Brazil’s Development Strategy

Nelson BarbosaNovember 7, 2011

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Brazilian Opportunities

• Trade and finance: increase in the terms of trade pulled by the Asian demand for commodities

• Demography: reduction in the overall dependency ratio (children + elderly)

• Institutional development: democratic environment with political stability and low jurisdictional uncertainty

2

Terms of trade and development: periods of favorable terms of trade have usually allowed fast growth and structural change in Brazil. High terms of trade are not necessarily a “development curse”

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Terms of trade and development: periods of favorable terms of trade have usually allowed fast growth and structural change in Brazil. High terms of trade are not necessarily a “development curse”.

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5

Brazilian Choices

• Growth and distribution: the Lula administration started a new phase of economic policy, more focused on accelerating economic growth and reducing income inequality

• Financial fragility: the Lula and Dilma administrations also chose to reduce the economy’s exposure to external shocks through foreign-reserve accumulation and high primary surpluses

6

Brazilian Economic Growth

7Source: IBGE

Income Distribution

8*/ Gini index of household per capita income.Source: IBGE. Elaborated by: MF/SPE.

Financial fragility *

9

18,1

31,5

42,9

26,5

12,1 12,7

4,81,5 2,6

5,3

11,814,9

-6,8 -6,0-0,5

-4,0 -1,7 -2,0

1974 1982 1987 1998 2008 2011

Total External Debt International Reserves

Current Account

Latin America Debt Crisis

Last year of fixed NER

(Plano Real)

Moratorium on Foreign Debt

Impact of 1st oil shock Present

(Sep/2011)Subprime

crisis

*/ Estimated data – September/2011.Source: BCB. Elaborated by: MF/SPE.

Beyond the Washington ConsensusMacroeconomic Policy

• A pro-growth policy is consistent with macroeconomic stability, provided that one avoids extreme choices in the policy trade-offs– Inflation targeting with a reduction in the real

interest rate– Floating exchange rate with reserve

accumulation– Fiscal targets with an increase in income

transfers and incentives to investment10

Inflation

11

8,9

6,0

7,7

12,5

9,3

7,6

5,7

3,1 4,5

5,9

4,3

5,9 6,4

4,7

0

2

4

6

8

10

12

1419

99

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*

2012

*

*/ BCB’s forecast.Sources: IBGE and BCB. Elaborated by: MF/SPE.

Real interest rate (“ex ante”)*

12*/ Ex-ante (Swap 360 / Market Expectations for Inflation).Sources: BCB and BMF. Elaborated by: MF/SPE

4,5

-

2

4

6

8

10

12

14

16

18

20

22

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03

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04

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05

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06

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07

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08

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09

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Beyond the Washington ConsensusThe Role of the State

• Economic development requires an active role from the State– Market regulation (from investors’ to

consumers’ protection)– Long-term planning and finance (infra-

structure and innovation)– Universal public services– Income distribution

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The Brazilian Growth ModelFirst phase: wage-led expansion

• Increase in income transfers through a higher minimum wage and minimum-income programs to reduce poverty (Bolsa Família).– Increase in private consumption– High capacity utilization– Recovery of investment– Increase productivity and real wages– Reduction in income inequality

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15Sources: MF/STN

16Sources: MF/STN

The Brazilian Growth ModelSecond phase: investment-led growth• Increase in public investment and tax and

financial incentives to private investment– Higher investment in economic and social

infra-structure (PAC)– Expansion in long-term finance (BNDES)– Industrial policy (PDP and PBM)– Increase in residential investment (MCMV)

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Public Investment

18

0,31 0,47 0,48 0,64 0,72 0,86 1,01 1,21 1,05

1,111,02 1,01

0,981,12

1,43

1,851,92

1,71

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

2003 2004 2005 2006 2007 2008 2009 2010 2011**

State Enterprises *

Federal Government

PAC

*/ Excludes foreign investments.**/ Accumulated in 12 months up to August.Sources: MF/STN and MP/DEST.

Investment and Saving (% of GDP)

19

10

11

12

13

14

15

16

17

18

19

20

Investment rate Domestic Saving

Source: IBGE. Elaborated by: MF/SPE.

A Keynesian-Structuralist View

• Increase in investment through incentives to investment rather than through disincentives to consumption

• Why? Because potential output can growth faster through many productivity gains that could only be made through faster growth– Increase in the “modern” formal sector of

the economy, catching up and economies of scale

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The Brazilian Growth ModelThird phase: education and innovation

• Increase in public investment in education and tax and financial incentives to R&D, innovation and “digital inclusion”– Higher investment in education (PROUNI,

REUNI e PRONATEC)– Tax and financial incentives to innovation

“in company” (through BNDES and FINEP)– Increase in investment in ICT (REPNBL)

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Old and New ChallengesInternational situation

• Slow growth and financial uncertainty from advanced economies

• Increasing competitiveness from other emerging economies, especially China

• Trade specialization of Brazil in primary products due to high commodity prices and exchange-rate appreciation

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Old and New ChallengesDomestic situation

• Increasing demand for public services and public investment with a stable tax burden– The new middle class and the hierarchy of

needs• Reduction in production costs through tax

reform and financial development– Structural and incremental reforms

• And a still high real interest rate.23

Economics and Politics

• High rent from commodities can finance structural change (ex: new oil reserves)

• Demographic trends will remain favorable until the mid 2020s

• And there are still many more productivity gains to be made

• Success depends mostly on the maintenance of a political consensus over the development strategy

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