Download Brazil`s Development Strategy

Brazil’s Development Strategy
Nelson Barbosa
November 7, 2011
1
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”
160
Brazil: terms of trade index (2006=100)
140
120
100
80
60
Source: IPEADATA, elaboração: MF/SE
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
40
3
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”.
160
Brazil: terms of trade index (2006=100)
140
120
100
80
60
Source: IPEADATA, elaboração: MF/SE
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
40
4
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
7
Source: IBGE
Income Distribution
0.600
Gini index*
0.580
0.573
0.565
0.565
0.568
0.566
0.560
0.560
0.558
0.553
0.547
0.545
0.540
0.535
0.532
0.528
0.520
0.520
0.514
0.509
0.500
1992
1993
1995
1996
1997
1998
1999
2001
2002
*/ Gini index of household per capita income.
Source: IBGE.
Elaborated by: MF/SPE.
2003
2004
2005
2006
2007
2008
2009
8
Financial fragility *
42,9
Total External Debt
International Reserves
Current Account
31,5
26,5
18,1
12,1 11,8
4,8
5,3
2,6
1,5
-0,5
-6,8
1974
Impact of 1st
oil shock
-4,0
-6,0
1982
Latin America
Debt Crisis
14,9
12,7
1987
Moratorium on
Foreign Debt
-1,7
1998
2008
Last year of
fixed NER
(Plano Real)
Subprime
crisis
*/ Estimated data – September/2011.
Source: BCB.
Elaborated by: MF/SPE.
-2,0
2011
Present
(Sep/2011)
9
Beyond the Washington Consensus
Macroeconomic 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 investment
10
Inflation
14
12,5
12
10
9,3
8,9
7,7
8
7,6
6,0
6
5,9
5,7
4,5
4
5,9
6,4
4,7
4,3
3,1
2
2011 *
2010
2009
2008
2007
2006
2005
2004
2003
2002
2012 *
*/ BCB’s forecast.
Sources: IBGE and BCB.
2001
2000
1999
0
11
Elaborated by: MF/SPE.
Real interest rate (“ex ante”)*
22
20
18
16
14
12
10
8
6
4,5
4
2
*/ Ex-ante (Swap 360 / Market Expectations for Inflation).
Sources: BCB and BMF.
Elaborated by: MF/SPE
out 11
abr 11
out 10
abr 10
out 09
abr 09
out 08
abr 08
out 07
abr 07
out 06
abr 06
out 05
abr 05
out 04
abr 04
out 03
abr 03
out 02
abr 02
out 01
-
12
Beyond the Washington Consensus
The 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 (infrastructure and innovation)
– Universal public services
– Income distribution
13
The Brazilian Growth Model
First 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
14
15
Sources: MF/STN
16
Sources: MF/STN
The Brazilian Growth Model
Second 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)
17
Public Investment
3,50
PAC
State Enterprises *
3,00
Federal Government
2,50
1,92
2,00
1,85
1,43
1,50
1,00
1,11
1,02
1,01
0,98
0,50
0,00
1,71
1,12
0,48
0,72
0,31
0,47
0,64
0,86
2003
2004
2005
2006
2007
2008
*/ Excludes foreign investments.
**/ Accumulated in 12 months up to August.
Sources: MF/STN and MP/DEST.
1,01
2009
1,21
1,05
2010
2011**
18
Investment and Saving (% of GDP)
20
19
Investment rate
Domestic Saving
18
17
16
15
14
13
12
11
10
19
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
20
The Brazilian Growth Model
Third 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)
21
Old and New Challenges
International 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
22
Old and New Challenges
Domestic 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
24