariff struc-
ted under the Paris Agreement.34 tures, rationalizing taxes, charges, and subsidies.
Electrical pricing and tariff structures need to be
Policy Recommendations reformed to relieve pressure on end-users and
enhance transparency, including by contractually
3.328. Continue efforts to diversify the elec- separating capacity from energy production and
tricity matrix towards renewable sources. This rationalizing cross‐subsidies and levies.
includes a further expansion of solar, wind, and
biomass generation, and the gradual introduction 3.332. Improve the flexibility of SIN and power-
of new technologies such as offshore wind, floa- -transfer capability between subsystems. This
ting solar PV, and battery energy-storage systems. requires investment in digitization of the trans-
mission infrastructure, the introduction of tech-
3.329. Recover and/or increase the efficiency of nologies such as flexible AC transmission systems
existing hydroelectric power plants. More than (FACTS) and battery energy storage system, and
half the country’s hydroelectric plants are more new bidding processes to expand interconnections.
than 30 years old;16 considering that the estimated
useful life of the electrical and mechanical equip- 3.333. Promote Regional Integration. Deeper
ment of such plants is between 20 and 30 years, the electrical interconnection between Brazil and its
potential to modernize the Brazilian hydroelectric neighbors would improve the reliability of SIN and
infrastructure is significant. 35 Such moderniza- optimize the use of renewable energy resources
tion, which would require an estimated US$15 available in Southern Cone countries. Experience
billion of investment, 36 would improve system from Brazil’s water crisis in 2021 confirms that ener-
flexibility and energy security, offering additional gy integration helps mitigate electricity shortages,
capacity in times of drought and a more-efficient ensuring supply from neighboring countries with
integration of variable renewable energy resour- different seasonal features. In 2021 Brazil imported
ces, such as solar or wind. Continued fiscal and more than 6,000 GWh from Argentina and Uruguay,
regulatory incentives can encourage the use of the equivalent of a power plant producing 750 MW
renewable energy combined with battery storage, per month on average.38 In recent years, there has
especially for isolated systems in the North and been renewed interest in Brazil for regional electri-

Pillar 4 | Incorporating green growth into the country’s development model

off-grid agribusiness facilities.37 cal integration projects, including:
I. potential integration with the Arco Norte
3.330. Improve the water and energy security. (Guyana, French Guyana, and Suriname);
Nature Based solutions (NBS) offer cost-effective II. interconnection and/or a shared hydroelec-
approaches to improve the long-term performan- tric power plant with Bolivia;
ce of water and energy systems across the country. III. two shared hydroelectric plants with Argen-
Restoring forests and wetlands in watersheds ups- tina; and
tream of cities and hydroelectric facilities can ad- IV. the reinforcement and expansion of existing
dress issues of water quantity (through smoothing electrical interconnections with Argentina,
the peaks and valleys of seasonal water flows) Paraguay, and Uruguay, within the framework
and quality (through reducing sedimentation and of the Electrical Interconnection System of the
pollution) (Browder et al. 2019; Filoso et al. 2017). Southern Countries (SIESUR).39

34 Energy Transition Program (CEBRI-EPE-IDB), Trends and Uncertainties of the Energy Transition in the Brazilian case, 2021.
35  ccording to the PDE-2031, the modernization and repowering of existing hydroelectric plants could increase their capacity to up to 11GW, covering
A
the expected electricity demand until 2031.
36 Modernization of hydropower in Latin America and the Caribbean: Investment needs and challenges (IDB, 2020)
37 Frost & Sullivan, July 2021.
38 PDE-2031 (EPE, 2022)
39 According to recent analysis by the IDB, the potential economic benefit to Brazil from increased exchange of electricity with its neighbors could
approach US$250 million.

BID — Banco Interamericano de Desenvolvimento 171

 3.334. Modernize and digitalize the electrical ne- in advanced biofuels (e.g., cellulosic ethanol, hy-
twork. The power sector shows clear and inexorable drogenated diesel, biokerosene, renewable bunker)
trends: a global transition toward variable renewable and biogas/biomethane. However, regulatory deve-
energy sources, small-scale distributed generation, lopment and planning are critical to ensuring that
storage technologies, and electric mobility; greater technological options are assessed based on their
awareness and knowledge among consumers, who value-add for society, that adequate coordination
demand new value-added electrical services and exists between the public and private sectors, and
more information about them; and a push toward that the country is prepared for both the opportuni-
modernization and digitization in the distribution ties and the risks of the energy transition.
segment, for example in advanced metering and au-
tomated infrastructure, which requires investment 3.337. Develop the offshore wind industry. To
that, while significant, should not compromise the make the most of this long-term opportunity, the
financial viability of distribution companies. Measu- country needs skilled and well-trained person-
res that can help improve the viability of electricity nel—estimates suggest that each MW produced
distribution include: the adoption of a low-voltage from offshore wind requires two trained workers—
binomial tariff, location and time signaling for con- and appropriate standards of health and safety.41
sumers who generate their own energy, and the sepa- Brazil can benefit from its experienced oil and gas
ration of electricity trading and distribution services. industry workforce which, with relevant training,
could transfer its skills and knowledge to the of-
3.335. Enhance the resilience and efficiency of fshore wind industry.42
isolated systems. Relevant steps include: promo-
ting hybrid production among independent power 3.338. Follow and support shifts in the power
producers (IPPs), combining diesel with renewable sector. Historically a regulated market, power ge-
sources and battery-energy storage; expand invest- neration is shifting toward the free market,43 which
ment to accelerate the connection of isolated areas has become the main driver for the expansion of
to SIN; and facilitate the development of renewable renewable-energy generation. Moreover, increased
and hybrid generation to be considered in future appetite for distributed generation (e.g., solar panels
bidding rounds for energy supply, by offering econo- installed in homes and businesses) reduces demand
mic feasibility assessments, technical support hubs, from SIN.44 Transparent rules and updated standards
financing facilities, and public relations incentives.40 can support a smooth shift in power demand and
allow renewable energy companies to move from
3.336. Build on the energy transition to achieve supplying power to services, such as: supply of RECs,
carbon neutrality by 2050 and become a global electric-vehicle charging, energy management,
leader in low-carbon solutions. Brazil could be one smart-home and smart-city services, energy storage,
of the lowest-cost producers of green hydrogen by insurance, and installation of home appliances.45
2050, due to its largely renewables-based electricity
Country Development Challenges - Brazil

supply. Similarly, the country is set to be a global le- WATER RESOURCES

ader in bioenergy, with biofuels such as ethanol and
biodiesel playing an important role in transport and 3.339. Brazil’s surface water resources are abun-
electricity generation, and can develop know-how dant, accounting for 12% of the world’s total, but

40 Mobilizing Clean Energy Investments for Brazil. Brazil Deep-Dive Project (WEF-EPE-IDB, 2022)
41 Global Wind Organization and Global Wind Energy Council, 2020.
42  Technical skills native to the oil and gas industry that are in-demand on wind projects include: geotechnical engineering, marine engineering, sur-
veying, installation management, and offshore construction. Airswift, 2020.
43  The free power market is expected to continue growing, due to an increasing number of SMEs opting to exit the regulated market to lower their elec-
tricity costs. Brazil is expected to start a progressive transition towards a fully liberalized retail power market from 2024 (Per the Provisional Measure
(MP) 465/2019). Power consumers with loads <0.5 MW will be allowed to purchase power from any agent on the market. Currently this only applies to
consumers with loads <1 MW. CCEE, Frost & Sullivan, July 2021.
44 BNAmericas. Slight reduction in power consumption, 2022
45 Frost & Sullivan, July 2021.

172
unevenly distributed across the country. Althou- supply. Increasingly frequent and severe droughts
gh annual rainfall in Brazil is 1,760 mm on average, have been occurring throughout the country, with
it varies from less than 500 mm in the semi-arid re- the worst ones recently recorded in the states of
gion of the Northeast to more than 3,000 mm in the Paraná, São Paulo, Mato Grosso do Sul, Minas Ge-
Amazon (ANA, 2020). Almost 80% of the country’s rais, Rio de Janeiro, Espírito Santo, Goiás, Tocan-
surface water is in the Amazon basin where, on the tins, and parts of Bahia (ANA, 2020).
other hand, population density and water demand
are low. Conversely, the semi-arid region of nor- 3.343. Water quality is an important factor in de-
theastern Brazil has only 4% of the country’s water termining the availability of water resources. Wa-
resources, while accounting for 18% of its territory ter quality—which ANA defines in terms of bioche-
and 30% of the population (World Bank, 2021). mical demand for oxygen (BOD), total phosphorus,
and water quality index (IQA)—is good in 71% of
3.340. Similarly, groundwater is plentiful in abso- monitored water bodies (UN Water, 2022). The
lute terms, but its availability varies greatly across worst BOD levels were recorded in Rio de Janeiro,
regions. Although recent estimates place the num- Belo Horizonte, and São Paulo. Phosphorus in sur-
ber of wells in Brazil at 2.4 million, only 326,000 face water mainly derives from fertilizers, animal
were recorded in the Groundwater Information manure, and domestic or industrial effluents. Fi-
System (SIAGAS) as of 2020. The Integrated Groun- nally, the worst IQA values were observed in large
dwater Monitoring Network (RIMAS) monitors 23 cities, highlighting the challenges from poor sa-
aquifers (ANA, 2020). By 2050, climate change will nitation, and the need for better infrastructure to
have reduced the recharge of aquifers in the Northe- control water pollution in urban areas (ANA, 2020).
ast by an estimated 70% relative to 2010 levels, and Sediments from deforestation due to agricultural
by between 30% and 70% for aquifers in the east of expansion also affect water quality and, in turn, its
the country. Estimates for other regions are more availability. Such sediments contain organic car-
encouraging, with relative recharge levels rising by bon precursors for the formation of carcinogenic
between 30% and 100% (Hirata & Conicelli, 2012). trihalomethanes during drinking-water chlorina-
tion, as well as chromium, mercury, selenium, and
3.341. In 2019, the main water uses in Brazil were ir- other toxic trace metals (IPCC, 2022).
rigation (66.1%), animal use (11.6%), drinking-water

Pillar 4 | Incorporating green growth into the country’s development model

supply (11.4%), industry (9.7%), mining (0.9%), and 3.344. Brazil has made efforts to integrate water
hydropower (0.3%) (ANA, 2022). Water demand has security in policy decisions. The National Water
been growing in the country with an estimated incre- Security Plan (PNSH), launched in 2019, has de-
ase of approximately 80% in total water withdrawals fined an investment program for strategic water
over the past two decades. Withdrawals are expected infrastructure based on regional priorities, with
to grow by another 23% by 2030, and consumption the objectives of securing water supply and redu-
by 29%. The largest increases in consumption by cing the risk of extreme flood and drought events
2030 are forecast to involve industry (+51%), mining (Government of Brazil, 2020; ANA, 2019). The
(55%), irrigation (+30%), and animal use (24%). PNSH adopts a standardized Water Security Index,
which facilitates communication and coordina-
3.342. Growing water demand, stemming from tion at the watershed, regional, state, and muni-
demographic growth and water-intensive eco- cipal levels, but does not address the institutional
nomic activity, has contributed to rising water capacity constraints to such coordination. The
stress in recent years. The issue is most critical in PNSH focuses largely on grey infrastructure (re-
the Southeast and the South, where rice irrigation servoirs and water conveyance systems), missing
demands high levels of water extraction. The situ- an opportunity to better integrate nature-based
ation is also difficult in the Northeast, where water solutions (NBS) into an adaptation strategy for a
demand is considerable relative to the available range of future scenarios.

BID — Banco Interamericano de Desenvolvimento 173

 3.345. The management of water resources faces 3.347. Constraints to institutional capacity af-
several key challenges.46 Water-resource plans fect water management, especially at the state,
at the national, state, and local levels are poorly basin, and municipal levels. While ANA has a high
coordinated and rarely implemented. The borders level of capacity, with qualified personnel and ade-
of municipal, state, and federal jurisdictions do not quate funding, the main issues concern capacity
match hydrological boundaries, complicating the for monitoring and evaluation, coordination, and
definition of an appropriate functional scale. Admi- budgeting at the state level. Needs and priorities
nistrative divisions between ministries and public vary by state: in the Amazon, for example, staffing
agencies undermine policy consistency across and funding are insufficient, while in other states
water-resource management, agriculture, energy, certain stakeholders struggle to participate effecti-
environmental licensing, sanitation, and land use. vely in discussions on water management.
Insufficient data on water access and quality affects
decisions on the allocation of resources. Watershed 3.348. Transboundary waters are vital in Brazil,
committees have robust deliberative powers but as more than 60% of the country’s territory sits
limited implementation capacity. Cities lack contin- within drainage areas of transboundary basins.
gency plans for coping with the effects of extreme Brazil shares water resources with 10 neighboring
climate events (e.g., droughts and floods) resulting countries, including 83 watersheds and 11 trans-
from climate change. Limited coordination among boundary aquifers mainly located around the Ama-
government agencies across sectors and adminis- zon and Plata basins. Major treaties regulate the use
trative levels, and weak collaboration with water- of transboundary waters in the region,47 but their
shed committees and the private sector, undermine implementation suffers from inconsistency in the
the overall efficiency of water management. relevant national policies, plans, and practices.

3.346. Coordination among levels of government Policy Recommendations

can be improved. Responsibility for water-related
policies and tasks is fragmented across national 3.349. Build capacity at all levels of government.
ministries and public agencies, as well as local and Improved capacity to monitor the quantity, quali-
regional authorities. The National Council on Wa- ty, and use of groundwater is essential to water-se-
ter Resources (CNRH) was meant to enhance co- curity planning at different institutional, sectoral,
ordination between the federal and state levels but and geographical levels (national, state, basin and
has not fully done so yet. Decisions at the federal municipal). Greater capacity is also needed to map
and state levels are not mutually reinforcing, cros- and process information and data for water-re-
s-sectoral coordination is generally poor, and mi- source management, and for supporting the de-
nisterial representation is not sufficient to achieve sign and implementation of water-security plans
consensus on strategic issues. The mismatch by basin authorities, operators, and cities, with a
between the administrative borders of municipa- focus on managing droughts and floods exacerba-
Country Development Challenges - Brazil

lities, regions, and states and hydrographic boun- ted by climate change.
daries hampers water policy and duplicates efforts
at the subnational level, paving the way for lack 3.350. Modernize the use of information. Tools
of cooperation, transparency, and participation. and methodologies to collect information and su-
(OECD, 2015). Isolated development in certain sec- pport decision-making (e.g., water balances, early
tors, such as agriculture, can affect other sectors, warning systems, basin-level studies of climate)
such as hydropower, especially in basins where can be improved, along with information-exchan-
competition for access to water is intensifying. ge mechanisms across levels of government. The

46 OECD, 2015.
47  E.g., the Treaty of the Plata Basin, the Amazon Cooperation Treaty, the Agreement on the Guarani Aquifer, the Paraguay-Paraná Waterway Agree-
ment, the Itaipu Treaty, and agreements concerning the Uruguay River, the Mirim Lagoons, and the Quaraí and Apa Lagoons.

