Charting new directions: - Alfred Herrhausen Gesellschaft

Charting newdirections:Brazil’s role in a multi-polar world

2Charting new directions: Brazil’s role in a multi-polar worldPublished in 2011 by ForesightCopyright © 2011 ForesightForesight contacts:ALFRED HERRHAUSEN SOCIETYThe International Forum of Deutsche BankUnter den Linden 13-1510117 BerlinGermanyt: +49 30 3407 4201f: +49 30 3407 4209w: www.alfred-herrhausen-gesellschaft.dePOLICY NETWORKThird Floor11 Tufton StreetLondon SW1P 3QBUnited Kingdomt: +44 (0)20 7340 2200f: +44 (0)20 7340 2211w: www.policy-network.netFront cover photo: National Congress of Brazil (Nereu Ramos Palace) in BrasíliaSection one photo: Bovespa, the São Paulo stock exchangeSection two photo: Paraisopolis in the city of São Paulo © Tuca VieiraSection three photo: Itamaraty, the ministry of external affairs in BrasíliaAll rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may bereproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording orotherwise, without the prior permission of the publisher.Printed by Newnorthwww.foresightproject.net

Charting new directions: Brazil’s role in a multi-polar world 3ContentsForeword 5Wolfgang Nowak and Priya ShankarPreface 7Marcio PochmannIntroduction: Reclaiming the future 11Alfredo Cabral, Elena Jurado and Priya ShankarSection one Pathways to sustainable growthBuilding Brazil’s economic future 17Nelson BarbosaNavigating the labyrinth: innovation and development 21Glauco ArbixBecoming an energy powerhouse 25Mauricio Tolmasquim and Amilcar GuerreiroEscaping the trade trap: the east Asian experience 29Yang YaoData Economic and social data 34Section two Internal tensions and social cohesionAdvancing a new deal for Brazil 43André SingerThe construction of a strategic social policy 47Jorge Abrahão de CastroThe national option: throw out the old clothes and build a new model 51Daniel VargasThe search for a moral compass: India after globalisation 55Niraja Gopal JayalOvercoming political polarisation: the future of the United States 59William GalstonSection three Seeking autonomy in an age of interdependenceThe cautious emergence of Brazil 65Riordan RoettBrazil and Latin America: towards integration or separation? 69Marcel F. BiatoThe diplomacy of generosity 73Rubens BarbosaCharting a course for Brazil’s rise 77Charles A. KupchanAbout Ipea, Alfred Herrhausen Society and Policy Network 82ContentsThe views expressed in the articles of this reader are solely those of the authors and do not represent the views of the conveners of the Foresight project.

Charting new directions: Brazil’s role in a multi-polar world 7PrefaceMarcio PochmannIn recent years, in a context of deepening democracy(where a metalworker and now a woman have beenelected president), Brazil has managed to reconcileeconomic growth with improved income distribution.Progress has been made in the modernisation ofeconomic activity, the promotion of more equitableand environmentally sustainable development andthe valorisation of citizenship. Over ten million jobswere created between 2003 and 2010, accompaniedby a significant increase in real income and minimumwage. The Brazilian state has played a strategicrole in the advancement and protection of socialsecurity. Direct income transfer programmes to poorfamilies, including Bolsa Familia (the family allowanceprogramme), the continuous benefit provision and therural pension programmes were crucial for the cycleof sustained economic growth, strengthening theinternal market and improving living conditions of thepoorest segments of society.Considerable progress has also been made inforeign relations. International reserves surpassed$300bn and Brazilian companies and banks wereinternationalised. The country now participates invarious significant international forums, such as theG20 major economies, the G20 developing nations,the Basel Committee on Banking Supervision and theFinancial Stability Board. It has also been involved in thereform of IMF and World Bank voting and governancestructures.Considering the current innovative and creativemoment in the field of ideas and public policies,the Institute of Applied Economic Research (Ipea)believes that these achievements need to be widelydiscussed, understood and improved, when pursuingthe new model of Brazilian development. 1 In termsof the design and implementation of public policies,the ongoing, collective and cumulative exercise ofdemocracy in Brazil points towards the growingmaturity of institutions. But major challenges still loomover Brazilian society.As stated by the President, Dilma Rousseff:“the economic and social gains of recent years areallowing a renewed confidence in the future. A hugewindow of opportunity opens for Brazil. To becomean economically rich and a socially just country nolonger seems a distant goal. However, there still areenormous challenges ahead. The main ones include theprovision of quality education, the democratisation ofknowledge and a form of development which respectsthe environment. Prioritising education implies theconsolidation of universal values of democracy,freedom and tolerance, ensuring opportunities forall. We are making the right choices: Brazil combinesthe effective reduction of social inequalities with itsinsertion as a leading environmental, economic andcultural power”. 2The population’s full social inclusion depends onuniversalising and improving the quality of essentialpublic services, particularly health, education andsafety. President Dilma Rousseff, in her inaugural1 The Institute for Applied Economic Research (Ipea) has made an enormous effort to understand the main characteristics of this “new cycle of Braziliandevelopment,” based on the expansion of the domestic market, the reduction of poverty and income inequality, expanding popular participation andintensifying international insertion by means of the project Perspectives of the Brazilian Development, which articulates a comprehensive set ofstudies, called “Core Themes for Development”. All these documents are available on Ipea’s website (http://www.ipea.gov.br).2 Rousseff, Dilma. “País do conhecimento, potência ambiental”, Folha de S.Paulo, São Paulo, 20 February 2011, p.A3..Preface | Marcio Pochmann

8Charting new directions: Brazil’s role in a multi-polar worldaddress, explained her government’s obstinate struggleto eradicate extreme poverty and create opportunitiesfor all. “I will not rest while there are Brazilians whohave no food on their tables, while there are desperatefamilies on the streets, while there are poor childrenabandoned to their own devices. Family unity lies infood, peace and happiness. This is the dream I willpursue!”Ipea seeks to contribute to this goal by developinga measurement of extreme poverty that will allowthe tracking and monitoring of government actionsaimed at reducing the number of poor citizens in thecountry over the coming years. The national rate ofextreme poverty fell from 42.9% in 1978 to 9.4% in2008. Furthermore, rural poverty declined from 72.5%to 22.9%, while urban poverty fell more rapidly, from18.4% in 1978 to 5.5% in big cities, and from 38.1%to 7.8% in smaller towns during the same period.Accordingly, when considering the rate of extremepoverty, for every existing destitute person in majormetropolitan centres, there are four times as manyin the rural areas. Overcoming extreme poverty,which still affects one in ten Brazilians, requiresfurther refinement of policies, targeting mainly ruralareas 3 . Therefore, these differences in rural and urbaneconomic and social structures are important whendesigning public policies, capable of addressingextreme poverty throughout the country.By sharing good practices in the formulation andimplementation of public policies - be they domestic orinternationally oriented - Brazil has been consolidatingits presence in the world. The major transformationsin the social and economic arena, resulting from theimplementation of inclusive public policies, designed bythe Brazilian government, have attracted the attentionof the international community. At the same time, anactive diplomacy promoting global development andthe increasing participation of developing countriesin international trade, gross fixed capital formation,south-south cooperation and major internationalforums have also helped consolidate Brazil’s presencein the international political arena.According to the minister of external relations,Antonio Patriota, “In the new multipolar configurationthat has been shaping geopolitics in the early yearsof this century, Brazil - with a tradition of peace andtolerance - stands out as an actor with favourableattributes for promoting more inclusive developmentmodels and strengthening cooperation among nationsthrough governance mechanisms that are morelegitimate and representative”. 4 In concert with theBrazilian Agency for Cooperation (ABC) of the Ministryof External Relations, Ipea conducted a survey whichindicated that the country spent R$2.9bn (from2005-2009) on development cooperation, includinghumanitarian assistance, scholarship for foreigners,technical, scientific and technological cooperation, andcontributions to international organisations. 5 For themost part, Brazilian cooperation has been intended forthe least developed countries in Latin America and theCaribbean, Africa and Asia.In a world marked by increasing globalinterdependence, understanding how internationaltrends affect local dynamics, and vice-versa, is anessential task for the success of any country. Hencethe importance and necessity of the Foresight projectdeveloped in partnership with the Alfred HerrhausenSociety and Policy Network.It is the mission of Ipea “to produce, articulate anddisseminate knowledge to improve public policies andcontribute to the planning of Brazilian development”.In this maxim it is crucial for Ipea to help pursue and3 Household income per capita up to a quarter of minimum wage4 Patriota, Antonio A. Remarks by Minister Antonio de Aguiar Patriota during the Inauguration Ceremony for the Office of Brazilian Ministry of ExternalRelation. Brasília, Ministry of External Relations, 2 January 2011.5 See “Brazilian Cooperation for International Development: 2005 and 2009”. Brasília: Institute for Applied Economic Research (Ipea) and Brazilian Agencyfor Cooperation (ABC), 2010.Preface | Marcio Pochmann

Charting new directions: Brazil’s role in a multi-polar world9disseminate the principles and ideals of a nationaldemocratic state, of participatory governmentplanning and public policies as vehicles for economicand social development, both locally and globally. Thepartnership of Ipea with the Foresight initiative supportsthis process by bringing viewpoints from differentcountries to the domestic debate and internationallydisseminating national innovative practices.Marcio pochmann is president of the Institute for AppliedEconomic Research (Ipea).Preface | Marcio Pochmann

Alfredo Cabral, Elena Jurado and Priya Shankar * development model. There remain no clear answersCharting new directions: Brazil’s role in a multi-polar world 11of development Brazil should follow in an uncertainIntroduction:world. The global financial crisis led to the questioningof the American model of freewheeling capitalism,Reclaiming the future the European social model based on a paternalisticwelfare state, and even the east Asian export-ledor ‘models’ for the future. Indeed, many countries arerealising the need to rethink their future or challengethe conventional wisdom and assumptions that haveguided their choices. Brazil, with its wide range ofexperiences and experiments, is uniquely poised totake part in this process.On 1 January 2011, in her inaugural address as Brazil’sfirst female head of state, Dilma Rousseff reiterated herpromise to consolidate and take forward the policiesof the previous Presidency, which saw rising optimismand self-confidence in Brazil. Observers have often saidof Brazil that it is “the country of the future and alwayswill be”. Over the last decade, with socially inclusiveeconomic growth and increasing international clout,the future appears to have arrived. Indeed, there is agrowing sense in the country that now is the moment ofBrazil, and that the country can shape its own destiny.There are good reasons for Brazilians to feelconfident. Their country has weathered the recentglobal financial crisis successfully and tens of millionsof its citizens have risen into the ranks of the middleclass over the last few years. Rich in commodities andwith a strong manufacturing base, Brazil combines avariety of attributes which promise to serve the countrywell in an increasingly complex international landscape.This includes a liberal democratic system and vibrantmulticultural society with strong affinities to Europe,Africa and Asia – a multifaceted national identity whichprovides Brazil with a unique vantage in both the globalnorth and south.However, significant challenges remain, includingin relation to education, health, crime and inequality.The country has successfully and peacefully managedthe transition to a democratic polity, a stable economy,and an increasingly middle-class society. Thesetransitions have been based on gradual and hybrideconomic, social and international policies, which defyeasy categorisation. As the contributions to this readermake clear, the refusal to be bound by the constraints ofa specific paradigm brought considerable achievementsto Brazil, both at home and abroad. However, in orderto consolidate and further its achievements, Brazilwill need to complement its creative, but sometimespiecemeal, ad hoc policies with a bolder and morestrategic approach.Its success will ultimately depend on the Brazilianleadership’s ability to coordinate its policies in pursuitof a clear set of goals. This reader explores Brazil’sprospects for achieving this in the context of threedistinct, but inter-related challenges: pursuing balancedeconomic growth; managing internal tensions andensuring social cohesion; and seeking greater autonomyin an interdependent world. Each of these challengesis explored in a separate section of the reader by aselection of Brazilian and international authors. Thearticles provide valuable insights into Brazil’s nationalspecificities and also highlight important parallels andlessons between Brazil and other major powers.There are growing questions about the future path* We are grateful to Ben Blackburn and Robert Tinker for their excellent assistance with this publication.Introduction: Reclaiming the future | Alfredo Cabral, Elena Jurado and Priya Shankar

12Charting new directions: Brazil’s role in a multi-polar worldPathways to sustainable growthThe current financial crisis seems to have dealt aserious blow to the American neoliberal growthmodel, which encouraged conspicuous levels ofconsumption and allowed for high levels of debt. EastAsian growth strategies, based on export-led growth,high savings and low levels of domestic consumptionare also under pressure. And, as the global economybegins to recover, there are still no clear pathways tosustainable growth.In Brazil, the previous President, Luiz Inácio Lula daSilva, continued the market-oriented policies of hispredecessor, Fernando Henrique Cardoso, includingfiscal discipline and a floating exchange rate, in orderto maintain macroeconomic stability. But thesepolicies were combined with a developmentalistapproach to social policy and strategic interventionsin the economy through a raft of industrial policies.This led to the resilience of the Brazilian economyin the face of the financial crisis, but significant risksand dilemmas remain.At the macroeconomic level, there is the dilemmaof how to maintain public spending in a way that isconsistent with fiscal stability. As Nelson Barbosaargues, this may be possible by bringing moreeconomic activity into the formal sector with theresultant benefits for public revenues. There isalso concern about how to encourage growth andinvestment in a manner that does not accelerateinflation. And, therefore, the interest rate, whichis amongst the highest in the world, is a highlycontentious issue in Brazil with many advocating ahigh interest rate to keep inflation levels low whileothers argue for a lowering of the interest rate inorder to make credit for investment more easilyavailable.Many are optimistic that Brazil may be able toovercome these dilemmas by harnessing its naturalresources. The recent discoveries of oil and gas offthe coast of Brazil present the country with a valuableopportunity and it has the potential to utilise theseenergy resources for its economic development,as Mauricio Tolmasquim and Amilcar Guerreiroadvocate. Brazil’s rich commodity base is a hugeadvantage, but there are also risks associated withexcessive reliance on primary products. As Yao Yangpoints out, a resource curse hangs over commodityrich countries, where improved terms of trade forthe export of commodities (in particular currencyappreciation) often reduce the competitiveness ofthese countries in manufactured goods.Indeed, there is debate in Brazil about whether toemphasise commodity production or manufacturingas the path to economic growth. However, such astark choice may not be necessary and there couldbe synergies between the two sectors if the Braziliangovernment is strategic in its choices, such asutilising profits from commodity exports to financethe diversification and development of the rest of theeconomy and create jobs. In addition, as Glauco Arbixargues, innovation will be increasingly significant inhelping spur economic growth across each of thesesectors. However, if the Brazilian economy is toenhance growth and achieve innovation, a numberof complex and difficult structural changes will benecessary, including further tax and financial reformsto facilitate financing and the growth of small- andmedium-sized businesses, and broad infrastructuralimprovements.Internal tensions and social cohesionThe changes associated with globalisation have puta strain on the social fabric of countries, with risingindividualism in metropolitan areas, while exposingdeep divisions between regions, rural and urbanareas, socioeconomic groups and ethnicities. AsWilliam Galston and Niraja Gopal explore in theircontributions, this is as true in advanced industrialisedcountries such as the United States as it is in thedeveloping world, where huge income disparitiescontinue to widen.In this context, Brazil’s recent experience can beconsidered a success story. Through a combinationof orthodox macroeconomic policies and anIntroduction: Reclaiming the future | Alfredo Cabral, Elena Jurado and Priya Shankar

Charting new directions: Brazil’s role in a multi-polar world 13unprecedented expansion of social spending, Brazilachieved remarkable reductions in income inequalityand extreme poverty. As Jorge Abrahão de Castropoints out, the Lula administration’s hybrid economicand social policies transformed public spending intoa core element in the country’s growth strategy,creating new consumption markets rather than onlyassisting the destitute. Despite the frictions whichare set to mark the political cycle, described in thisvolume by André Singer, the cross-partisan consensusaround programmes like Bolsa Família suggest longterm continuity in income transfer.However, persistent social and regional tensionsand inequalities remain. Even though growth isbeginning to spread to other regions, the state ofSão Paulo continues to account for one-third of GDP.Meanwhile, income disparities are significantly higherthan in other emerging economies, including Indiaand China. And the country faces further dilemmasin addressing public security and racial inequality.If Brazil is to consolidate its social achievements, itwill need to complement its use of income transferswith policies aimed at strengthening universalpublic services, but this presents considerablechallenges. There is no agreement on the size andscope of government interventions, or on the kindof taxation that will provide the funding for additionalpublic spending. Moreover, even if the fundingcan be obtained, it is not clear that redistributivepolicies will be sufficient to correct the country’sentrenched inequalities. As Daniel Vargas warns inhis contribution, if Brazil is to achieve a truly cohesivesociety, it will need to make more fundamentalchanges to its national model.Seeking autonomy in anage of interdependenceThe capacity to shape international norms is aprerequisite for successful national development.The demands for reform of global governanceadvanced by the emerging economies over the lastdecade should be understood in this light. WithinBrazil, there are voices calling for greater autonomyin international negotiations. Under the banner of”sovereign international insertion“, there is a growingbelief that, as a big state, Brazil should have thecapacity to participate in international affairs on thebasis of its own national strategic considerations.Brazil has led calls for reform of the votingstructures of the Bretton Woods institutions andplayed an assertive role in negotiations within theWTO. It fostered closer links with the global south,particularly with other Latin American countries andAfrica. Indeed, as Rubens Barbosa points out in hiscontribution, the prioritisation of south-south relationshas given Brazil a new diplomatic soft power, whichit has used effectively to promote its interests in avariety of international forums.And yet, as Riordan Roett suggests, Brazil has notbeen radically revisionist. It has pursued reformsin a conciliatory manner, trying where possible toseek consensus with all the major powers ratherthan unilaterally disrupt the status quo. Over thelast few years, Brazil maintained amicable relationswith the United States, paid its IMF debt andplayed a cooperative role within the United Nationsframework. So far, this conciliatory approach hasserved Brazil well. However, in order to enhance itscapacity to institutionalise change, Brazil may needa more audacious approach and will be faced withdifficult choices.This will include a balancing of its regional andglobal pursuits. So far, Brazil’s efforts at regionalintegration have met with considerable success butthere are tensions, as Brazil’s growing internationalpresence arouses concern among its neighbours.As Marcel Biato proposes in his contribution, thetask before Brazil is to continue deepening regionalintegration beyond its current emphasis on trade.This will help create the united regional front Brazilrequires to have a greater voice in the rest of theworld.In order to further these aims, Brazil will need towork on improving its homefront as Charles KupchanIntroduction: Reclaiming the future | Alfredo Cabral, Elena Jurado and Priya Shankar

