Brazil has made remarkable social and economic progress in the past two decades, but must now overcome important challenges if it is to put its economy on a stronger, fairer, greener growth trajectory, according to two new reports from the Organization for Economic Cooperation and Development (OECD).

An economic survey says that Brazil is at a critical moment, as the fiscal situation is challenging, inflation is high, and previous tailwinds from high commodity prices are fading. All of this is putting pressure on the wider economy, which is projected to contract by 3.1 percent this year and a further 1.2 percent in 2016. The survey recommends Brazil move ahead with the planned fiscal adjustment, which will be critical for strengthening public finances, restoring market confidence and preparing for intense population ageing.

Brazil will also need to rein in the expansion of public expenditures, notably by making public spending more effective and reforming the pension system. Improved targeting of social benefits – spending more on the poor, and less on benefits for those who have successfully joined the middle class – could simultaneously reduce inequality while strengthening the public finances.

“Macroeconomic stability has been a crucial factor behind Brazil’s success in the past,” said OECD Secretary-General Ángel Gurría, “but progress must continue on the fiscal and monetary fronts. Ambitious structural reforms are urgently needed to close the productivity gaps with other leading emerging economies while ensuring all Brazilians can share the fruits of prosperity.”

Raising productivity will be essential for Brazil’s future economic growth, particularly in the industrial sector, which still has significant unexploited potential. Reforms to the fragmented indirect tax system, better infrastructure, increased competition and stronger integration into international trade are essential both to raise productivity and improve the incentives to innovate. Ambitious structural reform to reduce the so-called Brazil cost is urgently needed to unleash the full potential of the economy.

The OECD’s first-ever environmental performance review of Brazil draws attention to the strong progress made in reducing deforestation and emissions of greenhouse gases over the past 15 years. It also points out, however, that a decade of rapid urbanization and economic growth have increased pressure on the environment, with severe water shortages in the southeast, soil contamination from inadequate wastewater treatment and rising air pollution. More people now have access to clean water, sanitation and waste management services, but regional disparities are large.

“Brazil has made tremendous progress in terms of its environmental performance, but rigorous policy implementation remains critically important,” said Gurría. “Greening the economy can also bring huge social and economic opportunities, with green markets offering potential to boost GDP by up to seven percent.”

The high share of hydropower and biofuels in the Brazilian energy mix helps keep the economy’s carbon intensity low. Greenhouse gas emissions have dropped by more than 40 percent since 2000 but emissions from industry and transportation are still rising.

The review recommends Brazil do more to link environmental priorities with economic policies so as to ensure the sustainable use of its environmental resources. Brazil should strengthen implementation and enforcement capacity at local level to reduce the gap between ambitious environmental goals and policies actually implemented in areas such as public transport and waste management.