174
acquisition and processing of information based 3.355. Assess the sustainability and resilience
on remote sensing can complement field informa- of water management in light of the Paris Agre-
tion in areas of difficult access, a major value-add ement commitments. Brazil is highly relevant to
considering the continental dimensions of the global negotiations on climate change, both due
country and its bio-geography. to its ecosystem and its role as a global commodity
producer. Given the implications of its water foo-
3.351. Promote analytical studies and multisecto- tprint, the country should propose compensation
ral master plans. Good planning involves accoun- schemes for water-related externalities generated
ting for water demand to effectively manage water by global value chains.
security and defining nexus investments that recon-
cile different sources of demand while improving WATER SUPPLY AND SANITATION
adaptive capacity—e.g., multipurpose projects and
combined water solutions. Master plans should in- 3.356. There are significant challenges in the
corporate principles of the circular economy, with water supply sector. Nearly 35 million Brazilians
investment at the urban and basin levels focusing do not have access to treated water and nearly 100
on loss reduction, reuse, aquifer recharge, and sus- million Brazilians do not have sewage collection/
tainable drainage infrastructure. Investment in the residential sanitation (TrataBrasil, 2019).48 Water
conservation of critical areas and water sources, as supply is uneven and varies widely between re-
well as the promotion nature-based solutions, are gions, municipalities, or even in different districts.
paramount to the country’s water security. Water losses are significant and are on the rise,
38.3% of the treated water does not reach final con-
3.352. Enhance knowledge of eco-hydrological sumers. Water losses in some states can be as high
systems. This could help combine traditional water as 69% (Amazonas), 66% (Amapá), and 60% (Ma-
infrastructure with nature-based solutions that pro- ranhão) (by comparison, water losses in Mexico
vide greater efficiency, reliability, and cost-effecti- are 24% and 35% in Peru). The lack of investment
veness in the provision of water-security services. means an aging infrastructure that is more prone
to waste (Agencia Brasil, 2019). Water is key to pull
3.353. Improve water quality through safe sani- women out of poverty (BRK Ambiental, 2018).
tation, afforestation, and erosion protection. At

Pillar 4 | Incorporating green growth into the country’s development model

the institutional level, the federal CNRH and the 3.357. Quality is also a challenge. According to
subnational State Councils for Water Resources PLANSAB (2019), more than 37% of the population
(CERHs) need stronger coordination capacity. At receives a low-quality drinking-water supply, due
the same time, state- and basin-level authorities to lack of internal plumbing, water that is not safe
have room to improve various aspects of water-re- to drink, or irregular service. In 2020, the SNIS
source management (e.g., technical quality, trans- recorded 67,600 water-supply outages affecting
parency, and public participation), and to facilitate 152.4 million residences, and 195,600 systematic
and encourage adaptation to climate change. interruptions affecting 172.0 million residences.
According to the Information System for Monito-
3.354. Promote coordination mechanisms and ring the Quality of Water for Human Consumption
legal tools for the management of transboundary (Sisagua), in 2017, the share of samples from the
basins. This would help increase the sustainability public water supply contaminated by Escherichia
and climate resilience of basins that host global “hot coli was above the legal limit in 6% of Brazilian mu-
spots” for ecosystem services and biodiversity, such nicipalities. Additionally, Sisagua received more
as the Amazon, the Cerrado, and the Pantanal), while than 219,000 complaints about the color of the water
creating new opportunities for regional integration. coming from public pipes, and more than 200,000

48  4% of the population have potable water and only 52% have sewage coverage. More than 34 million people don’t have access to drinking water.
8
BNAmericas Intelligence Series. Opening the Floodgates to Private Investment in Brazil’s Water Sector. January 2021.

BID — Banco Interamericano de Desenvolvimento 175

 complaints regarding its odor or taste. Finally, only 3.359. Water and sanitation demand major invest-
77% of Brazilian municipalities had taken steps to ments. According to IADB estimates, the invest-
monitor the quality of water for human consump- ment required through 2030 to close the infrastruc-
tion, with the North and Northeast macro-regions ture gap amounts to US$36.7 billion with regard to
recording the most precarious indicators. access to safe water, and to $67.5 billion with regard
to access to safe sanitation (Brichetti et al., 2021).
3.358. Access to sanitation is poor across the
country. According to SNIS (2020), only 59.2% 3.360. Brazil approved a new regulatory framework
of municipalities in Brazil have a public sewage for the sector. Law No. 14.026 of July 15, 2020 updated
system; the remaining 40.8% use alternative so- the legal framework for basic sanitation, setting the
lutions, such as septic tanks, rudimentary tanks, goal of achieving universal access to it by 2033. The
open pits, or direct discharge into water bodies. new law eliminates the option of establishing sani-
Sewage networks cover 55.0% of the total popu- tation contracts between municipalities and SOEs
lation (114.6 million people) and 63.2% of the without bidding; allows states to collectively contract
urban population (112.4 million people), with the services for groups of small municipalities; grants
highest regional coverage recorded in the Southe- the National Agency of Water and Basic Sanitation
ast (80.5%) and the lowest in the North (13.1%). (ANA) the power to draw up sectoral rules and service
Countrywide, only 79.8% of the sewage collected is standards; and makes it possible for the private sec-
treated, with regional treatment rates lowest in the tor to play a more active role in water and sanitation.
Northeast (76.0%) and highest in the Centre-West,
(94.3%). 901,300 sewage leakages were recorded in 3.361. The new regulatory framework aims to
2020, of which 74.2% in the Southeast (MDR, 2021). increase private-sector participation. The new le-

Advances in the regulation of the Water

and Sanitation sector
In 2020, the government approved a new legal framework for water and sanitation, marking an important
step towards the goal of ensuring universal water and sewage services by 2033 and enabling greater
private investments in sanitation services. The National Agency for Water and Sanitation (ANA) regulates
the water and sanitation sector and is responsible for implementing the National Water Resources
Policy. The agency is also empowered to edit reference standards for regulating public water and
sanitation services. These standards are to be instituted progressively and should promote adequate
service coverage. Parameters will be established to monitor compliance with coverage targets, quality
Country Development Challenges - Brazil

indicators, and water-potability standards, as well as cost-limiting criteria for user payments.

According to the law, the rules should also stimulate cooperation between federal entities, enable
the adoption of processes tailored to specific local conditions, encourage the regionalization
of service provision, contribute to the technical and financial viability of services, and leverage
economies of scale and efficiency gains to expand services. The new law prohibits so-called
program contracts for the provision of public water and sanitation services, which previously
enabled mayors and governors to establish partnerships with state-owned enterprises without
a bidding process. Henceforth, such contracts must be open to competing bids from public and
private service providers. Finally, under the new law the rules may also be applied to cooperation
agreements signed by blocks of municipalities for the collective contracting of sanitation services.

176
gal framework for sanitation services has renewed difficulty in maintaining the viability of services,
the interest of private companies in the sector. The and may compromise their quality (MDR, 2021).
public and private sectors can cooperate in water
and sanitation on the basis of three main models: 3.365. Innovation and digitization may help increa-
concessions, Private Public Partnerships (PPPs), se productivity. While some of the sector’s problems
and service outsourcing. Success stories of ser- can only be solved through institutional reform or
vices operated by private firms, alone or in part- large investments in infrastructure, innovation and
nership with the public sector, have already been digital transformation can address certain challen-
emerging (ABCON SINDCON, 2021). The share of ges. The public procurement of innovative solutions
private firms in the sector is expected to grow from (PPI) could help greatly, ensuring competition and
6% in 2020 to 40% by 2033. 49
transparency in efficient procurement processes
(IADB,2021). In recent years, Brazil has launched
3.362. Water losses are significant. According to several national programs to promote innovation.
the Thematic Diagnosis of Water and Sewage Servi- Major steps forward include: the creation of the
ces - Overview (MDR, 2021), the rate of loss in water Legal Framework for Startups, with a new PPI instru-
distribution in Brazil is 40.1%—i.e., for every 100 ment that can foster innovation in the public sector;
liters distributed by service providers, only 59.9 are auditing authorities have taken a greater interest in
available for use by consumers. The rate of loss has innovation and launched initiatives in this space,
been growing recently after plateauing between such as the innovation laboratory of the Federal
2012 and 2015, when it was under 37.0%. Losses vary Court of Auditors; and public water and sanitation
by region, showcasing geographical and socioeco- companies have made progress in open innovation
nomic inequalities that affect the quality of service. and technological research. However, the country’s
innovation system still has deficiencies and regional
3.363. The sector should improve its energy asymmetries, adding to the challenges of the digital
efficiency. SNIS has recorded a steady growth in transformation (IADB, 2021).
the electricity costs borne by water and sanitation
service providers, which reached R$7.4 billion in Policy recommendations
2020. Electricity is the second-largest expense item
for the sector (15.7% of total costs), trailing only per- 3.366. Enhance the financial viability of services

Pillar 4 | Incorporating green growth into the country’s development model

sonnel (both in-house and external) which accou- and operators. New technologies can reduce wa-
nts for 58.0%. However, there are indications that ter losses and improve energy efficiency, while the
providers are not on track to meet the operational rehabilitation, improvement, and maintenance
efficiency goals proposed in PLANSAB (2019). of existing basic sanitation infrastructure—with
intensive use of labor to support job creation—
3.364. Productivity in the water and sanitation can enhance its viability. A stronger strategic
sector is suboptimal. The sector spent an average framework and national public policy for basic
of R$3.98 per m3 of water produced in 2020, 2.3% sanitation can further promote efficiency and sus-
more than in 2019, while the average tariff was tainability in the sector.
R$4.25/m3, 1.4% lower than in 2019. Across the 26
Brazilian states and the Federal District, 11 states 3.367. Address institutional and regulatory bottle-
recorded average total expenses above the average necks. The institutional reinforcement of service
tariff: six states in the North (Amazonas, Rondô- providers and relevant public authorities can
nia, Acre, Amapá, Pará, and Roraima), and five in improve the sustainability of infrastructure and sa-
the Northeast (Sergipe, Paraíba, Alagoas, Mara- nitation services. Promoting efforts to build institu-
nhão, and Piauí) (MDR, 2021). Average expenditu- tional capacity for project structuring, particularly
res above the average tariff are a sign of potential at the state level, will be important. Equally relevant

49 BNAmericas. Spotlight: The growing private sector participation in Brazil’s sanitation industry. Nov. 2021.

BID — Banco Interamericano de Desenvolvimento 177

 is improving coordination among agencies involved Rapid urban expansion in Brazil has led to settle-
in the project lifecycle. Transparency, accountabi- ment patterns that put many residents at risk of
lity, and oversight of the process and of potential natural disasters, such as flooding and landslides.
investors early in the project cycle will be key to mi-
tigating integrity issues at later stages. Overall, the 3.371. Drought and flooding are the most common
regulatory and business environments for PPPs and natural hazards, with severe impacts in urban are-
concessions will be crucial to attracting first-class as. Poor drainage systems, vast impermeable surfa-
sponsors, in a context of global competition. ces, and informal settlements in riverine flood zo-
nes contribute to increasing flood risk in Brazilian
3.368. Accelerate innovation and digital transfor- cities. One study estimates that 83 cities, accounting
mation. More innovation and digitization among for 22% of the Brazilian population, are exposed to
public agencies and service providers can help high risk of flooding (Rasch, 2016); other estimates
build more efficient, effective, and cyber-secure that 7.1 million urban residents live in areas at high
infrastructure services. risk of flooding or landslides (Alves, 2021), with
the latter posing a major threat to those living in
3.369. Incentivize the participation of the private informal settlements on steep slopes in many cities
sector in sanitation services, especially in the (Mendes et al., 2018; AP, 2010). These patterns of
form of technology transfer and financing. The urban expansion, combined with climate change,
capital markets can mobilize additional sources of can cause extreme flooding events, such as those
financing for projects in the pipeline. In June 2021, that occurred in Belo Horizonte in 2020 (Cuppucini,
Brazil’s lower house approved a bill extending tax 2020). Between 1995 and 2017, an estimated US$37
breaks for infrastructure financing through de- billion was spent in response to these hazards in
bentures, which raised R$253.4 billion. 50
urban areas nationwide (S2ID, 2017). Floods accou-
nt for more than 65% of natural hazards in the last
DRAINAGE decade, and heavy rainfall, which triggered flash
floods and landslides, was responsible for 74% of
3.370. Incorporating green solutions into urban deaths from natural disasters between 1991 and
infrastructure fosters resilience to flooding and 2010 (Government of Brazil, 2020). Between 1900
heat-island effects and improves quality of life and 2020, 80 major floods were recorded in the cou-
for urban residents. Brazilian cities have grown ntry, affecting almost 12 million people and causing
rapidly in recent decades: the country’s urban po- damages for US$6 trillion ( UCL, 2022). On the other
pulation rate rose from 65% of the total population hand, Brazil experienced 18 major droughts over
in 1980 to over 87% in 2020 and is still growing at the same period, affecting nearly 80 million people
about 1% per year (World Bank, 2021). Several pat- and causing an estimated R$111 trillion in damages
terns throughout the country attest to increasing ( UCL, 2022). Notably, a drought in 2014 reduced
urbanization: for example, large cities expand to water volume in São Paulo’s largest water supply
Country Development Challenges - Brazil

capture smaller cities on their periphery, crea- systems to just 5% of capacity (IPCC, 2022).
ting sprawling metropolitan areas that often lack
strategic regional planning (WRI Brazil, 2021). As 3.372. A large share of the population is exposed
Brazil’s cities continue to grow, integrating nature- to floods. As of 2020, the SNIS classified 1,279 mu-
-based solutions into urban planning can enhance nicipalities (23.0% of the total) as subject to mass
connectivity, increase resilience to natural disas- movements and floods from critical hydrological
ters, improve urban public health, and augment events, exposing two million households in urban
economic productivity (Juno and Virsilas, 2019). areas to flooding risk. In the same year, 22,200

50  NBIMA, 2022. Mercado de capitais encerra 2021 com R$ 596 bilhões in issuances. As of 2021, Chile (US$17.8bn) and Brazil (US$11.7bn) were home
A
to the largest green, social and sustainability bond markets in LAC. Brazil is the region’s largest green bond market, at US$10.3bn in cumulative issu-
ance (Climate Bond Initiative, 2021). The new Foreign Exchange Law, set to come into force in December 2022, is expected to increase and diversify
investors in the country. The law has multiple benefits, including allowing for contracts in foreign currency.

178
episodes of flooding in urban areas left 218,400 pe- 3.375. Governance of the drainage sector is
ople homeless and/or displaced, including 84,900 weak. Considering the services delivered by mu-
people (38.9% of the total) in the North. The rate nicipal authorities and other government bodies,
of mortality associated with floods is estimated at SOEs, and public-private partnerships, the public
0.26 deaths per 100,000 inhabitants countrywide, sector is involved in the provision of drainage ser-
with a peak of 0.94 in the South. vices in 99.9% of Brazilian municipalities. Only in
1.7% of municipalities are drainage services regu-
3.373. Many Brazilian cities have insufficient drai- lated by an appropriate entity. In addition, only 24
nage. 45.3% of municipalities have an exclusive municipalities charge for drainage services, and
drainage system, 12.0% have a unit system (i.e., mi- just 12 do so via a dedicated fee. Among the muni-
xed with sanitary sewage), 21.3% have a combined cipalities that do not charge for drainage, 48.9%
system (i.e., part exclusive, part unit), 5.8% use a dif- pay for it out of the general budget, 4.5% use other
ferent system, and more than 15% have no drainage resources, 3.6% use other sources associated with
system (MDR, 2021). Moreover, regular preventative the general budget of the municipality, and 43.0%
maintenance is lacking; in 2020, 1,206 municipali- do not have a clearly identified source of funds
ties (29.4% of the total) did not carry out any work for the provision of such services. In 2020, 7.7% of
on their drainage systems (MDR, 2021). According municipalities recorded a surplus on the provision
to PLANSAB (2019), it is difficult to define objectives of drainage services (i.e., their dedicated revenues
for urban drainage performance, due to gaps in the exceeded their expenses), 46.9% reported a deficit,
available data and the lack of a meaningful indicator and 36.1% broke even (MDR, 2021).
for quality of service. The targets proposed by PLAN-
SAB are: reducing the number of municipalities that Policy recommendations
experience floods in urban areas; and reducing the
number of households at risk of flooding. 3.376. Promote the planning in the sector. Such
planning should aim to reconcile urban expansion
3.374. Widespread technical shortcomings affect with the preservation of flows in river basins, by
drainage quality. Brazil lacks national technical implementing new systems as well as maintaining
standards for drainage systems and rainwater and upgrading existing ones. Useful planning and
management, as well as a fully standardized ter- management tools include: drainage master plans,