14Charting new directions: Brazil’s role in a multi-polar worldpoints out. This will require greater investment inhuman capital and institutional infrastructure toguide and sustain its pursuit of greater autonomy and“sovereign international insertion”.Brazil in a multipolar worldWith the international and domestic legacy that itinherits, Brazil has before it a range of unprecedentedopportunities. At the international level, as the globalbalance of power shifts, there is greater room formanoeuvre for Brazil and other emerging economies.Free of the geopolitical conflicts and enmities thatconstrain other emerging powers, Brazil can makethe most of this changing international landscape.With the declining hegemony of the Americanmodel, there is now a plurality of choices about thepaths that Brazil and other countries can follow. Atthe domestic level, Brazil has successfully achievedmacroeconomic stabilisation and widespread povertyreduction. Its discovery of oil and gas, as well as itsvast agricultural and mineral resources, offer it anenvironment of abundance and plenty rather than theconcerns about scarcity that many other emergingpowers face.If Brazil is to further and consolidate its successes,and make the most of these vast opportunities, it willneed to complement its innovative mix of policies witha more strategic and coordinated approach. As thearticles in this volume point out, there are often linksbetween different policy areas from oil explorationto education. Keeping in mind these linkages andensuring that different measures work together willbe key in the years ahead. And, in an interdependentand rapidly changing world, the decisions Brazilmakes will also have important implications for otherparts of the world. As such, there is a mutual interestfor countries to learn from each other, a process thatthe Foresight initiative and this publication aim tofacilitate.Alfredo Cabral is strategic planning and policy researcherat Policy Network.Elena Jurado is head of research at Policy NetworkPriya Shankar is senior project manager and researcher atPolicy NetworkIntroduction: Reclaiming the future | Alfredo Cabral, Elena Jurado and Priya Shankar

Section one:Pathways tosustainable growth

Charting new directions: Brazil’s role in a multi-polar world 17Building Brazil’seconomic futureNelson BarbosaOver the past eight years Brazil has initiated a newdevelopment cycle based on the expansion of itsdomestic market and a reduction in poverty andincome inequality. The starting point of this modelwas an exogenous policy driven expansion in thecountry’s social safety net, through higher incometransfers to the poor and faster growth in the realminimum wage. This initial stimulus by the federalgovernment started a virtuous circle of growth ofincome and employment in which the increasein the workers’ income and consumption led tomore investment, and which in turn raised labourproductivity and allowed for further increase in realwages without excessive pressures on inflation.The virtuous circle between real wage and labourproductivity was also aided by a series of governmentprogrammes aimed at social inclusion through creditexpansion and higher public and private investmentin housing and infrastructure.The new Brazilian modelThe new Brazilian model has also benefited fromthe growing world demand for commodities in thepast eight years. The increase in Brazilian commodityexports allowed a substantial growth in Brazilianimports of capital and intermediary goods withonly a moderate reduction in the country’s currentaccount balance in terms of GDP. At the same time,the increase in foreign capital inflows allowed theBrazilian government to increase its internationalreserves substantially and, in this way, it reduced thecountry’s vulnerability to international financial shocks.However, the counter-effect of the commodity boomwas the appreciation of the Brazilian currency, whichinitially helped the central bank to fight inflation andreduce real interest rates, but that more recentlyhas been eroding the competitiveness of Brazilianmanufacturing.A key factor for Brazil’s success in the past eightyears has been a pragmatic and responsible approachto macroeconomic policy. On fiscal policy, all of theincrease in the federal revenues in terms of GDP hasbeen channelled into income transfers and publicinvestment, leaving the net tax burden on the privatesector stable. On monetary policy, the governmenthas adopted realistic inflation targets to deal withprice shocks coming from the rest of the world andthe structural change in Brazil’s own economy. Thisapproach managed not only to accelerate growth andreduce inflation, but also reduced the country’s netpublic debt in terms of GDP and real interest rate. Ina nutshell, Brazilian macroeconomic policy has beenmarked by financial and social responsibility.The success of the recent Brazilian model and thechange in international conditions after the 2008-09crisis created new challenges for Brazil’s economicpolicy. On the domestic side, there is a growingdemand for the expansion and improvement inuniversal public services, especially in health,education and public security. There is also theneed to consolidate the social safety net expandedin the last eight years and to address the inevitablepressures of ageing on social security. Since all ofthese social demands must be attended to withoutcompromising fiscal and monetary stability, a furtherincrease in social spending depends on additionalgrowth in government revenues in terms of GDP,as well as on a reduction in the growth rate of nonessentialpublic spending.On the international side, the appreciation ofthe Brazilian real and the expectation of furtherappreciation due to oil exports in the near futureBuilding Brazil’s economic future | Nelson Barbosa

18Charting new directions: Brazil’s role in a multi-polar worldA key factor for Brazil’s successin the past eight years has been apragmatic and responsible approach tomacroeconomic policyput more pressure on the Brazilian government toincrease the country’s international competitivenessthrough structural programmes or reforms. The listof usual suspects includes tax reform, financialdevelopment and better infrastructure, but it alsoincludes a more active role for the state in planningand coordinating large investment projects as well asstimulating research, development and innovation.Fiscal and macroeconomic challengesThe new Brazilian model combines economic growthwith a reduction in income inequality. The aim for the2011-14 period is to achieve an average annual GDPgrowth rate between five percent and six percent, sothat labour productivity and real wages keep growing,the middle class continues to expand, inflation remainson target and public finances continue to improve.There are two main challenges to this objective.First, to manage the growth of public spending in away that is consistent with fiscal stability and, at thesame time, consolidates the social safety net built inthe recent past and attends to new social demands.Second, to manage the growth of investment andconsumption in a way that sustains growth withoutaccelerating inflation and, at the same time, avoids asubstantial increase in the country’s current accountdeficit.Consider first the fiscal challenge. In general thetax revenues of the Brazilian government have beengrowing slightly faster than GDP in the past yearsbecause of the increase in per capita income andreduction in the share of informal markets in theeconomy. Since there are still unexplored gains tobe made by bringing more people and firms to theformal economy, it is reasonable to expect thatgovernment revenues will increase slightly fasterthan GDP in the next years. 1 In turn, this expectedgrowth in government revenues means that therewill be some space for tax cuts even while increasingsocial spending per capita. Key to this solution is thatthe Brazilian population is expected to grow 0.7%per year during this decade. For instance, if socialspending grows five percent in real terms every yearwhile GDP grows at 5.5%, there will be no additionalpressure on the government’s budget from socialprogrammes, but per capita social spending will stillincrease by 52% in 10 years. The main challengeto public spending is therefore more political thaneconomic: to manage the expansion in socialprogrammes in a way that is consistent with bothfiscal stability and people’s expectations.Moving to the macroeconomic balance, thegovernment simulations indicate an average annualGDP growth of 5.5% would require an increasein Brazil’s investment ratio from 19% in 2010 tosomething between 22% and 23% in 2014 to keepinflation stable. This result would require an averagegrowth rate of 10% in investment, which in turnmeans that consumption would have to grow slowerthan GDP in the near future in order for Brazil to avoidan excessive increase in its current account balance.But is the required growth rate in consumptionsocially acceptable? Again the question here seemsmore political than economic, since even a relativelyslower expansion in consumption would still increasethe per capita consumption substantially in the nextyear.To illustrate the previous point, a simplemacroeconomic exercise shows that Brazil canreach an investment ratio of 22.5% by 2014, with arelatively stable trade balance in goods and services1 The market estimates of the GDP-elasticity of government revenues range from 1.1 to 1.3.Building Brazil’s economic future | Nelson Barbosa

Charting new directions: Brazil’s role in a multi-polar world 19in terms of GDP, provided that the country maintainsan average annual growth rate of 5.5% for GDP, 10%for investment, and 4.5% for consumption. 2 In turn,the relatively slower growth in overall consumptionis consistent with an average expansion of fivepercent in private consumption and three percentin government consumption. 3 Considering theexpected growth in Brazilian population, an averageannual growth rate of five percent in consumptionmeans a cumulated increase of 18% in per capitaconsumption in just four years.Financial developmentIn addition to macroeconomic consistency, theexpansion in Brazil’s investment ratio also dependson financial development. In the past eight yearsmost of the domestic funding in investment hasbeen supplied by the federal government through itsdevelopment bank, the BNDES. Since this source offinance has a high fiscal cost because of Brazil’s highreal interest rate, it is necessary to develop privatesources of finance in domestic currency whilereducing the economy’s interest rate. This challengewould require three parallel actions.First, maintain fiscal and monetary stability, withrealistic inflation targets, to continue to reduceBrazil’s real interest rate. The obvious trade-off hereis that a fast reduction in inflation targets means aslow reduction in real interest rates and vice versa.Second, change financial regulation to adaptthe economy to a low inflation and low interestrate context, in particular by reducing interest-rateindexation in public debt and eliminating institutionalfloors to market interest rates. Here, the main tradeoffis between the long term gains of changing theterm and index structure of public debt and the shortrun cost of doing it.Third, improve financial supervision and regulationto expand long term finance for investment in fixedcapital and housing, while preventing speculativebubbles. The obvious trade-off here is between fastercredit expansion and stronger supervision.Commodities and manufacturing:finding a balanceBrazil has been a strong commodity-exportingeconomy throughout its history. Its abundant naturalresources give it natural advantages in the productionof agricultural and mineral commodities, whereas thenewly discovered oil reserves indicate commodityexports may become even more significant in thenear future. Despite this background in primaryproducts, Brazil has also been able to develop a largeand diversified industrial structure since the mid 20thcentury.The main reasons for this industrial developmentwere a set of nationalistic government policies andprogrammes dating back to the 1950s and, moreimportantly, the size of the Brazilian domesticmarket. In contrast to other commodity exportingeconomies, the size and scale of Brazil’s domesticmarket makes it possible for the country to buildcompetitive advantages through temporaryprograms of industrial or productive development.The key to success in this area is to devise a setof transparent policy instruments that is capable ofstimulating investment, research and development,while avoiding the creation or permanent protectionof inefficient production. In line with Rodrik’s analysisof industrial policy, it is more important to drop thelosers when that condition becomes clear than topick the winners when one does not know who theymight be. 4In the specific case of Brazil the challenge for thecoming years is use the extraordinary “profits” fromcommodity production, especially oil, to financeand stimulate the development and diversificationof the rest of the economy. The activities to be2 The “starting” conditions are an investment-ratio of 19% of GDP and a trade deficit in goods and services of one percent of GDP on 2010.3 To put these numbers in historical perspective, the average growth rate of private and government consumption in 2003-10 was 3.6% and 4.3%,respectively.4 See, Rodrik, D. (2010), “The Return of Industrial Policy”, available at: http://www.project-syndicate.org/commentary/rodrik42/English.Building Brazil’s economic future | Nelson Barbosa

20Charting new directions: Brazil’s role in a multi-polar worldtargeted include exports, investment and innovation,which have been benefiting from general tax andfinancial incentives in the last eight years. The newfocus in the government agenda would also includelabour intensive production of goods and servicesthat employ highly skilled labour. In the short run,an important government tool to stimulate theseactivities is to reduce the relative cost of labourthrough a cut in government payroll taxes. The mainfocus of future government incentives should be toshape the content of domestic production togetherwith foreign partners around performance targets toaccelerate industrial catch up.Nelson Barbosa is executive-secretary of the Ministry ofFinance, BrazilBuilding Brazil’s economic future | Nelson Barbosa

Charting new directions: Brazil’s role in a multi-polar world 21Navigating thelabyrinth: innovationand developmentGlauco ArbixBrazil is at a key stage in its economic development.It has weathered the global financial crisis betterthan most countries and demonstrated high ratesof economic growth over the last decade. Yet, theBrazilian economy also faces significant challenges,including an appreciating real and competition fromcheap imports that threaten the industrial sector. In aninterdependent and globalised economy, innovationhas a significant role to play in spurring growth andhelping national economies find their distinctive niche.In Brazil, there is a new emphasis on innovation thatcomes from the recognition of the need to diversifythe economy, to expand exports and to increase theeconomy’s productivity and competitiveness. It isalso an area where, though Brazil has made a lot ofprogress in the recent past, it still has a long wayto go.The ecosystem of innovationThe debate about the meaning and potential ofinnovative practice still suffers from conceptualconfusion and it is important to differentiate innovationfrom invention. While invention and innovation areconnected by a continuum, innovation refers to a firstcommercialisation of an idea or project. Therefore,the sphere of innovation is a company, capable offine-tuning production and marketing, while inventionhas a different orientation and occurs in laboratories,universities and research centres. The transformationfrom invention to innovation does not always happenquickly and requires different types of knowledge,abilities, skills and resources.It is often the start of competition between firms,usually based on small changes, addition or copies,which enables the evolution from an inventioninto a viable product for the marketplace. Indeed,innovation is the result of extensive processes ofimprovement and redesigns, which may or may notinvolve technology, academic research or appliedresearch. All processes, discoveries, new productsand services, whether high-tech, low-tech or notech,that add economic value are innovations. Subtlemechanisms, seemingly minor and unimportant, areoften the real engines of the economy rather than bigleap advances in high technology.However, it is not easy to visualise the innovationprocess in all its breadth. Innovation often goesbeyond the horizon of business and developsthrough an extensive network of employees. Indeed,its commercial aspect is only one of its many faces.The web formed involves companies, entrepreneurs,researchers, distributors, academic institutions andconsumers, and creates a highly diverse and complexinnovation ecosystem. There is no ready recipe forguidance in this environment that, despite recentadvancements, still resembles a labyrinth.Brazil’s legacy and recent developmentsBrazil is a country that industrialised late and theprocess of developing science and technologyresearch only began in the 1970s, and was basedmostly at universities and research institutions. It isalso important to keep in mind that Brazil experienceda long period of macroeconomic instability in the nextdecades which significantly influenced the agendaof government, academia and business. As result,there was a low priority assigned to the economicsof innovation in the 1980s and early 1990s.The perspective began to change as the Brazilianeconomy stabilised and responded to the dynamicsof globalisation. In the late 1990s, sector funds wereintroduced to make resources available for researchNavigating the labyrinth: innovation and development | Glauco Arbix

22Charting new directions: Brazil’s role in a multi-polar worldand innovation in different industrial sectors. In2004, the federal government announced the Policyof Industry, Technology and Foreign Trade (PITCE),structured around innovation. The Law of Goods andthe Innovation Law that were adopted in the wakeof PITCE played an important role in building anenvironment that encourages innovation.Today, there are a range of resources availableto Brazilian companies that pursue innovation inproducts and processes. Bureaucratic procedureshave been simplified and tax incentives for researchand development (R&D) are available. There is a newsystem of subsidies for technological developmentprojects as well as subsidies that help placeresearchers in companies. The legal frameworkencourages greater interaction between universitiesand companies, and there are funding programmesfor innovation from venture capital.Achievements and challengesBrazilian policies for R&D have made possiblethe systems that support the aerospace industryat Embraer, refining and extraction at Petrobras,agricultural training at Embrapa and, more recently,the China-Brazil satellite programme. Indeed,expenditure on research and development has goneup and is now around one percent of GDP. Brazilalso has a large consumer market and a relativelylarge industrial sector. There are 90,000 industrialfirms that employ over six million workers and investabout $3bn a year in R&D.A significant portion of the business communityis now aware of the importance and necessity ofinnovation. Indeed, studies show that a new group ofenterprises is emerging that grows faster than otherBrazilian companies. This new group of enterprises ismore productive, invests more in R&D, training andcapacity building, pays better wages to employeesand obtains a special price on the internationalmarket. 1 Many of these companies have begun tointernationalise their activities, investing in othercountries and building systems of production andservices abroad. They are forming a select group ofcompetitive Brazilian multinationals.However, significant challenges remain andtechnological innovation indicators in Brazil are farbelow those in developed countries. Indeed, Chinaand India are making faster and wider strides in thefield of innovation. China has moved to third in theranking on investment in R&D, with a growth rate of18% over the last few years. 2The biggest challenge is encouraging greaterinnovation in the private sector. In Brazil, only about30% of companies are innovators while the averageshare in European Union countries is 50%. Braziliancompanies invest about 0.6% in R&D compared with2.7% in Germany and 2.5% in France. 3Making public funding more accessible to theprivate sector also presents a challenge. In Brazil,although the government is responsible for more thanhalf of R&D expenditure overall, Brazilian companiesuse 90% of their own resources rather than applyingfor and making use of funding available from thegovernment. In developed countries, governmentslargely fund R&D at a non-recoverable or zero interestrate, that is, under much more favourable terms thanin Brazil. In fact, the investment of public resourcesin R&D in private companies can have a significantpositive impact. Studies show that the utilisation ofpublic funds in R&D in Brazilian companies oftenimproved productivity and quality of wages andwork. Studies also indicate that Brazilian businessesreceiving public resources also invested more oftheir own resources in R&D. This is very beneficialfor Brazilian economic development overall, but thescope of current programmes is still limited andneeds to be expanded.Another challenge is that research remains more1 See Bahia, L. and Arbache, J.S. (2005).2 See Rodriguez, A., Dahlmann, C., and Salmi (2008). Further see OECD (2008) and Mobit (2007).3 Research by the Observatory for Innovation and Competitiveness in EUA, Canada, France, UK, Finland, Ireland, and Japan (MOBIT, 2007).Navigating the labyrinth: innovation and development | Glauco Arbix

