How can Brazil grow?

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The key anchor has been poor productivity, according to McKinsey. Several entrenched macroeconomic and structural barriers need to be tackled for this to change. For one, the high levels of informality:

The most important barrier—responsible for some 45 percent of the nonstructural gap—is Brazil's huge informal economy, which represents about 40 percent of the gross national income. By avoiding taxes, ignoring quality and safety regulations, or infringing on copyrights, "gray-market" companies gain cost advantages that allow them to compete successfully against more efficient, law-abiding businesses. Honest companies lose profits and market share, and thus make less money to invest in technology and other productivity-enhancing measures.

And the excessive red-tape:

Regulations that limit productivity—such as labor and tax laws, price controls, product regulations, trade barriers, and subsidies—are equally problematic. Constraints on laying off workers (which add to employment costs) and restrictions on hiring temporary workers prevent businesses from adjusting their workforce to meet fluctuations in demand.

The Doing Business report ranks Brazil 119 out 155 in terms of business regulations. Also see this note on informality in Brazil.

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