Pillar 4 | Incorporating green growth into the country’s development model

minology for the sector. Most service providers do master plans for land use and occupation, hydrolo-
not have information systems, databases, or me- gical data-monitoring and risk-alert systems, and a
chanisms for systematic data collection, and often cadastral system for infrastructure.
have incomplete knowledge of the infrastructure
installed in the municipalities where they operate. 3.377. Improve the quality of drainage. Green in-
In 2020, only 714 municipalities (17.4%) had a drai- frastructure, compensatory techniques, and flow
nage master plan, and 1,430 (34.8%) had a technical damping can help enhance the sustainability of
record of works. In the same year, 1,332 municipali- drainage and revitalize river basins, while carefully
ties (32.4%) had mapped out their areas at risk, with assessed technological solutions can improve the
higher percentages in the Southeast and the South; planning, regulation, delivery, and supervision of
1,184 municipalities (28.8%) monitored hydrolo- drainage services. Urban stormwater drainage and
gical data, while only 620 municipalities (15.1%) management need appropriate revenue models,
had adopted hydrological risk-alert systems (MDR, incentives, and subsidies, combined with viable
2021). As of 2020, the SNIS had identified only 205 and effective collection systems, as well as broader
municipalities with rainwater damping reservoirs, organizational frameworks that draw on interna-
302 municipalities with linear parks, and 602 muni- tional best practice. The mapping of areas at high
cipalities with urban public roads featuring natural hydrological risk must continue, while implemen-
drainage solutions (MDR, 2021). ting transparent participatory mechanisms is key to

BID — Banco Interamericano de Desenvolvimento 179

 democratic and sustainable drainage management. 3.380. Regional inequalities persist in waste col-
Finally, priority interventions must focus on muni- lection. MSW collection in Brazil is largely conven-
cipalities suffering from critical flood problems. tional or mixed—i.e., without source separation—
which limits the potential for MSW recovery. 83% of
SOLID WASTE MANAGEMENT households are served by door-to-door solid-waste
collection, 8.1% are served by curbside schemes,
3.378. Waste management and recycling is set to while the remainder do not benefit from regular
become a multibillion-dollar market in Brazil, with collection services. As a result, approximately 7.2
major financial and public-health benefits. The million tons of MSW were not collected in 2018. The
combined size of the sanitation and waste-manage- quality of services varies across regions. In 2018,
ment markets is expected to grow from US$4 billion the coverage of collection services was highest in
in 2021 to US$10 billion in 2031. Public, private, and the Southeast, at 96.2% of the population, followed
civil-society participants (including informal col- by the Center-West at almost 93%; and lowest in the
lectors) should cooperate to improve efficiency in North, at 83.6%.53 Finally, the South region includes
waste collection, sorting, and treatment to increase the largest number of municipalities that offer col-
reuse and recycling rates and to promote the circular lection services, followed by the Southeast, while
economy through reverse logistics, i.e., the reuse, numbers are much lower in the rest of the country.
recycling, treatment, and final disposal of waste.
Waste-collection associations and cooperatives, 3.381. The rate of waste recovery is low. In 2018,
which collect more than a third of recyclable waste in only 2.2% of the dry waste54 and 0.2% of the organic
Brazil, will play a key role. Waste can also be used to waste collected were recovered.55 Waste-to-energy
generate energy, opening up a new income stream. initiatives mainly focus on the recovery biogas
from landfills, co-processing in cement plants, and
3.379. Waste management has room for progress bio-digestion of specific waste streams. The PNRS
in the country. Brazil produces 79 million tons of aims to involve recyclers in “shared responsibility”56
municipal solid waste (MSW) per year, but 47% of efforts, but the notion of paying for selective-collec-
municipalities dispose of it improperly. Collection tion services is relatively new in Brazil, and the mu-
rates are highest in the southern regions (betwe- nicipalities that do pay for such services are mostly
en 50% and 60%), and lowest in the Center-West in the Southeast and the South. Multiple factors
(30%), North (12%), and Northeast (11%) regions.51 influence the economic viability of recovery activi-
The National Solid Waste Policy (PNRS) defines the ty, including the territorial distribution of recycling
prevention of waste generation as a priority for providers and facilities which, once again, tend to
good MSW management, followed by reduction, concentrate in the Southeast and the South.
reuse, and recycling. However, on a per capita
basis, MSW generation has been increasing 52 in 3.382. Waste disposal is often inadequate.
recent years, reaching 1.04 kg/inhabitant-day. The Disposal in sanitary landfills remains the most
Country Development Challenges - Brazil

organic fraction makes up 45.3% of Brazil’s MSW; common (accounting for 59.5% of all MSW, or
recyclable waste accounts for 33.6% of the total, approximately 119,000 tons/day), followed by
divided across plastics (16.8%), paper and cardbo- inadequate disposal in controlled and dump sites
ard (10.4%), glass (2.7%), metals (2.3%), and multi- (more than 40% of MSW, or 80,000 tons/day). 54%
layer packaging (1.4%). of municipalities in the North, Northeast, and

51 Frost & Sullivan. Brazilian Municipal Waste Management Services Growth Opportunities. Jan. 2022.
52 This analysis focuses on MSW, including domestic waste, as defined by Law No. 12,305/2010, which differentiates “waste” from “rejects” (rejeitos). Waste
comprises potentially recyclable components (dry and organic); rejects are solid waste that can only undergo environmentally appropriate final disposal.
53 Average MSW collection rate in LAC: 95% in urban areas, 75% in rural areas.
54 The share is higher for certain packaging components, such as: steel cans, 47.10%; aluminum cans, 97.40%; paper and cardboard, 66.90%; multilayer
containers, 42.70%; plastics, 22.10%; and glass, 25.80%.
55 SNIS - Sistema Nacional de Informações sobre Saneamento
56 The notion of shared responsibility embedded in the PNRS is central to the reverse-logistics system, making the generator responsible for the desti-
nation of the product after consumption, and ensuring the return of recyclables to the productive chain.

180
Center-West regions inadequately dispose of a 3.386. The extraction of energy from waste
significant proportion of their MSW. should be developed. In 2020, the federal gover-
nment allowed for the inclusion of energy pro-
3.383. Institutional capacity in the sector is weak. duced from MSW in auctions for the purchase of
Cooperation and mutual assistance initiatives are electricity from new generation projects, starting
fundamental to improving the management of MSW from 2021. The expected duration of the supply
services, which most municipalities struggle with. contracts from such auctions ranges from 15 to
Consortia or other forms of cooperation between 25 years. In 2018, Brazil captured an estimated 4.2
states can help achieve stronger institutional capa- billion Nm³ of biogas, but only 9% of it was used for
city. The Ministry of the Environment has supported electricity generation. Moreover, the methane re-
states and municipalities in the establishment of coverable from all the organic waste generated in
public consortia for solid-waste management. the country in 2018 could have supplied 49 million
homes. The recovery of energy from MSW is incre-
3.384. Waste-management planning has vast asing, including through landfill biogas (LFG) re-
room for improvement. The Solid Waste Manage- covery initiatives (as 2015, 17 municipalities were
ment Plans are planning and management tools capturing biogas from landfills for energy genera-
that, per the PNRS, municipalities must prepare in tion). Waste-derived fuels (CDR) have significant
order to access federal financial resources related potential in the cement industry, where they could
to solid-waste management. The share of munici- replace imported and more-polluting petroleum
palities that had developed such plans rose57 from coke. Waste-incineration projects, in cases where
33% in 2013 to 55% in 2017. 1,810 out of 3,469 muni- other forms of final disposal are not technically or
cipalities had a Solid Waste Management Plan that economically feasible, are still in early stages, but
year, and 267 had an interurban plan. States are also could attract investment within a more dependab-
legally required to draw up their own State Plans le legal and regulatory framework.
for Solid Waste (PERS), but the South region was the
only one where all states had done so as of 2020. Policy recommendations

3.385. The financial viability of waste management 3.387. Implement the National Plan for Solid Waste
must improve. According to the SNIS, as of 2018 only (PLANARES). Launched by the Ministry of Envi-

Pillar 4 | Incorporating green growth into the country’s development model

47% of municipalities charged for the collection and ronment in 2022, the plan aims to develop viable
final disposal of household solid waste. The means of systems for the recovery of dry recyclables, linked
collecting such charges were, in order of preference: to environmental education and the reinforcement
I. a fee attached to the property tax (IPTU); of waste-picker cooperatives and associations;
II. a fee attached to the water bill; increase the recovery of organic waste; enable the
III. fare on a specific ticket; use of energy from waste; and ensure that the final
IV. others; and disposal of waste is environmentally sound.
V. fee.
Waste-collection services are often loss-making, 3.388. Enhance planning, institutional capacity,
and municipalities usually resort to federal finan- and logistics. Relevant measures include: (a) su-
cial aid. The new legal framework for sanitation set pport for the development, monitoring, and imple-
out in Law No. 14.026 calls for collection mecha- mentation of state and municipal plans, validating
nisms that ensure the financial viability of waste their effectiveness and making adjustments where
management. This is especially relevant because needed; (b) preparation of regional studies and in-
Brazilian municipalities often struggle to ensure ter-municipal arrangements; (c) modernization and
compliance among taxpayers. improvement of municipal enforcement of tariff

57 Profile of Brazilian Municipalities (MUNIC).

BID — Banco Interamericano de Desenvolvimento 181

 collection; and (d) promotion of separate collection addition, there are limitations in the infrastructure
of dry recyclables, organic fraction, and rejects. and operation of several airports.63

TRANSPORT 3.391. The digital transformation of the transport

sector is far from complete. Although progress
3.389. Investment in transport is crucial to Bra- towards digitization has been occurring within
zil’s productivity and competitiveness. Growth the Infrastructure Ministry,64 as well as in logistics,
in productivity, trade, and competitiveness are safety, and mobility services,65 the digital maturity
related to the efficiency of logistics corridors, the of Brazilian transport companies remains below
quality of the road network, and the accessibility world average, particularly among firms active in
of roads and waterways. Brazil has 1.7 million logistics and supply chain.66
km of roads, 29,817 km of railroads, 64 ports, 44
airports, 27,500 km of waterways and navigable 3.392. Transportation is responsible for a signifi-
rivers, and urban transport systems for the 86.6% cant proportion of Brazil’s emissions. Transporta-
of the country’s population that lives in cities. Ro- tion generates approximately a quarter of Brazil’s
ads mobilize 58.3% of domestic cargo, and 85% of total carbon emissions from human activities and
companies in the country’s 20 major industries 58
more than 40% of emissions in large cities (IPCC,
depend on the road network. However, only 14% of 2018). The country increased its CO2 emissions by
the road network is paved, and only 38% of it is in 18% between 2008 and 2018 (BP Statistical Review
good or very good condition. These shortcomings of World Energy, 2019), with transportation accou-
affect 36.5% of the population (77.6 million people) nting for 57.7% of them in 2020.67 Reducing carbon
and constrain growth in 15 major industries. emissions from transportation is a major challen-
ge, given the growing demand for transport and
3.390. Brazil’s transportation matrix is overdepen- the resulting need for infrastructure in both urban
dent on road transport. Trade flows rely on a poor-
59
and rural areas. Brazil makes relatively little use of
-quality, congested road network—especially in the less-polluting fuels and alternative energy sources
north and northwest of the country—that cannot and relies heavily on road transport. About 65%
meet the needs of supply chains and causes delays.60 of domestic freight is transported by truck, but
Despite their extensive network, railways face 61
the trucking industry is marred by excess supply,
interoperability challenges and struggle to attract low profit margins, and limited economic and
private financing. Brazil has a number of large port technical regulation.68 Thus, drastically reducing
terminals, but dredging restrictions and limited emissions requires new technologies and a push
operational capacity thwart their efficiency. Wate- 62
for modal and infrastructural changes.
rway development would have strategic value, but
requires significant investment to become a cost-e- 3.393. Brazil remains dependent on fossil fuels.
ffective option for supply chains in the country. In In 2019, fossil fuels accounted for more than 50% of
Country Development Challenges - Brazil

58  hese include textiles, shoes, chemicals, cement, metals, aircraft, motors, heavy machinery and equipment, and the agricultural chains of coffee,
T
soybeans, wheat, rice, corn, sugarcane, cocoa, citrus, and beef.
59 Ministerio da Infrastrutura, 2021. Plano Nacional de Logística, 2035.
60 Fitch Solutions, 2022.
61 At 29,850km, Brazil’s railway network is among the longest in the world and, like the road network, mostly concentrated in the southern and coastal
region. Fitch Solutions, 2022.
62 Restrictions placed on foreign investment have also discouraged international terminal operators from entering the country. Fitch Solutions, 2022.
63 Fitch Solutions, 2022.
64 Between 2019 and 2021, the Infrastructure Ministry digitalized 100% of its public services and developed 53 digital projects, including the Transit
Portal, portals for the National Agencies for Roads and Waterways Transport, Digital Transit Payments, InfraBR & Safe Boarding for cargo, and an
electronic driving license and vehicle registration.
65 Such as speed and traffic control, artificial intelligence algorithms applied to road safety, Mobility as a Service apps (MaaS), e-parking, digital marke-
tplaces to buy transport services, electronic ticketing, online checking across transport modes, digital marketing, cargo tracking and e-booking,
traffic surveys based on data intelligence analysis, as well as apps on road maintenance and social distance developed by the IDB.
66 McKinsey, 2019
67 Balanço Energético Nacional – EPE/MME in Ministerio da Infrastrutura 2022
68 EPL, 2015; EMIS, 2018.

182
the country’s total energy consumption. Reducing on land use from a proposed road between Pucall-
greenhouse gas emissions from hard-to-decarboni- pa, Peru and Cruzeiro do Sul, Brazil suggested that
ze sectors—such as transport and heavy industry— the expected conversion of natural vegetation to
is key to meeting Brazil’s commitments under the other types of cultivation would lead to a 1,000%
Paris Agreement, which include becoming carbon increase in sedimentation of drinking water for
neutral by 2050. The industrial and transport sec- certain downstream communities.72
tors account for the majority of Brazil’s final energy
consumption, with shares of 31% and 33%, respec- Policy Recommendations
tively. The main non-renewable sources in the in-
dustrial sector’s energy consumption mix are: coal 3.396. Invest in the transportation sector. Brazil’s
and its derivatives (15% of total sectoral energy con- transport development requires increased public
sumption), petroleum products (13%), and natural investment and private long-term financing to ex-
gas (11%). Moreover, 78% of the energy consumed pand and maintain the road network, modernize
by the transport sector comes from non-renewable logistics services, improve multimodal integra-
sources—specifically, diesel (46% of total sectoral tion, and generate demand for and financial incen-
energy consumption) and gasoline (32%).69 tives to public transport systems.

3.394. Brazil has many avenues to promote green 3.397. Adopt a green growth strategy. Such a stra-
growth in the transportation sector. For example, tegy should include:
Brazil is cementing its position as a regional hub for I. action plans aligned with the Paris Agre-
the production of electric vehicles (EVs), which it ement, setting out specific goals for each
could advantageously export across LAC thanks to transport mode;
Mercosur and other free-trade agreements. Howe- II. emission targets in 17 major cities to promote
ver, Brazil can do much more to encourage EV pur- hybrid and electrified urban transport, across
chases among individual and commercial buyers, both public fleets and private vehicles;
as current incentives comprise solely certain tax III. sustainable urban mobility plans in prioriti-
exemptions at the federal and state levels.70 Sepa- zed cities;
rately, the country needs to enhance the resilience IV. a 4.0-SURE Roads Program, with net-zero
of its transportation infrastructure, which is incre- targets for both the construction and opera-

Pillar 4 | Incorporating green growth into the country’s development model

asingly threatened by climate and environmental tional phases;73
disruption. Notably, floods and landslides caused V. R&D on sustainable fuels in aviation, mariti-
nearly US$1 billion in damages to Brazil’s transpor- me and waterways transport,
tation infrastructure between 2011 and 2016. 71
VI. urban land regulation for sustainable mobi-
lity; and
3.395. Transportation infrastructure can have a VII. green bonds and other innovative financial
major impact on natural capital, both directly and sources and business models.
indirectly. For example, expanding or improving
a road network can prompt changes in land use in 3.398. Support logistics corridors and multimo-
adjacent areas, leading to deforestation or degra- dal transport. Transport infrastructure will be
dation, with downstream impacts on other ecosys- a growth area in Brazil’s infrastructure market,
tem services. An analysis of the indirect impacts due to major investments planned under recent

69  The segments of difficult decarbonization are those that, for technical or economic reasons, have limited prospects of replacing fossil fuels with less-
-polluting sources of energy. This definition mainly applies to transport and heavy industry.
70 Fitch Solutions, 2021.
71 World Bank. 2019. “Improving Climate Resilience of Federal Road Network in Brazil.” Washington, DC: World Bank. doi:10.1596/32189; World Bank. 2016.
“Damage Report: Material Damages and Losses Due to Natural Disasters in Brazil, 1995–2014.” Working Paper No. 111703, (in Portuguese)”. Brasilia.
72 Mandle, L., R. Griffin, J. Goldstein, R.M. Acevedo-Daunas, A. Camhi, M.H. Lemay, E. Rauer, and V. Peterson. 2016. “Natural Capital & Roads: Managing
Dependencies and Impacts on Ecosystem Services for Sustainable Road Investments.” IDB.
https://publications.iadb.org/en/publication/17173/natural-capital-and-roads-managingdependencies- and-impacts-ecosystem-services.
73 4.0- SURE Roads combine sustainable materials and standards, with innovations on digitization and resilience to climate change.

