It is high time for Brazil to seize its future. The world’s fifth-most-populous nation needs a long-term vision for its economy, as well as a commitment at all levels of government to implement measures that could lead to a dramatic increase in productivity. We believe that such measures could in time lift the country’s GDP-per-capita growth from less than 1 percent a year to a sustained rate of around 7 percent.

Brazil has no time to lose. Its economic growth has stalled during the past 25 years, in stark contrast to the strong recent performance of the other three “BRIC” countries: Russia, India, and China. While macroeconomic conditions have improved substantially in Brazil during the past few years, they will not on their own be sufficient to tackle the root cause of the country’s lackluster economic performance—the slow increase in labor productivity, which is the primary determinant of national wealth. In 2004 Brazil’s productivity per hour worked was only 18 percent of the US level.

When we mapped barriers to the growth of productivity in key sectors of the economy,¹ we found that structural barriers create only about one-third of Brazil’s gap with the United States. The first structural barrier is Brazil’s modest per capita income, which favors lower-value-added products and services. The second is the low cost of labor, which is cheaper than capital and therefore discourages the use of machinery that would improve productivity. These structural limitations will fade if Brazil can achieve strong and sustained economic growth. But for this to happen, the government must tackle four nonstructural obstacles, which are responsible for the remaining two-thirds of the productivity gap: a huge informal economy (and inappropriate regulations that make it costly for companies to enter the formal economy), macroeconomic instability, inefficient public services, and an inadequate infrastructure (exhibit).

To encourage a public debate among Brazil’s leaders on how to boost economic development, we now turn our attention from analyzing the barriers to proposing ways to overcome them. The research of the McKinsey Global Institute (MGI) on productivity in 17 countries shows that appropriate social and economic policies can tear down nonstructural barriers to productivity over time. A feasible program that builds on international experience but is tailored to Brazil’s specific challenges should include five important sets of measures.

Our first priority deals with the informal economy, or gray market, the biggest drag on Brazil’s productivity because it stands in the way of fair competition, particularly in domestic business sectors. A second is to reduce government expenditures and so create more stable macroeconomic conditions, which are important for the international competitiveness of the economy as a whole. Such conditions would also make it possible to cut taxes and thereby decrease incentives for companies to operate informally. A third priority is to improve the efficiency of Brazil’s ill-functioning judicial system and to set a good example for reforming health, education, and other public services. A fourth priority is boosting productive infrastructure investments, which are far lower in Brazil than in many comparable developing economies.² (Four accompanying articles describe measures to address these priorities.) Finally, to implement the measures effectively, it is absolutely essential for any development plan to include a fifth set of measures, with two overarching elements.

The first of these elements is creating a firm commitment to a long-term vision and targets—a commitment embraced by politicians from different parties; civil servants in the federal, state, and municipal governments; and private-sector business leaders. We propose, for instance, that Brazil should embrace a vision to cut the informal economy in half—to 20 percent of GDP, from 40 percent—by 2018. We have chosen 12-year targets because the priority measures are politically, socially, and legally complex; time will be needed to implement them and achieve results. Moreover, 12 years is equal to three presidential terms, which would put pressure on the government and the opposition to accept a coordinated plan underpinned by a commitment to comply with previously agreed-upon contracts, norms, and regulations, so that initiatives continue even if governments change.

As for the second overarching element, it will be necessary to coordinate the program and to assign clear responsibility for its implementation to relevant ministries and agencies. We propose the establishment of a central coordinating body, similar to the Prime Minister’s Delivery Unit, which works closely with government ministries to support and monitor the reform of public services in the United Kingdom. The unit, whose leaders are appointed by the prime minister, has served as a model for similar organizations in Australia and Canada.

A Brazilian equivalent could be configured in many different ways. The most important thing, perhaps, is to provide for the institutional continuity of reform regardless of the dominant political party at any given time. Therefore, the senior people should be highly regarded across sectors and come from a range of political and other backgrounds. The unit could report directly to the president of Brazil and be advised by independent academics, international experts, and prominent businesspeople. It could coordinate the work of special liaison subunits tackling the areas singled out for reform; a subunit battling informality, for instance, might support efforts across business sectors, ministries, and states, as well as the legislative and judicial branches. Finally, it could propose targets, define how to track progress, monitor results, and provide methodologies and solutions to ministries and agencies responsible for implementing specific measures.

Overcoming the obstacles to increased productivity in Brazil will require political will and endurance. But if Brazil takes the right steps now, this land of promise can finally begin to fulfill its potential for growth and prosperity.