The Brazilian Economy Today

Towards a New Socio-Economic Model?

Anthony Pereira, Lauro Mattei, Anthony Pereira, Lauro Mattei, Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137549815
• Topic: Economía
• Subtopic: Economía del desarrollo

Pereira and Mattei bring contributors together in this exciting volume to further understanding about the recent Brazilian Economic Development Model and discuss the related social conditions. The authors analyze both the political economy and social public policies to highlight new opportunities to create a sustainable development model.

Part I

Introduction

1

Dilemmas of Brazilian Economic Development in the Twenty-First Century

Lauro Mattei and Anthony W. Pereira

Introduction

After several decades of stagnation since the beginning of the twenty-first century, the Brazilian economy has made important changes (ECLAC, 1950; Edwards, 2009 Panizza, 2009). There has been a new growth cycle that directed government action to combat social inequalities and resume the construction of a new pattern of development, but without changing the structural conditions of a peripheral economic system (Sicsú, Oreiro and Paula, 2003). This growth cycle was relatively high between 2003 and 2010, when the country had an annual growth rate of 2.5 percent compared to less than one percent in the previous decade (Weisbrot, Johnston & Lefebvre, 2014). However, due to the global economic crisis, since 2011 the Brazilian economy has been stagnant, with very low GDP growth rates (Bacen, 2014).

This new cycle of growth has been supported by some economic policy instruments that enabled Brazil to have a greater participation in global trade, while initially easing the effects of the current crisis that have impacted, particularly after 2008, the entire global economic system, (IPEA, 2009; IPEA, 2010). However, this phase was ending just as this book was being written. The problems caused directly and indirectly by the crisis were starting to have major effects on significant social strata, leading to the establishment of social rebellions across the country during June 2013, and the protests that occurred in March and April 2015.

This process of social upheaval that is currently underway calls into question the myth that had been promulgated since 2003 that Brazil had a new phase of development, with emphasis on two key factors that were being overcome: the poverty of a large sector of the population and an extreme dependence on international capital. This wave of optimism that prevailed until recently, for many years actually hid weaknesses and contradictions of the Brazilian model of economic development – many of which will be analyzed in this book.

The process of economic stabilization

The last two decades of the twentieth century were marked in Brazil by deep economic and social crises. With the end of military rule, the country had failed to maintain the growth trajectory of the post-war period when it implemented an industrial development model based on the import substitution process (Ocampo and Ros, 2011).

The constant crisis of external debt and the domestic inflation led, in the 1980s, to the adoption of various economic plans – programs that quickly lost their effectiveness (Freitas, 2012). Only since July 1994, with the implementation of the “Plano Real,” has the economy been stabilized. This was managed through the adoption of a set of structural adjustment policies that were anchored on four pillars: banking and financial deregulation; trade liberalization, with the opening of the economy to goods and services from abroad; stabilizing prices via a fixed exchange rate policy; and reducing state participation in the economy through a large-scale program of privatization of state enterprises.

After more than two decades, it is possible to analyze the 1990s with greater clarity and consistency regarding Brazil’s economic and political choices. Seeking to confront the serious crisis affecting the country since the early 1980s, a set of macroeconomic policies were adopted in order to stabilize the economy and restore growth. To a large extent, it can be stated that these policies were strongly influenced by political ideas emanating from the industrialized countries and consolidated in the so-called “Washington Consensus.” In general, this consensus determined that the best strategy for coping with crisis in the peripheral countries would be to deregulate their economies in order to attract new foreign investment and allow the free mobility of capital (Porzecanski and Gallagher, 2007; Correa, 2002).

In addition, economic liberalization was defined as essential. This resulted in expansion of international trade and the programs to privatize state enterprises as the means to tackle the fiscal problems of national states. Thus, it was believed that trade liberalization, financial deregulation, and privatization of state enterprises would automatically take economic systems to levels of growth higher than those shown in the decade of crisis.