BID — Banco Interamericano de Desenvolvimento 183

 concessions, and a large-scale pipeline of future can be instrumental in mitigating the country’s
concessions. 74 Supporting the structuring and dependency on road transport, especially through
development of strategic transport and logistics railways development. Multilateral institutions can
projects, with private participation, can have a sig- also have a strategic role in supporting railway pro-
nificant developmental impact. A robust pipeline jects, whose financing has historically been cons-
of road infrastructure investment and concession trained by technical and operational risk factors.
projects has the potential to improve the quality
and capacity of road assets, increasing road safety 3.402. Advance the electrification of public and
and climate resilience. private transport. Brazil should promote regulatory
and fiscal incentives to scale the electrification of
3.399. Accelerate the digital transformation. public-transport systems and the deployment of
Road connectivity is key to improve logistic effi- electric vehicles for cargo transportation and priva-
ciency, monitoring of cargo, and adoption of smart te use. Multilateral institutions can assist the coun-
technologies. Relevant steps include: try in deploying consistent incentives, and support
I. modernizing technologies across logistics relevant financing to the private sector.
infrastructure and services;
II. developing technology pilots to reduce ope- 3.403. Develop multimodal transportation sys-
rational costs, and modernizing quality stan- tems to reduce logistics costs. The federal and
dards in transport and mobility infrastructure; subnational governments should develop strategic
III. promoting national and international inte- transportation plans that integrate different trans-
gration of transport modes and markets; and, portation modes, support regional value chains,
IV. improving efficiency in public spending, and coordinate policies across jurisdictions.77
planning, project appraisal, and governance of
infrastructure and services, to promote fiscal 3.404. Modernize and expand rail infrastructure.
sustainability, a reduction in transport-related The National Logistics and Transportation Plan
inequalities, and targeted social opportunities. (Plano Nacional de Logística e Transportes, PNLT) es-
timates that doubling Brazil’s rail network by 2030
3.400. Enhance the resilience of the transport would increase the transportation sector’s energy
sector. Managing forests to reduce landscape risk efficiency by 38%, reduce fuel consumption by
near roads can be up to 16 times more cost-effec- 41%, and cut CO2 emissions by 32%.
tive than repairing damaged road networks. Res-
toring and protecting coastal ecosystems, such as 3.405. Upgrade port and airport infrastructure
reefs and tidal wetlands, can reduce flooding and and improve operational efficiency. Port opera-
erosion affecting coastal highways and railways.75. tions should be streamlined, and infrastructure
In Belém, for example, each 20 km stretch of man- upgraded to service larger vessels in strategic
grove forest provides infrastructure protection be- terminals. Stronger connections between ports
Country Development Challenges - Brazil

nefits worth between US$100 million and US$250 and domestic rail, road, and waterway networks
million, including for roads and ports.76 would reduce logistics costs and enhance trans-
portation efficiency. Better access to ports in the
3.401. Increase the participation of the private North could reduce transportation times to some
sector in railways development. The private sector of Brazil’s main external markets, including Euro-

74 Fitch Solutions, 2022

75 WEBB, Bret M. et al. White Paper: Nature‐Based Solutions for Coastal Highway Resilience. Federal Highway Administration (US), 2018.
76 Menéndez, P., I.J. Losada, S. Torres-Ortega, S. Narayan, and M.W. Beck. 2020. “The Global Flood Protection Benefits of Mangroves.” Scientific Re-
ports 10 (1): 4404. doi:10.1038/s41598-020- 61136-6.
77 A study on the main logistics corridors, routes, and destinations for some export-oriented commodities, recently conducted by the Ministry of Trans-
port, Ports and Civil Aviation (FGV, 2018), can help prioritize investments. Maintenance and operation of highways can be transferred to the private
sector (FGV, 2018).

184
pe, by almost a week.78 Addressing airport capacity the 20 municipalities with the largest at-risk popu-
constraints will require a combination of infras- lation, the issue is most critical in Salvador, where
tructure upgrades and operational improvements, 1.2 million people (45.5% of the total population)
including the use of concessions. lived in areas at risk, and in São Paulo, where the
figure was 674,000 (6% of the total population).
GREEN CITIES
3.409. Urban concentration in metropolitan
3.406. Few cities have a plan for the transition to regions and large and medium-sized cities con-
a zero-carbon economy. According to the SEEG tributes to Brazil’s environmental challenges.
2021 report, Brazil is the world’s sixth-largest GHG Many cities must contend with rapid urbanization,
emitter, contributing 3.2% of global GHG emis- inefficient planning, and growing car ownership.81
sions. In terms of road traffic, the country is the Common challenges include the prevalence of
world’s eighth most-congested overall, with São low-density, high-value land in downtown areas,
Paulo placed fifth on the Global Traffic Scorecard’s poor accessibility, car dependency, and uncontrol-
ranking of most-congested cities. Uncontrolled led non-contiguous sprawl. Low-income residents
urban expansion increases the need for mobility are forced to move toward the peripheries, where
infrastructure, but the country lacks integrated they face longer and more expensive commutes by
planning for land use and transportation (IADB & public transport.82 Traffic jams in São Paulo alone
UKSip, 2021). Six cities have published their cli-
79
cost an estimated R$156.2 billion per year.83 Mea-
mate action plans, but most do not have a climate sures towards low-carbon cities could prompt the
planning tool, and data about the contribution of creation of 4.5 million new jobs and a 35% reduc-
cities to GHG emissions is incomplete. tion in GHG emissions by 2030, and of 1.5 million
jobs and an 88% reduction in GHG emissions by
3.407. Brazilian cities are vulnerable to clima- 2050.84 Cities should prioritize natural processes
te change. According to the Brazilian Panel on and holistic urban management to minimize en-
Climate Change (PBMC, 2013b), most of the Nor- vironmental impacts from urbanization, while
theast, the northwest of Minas Gerais, and the protecting their people and physical heritage from
metropolitan regions of São Paulo, Rio de Janeiro, adverse climate effects.
Belo Horizonte, Salvador, Brasilia, and Manaus are

Pillar 4 | Incorporating green growth into the country’s development model

the areas most susceptible to the adverse effects 3.410. Most Brazilian cities do not have climate-
of climate change, and where extreme weather -change adaptation plans or urban planning stra-
events will concentrate by the end of the century. tegies, and do not include climate considerations
The growth of large cities in Brazil has been rapid in urban development projects. Cities struggle to
and disorderly, and lack of housing has led to the mobilize public and private investments for pro-
occupation of areas at risk (PBMC, 2018). jects focused on urban climate adaptation and resi-
lience, which could greatly support climate-chan-
3.408. Climate-related risks affect buildings, in- ge mitigation efforts. Resilient infrastructure can
frastructure, and people in Brazilian cities. In 2010 reduce urban vulnerability by improving drinkin-
(IBGE, 2018), 8.27 million people lived in areas g-water supply, sanitary sewage, street cleaning,
at risk across 872 municipalities,80 most of which urban solid-waste management, and drainage and
were located on the country’s east coast. Among management of urban rainwater.

78 ANTAQ, 2017.
79 São Paulo, Río de Janeiro, Salvador, Curitiba, Recife, and Fortaleza have published climate action plans.
80 CEMADEN (National Center for Natural Disaster Monitoring and Alerts) monitors 958 municipalities for natural disasters (IBGE, 2018).
81 Between 2003 and 2014, the urban population in major Brazilian cities increased by 21.3%, while the number of automobiles increased by 116% (Asso-
ciação Nacional de Transportes Públicos, 2016).
82 CNI, 2012. Cidades: mobilidade, habitação e escala – um chamado à ação.
83 Haddad, E.A. and Vieira, R.S., 2015. Mobilidade, acessibilidade e produtividade: nota sobre a valoração econômica do tempo de viagem na região
metropolitana de São Paulo. Núcleo de Economia Regional e Urbana, Universidade de São Paulo.
84 Coalition for Urban Transformation, 2021, Seizing the Urban Opportunity.

BID — Banco Interamericano de Desenvolvimento 185

 3.411. Current urban mobility policies do not 3.412. Shortcomings in transport infrastructure
contribute to a green development model. Urban take a heavy toll on citizens and the environment.
mobility challenges, caused by growing demand CPI (2018) shows that the prevalence of motorized
on transport networks and the deteriorating qua- individual transport has a detrimental impact on
lity of public transportation, are significant. In air quality and road safety. Notably, Brazil has the
most Brazilian cities, public policy favors private highest annual number of motor accident victims in
transportation—and particularly the use of cars the world. The country should adopt policies that in-
and motorcycles—thus hindering sustainable centivize a change in behavior by freight and passen-
urban mobility. Uncontrolled urban sprawl, and ger operators, as well as by their users, to promote
particularly the expansion of low-income suburbs, more-efficient, low-carbon transport systems; im-
increase congestion and extend commuting times. prove access to mobility services; strengthen energy
Although all cities with a population of more than security; reduce urban pollution; and improve the
20,000 (a total of 3,065 cities) are legally required health and quality of life of the population.
to devise a mobility plan, as of 2016 only 171 cities
(9% of the total) had done so,85 due to limited tech- 3.413. Enhancing the social inclusivity of public
nical and institutional capacity.86As of 2019, due to transport can contribute to reducing inequalities
inadequate urban planning and engineering, 3,653 and poverty. Safe and reliable transport connects
municipalities (45.3% of all municipalities in the people with social services, jobs, and opportunities,
country) had been affected by floods in the pre- contributing to poverty reduction and sustainable
vious five years, with the highest concentration in development (UN, 2015).87 In Brazil, however, only
the Southern region (64.2 percent) and the lowest 11.7% of municipalities operate intercity trans-
in the Northeast region (34.3 percent). port services with fleets accessible to people with

FIGURE 3.18. Distribution of the household expenditure in urban areas

18.00%

15.89%
16.00%

13.78%
14.00% 13.30% 13.13% 12.92%

12.00%

10.21%
10.00%
8.74%

8.00%
6.73%

6.00%
Country Development Challenges - Brazil

4.00%

2.00%

0.00%
Housing Transportation Food Clothing

2008 2017

Source: CPI (2018) and PNAD – IPEA (2021)

85 Ministério das Cidades, 2017.

86 Nassar, 2018.
87 Mobility is a social right under Brazil’s Federal Constitution. Access to safe, accessible, and sustainable transport for all, with special attention to the
needs of women, children, elderly, people with disabilities and vulnerable groups, is a sustainable development goal (SDG -11).

186
disabilities. Relative to the averages for the overall I. promote the efficient use of urban land arou-
population, Afro-Brazilians live farther from both nd transit stations;
motorized and active transport systems,88 pay more II. be a powerful financing and planning tool
in fares, and face overcrowding and lack of transit for transit-related investments;
options; in addition, 91% of Afro-Brazilian women III. help governments fund high-quality local
live farther from medium/high-capacity stations, infrastructure without major effects on pu-
and cannot access services suited to their mobility blic debt;
needs.89 Access to basic transport services on rural IV. promote a pedestrian-friendly environment,
roads is associated with poverty reduction, particu- through transit riding, walking and bicycle
larly in agricultural municipalities.90 To help reduce travel; and
inequalities and poverty, public transport policies V. reduce traffic congestion, improving air qua-
need to adjust benchmarks of quality, coverage, sa- lity and reducing GHG.93
fety, social accessibility, and affordability to the ne- Overall, such projects promote efficient, compact,
eds of women, persons with disabilities, the elderly, vibrant, walkable, and mixed-used neighborhoods.
and vulnerable groups, and ensure the economic
viability of the related investments. 3.416. Develop low-carbon cities, setting goals
for urban decarbonization. Key actions include:
3.414. Deaths from diseases caused by atmos- I. adopting ecological urban design to promo-
pheric, chemical, and soil contamination are on the te safe, non-motorized, emission-free public
rise, especially among vulnerable populations. Air transport, discouraging the use of private
pollution—driven by increasing motorization, lack vehicles and promoting road safety;
of public transport, and obsolete regulation—kills II. promoting TOD strategies to coordinate
approximately 51,000 Brazilians per year (WRI, density planning, mobility interventions,
2021).91 The country does not consistently monitor and infrastructure development, thereby
air quality, adopts permissive baselines relative to reducing private-vehicle trips94 to the bene-
WHO recommendations, and does not enforce pe- fit of public transport;
nalties when air quality parameters are disregarded. III. creating public green spaces for carbon
capture, efficient drainage, and mitigation of
Policy Recommendations heat-island effects, reducing health risk and

Pillar 4 | Incorporating green growth into the country’s development model

urban inequalities; and
3.415. Reduce GHG emissions through the sustai- IV. encouraging the efficient use of energy, wa-
nable integration of urban planning with green mo- ter, and construction material in buildings,
bility systems and buildings. Urban infrastructure prioritizing renewable energy sources and
investments should aim to alleviate vehicle conges- low-energy materials.95
tion through good density planning. Integrating hou- The Amazon region needs tailored interventions,
sing and transportation planning through transit-o- to facilitate sustainable models of urban develop-
riented development (TOD) can reduce travel times.
92
ment that are compatible with the region’s natural
Experience shows that successful TOD strategies can: and cultural context.

88 In one-third of state capitals, more than 90% of the population lives far from a bicycle lane.
89  ata covering Sao Paulo, Rio de Janeiro, Curitiba, and Fortaleza (Bittencourt, Gianotty and Marques, 2020), and surveys from The Color of Mobility
D
Program (ITDP, 2021). Afro-Brazilian women are also vulnerable to gender-based violence on public transportation. Sao Paulo, Curitiba, and Uber-
landia have successful examples of social access to transport.
90 Access to infrastructure and poverty in Brazil; empirical research (Medeiros, Hermeto, Oliveira, 2020)
91 The State of Air Quality in Brazil: https://wribrasil.org.br/pt/publicacoes/o-estado-da-qualidade-do-ar-no-brasil.
92 TOD is an urban development model that maximizes residential, commercial, and recreational spaces within walking distance of public transport. It seeks to
increase the number of public-transport users, reduce private-vehicle use, and promote sustainable urban growth (IADB, 2020, from Cervero et al., 2002).
93  “Transit Oriented Development: how to make cities more compact, connected and coordinated” (IADB, 2020); and World Bank, 2015. Financing Tran-
sit-Oriented Development with Land Values: Adapting land value capture in developing countries.
94 Integrating mixed land use in urban planning with the promotion of electric and emission-free non-motorized vehicles can effectively reduce trans-
port-related emissions (IADB, 2020).
95  Vamos construir verde? Guia prático para edificações, espaços públicos e canteiros sustentáveis no Brasil – Let’s build green? A practical guide for
sustainable buildings, public spaces and building sites in Brazil (IADB, 2020).

