Global Trends by Martin Khor

Tuesday 15 November 2011

Brazil, a country on the go…

After a long period of stagnation, Brazil implemented a successful anti-poverty programme and then launched a new development and financial policy, while revitalizing the strong role of the state.


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.