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Universidade de Brasília
Departamento de
Economia
STRUCTURAL CHANGE, MACRODYNAMIC CAPABILITY AND ECONOMIC
PERFORMANCE IN LATIN AMERICA: THE CASE OF BRASIL
Joanílio Rodolpho Teixeira
Department of Economics, University of Brasília (UnB)
The onset and aftermath of the debt crisis during the socalled "lost decade" of the eighties led many countries in
Latin America to abandon the inward-oriented, state-led,
development model that had been in place for the better
part of four decades. In its place was substituted an
outward-oriented model heavily reliant on market forces.
Almost two decades latter the picture is mixed. Growth did
not pick up as expected during the nineties, leading to
increasing disappointment with market oriented reforms.
Even Though things have improved in recent years, it is
not clear to what an extent this is due to the international
commodity boom more than to reforms finally paying off.
Elements of the
Washington Consensus
1.
2.
Fiscal discipline
Redirection of public expenditure priorities towards health,
education and infrastructure
3. Tax reform including the broadening of the tax base cutting
marginal tax rates
4. Unified and competitive exchange rates
5. Secure property rights
6. Deregulation
7. Trade liberalization of inward foreign direct investment;
8. Privatization
9. Elimination of barriers to direct foreign investment (DFI)
10. Financial liberalization
The Washington Consensus and East Asia
Elements ot the Washington Consensus
South Corea
1. Fiscal discipline
Yes, generally
2. Redirection of public expenditure
Yes
priorities towards health, education and
infrastructure
3. Tax reform, including the broadening Yes, generally
of the tax base and cutting marginal tax
rates
4. Unified and competitive exchange
Yes (except for limited time
rates
periods)
5. Secure property rights
President Park starts his rule
in 1961 by imprisoning
leading businessmen and
threatening confiscation of
their assets.
6. Deregulation
Limited
7. Trade liberalization
Limited until the 1980s
8. Privatization
No. Government established
many public enterprises
during 1950s and 1960s.
9. Elimination of barriers to direct
foreign investment (DFI)
10. Financial liberalization
DFI heavily restricted
Limited until the 1980s
Source: Williamson (1994) for first column, and authorΥs evaluation.
Taiwan
Yes
Yes
Yes
Yes
Yes
Limited
Limited until the 1980s
No. Government established
many public enterprises
during 1950s and 1960s.
DFI subject to government
control
Limited until the 1980s
Limits of the Stabilisation Plan
Based on the Exchange Anchor
Rate of exchange as
nominal anchor
Constraints and unrestrictions in
the international financial market
(Pendulum Policy)
Overvaluation of
Real
Deterioration of
trade Balance
Inflow of foreign
capital
Desacceleration
of inflation
Monetary policy
Against the stream
High rates
of interest
Expansion of
foreign debt
Bubbles of
consumption
Expansion of
Monetary base
Expansion of the
debt services
Operations to
sterilize
(open market)
money
Expectation of
devaluation
Stagnation
Unemployment
Recession
Unrestrictions and
Constraints in domestic
Financial markets
Expansion of
National Debt
Risks of speculative
attacks
Lack of credibility
Increasing risk
of default and
bankruptcy
Brazilian Perspective of the Washington Consensus
Reduction of
Public expenses
Improvements
In the productive
process
Reduction of
inflation
Reduction of
subsides
Controls of money
Supply and bank’s
Credits
Expansion of the
rates
of interest
Improvements
in income
distribution
Reforms of
Public sector
(privatization)
Reduction of
Private
investments
Expansion of
GNP
Liberalization of
Domestic markets
Expansion of
private savings
Reestablishment of
Competitive
relative prices
Expansion of
Investment
Devaluation of
Real
“Improvements” in
the trade balance
Liberalization of
foreign trade
Increasing
productivity
Expansion of
Savings
Reduction of imports
Better immersion
In international
Economic relations
Expansion of exports
PHASE I
Reduction of
Foreign debt
PHASE II
The figure shows a standard Swan diagram. We imagine a country with a
pegged exchange rate and high capital mobility, so that interest rates are
determined by the need to avoid rapid depletion of reserves, and in effect
monetary policy is removed as a tool of stabilization. Thus the "expenditure
level" policy variable on the horizontal axis is fiscal; glossing over many
complications, we can simply think of it as the budget deficit. On the other axis
we show an "expenditure composition" variable, the cost of production in our
country relative to that abroad.
What Swan pointed out was that the nature of the difficulties facing a country depend on
where in this space it resides. To see this, we draw two curves. One curve represents
conditions under which the country has "internal balance"; as drawn, it is upward-sloping.
The reason is that any rise in the country’s relative costs would tend to reduce exports,
increase imports, and thus reduce employment; to compensate, to keep employment
constant, the country would need to have a fiscal stimulus – a larger budget deficit. At any
point to the right or below this internal balance curve, the economy will suffer from too much
demand for its goods, and will experience inflationary pressures. At any point above or to
the left, it will suffer from unemployment.