It was with the Plano Real of 1994 that Brazil adopted this strategy. The economic plan’s main goal was to tackle the inflationary process and ensure macroeconomic stability through price stability. Although this stabilization was successful, the contradictions in the economic policy put in question the choice between restoring economic growth or resuming development of the country. The path that was chosen between 1995 and 2002 (under the government of President Fernando Henrique Cardoso) was to stabilize the economy through the adoption of a policy of extremely high interest rates compared to those of countries in similar situations. Thus, several authors (Bresser-Pereira and Nakano, 2002; Bresser-Pereira, 2012; AKB, 2013), claim that Brazil built for itself an interest rate trap that led to a perverse balance, as the economic measures became unable to stimulate the resumption of sustainable development. To a great extent, this problem became worse as Brazil sought to recover its levels of economic growth, which fell on the constant search for foreign savings.

This strategy proposed by developed countries and multilateral agencies (the International Monetary Fund and the World Bank), and passively accepted by peripheral countries, was one of the main impediments to the resumption of Brazilian economic development on a sustainable basis in the 1990s. Thus, in the late twentieth century, Brazil neither achieved macroeconomic stability nor resumed economic development at desired levels. Even in keeping the inflation under control, the macroeconomic policies adopted by the stabilization plan only proved effective in the early years of the Plano Real, as the international economic crisis of 1997–1998 provoked strong speculative movements in various financial markets, culminating in capital flight, particularly in developing countries.

At the end of 1998, with sizeable loans from the International Monetary Fund to cover the current account deficit, Brazil was forced to alter its exchange rate policy – a fixed exchange rate model was replaced by a floating exchange rate regime – and adopt an inflation-targeting regime and primary surplus in the fiscal sphere, as a means of warding off fears concerning the country’s ability to honor its commitments to international financial agents.

Although these measures managed to keep inflation stable, they failed to promote a recovery in economic growth. The last years of the twentieth century were consequently marked by economic stagnation, a process that generated strong internal contradictions that are made explicit in the low rate of GDP growth, a rise in unemployment, and a worsening of social conditions for a significant portion of the population. It is this agenda that in a large part was restored in the first decade of the twenty-first century.

It was in this climate of economic, political and social instability, that Luiz Inácio “Lula” da Silva was elected in 2002 as the President of Brazil, seeking to adopt a new economic and social development model to secure the resumption of growth, increase levels of job creation, fight against hunger and poverty, and improve levels of income distribution.

A growth strategy based on an “international commodities boom” and the expansion of the internal market

From 2003, a new growth strategy was put in place with the implementation of various policies aimed at stimulating productive investment and the generation of employment and income, while retaining the basis of macroeconomic stability of the previous period. Thus, Brazil had shown since 2003 a consistent pattern of growth that not only excelled among emerging countries, but also made it a major player in the global economic order (Gonçalves, 2003; IPEA, 2010; Ferrari Filho, 2003).

However, after Brazil began to suffer the effects of the subsequent global economic crisis, this growth trend was reversed. Thus, it is noted that between 2011 and 2014, the average rate of GDP growth was extremely low, at around 1.5 percent, with a virtually zero rate of growth in 2014 (Bacen, 2015). All recent forecasts (IMF, World Bank and Central Bank of Brazil) show that this economic scenario will not change in 2015, and may even provide lower rates to those of the previous year.

Note should also taken that the growth of the Brazilian economy, especially between 2003 and 2008, was made possible by a favorable international environment, especially with the expansion of the global demand for commodities and the consequent increase in their prices, combined with a recovery of the domestic market, boosted by demands for durable consumer goods, especially in light of a liberal credit policy thanks to the abundance of international liquidity.