Charting new directions: Brazil’s role in a multi-polar world 23There is a need to rethink developmentand search for a new configuration ofpolicies and instruments capable ofsteering Brazil through globalisationand developing an economic systemthat has knowledge as its backboneacademic or lab-based rather than applied andgeared towards commercial viability. The numberof researchers working on technological innovationremains small and there still needs to be closerrelations between universities and companies.The road ahead: a new synthesisWhile Brazil has made great progress on creatingan environment suitable for innovation, much stillremains to be done. New instruments need to becreated and existing mechanisms improved. It willalso be important to lay the roots for developing acorporate culture of innovation, especially throughencouraging interaction and synergies betweenuniversities and companies. An innovation-friendlyenvironment is characterised by the confluence ofknowledge, the exchange of skills and a diversity ofpublic and private sources. To realise an enterprise’spotential, the process of planning, while important,only partially accounts for success. Reflection on theinnovation agenda, therefore, points to the searchfor new syntheses between the public and privatesectors in Brazil, far from the protectionist statismand market fundamentalism that have so oftenmarked Brazilian history.Moving forward, it will be essential to keep in mindthat while the Brazilian state has an important role toplay in spurring innovation, it cannot afford to think,formulate, implement and evaluate new developmentpolicies without consultation, cooperation andinteraction with business and civil society. To facethe challenges of the 21st century, the institutionsgenerated by the developmentalist state must berevised and restructured in order to make way for asociety aligned with the times.The institutional architecture of the Brazilian statecan often be inflexible, inadequate and resistantto change. There is a need to rethink developmentand search for a new configuration of policies andinstruments capable of steering Brazil throughglobalisation and developing an economic systemthat has knowledge as its backbone. It will beimportant to integrate instruments to promotetechnological innovation in various institutions. Thiswill only be possible if the state has a strategicinnovation policy. Whether or not there is boldnessin business strategies also depends on the spreadand entrenchment of this future vision. The privateand public sector need to seal a new commitmentto the country. Brazil needs a new synthesis, moreaggregated and less polarising.Glauco Arbix is president of the Innovation Agency (FINEP) ofthe Ministry of Science and Technology, BrazilNavigating the labyrinth: innovation and development | Glauco Arbix

Charting new directions: Brazil’s role in a multi-polar world 25Becoming an energypowerhouseMauricio Tolmasquim and Amilcar GuerreiroThe current global energy scenario is marked by anongoing search for energy security and efforts to meetthe challenges presented by global warming. Brazil,with its vast energy potential, can contribute towardsboth of these processes. Moreover, the Brazilianenergy sector can play a key role in the country’seconomic development. Brazil’s dependence onexternal energy sources is less than five percent. Itis self-sufficient in oil and also has a large renewableenergy sector 1 , with over 47% of its overall energymatrix accounted for by renewable sources 2 . Indeed,if Brazil is able to harness its energy potential, thiscan serve as both a source of economic growth andgreater energy security in the country, as well as oflower carbon emissions at the global level.Oil and gas: new finds, new dilemmasUntil recently, Brazil had not been a major playerin the world oil market. However, this situation ischanging thanks to the success of Brazil’s off shoreexploration and extraction. Brazil has achieved selfsufficiencyin oil and has built up a level of reservessufficient to sustain national production for 30 years.Estimates suggest that an additional 50bn barrels –equivalent to four percent of proven world reserves –may be achieved through the exploitation of recentlydiscoveredoil located in the pre-salt region off Brazil’scoastline. Official data on gas reserves in Brazil do notgrant the country a leading role in the internationalgas market but, just like oil, the discoveries of gas inthe Brazilian pre-salt layer could change this outlook.However, while the revenue potential of thesereserves has led to great optimism, it also presentssignificant challenges over how best to manage thereserves, regulate their exploitation, and distributethe wealth generated. While the future strategy isyet to be determined, it is likely that two fundamentalelements will be present: regional integration andthe sovereign appropriation of wealth generated bylarge reserves.Biomass: the comparative advantageMuch of Brazil’s territory lies in the region of theplanet that is most suitable for the production ofbiomass. Part of this potential is already being usedto produce electricity, for example from sugarcanepulp. But taking greater advantage of this potentialrequires investment in technology and equipmentto recover the biomass that is under-used or leftabandoned in fields. The prospects are promising,especially for generation of electrical power. Fromonly the sugarcane pulp that is currently available, thepotential electricity generation is estimated at 10,000MW. With the development of technology and bymaking good use of tips and straws, this figure couldat least double.A common concern with biomass production isits possible impact on food production and socioenvironmentalecosystems. Fortunately, there is notmuch cause for these concerns in the case of Brazil.The numbers speak for themselves. For example,the area presently dedicated to the production ofsugarcane is less than six million hectares, whichis not even 0.7% of the entire national territory andless than seven percent of the total area available foragricultural activities. There is therefore enough space1 Because of the competitive presence of ethanol, only 78% of the energy consumed in transportation comes from oil derivatives, one of the lowestrates in the world.2 EPE [Energy Research Company]. Balanço Energético Nacional 2010. Ano Base 2009. Rio de Janeiro: EPE, 2010.Becoming an energy powerhouse | Mauricio Tolmasquim and Amilcar Guerreiro

26Charting new directions: Brazil’s role in a multi-polar worldfor the planted area to expand without jeopardisingfood production or regions of significant socioenvironmentalvalue. Another reason for optimism isthe technological advances that have made ethanoland bio fuel from sugarcane competitive products.And, increased productivity contributes decisively tothe preservation of areas meant for different crops,other uses and eco-systems. Indeed, over the last 25years, an area equivalent to 2m hectares has been“saved” in this way.Technological advances have not only been madeon the supply side of energy. Flex-fuel vehicles, withengines that work on any proportion of ethanol andgasoline, are now well established. Only six yearsafter being launched in 2003, flex-fuel vehiclesalready amount to 35% of the national fleet of smallcars, something close to 9m units. 3The Brazilian bio-energy industry has also leanta strategic dimension to trade relations withAfrica and Latin America. The development of aninternational market for bio fuels would improvetechnology, optimise and drive down the costs ofproduction. Brazil’s comparative advantage and earlyestablishment of a bio-energy industry would makeit a world leader in any such marketplace.Hydro-electricity: the multifaceted potentialHydro-electricity accounts for approximately 85%of Brazil’s total energy production (2009) and isits main source of electricity. 4 In world terms,Brazil is behind only Russia and China in usablehydraulic potential. Taking advantage of this potentialis clearly in the country’s strategic interest, particularlyas it combines four vital attributes: it is renewable;it does not emit greenhouse gases; it is extremelycompetitive; and plants can be built almost entirelyusing domestic contractors and service providers,thus stimulating the creation of jobs and wealth.Generally, while economically developed countriesIt must be ensured that Brazil’sabundant hydraulic resources are usedas effectively as possible to meet agrowing needmake good use of their hydraulic potential, the ratesin Africa, Asia (except China) and South America(except Brazil) are still very low. Given the rapidlygrowing energy demands of many developingcountries, there is potential for hydro-electricity toplay a key role in meeting these needs given its underusein these regions. It must be ensured that Brazil’sabundant hydraulic resources are used as effectivelyas possible to meet a growing need. Brazil has underconstruction two large projects on the Madeira river –Santo Antonio and Jirau - which together total 6,500MW, and in 2010 the decision was made to build theBelo Monte plant on the Xingu river (11,200 MW) andthe Teles Pires plant (1,820 MW).However, there are also significant risks involved inthe expansion of hydro-electricity in Brazil. Two-thirdsof the national territory is covered by biomes of highenvironmental value (the Amazon and the Cerradoscrubland), and 70% of Brazil’s hydro-electric potentialis located in these biomes. Clearly the developmentof any hydraulic potential should ensure that theenvironmental impacts are minimised. Promisingly,many areas in the vicinity of existing dams are todayamong the best conserved, both with regards toflora and fauna, and archaeological sites. Also, fromthe socio-economic angle, one can see the strikingeffect of recent projects around which settlementsare beginning to exhibit human development indiceshigher than those of the surrounding region. Hydroelectricplants are more than electricity factories,they can be catalysts for regional development andenvironmental preservation.3 Losekann, L. e Vilela, T. “Estimação da frota brasileira de automóveis flex e a nova dinâmica do consumo de etanol no Brasil a partir de 2003”. Availableat .4 This considers imports coming from the Paraguayan part of the Itaipu plant.Becoming an energy powerhouse | Mauricio Tolmasquim and Amilcar Guerreiro

Charting new directions: Brazil’s role in a multi-polar world 27Wind energy: increasing competitivenessBrazil’s potential for wind energy is tremendousand growing fast. Five years ago there were onlyten plants in operation providing less than 30 MWof electricity. By the end of 2010, this had risen to830 MW. Moreover, energy auctions held in 2009and 2010 yielded contracts to build wind farmsgenerating 1,806 MW and 2050 MW by 2012 and2013 respectively. In three years, this would haverisen 530% to go beyond 5270 MW.The main challenge to the development of asuccessful wind-energy industry is improving itscompetitiveness in order to make it more costeffective. The supply base of wind energy needs tobe expanded and diversified. This can be achievedwith the support of the BNDES (National Bank forEconomic and Social Development). which isworking to expand energy infrastructure generally,demonstrating that the conditions required forfinancing the industry are available. Indeed, thesuccess of the auctions in 2009 and 2010 attests tothe promise of improving market conditions becausethey simultaneously stimulated competition andconferred bankability to the projects through longtermcontracts for the purchase of energy.need to be overcome if Brazil’s burgeoning energyindustries are to fulfill their promise. If these issuesare managed effectively then, given the strength ofits resources, the dynamism of its economy and itspolitical stability, the ingredients exist for Brazil tobecome an energy powerhouse of the 21st century.MaurIcio Tolmasquim is president of the Energy ResearchCompany (EPE) of the Ministry of Mines and Energy, BrazilAmilcar Guerreiro is director of EPELooking to the futureBrazil’s energy policy aims to keep strict commitmentsto environmental preservation, sustainably managenatural resources, and minimise its dependence onthe external market for fossil fuels. Motivated bymeeting the challenge of global warming and theneed for energy security, this policy has led to thedevelopment of a cleaner and more diverse energymatrix, which has set Brazil on a path that moves itaway from external fossil fuel supplies towards anexpanding domestic capability, and increasingly awayfrom non-renewable sources towards bio-fuels, windandhydroelectric power.Much of this optimism is, nevertheless, based on theassumption that the great potential of Brazil’s futureenergy supply will be realised. Significant challengesBecoming an energy powerhouse | Mauricio Tolmasquim and Amilcar Guerreiro

Charting new directions: Brazil’s role in a multi-polar world 29Escaping the tradetrap: The east AsianexperienceYang YaoThe neo classical economic dictum that free tradewill always improve the welfare of trade partners canbe challenged from two approaches. On one handthe Infant Industry Theory (IIT) questions the extentto which a country with a developing manufacturingsector can grow under the conditions of free trade.On the other, the Dependency Theory (DT) challengesthe received wisdom that a relationship of free tradebetween a centre of wealthy states and a ‘periphery’of poor states will always result in the improvedwelfare of the latter. Related to DT’s understandingof the centre-periphery relationship is the morerecently formulated theory of the resource curseaccording to which this relationship’s terms of tradecan hurt resource exporting countries by creating a”trade trap“. In recent decades China has followedthe trend of the east Asian Tiger economies in relyingheavily on exports to achieve economic growth whilesimultaneously escaping the trap that the resourcecurse describes.The risks of tradeAccording to IIT, manufacturing is characterised byincreasing returns, and for a firm to make profit theymust achieve a minimal efficient scale (MES). Forfirms to grow and begin to achieve their MESs, highprices are needed. However, according to IIT thereis a contradiction between the protection of highprices required for firms to achieve their MESs andfree trade, because foreign products, presumablyproduced in more advanced countries where firmsoperate above their MESs, suppress domesticprices. As a result, a poor country may not be ableto develop a viable manufacturing sector under freetrade as it would be killed when at an infant stage.On the DT model, the world is categorised intocentre and periphery. There is a relationship ofdependency between a centre which generatestechnological progress and manufactures industrialgoods, and a periphery which provides the centre’sresources. Thus, the periphery depends on thecentre for its growth. Against conventional wisdomhowever, technological progress does not improvethe periphery’s terms of trade, so its welfare does notimprove. This can happen if technological progressin the centre is characterised and dominated by theexpansion of varieties, rather than improvementof efficiency in producing existing products, or ifthe elasticity of price substitution is large betweenproducts.Related to this model is a more recent theory whicharticulates what is called the resource curse. For DT,the periphery is negatively affected because its termsof trade for resource export do not improve, and thusnor does its welfare. The resource curse explains aprocess whereby improved terms of trade for resourceexport can damage resource exporting countriesinstead of helping them. Improved terms of trade forresource export imply worsened terms of trade formanufacturing export, so the manufacturing sectorcannot grow and indeed can shrink, if the resourcemanufacturingrelative price changes dramatically. Apositive and large demand shock or a discovery oflarge resource reserves has a similar effect. Due to theproblem of the resource curse, a resource-rich countrymay be locked into exporting resources, perpetuatingits dependency on the centre. All three theoriessuggest that developing countries, particularly thoseheavily dependent on resource export, could fall intoa “trade trap“ – a stage locked in exporting primarygoods. The oil exporters are an example of those whohave fallen into such a trap.Escaping the trade trap: The east Asian experience | Yang Yao

30Charting new directions: Brazil’s role in a multi-polar worldEast Asian success storiesHowever, there are also countries who, despiteobserving the correct economic conditions, havemanaged to escape the trade trap. The east AsianTigers are an example of this group. More recentlyChina has followed the east Asian Tigers in theirreliance on exports to achieve high economic growth,and likewise its exports are becoming more and moretechnologically sophisticated. In the early 1980s, theshare of primary goods in China’s exports was closeto 60%. By the mid-1990s, this share dropped to10%, and low-tech exports such as garments andshoes became the largest category of export. Today,the bulk of China’s exports consist of electronicgoods. What are the common features of the eastAsian success stories?First, the east Asian governments adopted policiesthat encourage the export of non-primary goods. Thisincludes a competitive exchange rate for the currency,low barriers to the export market, and absenceof export tariffs. Taking the trade trap dilemmaseriously, many developing countries overvalued theircurrencies and taxed resource export. The formermeasure was aimed at lowering the costs of importsof foreign equipment and technology, whereasthe latter was aimed at transferring wealth fromthe resource sector to other sectors. However,overvalued currencies severely reduced thecompetitiveness of these countries’ manufacturinggoods in the international market. Further, taxesfrom the resource sector were not effectively usedto foster the development of non-resource sectors.In east Asia, competitive exchange rates allowed theeconomies in this region to explore their comparativeadvantage in labour and export labour intensivemanufactured goods as a first step towards escapingthe trade trap.Second, the benefits of primary good exportswere spread to a large proportion of the population,especially the poor. In east Asia’s early stageof development, primary good exports wereconcentrated on agriculture. As a result, exportsbenefited farmers, typically the very poor in adeveloping country. As their wealth increased,farmers were able to improve their farmingtechnologies, freeing up labour from agriculture andjump-starting economic development. This scenariois atypical of resource-exporting countries, however,where the ownership of resources is often narrowlyconcentrated. As a result, benefits do not spreadto ordinary people, thus severing this channel ofdevelopment.Third, domestic policy encouraged the expansion ofthe manufacturing sector. This includes strengtheningbasic education, improving innovation capacities,providing infrastructure, and lowering restrictions inthe labour market. The most effective way to improvethe living standard of the poor is to provide jobs, butcommonly the restrictions applied to large firmsin the labour market discourage the expansion ofindustry. Many firms remain small in order to avoidbeing subject to the restrictive labour laws appliedto larger firms. East Asian countries have addressedthis issue and avoided disincentives by adopting agradual approach to improving their labour standards.In addition, these countries prioritise educationand innovation, which enables them to climb thetechnological ladder and improve their exports.Fourth, a realistic and gradualist approach hasallowed the east Asian economies to avoid majorsetbacks. In the late 1970s, Latin American countriesborrowed heavily from the international market. Themeasure was aimed at improving economic structurein a short period of time, yet this was underminedby the two decades of high inflation and low growththe resulting debt crisis caused. By contrast, eastAsia’s progress has been fast but has also remainedpiecemeal.The Chinese experienceOne finds the above four points reflected in China’sexperience of development. Prior to 1978, whenChina adopted the open door policy, the Chineseyuan was greatly overvalued. During the 1980s, theEscaping the trade trap: The east Asian experience | Yang Yao

Charting new directions: Brazil’s role in a multi-polar world 31Gradualism is a distinctive featureof China’s transition from economicplanning to the market, but it is also afeature of China’s other policy changesyuan’s official value was reduced gradually, and inthe meantime markets were established to allowexporters to exchange their foreign earnings intothe yuan under market determined rates. By 1994,the official track was merged with the market track,bringing the yuan’s value to a competitive level, andgreatly enhancing China’s non-primary goods export.In 2001, China joined in the World Trade Organization,which removed external constraints on China’sexports. As a result, China’s exports increased by arate of 29% per annum between 2001 and 2008.In the 1980s, China’s primary good exports wereconcentrated on agricultural goods, which benefitedfarmers by increasing their income, as describedabove. They were then able to develop small-scaleindigenous industries, which in turn changed China’sexport structure. In the early 1990s rural industriesaccounted for half of China’s industrial output, and40% of China’s exports.Though China treated capacity building as a toppriority of industrial policy even before its opendoor policy, the close door approach did not resultin achievements commensurate with the effortsexerted. During the 1980s, China began to take acompletely different approach by treating foreigndirect investment (FDI) as a coherent part of a nationalplan to upgrade the country’s industrial structure. Inthe first 20 years, FDI was concentrated in labourintensiveindustries, raising fears that FDI wouldreinforce China’s place in the trade trap. However,China’s export has become increasingly sophisticatedin the last decade, and FDI has played a positive rolein this process. FDI now accounts for half of China’sexports.Gradualism is a distinctive feature of China’stransition from economic planning to the market, butit is also a feature of China’s other policy changes.Toward the end of the 1970s, China also followed theLatin American model by borrowing from the worldfinancial market, mainly to finance its technologicalimport. Yet the scale of China’s borrowings wasmuch smaller than that of Latin American countries,and China stopped borrowing soon after signs of amarket downturn became visible. Moreover, thereliance on FDI to upgrade its export is also a resultof pragmatism. The Chinese government was ableto resist the temptation of pursuing national prideand was not shy to use FDI to upgrade China’stechnology.Lessons for BrazilThe east Asian success stories provide lessonsfor Brazil. Resource export can be a catalyst forsustainable, nationwide economic growth. The keyis to generate positive externalities that promote thedevelopment of manufacturing. There are severalreasons why manufacturing is critical for Brazil.First, the development of manufacturing canhelp Brazil reduce its dependency on the exportof resources, which has an appreciation effect ona country’s currency. Internationally, it reduces acountry’s competitiveness in manufactured goods,and domestically it increases the relative price ofservice goods which further depresses the growthof manufacturing. To balance these negative impacts,Brazil needs to have a concrete plan to boost domesticmanufacturing.Second, for a large country like Brazil thedevelopment of manufacturing is an indispensablestep toward higher income levels. Services growfaster when a country experiences a boom of resourceexports, leading some to believe that a country canjump over the period of manufacturing. However, thisis wrong in two respects. First, growth generated bya resource boom is unsustainable as services donot generate exports and in the end, when resourceexports slow down, a country will encounter currentEscaping the trade trap: The east Asian experience | Yang Yao