BID — Banco Interamericano de Desenvolvimento 187

 3.417. Improve technical assistance and finan- revenue options beyond transit fares and passen-
cing for the implementation of low-carbon stra- ger growth. It thus enables land-value capture and
tegies. Urban and land-use planning strategies greater financial viability.
can incorporate sustainability and low-carbon
criteria, through efforts that include: 3.420. Adopt new technologies to improve trans-
I. calculating GHG emissions at city level; portation efficiency. Modern technologies such
II. establishing climate-change mitigation go- as drones and vehicle sensors can enhance control
als aligned with national commitments; and over freight movement and logistics. Intelligent
III. identifying opportunities and strategies for transportation systems (ITS) technologies can
low-carbon urban development. transmit traffic information to control centers in
real time, enhance the safety and efficiency of public
3.418. Implement effective mobility plans. The transportation, improve oversight and risk manage-
National Urban Mobility Policy (Política Nacional ment in urban rail systems, and increase the capa-
de Mobilidade Urbana, PNMU) establishes prin- city of port terminals through vessel-traffic mana-
ciples, guidelines, and tools to help cities create gement systems and radio-frequency identification
urban mobility plans. The PNMU encourages systems, inter alia. Maximizing the value of ITS tech-
cities to integrate different transportation modes, nologies will require developing the infrastructure
prioritize public transit and non-motorized trans- (e.g., charging terminals) to facilitate the adoption of
portation options, and focus on equity in public new transport solutions (e.g., electric vehicles).
spaces and public participation. Transportation
interventions should be coordinated with other 3.421. Promote a more resilient urban environ-
urban development policies, particularly around ment. Urban development needs to be set within
land use, to facilitate planned urban expansion environmental boundaries, through planning and
and maximize the use of transportation systems. management models that rely on natural capital to
improve resilience.96 Relevant measures include:
3.419. Support integrated urban development I. promoting adaptive urban planning solu-
and mobility strategies based on the TOD model. tions that incorporate disaster-risk manage-
International practice shows that successful TOD ment and a climate-change focus, and com-
projects need: bine urban ecosystems and natural capital97
I. governance mechanisms to overcome insti- with other risk-management instruments;
tutional barriers and facilitate coordination II. encouraging ecological design, green infras-
between public and private stakeholder; tructure, nature-based solutions, and the
II. appropriate legal and regulatory frameworks; supply of public green areas to prevent and
III. the integration of spatial and public-transit mitigate natural disasters;
planning with land management; III. incorporating urban resilience into infras-
IV. economic and fiscal instruments to mobili- tructure planning at the subnational level; and
Country Development Challenges - Brazil

ze resources; IV. prioritizing protection and emergency res-

V. integrated policies for sustainable urban de- ponses in areas with vulnerable populations
velopment; and and critical infrastructure.
VI. modelling of the potential environmental,
social, and economic impacts of the projects. 3.422. Reduce atmospheric, water, acoustic, and
The TOD model offers a suitable platform for both soil contamination.98 Emissions regulation, dri-
public and private investment and helps identify ving restrictions, and green infrastructure are ef-

96 Natural capital and ecosystem services mitigate natural disasters. Coastal vegetation reduces the effects of tsunamis, hurricanes, floods, and other
natural disasters; it also reduces erosion from heavy rains and serves as a water filter that retains sediments from forest fires (IADB, 2021).
97  atural capital is the stock of assets that includes minerals, soil, air, water, and all living beings from which humans obtain ecosystem services, and
N
which make human life possible. http://www.thebiodiversityconsultancy.com/es/approaches/natural-capital/.
98 Joint actions with the Environment and Biodiversity, Water and Sanitation, and Transport sectors.

188
fective tools to mitigate pollution. Recommended and abundant agricultural resources offer a solid
measures include: foundation for the development of biological pro-
I. adopting integrated planning and manage- ducts and industries, with high-value applications
ment of land use and mobility to reduce the across several sectors. Realizing this potential re-
use of private vehicles; 99
quires a coordinated effort to discover natural pro-
II. preventing the contamination of aquifers perties with economic value and invent or acquire
and watersheds, through optimal solid-waste technologies and processes to transform biomass
treatment as well as natural drainage sys- into products of commercial value. In other words,
tems and green infrastructure that reduce transforming the emerging sectors of the bioeco-
impermeable surfaces; nomy into engines of sustainable growth will requi-
III. combining regulatory measures with tech- re scientific research and technological innovation.
nological innovation, data analysis, and gre-
en infrastructure to reduce contamination 3.425. Developing the bioeconomy faces ma-
levels; and jor challenges. First, logistical constraints are
IV. strengthening the monitoring of contaminants. significant. Although road transport provides
capillarity and agility to value chains, it is one of
(3) Promote a sustainable economy: the least-efficient modalities in terms of GHG per
Bioeconomy, Agriculture, transported cargo. Furthermore, in a country of
Mining and Tourism continental dimensions and with a poor-quality
Brazil can manage its natural resources in a sustaina- road network, dependency on road-based logis-
ble and economically beneficial way, while improving tics is a risk. The enforcement of environmental
living standards in the country’s least-developed areas. legislation is inadequate, with rules routinely
By fostering sustainable economic activity, Brazil can circumvented or ignored.100
both reduce poverty and inequality, and protect the
environment. Achieving these objectives will require 3.426. The Amazon region can strongly benefit
investment, innovation, planning, and systemic chan- from the development of the bioeconomy. Des-
ge across several sectors. pite their natural wealth and diversity, the nine
Brazilian states that make up the Legal Amazon101
3.423. The bioeconomy comprises any economic account for less than 9% of national GDP,102 and the

Pillar 4 | Incorporating green growth into the country’s development model

activity based on the use of natural renewable region underperforms the rest of the country on
biological resources, from both land and water, to many social indicators. The Human Development
obtain food, materials, and energy, while ensuring Index (HDI) of the Legal Amazon falls consistently
the availability of resources for future generations. below the national average on all three of its di-
The bioeconomy reinforces connections between mensions—income, longevity, and education—
the primary sector, manufacturing, and services, while 90% of municipalities in the region rank as
contributing to broad economic development. medium, low, or very low on the HDI scale.103 40%
of the region’s population is poor, a much higher
3.424. The bioeconomy can help accelerate the share than in the rest of the country.104 In this con-
green transition while creating high-quality em- text, the bioeconomy represents an environmen-
ployment opportunities. Brazil’s vast biodiversity tally friendly path to development.

99 The regulation and monitoring of emissions from these vehicles can also be strengthened.
100 3° Mapa de Impacto - Relatório Ambiental
101 The Legal Amazon officially encompasses the seven states of the North Region (Acre, Amapá, Amazonas, Pará, Rondônia, Roraima, and Tocantins),
as well as most of Mato Grosso in the Center-West region, and the western part of Maranhão in the Northeast.
102 Santos, D., et al., “Fatos da Amazônia 2021”, Amazonia 2030 Project, March 2021.
103 Atlas do Desenvolvimento Humano
104 In addition, the Legal Amazon is highly vulnerable to climate change because of its direct exposure to climate risks, its high sensitivity to such risks, and its
low adaptive capacity. Existing literature exposes how global warming may induce a higher frequency of extreme climate events and fires, directly impac-
ting forests and agricultural productivity. In parallel, changes in land-use linked to unsustainable practices in agriculture and other land-use are a primary
cause of forest loss, exacerbating the problem. Climate vulnerabilities and the spread of unsustainable land-use in turn contributes to aggravate condi-
tions for the local population, particularly the most vulnerable, potentially adding to the already significant deficiencies observed in their basic needs.

BID — Banco Interamericano de Desenvolvimento 189

 3.427. Brazil will benefit from a national strategy involving firms in the Legal Amazon was 3% of the
for the bioeconomy. Successful strategies for the national total.107 Moreover, bioeconomy busines-
bioeconomy require an institutional structure for ses tend to have several features that enhance the
the promotion and development of private busi- credit risk attached to them, namely:
nesses that, by sustainably tapping the potential I. they are often in the early stages of develop-
of biodiversity, create new products and processes ment, have low incomes, and are located in
and enhance economic diversification. Public po- less-developed areas;
licies targeted to productive sectors, training pro- II. depend on small enterprises or producers in
grams, and efforts to better organize value chains their value chain who have little or no inde-
can foster bio-businesses active in perennial agri- pendent funding;108
culture, agroforestry, aquaculture, forestry planta- III. lack traditional collateral;
tion, non-timber natural forest products (NTFPs), IV. have payback models that may increase tran-
nature tourism, and ecosystem services. 105
saction costs and risk levels;
V. operate in volatile markets; and
3.428. A weak institutional environment hinders VI. have little or no track record to help assess
the development of the bioeconomy. Brazil suf- their profitability, biodiversity impacts, or
fers from a lack of systems and tools for the valua- contribution to mitigating climate and envi-
tion of assets that produce carbon sequestration, ronmental risks.
reduce GHG emissions, and mitigate vulnerability
to climate risks. This shortcoming diminishes the 3.430. The bioeconomy suffers from a lack of
capacity to attract private investment to activities standardized frameworks to monitor biodiversity
that protect natural capital. Current legal and go- and climate vulnerability.109 A lack of data, measu-
vernance frameworks tend to distort the true cost rement systems, taxonomies, and accounting sys-
of unsustainable use of forests and land, and fail tems to evaluate natural capital and forest assets
to assign a tangible value to conservation, climate undermines awareness of the bioeconomy’s con-
mitigation, or increased climate resilience. tribution to climate-change mitigation and adap-
tation. As a result, the benefits from a sustainable
3.429. The supply of funding to the bioeconomy use of resources, which reduces GHG emissions
is limited. Bio-businesses are typically MSMEs and and enhances climate resilience, are not properly
too small to access the capital markets. In gene- understood or considered110 by either public or
ral, MSMEs in Brazil also have less access to bank private actors. Measuring and reporting systems,
credit than larger firms and remain dependent on metrics, and indicators are key to building credibi-
other sources of financing such as family savings, lity for the bioeconomy.
cashflow from current operations, trade finance,
advance payments, or loans against product. In the 3.431. Capacity issues compound the poor
Amazon, the issue is compounded by the scarcity awareness of the market opportunities for the
Country Development Challenges - Brazil

of financial institutions and tighter credit condi- bioeconomy. Key shortcomings include: a dearth
tions;106 as of 2019, the share of credit transactions of specialist knowledge about resilience-enhan-

105  here are some attempts in this direction. The existing Action Plan on Science, Technology, and Innovation in Bioeconomy, which was approved in
T
2018 (PACTI Bioeconomia). PACTI Bioeconomia focuses on five thematic areas: the valorization of biomass, processing and biorefineries, biopro-
ducts, the creation of a bioeconomy observatory, and the creation of a National Bioeconomy Committee. Following the PACTI Bioeconomia, the
MCTI launched the Productive Chains of Bioeconomy program in 2020, investing approximately US$1 million in projects related to four priority value
chains: açaí, cupuaçu, pirarucu, and licuri. The Ministry of Agriculture also launched a program in support of the development of new technological
solutions in the production chains related to agriculture, livestock, and aquaculture in 2020 (National Bio-input Program). And, in addition, a national
biofuels policy (RenovaBio) was also launched in 2020.
106 Nature Services. Unlocking Private Capital by Valuing Bioeconomy Products and Services with Climate Mitigation and Adaptation Results in the
Amazon. 2021.
107 Pamplona, L. et al., “Potencial da bioeconomia para o desenvolvimento sustentável da Amazônia e possibilidades para a atuação do BNDES”, BN-
DES, December 2021.
108 Rubino, M. et al., Biodiversity and Business in Latin America, Chapter 4: Financing Needs, IFC, 2000.
109 IPCC (2019), Special Report on Climate Change, Desertification, Land Degradation, Sustainable Land Management, Food Security, and Greenhouse
Gas Fluxes in Terrestrial Ecosystems: Summary for Policy Makers.
110 Financial Times, ESG investors wake up to biodiversity risk, 2020.

190
cing investments, the basic properties of natural biological materials (i.e., cells, tissues, DNA, antibo-
materials, and the production and marketing of in- dies, enzymes, virus, viral plasmids, and reagents);
novative products or business models; insufficient intellectual property regulation; the tax system;
alignment with international standards and nor- and the mechanisms for reducing CO2 emissions.
ms; inadequate access to markets; insufficient lo- Moreover, supporting the provision of public goods
gistical capacity; and limited use of certifications. such as biorefineries, specialized equipment, and
other research infrastructure and services could
3.432. The bioeconomy can foster regional integra- stimulate advances across several value chains,
tion in the Amazon basin. Opportunities for the de- increasing the value-added of their products, and
velopment of bioeconomy products, processes, and preserving key sources of biomass.
services are available to firms in nine countries across
the Amazon basin, many of whom will be facing simi- 3.435. Promote innovation and research to cre-
lar challenges. Each country may also benefit from ate sustainable business opportunities. Brazil
sharing experience and best practices in policy and lacks incentives for investment into climate-change
regulatory reforms to support the bioeconomy. mitigation and adaptation projects, such as the
development of climate-resistant crop varieties
Policy Recommendations or sustainable-forestry value chains. Appropriate
policies can promote the responsible exploitation
3.433. Enact targeted policies to support the bio- of biodiversity-based products and strengthen the
economy. Relevant measures include: market for them. Measures that promote sustaina-
I. grants for basic research; ble value chains for biodiversity-derived products
II. subsidies or credits for R&D; are especially important in the Amazon area, which
III. support for the development of prototypes includes some of Brazil’s least-developed regions.111
and proof-of-concepts that aim to solve so-
cial or industrial challenges, or to replace 3.436. Use public policy to incentivize sustainab-
fossil fuel-based products; le production methods. The Rural Credit Program
IV. Seed capital for bioeconomy startups; can improve the quality of agricultural invest-
V. a focused program of public procurement ment. In the North region, which largely overlaps
for bio-based products; and/or, with the Amazon, the government should support
VI. the provision of catalytic public goods, such

Pillar 4 | Incorporating green growth into the country’s development model

integrated production systems that avoid defo-
as research infrastructure, specialized equi- restation and maintain or enhance biodiversity,
pment, biorefineries, or support services. improve resilience to climate change, and support
Moreover, a number of initiatives could support the sustainable development of the bioeconomy.
the ecosystem for research and innovation in the In addition, tax instruments, such as an ecological
bioeconomy, such as: ICMS and the rural property tax, can be used to in-
I. legal and regulatory change to improve the centivize sustainable practices.112
business climate for the bioeconomy;
II. efforts to attract, develop, and retain specia- AGRICULTURE
lized talent; and
III. the promotion of angel and venture-capital 3.437. Agri-business is one of the most dynamic
investment in the sector. sectors of the Brazilian economy. Brazil is the
fourth-largest agricultural producer in the world,
3.434. Accelerate the productive transformation the main producer of coffee, sugarcane, and citrus,
of the bioeconomy. Regulatory reforms are needed and the second-largest producer of soybean, beef,
in a number of areas including processes to import and poultry. Agriculture (including ranching)

111 PPCDam, 2004.

112 CPI, 2018.

BID — Banco Interamericano de Desenvolvimento 191

 uses 28.7% of Brazil’s 8.5 million km2 of territory, bedrock of the Brazilian economy,113 but unsustai-
accounts for 22% of its GDP, and is a major source nable practices threaten their long-term stability.
of income, employment, and foreign exchange. Agriculture and ranching are the primary drivers of
The agricultural sector, however, features a glaring ecosystem degradation and deforestation in Brazil,
dichotomy. Most of its dynamism stems from the particularly in the Amazon, Atlantic Forest, and Cer-
large-scale production of export commodities in rado ecoregions.114 Over the last 35 years, 64 million
the South, Southeast, and Center-West regions. In hectares throughout the country were deforested
contrast, family farming is marred by low produc- and converted to pastureland.115 The conversion of
tivity and a high incidence of poverty, especially in native forests to grow crops is also a major driver of
the Northeast and North regions. Small-scale agri- ecosystem loss: soy production, for example, con-
culture accounts for 85% of agricultural produc- tributed to nearly 22 million hectares of forest loss in
tion units and up to 70% of output for some of the the Amazon and Cerrado regions between 2006 and
country’s staple foods, employing three-quarters 2017.116 These rapid shifts in land use are not only a
of the farm labor force. However, it only generates threat to biodiversity and natural habitats in globally
one-third of total agricultural income. important ecoregions, but also economically unsus-
tainable. Ecosystem services—such as microclimate
3.438. Ensuring that the agricultural sector main- stability, soil fertility, water availability, and pollina-
tains its competitiveness and positive contribu- tion—underpin land productivity. As a driving force
tion to the overall economy requires dealing with of ecosystem degradation, Brazil’s ranching sector
environmental, climate and social related risks is undermining the natural capital it depends on
and challenges. These challenges include, inter for long-term success. More than half of Brazil’s 173
alia, poor infrastructure, demographic changes in million hectares of pastureland are classified as de-
rural areas, social and regional disparities, overall graded, and nearly a quarter as severely degraded.
environmental sustainability of the sector in its Degradation causes a drop in carrying capacity and
use of natural resources, and climate change. The production per unit-area and is a major liability to
model of increasing production through “frontier the sustainability of the sector.117
expansion” is outdated and increasingly out-of-step
with markets and societal demands. It not only falls 3.440. Agricultural production is marked by
short of sustainability standards, but also faces inequalities. Brazil features, on the one hand, a
increased production risks as deforestation and fo- modern and prosperous commercial farming
rest fragmentation alter regional climate (Butt et model which is largely mechanized, focused on
al., 2011; Spracklen et al., 2018). Many studies have export crops, and linked to an extensive chain of
pointed to sector-specific proposals to address this related activities: from the production of agricul-
(Cohn et al., 2014; Gibbs et al., 2015; Nepstad et al., tural inputs (e.g., machinery, agrochemicals, and
2014), but Brazil still lacks a long term, integrated biotechnologies), to the transformation of raw
approach to reconcile its production goals with en- commodities into higher-value products. On the
Country Development Challenges - Brazil

vironmental conservation. other hand, a small-scale, family-based, and often

subsistence-focused agriculture uses rudimentary
3.439. The agricultural sector must become more production techniques, is barely mechanized, but
sustainable. Agriculture and ranching are the employs about 70% of the rural workforce (Agri-

