A Neoclassical Analysis of the Brazilian "Lost-Decades"

After the World War II, Brazil was one of the fastest growing economies in the world, growing at an average rate of more than 7% from 1950 to 1980. While Brazilian per capita GDP was roughly 15% of the U.S. per capita GDP in 1950, it achieved 30% in 1980. However, since then, Brazil has been growing at small or even negative rates, and in 1998 its per capita GDP was back to 20% of the U.S.. This paper investigates possible reasons for what is usually called the Brazilian "lost decades", based on an accounting procedure applied to a simple neoclassical model as in Chari, Kehoe and McGrattan (2006). After decomposing four types of shocks (productivity, labor, capital and income accounting), each of them is fed back into the model and the predicted and actual data are compared. It is shown that, for the case of the Brazilian "lost decades", productivity shocks seem to be the most important factor in explaining the behavior of output and consumption during the eighties, and labor shocks are the main responsible for the behavior of the variables of interest during the nineties. Increased barriers to competition and the changes imposed by the 1988 Constitution in labor markets are possible explanations for the results.