32Charting new directions: Brazil’s role in a multi-polar worldaccount deficits. Second, it is widely observed fromthe history of advanced economies that the share ofmanufacturing in the national economy experiencesa hump-shaped trajectory, i.e. increasing in theearly stages and decreasing in the latter stages ofdevelopment. The US experienced the turning pointin the late 1950s. Brazil has not yet reached this pointso manufacturing should still grow.Third, manufacturing is especially effective inraising the income of the poor because it generatesjobs. This is particularly acute in the case of Brazil,which has one of the world’s most unequal incomedistributions. The export of resources on the otherhand, is not that effective in generating employment.While the services sector does generate employment,growth in services induced by a resource boom isunsustainable.Yang Yao is professor and director of the China Centre forEconomic Research, Peking UniversityEscaping the trade trap: The east Asian experience | Yang Yao

Data section

34Charting new directions: Brazil’s role in a multi-polar worldEconomic and social dataWith a federal system and heterogenous population, Brazil exhibits great diversity. The country’seconomy is robust and weathered the recent financial crisis better than most but it alsofaces challenges such as the rising value of its currency. Economic growth has beenaccompanied by social inclusion, with rapid reduction in poverty and unemployment levels.Yet, huge inequalities and regional disparities remain. As Brazil begins to overcome these and developsfurther, its share of the word economy is growing and it is now widely regarded as a significant global actor.Map of BrazilPopulation190.7 millionSource: IBGE, 2010 CensusEconomic and social data

Charting new directions: Brazil’s role in a multi-polar world 35Brazilian political systemBrazil is a federal republic with a multi-party political system and independent judiciary. It iscomposed of twenty-six semi-autonomous states and one federal district, each with its ownconstitution and popularly elected legislature and governor. Democracy was re-established inthe country in 1985 after twenty-one years of military rule, and a new federal constitution wasimplemented three years later. Over the last two decades, the country witnessed a markedincrease in political stability and the rise of a vibrant civil society, including a growing numberof associations representing the rights of minorities and other traditionally excluded groups.Five main parties have come to dominate the political landscape: the PT (Workers Party,leading party of the governing coalition), the PSDB (Brazilian Social Democratic Party, mainopposition), the PMDB (Brazilian Democratic Movement Party), the DEM (Democrats), and thePV (Green Party).Racial groups in Brazil0.7%43.6%48.7%Urban vs Rural population7%14%Indigeneous or OtherMixedSource: Brazilian Institute of Geography and Statistics (IBGE)BlackWhite86%Source: IBGERuralUrbanEconomic and social data

36Charting new directions: Brazil’s role in a multi-polar worldBrazilian GDP: composition by economic sectors6.1%25.4%Agriculture and Livestock Industry Services68.5%Source: IBGEBrazilian current account balance20,00010,0000US$ millions-10,000-20,000-30,000-40,000-50,0001998199920002001200220032004200520062007200820092010Source: Central Bank of BrazilExchange rate: Brazilian real to US dollar1.5Exchange rate2.02.53.020032004200520062007200820092010Source: Central Bank of BrazilInflation and interest ratesInflation 2010 Interest Rate 2010Central Bank Target (Annual rate)4.50%Inflation rate5.91%Central Bank Target (SELIC Target)10.75%Interest rate (SELIC)10.66% ** Average rate based on 252 weekdaysSource: Central Bank of Brazil, IBGEEconomic and social data

Charting new directions: Brazil’s role in a multi-polar world 37Social public spending25Spending 200520Spending 198515Percent of GDP1050TotalFederalSource: Brazilian Ministry of Finance, Ipea, Central Bank of BrazilStateMunicipalInequality reduction in Brazil0.7Poverty reduction in Brazil40 Poverty reduction35Extreme povertyreductionGini coeffiicient0.60.5Percentage of the population302520151050.41999 2001 2003 2005 2007 20091998 2000 2002 2004 2006 2008Source: Ipea01998 2000 2002 2004 2006 20081999 2001 2003 2005 2007 2009Source: IpeaThe Gini coefficient is a commonly used measure ofinequality. The coefficient varies between 0, whichreflects complete equality and 1, which indicatescomplete inequality.The poverty line is equivalent to double the estimateof the extreme poverty line. The extreme povertyline is an estimate of the cost of a food basketcontaining the minimum amount of calories requiredto meet the basic needs of an individual, based onthe recommendations of FAO and WHO.Economic and social data

38Charting new directions: Brazil’s role in a multi-polar world80Distribution of national income2008Regional share of national income (2007)607060199850Percentage share of GDP504030Percentage share of GDP4030202010100Richest 20%Middle 20-80%Poorest 20%0NorthMidwestNortheastSouthSoutheastSource: Disoc/Ipea (Millennium Development Goals – 4th national monitoring report)Source: IBGE15Unempolyment rate150Minimum wage140Percentage of population12Minimum wage per month (in Brazilian reals)1301209110100620032004200520062007200820092010902002200320042005200620072008Source: IBGESource: IpeaEconomic and social data

Charting new directions: Brazil’s role in a multi-polar world 39Growth in GDP and total GDP15,000200GDP in 2009, Billions of international dollars12,0009,0006,0003,00015010050GDP growth from 2000 to 2009, percent0EUUSChinaIndiaRussiaBrazilSouthAfrica0Source: IMFForeign direct investmentShare of world foreign direct investment Change in share of world FDI (2000-2008)206315Outward, 2008Inward, 20080-3OutwardPercent10PercentInward-65-9-120RussiaIndiaChinaBrazilUSUKFrance Germany-15RussiaIndiaChinaBrazilUSUKFrance GermanySource: UnctadEconomic and social data

40Charting new directions: Brazil’s role in a multi-polar worldShare of world tradeShare of world trade Change in share of world trade, exports, 2000-2008205ExportsImports431521Percent10Percent0-1Exports-2Imports5-3-4-50BrazilChinaIndiaRussiaUSEU-6BrazilChinaIndiaRussiaUSEUSource: WTOEconomic and social data

Section two:Internal tensionsand social cohesion

Charting new directions: Brazil’s role in a multi-polar world 43Advancing anew deal for Brazil 1André Singerdetails of the path to be taken over the years to come.A large proportion of the conflicts will occur behindthe scenes, manifest in intrastate negotiations, andgo largely unperceived by the wider public. Thisinvolves a delicate network of pressures and counterpressureswithin the government.The last decade has seen enormous social progressin Brazil with significant reduction in povertyand inequality. A remarkable social transformationthrough which most of the population enjoys acomfortable life, a Brazilian “new deal” has beenset in place. Yet, the process of improving the qualityof life of millions is still only in its initial stages andmany difficulties remain. Indeed, the social policiesof the last decade were built on the back of rapideconomic growth. The nature of economic and socialdevelopment is so intertwined that if Brazil is to buildon its recent social successes, it will need to maintainand advance the momentum of its economic growth.There are many trade-offs and choices that the newgovernment faces in its pursuit of development andthe outcomes are likely to depend on a delicatebalancing of different political interest groups.In her election campaign, President Dilma Rousseffpledged to eliminate hardship and extreme povertyby raising the minimum wage, gradually increasingcash transfers and strengthening the government’srole in the economy. She also stated that the CentralBank would retain its autonomy to define monetarypolicy, allow a floating exchange rate and to exercisefiscal tightening. One should not infer from themoderation of this platform that it is free fromtensions, the outcome of which shall inform the finerManufacturing or commodities?Reducing poverty and inequality hinges on sustaininggrowth at around the five percent mark. In order toattain this level of growth, a feat not achieved evenduring Lula’s second term, a series of choices willhave to be made. The views on how best to achievethis can be divided into two main categories. Thefirst advocates significantly increasing the amount ofpublic investment to boost value-added manufacturingin Brazil. The funds for public investment wouldbe found by reducing the amount set aside for thenational debt, a move that the Central Bank resists.The second approach advocates a model based onthe export of commodities, such as soya bean, meatand iron ore, in order to advance economic growth.Underlying these conflicting points of view are anumber of different social and economic interests,and the nature of the confrontation between themwill define the future dynamic.Commodity exports played a big role in Brazil’seconomic growth over the last few years. The value ofexports tripled between 2002 and 2008 from $60bnto almost $200bn. However, there are concernsthat Brazil may fall victim to the Dutch diseasewhereby market mechanisms tend to drive countrieswith vast natural resources towards a chronicallyovervalued currency. It then becomes cheaper toimport manufactured products than to produce themdomestically.Currency: high or low?Some advocate that in order to combat the Dutch1 Adapted from an article published by the author in the magazine Piauí, October 2010Advancing a new deal for Brazil | André Singer

44Charting new directions: Brazil’s role in a multi-polar worldthe aim of reducing poverty viaincome transfer to the underprivilegedsegments of society will be the definingtone of the coming years.disease, it is vital to manage and devalue the currencyas opposed to allowing it to fluctuate at the mercy ofthe markets. A coalition of interests led by financialcapital has so far blocked devaluation of the currency.Since cheap imports help control domestic pricesensuring purchasing power for consumers, especiallyextremely low-income groups, there is pressure tokeep imports at this level. Moreover, cheap importsprovide the traditional middle class access to importedproducts (while a strong Brazilian real also makesinternational travel more affordable). An overvaluedcurrency is also favourable for international holdersof capital who profit from making speculative cashinvestments in Brazil that yield high rates of interestin a strong currency.Detractors of a highly valued currency includeindustrial entrepreneurs, factory labourers andexporters. There is growing concern within industryover the relentless decline in manufacturing activitysince the early 1990s. These claims provided groundsfor the government to levy a two per cent tax onspeculative capital in 2009 amid the global financialcrisis. The measure, albeit timid, acted as a brake onfurther currency valuation, while also indicating theexistence of significant social sectors concernedwith the Dutch disease. The valuation of the Brazilianreal and how to balance the competing interestsof those who favour a higher value and those whofavour devaluation remains a significant challenge forthe current government.Interest rate and creditBrazil has one of the highest interest rates in theworld. High interest rates are known to stymieinvestment in manufacturing since capital yieldsearnings without the need “to make anything”. Highrates also lead to a transfer of public funds - whichcould be dedicated to creating infrastructure - into thehands of those who seek profit for reinvestment or tospend on luxury consumer goods. Business ownersin the manufacturing sector (for whom the interestrate is critical) and labourers in general (for whomincreased employment is critical) have momentarilyjoined forces in the fight against high interest rates.At the same time, the expansion of credit duringPresident Lula’s second term (rising from 25% to40% of GNP) went ahead despite opposition fromprivate banks. This expresses the government’sincreased ability to compel the banks to lend to thepublic. The support from the Brazilian DevelopmentBank (BNDES) as financiers was crucial for offeringlower interest rates to industrial companies. But theferocity of the battle to maintain high interest rateswill also relate to the enormous clout accumulatedby the financial sector under the bannerof globalisation.The social agendaIrrespective of the result of the frictions set to markthe political cycle, the aim of reducing poverty viaincome transfer to the underprivileged segmentsof society will be the defining tone of the comingyears. Universal rights to health, education andsecurity cannot materialise without increased publicinvestment. In Brazil, huge swathes of the populationdo not yet have basic sanitation or even minimal qualityhousing. Besides the cash transfer programmes,other programmes for health, education and publicsecurity are fundamental to reduce poverty andinequality. This calls for huge expenditure, along witha government equipped to exercise key functions.Equally important is the continuing need to valuepublic functionaries by restructuring the careers andincreasing the pay of civil servants.No consensus has been reached concerning thesize and scope the government should have in Brazil.Similarly, no agreement exists on the tax reformsAdvancing a new deal for Brazil | André Singer

Charting new directions: Brazil’s role in a multi-polar world 45that should guarantee funding for public spending.While labour organisations suggest making tax moreprogressive, corporate entities seek to reduce thetax burden. The pressure from Brazil’s elite to containgovernment spending is set to grow.Thus, the range of public health and educationservices is a theme over which the majoritycoalition is divided. In the workers’ view, theconstitutional mandate of making public health andeducation accessible to all should be fulfilled. In theentrepreneurs’ view, the privatisation process alreadyunderway and evidenced by health insurance plans,private schools and so on, should be embraced andexpanded. This represents a divide over the role ofprofit in catering to basic needs such as medicineand education.Shifting alliancesA system of footloose alliances is characteristicof the current scenario, in which shifts in materialconditions can orchestrate swift changes in position.The mobility generated by the reduction in povertyexemplifies this. With work cards signed up andaccess to credit, low-income Brazilians began topurchase fridges, television sets, computers, carsand later even houses, using long term financing.The capitalists in these business segments wereable, in turn, to increase production and turn greaterprofits, strengthening the symbiosis betweenworkers and productive capital.At the same time, Brazilian society remainsextremely conservative and gross inequality is anormal part of life. The rifts separating the vast legionsof poor Brazilians from the traditional middle-classrun deep, and society resists attempts to changea long-entrenched situation. However, the relativesuperiority of the elite is diminishing as upwardsocial mobility intensifies. The pace of progresstoward a potential decent and equitable societydepends, to a certain extent, on the correlation offorces between the new middle classes and thetraditional elite.The fact that international headwinds, whosetemperature and strength tend to influencethe domestic discourse, appear confused mayactually bode well for Brazil’s Rooseveltian dream.In emerging countries, the global financial crisisclarified the perception that an autonomous pathfor development was needed that did not flow fromnorms or prescriptions established by the advancedpowers. Brazil in particular, set in its desire to morphinto a middle class society, is evolving its own modelof development. The path ahead will be rife withpitfalls, and the outcome uncertain. Nevertheless,the direction of Brazilian society will be marked by anhistoric attempt to reduce poverty and inequality fora long time to come.André Singer is professor of politics at the University of SãoPaulo and former press secretary in the President’s OfficeAdvancing a new deal for Brazil | André Singer

Charting new directions: Brazil’s role in a multi-polar world 47The constructionof a strategicsocial policy 1Jorge Abrahão de CastroThroughout history, societies have constructed aseries of multi-purpose mechanisms to protect andsupport the social life of their members. Protectioncomes in the form of social security policies designedto reduce and mitigate the risks and vulnerabilities towhich people are exposed, while support comes inthe form of policies intended to ensure that citizenshave broader access to opportunities and resources.However, contrary to popular perception, socialpolicy is not only an altruistic and charitable pursuit tohelp those in need. As the experience of the recentpast in Brazil demonstrates, social policy can also bea key factor for economic growth. Indeed, it can be astrategic element in national development.Public spending and its social impactThe level of spending on social policy in Brazil haschanged significantly over the last two decades. From1993 onwards, with the implementation of policies putforth in Brazil’s constitution, social spending startedto grow in a sustained manner. The analysis of thedata presented in Chart 1 signals a trend of growth insocial public spending of 2.7 percentage points (p.p.)of GDP in 11 years, representing growth of over 10%.More importantly, this spending growth is not justtaking place at the federal level, with growth of 0.2p.p. in state social spending and 0.4 p.p. in municipalsocial spending reflecting a key trend.Analysing the volume of funds (see Chart 2), wecan see that federal social policy has been centredon the following areas: the national social securitysystem, pensions and benefits of civil servants,health, social assistance, education, labour andincome. At the same time, the nature and prioritiesof public spending changed, with policy areas suchas social security increasing their share.Brazil’s social policies underwent a majordiversification and expansion, with changes in thescope of the Social Security System, Social Assistanceand Defence of the Worker, for example (see Chart2). As a result, social assistance, labour and incomeincreased their shares in overall social spending.In the case of social assistance, the assistentialistmodel was replaced by a model of rights with anincreasingly comprehensive coverage of the Brazilianpopulation. Social assistance was recently expandedwith the creation of Bolsa Familia, a conditional cashtransfer programme, and the implementation of theUnified Social Assistance System (SUAS). In the areaof labour and income, a public employment systemwas created, expanded and consolidated. There hasbeen major progress and expanded social protectionin Brazil, driving stronger investments in this sector.On the other hand, spending on public educationand health policies remained more or less static. Interms of their share of GDP up to 2005, these areasfailed to increase their share of the pie. Althoughin absolute terms these areas now receive muchmore investment, spending merely tracked GDPgrowth and was not earmarked as a governmentpriority. Similarly, spending on housing and sanitationdeclined, which is visible in the condition of thissector today.Although significant challenges remain, overallincreased public spending on social policy had anenormously beneficial impact on the quality of life of1 This text is a product of the studies, research and discussions carried out in recent years with technical experts/researchers from the Board of SocialStudies and Policy (Disoc) of Ipea. The basis and main reference of this text was: Políticas Sociais – Acompanhamento e análise no 17; and Perpectivada Política Social no Brasil (Social Policies – Monitoring and analysis 17; and Outlook for Social Policy in Brazil).The Construction of a Strategic Social Policy | Jorge Abrahão de Castro

48Charting new directions: Brazil’s role in a multi-polar world2520151050SPS Total FederalSource: Disoc/Ipea876543210Chart 1Social public spending (SPS)by government sphere (%, 1995 and 2005)spending 2005spending 1995StateMunicipalChart 2Share of spending of areas in social federalspending (SFS)(%,1995-2005)SocialsecuritysystemPensionsandBenefitsof CivilServantsSource: Disoc/IpeaHealth Social EducationAssistancespending in 2005spending in 1995LabourandincomeHousingandsanitationOthersthe Brazilian people. The higher volume of spendingenabled a greater supply of goods and social serviceswhich diversified and improved social protectionand the generation of opportunities for the Brazilianpopulation. The proportion of the population living inpoverty declined, as did levels of income inequality.The infant mortality rate declined from 47.1 in 1990 to19.0 in 2008. Life expectancy increased from 68.5 in1995 to 72.1 in 2007. The school attendance rate roserapidly at all levels and age brackets and the illiteracyrate nearly halved from 17.2% in 1992 to 9.7% in2009. Brazil made enormous progress on a series ofsocial indicators and the improvements can be felt inthe daily lives of Brazilian citizens.A double benefit: the economic advantagesIt is little discussed that the bulk of public spendingon social policy has a double benefit, since itpromotes growth and improves the distribution ofincome. Most social spending benefits the pooreststrands of society, as in the case of Bolsa Familia,the Benefit of Continued Social Assistance Provisionand the subsidised benefits of the Social SecuritySystem (family-based, domestic workers, smallbusinesses, among others). But social spending alsobenefits the middle class (e.g. salaries of teachers inbasic education, or the vast majority of urban socialsecurity benefits in Brazil). With better distribution ofincome, salaries and services, a key portion of socialspending remains in the country and strengthens thecircuit of income multiplication. As these sections ofsociety start to consume and save more, this leadsto stronger sales, more production and greater jobcreation.Analysing the data, we reach the importantconclusion of the existence of a GDP multiplierworth 1.37, resulting from growth in the exogenousvariables of aggregate demand stemming from socialspending (see Exhibit 1). This means that for everyR$100 spent by the government on social spending,R$137 is generated in GDP. The multiplier of socialspending, in terms of GDP is much greater than theThe Construction of a Strategic Social Policy | Jorge Abrahão de Castro

