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Brazil’s demographic conundrum
August 26, 2013, 6:14 am

The recently released final statistics of the 2010 Census show that Brazil has made considerable headway in many areas over the last decade. For example, there has been a significant improvement in the distribution of personal and regional income, a drop in infant mortality and illiteracy rates, as well as higher access to public services.

The Census also confirmed that Brazil is undergoing a substantial demographic change.

The dipping fertility graph

Forecasts indicate that Brazil’s fertility rate will be among the lowest in the world by the end of this decade [Getty Images]

Forecasts indicate that Brazil’s fertility rate will be among the lowest in the world by the end of this decade [Getty Images]

The average geometric rate for annual growth in the population went from 1.64 per cent, registered in the 1990 Census, to 1.17 per cent, in the latest survey. The main factor behind this decrease was the change in fertility rate. In 1990, fertility rate was at 2.38 children per woman; however, in 2010, this rate was a mere 1.86, well below the population replacement rate of 2.1, and below the rate in several developed countries.

The change in Brazil’s fertility rate draws attention due not only to its similarity with typical rates in wealthy countries, but also to the swiftness of the fall, which dropped from four to two children per woman in a mere 25 years – in wealthy countries, such a change would require 60 years or more. Forecasts indicate that Brazil’s fertility rate will be among the lowest in the world by the end of this decade.

Owing to the low birth rate and the increase in life expectancy, the age-groups of the population are changing rapidly. In 1990, some 35 per cent of the total population was in the 0-to-14-year-old age group; in 2010, this percentage dropped to 24 per cent. In 2025, that number is expected to be less than 17 per cent. Meanwhile, the over-60 group, which was at 7.0 per cent in 1990, grew to 11 per cent in 2010, and, before 2025, it is expected to be larger than the young population. The rapid growth rate of the elderly is expected to be accompanied by the drop in the total population by the end of the 2030s.

The Census reports that Brazil is on the fast track to having a demographic standard that is typical in wealthy countries, even though it is a country in which the per-capita income is considered low by comparison. And hence, Brazil, in the near future, is expected to face its biggest challenge in the struggle to achieve prosperity and social progress, which entails discovering the means to encouraging the per-capita income to grow while it is approaching the end of the demographic dividend, due by 2023.

"Social security is already operating with high and increasing deficits even before the country has truly aged" [Getty Images]

“Social security is already operating with high and increasing deficits even before the country has truly aged” [Getty Images]

The costs of ageing

Sluggish growth in the population reduces the increase in demand for basic goods and services, creating opportunities to improve standards of living and preserving the environment. Nevertheless, on the other hand, it also bears some important challenges for economic growth.

The first is fiscal, because the growth in the elderly population means an increase in retirement and pension payouts, as well as spending on health, which, in turn, puts pressure on taxes and the government’s fiscal capacity to invest. One concern is that the social security is already operating with high and increasing deficits even before the country has truly aged. The combination of a low average retirement age in terms of tax contribution, which is a mere 54.4 years for men and 51.3 years for women, and a growing life expectancy, complicates the fiscal equation even more.

The second challenge is savings, which are low and need to increase. The problem is that the aging population tends to be accompanied by a slow increase in savings, because there is the tendency for people to save more during their active age and less during the inactive age.

The rising lack of labor is expected to affect the potential production output [Getty Images]

The rising lack of labour is expected to affect the potential production output [Getty Images]

The third challenge is the potential output. Since the beginning of the 2000s, there has been a rapid slowdown in the growth rate of the working age population. While the number of people entering the workforce is still on the rise, such growth has come to fade. Projections show that this number will grow until 2023 and will subsequently slowdown rapidly. This phenomenon is one of the causes of the current lack of labor in Brazil. In fact, the lack of labor, even if poorly qualified, is already a reality and has contributed to postponing or even canceling investments. This also helps explain the significant increase in real wages in the private sector and the fall in unemployment over the last years. As growth in the Brazilian economy is historically based on accumulation of production factors and not on increases in total factor productivity, the rising lack of labor is expected to affect the potential output.

The fourth challenge is related to competitiveness. The increase in labor costs has been accompanied by its growing participation in total costs in practically all economic sectors. The average cost in US dollars for an hour of work in the manufacturing sector has grown significantly, and is now comparable to that of countries like Taiwan and Poland, for example. Increasing work costs help explain the loss in competitiveness in some manufacturing industries and the growing role of the commodities sector in the Brazilian economy.

For Brazil to grow sustainably, it will have to respond and adapt to the demographic changes. The response is expected to be in the form of a substantial increase in labor productivity, which, in turn, requires more investments in technology, vocational training, infrastructure, and better education, as well as helping boost the productivity of micro and small companies, where most workers are employed. Adaptation should be made through institutional reforms aimed at reducing microeconomic distortions, increasing public and private savings, modernizing the labor and social security legislations, and adjusting them to the demographic and economic reality of the country.

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

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