The hosts have made a low-key start to the finals, with their 3-1 win over Croatia marred by controversial refereeing decisions before their disappointing 0-0 draw against Mexico.
Zico, who starred for the South American giants at three World Cups, believes Paulinho is suffering from a lack of confidence after a difficult season with Tottenham and is a shadow of the player from the 2013 Confederations Cup.
"The most important change was never made: Paulinho once again had a game to forget," he said in The Guardian.
"He is a problem now because he is a shadow of the player that last year proved so important in creative and defensive duties. He is a true box-to-box player that I had the pleasure to interview for my TV show and I advised him to keep playing that way.
"Paulinho should have made way for Ramires in the middle and Willian could have been an option to replace Hulk on the right.PHOTOS: Beautiful people in Brazil | Brazil protests | Soccer fanatics | Fan tattoos
"Paulinho had a tough season at Tottenham and it's blatantly clear that he lacks rhythm and confidence. He is not as incisive as he used to be.
"There was also too much space between Paulinho and Luiz Gustavo, who was dropping back too much instead of closing down the Mexicans."
Zico also looked ahead to Brazil’s final group match, against already-eliminated Cameroon, and suggested that the hosts could learn a lesson from Spain's early exit from the tournament.
"Cameroon have problems of their own, having lost Alex Song to a red card and seen their own players almost trading blows. That doesn't mean they will just wait for Brazil to win," he continued.
"In this sense, the draw with Mexico might be the moment Brazil had a reality check and got their act together. If anything, they can look at Spain's demise, a lesson to everybody.
"The Selecao are still among the favorites in this World Cup, but they are here to fight for a trophy, not collect it."
Brazil meets Cameroon in Brasilia on June 23.