Charting new directions: Brazil’s role in a multi-polar world 49For every R$100 spent by thegovernment on social spending,R$137 is generated in GDPmultiplier of spending on public debt interest (0.71%)and almost identical to that of commodity exports(1.40%), but falls below that of investment in civilconstruction (1.54%).Exhibit 1 Economic Cycle of Social Public SpendingMultiplier1% GDP increase inSocial Policy SpendingNationalAccountsmatrix=1.37%GDP Growth=1.85%Growth inhouseholdincomeNational Taxation System56% of SPS returns to the state in taxes and contributionsThe data also shows that the state receives 56% ofthe amount that it originally spent in the form of taxrevenues. In other words, out of every R$100 initiallyspent, R$56 is returned in the form of national taxrevenues.In terms of household income, the simulationsshow that an increase of one percent of GDP in theaforementioned social programmes and policiesraises household income by 1.85% on average,where household income represented around 81%of GDP in 2006. The multiplier of social spendingon household income is much greater than themultiplier of investment in civil construction (1.14)and commodity exports (1.04).In other words, these results show that the notionthat social spending is economically futile is untrue.Rather, it is a very important element in the dynamicsof the national economy, mainly of that targeted tothe local market.In the case of monetary transfers, the biggestmultiplier of GDP and of household income belongs toBolsa Familia. For every R$1.00 spent on the program,GDP will rise by R$1.44 and household income by2.25% in the overall circuit of income multiplicationin the economy. By way of comparison, spendingof R$1.00 in interest on public debt will generateonly R$0.71 of GDP and a 1.34% rise in householdincome. In other words, at least in terms of GDPgeneration, the cost of interest payments outweighsthe benefits, whereas Bolsa Familia generates moreeconomic benefits than it costs.Even the social security system’s transfers toretirement, pension and assistance payments havea substantial multiplier effect (1.23). The explanationlies in the fact that, due to Brazil’s still abysmalincome inequality, an almost neutral transfer leadsto a significant improvement in inequality levels andthus in the consumption propensity and profile of thepopulation as a whole.The income transfers that most benefit the pooreststrands of society provide a further boost to GDPand household income because poorer people tendto consume virtually their entire income (they cannotsave) and spend it on national products, with fewerimports in their consumption basket. Therefore, inthis case the degree of leakage is much lower.Laying the foundationsThe Brazilian population has achieved major socialprogress in recent years. These achievementsdemanded a greater effort in terms of funds forfinancing programmes and actions. This enabled thecreation of a number of technical and administrativemechanisms which involved the hiring and training ofThe Construction of a Strategic Social Policy | Jorge Abrahão de Castro

50Charting new directions: Brazil’s role in a multi-polar worldcountless professionals, the creation and constructionof real estate properties and the acquisition ofequipment for the provision of goods and services.These physical, financial, human and institutionalresources enabled the structuring of a broad anddiversified set of mechanisms of social protectionand social promotion that are helping to improve thebasic living conditions of the population, includingthose related to poverty and inequality. Social policyhas also become a powerful instrument that hassimultaneously enabled the expansion of aggregatedemand with the capacity to create a broad localmass consumption market.Social policy has provided a boost to production andemployment, multiplied income, reduced poverty andinequality and played an indispensable and strategicrole in driving the national economy. This processis laying the foundations for constructing a moredemocratic nation, one that is economically robustand socially just.Jorge Abrahão de Castro is director of social studies andpolicies at the Institute of Applied Economic Research (Ipea)The Construction of a Strategic Social Policy | Jorge Abrahão de Castro

Charting new directions: Brazil’s role in a multi-polar world 51The national option:throw out the oldclothes and builda new modelDaniel VargasThe rise of the new middle class in Brazil is a significantsocial phenomenon. Mostly comprised of youngermulattoes and mestizos from the lower classes whostrive to get a business of their own started, thismiddle class is spread throughout the north, northeastand centre-west, in the outskirts of large citiesas well as in the interior of the country. It is alreadydictating fundamental changes in Brazil’s economic,cultural, social, intellectual and political dynamics.Understanding the significance of these changes isof utmost importance in order to understand today’sBrazil, its problems and their possible solutions.But more than that, it is a decisive step towardsunderstanding the onus of historical responsibilitythat falls on the shoulders of all of us Brazilians whonow have the chance to contribute to humanity.The emergence of the middle class in Brazil,a theme first put forth on the political agenda byRoberto Mangabeira Unger, 1 was driven by a seriesof policy initiatives including the maintenance ofmacroeconomic stability, increases in the minimumwage, investments in infrastructure and social policiesaimed at transferring income. People began toconsume more, which led to a consumption market inthe country. There began to appear thousands of smalland medium informal and family-based enterpriseswhere until a short time ago there predominated arudimentary economy of subsistence. In Toritama(Pernambuco), for example, a veritable industrialpole has blossomed in the middle of the north-eastbackwoods and already accounts for one third of thejeans sold in the country.Social and cultural changesThe new middle class has begun to impose culturalchanges in Brazilian society. With its own style andway of doing things, it differs from the predominantvalues and practices of Brazil’s urban centres. Newmusical styles transcend their place of origin and winmore projection in the mass media. New accents andpersonalities are gradually attracting the attentionof the rest of the country. But the most importantaspect of this cultural change is the proliferation allover the country of new churches and associationsthat inspire the spirit of combat in simple people,reinforce the feeling of solidarity beyond the familyand often help to make up for cultural and emotionaldeficits. Of course, there are problems such ascommercial exploitation of the faith of poor folk. Butwhat is certain is that the new churches are sculptingthe soul of the Brazilian people and corroding therationalist conviction that the natural outcome ofprogress is secularisation. Brazil is growing less andless secular and more and more advanced.The third area in which Brazil is fast changing is itssocial structure. For the first time in its history themiddle class represents more than half the nationalpopulation. Almost 30 million people have already leftthe ranks of poverty in the last ten years and over 35million have joined the middle class. The region ofthe country that has grown the most for years nowis no longer the south-east, where the traditionalcommercial centres are located, but the north-east,followed by the centre-west and the north. Andthe cities with the highest rates of economic andpopulation growth are not the large capitals but rather1 Professor of Law at Harvard University and formerly minister of strategic affairs in BrazilThe national option: throw out the old clothes and build a new model | Daniel Vargas

52Charting new directions: Brazil’s role in a multi-polar worldthe mid-sized cities in the interior of Brazil. Wheresome years ago the poor man from the backlands ofthe north-east dreamed of moving to São Paulo towork for a big multinational, today it is more likely tofind an employee of a big multinational in São Paulodreaming of returning to the north-east to open uphis own business.A shifting paradigmThese changes are already starting to cause somefractures in the social thinking that prevails in Brazil.The national conscience has often been imprisonedbetween two mistaken paradigms. 2 Brazil is viewedeither according to the logic of developed centresand subaltern peripheries, or according to the coloniallogic of masters and slaves. We see our problemsfrom the perspective of an outside centre of gravitythat lies beyond our control in the hands of leadersof the global economic system, or else anchored ina patrimonial and oppressive culture from which wehave barely managed to set ourselves free. The riseof the simple, hard-working Brazilian who managesto join the middle class, redeems the country’s selfesteemand offers a horizon of reflection that bearsno resemblance to the timidity of inauthentic thinkingin the country. It no longer seems enough to say thatthe root of our problems is in New York or London. Orthat the problem of Brazil is the “little way out” thatBrazilians always manage to conjure up to resolve anysituation. Now it is time to build in Brazil an authenticsocial thinking that sees how Brazilians act not as aproblem but rather as a solution.It is precisely this change that is beginning totake place with increasing vigour in national politics.The new middle class is quickly becoming organised.It now elects local representatives, councillors,members of parliament and mayors. In the federalsphere it has just begun to influence some trajectories,as shown, for example, in the commitment of thenpresidential candidate Dilma Rousseff to set upa Ministry of Small and Medium Companies. In avery short time, the national agenda is likely to bedetermined by the beliefs and expectations of thisnew social group.Remaining contradictionsReasons abound for Brazil to be proud of themoment it is experiencing. Yet contradictions remainthat have long split Brazil in two: the few and themany. In the productive market, although small andmedium companies account for most of the jobs andincome generated in Brazil they are still strangled byhaving no access to credit, while the vast majorityof the resources made available by the NationalBank of Economic and Social Development (BNDES)is distributed to a handful of large corporations.In the labour market, despite Brazilian legislationbeing recognised as a canon for protecting theworkers, close to half of our labour force is madeup of informal, precariously protected employees.In agriculture, small and medium-sized Brazilianfarmers still lack proper technical assistance andadvanced mechanisms that ensure they can markettheir production at a fair price, such as the exportingagro-businessman enjoys. In education, while theupper class enjoys expensive, private educationservices of high quality, the poor masses have tocontent themselves with a highly deficient publicschool system.Until when? For the first time in history, Brazilhas the chance to exercise a national option in anatmosphere of peace, political and economic stability,and in full compliance with democratic values. Tochoose between on the one hand carrying on withits traditional model of development, inspired in thecanons of European social democracy, combininggrowth (in the centre) with social programmes totransfer income (to the margins), or, on the other,2 The Brazilian sociologist, Jessé de Sousa has described this syndrome as inauthenticityThe national option: throw out the old clothes and build a new model | Daniel Vargas

Charting new directions: Brazil’s role in a multi-polar world 53For the first time in history, Brazil hasthe chance to exercise a “nationaloption” in an atmosphere of peace,political and economic stability, and infull compliance with democratic valuesthrowing out the old clothes and inaugurating anew path, one that is authentic and unexplored,one that throws wide open the narrow door of therepresentative democracy and market economy thatare currently in place. This is the real, unique chancethat history offers the country today to reconcilewith itself. And to do so by radically expanding theopportunities for learning, work and production, forthe benefit of millions of simple men and womenwhom we are still learning to admire.Democratising the marketBrazil’s future calls for building a new model ofdevelopment. This model should include four setsof actions, many of them already formulated by theSecretariat of Strategic Affairs. First, democratisationof the market economy in order to expand accessto the instruments of production is required. Brazilneeds a new industrial policy that will increase anddecentralise access to productive credit, technologyand knowledge so as to enable small and mediumcompanies to lead the process of innovation anddevelopment across the entire country. The countryalso must change the bases of its agriculture byinvesting in strengthening small, entrepreneur-basedagriculture, to interiorise the generation of income,and to consolidate a strong rural middle class. Aprofound reform of the archaic labour legislation isalso necessary. This requires combating informalitywith measures such as relieving the payroll, but itmust also represent precariously protected workersby creating a new labour regime to complement theexisting one.An education revolutionBrazilian education and science have to undergoa revolution in quality. If on the one hand we haveadvanced a great deal in the last few years in providingaccess to schooling, on the other hand Brazil cameto a standstill years ago in the world rankings foreducational quality. Brazil needs to strengthen itspre-school situation, for that is where the citizen’scognitive capacity is basically formed. Secondaryschool also needs to be transformed by reorganisingits teaching model and making it less informativeand more analytical, less committed to technicaltraining aimed at rigid trades and more committed totraining professionals with flexible skills. Brazil needsto be rudely awakened and shook up to science soas to bring its universities closer to more advancedenterprises, thereby creating a virtuous circlebetween technological innovation and cutting-edgeeconomy. This will only happen when Brazil stopstreating its leading research centres like fantasylandsinhabited by morally corruptible intellectuals.Reforming politicsThere has to be a change in Brazilian politics. Themost pressing change involves engaging in a reformthat will emancipate Brazilian politics from theinfluence of money, or else politics will continueto be seen as a dirty and base activity. It is alsocrucial to change radically the conception of Brazilianconstitutionalism. The constitution is not meant forsaying that “you cannot do that”, or that “it cannotbe done”, for braking or interrupting politics. Quitethe contrary: we need a constitution to activatepolitics, to join together and commit the best of ourintelligence and energy to confront our most seriousproblems and make our noblest dreams come true.In order to do so, the steel skeleton of federalismand the separation of powers in the country must besubstituted by more malleable rules that allow andstimulate collaboration among the federal bodies. Itis also vital to oxygenise representative democracywith channels of direct participation by widening theThe national option: throw out the old clothes and build a new model | Daniel Vargas

54Charting new directions: Brazil’s role in a multi-polar worldchannels of political participation such as plebiscitesand referenda.Reviving the stateThe state capable of satisfying all these demands stilldoes not exist, neither in Brazil nor anywhere else inthe world. The state has to be changed in order to buildthis new model of development. The reconstitutedstate will result from the combination of three tasks.The first is to intensify the professionalisation of publicadministration by reducing the number of loosely(politically) appointed commissioned posts andsubstituting these with qualified professional staff,supervised internally and externally and operatingaccording to flexible goals. The second task is toadapt the public sector to methods and principles thatare typical of the private sector. Public administrationshould be ruled by efficiency, but without forgettingthat in the case of the state, efficiency is dictatedby public norms rather than by the free action of thecivil servant. The third task is to make flexible thecriteria for providing public services such as healthand education by removing the gap between state,market and civil society, in a regime of collaborationaimed at fulfilling social ends.the spirit. The emergence of the middle class in Braziland its effect on the economy, society, culture andconscience have spread the future open in front ofus. It is now up to us to decide whether we are goingto take on this responsibility and build a new model ofdevelopment that embraces the middle class, unitesthe country and contributes to humanity, or if we aregoing to go on wearing the same old clothes.Daniel Vargas is a former minister for strategic affairs anda researcher at Harvard UniversityAn open futureThis set of measures shows an authentic itineraryfor the development of the country that can givethe great majority of the population the chance tolearn, work and produce. On doing so, Brazil can alsoserve as inspiration for other parts of the world. Inthe 19th century, Hegel said that installing a newconscience in the new world – the United Statesof America – represented expansion of the spirit.For Hegel, spirit meant a form of self-consciouslife, reflexive energy, own light. The United Statesrepresented the self-conscious expansion of thepossibilities of thinking and acting in the world.Today, the new world is Latin America, Africa andAsia. It is in these regions that the world is nowbeginning to experience a new stage of expansion ofThe national option: throw out the old clothes and build a new model | Daniel Vargas

Charting new directions: Brazil’s role in a multi-polar world 55The search for amoral compass: Indiaafter globalisationNiraja Gopal JayalIndia is in the throes of a tumultuous transformation,arguably even more profound in its social impactthan the transition, 64 years ago, from colonialismto independence and democracy. This shift hasin no small degree been mediated by economic,technological and cultural globalisation. Theliberalisation of the Indian economy in the early 1990sunleashed economic energy and entrepreneurship onan unprecedented scale, translating very quickly intobreathtaking economic growth rates which catapultedIndia to membership of the G20, and even the headyannual invitation to the G8 high table. It also heraldedan unaccustomed sense of optimism in Indian society,as new economic opportunities held out the promiseof making possible a better life for the vast majority ofIndia’s citizens.Twenty years on, despite an extraordinary story ofeconomic and social mobility for many, impressivelevels of economic development co-exist withalmost stagnant levels of human development.India’s economy is ranked eleventh in the world byGDP and fifth in terms of GDP in Purchasing PowerParity. On the Human Development Index, however,India occupies a rank of 119 out of 169 countries.At no previous time has it been harder to come toterms with the contradictions of darkest poverty (inabsolute numbers equivalent to the entire populationof India at independence) coexisting with wealth ofunimaginable proportions; with thousands of indebtedfarmers committing suicide even as India’s wealthiestman spends $2bn on his new 27 storey home with astaff of 600 people waiting on a family of six.The individual-community dualityThere is today a pervasive sense of crisis – moral, socialand institutional – as Indian society tries desperatelyto make sense of a rapidly changing social worldthat appears to be built on quicksand. Colonialisminsistently represented India as a political communitymade up of several social communities, and individualschiefly as members of such communities. The IndianConstitution sought to redefine the relationship as onebetween the state and its individual citizens, but it isglobalisation that has given impetus to the project ofmaking individuals out of the members of this socialworld. In the economic context, these are consumercitizensnegotiating a marketplace of multiple choices,acquiring English language skills as an instrumentof upward mobility and chasing aspirations throughemployment in the business process outsourcing,technology and services sectors. This energy isparticularly palpable in the small towns of India, fromwhich young people are breaking through meritocraticentry-level barriers into the diverse and intenselycompetitive worlds of industry, government, sport andthe media.This new spirit of individualism is somewhat at oddswith the customary forms of citizenship in the polity.With the politics of caste, region and religion beingdominant in the period before the economic reforms,the relationship between citizen and state has longbeen mediated by community. Community identityThere is today a pervasive sense ofcrisis – moral, social and institutional– as Indian society tries desperatelyto make sense of a rapidly changingsocial world that appears to be built onquicksandThe search for a moral compass: India after globalisation | Niraja Gopal Jayal

