1

THE NEW BRAZIL: ACHIEVEMENTS AND CHALLENGES

Edmar BachaYale Law SchoolApril 17, 2013

2

THE NEW BRAZIL IN A NUTSHELL

• 1985: Redemocratization• 1988: New Constitution• 1994: Stabilization and reforms under Cardoso• 2002: Lula’s election and social policies• 2004: Commodity boom• 2011: Middle-income trap sets in?

3

ECONOMIC HIGHLIGHTS

• Inflation and growth record • Recent achievements • Structural challenges

4

INFLATION AND GROWTH RECORD

5

THE OLD AND THE NEW: INFLATION BEFORE AND AFTER THE REAL PLAN

6

INFLATION BEFORE THE REAL PLAN, 1980-1993

7

INFLATION AFTER THE REAL PLAN, 1995-2012

Consumer Inflation (IPCA) - YoY (After Plano Real )

22.4%

9.6%

5.2%

1.7%

8.9%

6.0%

7.7%

12.5%

9.3%

7.6%

5.7%

3.1%

4.5%

5.9%

4.3%

5.9%6.5%

5.8%

0%

5%

10%

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

8

GDP GROWTH:SOME RECOVERY AFTER LOST DECADE

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

Yearly GDP growth rates (Y')

Y' ten-year moving average

9

RECENT ACHIEVEMENTS

10

POOR FAMILIES’ INCOMES GREW FASTER THAN THE RICH, 1999-2009

1º 2º 3º 4º 5º 6º 7º 8º 9º 10º0

1

2

3

4

5

6

Average: 2,4

Average annual real growth rate of per capita household incomes, by income deciles (from poorest to richest),1999-2009 (%)

11

POOR FAMILIES’ GAINS WERE UNAFFECTED BY THE FINANCIAL CRISIS

(PER CAPITA HOUSEHOLD INCOME GROWTH, 2009-2011)

12

UNEMPLOYMENT IS THE LOWEST EVER (2002-2013)

• 3

• 5

• 7

• 9

• 11

• 13

• 15

•ju

n/02

•ou

t/02

•fe

v/03

•ju

n/03

•ou

t/03

•fe

v/04

•ju

n/04

•ou

t/04

•fe

v/05

•ju

n/05

•ou

t/05

•fe

v/06

•ju

n/06

•ou

t/06

•fe

v/07

•ju

n/07

•ou

t/07

•fe

v/08

•ju

n/08

•ou

t/08

•fe

v/09

•ju

n/09

•ou

t/09

•fe

v/10

•ju

n/10

•ou

t/10

•fe

v/11

•ju

n/11

•ou

t/11

•fe

v/12

•ju

n/12

•ou

t/12

•fe

v/13

13

NET PUBLIC SECTOR DEBT IS FALLING (1991-2013,% GDP)

1991.01

1991.12

1992.11

1993.10

1994.09

1995.08

1996.07

1997.06

1998.05

1999.04

2000.03

2001.02

2002.01

2002.12

2003.11

2004.10

2005.09

2006.08

2007.07

2008.06

2009.05

2010.04

2011.03

2012.02

2013.010

10

20

30

40

50

60

70

Sem Eletrobras e Petrobras Total

14

REAL INTEREST RATES ARE THE LOWEST EVER (1996-2013, p.y.)

12m accumulated

0%

5%

10%

15%

20%

25%

30%

19

96

.01

19

97

.01

19

98

.01

19

99

.01

20

00

.01

20

01

.01

20

02

.01

20

03

.01

20

04

.01

20

05

.01

20

06

.01

20

07

.01

20

08

.01

20

09

.01

20

10

.01

20

11

.01

20

12

.01

20

13

.01

15

BRAZIL IS A NET CREDITOR TO ABROAD(GROSS AND NET EXTERNAL DEBT AS A RATIO TO EXPORTS,

1970-2012)

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

4°Tr

im.1

970

4°Tr

im.1

973

4°Tr

im.1

976

4°Tr

im.1

979

4°Tr

im.1

982

4°Tr

im.1

985

4°Tr

im.1

988

4°Tr

im.1

991

4°Tr

im.1

994

4°Tr

im.1

997

1°Tr

im.2

000

4°Tr

im.2

000

3°Tr

im.2

001

2°Tr

im.2

002

1°Tr

im.2

003

4°Tr

im.2

003

3°Tr

im.2

004

2°Tr

im.2

005

1°Tr

im.2

006

4°Tr

im.2

006

3°Tr

im.2

007

2°Tr

im.2

008

1°Tr

im.2

009

4°Tr

im.2

009

3°Tr

im.2

010

2°Tr

im.2

011

1°Tr

im.2

012

4°Tr

im.2

012

Dívida total líquida / exportações

Dívida externa total / exportações de bens e serviços

16

BRAZIL’S GDP VALUE AND RANK SOARED, 2000-2012

0

2

4

6

8

10

12

14

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Brazil's rank among biggest world economies

0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Brazil: GDP in US$ bi

17

STRUCTURAL CHALLENGES

18

INFLATION-GROWTH TRADE-0FF IS UNFAVORABLE

19

TAX BURDEN IS HIGH(SELECTED COUNTRIES FROM OECD AND LATIN AMERICA)