The other curve shows conditions under which the country has "external balance". It slopes
downward, because an increase in spending would other things equal increase the current
account deficit; to offset this the relative cost of production in this country would have to fall.
At any point below or to the left of the external balance curve, the country will have a current
account surplus (or at least a deficit below what is really appropriate), at any point above or
to the right an unacceptably high current account deficit.
These two curves define four "zones of economic unhappiness", shown in the figure;
only at the point where the two curves cross is the economy without problems internal
or external. (All happy economies are alike; each unhappy economy is unhappy in its
own way). A country may have an external surplus or deficit; it may have unemployment
or inflation. And by considering what kind of economic problems a country has, one
gets a clue as to what kind of policy action is appropriate.
The IB curve reflects all combinations of the exchange rate (e) and domestic spending (C+ I + G) that generate
the desired internal balance in the economy. Similarly, the EB curve shows all combinations of e and (C + I + G)
that produce external balance(balance in the current account). The area below the IB curve indicates
unemployment, and the area above the curve reflects inflation. The area below the EB curve reflects current
account deficits and the area above the curve indicates current account surpluses.
Selected Indicators of the Brazilian Economy
C O NTENTS
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2.66
3.27
0.13
0.79
4.36
1.31
1.93
0.54
4.94
2.3
2.86
2.2
3.3
0.0
0.3
4.3
1.3
2.7
1.1
5.7
2.9
3.7
Rate of In vestment" (% GDP ).
19.1
19.6
19.2
17.9
19.3
19.4
19.8
19.0
17.6
18.7
18.9
Rate of Unemployment
10.5
10.7
11.9
11.8
11.7
11.1
11.6
11.5
9.8
9.8
9.7
Price Index (%)
9.56
5.22
1.66
8.94
5.97
7.67
12.53
9.30
7.60
5.69
3.14
Basic Rate of Interest(%) Π
accumulated
27.41 24.79 28.79 25.59 17.43 17.24 19.17 23.35 16.25
19.04
15.08
Real Rate of Interest (%)
16.29 18.60 26.69 15.28 10.81
8.89
5.90
12.85
8.04
12.63
11.57
Primary Superavit(% of GDP ) new
meth.
-0.09
3.35
3.55
3.89
4.18
4.35
3.88
Public Debt/GDP (%) new meth.
30.72 31.83 38.94 44.53 45.54 48.44 50.46 52.36 46.99
46.45
44.91
T rade BalanceΠ US$ bi
-5.60
44.76
46.11
Export Π US$ bi
47.75 52.99 51.14 48.01 55.09 58.22 60.36 73.08 96.48 118.31 137.47
ImportsΠ US$ bi
-73.55 -91.36
53.35 59.75 57.71 49.21 55.78 55.57 47.24 48.30 62.83
Current Account (% of GDP ) new
meth.
-2.80
-4.19
-1.51
0.76
1.76
1.59
1.24
Current Account (US$ bi)
23.50 30.45 33.42 25.33 24.22 23.21
-7.64
4.18
11.71
13.98
13.28
Exchange RateΠ nominal variation
(%)
6.88
7.41
8.27
48.01
9.30
18.67 52.27
18.23
-8,13
-11.81
-8.66
Average Exchange Rate (R$/US$)
1.00
1.08
1.16
1.81
1.83
2.35
3.07
2.93
2.43
2.18
GDP Π real variation (%)
ancient methodology
GDP Π real variation (%)
new methodology
-0.88
-6.75
-3.50
0.01
-6.57
-3.96
2.92
-1.20
-4.32
3.24
-0.69
-3.76
2.65
13.12 24.78 33.64
2.93
EMBI spreads
Close July 23th
Argentina
Belize
Brazil
Chile
Colombia
Dominican Rep
Ecuador
El Salvador
México
Panamá
Perú
Trinidad and Tob.
Uruguay
Venezuela
Costa Rica
Guatemala
Jamaica
LAC Average
AMBI Global
VIX
US High Yield
Source: IDB Research Dept.
355
407
169
85
139
170
723
138
119
142
133
147
168
327
114
150
314
224
189.04
16.81
8.54
Close Oct 10th
372
484
161
123
153
219
585
166
116
152
127
164
201
398
183
146
357
242
200.06
16.67
8.56
Change
between
07/23-08/16
%
43,5
5,7
34,9
31,8
55,4
61,2
6,5
39,9
36,1
38,7
44,4
13,6
38,1
56,3
72,8
34,7
30,6
38
36,2
83,4
7,1
Change
between
07/23-09/07
%
30,4
19,2
24,9
31,8
54
75,9
-3
48,6
17,6
32,4
32,3
16,3
47
56,6
76,3
40
30,6
37,1
30,9
56,0
5,8
Change
between
07/23-10/10
%
4,8
18,9
-4,7
44,7
10,1
28,8
-19,1
20,3
-2,5
7,0
-4,5
11,6
19,6
21,7
22,0
28,0
13,7
13,0
5,8
-0,8
0,3
Currency moves
Argentina
Belize
Brazil
Chile
Colombia
Dominican Rep
México
Perú
Trinidad and Tob.
