Charting new directions: - Alfred Herrhausen Gesellschaft

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