56Charting new directions: Brazil’s role in a multi-polar worldhas not entirely lost legitimacy as a form of politicalintermediation, but there is now a possibly creativetension between the rival pulls of individualism –born of the market – and community as constructedin the sphere of politics. New forms of individuatedcitizenship are now being enabled by civil societyactivism and the electronic media, which offer unusualopportunities for expressive citizenship, even if theseare largely restricted to the educated middle-classesand may sometimes even teeter on the brink ofvigilantism.The affective bases of politics are however farfrom dead. Caste continues to have greater politicalpurchase than social; it is a far more potent instrumentin the political sphere than the social or ritual. The tiesof family too remain strong and resilient, especiallywhere power and/or money are involved. If the largestprivate corporations in India are family firms, so arethe bulk of its political parties. The dynastic principledetermines, with a few exceptions, succession inboth. An astonishing one-third of all members ofparliament come from political families, and this trendis repeated all the way down the line to the institutionsof local governance. The leadership of most politicalparties is tightly controlled by a single individual and,with the exception of three regional parties headed bysingle women, the principle of inheritance is beyondquestion. The commercial interests of many partysupremos, from ownership of educational institutionsto media companies, are well-known. Economic powertranslates into political power with the same ease andfluidity as political power does into economic.A sense of crisisThe moral despair we encounter today is thus forcingIndian society to negotiate afresh the question of howand where to draw the line between the public and theprivate. The elite consensus on modern institutionalnorms that sanctified this boundary was firstinterrogated, three decades ago, by a new democraticvernacular, in particular the language of the backwardcaste parties. Their impatience with, and even rejectionof, these norms was initially valorised as a plebeianresponse to the norms of self-serving and hegemonicupper class/caste groups. Over time, however, thefungibility of norms has meant not the construction ofan alternative moral universe, but only the breakdownof the older normative consensus. A series of recentscandals involving government, corporate interests,and the media, have generated anxieties about therelentless and all-pervasive march of greed and graftas well as about the “moral fibre” of Indian society.As is often the case, what is popularly apprehendedas moral crisis is embedded in and symptomatic of alarger phenomenon.What recent exposures of corruption havedemonstrated, above all, are the enormousopportunities for profiteering afforded by the controlthat state personnel exercise over the licensingand allocation of hugely valuable land and naturalresources such as oil and minerals, and now evenspectrum bandwidth for wireless communication.Rampant cronyism between state personnel(politicians as well as bureaucrats) and privateinterests has rarely been as clearly marked as now.Not since slavery was legal has the marketisation ofhuman beings been so celebrated: recent newspaperheadlines in India described particular cricketersto have been “auctioned” to premier leagues forobscene amounts of money, even as others werenamed as having remained “unsold”. Much worsethan these examples of commercial egregiousness,however, are the ecological crises, and the cynicalexploitation and marginalisation of tribal people livingin areas rich in mineral and forest resources.Social inclusion without solidarityThese moral and institutional deficits are arguably builtupon an older failure – that of an earlier tradition ofwhat may loosely be called Indian social democracy tochannel the affect of community into a more secularsense of social solidarity. The constitution made theindividual the fundamental political unit of the state, butit also provided for group identities to be recognisedThe search for a moral compass: India after globalisation | Niraja Gopal Jayal

Charting new directions: Brazil’s role in a multi-polar world 59Overcomingpolitical polarisation:the future of theUnited StatesWilliam GalstonDifferences of principle and also of interests existin every society. In free societies, those differencesare bound to find expression in political and socialconflict. Social cohesion does not, indeed cannot,mean the absence of conflict or the achievement ofjustice. It requires agreement on the institutions andprocedures through which conflicts are adjudicated;the sense that society is moving over time towardgreater fairness and inclusion; and the belief thatthe competing groups are members of a singlecommunity that shares a common destiny.The unity of the United States rests, not onshared ethnicity and common descent, but ratheron the people’s assent to common principles,institutions, and hopes. The principles are set forthin the Declaration of Independence; the institutions,in our Constitution as elaborated over centuriesof interpretation; and our hopes, in the famousAmerican dream, that individuals who are willing towork hard and play by the rules can build better livesfor themselves and their children. The movement forequal rights for African-Americans defeated calls forblack nationalism by appealing successfully to thehistoric bases of American unity. Its demand wasinclusion, not separation, and it succeeded in partbecause white America could not deny the moralforce of its claims.Points of tensionHaving said this, there can be little doubt thatcohesion in the United States has weakened inrecent decades. Polarisation between politicalparties has risen to its highest level in more thana century. The two major parties now espousefundamentally different ideological orientationstoward the role of government in economic andsocial life, the interpretation of the Constitution, andmuch else. The parties also represent very differentconstituencies. The Republicans, our conservativeparty, include the majority of white Americans,older Americans, and members of the businesscommunity. The Democrats, our centre-left party,include the majority of women, African-Americans,young adults, labour union members, and votersfrom Spanish-speaking countries. These differencesof outlook and constituency are complicating effortsto make progress on daunting fiscal and economicchallenges.High levels of religious belief and observance havelong distinguished the United States from mostEuropean democracies, and scholars point to religionas one of the key sources of our unusually vibrant civilsociety. But in recent decades religious differenceshave tended to weaken social cohesion in the UnitedStates. Liberal Protestants, Catholics shaped byVatican II, and secularists have joined left-leaningmovements and have aligned themselves with theDemocratic Party, while evangelical Protestants,traditionalist Catholics, and Orthodox Jews havebecome mainstays of conservative politics and ofthe Republican Party. Debates over abortion, humanembryo research, and legal rights for gays andlesbians both reflect and deepen moral divisions inUS society.While the United States thinks of itself as a nationof immigrants, this has not been consistent throughour history. Between 1924 and 1965, the gates ofimmigration were all but shut, and immigrants fell toa record low five percent of the US population. The1965 immigration reform reopened those gates, andthe ensuing surge has nearly tripled the immigrantshare of the population. Not only were the numbersOvercoming political polarisation: the future of the United States | William Galston

60Charting new directions: Brazil’s role in a multi-polar worldof immigrants very large, but also their sources werenew. A far higher percentage than ever before camefrom Spanish-speaking countries, and many of themviolated the law to enter or remain in the UnitedStates.By the 1980s, this had become a divisive politicalissue and it has remained so ever since. To traditionalanxieties about the economic and social costs ofimmigration were added fears about cultural andlinguistic separatism. Most US citizens see thedivisions between English and French speakingCanadians as an outcome to be avoided at all costs.The troubled history between the United Statesand Mexico is an added complication, especiallywhen a few activists unwisely resort to irredentistlanguage. Immigration has even caused divisionswithin conservative ranks: members of the businesscommunity typically welcome both high-skilled andlow-skilled immigrants to do jobs that the nativebornare unable or unwilling to perform, while socialconservatives focus on issues such as language,culture, welfare, and crime.Changing economic patternsBeyond these adverse political, cultural, and socialtrends, economic cohesion has diminished in theUnited States as well. In the three decades after theSecond World War, as productivity rose, all sectorsof the workforce enjoyed rapid economic gains, themiddle class expanded, and poverty plunged. By theearly 1970s, the share of income and wealth enjoyedby the bottom three quintiles of the population hadreached its highest level since the 1920s. And thenthese trends reversed. Income increases slowed,the gains from productivity improvements wentdisproportionately to upper-income households, andincome and wealth became increasingly unequal.While income in the bottom quintiles stagnated,those at the top saw their income more than triple.In the early 1970s, the compensation for the typicalbusiness executive was about 30 times the income ofthe average worker. By 2005, executive compensationstood at 120 times the average for all workers. Notsurprisingly, the share of household income receivedby those making more than $100,000 more thandoubled between 1980 and 2005, from 9.4% to20.2%, and the top 10% of households held about70% of total wealth.Analysts have long debated the causes of thesetrends. No doubt immigration, technology, trade,and the decline of labour unions have all played apart. Changes within the manufacturing sector areespecially significant, because for much of the postwarperiod manufacturing provided a large share ofmiddle-income jobs for workers with modest levels ofeducation and skills. While the United States remainsthe world’s leading producer of manufactured goods,employment in the manufacturing sector has beendrastically reduced. US manufacturing output in 2010was higher than it was in 2000, but in that samedecade, US manufacturing employment fell by onethird,from 17.2m to 11.6m. Very large productivitygains enabled US-based firms to remain viabledespite increasing pressure from global competitors.The downside was not so much economic associal. Many displaced manufacturing workers wereforced to accept new jobs at lower wages. Othersnever found work and were forced into prematureretirement with limited resources. Manufacturingstates and cities in the US heartland were particularlyhard hit, exacerbating regional disparities.Declining social mobilityThroughout US history, a high level of social mobilityhas counteracted periods of rising inequality. Indeed,the belief that in the United States, anyone canrise out of poverty through self-discipline and hardwork has sustained social cohesion despite levels ofinequality that would have generated intense conflictin more static societies. There is mounting evidence,however, that upward mobility in the United States isharder than it was once and may now occur less oftenthan in other advanced democracies. One study foundthat of American male workers today whose fathers’Overcoming political polarisation: the future of the United States | William Galston

Charting new directions: Brazil’s role in a multi-polar world 61income fell into the bottom fifth, 42% themselvesremain in that lowest quintile. The comparable figurefor Denmark was 25%; for Norway, 28%; for the UK,30%.Regrettably, the educational system that oncesustained the US mobility advantage may now beundermining it. Roughly 30% of secondary schoolstudents leave without receiving their diploma, andvery high numbers of low-income college studentsfail to complete their two year and four year degrees.International comparisons suggest that the US isfalling behind other advanced industrial societiesin both secondary school graduation and collegecompletion rates.In the past, social programmes have also helpedameliorate rising inequality. Since the early 1970s,public spending targeted at poor and low-incomehouseholds has more than tripled and now amountsto more than $600bn annually. Unfortunately, thisspending is coming under intense pressure atevery level of the US federal system. The nationalbudget is running deficits and accumulating debt atan unsustainable pace, and it will be very difficultto move toward balance without reducing socialspending. Indeed, the greater the political difficultyof reducing spending for middle-class pensionsand health care, the larger the cuts in meanstestedprogrammes are likely to be. In addition, therecent great recession dealt a body-blow to stateand municipal finances, and recovery is likely to bepainfully slow. In the meantime, even if governorsand mayors are able to raise taxes (no easy matterin current circumstances), they will also be forced tocut programmes that finance health care, education,and social services for low-income populations.The key to progress is a return tovigorous economic growth whose fruitsare widely sharedA hopeful futureThe short to medium term prospects for improvedsocial cohesion in the United States are not bright.Nonetheless, there is cause for longer term hope.The key to progress is a return to vigorous economicgrowth whose fruits are widely shared. And despitepartisan contestation, there are signs of an emergingconsensus around a pro-growth agenda for thesecond decade of the 21st century. This involvesthe continuation of short-term stimulus combinedwith a multi-year plan for fiscal consolidation andstabilisation. There would be a shift away fromuniversal social programmes towards measuresbetter targeted to the needs of poor and low-incomehouseholds. Increased investment in areas such asresearch and development, innovation, infrastructureand education reform will be vital for long-termgrowth. This will need to be accompanied by renewedprogress in international trade as well as a meetingof the minds with China on currency issues.Throughout the past century, there have beenepisodes of anxiety that the US is losing ground andthat our best days are behind us. The focus of thisanxiety has shifted within my lifetime, from Russia toJapan to Germany and now to China. But the basicstructure of the anxiety has remained the same— that the United States distinctive ensemble ofeconomic organisation, political institutions, and socialunderstandings was no longer suited to changedcircumstances. Each time, pessimists underestimatedthe US ability for self-correction, adaptation, andrenewal. Today, its core strengths remain intact: anenergetic and hardworking population; an economythat encourages entrepreneurship; a social systemthat prizes individuality and innovation; and aneducational system that, for all its flaws, encouragesstudents to think for themselves.The major question-mark today is not any of these,but rather the capacity of US political institutions toovercome polarisation and myopia and come togetheraround the steps that are needed to ensure widelyshared prosperity in the coming decades. The declineOvercoming political polarisation: the future of the United States | William Galston

62Charting new directions: Brazil’s role in a multi-polar worldof the United States, were it to occur, would comenot at the hands of any competitor but rather fromself-inflicted wounds, a failure of self-government.William Galston is Ezra K. Zilkha chair in governancestudies at the Brookings Institution in Washington DC, andformer policy advisor to President ClintonOvercoming political polarisation: the future of the United States | William Galston

Section three:Seeking autonomyin an age ofinterdependence

Charting new directions: Brazil’s role in a multi-polar world 65The cautiousemergence of BrazilRiordan RoettWhile a great deal of attention has been given to theextraordinary economic and financial development ofthe Brazilian economy, there has been less systematicexamination of the country’s growing regional andglobal political importance. It is fair to say that theemergence of Brazil politically is founded to a largedegree on the astute economic management of twoBrazilian administrations, that of Fernando HenriqueCardoso (1995–2002) and that of Luiz Inacio “Lula” daSilva (2003–2010). In 15 years, Brazil has establishedan international reputation for a pragmatic and flexibleprogramme of banking reform, inflation targeting,a fiscal responsibility pact between Brasília and theprovinces, and a series of other reforms that allowedPresident Lula to state that Brazil was the last countryto enter the 2008–2009 crisis and the first to emergerelatively unscathed.Economic development through politicalconsistencyContinuity in policy has been key. In 1993–1994Cardoso instituted the “stabilisation programme”known as the real plan, which proved to be critical.He dealt with the financial crisis of 1999 when thecurrency was devalued in response to pressurefrom currency speculators by acting quickly and,ultimately, successfully. The Cardoso administrationstrongly supported the privatisation of state-ownedenterprises, despite fierce opposition from workersand those on the political left. Unlike his predecessors,Cardoso established the principle of Central Bankautonomy. That policy, the basis of much of thecurrent stability, was then reaffirmed by PresidentLula, over the objection of members of his ownWorkers Party (PT) who believed the party shouldhave the same access to inflationary policies throughprinting money as previous governments.President Lula took office in January 2003 in thecontext of lingering concern that he would not continuethe fiscal and monetary policies of his predecessor. Infact, in a “Letter to the Brazilian People” issued duringthe presidential campaign he had pledged to recognisecontracts, maintain fiscal stability, and reduce thecountry’s debt. He appointed a widely admiredpresident of the Central Bank, Henrique Meirelles, anda highly competent finance minister, Antonio Palocci.The economic team worked well together and withina matter of months it was clear that the gains of theprevious government were being used for the nextsteps needed to modernise the economy.The Lula presidency also had the extraordinarygood fortune to take office as a global commodityboom was underway, driven particularly by China.Brazil, an agricultural giant, is an important providerof a wide range of foodstuffs for the internationalmarket. It is also one of the largest producers of ironore, used to produce steel and a key component ofthe Chinese development model. In addition, thebiofuels programme, in which Brazil has been a leader,took off with the rapid expansion of the sugar-derivedethanol programme. And, in the middle of the Lulapresidency, massive reserves of oil and natural gaswere discovered off the south-east coast of Brazil.Leader of regional integration and cooperationUsing Brazil’s financial stability and growing tradeclout, the Lula government continued the expansionof the country’s role in South America and, selectively,on the global scene. While for centuries Brazil hadbeen viewed with suspicion by its Spanish Americanneighbours, Brazilian governments, following thetransition from military rule in 1985, actively pursuedThe cautious emergence of Brazil | Riordan Roett

66Charting new directions: Brazil’s role in a multi-polar worldpolicies of sub-regional integration and cooperation.The outstanding example is Mercosul, the commonmarket of South America that was initiated by Brazil,Argentina, Uruguay and Paraguay. This is the firstsuccessful effort at regional integration in the historyof the continent. Towards the end of his administration,President Cardoso convened the first summit ofSouth American heads of state in Brasília (2000). Thatwas an important turning point in Brazil’s relationswith its neighbours. In the following years, Brazil hascome to be seen as a good partner and a collaborativeneighbour. A second regional summit was convenedin Guayaquil, Ecuador in 2002.Deeper continental integration and cooperationhad been a long overdue policy objective in SouthAmerica. At Brazil’s urging, a third summit was heldin Cuzco, Peru in December 2004, moving the projectforward dramatically. The Cuzco Declaration set forththe framework for a South American Community ofNations (SACN). The objective was to bring togethertwo existing, sub-regional trade blocs, Mercosul andthe Andean Community of Nations. At a summithosted by President Lula in Brasília in May 2008 aconstitutive treaty was unanimously approved tocreate the Union of South American Nations (Unasul)that replaced SACN.Not only concerned about South Americanintegration, Brazil took the initiative of convening thefirst Latin American and Caribbean summit in Brazilin December 2008. Symbolically, the United States,Canada, and the European Union were not invitedto participate, while the Castro regime in Cuba wasincluded. That very political decision was viewed as adeliberate criticism of the US embargo.Another important initiative of Brazil in the regionwas the formation of the South American DefenceCouncil which will serve as a mechanism for regionalsecurity and military defence cooperation. Brazilis also strongly supportive of the new Initiative forInfrastructure Integration of South America (IIRSA),the free movement of people in the region, and theSouth American Energy Ring. In fact, Brazil has beenBrazil will be a key player in continuingtalks on how to prevent anotherfinancial meltdown, just as it has beena major player in ongoing talks toconclude a new international traderegimethe patient midwife for these regional programmesand deserves great credit for its role.A growing voice in a changing global landscapeBrazil has also become a critical player in a number ofglobal initiatives. As the 2008 financial crisis deepened,pressure from the emerging market economies ledthe lame duck administration of President George W.Bush to breathe new life into the G20. A collectionof the 20 largest economies in the world, the grouphas debated and pursued a new financial architecture.They have also argued, successfully, for a moreprominent role of the major developing economies atthe International Monetary Fund (IMF). President Lulaand his finance minister were very vocal in criticisingthe industrial countries for poor management, laxregulatory rules, and a lack of transparency. It is inthis context that President Lula liked to remind thedeveloped countries that Brazil was the last majoreconomy to enter the crisis and the first to emerge.Brazil will be a key player in continuing talks on howto prevent another financial meltdown, just as it hasbeen a major player in ongoing talks to conclude anew international trade regime. The trade negotiationsbegan in 2001 in Doha, Qatar. The so-called DohaRound has yet to conclude, but in all of the meetingsBrazil has argued forcefully for a level playing field forthe newly emerging economies.Perhaps the most important sign of Brazil’semerging role is its active leadership in the Brics, abloc composed of Brazil, Russia, India, and China. Theacronym has come to represent the beginning of theThe cautious emergence of Brazil | Riordan Roett

