Lessons From Brazil

Alejandro Nadal

Managing neoliberalism is an uncomfortable proposition, especially when you are a centre left government. The rhetoric from the government palace insists in painting a pretty picture of social progress in a context of economic development. But the truth is somewhat different: the constraints of the neoliberal policy package conspire to cancel the successes that may be attained in the realm of equity or growth. The fact is that neoliberalism is not made for development.

During the past decade a new myth was born concerning Brazil’s economic performance. Its growth rate was above Latin America’s mean rate (2.2 per cent) and its exports allowed for a significant surplus. Besides, the increase in social expenditures resulted in a significant reduction in poverty and hunger. What possibly could go wrong?

The angry demonstrations that spread throughout Brazil’s cities a few days ago were triggered by several factors. They range from the bad quality of public services in transportation, health and education, to widespread corruption and the lavish expenditures in preparation for the World Cup. Violent repression fuelled the vigorous protests against a political elite more preoccupied with preserving their well-paid jobs than anything else. Some analysts have advanced the hypothesis that various conservative forces in Brazil were behind the wave of discontent with an eye on the 2014 elections. That may very well be true and the drop in popularity of Brazilian president, Dilma Rousseff, is a bad sign in this context. She has tried to recover the initiative by announcing a plan for “political reform” that would lead to greater democracy, transparency and better public services. It is too soon to conclude whether this move will be successful or not. In any case, events in Brazil force a more rigorous analysis of the structure and performance of the economy.

The first point concerns GDP growth. Between 1999 and 2011 the mean annual growth rate was 3 per cent. This is far from spectacular and certainly below needs for new jobs in the South American giant. In those years, the Brazilian economy underwent important ups and downs, alternating years of rapid expansion (7 per cent in 2010) with others of bad performance (minus 0.2 per cent in 2003 and 2009).

Open unemployment reached 6 percent of the active labour force in 2011 and the central bank stated its concern. Of course, this appears to be extremely low when compared with European-crisis standards. But unemployment figures in Latin America have to be taken with a large grain of salt, and Brazil is no exception. Between 2000 and 2007 more than 51 per cent of total employment in Brazil was concentrated in the so-called “informal sector”. These jobs are badly remunerated and imply very low productivity. They are not the basis for anything resembling sustainable growth. As in Latin America, the informal sector is the perfect disguise for the economic problem of capitalism (and it explains why this low growth region has low open unemployment rates).

During the nineties Brazil underwent severe stabilization programs that entailed fierce wage contractions, fiscal adjustments and even a monetary reform. Inflation was cut down from a spectacular 2400 per cent to historically low levels of 5 percent. Since then, a restrictive macroeconomic policy reigns with a huge primary surplus and some of the highest interest rates in the region.

Lula’s two presidential terms sought to reconcile the priorities imposed by neoliberalism with the objectives of social justice. In order to respect the macroeconomic balances of the neoliberal open economy model, Brasilia chose to develop a new and more flexible approach to social policy. The key components of this approach includes social security, minimum wage hikes and several important cash transfer programs (a good analysis is provided by Ferreira de Souza).

The impact of this policy mix on inequality has been clear, but its benefits should not be exaggerated. Extreme poverty indicators do show a decline, but using the World Bank PPP poverty line of $1.25 USD per day partly explains the speed and depth of the improvement. Also, it took fourteen years, from 1995 to 2009, to bring down the Gini coefficient from 0.599 to 0.539. An important achievement, no doubt, but also an indicator showing there is much to be done. One critical aspect of redistribution, the question of agrarian reform, has been put aside as a result of the “success” of these social policies.

Perhaps the big question is if these achievements are sustainable. In order to obtain resources for these programs Brazil increased fiscal pressure: fiscal revenues are now 36.2 per cent of GDP. This high level is comparable to developed countries with good quality public services in health, education and transport. This is not the case of Brazil, where quality in these items leaves much to be desired.

Fiscal policy in Brazil conserves its neoliberal imprint. Its main objective is to generate a primary fiscal surplus. Last year, the primary surplus surpassed 53 billion US dollars, the equivalent of 2.3 per cent of GDP, but remained below the original goal of 3 per cent. During all of these years Brazil has maintained one of the largest primary surplus in the world, an amount that would make a big difference in the quality of public services.

The structure of income tax is not as progressive as it could be and low-income workers have to carry a disproportionate burden. Besides, the weight of indirect taxes in total tax revenues is exaggerated:  48 per cent of total tax revenues come from this regressive tax (value added tax revenues represent approximately 12 per cent of GDP in Brazil).

Perhaps one of the key weaknesses in Brazil’s economic edifice is in its export sector. It can be said that the foundations of its export sector are not as robust as they should be. Approximately 55 per cent of total exports come from the primary sector and this implies a dramatic social and environmental cost. The expansion of transgenic soybean in the Cerrado is a well-known experience of a booming agri-business model that entails severe and far-ranging environmental damages (for a critical assessment see Sergio Schlesinger). In spite of the environmental and social costs of its “failed-but-successful” agri-business model, Brazil is promoting its extension to African countries such as Mozambique. In addition, price volatility in commodities came around to haunt the Brazilian experience once more in 2012 and gave the country its worst trade surplus in a decade. Brazilian industry had a bad year in 2012 and significant signals of fragility persist as the global crisis continues in its smouldering phase.

Brazil would need better growth performance to maintain its mixed bag of neoliberalism and social policies. As noted, it remains to be seen if this model is sustainable. If it is not, the key lesson from Brazil is that attempts to ‘manage’ neoliberalism in order to attain development are doomed to fail. At the end of the road, there is no development, nor a human face.

Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.