Brazil, a country on the go…

Martin Khor

Last week I visited Brazil and found it to be a country on the go.  At a seminar in Rio de Janeiro and later visiting government officials and think-tanks in Brasilia, I found a country Brazil proud of its recent social achievements and embarking on a new development strategy to boost production.

The seminar was aptly titled “New Economic Thinking, Teaching and Policies”, organized by the Ford Foundation, the MINDS economists’ network and hosted by BNDS (the Brazilian Development Bank).

Local and foreign economists and policy makers examined the new Brazilian approach to development, which is now made more challenging because of the expected return of global recessionary conditions.

For decades, Brazil had been the growth power-house of South America, until the economy stalled in the 1980s and 1990s as a result of debt and Washington Consensus policies, which stressed that the state should have a minimal role in economic and social matters.

When Lula de Silva took over as President, he first focused on social development, providing income to millions of poor families under the famous Zero Hunger programme.  Poverty and inequality was reduced.

In its second term, the Lula administration undertook a new phase of “state activism”, explained Glauco Arbix, head of FINEP (an agency that provides finance for technology-lined projects).  The activism included a 2007 growth acceleration plan, a 2008 productive development policy and a 2011 Brazil major plan, which put production and job-creation at the centre.

The “recovery of the state” had three aspects – transformative (dismantling old incorrect policies), corrective (re-orienting and adapting of goals) and constructive (building new institutions and policies).

Deputy finance minister Nelson Barbosa told the seminar that the good terms of trade (export commodity prices have shot up) provided Brazil with revenue to fund the social programmes that helped the poor.

Two major areas of progress have been growth with distribution and reduced inequality; and reducing financial fragility (external debt fell from 43% of GNP in 1995 to 13% while foreign reserves grew to the present 15% of GNP).

Brabosa described the move away from the previous Washington Consensus policies, with Brazil now avoiding extreme choices in policy trade-offs.  There is inflation targeting but also interest rate reduction; a floating exchange rate regime but with reserves accumulation; and fiscal targets while increasing income transfers to the poor and providing incentives for businesses to invest.

Another aspect of Brazil’s new development policy beyond the Washington Consensus is the conviction that economic development requires an active role of the state, said Barbosa.  The state’s roles include regulating the market (including towards sound investment and consumer protection), long-term planning (including infrastructure growth and innovation); sound financial policies; providing universal public services; and re-distributing income.

The Brazilian growth model has gone through three phases – wage-led expansion (with income transfers and higher minimum wages leading to increased consumption and a recovery of investment); investment-led growth (higher public investment and financial incentives to private investment) and the new phase under President Dilma with emphasis on education and innovation to spur long-term growth.

Not everything is rosy, however.  Jose Antonio Ocampo, a Columbia University economics professor and former head of the UN’s Economic and Social Department said in the last 5 to 8 years Brazil had made a promising come-back.   But there are some serious problems – the low investment rate; interest rate is the highest in the region; the high appreciation of the currency, which has affected export competitiveness.

The seminar also heard about a unique Brazilian institution – the Brazilian Development Bank which hosted the seminar in its headquarters.  The Bank (which lends out more than the World Bank) is not only the main facilitator of Brazil’s industrial policy and development projects but also played a key role in formulating the policies that enabled Brazil’s quick  recovery from the 2008-9 recession.

In Brasilia, I met the head of another unique institution, the IPEA, an economics think-tank under the President’s office.  Marcio Pochmann said that IPEA’s priority is to help reposition Brazil in the new world, in which the economic crisis will be deep and prolonged, global governance is under threat and international institutions will weaken.

He noted that the G20 leaders are having a weak response to the crisis.  In this situation, the South must find a stronger voice in global affairs.

I also had a most interesting discussion with Prof. Marco Garcia, a famous historian who is President Dilma’s chief foreign affairs advisor, having also served President Lula in that capacity.  Garcia is obviously a learned man with deep knowledge of the South American region and the world.  He has played a significant role in developing Brazil’s policy towards Asia, Africa and the developed world.

And of course most importantly in South America of which Brazil is the giant.  A significant point he made is that Brazil is promoting a type of regional integration that should be mainly based on production, energy and infrastructure, rather than an integration led by trade liberalization which tends to benefit only the strong countries and could thus cause disharmony among the region’s countries.

The Foreign Minister Antonio Patriota has the unassuming air of a sincere man of diplomacy, but he carries the burden of leading Brazil in WTO and regional trade relations, in the climate negotiations as well as all other aspects of foreign policy, including supporting the President in the G20 Summits.

