Brazil’s Neo-Developmentalist Lesson for Europe’s Unemployment Problem

Cornel Ban

During the post-war decades the direct creation of jobs through the expansion of employment in the public sector or through the government funding of public works was a reliable policy workhorse for employment policy. However, over the past three decades this policy has been replaced by market-oriented strategies such as labor market deregulation and cuts in corporate and marginal income tax.

In the EU this neoclassical turn led to a cul-de-sac. The crisis exposed the extent to which job creation in the 1990s and 2000s was reliant on unemployment-mopping sectors like construction and retail. Moreover, with few exceptions, even before the crisis unemployment figures across the EU looked mediocre at best, with youth suffering disproportionately from the crunch in employment in general and in living wage jobs in particular. According to Eurostat, between 2000 and 2007 the youth unemployment rate in the EU was around 16 percent.

The fall in output caused by the crisis and the austerity policies adopted since 2010 have made matters worse. Today, with 22 percent youth unemployment, the average European young person is as likely to be unemployed as the average Spaniard—and Spain’s employment situation is seen as catastrophic. Given the current policy climate things look grimmer still. Recent IMF research using data from the past 30 years found that austerity has even worse consequences for long-term unemployment (Ball et al 2011).

Does the failure of the neoclassical employment strategy mean that Europeans should revisit direct forms of employment creation? The sovereign debt crisis that struck the Eurozone may dampen such expectations. Governments that are in the crosshairs of sovereign bond markets view the expansionary fiscal packages required to expand government payrolls or to contract public works as unviable. But even if governments acquiesce to austerity policies, they may still find some policy space on the employment front.

For the past two years vocational training has been the talk of the town. Austria, the Netherlands, and Germany have shown that vocational education programs that respond to labor demand in competitive manufacturing sectors make a great deal of difference for employment figures. Denmark’s flexi-security also withstood the test of the crisis. Yet these robust policies do not travel easily to other national contexts in the short term, as they are based on finely-tuned institutional synergies between the state, labor and capital that took a long time to build. Not every national economy can be transformed overnight into a German-style system of strong export-led manufacturing or magically procure the institutional and fiscal resources of a Scandinavian unemployment insurance system.

Yet the case of Brazil during the crisis suggests that more direct forms of employment creation are viable for fiscally constrained governments. It is popular knowledge that despite introducing controls on capital inflows and raising the minimum wage above inflation in real terms, Brazil’s Labor governments did not excite the notorious ire of sovereign bond markets. But Brazil’s subtler policy lesson for Europeans has been its government’s active use of an employment policy instrument typically associated with industrial policy: job-creating investments financed through public financial institutions such as development banks and sovereign wealth funds.

Thus, in 2009 and 2010 the Brazilian Ministry of Finance asked three federal banks owned by the state to keep lending to employment-rich firms at a moment when private banks were weary of lending. To ensure the success of this counter-cyclical operation, the Ministry of Finance spent no less than 3.3 per cent of GDP to capitalize the already huge BNDES (Banco Nacional de Desenvolvimiento Economico e Social) so that this bank could increase its volume of credit by no less than 85 percent by offering loans to firms at half the level of the yield on government bonds. But because this measure was a below-the-line loan to BNDES, it was not considered as part of a stimulus package.

In addition to these employment-creating/saving credit lines through state banks, in 2009 the government in Brasilia asked its sovereign wealth fund to release almost half of the fund’s resources to labor-intensive infrastructure investments (ILO 2011; Ban, forthcoming).

Public banks with clear development goals once served Europe well during postwar recovery as well as in the spectacular growth of some East Asian economies. The familiar counterarguments about the supposed superiority of the private financial sector over the public should resonate less today, given the very high cost of the financial crisis on governments’ balance sheets. BNDES is, after all, a competitor to the World Bank itself in terms of its lending portfolio and its public mandate has not come at a cost to its soundness.

As for the objection that development banks are an instrument for developing countries, modesty should be in order. There is nothing “developed” about punishing levels of unemployment, and the rise of the BRICs challenges old assumptions about core and periphery in the global economy. Moreover, as the crisis demonstrated ad nauseam, eurozone member states are already in the position of developing countries when it comes to their relationships with sovereign bond markets (de Grauwe 2011).

Bibliography

Ban, Cornel (forthcoming) “Brazil’s Liberal Neo-Developmentalism: New Paradigm or Edited Orthodoxy?” Review of International Political Economy.

Ball, Laurence, Leigh, Daniel and Loungani, Prakash (2011) “Painful Medicine” Finance & Development, September 2011, Vol. 48, No. 3

De Grauwe, Paul (2011), “Managing a fragile eurozone”, VoxEU.org.

International Labor Organization (2011) Brazil: An innovative income-led strategy.