Is there a Brazilian development model? Is it broken? Prof. Edmund Amann (Leiden University)Prof. Armando Barrientos (University of Manchester)

Why has Brazil been of interest to other emerging countries?

Social contract / consensus

Institutions of economic management

Innovative social policies

Finding 1: The Brazilian ‘model’ is a blend of consensus and conjuncture

IRIBA yellow tint (background): Red=2248, Green=244, Blue=219 (#f8f4db)

Finding 2: Brazil’s development ‘model’ is based on inclusive growth

0.2

.4.6

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0 .19 .38 .57 .76 .95Percentiles (p)

Confidence interval (95 %) Estimated difference

( Ref. period = initial | Order : s=1 | Dif. = ( Q_2(p) - Q_1(p) ) / Q_1(p) )

Brazil Growth Incidence curve 2001-2012

How was greater equality achieved?

• Lower inflation protects real incomes of the poorest

• Rise in employment incomes for bottom 5 deciles of the population relative to top 5

• Advent of social programmes, especially Bolsa Familia CCT programme in the late 1990s and early 2000s

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Finding 3: Macro stability has underpinned progress

The Real Plan - implemented in the mid 1990’s - ended hyperinflation.

There’s been a sustainable expansion of credit to households & businesses.

The national developmentbank (BNDES) has played an active role – particularly Following the Global Financial Crisis

Finding 4: Fiscal capacity and responsibility has been vital

Institutional responsibility was established in the battle against hyperinflation.

Brazil has benefited from taxreform and capacity built from the 1960s.

Finding 5: Agriculture has been transformed

Since 2000, Brazilian agricultural production and exports have increased enormously.

The production of crops rose by over 150%, while exports multiplied eightfold from 1990 to 2012

Not the result of an overarching plan – but the product of various institutions mutually reinforcing each other

Finding 6: Brazil shows the ‘resource curse’ is not inevitable

High-valued wood products

Phytotherapics andphytocosmetics components

Biotechnology

Leading firms re-organize and re-focus their

research activities to face the new economicand institutional conditions of the 1990s

Electricity and steam

VCP-J

Suzano

Klabin

Leading firms strengthen their internal R&D

after the end of the IPEF/ESALQ external

Aracruz’s breakthrough innovation inforestry with worldwide recognition(Marcus Wallenberg Prize)

Suzano completes a six-year research projectand becomes world’sfirst paper maker fromeucalyptus pulp

Leading firms draw on their forestry

innovative capabilities to explore newtechnological and market opportunities

Leading firms re-organize their forestry researchactivities after the Genolypus project

Leading firms engage in the Genolyptus project

Aracruz structures its forestry R&D centre to tackleeucalyptus diseases

1950s-1960s 1970s-1980s 1990s 2000s

Brazil is the 4th largest producer of forestry-based pulp and the 9th largest producer of paper

Finding 7: Social policy has focused on inclusion & productivism

Innovative antipoverty transfers have:

1)Explicitly targeted human development, rather than simply acting as a more traditional safety net for the sick and old.

2)A productivist element, concerned with economic inclusion.

3)A focus on citizenship- and rules-based transfers, avoiding clientelism.

Finding 8: Rising tax revenues have been redistributed

The tax system prioritises revenue raising over efficiency.

Supporting the expansion of public transfers and other social policies.

Finding 9: Human capital accumulation improved average wages, while labour market institutions reduced earnings inequality

Brazil has invested significantly in formal education – but also ensures that effective vocational training is provided, particularly through SENAI.

Rises to the minimum wage have helped to reduce inequality since 2005.

The main factors behind the decline of earnings inequality were reduced gender, racial and geographical differentials.

0.59

0.50

0.58

0.47

0.52

0.40.4

.45

.5

.55

.6

Gin

i Ind

ex

1995 2000 2005 2010year

Labor income 95% CI Household percapita income 95% CI

Reduced household incomes and labour earnings inequality

Finding 10: There are limitations to the ‘model’

Slowdown in growth

Lack of investment in infrastructure & unstable regulatory frameworks stifle development

Exposure to world commodity markets

Institutional reforms did not extend to the political system (corruption)

Increasing strain on the social contract

So what went wrong?

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Growth collapses

Source: IBGE/IPEA

%

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A Brazilian Crisis?

• Between 2011 and 2013 annual GDP growth slipped from 3.9 to 2.7%,

• GDP contracts by 3.8% in 2015.• Rising unemployment• Extreme poverty rose between 2012 and 2013 (from

10.08m to 10.45m), a first since 2003• Accompanying this, social unrest in the run up to

FIFA 2014 and 2016 Olympics

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Is the crisis rooted in a commodities bust?

• A key leg of the model – high commodity prices - has been removed

• During the high growth years Brazil became relatively more dependent on commodity exports

• This is a source of structural weakness which has afflicted Brazil at many points in history, even before independence from Portugal

• Since 2012, key commodity prices have plummeted

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Roots of the Crisis I: CommoditiesIMF Primary Commodity Price Index (2005=100)

Source: IMF 19

But there are other causes….

Roots of the Crisis II: debt

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Roots of the Crisis III: Fiscal discipline lapses

Red and blue lines: respectively net and gross public debt as a percent of GDP Problem is partly constitutional – 90% of federal spending is ring fenced. Main spending is on pensions, social security, transfers to states & municipalities and debt servicing (the latter approx 20% of GDP)

Source: Treasury/IPEA

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Roots of the crisis IV: Infrastructure bottlenecks

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Roots of the Crisis V: Low Productivity Outside NRB sectors

Source: Palma, 2011

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How to exit the crisis? The obvious (but hard to do…)

• On the supply side, improve competitiveness and diversify the economy away from commodities.

• For the public sector, restrict spending in non-pro-growth activities, e.g. pension reform

• Reinforce Fiscal Responsibility Law. Transparency in large infrastructure contracts

• Diversify capital investment financing • Reconfigure Mercosur customs union But ….They all involve tackling vested interests

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• All require effective policy design and a clear political pathway for rapid implementation

• Neither seem likely

Why is the political system failing?

• Party system is very fragmented, PT only had 13 deputies coalition government is vital

• Open lists with proportional voting, party funding and television time regulations – all favour small parties

• See-saw of centralization and decentralization since the restoration of democracy has led to a complex tax system while the earmarking of spending limits the power of the executive

• Estate governors have strong influence on who is elected to the senate because of local spending on projects

And progress will be made harder by the Lava Jato Scandal

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What might be achieved in the short term in the absence of deep structural reform?

• Fundamentals may favour Brazil once commodity prices rebound – there is some sign of this

• Social programmes have been scaled back but not abolished so potential for inclusive growth has not vanished

• Short term fiscal adjustment and a new administration has triggered a mild rebound in investor confidence

• A weaker Real has already turned around the trade balance

Conclusions

• Sustainable recovery will require real structural reforms and the disciplined pursuit of realistic macro targets

• Achievement of the former is very unlikely in the short to medium term given levels of political turbulence

• All this raises a much broader question: are Brazil and other key emerging economies locked in a middle income trap?

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