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Brazil’s Development Strategy

Brazil’s Development Strategy. Nelson Barbosa November 7, 2011. 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)

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Brazil’s Development Strategy

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  1. Brazil’s Development Strategy Nelson Barbosa November 7, 2011

  2. 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

  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”

  4. 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”.

  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 Source: IBGE

  7. Income Distribution */ Gini index of household per capita income. Source: IBGE. Elaborated by: MF/SPE.

  8. Financial fragility * */ Estimated data – September/2011. Source: BCB. Elaborated by: MF/SPE.

  9. Beyond the Washington ConsensusMacroeconomic 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 */ BCB’s forecast. Sources: IBGE and BCB. Elaborated by: MF/SPE.

  11. Real interest rate (“ex ante”)* */ Ex-ante (Swap 360 / Market Expectations for Inflation). Sources: BCB and BMF. Elaborated by: MF/SPE

  12. Beyond the Washington ConsensusThe 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 (infra-structure and innovation) • Universal public services • Income distribution

  13. The Brazilian Growth ModelFirst 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. Sources: MF/STN

  15. Sources: MF/STN

  16. The Brazilian Growth ModelSecond 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 */ Excludes foreign investments. **/ Accumulated in 12 months up to August. Sources: MF/STN and MP/DEST.

  18. Investment and Saving (% of GDP) Source: IBGE. Elaborated by: MF/SPE.

  19. 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 ModelThird 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 ChallengesInternational 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 ChallengesDomestic 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

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