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Size and Importance of Tertiary Activities and Informality in the Brazilian Economy

Tertiary activities are becoming more and more important all over the world, as their share in total income increases with the level of economic conditions within countries, as Figure 1 exhibits. A comparison with other countries in the same range of GDP per capita values indicates that Brazil occupies an average position, but improved economic performance, as the GDP growth rates in recent years indicate, will tend to increase its importance in the economy. It is interesting to point out that Brazil and Argentina are very close in the importance of tertiary activities in their respective economies. Its present importance and its prospects for expansion, make this sector an interesting study case, one that receives relatively little attention in economic analyses in general.Given the nature of such activities, their location is predominantly urban, what poses a particular set of concerns, including excessive growth of cities. One of such concerns relates to informality, for this sort of activity is particularly prone to be offered by small establishments, with a small amount of start-up capital, and geographically restricted markets. Considering the high share of population living in urban areas in Brazil, studying the tertiary activities, and especially the informal segment of such activities, is fundamental for understanding the economic dynamics of cities and regions. Provision and financing of public services is related to the revenue-gathering capacity of cities, which is not enhanced when the share of informal activities. Therefore, the increasing informality that comes about with the increasing importance of tertiary activities poses important political economy challenges for the future of cities. The paper is organized in 5 sections, including this introduction. In section 2 we present some descriptive statistics about the size and recent evolution of both tertiary and informal activities. Section 3 presents some information about the distributive aspects involved in the increasing importance of tertiary activities, and how these aspects differ between formal and informal activities. Section 4 presents the results of simulations of the potential changes in income inequality and informality that would accompany the growth of tertiary activities. Section 5 describes the conclusions of the study.