Charting new directions: Brazil’s role in a multi-polar world 67“passing of the guard” from the post-1945 industrialpowers to the strong, emerging economies that will,over the next few decades, replace the Europeancountries as the engines of growth in the worldeconomy. President Lula hosted the most recentsummit of the Bric countries in 2010 and the nextsummit will be held in Beijing. Pursuing its vision ofsouth-south diplomacy, Brazil has also been a leader inthe organisation of Ibsa, the bloc comprised of India,Brazil, and South Africa. Indeed, as recognition of SouthAfrica’s growing importance, Brazil has supported theinvitation by China to include South Africa in the 2011Bric summit in Beijing.Relations between Brazil and China have developedrapidly since the state visit to South America ofPresident Hu Jintao in 2004. In 2010, China replacedthe United States as Brazil’s principal trade partnerwhile the Chinese market is a major purchaser of themany high quality foodstuffs and raw materials thatBrazil possesses in abundance. There are, however,tensions in the relationship. According to the FinancialTimes, recent Brazilian central bank data confirm that in2010 China became the biggest foreign direct investorin Brazil, with China accounting for about $17bn oftotal FDI inflows that year out of a total of $48.46bn.The principal source of concern here is the dramaticincrease of cheap imports into Brazil, helped by a surgein the value of the Brazilian real that is undermining thecompetitiveness of domestic industry, while most ofthe Chinese investment has gone to industries relatedto commodities. The Brazilian government may haveto consider measures to impose restrictions on FDIin mining, including minimum domestic supply quotasand screening transactions to be sure they serveBrazil’s interests as well as those of China.At the global level, it is clear that Brazilian-Chinesecooperation is expanding. Some argue that the Beijingregime seeks to replace the traditional leadershiprole of the United States in Latin America. That is notapparent at this point in time, but we do not knowwhat future strategic decisions will be made as theregion becomes more important as a source of rawmaterials and agricultural products. The United Stateshas become increasingly unpopular in the region due toits identification with the failed policies of the so-calledWashington Consensus of the 1990s. That set of policyprescriptions called for significant macroeconomicchanges but overlooked unemployment, poverty,and inequality. While the United States remains asignificant player in the region, it is no longer themain one. In fact, there is no longer an American vetoover Latin American policy initiatives and US policyprescriptions are generally ignored.Brazil: a standard bearer in a new world order?Over the last 15 years, Brazil has emerged as anincreasingly sophisticated player in regional and,selectively, global affairs. As commentators havenoted, Brazil has no major ethnic fault lines, it is atpeace with all of its neighbours, it is a consolidateddemocracy, and it is not a nuclear power—nor doesit have ambitions to become one. As Brazil affirms itsposition as an important supplier of oil, natural gas,commodities, and minerals to the world markets, itsinternational presence will be increasingly strong.This is significant in the context of a new world orderin which the United Nations seeks to restructure itsSecurity Council, to include, for example, Brazil as thenatural candidate representing Latin America.Newsweek’s Mac Margolis has called Brazilthe “crafty superpower.” It is not clear whether ornot Brazilian policy-makers agree with thatcharacterisation, since Brazil pursues its regional andglobal agenda with great caution. But it may wellcome to represent the new realities of the 21st centuryas Brazil continues to be viewed as a sophisticatedand necessary component of global governance.Riordan Roett is Sarita and Don Johnston professor anddirector of the Western Hemisphere and Latin American Studiesprogram at Johns Hopkins UniversityThe cautious emergence of Brazil | Riordan Roett

Charting new directions: Brazil’s role in a multi-polar world 69Brazil at thecrossroads: towardsregional integration?Marcel F. Biatoambitious programme of regional integration.Brazilian financing agencies and banks are at thevanguard of highway projects to shorten continentalsizedistances and schemes for interconnectingenergy supplies. Brasília promotes the infrastructuraldevelopment necessary for the rhetoric of regionalsolidarity to become a reality. Although Brazilianinvestment in capital, technology, revenue and jobshas enjoyed regional public support, there havebeen protectionist protests and concerns in othercountries.Brazil is at a crossroads as the global geography ofpower continues to change following the financialcrisis. Do we seek strategic alliance with the otheremerging countries that will perform a key role in aglobalised world? Or, do we intensify the process ofregional integration in Latin America?Globalisation and regionalisation – contradictoryagendas?The economic and cultural gap between Brazil and itsSpanish-speaking neighbours has always encouragedscepticism towards the regionalisation agenda.Is it worthwhile for Brazil to join forces with itsfragmented neighbours, historically more associatedthrough divergence than shared vision? In the 19thcentury the Brazilian monarchy was regarded asimperialistic by many other countries in the region.Autonomy from its Latin-American surroundings wasa national objective for Brazil, as intensely yearnedfor as it was poorly disguised.As Brazil’s position as a global actor is consolidated,this aspiration is reinforced: to utilise its size, growthand resources to win markets and forge partnershipswith other countries that will emerge as the dynamicpoles of the global economy. The fact that Brazil ismaking use of the opportunities of globalisationis beyond doubt; its foreign trade has diversifiedconsiderably, as have its partnerships with otheremerging powers.At the same time, Brazil is also pursuing anThe need for democratisationAre the dual agendas of globalisation andregionalisation contradictory? Has Brazil abandonedits erstwhile ambition of overcoming geographicallocation? How did this metamorphosis come about?In fact, Brazil’s regional integration agenda and theforces of globalisation are not mutually exclusive. TheLatin American agenda should be seen as part of astrategic response to the deep changes underway inthe global scenario. This may seem paradoxical, forwhat, many will ask, does regional integration haveto do with climate change, the global financial crisis,or energy insecurity?These challenges highlight the nature of globalinterdependence, and are directly linked tofundamental imbalances in the current world order.As emerging economies rise, their growing demandputs pressure on the supply of biological, mineraland energy resources. Simultaneously, globalisationaccelerates the speed with which jobs, people andinvestments migrate. This change has exacerbatedsocial tensions and uncertainties, and can be seenon the front pages of newspapers everyday: shopsbeing looted for food, xenophobic reactions to poorimmigrants, calls for protectionism, and competitionfor natural resources.It is imperative to reorganise a productive model thatwastes finite natural resources while at the same timecondemning a significant proportion of the world’spopulation to sub-human conditions of subsistence.Brazil at the crossroads: towards regional integration? | Marcel F. Biato

70Charting new directions: Brazil’s role in a multi-polar worldIt has become quite clear that globalisation is notleading to increased uniformity and equity – we arenot growing more alike in terms of political ideologyor standards of well-being, as was predicted. On thecontrary, we now see that interdependence tendsto reinforce the bargaining power of the strongestand the most agile. This is why the main victimsof globalisation are the same as always: the leastcapable of protecting themselves from global crises.How do we address this challenge?Part of the answer lies in democratising decisionmakingprocesses at the global level. The delay inreforming the Security Council and democratisingWTO institutions explains Brazil’s emphasis oninnovating partnerships with common objectives anddefined agendas; a diplomacy of variable geometrythat will facilitate alliances and partnershipsdesigned to rebuild, rather than subvert, multilateralinstitutions.The most important of these partnershipspromoted by Brazil to reform the international orderis regional integration. With national nuances LatinAmerica is undergoing a true revolution, one that isdemocratic and essentially peaceful. It is founded ontwo heterodox theses.First, there is the rejection of the idea that atrade-off exists between economic growth andincome redistribution. Over the last decade Brazilhas demonstrated that consolidating a market ofmass consumption anchored in expanding jobs andwages – resulting from broader access to credit andincome-transferring policies – is the best guaranteeof sustainable growth, particularly in a period ofglobal recession.Second, there is the recognition that democraticrestoration in Latin America is necessary butinsufficient to guarantee competitive insertion of theregion in the global economy. Sharing fundamentalvalues with the advanced powers – commitmentThe truth is that the dichotomybetween Brazil’s regional integrationagenda and the forces of globalisationis a false oneto dialogue, protection of human rights, reclaimingsocial debt, and economic stability – will in itself notturn us into a relevant global pole of power.Increased integrationLatin America faces the contradictions of a societymarked by high levels of socio-economic exclusionand political apathy, and a lack of effective institutions.In many cases, this has frustrated the expectationsof the economic integration programme, oftenstimulating rivalries and unresolved nationalistconflicts, rather than encouraging closer regional ties. 1Although intra-regional trade has enjoyed significantgrowth, little progress has been made as far as themain aim is concerned: to create an economic spacecapable of distributing development in a democraticfashion across all countries and sectors.The principal instrument here – customs union –brought into relief the lack of competitiveness of thebloc’s smaller economies, and their asymmetry inrelation to others. Providing these economies withprivileged access to larger consumer markets was oflittle practical use when in reality this perpetuated ahistorical pattern of unequal exchange. The smallereconomies were unable to reduce their dependencyon exports of primary products of low aggregatevalue.It is still possible to utilise intra-regional trade andinvestments as a tool for further integration, but it isimportant to keep in mind and attempt to reduce theserious asymmetries among members of the bloc.Efforts have been made to achieve this aim. Brazil1 The economic integration programme was first launched by ALALC (The Latin American Free Trade Alliance) in 1960 and re-invented in 1980 withALADI (the Latin America Integration Association).Brazil at the crossroads: towards regional integration? | Marcel F. Biato

Charting new directions: Brazil’s role in a multi-polar world 71has formulated technical cooperation programmesand extended streams of concessional credit inpriority sectors of the smaller Latin Americaneconomies which seek to improve efficiency andcompetitiveness. However, further progress willbe difficult if economic reorganisation in the regionis not assisted by sponsorship from the BrazilianDevelopment Bank (BNDES) and other regionalagencies 2 . This is the case particularly in the areaof communications, transportation and energyinfrastructure.At the same time, creating the Bank of the South,expanding trade in local currency and improvingthe Aladi Agreement on Reciprocal Credit are allfurthering economic development in the region. Theexercise is more advanced in the sphere of Mercosul,where as part of the effort to expand and strengthenits mechanisms of governability, a structural fundwas launched to provide resources for reducing thestructural bottlenecks of the smaller economies inthe bloc. 3Strengthening institutional architectureIf globalisation necessitates a democratic“re-founding” of the multilateral system, Latin-America’s regional architecture must also undergoreforms. Launching Unasul (The Union of SouthAmerican Nations) and strengthening the dialoguebetween Latin America and the Caribbean throughthe Group of Rio in 2008 all help achieve this. Whatsome perceive as simply multiplying forums actuallyreflects the enormous institutional experimentationof a region experiencing change and seeking toredefine its world role. Unasul provides an institutionalumbrella for avoiding a mercantilist tendency whichseeks to limit the integration effort in the region tothe area of trade.While historically, the countries of the regionhave been resistant to intervention and mutualinterference, the continent must overcome itsdistrust if it is to successfully consolidate as a zoneof political and social stability, free from ideologicalantagonism. The South American Defence Council istherefore of great importance to regional integration. 4The Council offers a forum for dialogue to negotiatetensions harmoniously among neighbours. Themotivation for the creation of this body came in thewake of the border conflict between Ecuador andColombia in 2008, and its supervision prevented thetensions between La Paz and autonomous leaders ofthe Bolivian “half-moon” movement descending intocivil war. Underlying these initiatives is a convictionthat South America will not overcome its deepchallenges if it fails to arrive at collective solutions.Otherwise, dangerous vacuums of power will persistthat can be used as a pretext for external actors tointervene in the region.Overcoming history: first alliesThe high rates of growth of the last ten years suggestthat the region is on the right path, yet Latin Americacontinues to manifest contradictions. It possessesvast energy reserves, but electricity is scarce. Itenjoys enormous biodiversity, but its environmentis still not fully respected. It is one of the richestagricultural and mineral areas in the world, but deepsocial injustice and economic asymmetry prevail.Moreover, there are a number of risks on thecurrent path. How can we ensure that the Chinesedemand for commodities will continue to help, and2 The Banco Interamericano de Desenvolvimento (Interamerican Development Bank) and the Corporación Andina de Fomento (Andean DevelopmentCorporation).3 With the intention of avoiding or reproducing the “democratic deficit” that threatens the European Union, here the aim is to broaden citizens’participation through Mercosul Social, the Forum of Cities and the Mercosul Parliament.FOCEM - The Mercosul Structural Convergence Fund.4 Conselho Sul-Americano de Defesa (South American Defense Council – CSD)Brazil at the crossroads: towards regional integration? | Marcel F. Biato

72Charting new directions: Brazil’s role in a multi-polar worldnot hinder, development in Latin America? How canwe guarantee that the region does not fall prey tothe Dutch disease, and its natural resources becomea source of prosperity and autonomy? 5 How canwe make the exceptional biodiversity of the regiona factor of comparative advantage in a world thatis more and more urbanised, rather than a factor offragility under the threat of climate change?In its effort to resolve these challenges andattempts to place the country at the centre of globaldecision-making, Brazil’s first allies are its neighbours.These nations have travelled similar trajectories,each trying to overcome a history of politicalauthoritarianism that worsened social and economicexclusion. Together, these countries enjoy the bestconditions to promote reforms – both at home andat the level of global governance. These reforms arenecessary to realise Latin America’s potential andmeet its many challenges.Only unified regional action will allow Latin Americato overcome its history of social and economicfragility, thereby enabling it to exert influence onthe changing international order. At a time when oldparadigms are subject to scrutiny, it is indispensablethat we should dare to create new links of interestand synergy. For Brazil, the point of departure will bethe continent itself.Marcel Fortuna Biato is the Brazilian ambassador toBolivia5 The Dutch disease describes the experience of the Netherlands during the 1960s in which a rapid increase in wealth had negative consequences forthe competitiveness of some sectors of the economy.Brazil at the crossroads: towards regional integration? | Marcel F. Biato

Charting new directions: Brazil’s role in a multi-polar world 73The diplomacyof generosity 1Rubens BarbosaAn aspect of Brazilian foreign policy that has receivedlittle attention is the technical and financial assistanceprovided by Brazil to many developing countries,especially in Africa and Latin America. This is oneof the ways in which the Brazilian government hasstrengthened its policy of south-south cooperationover the last eight years. Brazil is gradually becomingone of the leading providers of financial and technicalassistance to less developed countries. In 2010, thecountry committed itself to over $4.5 billion (USdollars) in overseas assistance. 2The reason provided by Itamaraty 3 for overseasassistance is to strengthen solidarity betweenBrazil and the rest of the world. Brazilian technicalcooperation has no attached conditionalities andis driven by demands made by partner states. It isalways developed in keeping with the guidelines ofBrazilian foreign policy, with priority given to supportfor the socio-economic growth of relatively lessdeveloped countries, especially in Latin America andAfrica. Cooperation is characterised by a transferof knowledge that places emphasis on improvingthe quality of human resources, employing locallabour and pursuing projects that acknowledgethe peculiarities of each country. It is based on thesolidarity that underpins the relationship betweenBrazil and other poorer countries, and is aimed atspreading knowledge towards the autonomousdevelopment of recipients.Scale and methodsThe resources deployed in Brazil’s overseas assistanceprogrammes amount to $1.2bn: more than Canadaand Sweden, both traditional donors and providersof assistance to developing countries. There arecurrently 221 projects and 324 isolated activities in 81countries: 19 in Central America and the Caribbean,12 in Asia and the Middle East, two in Europe, 38 inAfrica and South America. These projects range froma bureau for agricultural research in Ghana to a modelcotton plantation in Mali to a factory for anti-retroviralmedicine in Mozambique. The main policy areasof cooperation in the period from 2003-2010 wereagriculture (21.8%), health (16%), education (12%),environment (7%) and public security (6%).In addition to technical assistance project, thereare also resources devoted to humanitarian aid forcountries affected by natural disasters. Some of thisfunding is directed through international agenciessuch as the United Nations Development Programmeand the Food and Agriculture Organisation.The Brazilian government has spearheaded theInternational Action to Combat Hunger and donatedfood to a wide range of countries in different partsof the world including Sudan, Somalia, Niger andPortuguese-speaking African countries, the GazaStrip, El Salvador, Haiti, Cuba, South Africa, Jamaica,Armenia, Mali, Kyrgyzstan, Western Sahara,Mongolia, Iraq and Sri Lanka.Along with providing assistance, the Braziliangovernment has also granted credit and forgiven debtsto countries including Congo, Angola, Mozambique,Bolivia, Ecuador, Paraguay, Surinam and Tanzania.There have been a number of Brazilian agenciesand ministries involved in international assistanceprogrammes including Itamaraty, the Treasury, the1 Adapted from an article published by the author in the newspaper O Estado de S. Paulo, 11 October 20102 The Economist, July 15 20103 The popular name for Brazil’s Ministry of External RelationsThe diplomacy of generosity | Rubens Barbosa

74Charting new directions: Brazil’s role in a multi-polar worldThe prevailing principle in cooperation isthat of horizontality, whereby a recipientis not subservient to the donor but actson an equal footingBrazilian Development Bank (BNDES), the Bank ofBrazil, Embrapa (Brazilian Enterprise for AgriculturalResearch), CNPq (the National Council of Scienticand Technological Development) and others. Thisdemonstrates that there is a wide range of consensusand coordination that overseas assistance is avaluable part of Brazil’s policies.or simply for its way of doing things. In all cases theprinciples of Brazilian south-south cooperation mustbe respected. This means it must be demand-driven,that local resources must be deployed, and that it isnot for profit. Brazil does not see itself as an emergingdonor. Rather than the relationship being of onebetween a donor and a recipient, Brazil considerssouth-south cooperation not as an aid donation butas a partnership which benefits all parties. In otherwords, the prevailing principle in the cooperationis that of horizontality, whereby a recipient is notsubservient to the donor but interacts on an equalfooting and where entering into the relationship isbeneficial to all.Unique principlesSince 2008, the Brazilian Agency of Cooperation hasendeavored to establish a new strategy of action thatprioritises “structuring” projects, which are moreholistic, long-term and complex, rather than specificsmall-scale projects. These “structuring” projectstend to have a more meaningful socio-economicimpact. They encourage more sustainable results ofcooperation and facilitate the mobilisation of Brazilianinstitutions to carry out the projects.This form of action also contributes to creatingspace for drawing up triangular partnerships with otherinternational actors. Provided that the conventions ofBrazil’s technical cooperation policy are respected,the Brazilian government is open to the possibilityof developing trilateral cooperation with any othercountry, including those of the ‘south’ (for examplethe trilateral-cooperation health project in Haitiwhich relies on the joint actions of Brazil and Cuba).Other examples of trilateral cooperation include theStrengthening of the Investigation Institute project inMozambique with the United States (USAID) and thePro-Savanna project to develop the tropical savannasin Mozambique in association with Japan (JICA).Developed countries and international organisationsare beginning to turn to Brazil for its technicalcapacities, its cultural and linguistic characteristics,Factors guiding assistancePotential profit is never a determining factor for Brazilentering into south-south or trilateral cooperationagreements, and while any secondary impacts onexports or Brazilian investments are seen as positivecollateral effects, they are never prerequisites for theapproval of projects. Commercial interests, then, arenot an inherent part of projects for Brazilian southsouthcooperation.Indeed, rather than commercial factors, it ispolitical dynamics – particularly President Lula’ssearch for both national and personal prestige in theinternational arena and the desire to win a permanentposition on the United Nations Security Council - thatbetter explain the motivations behind the diplomacyof generosity undertaken by Brazil in Latin Americaand Africa over the last few years.Although Brazil imposes no conditions on thecountries that receive aid, it is equally true, however,that the Lula administration did not take intoconsideration values that Brazil defends internally,such as democracy and human rights, insteadpreferring to adopt the perspective that “business isbusiness”.Impact on domestic industriesItamaraty has also sought to help poorer countriesThe diplomacy of generosity | Rubens Barbosa