113  omiero, V., A.C. Barros, A. Bassi, A. Lucena, A. Szklo, B. Pinheiro, B. Cunha, et al. 2020. “A New Economy for a New Era: Elements for Building a More
R
Efficient and Resilient Economy in Brazil. Working Paper.” São Paulo, Brasil: WRI Brasil. https://wribrasil.org.br/sites/default/files/wribrasil_neweco-
nomyforanewera_en.pdf.
114 GFW. 2021. “Brazil Deforestation Rates & Statistics.” Global Forest Watch. 2021. https://www.globalforestwatch.org/dashboards/country/BRA?ca-
tegory=forest-change.
115 Feltran-Barbieri, R., and J.G. Féreas. 2021. “Degraded Pastures in Brazil: Improving Livestock Production and Forest Restoration.” Royal Society
Open Science 8 (7): 201854. doi:10.1098/rsos.201854.
116 Asher, C. 2019. “Brazil Soy Trade Linked to Widespread Deforestation, Carbon Emissions.” Mongabay Environmental News. April 3, 2019. https://
news.mongabay.com/2019/04/brazil-soy-tradelinked-to-widespread-deforestation-carbon-emissions/.
117 Feltran-Barbieri, R., and J.G. Féres. 2021. “Degraded Pastures in Brazil: Improving Livestock Production and Forest Restoration.” Royal Society Open
Science 8 (7): 201854. doi:10.1098/rsos.201854.

192
cultural Census, 2017). The challenge lies in foste- nership, 2015), and the Soy and Beef Moratoriums,
ring productivity and more developed value chains among others. There is increasingly broad agre-
among family farmers, particularly where their ement in Brazil that the country cannot continue
number is highest and their productivity lowest. to sacrifice its natural environment to meet short-
-term targets of economic and agricultural growth
3.441. The great challenge is to implement a more (Pinto et al., 2017; Strassburg et al., 2014).
efficient and socially inclusive model of agricul-
ture, with a sustainable approach of integrated 3.443. Production and productivity gains over
management (crop-livestock-forestry). Such a the past decades largely resulted from invest-
model would make possible to maintain the deve- ment in R&D and technology adoption. Tech-
lopment of the agricultural sector, while reducing nologies that made it possible to grow crops on
emissions, adapting to further impacts of climate tropical soils, the genetic improvement of plants
change and reducing ecosystem degradation. In and animals, integrated pest-management me-
this sense, the main national policy for meeting thods, mechanization, and the ability to harvest
the climate goals in the agricultural sector is the various crops multiple times a year from the same
ABC+ Plan (Sectoral Plan for Climate Change Mi- plot of land have led to extraordinary productivity
tigation and Adaptation for the Consolidation of a growth. Between 1961 and 2012, the agricultural
Low-Carbon Economy in Agriculture, 2nd stage). production index grew by more than eight times,
The plan’s main instruments to achieve NDC’s go- while the population increased by 2.5 times. Data
als are recovering 15 million hectares of degraded from FAO shows that while cultivated land shrank
pastures, expanding the use of no-till farming by by 1.91% in Brazil between 1975 and 2005, land
8 million hectares, and increasing the crop-lives- productivity soared by 84.7%. Between 1997 and
tock-forestry integration (ILPF) systems by five 2015, the total factor productivity (TFP) of Brazi-
million hectares (MAPA, 2012). In its second stage, lian agriculture grew by 4.3% per year—twice as
the original targets were maintained, and new much as in the US, the world’s largest agricultural
technologies were included, such as bio inputs, producer (Gasques et al., 2016). The impressive
irrigated systems and intensive finishing of cattle growth rate of TFP in agriculture, and its sharp ac-
aiming to reach 5 million individuals, using the celeration since 1997, stem from:
confinement or semi-confinement technique, cha- I. a constant increase in agricultural research

Pillar 4 | Incorporating green growth into the country’s development model

racteristic of tropical agriculture. For the recovery expenditures between 1970 and 1997;
of degraded areas, the plan foresees 4 million hec- II. favorable agricultural credit policies and
tares recovered in commercial production areas incentives; and
of wood, fibers, food, bioenergy, and non-wood III. macroeconomic stabilization policies enac-
forest products. (MAPA, 2021). ted since 1994 (Brigatte and Teixeira, 2011;
Arias et al, 2017).
3.442. The business case for improving the
environmental performance of agriculture is in- 3.444. Low-carbon production systems are
creasingly clear. International markets demand unaffordable for small producers, and the rele-
deforestation-free products that meet multi- vant agricultural extension services (ATER) are
ple sustainability criteria (Lambin et al., 2018). In limited. Farmers need training and technical as-
response, traders, meatpackers, and animal-feed sistance to adopt innovative practices. Empirical
producers have made voluntary commitments to evidence indicates that access to credit boosts the
source deforestation-free commodities within the productivity and income of small-scale agricultu-
frameworks of the Consumer Goods Forum (CGF, ral producers, as well as their propensity to invest
2019), the Tropical Forest Alliance (TFA, 2020, 2019), and sell more, while reducing environmental
the New York Declaration on Forests (NYDF, 2019), impacts and vulnerability to climate risk (Sekyi,
the Amsterdam Declaration Partnership (AD-Part- 2020). Although the guiding principle of the ABC+

BID — Banco Interamericano de Desenvolvimento 193

 Plan is the integration of environmental criteria approximately 70% of the farmers who request it.
into credit lines and financing policies for techni- At the national level, credit was obtained by 43.6%
cal assistance (MAPA, 2021), small and family pro- of farmers who received extension services, but
ducers struggle to access the resources they need. only by 7.4% of those who did not (IPEA, 2019). Ru-
ral development and the ensuing gains in produc-
3.445. Access to ATER is low and unequal, both tivity depend on the intensity and quality of ATER,
by region and type of producer. ATER in Brazil is which allows for the adoption of technological
regulated by Law No. 12,188/10, which established innovations and for technical and organizational
the National Policy for Technical Assistance and follow-up on rural properties. In Brazil, and parti-
Rural Extension (PNATER), and the National Pro- cularly in the North and Northeast, poor access to
gram for Technical Assistance and Rural Exten- ATER and shortcomings in its quality are an obsta-
sion in Family Agriculture and Agrarian Reform cle to achieving better results.
(PRONATER). The law defines ATER as a “non-for-
mal education service, of a continuing nature in 3.447. ATER alone cannot cover all the needs of
rural areas, which promotes processes of mana- farmers. ATER services cannot fully reinforce the
gement, production, processing and commer- capacity of farmers, particularly small ones, in the
cialization of agricultural and non-agricultural following areas:
activities and services, including agro-extractive, I. access to finance;
forestry and artisanal activities” (Brazil, 2010). II. access to public services;
ATER is delivered by government agencies (mainly III. the ability to adopt practices that ensure
at the state level), private companies, and civil-so- climate-change resiliency and sustainable
ciety organizations to individual farmers, farmer productivity;
groups, cooperatives, and associations. Data from IV. access to markets;
the latest Agricultural Census in 2017 shows that V. compliance with health and environmental
only 18% of the approximately 3.9 million family standards; and
farmers in Brazil received ATER. Regional diffe- VI. ability to meet the needs of vulnerable
rences are notable, as the share ranges from 9% in groups such as women, the young, and tradi-
the North and 14% in the Northeast, to 47% in the tional communities.
South (IPEA 2019).
3.448. ATER professionals need training and
3.446. Rural extension services are overstret- knowledge development. This is a priority for te-
ched. The number of families supported by each chnicians from public and private ATER agencies
technician is generally very high (more than 120 and should focus on technological innovations
families per technician), which prevents adequate that improve agricultural systems, foster climate-
follow-up. In most cases, assistance visits are qui- -change adaptation, and promote the sustainable
ck and infrequent. The situation is especially cri- intensification of production. In addition, ATER
Country Development Challenges - Brazil

tical in the North region, due to the vast distances professionals need appropriate methodologies
to be covered as a result of low population density, and tools to work with women, the young, and tra-
and the poor state of communication infrastructu- ditional communities. Distance-learning courses
re. These limitations are common to both public are an option to be considered.
and private ATER services, although they are more
pronounced for the former. At the national level, 3.449. Agricultural activity is linked to defores-
57% of farmers receive public extension services tation, both legal and illegal, in several ways.
and 43% receive private services (IPEA, 2019). One connection stem from the sluggishness of
In the North and Northeast, public ATER serves the Rural Environmental Cadastre (CAR).118 Lan-

118  he CAR refers both to a geo-referenced database, maintained by the states in coordination with the federal government, and the process of regis-
T
tering a holding in the database, on the basis on geo-referenced data about the holding and about mandatory native vegetation areas. The registra-

194
tion of each holding must be performed by an accredited professional or firm and validated by the relevant state environmental agency.
downers who wish to expand activities on their reducing deforestation, and increasing income
plots in a lawful manner frequently fail to do so generation. According to EMBRAPA (2018), the
due to the government’s slowness in granting main tools to improve the agricultural sector’s con-
the relevant licenses. Thus, landowners often tribution to sustainable growth include:
deforest before having obtained a license, whi- I. expanding the offering of technical and rural ex-
ch is illegal. Only about 1% of the CAR has been tension to small and medium-sized producers;
fully implemented since its inception (Costa et II. reducing the energy input of agricultural
al, 2022),119 and an enormous backlog threatens production systems, and replace fossil car-
the viability of the Forest Code. Moreover, agri- bon sources with renewable sources;
cultural expansion on public land and the rela- III. implementing animal and plant production
ted illegal deforestation are largely unchecked, systems that consider regional characteristi-
especially in the Amazon. The solution to these cs and use resources rationally;
challenges lies in greater public sector capacity IV. improving access to social capital to facilita-
to ensure timely environmental licensing for te the adoption of environmentally sustaina-
private land, as well as the integrity of public land ble technologies and practices;
outside of protected or indigenous areas. V. expanding credit and mechanisms for rewar-
ding rural producers for their environmental
3.450. Agricultural health is an important challen- services, focusing on reducing GHG emis-
ge for Brazil. Issues in agricultural health exacer- sions and improving water availability.
bate constraints to productivity growth and market Furthermore, while illegal logging, mining, ur-
access. Intensive tropical agriculture, practiced ban expansion, and infrastructure development
across diverse local ecosystems in a context of lar- play an important role in deforestation in the
ge-scale international trade, is exposed to risk from Amazon (Diniz et al., 2019), the expansion of the
agricultural diseases and pests, and maintaining agricultural frontier has been a major driver, and
sanitary standards is a constant challenge. Over the especially the conversion of forests into pastures
last ten years, Brazil has suffered substantial agri- and crops (Rivero, Sergio et al., 2009). Therefore,
cultural losses from at least 35 new pests. Another reducing deforestation requires action across
500 quarantined pests, many of which are present in several dimensions, such as: establishing and
neighboring countries, may cause significant dama- enforcing legal mandates to protect forests; ex-

Pillar 4 | Incorporating green growth into the country’s development model

ge.120 The 2005 outbreak of foot-and-mouth disease panding legally protected areas; strengthening
in the state of Mato Grosso do Sul caused the loss of information systems for monitoring defores-
78,000 head of cattle, cut beef prices by 15%, blocked tation; expanding land regularization; raising
beef exports to more than 30 countries, and reduced public awareness of the importance of forests for
their volume by over 40%. Between 2012 and 2013, the environment and the climate; and creating
an outbreak of cotton bollworm (Helicoverpa armi- incentives for farmers and rural communities to
gera) damaged cotton and soybean production in the avoid deforestation.
states of Mato Grosso and Bahia, raised costs by 10%
due to the increased need for insecticides, and inflic- 3.452. Build a new form of ATER that combines fa-
ted losses of US$800 million in 2013 alone. 121
ce-to-face and digital modalities. Face-to-face ac-
tivities, limited to the minimum necessary, should
Policy Recommendations be complemented by remote or digital activities.
Access to and use of digital tools are growing in rural
3.451. Highlight the central role of the Brazilian areas, although connectivity remains an issue, es-
agricultural sector in achieving climate goals, pecially in the North and Northeast regions.

119 Full implementation meawns that all steps, from registration to validation and vegetation recovery plan, have been fulfilled.
120 Martin Neto et al., 2016.
121 Pomari-Fernandes et al., 2015

BID — Banco Interamericano de Desenvolvimento 195

 3.453. Scale new technologies for the benefit of 3.457. Strengthen the agricultural health system.
small family farmers in the North and Northeast. The government should invest in agricultural
The strong development of agtech firms points health institutions and programs, and support
to their relevance, but their services need to be research into sustainable methods of controlling
extended to small family producers in less-develo- pests and diseases in plants and animals. Reducing
ped regions, in coordination with ATER services. the risk of introducing new pests, which can inflict
Agtechs can contribute in areas such as innovation major economic losses and jeopardize access to
in production systems, data analysis and techno- export markets, will be especially important.
logical support for decision-making, climate and
market information, logistics information, storage MINING
and transport, digital certification, and online
markets and food stores. 3.458. There are challenges for a sustainable
mining. Small-scale alluvial mining is one of the
3.454. Expand the role of farmers’ organizations main causes of deforestation in the Amazon and is
as providers of ATER. Producer organizations associated with important impacts on indigenous
and cooperatives, particularly in the South, have and Afro-descendant communities in the region.
been increasingly providing direct technical With low levels of formalization, this activity is
advice to their members. This trend has shown challenging to monitor and control. This genera-
positive results, particularly to solve production tes serious social and environmental impacts and
issues. It is still very limited in the North and contributes to a significant fiscal loss.
Northeast, but has the potential to become more
widespread, as a complement to the services of Policy Recommendations
public and private ATER providers.
3.459. Improve the sector governance. In the con-
3.455. Invest in training in rural areas. The low le- text of the improving the management capacities of
vel of education of many farmers, and their lack of the Amazonian territory, it could be useful to analyze
access to technical assistance and rural extension, and review mining concession policies and address
hamper the adoption of new technologies. Impro- professional or corporate mining as an option to in-
vement in the training of young people in technical tegrate this sector into the sustainable development
institutes and rural education establishments of the region. Indeed, considering the gold reserves
(such as agricultural family schools) can contribu- of the Amazonian territory and the difficulty of con-
te to the integration of new practices and technolo- trolling its informal extraction, it is critical to rein-
gical innovations in agricultural production. force formalization and concession policies with a
long-term conservation approach. To achieve this, it
3.456. Enhance access to export markets. Efforts is essential to create a framework of institutional or
Country Development Challenges - Brazil

should continue to improve animal health and tra- corporate responsibility for the environmental and
ceability, while good environmental performance social conservation status of a concession, including
may facilitate trade agreements and market access territories not exploited at the mining level, but are
(OECD,2021). In particular, investments to increa- close or nearby mining/extraction activity.
se product traceability (focusing on origin, quality,
nutritional value, and safety) will create a closer TOURISM
connection between producers, investors, and
consumers. Investment in transportation infras- 3.460. Building a sustainable tourism industry in
tructure is also required to meet growing demand Brazil will require overcoming multiple challenges
and lower the cost of freight, a significant compo- related to institutional capacity and managerial
nent of the “Custo Brasil”. expertise. Tourism management boards, espe-