Uruguay
Costa Rica
Guatemala
Jamaica
Average
Change
between
07/23-08/16
%
1,09
0
11,63
2,12
12,28
0,61
3,93
0,32
-0,16
-0,44
0,02
-0,2
0,82
2,46
Source: IDB Research Dept.
Change
between
07/23-09/07
%
1,19
-1,02
6,65
1,07
14,25
1,83
3,48
0,16
-0,32
-1,6
-0,03
0,16
2,28
2,16
Change
between
07/23-10/10
%
0,92
0
-2,18
-3,59
3,59
2,13
0,54
-4,48
-0,32
-6,24
-0,02
0,91
0,53
-0,63
Stock prices
Argentina
Brazil
Chile
Colombia
México
Perú
Venezuela
LAC 7 Avergage
Change
between
07/23-08/16
%
-20,4
-17,3
-10,2
-11
-13,6
-17,3
-4,4
-13,4
Change
between
07/23-09/07
%
-11,4
-6
-3,8
-4,2
-6
-16,8
-6,9
-7,9
Change
between
07/23-10/10
%
-1,1
8,9
1,1
-5,8
-0,1
-6,1
-9
-1,8
-7,9
-6
1
Dow Jones
Source: IDB Research Dept.
Monetary and Financial aspects of Macrodynamic Capability
7
Medium and Long
Term assets
Liquid Assets
Finance
1
2
Investment
Innovation
3
4
9
Consumption
Income /
Production
10
11
12
6
5
Employment
8
Saving
Structural Change
13
14
Development
HYPOTHESES ABOUT REFORM
1. Policy reforms emerge in response to crisis
2. Strong external support (aid) is an important condition for successful reform
3. Authoritarian regimes are best at carrying out reform
4. Policy reform is a right-wing-program
6. Reforms are difficult to sustain unless the government has a solid base of legislative support
7. A government may compensate for the lack of a strong base of support if the opposition is weak and
fragmented
8. Social consensus is a powerful factor impelling reform
9. Visionary leadership is important
10. A coherent and united economic team is important
11. Successful reform requires economists in positions of political responsibility
12. Successful reform requres a comprehensive program capable of rapid implementation
13. Reformers should mask their intentions to the general public
14. Reformers should make good use of the media
15. Reform becomes easier if the losers are compensated
16. Sustainability can be enhanced by accelerating the emergence of winners
Source: Williamson (1994)
THE DAUNTING TASK AHEAD
The current drawbacks in Lula’s administration prompt an impulse to answer a set of(im)pertinent questions regarding the
scope of policies for emerging economies:
i) Why do the administrators of the Financial system deliver the same medicine to each ailing
developing country?
ii) Is it the case that policies are only introduced if they are in the interests of the domestic oligarchy
who will retain wealth and privilege whatever external policies are proposed?
iii) Why do orthodox packages of structural adjustment systematically bring about recession,
unemployment and further polarization of income and wealth in countries with basically no social
safety nets to protect ordinary people?
iv) Why is it that the financial system is so fiercely protected in its speculative operations around the
world?
v) Are the conventional policies implemented because it is believed they really overcome crisis in
developing countries or they are mainly designed to benefit financial interest in advanced industrial
world?
vi) Why, in theory, do the financial monarchs support democratic institutions
when, in practice, they undermine democratic process by imposing imprudent
policies that hurt the ordinary people and lead to social turmoil and democratic setbacks?
vii) Why the adjustment crusade for “internal balance” (fiscal responsibility) and
“external balance” (current account equilibrium) is always pushing for the reduction of real
wages but rarely questions military and propagandist expenses?
viii) Why to enforce conventional measures to protect copyrights licensing,
designs and pattern laws, misconceived to the extent that they attempt to
confine knowledge to limited frontiers, instead of stimulating technological
diffusion, worldwide efficiency and higher welfare in developing countries?
ix) Finally, what should be a fair fiscal instance on developing countries in face
of recession or economic downturn?
There is some skepticism in the air but as Gramsci (1971, p. 374) used to consider, “if the
skeptic takes part in the debate, it means that he thinks that he can convince people. That
is, he is no longer a skeptic, but represents a positive opinion, which is usually bad and
can triumph only by convincing the community that other opinions are even worse,
because useless”. In other words, the choice to accelerate actions towards resource
creation with a human face is gloomy. Above all, banking institutions are more dangerous
nowadays to Brazil’s socio.economic progress than standing armies.