Brazil believes in South-South cooperation.  It takes its role in the BRICS (the so-far informal but getting more formalized grouping of Brazil, Russia, India, China, South Africa) seriously, as an alliance of big emerging countries that is a counter weight to the developed countries.

But Brazil has also developed strong links with Africa.  And Patriota gave a strong impressions that Brazil is very interested in stronger economic and political relations with Asia, especially China but also Asean.  He will soon attend the Asean ministerial meeting, at which Brazil will be one of the “Asean-Plus” countries for the first time.

The Ministry’s focus will increasingly be on the Rio-Plus-20 Summit on Environment and Development that Rio will host in June 2012.   There are hopes that the 20th anniversary of the original Rio Summit will be attended by many political leaders and that the Summit will give a much needed boost to multilateral cooperation at a time when the world is facing two increasing crises – economic and environmental.

By next June the global economic crisis will be at a high point, and Brazil will need all its skill to steer the Summit in a way that keeps the flame of multilateralism and international cooperation alive when countries are more tempted to look only after their own interests.

This piece was originally published by the Third World Network.

3 Responses to “Brazil, a country on the go…”

  1. Kevin P. Gallagher says:

    Bravo Martin. The Brazilian democratic project since 2003 is one of the more overlooked by those seeking success stories for emerging market growth and development. As another observer of the conference I add that there a few key things to watch with respect to the sustainability of Brazil’s promise.

    First, in addition to domestic demand much of Brazil’s growth has been due to the export of commodities such as soybeans, beef, oil, iron, and more. Such demand hinges on a few nations’ activity (namely China), is accentuated by speculation in global commodities markets, and therefore plays a role in pushing up the Brazilian real against the dollar. As Jan Kregel said at the conference, terms-of-trade improvements based on a shift in the composition of exports toward high priced commodities do not represent productivity growth in the economy and should thus be viewed as capital gains increases and not real income growth.

    What is more, such growth is not very employment creating, has little linkages to the rest of the economy and can be significantly environmentally destructive at the local and global level.

    Brazil has been valiant to counter these trends with a stabilization fund, a development bank-backed industrial policy, capital account regulations on short-term debt to temper exchange rate appreciation, and a reluctance to sign constraining preferential trade treaties.

    Brazil is experimenting with fresh new approaches to old but accentuated problems. To protect this experiment and to advance its contours as opportunities for other nations in the midst of the crisis, Brazil must also assume more of a leadership on the global stage–at the G-20, the IMF, and at the WTO–attempting to make these institutions more open, democratic, and flexible enough to enable stability, growth, and development.

  2. Yep, but really very conservative on fiscal policy, which implied in the period 2003-2010 a rate of growth of 4.05%, which is below the Latin American average (4.15% all ECLAC’s data). And they are pursuing a significant fiscal adjustment this year. And yes real interest rates were reduced, but continue to be to high. So macro policy is not helping much.

  3. Cornel Ban says:

    Spot on! Brazil is doing a liberal version of neo-developmentalism.
    Moreover, Brazil ran an interesting off-the-books counter-cyclical fiscal policy during the crisis. This measure was possible only because in violation of the Washington Consensus, the Brazilian government did not privatize federal banks and used them as development banks. Even before the crisis state banks were the main providers of industrial credit in Brazil with private banks keeping most of their operations in government bonds and consumer credit while remaining averse to extending credit to corporates. At $60 billion the lending of the state-owned BNDES now far exceeds that of the World Bank (The Economist, August 5, 2010).
    Given this structural characteristic of the financial sector, the Ministry of Finance was able to ask three federal banks (Banco Nacional de Desenvolvimiento Economico e Social or BNDES, Caixa Economica Federal and Banco do Brasil) to keep lending to employment-rich large firms and SMEs at a moment when private banks were weary of lending. To ensure the success of this operation, the Ministry of Finance spent no less than 3.3 per cent of GDP to capitalize BNDES, 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 the stimulus package (ILO 2011: 48-49).
    In addition to these credit lines through state banks, in 2009 the government used public savings to create a sovereign wealth fund with an initial amount of 0.5 percent of GDP which immediately planned the release of almost half of its money to infrastructure investments (ILO 2011: 41). In short, the government used 3.8 percent of GDP in off budget measures to fund carry out counter-cyclical fiscal policy by stealth. Had these measures been on the books, Brazil’s fiscal virtue would have been questioned, as the budget deficit would have been in the red.