How to increase productivity in Brazil?

This article was originally published in Ceteris Paribus, in Portuguese, on October 4, 2023.

As we know, public services in Brazil leave much to be desired. Despite having a high tax burden for an emerging country, the public sector in Brazil is unable to provide quality services. To make matters worse, the high level of government spending exacerbates a perverse macroeconomic imbalance of inflation and high interest rates.

Given this scenario, it is past time for the country to adopt a modernization agenda for the Brazilian State in order to achieve efficiency gains. We are one of the least productive countries in the world. Over the last 40 years, the average productivity growth rate of the Brazilian worker has been one of the lowest in the world.

One way to provide productivity gains, in addition to reforming our education policies, involves reformulating and adopting good incentives in public services — which, besides spending an absurd amount on payroll, drag down our productivity statistics.

According to the World Bank, Brazil spends about 13.35% of its GDP on active public sector personnel. We have a high primary expenditure (39.2% of GDP), a number well above the levels seen in the emerging world. Among the 64 nations for which the IMF releases this data, Brazil ranks sixth highest for this type of burden — close to Norway and Iceland, and ahead of Sweden. Colombia, Chile, and Peru, with realities closer to Brazil’s, keep their personnel expenditures around 6 percentage points of GDP.

Besides being double what the country invests in education, personnel spending in Brazil is 3.5 times the amount the country spends on healthcare (3.9% of GDP). Not to mention that the public budget is increasingly inflexible: 93% of budgetary expenses are earmarked, with 65% going towards salaries and pensions.

As if that weren’t enough, we also have the wage premium, which compares public and private sector workers with the same level of education, gender, skin color, age, and sector of activity. Even taking all these variables into account, a federal public employee earns almost 100% more than their equally qualified private sector counterparts.

Besides having an expensive public machinery, the existing incentives in the public service are flawed, negatively impacting civil servant productivity and delivering less efficient services. Many federal civil servants enter public service with high salaries, reaching the top of their careers in a short time. Progression occurs based on length of service or obtaining certification — and not based on delivering results.

We need an Administrative Reform that, in addition to bringing greater rationality to personnel spending, creates better incentives for civil servants, helping to unlock the low productivity of the public sector and improving efficiency gains overall.