|Macroeconomic Policy Changes Have Helped Brazil Increase Growth, But Much More is Needed|
Folha de São Paulo (Brazil), June 12, 2011
From 2004 to 2010, Brazil’s economy grew at an average of 4.2 percent annually, or more than twice as fast as it had grown from 1999-2003; or for that matter, more than twice as fast as its annual growth from 1980-2000. This was despite the impact of the world recession of 2009, which left Brazil with no growth for that year.
This faster growth enabled an accelerated reduction in poverty, a reduction in income inequality, and a reduction in unemployment to today’s record lows. In a detailed and important paper, economists Franklin Serrano and Ricardo Summa of the Universidade Federal do Rio de Janeiro argue that this was not only the result of favorable external conditions, but some moderate but important policy changes. Most importantly, the government allowed a more expansionary fiscal policy, including increased public investment. This helped especially to keep the damage from the world recession to a minimum and allowed for a faster recovery.
But another major macroeconomic policy problem remains: the central bank has been almost continually increasing the value of the real for years in order to meet its inflation target. It does this by raising short-term interest rates, as it has been doing recently. This increases capital inflows, which raises the value of the real. This lowers inflation mainly by reducing the price of imports.
But cheaper imports hurt Brazilian producers of tradable goods, which must compete with imports. The same is true for Brazilian exporters of most goods other than commodities – a higher real makes their goods less competitive in world markets. This has seriously hurt Brazil’s manufacturing potential, especially in the more technologically advanced sectors. For example, from 1996-2008 the imported content of “communications and electronic equipment” produced in Brazil rose by about 33 percentage points.
In some ways Brazil is similar to the United States, in the roots of its macroeconomic policy mistakes: the financial sector is too powerful. Just as Wall Street contributed massively to the financial crisis and Great Recession in the U.S., the financial sector in Brazil fights all too successfully for policies that stifle Brazil’s industrial development in order to promote its own interests.
The stakes are even higher for Brazil than for the United States, because it is still a developing country. From 1960-1980, Brazil’s growth rate was similar to that of South Korea, and Brazil had much higher income per capita. After 1980, South Korea continued on a fast-growth path, and today has living standards comparable to Europe. But Brazil stagnated and then (after 1990) took a sharp turn towards neo-liberalism; so despite its great advantage of natural wealth, Brazilians today have only about one-third of the per capita income of South Korea, four times the infant mortality rate, and 42 million people living on less than $3 a day.
The last six years have been a very good start in breaking from the long-term policy failure of the neoliberal era. But there is still a long way to go for Brazil to reach its potential.