The strategy based on internal consumption

The strong expansion of both productive and consumer credit, particularly through sizeable loans from the public banks – which accounted for more than 50 percent of the total available credit – helped boost economic activities. In terms of employment performance, between 2003 and 2010, more than 14 million formal jobs were generated, which contributed decisively to reducing the precariousness of the labor market, with the reduction of the informal labor sector. But it is necessary to note that the vast majority of these new jobs were low-paying, and that more than two-thirds of the economically active population earned the equivalent of less than three minimum wages (IBGE, 2009 and 2011). In addition, during the first decade of the century, Brazilians still worked an average of 44 hours per week and labor turnover increased. On the other hand, between 2003 and 2010 there was a policy to increase the minimum wage, which led to its rise by 60 percent compared to the last decade of the twentieth century (Carneiro, 2006; Ferraz, Crocco and Elias, 2003; Sicsú and Castelar, 2009; Sader, 2013; Cardoso Junior, 2009).

Thus, the per capita income that had been static for more than two decades, grew at an average rate of 2.8 percent per year during the period between 2003 and 2011. These indicators led to positive effects on the concentration of income. This narrowed the historical gap between the average income of the richest ten percent compared to the poorest ten percent from 53 times in 2002 to 39 times in 2010 (IPEA, 2009; IPEA 2010). The result, according to the government, was that some 20 million Brazilians have been pulled out of poverty and have become part of the middle class (Neri, 2012; Pochmann, 2012).

Alongside these economic changes, social policies (such as those relating to social security and income transfer) adopted by governments in the 2003–2011 period were decisive in keeping the consumer market buoyant, as more than 13 million families have been financial beneficiaries. However, it is noteworthy that these factors did not significantly alter the consumption pattern in view of the socio-economic disparities still present in Brazilian society (Hall, 2013; Campello and Nery, 2013 and 2014; Leão and Pinzani, 2013; Soares, 2013).

In some ways, 2003 to 2011 could be considered the period of pro-poor growth in Brazil. In this period, Brazilian per capita income increased by 40 percent, from US$155 (£118 at the rate of exchange of R$4.66 per pound prevailing in April 2015) per month to a little more than US$155 (£165), while the Gini coefficient fell by 9.2 percent, from 0576 to 0523 (Campello and Neri 2014: 29). The incomes of the bottom decile rose much faster than the incomes of the top decile. The poverty rate fell from 37.13 percent of the population in 2003 to 21.42 percent in 2009 (Montero, 2014: 133). In absolute terms, from 2001 to 2007, the population living in extreme poverty (with monthly per capita income below US$20, or roughly £15) fell by 11 million people, while the number of people living in poverty (with monthly per capita income below US$42, or about £32) declined by 13 million (Barros et al 2010: 137). From 2003 to 2011, the number of people in the so-called “class C” – the marketing category consisting of those with a monthly family income between US$282 [£214] and US$1,130 [£855] – rose from 65.8 million to 105.4 million, becoming the majority of the Brazilian population. Commentators began to point to the emergence of Brazil’s “new middle class.” Some hailed this new middle class as the harbinger of a major transformation of Brazil, while others argued that this so-called new middle class was actually the “new working class” (Chaui 2013; Neri 2012; Pereira 2010; Pochmann 2012; Souza and Lamounier 2010).

In this period, there was certainly a major expansion of federal spending in the social arena. A recent study revealed that social spending showed the following behavior: between 1995 and 2002 (under President Fernando Henrique Cardoso) such spending increased from 11.24 percent of GDP to 12.92 percent of GDP, while between 2003 and 2010 such spending increased from 12.92 percent of GDP to 15.54 percent of GDP; this means that there was a percentage increase over both periods totalling approximately 173 percent. In absolute terms, the federal government spent R$638.5 billion on social programs in the year 2010 alone (IPEA, 2012).¹

Also according to IPEA (2012), two areas had significant growth in the levels of social spending by the federal government: education and social assistance. Education spending under President...

Table of contents

• Cover
• Title
• Part I  Introduction
• Part II  Crisis in the Global Economic Order
• Part III  The Brazilian Economy Today: Situation and Challenges
• Part IV  The Brazilian Social Situation Today
• Index