Charting new directions: Brazil’s role in a multi-polar world 75by opening up the Brazilian market to productsfrom these countries on a tariff- and quota-freebasis – a move which may have negative effectson some Brazilian industries. The textile sector, forexample, would be seriously affected by importsfrom Bangladesh, which exports more than $70bnof textiles per year. Itamaraty has also concludednegotiations to expand and intensify the GeneralSystem of Trade Preferences (GSTP), which offerstariff reductions with quotas for poorer countries.Therefore, it seems that foreign policy has not beendriven by the interests of domestic industries.Showing generosity overseas is at the very leastcontroversial. The rate of domestic investment islow (around 17% of GDP) and financial assistanceabroad diminishes resources that might otherwisebe invested internally - on infrastructure, housing,energy, food and so on. It is highly apparent thatthe Brazilian cooperation for development policy hasclear political motivations based on a general principleof solidarity with poorer countries. In the last fewyears aid and technical cooperation have becomeone of the main lines of foreign policy, especiallyconcerning Latin America and Africa. Cooperationdoes not involve reciprocal commitments on the partof the receiving countries, nor is it linked to defendingBrazil’s economic and industrial growth.At times, overseas assistance is directed towardimproving infrastructure such as roads, and otherpublic works. By releasing credit for public worksin African and South American countries, Braziliancompanies could come to benefit by winningcompetition for providing services and exportingBrazilian products. In some cases, overseasassistance does enjoy the support of the Federationof Industries of São Paulo and its equivalent in otherstates.need to uphold. The commitment of the Braziliangovernment to offer solidarity to relatively lessdeveloped countries is likely to continue.However, bearing in mind the need to reducepublic spending in order to restore the balance ofgovernment accounts, financial aid beyond the limitsof the Mercosul area may be reduced. One can alsoexpect the new government to avoid expanding itsengagements with countries that fail to respect thesame values that Brazil defends at home, such ashuman rights and democracy.At the same time, the soft power approachadopted by Brazil will continue to grow and developbased on the principles of horizontality and lack ofconditionality that today characterise the Brazilianmodel of cooperation with less developed countries.RubeNs Antonio Barbosa is the president of theInternational Trade Council of the Federal of Industries of theState of São Paulo (FIESP)The future directionThere are already commitments in place withMercosul and bilateral agreements with countries inLatin America that the Rousseff administration willThe diplomacy of generosity | Rubens Barbosa

Charting new directions: Brazil’s role in a multi-polar world 77Charting a coursefor Brazil’s riseCharles A. KupchanBrazil is blessed among the world’s rising powers. Itis emerging in a uniquely peaceful region populatedmostly by democracies. In comparison with eastAsia, south Asia, west Asia, and Africa, Latin America– South America, in particular – is remarkably freeof geopolitical competition. That is one reasonthat neither Brazil nor any of its Latin Americanneighbours have nuclear weapons. India, like Brazil,is a rising power that enjoys a stable democracy. ButIndia resides in a very dangerous neighbourhood andhas a long history of rivalry with both Pakistan andChina; one reason why all three countries possessnuclear weapons. In short, Brazil’s rise is taking placein a singularly fortuitous political and geopoliticalenvironment.Brazil should capitalise on these benign conditionsas it maps out a strategy for the future. Unfettered bythe political and strategic constraints that face otherrising powers, Brazil is free to play a leading rolein shaping the international order that comes next.Brasília should take advantage of this opportunityto serve as a bridge builder, a rising state that helpsguide the transition from the current order (onedominated by the west) to one in which power andauthority will be more widely distributed.This essay lays out a number of principles to guidethe evolution of Brazil’s foreign policy as the countrycontinues to rise. Overall, Brazil should be mindfulof the need to keep resources and commitments inbalance and to pursue a paced and judicious coursethat expands the country’s influence while avoidingthe dangers of overreaching.The importance of strategyRising powers need to develop the political capacityand institutions as well as the intellectual resourcesrequired to formulate and implement a grand strategyof global reach. The political will and purposefulstrategic choices that guide emerging states do notcome naturally of their own accord. They must becultivated and nurtured.The United States, for example, was a major powerin economic terms well before it aspired to globalreach. It was not until the 1890s that the countrybegan in a purposeful manner to translate its materialresources into geopolitical influence. That shift waspossible only as a consequence of institutionalchanges: the federal government strengthenedits powers vis-à-vis the separate states and theexecutive branch strengthened its position withrespect to Congress. The onset of what came to becalled the “imperial presidency” enabled PresidentMcKinley, President Roosevelt, and those that cameafter them to allocate resources to building a highseasfleet and developing a grand strategy of globalengagement. During the 20th century, the UnitedStates went on to build the broad and deep nationalsecurity establishment that exists today. The StateDepartment, Pentagon, and National Security Councilare the most visible manifestations, but they drawon a foundation of universities, public policy schools,and think tanks.The lesson for Brazil is to invest in and developthe human capital and institutional infrastructureessential to guiding and sustaining Brazil’s rise as aglobal player. That means allocating new resourcesto expand institutions of higher learning aimed attraining diplomats as well as policy analysts andscholars of international relations. Brazil should alsocontinue investing in its diplomatic capacities and itsrepresentation abroad. And consideration should begiven to whether changes are needed in decision-Charting a course for Brazil’s rise | Charles A. Kupchan

78Charting new directions: Brazil’s role in a multi-polar worldPolitical cohesion and effectivegovernance are required to turnmaterial capability into both hard powerand soft powermaking and advisory structures to improve theformulation and implementation of national strategy.As the case of the United States makes clear,institutions matter.Power starts at homeState strength rests on a combination of economiccapacity and political cohesion. Political cohesion andeffective governance are required to turn materialcapability into both hard power and soft power. China,for example, has enjoyed substantially higher rates ofgrowth than India in part because an autocratic state,without the pulling and hauling of democratic politics,has provided generally purposeful, competent, topdowngovernance. The result has been shrewd policythat has maximised growth and dramatically reducedpoverty. China has also made domestic economicgrowth its top priority, and has adjusted its foreignpolicy accordingly. India, meanwhile, faces a morecomplicated and fragmented political landscape. Itsdecisions often aim more at satisfying a wide arrayof domestic constituencies than maximising growth.This is hardly to endorse autocracy, but only toreinforce the extent to which sound domestic policy,particularly on the economic front, is essential tosustain a steady rise in state strength.Brazil therefore needs to continue its focuson the home front, pursuing the combination ofsound macroeconomic policy, poverty reduction,and balanced growth across different sectors ofthe economy. This domestic focus is particularlyimportant in light of the fact that rising powersexperiencing rapid economic growth are prone tothe strategic excesses that are often a byproductof social dislocation. Changes in social hierarchydriven by domestic economic development haveconsiderable potential to lead to social imperialismi.e. the resort to aggressive foreign policies as ameans of consolidating domestic control throughpopulism and nationalism.Germany before World War I provides an illustrativeexample. From unification in 1871 through to themiddle of the 1890s, Germany pursued a pacedand judicious growth strategy, one that deliberatelyavoided direct rivalry with its neighbours. By the end ofthe 1890s, however, a domestic clash pitting iron andrye (industrialists and the landed aristocracy) againstthe rising working class prompted the government touse foreign policy as a tool of domestic manipulation.The rapid naval build-up coupled with the propagationof nationalist ideology succeeded in rallying thecountry around weltpolitik. But the turn in Germangrand strategy also upset the European balance ofpower, entrapped the country’s leaders in their ownnationalist propaganda, and pushed the great powerstoward World War I. Germany’s peaceful rise fell preyto a destructive grand strategy born of domesticpolitical dysfunction.Despite Brazil’s impressive economic progress, thecountry still faces numerous domestic challenges,including reducing economic inequality and poverty,distributing land ownership more equitably, andensuring balanced political representation of allclasses and races. Rapid economic growth, despiteits numerous benefits, does have the potential toproduce social dislocation and the populism andsocial imperialism that often accompanies it. Evenas it enjoys robust economic growth, Brazil mustguard against the temptations of seeking to exportdomestic political tensions, that is, to use foreignpolicy as a tool of domestic politics.The centrality of regional integrationThe benign strategic conditions in which Brazil’s riseis taking place stem in large part from the successfulprocess of regional integration that has taken placeduring the last three decades. Brazil and ArgentinaCharting a course for Brazil’s rise | Charles A. Kupchan

Charting new directions: Brazil’s role in a multi-polar world 79embarked down the path of rapprochementbeginning in 1979, clearing the way for the launchand development of Mercosul during the 1990s.Had that effort at regional integration failed, Brazil’srise would likely have quite ominous implicationsfor South America, encouraging Argentina and othercountries in the region to balance against Brazilianpower. Indeed, the rise of countries like China,India, and Turkey is causing considerable geopoliticaluncertainty precisely because these powers arerising in regions still plagued by dangerous rivalries.Even as Brazil’s strategic horizons expand in stepwith its rising power, it must continue to invest timeand energy into regional integration. Moving from theeconomic interdependence afforded by Mercosul tothe deeper political and strategic cooperation affordedby Unasul would be an important step forward. TheEuropean Union, after all, has been so successfulin bringing lasting peace to Europe because it isfar more than a trade bloc; along with Nato, the EUprovides a framework for collective managementof the region’s security. To be sure, Brazil’s growingstature gives it the wherewithal to become a playerin the middle east and other regions well beyondits own neighbourhood. But consolidating peaceand prosperity in South America must remain a toppriority. Only if Brazil continues to reside in a stableand cooperative neighbourhood will it be able toeffectively project its voice and pursue its interestsfurther afield.The exercise of strategic restraintWhen it comes to the scope of international influenceand foreign ambition pursued by rising powers, less ismore. Rising states that tread lightly and speak softlywill find their ascent less encumbered and turbulentthan those that swagger and shout.Bismarck was so effective in guiding Germany’searly rise because he reined in German ambition,focusing the country on economic growth anddiplomatic clout rather than military capability. Heargued against the acquisition of colonies, contendingthat overseas empire would distract Germany fromits continental vocation and needlessly provokerivalry with Great Britain and France. Bismarcksucceeded in maximising German influence bymaking it Europe’s diplomatic pivot. His successorsdid exactly the opposite, and paid a heavy price.They propagated nationalist myths at home andembarked on a military build up that led to Germany’sself-encirclement and an unintended great-powerwar. The exercise of strategic restraint worked toGermany’s advantage, while unbridled ambition ledto Germany’s downfall.China’s recent diplomatic track record is alsoinstructive. Over the past decade, China focusedon domestic growth and practiced restraint in itsforeign policy; its rise consequently met with littleresistance. More recently, China adopted a moremuscular stance, speaking in blustery terms about its“core interests” in the South China sea, confrontingJapan over disputed islands, and refusing to isolateNorth Korea even after it sank a South Koreannaval vessel and shelled a South Korea island. Theinternational response was immediate. The UnitedStates shored up its alliance network in east Asiaand launched a new strategic partnership with India.Japan announced that it was changing the strategicfocus of its military, ending its emphasis on the northin favour of concentrating on the Chinese threat to itssouthern islands. China’s more assertive diplomacydid more harm than good to its strategic position.The lesson for Brazil is to ensure that evenas it aspires to a level of international influencecommensurate with its power, it does so in a cautiousand judicious manner. Brasília’s focus should beon steps aimed at contributing to the provision ofpublic goods and strengthening a rules-based order,meanwhile avoiding actions that appear to be moreself-serving or intended to provoke. For example,the Brazilian-Turkish initiative to strike a deal withIran on the export of its uranium stockpile was aconstructive move; the United States and the EUshould have reacted more favourably and used it asCharting a course for Brazil’s rise | Charles A. Kupchan

80Charting new directions: Brazil’s role in a multi-polar worldbaseline for further discussion. In contrast, PresidentLula da Silva’s chummy relations with PresidentAhmadinejad were a mistake. Brasília seemed tobe embracing the Iranian leader at the very momentthat the international community was seeking toreinforce his regime’s isolation. The move may havebeen intended to bolster Brazil’s credentials as anindependent player, but it did more harm than goodto Brazil’s international standing. As the Wikileakscables made clear, even in the middle east itself,Ahmadinejad is anything but a respected leader.Bridging the developed and developing worldsDue to its benign geopolitical environment, stabledemocratic government, and its history of workingwith developed and developing countries alike, Brazilshould seek to cast itself as a bridge between thetwo groupings. Brasília should align with the westas appropriate, and it should align with the Brics orother developing groups as appropriate. Rather thanseeking to cast itself in a particular role or adhereto a particular ideology, Brazil should be guided by apragmatic, problem-solving agenda.In this respect, Brazil might seek to be a rulegenerator;a country that consciously helps recasta rules-based international order. At this point in thetransition to a post-western international system,rising powers are very adept at articulating what theydo not want: an international system under westernhegemony. But they are not yet ready to articulatewhat they do want; in other words, to articulate whatnorms would guide a post-western order. Brazil isparticularly well-placed to help fill that gap. It has‘street credibility‘ with rising powers, but its openeconomy and democratic institutions also give itstrong credentials among western powers.is diplomacy that is the critical ingredient to peacemaking, and only after the diplomats have donetheir work can commercial integration help seal thedeal. Brazil’s own experience bears out this insight.Rapprochement proceeded with Argentina primarilyas the consequence of diplomacy; commercialintegration remained quite limited during the criticalyears of exchanges, dialogue, and confidencebuilding.Only after relations between Brazil andArgentina were on a much better footing did Mercosultake off and succeed in deepening economicinterdependence.Brazil should shape its regional and global strategyaccordingly. Expanding economic engagement isimportant in its own right; it will facilitate Braziliangrowth and contribute to global prosperity. ButBrazil’s engagement strategy should also entail ahealthy dose of diplomatic initiative. In the Americas,the middle east, and beyond, Brazil should capitaliseon its growing power and influence to help solveintractable disputes and prevent new ones fromemerging. Effectively playing this role would helpmark Brazil’s arrival as a responsible great power.Charles A. Kupchan is professor of international affairsat Georgetown University and senior fellow at the Council onForeign RelationsDiplomacy before commercial engagementConventional wisdom holds that commercialintegration is a key ingredient of peace; economicinterdependence leads to geopolitical stability.The conventional wisdom, however, is wrong. ItCharting a course for Brazil’s rise | Charles A. Kupchan

Charting new directions: Brazil’s role in a multi-polar world 81

82Charting new directions: Brazil’s role in a multi-polar worldInstitute for Applied Economic ResearchFederal Government Secretariat of Strategic Affairs of the Presidency ofthe RepublicMinister Wellington Moreira FrancoA public foundation linked to the Secretariat of Strategic Affairs of thePresidency of the Republic, Ipea provides technical and institutionalsupport to government actions – enabling the formulation of numerouspublic policies and programs for Brazilian development – and makesresearch and studies conducted by its technicians available to society.URL: http://www.ipea.gov.brOmbudsman: http://www.ipea.gov.br/ouvidoriaPresidentMarcio PochmannDirector of Institutional Development Fernando FerreiraDirector of Technical Cooperation and Studies on International PoliciesMário Lisboa TheodoroDirector of Studies and Policies of the State, Institutionsand Democracy (under implementation) José Celso Pereira Cardoso JúniorDirector of Macroeconomic Studies and Policies João SicsúDirector of Regional, Urban and Environmental Studies and PoliciesLiana Maria da Frota CarleialDirector of Sectoral Studies and Policies, Innovation,Production and Infrastructure Márcio Wohlers de AlmeidaDirector of Social Studies and Policies Jorge Abrahão de CastroChief of Staff Persio Marco Antonio DavisonChief Communications Officer Daniel Castro

Charting new directions: Brazil’s role in a multi-polar world 83Alfred Herrhausen SocietyThe non-profit Alfred Herrhausen Society is the international forum ofDeutsche Bank. Its work focuses on new forms of governance as a responseto the challenges of the 21st century. The Alfred Herrhausen Society seekstraces of the future in the present, and conceptualises relevant themes foranalysis and debate. It works with international partners across a rangeof fields, including policy, academia and business, to organise forums fordiscussion worldwide. It forges international networks and builds temporaryinstitutions to help to find better solutions to global challenges. It targetsfuture decision-makers, but also attempts to make its work accessibleto a wide public audience. The society is dedicated to the work of AlfredHerrhausen, former spokesman of the Deutsche Bank board of directors,who advocated the idea of corporate social responsibility in an exemplarymanner until his assassination by terrorists in 1989. The Alfred HerrhausenSociety is an expression of Deutsche Bank‘s worldwide commitment tocivil society.www.alfred-herrhausen-society.orgPolicy NetworkPolicy Network is a leading international thinktank which providesprogressive solutions to the political challenges of the 21st Century. PolicyNetwork’s president is Peter Mandelson, former UK secretary of statefor business, enterprise and regulatory reform. The chair and director areRoger Liddle and Olaf Cramme, respectively. Policy Network encouragesdebate on contemporary social, economic and political issues by organisingseminars, conferences and round-table discussions, bringing togethersenior policymakers and leading experts, and offering a unique internationalperspective on today’s challenges and policy solutions. Through its researchand publications Policy Network seeks to have an impact on policy in Europeand internationally. It produces two types of publications: edited volumeswhich contain in-depth qualitative or quantitative research; and online papersand essays published on the website. Our current research programmesinclude: the ideological renewal of European social democracy – a newrevisionism for the 21st century; Foresight: forging common futures in amulti-polar world; the politics of climate change; an EU “fit for purpose” inthe global age; immigration and political trust; and globalisation and socialjustice.www.policy-network.net