On November 28, 2025, Brazil celebrated an important event when unemployment dropped to 5.4%, which was the lowest percentage ever recorded. Newly employed people in the labor market are receiving an average salary rise of 7%, and total payroll earnings are "top of the chart," as per one source. Brazil, in terms of the economy, is thought to be in the middle of a boom. But, on the other hand, what if this celebration is just the beginning of a heavy hangover from the past? Economist Paulo Gala says that the country may be hastily approaching a structural wall, not due to crisis or bad policies but owing to the very limits of Brazil's economic model.
A Boom Built on Quantity, Not Productivity
Gala maintain that the Brazilian economy is not growing due to innovative methods or higher efficiency, but merely as a result of a higher number of workers being brought under the umbrella of the labor market. More people are employed in the economy, not productivity increases of the workers or firms. The downside? This model has a shelf life, and Brazil is just now reaching that point. The signs point towards a crucial moment: businesses are not firing employees; rather, personnel are leaving to accept better-paying positions. The creation of payroll jobs is decelerating not because of the unavailability of job positions, but rather because there are no workers willing to take them. Brazil has ultimately exhausted the demographic potential for this growth model.
The Demographic Wall
Numerous nations aspire to arrive at a situation where there is a shortage of labor. However, this "good problem" turns out to be perilous if productivity does not increase with the workforce. A case in point is South Korea, which relied on full employment as a launch pad for a huge tech upgrade. Brazil, however, attained full employment without changing its low-complexity economic structure; what Gala refers to as a 1.0-liter engine trying to compete in a Formula 1 race.Rather than boosting the engine, Brazil just pressed the accelerator more vigorously.
A Fragile 2026 Ahead
The anticipations for 2026 indicate an even more rapid momentum. Alterations of income tax brackets along with election-year spending will increase the disposable income of consumers. The economy could still surpass analysts' expectations with greater GDP growth.Nicolas Kaldor’s Theory: Brazil’s Structural Trap
The situation described is similar to a theory suggested by British-Hungarian economist Nicholas Kaldor a long time ago. He was of the opinion that a country's overall economic growth in the long run is largely determined by the structure of its output, particularly its ability to produce increasing returns to scale, which is the capacity for efficiency improvements as the production output rises. High-tech and modern manufacturing industries are similar to software applications in that they have the potential for huge market expansion — millions of users instantaneously with almost no extra cost. On the other hand, low-skilled service sectors are like barbershops in that if one wants to double the output of such a service, one would need to double the manpower and the physical capacity as well.
The economy of Brazil continues to be in the state of "barbershop mode." A cycle of structural inflation is triggered whenever the economy reaches full employment and salary increases take place at a faster rate than productivity.The ultimate effect of the labor cost increase along with the unchanged efficiency of the company is that the company must raise prices, which in turn will lead to a decrease in the real income gains that workers have just experienced.
Why Monetary Policy Isn’t Enough
Increasing the interest rates would lead to a decrease in demand but would not resolve the issue of a structural productivity gap. Kaldor cautioned that either way using monetary policy alone would only cure the symptom and not the disease. Investment is disallowed by high rates and investment is exactly what Brazil requires to upgrade its industrial base.
The Only Path Out: A Productive Transformation
Brazil has to make a complete overhaul of its economic productive structure according to sources that are influenced by Kaldor's framework. This transformation will include but not limited to::- Merging high-complexity industrial sectors – More than just the number of factories; factories that manufacture advanced products.
- Creating technological abilities at home – Moving from being importers or owning plants to being developers of technology.
- Encouraging the confluence of industries with increasing returns to scale – The sectors where the rise in production is accompanied by an increase in efficiency.
- Setting up a nationwide system for innovation and skill transfer
– Persistent funding for R&D, training, and progressive industrial policy.
Embraer: A Global Aerospace Power Built on Public Resources
Embraer is one of the most prominent cases in this regard. The major airplane brazilian manufacturer was situated next to the Technological Institute of Aeronautics (ITA) to start with, a research institution that received only public funds and later on grew as a state-owned enterprise. It was only after the development of Embraer as a company was marked by cutting-edge technology, a creation of a strong supplier base, and the company's integration into the international competitive environment that the privatization process initiated.
The government, through its procurement, is still today one of the company's major support sources, like public support in the US.
The insiders responsible for Embraer’s privatization contend that the deal was made with the aim of maintaining the country’s strategic control even though the company turned into a private global leader in aerospace. The process of privatization, as stated, was equipped with tight safeguards: control by foreigners was not allowed, no single investor could occupy more than a third of the shares, and the Brazilian government kept a golden share, a special class of stocks that is limited to one and has the power to veto decisions concerning national security and strategic operations. These measures were actually enforced to keep the military part of Embraer under state control and at the same time, the company was allowed to expand to the international market competitively. When, during the Bolsonaro administration, there was one more attempt to get around these regulations and shift control to Boeing, it resulted in lawsuits, regulatory complaints, and political opposition. The agreement was ultimately scrapped and Embraer stayed an independent Brazilian company —proof, according to detractors, that privatization does not automatically endanger national interests when adequate institutional safeguards are in place. In any case, and despite attempts to transfer a company that cost billions of reais of Brazilian taxpayers to an American company during the Bolsonaro administration, the case of Embraer proves that Brazil is capable of succeeding if it creates a whole productive ecosystem rather than just a few individual companies.
Embrapa: The Public Engine Behind Brazil’s Agribusiness Boom
The Brazilian agribusiness sector, which can be likened to a giant, has its glorious rise traced back to Embrapa, the public research institution, which laid the foundations of agricultural science and technology through heavy investments. Private sector, indeed, would not have ventured into the area of research marked by longevity and high risk. Public financing took the opportunity, thereby changing the scenario and making the Brazilian agriculture a world leader.How Strategic Public Investment and Industrial Policy Can Boost Brazil’s Global Competitiveness
Regardless of political stories that imply the opposite, big economies such as the US are totally dependent on public spending to stimulate new product development and keep the industry competitive. Experts assert that Government procurement plays a crucial role in the U.S economy and attracts trillions of dollars, which is a practice generally connected with state-led or "socialist" development models even though the American rhetoric is completely opposite. The rationale is straightforward: when an investor establishes a potentially successful firm, the state automatically becomes a purchaser of the entire output, promising to buy it for many years. This way of securing the area for a long time enables the companies to expand their inventions and become contenders on the international market.
Brazil is currently in a complex situation: a temporary boom mixed with a long-term fragility. The pitch of the country's growth now comprises a limited resource (available laborers) rather than an unlimited one: knowledge and productivity.
If there are no fundamental changes made to the economy, then wages will continue to rise in contrast with productivity that is not growing, thus, a cycle of inflation and stagnation will always persist. The formula for promoting growth that is sustainable is very clear but difficult to implement. It demands vision, consistency, and a commitment of several decades. For this, the following is necessary::
- Increasing returns to scale activities (sectors where more production results in greater efficiency);
- Creating a country-wide system for innovation and technical learning (making huge outlays in R&D, technical training, and supportive industrial policy).