196
cially in the northern and northeastern states, lack 3.462. Transparency is also limited in the tourism
the experience necessary to strengthen local com- sector. Public sector actions are often opaque,
petitiveness while adapting to the effects of climate and participatory governance mechanisms must
change. In many cases, tourism plans and policies be strengthened to ensure the responsiveness of
are limited, partial, or nonexistent. In a recent public policies to local interests and preferences.
survey, policymakers in five of the seven northern The planning instruments and decision-making
states describe their capacity to mitigate the social records of public institutions are not published on
and environmental consequences of tourism and their websites. In half of the states, tourism firms
to manage climate vulnerability and disaster risk and industry associations play only a nominal
as “regular.” Authorities in only one state reported role in the elaboration and monitoring of tourism
working in partnership with other organizations policies, though in the other half the private sec-
and institutions to strengthen crisis mitigation and tor is much more actively engaged. Tourism and
disaster management. Of these five states, four environmental civil society associations also tend
have strategic tourism plans that run through 2025, to be highly engaged in the policy process, though
but none of those plans incorporate specific mea- the participation of tourism councils varies widely
sures related to climate change, crisis and disaster from state to state (Sagi, 2022a).
management, or other key elements of the 2030
Agenda. Three states have management plans for Policy Recommendations
crises and natural disasters in general, but these
plans do not deal specifically with tourism and are 3.463. Build institutional capacity to develop
not used by tourism management boards in their and manage sustainable tourism. The authorities
strategic planning. In interviews, management bo- should design public policies to strengthen knowle-
ards cite a high or medium probability of natural dge collection, crisis and disaster management, and
disasters occurring in the region, including floods, climate-change mitigation and adaptation among
fires, and deforestation, in addition to economic tourism stakeholders in the public sector, the private
crises (Sagi, 2022a). Similar patterns are evident in sector, and society civil. Creating planning instru-
the northeast region. ments and monitoring systems for the rapid analysis
of data from diverse sources would support infor-
3.461. Tourism management boards and other med decision-making by ensuring that policymake-

Pillar 4 | Incorporating green growth into the country’s development model

public institutions and participatory governance rs have access to timely and comprehensive informa-
mechanisms lack a culture of monitoring and ac- tion. Consistent, systematic training of the public,
countability. As they do not oversee the performance private, and civil-society stakeholders responsible
of strategic plans through clearly defined indicators, for the territorial management of tourism is vital.
these bodies do not have the capacity for continuous This training should cover areas such as partner-
learning. Tourism surveys are conducted on a ships, fundraising, crisis and disaster management,
sporadic and unsystematic basis (Sagi, 2022a), and market intelligence, and techniques for monitoring
inadequate data to inform decision-making was an the economic, social, and environmental impacts
especially acute challenge during the Covid-19 crisis. of tourism. Holding regular industry events and
Other fundamental competences related to sustaina- discussions can allow for open discussion to inform
ble tourism and international competitiveness are improvements in public policies, while building
weak or absent, including the capacity to form part- online platforms for information management will
nerships with the private sector and to secure project help ensure transparency and strengthen oversight.
financing from public or private sources. Tourism
boards and other public institutions rate their social 3.464. Improve logistics, sanitation, and tele-
communication, public relations, and social engage- communications infrastructure. Tourism centers in
ment capacities as “regular” (Sagi, 2022a). remote areas can explore alternative service modali-

BID — Banco Interamericano de Desenvolvimento 197

 ties that obviate the need for large, fixed investments 3.466. Improve the use of technology in the tou-
that can come at a high fiscal cost and entail a large rism sector. Encouraging the use of digital inter-
social and environmental footprint. Partnerships mediation platforms, digitizing management pro-
with research and technology institutes, univer- cesses, facilitating technological uptake by SMEs,
sities, and private companies can bring modern promoting the digital marketing of destinations,
technologies to these regions, especially the north, encouraging digital tourism entrepreneurship,
allowing for a lighter and more flexible approach to and using devices and applications to increase
improving service quality. Transportation systems quality of the visitor experience could accelerate
and access routes are an essential element of tou- the growth of Brazil’s tourism sector. Establishing
rism and adopting new practices and systems can and improving channels of communication with
improve the quality of tourism-related travel. For tourists, continually updating information about
example, creating scenic routes and circuits with the destination, and making reliable data available
viewpoints and informative multilingual signage to tourists and tourism firms could reduce infor-
can alleviate congestion on main transit arteries mation asymmetry and contribute to a more posi-
while providing a more appealing travel experience. tive tourism experience.
The tax revenue generated by the tourism sector can
also help to finance the implementation and mainte- 3.467. Reorient tourism to strengthen communi-
nance of vital infrastructure in underserved areas. ties and local businesses. Policymakers and des-
tination mangers should prioritize approaches to
3.465. Adopt a tourism model based on high ser- tourism development that support vulnerable popu-
vice quality and sustainability. Improved market lations. In addition to leveraging the trend towards
intelligence can shed light on the main obstacles more responsible tourism practices, encouraging
to competitiveness and sustainability in the north the engagement of SMEs in the tourism sector can
and northeast regions. Leveraging new technolo- magnify the local benefits of tourism development.
gies and a diverse array of analytical tools can help
identify opportunities for innovation, especially the 3.468. Invest in nature-based solutions. This
development of more sustainable products based on includes the adoption of more sustainable approa-
biodiversity and local production, while expanding ches by firms and destinations, including financial
awareness pf the social, environmental and econo- and non-financial incentive programs to promote
mic relevance of the tourism sector. Utilizing websi- environmentally responsible tourism, the imple-
tes, social networks, mobile applications, and other mentation of circular-economy projects linked to
platforms can enhance the quality and sustainability tourism, and efforts to embed environmental cons-
of the tourism experience while generating benefits ciousness along the tourism value chain. Capturing
for local firms and communities. These technologies the value of biodiversity and ecosystem services
are also critical to support effective data manage- through tourism, monitoring and reporting CO2
ment and monitor the various impacts of tourism emissions from tourism operations, and accelera-
Country Development Challenges - Brazil

activity. Access to financing and innovative project ting the decarbonization of tourism operations can
models could reduce bureaucratic costs and reinfor- increase the sustainability of the tourism sector
ce financial sustainability via the systematic qualifi- while enabling it to contribute more effectively to
cation of entrepreneurs and managers. In addition, climate-change mitigation and adaptation.
creating specific financing mechanisms and incenti-
ves for sustainable tourism projects—including ESG (4) Channel financial resources
investments by non-tourism-related firms—could for the green economy
complement other sustainability measures. Specific Boosting growth and development together with the
segments such as rural tourism, gastronomic tou- adoption of policies to greener the economy will require
rism, community-based tourism, and ecotourism several investments. A successful transition demands a
should be treated as development priorities. deep economic transformation, requiring the mobili-

198
zation of private finance on a large scale (IMF, 2021). environmental risks (Frisari et al,2019). Brazil’s
The financial sector can be an important driver of the financial regulations, most of which are issued by
Brazilian transition to a green economy. 122
the central bank, evince a substantial awareness
of the potential financial impact of climate change
3.469. Green and Sustainable Finance potential and other social and environmental issues. Since
in Brazil. Brazil has an estimated USD1.3 trillion 2014, the implementation of mandatory Social and
green investment need till 2030 for energy, trans- Environmental Responsibility Policies (SERP) has
port, buildings, waste and industrial energy enabled financial institutions to identify and quan-
efficiency, based on its climate commitments set tify risks while also disseminating risk-related
out in the Nationally Determined Contribution information to the financial system via the central
(NDC) . The majority of this investment is requi-
123
bank, which provides a structure for risk monito-
red in renewable energy and urban infrastructure, ring. Brazilian regulation provides specific criteria
including public transport, water and waste. 124
for assessing high-risk activities and requires ins-
and bioeconomy. A preliminary study done by the titutions to record the cost of social and environ-
IDB regarding investment opportunities for agro- mental damage over a period of at least five years.
forestry value chains, aquaculture, timber and In addition, regulated institutions must assess
non-timber products and ecosystem restoration the potential negative social and environmental
shows that there are more than 62,000 companies impacts of new products and services, along with
with investment opportunities for more than US$1 associated reputational risks.
billion in bio-business in the Brazilian Amazon.
98% of these businesses are through producers 3.471. Sustainability was adopted as the fifth pillar
and small and medium-sized companies also favo- of the 2020 Central Bank Agenda, integrating the
ring a huge potential for economic recovery for the promotion of sustainable finance and the provi-
region. Not to mention several other opportunities sion of social and environmental market informa-
and unaccounted for chains – such as ecotourism tion into the central bank’s institutional mandate to
or the service sector. The Financial Sector has support risk management and financial stability.125
a fundamental role in inducing the productive The agenda calls for the active management of
sector towards the Green Economy. In both its social and environmental risks, including climate
role as a financial intermediator – through credit risks, and the promotion of sustainable finance

Pillar 4 | Incorporating green growth into the country’s development model

operations – as well as an institutional investor and practices, including investments in clean energy,
insurer the financial sector will play a significant low-carbon agriculture, improved waste manage-
role in the transformation of the economy. Yet, the- ment, and resource efficiency. Several regulatory
re are challenges related to socio-environmental bodies also address social and environmental
analysis, monitoring, rating and valuation models. issues, and in 2018 the Superintendency of Private
Pension Funds (PREVIC) and the National Mone-
3.470. Brazil’s financial sector is among the more tary Council (CMN) revised Resolution 3792, which
advanced in LAC in terms of incorporating social governs investment practices and disclosure by
and environmental principles. Brazilian financial pension schemes, to include ESG criteria.
regulation has long reflected such principles, and
the country’s public and private financial institu- 3.472. There are self-regulatory bodies and
tions are regional leaders in addressing social and private sector initiatives. Not only are regulators

122  he Amazon initiative is an opportunity to the country to finance a green economy. The IDB initiative has been already approved and is in the process
T
of being implemented, a t the request of the 8 Amazon countries, including Brazil.
123 See also Brazil’s National Green Growth Plan and the role of the Inter-ministerial Committee on Climate Change and Green Growth in the creation and
consolidation of green criteria, taking into consideration the characteristics of each region of Brazil and all its biomes. Brazil’s Green Monitor provi-
des an overview of current initiatives.
124 Davidson, K., Gunawan, N., Ambrosano, J., and Souza L (2020). “Green Infrastructure Investment Opportunities: Brazil 2019.” IDB. https://doi.
org/10.18235/0002638
125 www.faidnbmnnnibpcajpcglclefindmkaj/https://www.bcb.gov.br/content/about/legislation_norms_docs/BCB_Disclosure-GRSAC-Report.pdf

BID — Banco Interamericano de Desenvolvimento 199

 playing a relevant role in the international arena, 3.474.Thematic bond issuances by sovereig-
but also private financial institutions. The Brazilian ns and other public entities will be critical to
Federation of Banks (FEBRABAN ) supports the 126
support the green transition. Issuances by the
UN Environment Finance Initiative and more than public sector can enhance market liquidity and
50 institutions such as asset owners, investment mobilize local and international private sector
managers, and service providers are signatories investment. Public entities are increasingly
of the UN backed Principles of Responsible Invest- looking to the global debt market to finance
ments (PRI). The Brazilian insurance market, under climate mitigation and adaptation projects and
the leadership of the National Confederation of achieve their NDC targets. Brazil is the LAC re-
Insurance Companies (Confederação Nacional das gion’s largest green bond market, representing
Empresas de Seguros Gerais, Previdência Privada about 36% of all issuances, and it is the second
e Vida, Saúde Suplementar e Capitalização, CNseg) largest thematic bond market, with 27% of all
has committed to promote the Principles for Sus- issuances. However, issuances by the public
tainable Insurance (PSI). Finally, five of the major sector are marginal, representing just 8% and 4%
Brazilian banks have committed to the Equator of the green and thematic bond markets, respec-
Principles. Banco Bradesco and Itaú Unibanco were tively. Thus far, only two public entities, BDMG
among the earliest banks to sign up, followed by and BNDES, have issued thematic bonds. Private
Banco do Brasil, Banco Votorantim and CAIXA. This financial and non-financial corporates dominate
level of engagement by Brazilian banks reaffirms the market, accounting for 92% of green bonds
the strong concern and business risk for a better and 96% of thematic bonds. By contrast, govern-
management of socio-environmental risks. ments in other LAC countries are deeply involved
in the thematic bond market, with issuance sha-
3.473. Capital markets can promote sustaina- res ranging from 24% to 80%.
bility by offering thematic bond products, inclu-
ding green bonds, which are designed to mobi- 3.475. Private and public sector issuers in Brazil,
lize large amounts of private capital to finance especially sovereign, development banks, gover-
projects with positive social and environmental nment-back entities face several financial and
impacts. Latin America’s thematic bond market non-financial barriers to access capital markets.
has grown considerably since its inception in The main barriers issuers encounter are
2014, though the region accounts for just 4% of I. eligible green project pipeline identification,
the US$3 trillion global thematic bond market II. high-upfront costs for green issuances inclu-
and 2% of the US$2 trillion global green bond ding the cost for framework development and
market. Nevertheless, the rapid growth of this the cost for pre-issuance external reviews and
market segment has attracted additional scrutiny inter-agency coordination,
from investors, regulators, and standards agen- III. costs for transparent and standardized re-
cies. Issuances in local currency are on average porting,
Country Development Challenges - Brazil

five times smaller than hard-currency issuances IV. costs for external verification post-issuance,
denominated in Swiss francs, euros, yen, or US V. development of a coherent and credible ins-
dollars. In the local-currency market, the average titutional green strategy of the issuer in line
issuance volume is US$80 million127 for thematic with the climate and sustainability pledges
bonds and US$54 million for green bonds. Hard- of the government, and
-currency issuances account for less than 40% of VI. the uncertainty about the benefits of the is-
all issuances but 75% of issuances in the regional suance (e.g. the resulting premium128, or the
thematic and green-bond markets. diversification of the investor base).

126  EBRABAN represents 122 banks which accounts for 93% of shareholder’s equity and 97% of the total assets of the national banking system in Brazil
F
retrieved from https://www.febraban.org.br.
127 All issuance volumes are calculated as USD equivalents.
128 A lower cost of capital for the issuer is called greenium, meaning that a green bond issuance is cheaper for the issuer than a comparable plain vanilla issuance.

