THE NEW BRAZIL: ACHIEVEMENTS AND CHALLENGES

Edmar BachaBrazil Seminar. Columbia University

September 10th, 2014

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BRAZIL’S ACHIEVEMENTS SINCE MID 1990s

• Inflation stabilization • Income gains of poor families• Declining unemployment rates• Lower real interest rates• From external debtor to external creditor

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INFLATION BEFORE AND AFTER THE REAL PLAN, 1979-94 AND 1994-2009

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INCOME DISTRIBUTION IMPROVED AFTER STABILIZATION, 1995-2012

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Yearly

Cumulative

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UNEMPLOYMENT IS THE LOWEST IN THE SERIES, 2002-2014

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REAL INTEREST RATES ARE LOWER THAN IN THE PAST, 1996-2014

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BRAZIL: A NET CREDITOR TO ABROAD(GROSS AND NET EXTERNAL DEBT AS A RATIO TO EXPORTS, 1970-2014)

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STRUCTURAL CHALLENGES

• Low growth syndrome• Unfavorable growth-inflation mix• Too high prices• Heavy tax burden• Very expensive social security • Low investment rate• Insufficient infrastructure• Poor education• Closed economy

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LOW GDP GROWTH RATES SINCE THE EARLY 1980s

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INFLATION-GROWTH MIX IS UNFAVORABLE (2011-14*)

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THE MOST EXPENSIVE COUNTRY AMONG THE BRICS

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TAX BURDEN IS HEAVY(OECD AND EMERGING MARKETS, 2013)

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SOCIAL SECURITY IS A BIG PROBLEM(OECD data for 2005)

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INVESTMENT RATE IS LOW AND BNDES OFFERS LITTLE HELP

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INFRASTRUCTURE LAGS

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EDUCATIONAL LEVELS ARE POOR(PISA 2012 RANKINGS & GRADES, SELECTED COUNTRIES)

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ONE OF THE MOST CLOSED COUNTRIES IN THE WORLD• Big economies, big

exporters: – US (1/2), China (2/1), Japan

(3/5), Germany (4/3), France (5/6), UK (6/4)

• Brazil: 7th largest economy in the world, but only the 22nd largest exporter

• Brazil’s GDP, 3.3% of world. Brazil’s exports, 1.3% of world.

• Ratio imports/GDP Brazil: 13%– Lowest value among the 176

countries considered by the World Bank.

• Paradox: Brazil the 4th most preferred destination for foreign direct investment

• Open capital account, closed current account: recipe for impoverishing growth

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CURRENT INDUSTRIAL POLICY: MORE PROTECTIONISM

• Response to deindustrialization and external deficits:– Discriminatory manipulation of taxes and import tariffs– Overambitious local content policy– Indiscriminate Buy Brazilian act with 25% preference

margin– Inadequate ‘national champions’ policy by BNDES

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Result is less competitiveness and lower productivity

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•Reduction of ‘Brazil cost’ (tax, bureaucracy, logistics)

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•International trade agreements

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•Replacing high tariffs by a more devalued exchange rate

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ALTERNATIVE INDUSTRIAL POLICY: INTEGRATION TO INTERNATIONAL PRODUCTIVE CHAINS

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Three Pillars

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CONCLUSIONS

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Brazil has come a long a way since the mid-1990s

But it needs more savings and investment, better education, and a reduction in the “Brazil cost” of doing business

Opening up to the world would work as a catalyst for the adoption of the reforms that Brazil needs to raise its GDP growth rates

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THANK YOU

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SOURCES FOR THE SLIDES

• S3: Miriam Leitão, Saga Brasileira: A Longa Luta de um Povo por sua Moeda. Record, 2011: 260-261.

• S4: Secretaria de Assuntos Estratégicos (SAE).• S5-S7: MacroEconomic Research Banco Itaú BBA. • S9: Edmar Bacha and Regis Bonelli, “Accounting for the rise and fall of Brazil’s Post-WW-II GDP

growth”, July 2012. Available at: www.iepecdg.com.br. Updated in July 2014 by Regis Bonelli.• S10: The Economist. • S11: IMF apud José Roberto Afonso and Kleber Castro.• S12: Paulo Tafner and Fabio Giambiagi, “Previdência social: uma agenda de reformas”. PPT.

October 2010.• S13: Armando Castelar, ”Desempenho Recente e Perspectivas de Crescimento da Economia

Brasileira”. Presentation to the Seminar: Whither Latin America? Rio de Janeiro: Vargas Foundation, August 9-10, 2012. Updated in July 2014 by Luísa de Azevedo Senra Soares.

• S14: World Economic Forum, apud Financial Times.• S15: OECD, PISA.

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