0 10000 20000 30000 40000 50000 60000 70000 80000 900000

10

20

30

40

50

60

Tax Burden x GDP per capita: Selected Countries - 2010

GDP per capita(US$)

Tax

Bu

rden

(%

of

GD

P)

US

20

INVESTMENT RATE IS LOWArgentina 23.6

Bolivia 15.9 Brazil 18.7 Chile 22.5 Colombia 22.7

Ecuador 25.4 Mexico 25.2 Panama 24.3 Paraguay 18.3

Peru 22.8 Uruguay 19.6 Mean 21.7

21

SOCIAL SECURITY IS A BIG PROBLEM(OECD data for 2005)

4 6 8 10 12 14 16 18 20 22 24 26 28 30 320

2

4

6

8

10

12

14

16

18

20Soc.Sec. spending (%GDP) and dependency ratio

Dependency ratio (age 65+/age 14-65, %)

Brazil

Chile

Argentina

South Korea

Mexico

Poland

Japan

Italy

Canadá

US

Belgiumca

Gernany

Uruguay

Equador

% GDP

22

EDUCATIONAL LEVELS ARE POOR(PISA 2009 RANKINGS, SELECTED OECD+ COUNTRIES)

1 Shanghai, China 600

2 Singapore 562

3 Hong Kong, China 555

4 South Korea 546

5 Taiwan 543

6 Finland 541

7 Liechtenstein 536

8 Switzerland 534

9 Japan 529

10 Canada 527

31 United States 487

47 Uruguay 427

63 Brazil 386

74 Kyrgyzstan 331

Maths

23

INFRASTRUCTURE LAGS

24

ECONOMY IS CLOSED TO THE WORLD IMPORTS OVER GDP (%): BRAZIL, L.A. , BRICS, US (2011)

Argentina 20Brazil 13Chile 35Colombia 20Mexico 33Peru 25

China 27India 30Russia 22South Africa 29

US 18Average (except BR&US) 27

25

EXTERNAL BONANZA HELPED BUT IT CANNOT GO ON FOR EVER

Year Terms of Foreign Excess Dom.Trade Transfers SpendingEffect/GDP Effect/GDP over GDP

2005 0,0% -3,6% -3,6%

2006 0,7% -2,9% -2,2%

2007 0,9% -1,5% -0,6%

2008 1,7% -0,2% 1,5%

2009 1,8% 0,2% 2,0%

2010 3,4% 1,1% 4,4%

2011 4,4% 0,8% 5,2%

2012 3,4% 1,5% 4,9%

Decomposition of External Bonanza, 2005-10(in 2005 prices)

26

SOURCES FOR THE SLIDES• S5: Miriam Leitão, Saga Brasileira: A Longa Luta de um Povo por sua Moeda. Record, 2011: 260-261.• S6: Henrique Carvalho, “IPCA e IGP-M: Inflação Histórica no Brasil”, February 21, 2011. Avaliable at:

www.hcinvestimentos.com/2011/02/21/ipca-igpm-inflacao-historica/. • S7, S12, and S14: Thanks to Aurelio Bicalho from Banco Itaú BBA. • S8: Edmar Bacha and Regis Bonelli, “Accounting for the rise and fall of Brazil’s Post-WW-II GDP growth”, July 2012.

Available at: www.iepecdg.com.br. Updated in April 2013 by Regis Bonelli.• S10: Edmar Bacha, “Introdução”. In: E. Bacha, Belíndia 2.0: Fábulas e Ensaios sobre o País dos Contrastes. Civilização

Brasileira, 2012. Computed by Rodolfo Hoffmann from PNAD data.• S11: IPEA, “A decada inclusiva (2001-2011): desigualdade, pobreza e politicas de renda”, Comunicados do IPEA n. 153,

Sept., 25, 2012.• S13, S15, S16, and S20: Armando Castelar, ”Desempenho Recente e Perspectivas de Crescimento da Economia Brasileira”.

Presentation to the Seminar: Whither Latin America? Rio de Janeiro: Vargas Foundation, August 9-10, 2012. Updated in April 2013 by Julia Cavalcante Fontes.

• S18: Monica de Bolle, Há Esperança para o trade-off entre Crescimento e Inflação? Seminário de Conjuntura -- IEPE/Casa das Garças, 8 March 2013 (available at www.iepecdg.com.br).

• S19: Thanks to José Roberto Afonso and Kleber Castro.• S21: Paulo Tafner and Fabio Giambiagi, “Previdência social: uma agenda de reformas”. PPT. October 2010.• S22: http://en.wikipedia.org/wiki/Programme_for_International_Student_Assessment• S23: World Economic Forum, apud Financial Times.• S24: World Bank Data: http://data.worldbank.org/indicator/NE.IMP.GNFS.ZS.

• S25: Edmar Bacha, “Bonança externa e desindustrialização: uma análise do período 2005-2011”. In: E. Bacha and M. de Bolle (eds.), O Futuro da Indústria no Brasil: Desindustrialização em Debate. Civilização Brasileira, 2013.