200
Addressing these barriers, will support the deve- place for the lifetime of the bond, and monito-
lopment of the market with evolving high-quali- ring systems must be institutionalized to guard
ty standards. against the turnover of ministry staff. Further
resources may be needed if the data reported by
3.476. A green bond framework is costly for pu- the issuer are verified externally.
blic issuers. Unlike traditional bonds, issuing a
green bond requires the establishment of a com- 3.478. The identification of green projects can
prehensive green bond framework defining whi- pose challenges. Despite a strong demand for
ch project categories are eligible to be financed green bonds from investors, the recurrent over-
and what outcomes will be reported. Creating subscription of recent issuances indicates that
this framework requires intra-institutional coor- the supply of such bonds is insufficient.129 A bin-
dination and a clear chain of responsibility. Im- ding constraint on the supply of green bonds is a
plicitly, the green bond framework and the issu- lack of identified, well-prepared, and bankable
ance of green bonds create new responsibilities green projects to be financed or refinanced. In-
for public regulators, and external support may vestment-grade ratings and access to the institu-
be required to overcome institutional capacity tional investor pool may also pose challenges, as
constraints and independently verify the sound- pension funds and other institutional investors
ness of the framework. Pre-issuance external re- often require investment-grade assets to buy into
views can be carried out according to the Green a bond in the hard-currency market. Issuers who
Bond Principles for a Second-Party Opinion and/ lack an investment-grade rating cannot access
or verified against the Climate Bonds Standard these investors, which tends to make their bonds
(CBS), depending on the eligible project cate- less attractive and reduce their price.
gories, the availability of verification standards
for particular sectors, and the perceived value 3.479. The institutional embeddedness of the
of such verification for investors. The upfront issuer’s environmental strategy can influence a
costs for developing and verifying a green bond green bond’s perceived credibility. Investors in-
framework often exceed the budget envelopes of creasingly want to ensure that their thematic bond
public agencies, which may also lack a full appre- investments are consistent with the government’s
ciation for the benefits of such a framework. long-term sustainability commitments. As public

Pillar 4 | Incorporating green growth into the country’s development model

Once established, the verified framework will issuers integrate their issuances into a coherent
remain valid for several years and can allow for sustainability strategy, they present their green
multiple issuances during that time. bonds as part of a wider plan to achieve overar-
ching environmental policy goals. The issuance
3.477. Transparent and standardized reporting of green bonds goes beyond financing individual
and external verification post-issuance can projects and becomes part of an integrated sustai-
entail significant costs. Assessing the use of nability strategy, generating greater engagement
bond proceeds and their environmental impacts between investors and issuers as their financial
requires appropriate institutional arrangements, and policy objectives align. Sovereign green bonds
collaboration, and monitoring and reporting sys- in particular offer a financial vehicle for achieving
tems. For example, during Chile’s first sovereign the NDCs, and explicitly linking the bond issuance
issuance of a green bond, the Ministry of Finance to the NDCs can signal policymakers’ commitment
and the Ministry of Environment collaboratively to the low-carbon transition, which helps reduce
reported on the amounts disbursed, the projects the cost of capital for green projects by attracting
financed, and the environmental impacts achie- new investors and mobilizing private capital for
ved. These reporting requirements remain in sustainable development.130

129 Climate Bonds Initiative. 2021. “Green Bond Pricing in the Primary Market: H1 2021”.
130 Climate Bonds Initiative. 2018. “Sovereign Green Bonds Briefing”.

BID — Banco Interamericano de Desenvolvimento 201

 3.480. To reduce the risk of greenwashing and investors, protect private investors from green
promote transparency, several national and in- washing, help companies to plan the transition,
ternational authorities have provided clear de- mitigate market fragmentation and help shift
finitions for green bond projects. The European investments towards where they are most nee-
Union has led these efforts though the establish- ded. 134 However, emerging market issuers face
ment of the European Green Bond Standard (EU challenges when it comes to adhering to these
GBS), a classification system for environmentally standards: the EU GBS is more sophisticated, and
sustainable economic activities based on the emerging markets might not have the sectoral
EU Taxonomy for Sustainable Activities. The data density for instance for baselines and ben-
definitions presented in the EU GBS are used by chmarks yet to adhere to the EU GBS. Therefore,
firms, investors, and policymakers, where they as country develop their green bond taxonomies,
provide a common basis for investment plan- these should reflect county-specific challenges
ning and prioritization, investor protection, and while trying to remain consistent with interna-
monitoring and reporting.131 However, emergin- tional guidelines and standards. To facilitate
g-market issuers may have difficulty adhering to common understanding of sustainable activities
these standards, as the EU GBS has sophisticated across markets, the EU launched its Internatio-
data requirements for establishing baselines and nal Platform on Sustainable Finance (IPSF), an
benchmarks. In contexts where international initiative to align taxonomies through dialogue
standards cannot be applied directly, national and coordination on development of taxono-
definitions should reflect country-specific chal- mies, while recognizing participating countries’
lenges while retaining as much consistency with particular context.135
international guidelines as possible.132 To faci-
litate a common understanding of sustainable Policy Recommendations
activities across markets, the EU launched the
International Platform on Sustainable Finance 3.482. Promote the green financing. The sector
(IPSF), which provides a platform for dialogue should incorporate the socio-environmental
and coordination on the development of stan- analysis policies and processes to all layers of
dards and definitions across a wide range of di- financing, taking into consideration the type of
verse contexts. 133
operation and client. Monitoring the effective-
ness of institutions’ socio-environmental policies
3.481. Evolving green finance taxonomies. To and processes. Improving of tools that facilitate
overcome the risk of greenwashing and promote the process of socio-environmental risk analy-
transparency, several national and international sis. Development of a qualitative rating of ESG
taxonomies provide green bond project defini- aspects that are analyzed in parallel with econo-
tions. For instance, the European Union has been mic-financial aspects and that can be applied by
leading such efforts though the establishment managers. Incorporation of stock prices through
Country Development Challenges - Brazil

of its European Green Bond Standard (EU GBS), insertion into a valuation model. Development
a classification system for environmentally of probability scenarios, in which analyses of
sustainable economic activities based on the EU share price sensitivity to ESG aspects are incor-
Taxonomy for Sustainable Activities. The EU GBS porated into the recommendations of analysts
provides definitions on environmentally sus- for management. Adoption of the Corporate Sus-
tainable activities to companies, investors, and tainability Index (CSI) portfolio, as a benchmark
policy makers, it is expected to create security for for responsible investments in order to define

131 OECD. 2021. “Scaling up Green, Social, Sustainability and Sustainability-linked Bond Issuances in Developing Countries”
132 The IDB Green Bond Transparency Platform is an initiative to bring transparency to the market.
133 Ibid.
134 OECD. 2021. “Scaling up Green, Social, Sustainability and Sustainability-linked Bond Issuances in Developing Countries”
135 Ibid.

202
niche investment products or as a methodologi- and practices must be clearly laid out yet suffi-
cal basis for analyzing companies in the portfolio. ciently adaptable to meet the unique needs of de-
Increase the importance of socio-environmental veloping countries and emerging markets. In an
risk analysis in pension funds through precise absence of a global taxonomy, the country should
mandates with active management generating issue its own taxonomy.
demand within the industry for integration of
socio-environmental risks. Build tools that fa- 3.485. Analyze the impact of fiscal incentives.
cilitate the process of socio-environmental risk Policymakers have a range of fiscal policy options
analysis. Fund managers face a number of chal- for channeling investment toward the green transi-
lenges—including data gaps, risk of corporate tion, both on the revenue and expenditure sides of
greenwashing, multiple disclosure standards, the budget. For example, climate-oriented funds in
and a lack of globally accepted taxonomies—in retirement plans or life insurance products could be
implementing investment strategies that support accorded favorable tax treatment (IMF,2021).
the transition (IMF,2021).
3.486. Establish a pipeline of sustainable pro-
3.483. Develop technical assistance programs jects. Brazil must develop a clearly defined pipe-
and appropriate regulations. Technical assistance line of environmentally responsible investment
is necessary to implement successful investment opportunities consistent with the government’s
projects and manage operational risks, and the use commitment to low-carbon development. In line
of blended financing could help foster sustainable with their institutional mandates, national and
development. 136
Regulatory reforms are also ne- sub-national development banks in Brazil can pro-
cessary in Brazil, which still lacks thematic awards vide a pipeline of green projects.138 Furthermore,
and other specific incentives for green lending.137 the authorities can implement policies to foster an
enabling environment for green-project develop-
3.484. Build a global climate-information archi- ment at scale according to international standards.
tecture. To facilitate assessments of transition-
-related risks and opportunities in the corporate 3.487. Use credit-enhancement instruments,
sector by portfolio managers, investors, and fi- such as partial guarantees, to develop a multi-
nancial authorities, and to prevent greenwashing -tranche sovereign green bond. Tranches that

Pillar 4 | Incorporating green growth into the country’s development model

and foster climate finance markets, policymakers benefit from a partial guarantee have higher cre-
should urgently seek consensus on a global cli- dit ratings and can be made accessible to a wider
mate-information architecture (IMF, 2021). Such range of investors. The benefit of the guarantee is
an architecture should include a harmonized and that they need not be disbursed if no default event
consistent set of climate-related disclosure stan- occurs. The guarantee carries an annual fee, whi-
dards, coupled with high-quality, reliable, and ch the issuer pays to the guaranteeing institution,
comparable data on climate-related indicators, as well as a one-time set-up cost for financial and
including forward-looking metrics underpinned legal structuring. The benefits of the guaran-
by verification, audits, and other mechanisms. tee—including higher demand, potential lower
Globally agreed-upon principles for sustainable interest rate costs, and inclusion in investment-
financing, along with standard definitions and -grade indexes and in the investment portfolios of
best practices, can help align investment flows institutional investors—must be balanced against
with climate goals. These principles, definitions, these initial and recurring costs.139

136 FGV (2018).

137 IFC and Sustainable Banking Network, 2016, “Greening the Banking System – Experiences from the Sustainable Banking Network (SBN) (Input paper
for the G20 Green Finance Study Group)”
138 The joint Hub Latam Initiative https://latamprojectshub.org/ by BNDES, Banobras, Alide, and IDB implements a consistent and comparable fra-
mework for information on the financial, institutional, social, environmental, and climate sustainability of infrastructure projects.
139 Providing proof of concept, Ecuador issued the world’s first Sovereign Social Bond in 2020. This bond was backed by a guarantee from the IDB and
attracted substantial international investor interest. The issuance was for US$400 million to finance Ecuador’s social housing program ‘Casa para todos’
(a house for all’). The bond benefited from a US$300 million partial credit guarantee. See: IDB. 2020. “5 Key Point of Ecuador’s Sovereign Social Bonds”.

BID — Banco Interamericano de Desenvolvimento 203

 Country Development Challenges - Brazil

204
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Annex

References

BID — Banco Interamericano de Desenvolvimento 227

 Annex 1 - The Use of Parsimonious by asking what factors keeps growth weak: inade-
Prioritization Methodologies quate returns to investment, inadequate private
Prioritizing development challenges requires a returns appropriability, or inadequate access to
combination of quantitative and qualitative assess- finance. In the Brazilian case, this methodology
ments about the country. Methodologies designed indicates that the low level of domestic savings cons-
to shed light on the relative importance of the titutes a binding constraint. Hausmann et al. (2005)
various bottlenecks can contribute to this task, but associate the problem with restrictions on the access
they cannot replace broader assessments based on to external finance. They state that improving the ef-
multiple analytical sources and even on subjective ficiency of public spending could be a solution, since
judgement. Ultimately, prioritization of develop- it would allow for higher public savings and a lower
ment bottlenecks amounts to the construction of tax burden. Hausmann (2008) further points out that
an evidence-based narrative for policy action in domestic savings are the binding constraint on grow-
which the proposed measures are structured arou- th and argues that the source of the problem is fiscal.
Country Development Challenges - Brazil

nd a few key broad areas of interventions. These

areas, in turn, branch out to specific policies that Acevedo et. al. (2019) extends Borenzsztein et. al.
reinforce each other in a logically consistent plan (2014) exploiting cross country sectoral informa-
to promote development effectively. This docu- tion to identify econometrically the development
ment performs a battery of parsimonious priori- gaps of a given country, focusing on the potential
tization methodologies available in the literature contribution of the private sector to address the
as a step in the construction of the diagnostics and development gaps. In the case of Brazil, the metho-
narrative for policy action. dology indicates that the most severe gaps are in
institutions, education and tourism. However, the-
Hausmann et. al. (2005) growth diagnostics appro- re are also negative gaps in agribusiness, transport
ach aims at identifying the most binding constraints and financial inclusion.

228
 FIGURE A1 – Development gaps (Acevedo et, al. (2019)

60

40

20

-20

-40

-60

-80
Institutions

Education

Tourism

Agribusiness

Transport

SMEs & Financial

Inclusion

Sanitation

Health

Financial Institutions
& Capital Markets

Climate Change &

Environment

Gender

Telecommunications

Water

Energy

Manufacture
Source: IDB Invest

Izquierdo et. al. (2016) provides another prioriti- focus so that Brazil could transition to the next
zation methodology by classifying the countries in cluster. The exercise also shows that transitioning
clusters according to their income level. Then the towards a higher income cluster would require
authors evaluate and compare the impact that clo- very large investments or policy efforts; in order
sing development gaps in different areas would have to reach a cluster transition probability of 75%, in-
on the probability of transitioning towards a higher frastructure needs to increase by 1.75 standard de-
income cluster. The methodology tries to find which viations while the capital markets and health indi-
reforms would be necessary to a country jump for cators require an increase of 1 standard deviation.

TABLE A.1. Priorities for productivity and Income (PPI) – Brazil

Sector Main Priorities

Infrastructure 1st Priority

Capital Markets 2nd Priority

Health 3rd priority

a highest cluster of development and analyze the The results of the methodologies taken collectively
interactions among different determinants of pro- inform the narrative for development challenges
ductivity. Differently than other methodologies, the put forth in this document. They also provide direct
methodology analyzes the impact of the sector on the support for some of its elements. For example, the
probability of jumping for a higher level of income. importance of infrastructure and social issues like
In this sense, the importance of the sector is not ne- health and education are covered by pillars 1, 2, and
Annex

cessarily linked to the size of the gap in the sector. 4 while the importance of a fiscally sound and effi-
cient State is also covered by pillar 1. Notwithstan-
The results for Brazil suggest that infrastructure, ding this, there are additional elements not flagged
capital markets, and health are the main areas to by the methodologies which are included in the dis-

BID — Banco Interamericano de Desenvolvimento 229

 cussion of the pillars as they are also deemed criti- inclusive growth. Yet, during the CDC process, it
cal development bottlenecks. In addition, there is a was observed that the IDB group analytical agen-
whole pillar (pillar 3) which focuses on bottlenecks da presents some knowledge gaps. These are key
related to the digital transformation, which with the areas across the pillars that lack strong evidence
exception of the challenge on financial inclusion is to implement effective public policies. Providing
not well captured by the methodologies. knowledge is key for public policy-takers, the
private sector and civil society to implement so-
Annex 2 - Knowledge Gaps lutions to the country’s critical problems, and to
The CDC brings a discussion about the challenges foster public debate and achieve the sustainable
and gives policy recommendations for the cou- development goals. The table below shows major
ntry based on strong evidence displayed in the themes that will shape the analytical agenda in
economic literature. The pillars are discussed so the coming years. This agenda will assist the cou-
that the country can achieve a sustainable and ntry to reach its development goals.

TABLE A.2. Knowledge Gaps

Pillar 1. Promoting a Resilient Recovery

The geopolitical The objective of the research would be to determine the roles Brazil could
context and plausibly assume within the global as well as the regional (LAC) context and
Brazil’s economic assess leadership potentials for Brazil in the region through its natural resource’s
integration potential, via productivity improvements or via technological leadership.

The main goal would be to determine the various ways in which Brazil may change its
Federalism and federalism and incentive more cooperation. The study should analyze models of a more
local governments cooperative type of federation across the world and focus on building a tax reform
that will boost the capacity of local governments to finance effective public policies.

The study would analyze the main challenges for monetary and fiscal policy in Brazil.
Fiscal Policy The analysis should focus especially on fiscal rules and improvements in the coordination
between fiscal and monetary policies to build a sustainable dynamic for public debt.

Pillar 2. Adopting a new social agenda for inclusive growth

The study would analyze the roles youth could possibly play in Brazil for the
coming years. Determine the various ways in which an aging society, the middle
class, and social services could impact pensions and public spending in Brazil.
Demographic and
The text would verify the main trends of demographic changes for Brazil in the
societal changes
future, what policies have been used in other countries to adapt to an aging
society and how could aging affect public spending in the coming years and the
different roles for civil society and the middle class in the future of Brazil.
Country Development Challenges - Brazil

Pillar 3. Fostering the digital Transformation for Development

The study would assess what might be future contexts for financial inclusion in Brazil. The
main goal would be to identify plausible fintech opportunities for the country. The study
Digitalization would analyze how are other countries innovating on new business, especially industry
4.0 and what Brazil can learn and apply from them. In addition, Brazil should explore
the use of technology for improving social policies especially education and health.

Pillar 4. Incorporating green growth into the country’s development model

The Amazon, Brazil needs a deep analysis about the Amazonian deforestation and its impact on
deforestation,
agriculture, food security, water security and energy security (electricity generation). In
renewable
addition, there is no analysis about the potential of carbon markets for Brazil. A deeper
resources, and
Climate Finance study about the opportunities in energy transition (e.g., green hydrogen) is needed.

230
Country Development Challenges - Brazil

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