Except for the Simples size-based tax exemptions and the R&D incentives, the remaining incentives have a sectoral focus and thereby generate distortions across sectors and activities. In addition, Simples also provides incentives to smaller firms, which can create threshold effects in preventing formal firm growth. The bulk of the implicit subsidies created by incentives go to firms in trade and services, and manufacturing industries. These differences across sectors erode a level playing field by favoring some firms and sectors over others.

# **_Additional government interventions: Product market regulations and competition law enforcement_**

Reducing cost of doing business and improving the adequacy of infrastructure are not enough to foster competition in markets and ensure domestic market integration. Effective antitrust enforcement and pro-competition regulation are also important. Even when transport and transaction costs are lower, or when costs of paying taxes, getting electricity and dealing with construction permits are reduced, there may be still firms exercising significant market power even in geographically large and integrated markets, for example, if they agree to collude on prices, or if there is a lack of regulation that prevents the abuse of dominance by firms that supply services in segments with features of a natural monopoly. Effective antitrust enforcement and procompetition regulation minimize these risks and are key pillars of a holistic competition policy.<sup>37</sup> In this turn, while this paper discusses specific policies that can enhance healthy market dynamics and competition, it does not include an assessment of Brazil’s competition policy implementation itself.<sup>38</sup> Available data on product market regulation reveal that government interventions in domestic markets have not been conducive to competition. Competition enhances productivity by improving allocative efficiency, enhancing productive efficiency, and boosting innovation. Aghion, Akcigit and Howitt (2014) also provide a compelling framework linking market competition to productivity growth through creative destruction, while Conway et al (2006) and Alesina et al. (2005) trace the positive impact of pro-competition product market regulation on productivity, and Barone and Cingano (2011) find empirical evidence that pro-competition reforms in input sectors benefit productivity of the overall economy. Furthermore, the introduction of anti-cartel policy is also related to higher labor productivity growth. Symeonidis (2008) records a 20 to 30 p.p. lower labor productivity growth in industries with cartels than in industries without cartels. Some government interventions unduly inhibit firm’s ability or incentives to compete. The OECD Product Market Regulation (PMR) indicator measures the degree to which policies or regulatory measures promote or inhibit competition in areas of the product market where competition is viable. PMR data for Brazil in 2013 suggests that policies and regulations in key sectors are less conducive to competition than in comparator countries.

While other BRICS countries have promoted reforms over the last decade, the overall restrictiveness of product market regulation in Brazil remained unchanged between 2008 and 2013. The general degree of restrictiveness of product market regulations in Brazil has not changed since between 2008 and 2013 and compares less favorably to other economies which on average have moved towards a more pro-competitive regulatory framework (Figure 24). In fact, while others

> 37 _Competition policy_ encompasses a set of policies and laws that ensure competition in the marketplace is not restricted in such a way as to reduce economic welfare (Motta, 2004).

> 38 For more details on what competition policy encompasses, see Kitzmueller and Licetti (2012).

21