IRIBA findings - Manchester workshop
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Is there a Brazilian development model? Is it broken? IRIBA project leads Ed Amann and Armando Barrientos outline the key findings from this 3-yr research project.
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IRIBA findings - Manchester workshop
- 1. Is there a Brazilian development model? Is it broken? Prof. Edmund Amann (Leiden University) Prof. Armando Barrientos (University of Manchester)
- 3. Why has Brazil been of interest to other emerging countries?
- 4. Socialcontract/ consensus Socialcontract/ consensus Institutions of economic managementInstitutions of economic management Innovative social policiesInnovative social policies Finding 1: The Brazilian ‘model’ is a blend of consensus and conjuncture
- 5. I RIBA yellow tint (background): Red=2248, Green=244, Blue=219 (#f8f4db) Finding 2: Brazil’s development ‘model’ is based on inclusive growth 0.2.4.6.8 0 .19 .38 .57 .76 .95 Percentiles (p) Confidence interval (95 %) Estimated difference ( Ref. period = initial | Order : s=1 | Dif. = ( Q_2(p) - Q_1(p) ) / Q_1(p) ) Brazil Growth Incidence curve 2001-2012
- 6. How was greater equality achieved? • Lower inflation protects real incomes of the poorest • Rise in employment incomes for bottom 5 deciles of the population relative to top 5 • Advent of social programmes, especially Bolsa Familia CCT programme in the late 1990s and early 2000s 6
- 7. Finding 3: Macro stability has underpinned progress The Real Plan - implemented in the mid 1990’s - ended hyperinflation. There’s been a sustainable expansion of credit to households & businesses. The national development bank (BNDES) has played an active role – particularly Following the Global Financial Crisis
- 8. Finding 4: Fiscal capacity and responsibility has been vital Institutional responsibility was established in the battle against hyperinflation. Brazil has benefited from tax reform and capacity built from the 1960s.
- 9. Finding 5: Agriculture has been transformed Since 2000, Brazilian agricultural production and exports have increased enormously. The production of crops rose by over 150%, while exports multiplied eightfold from 1990 to 2012 Not the result of an overarching plan – but the product of various institutions mutually reinforcing each other
- 10. Finding 6: Brazil shows the ‘resource curse’ is not inevitable High-valued wood products Phytotherapics and phytocosmetics components Biotechnology Leading firms re-organize and re-focus their research activities to face the new economic and institutional conditions of the 1990s Electricity and steam VCP-J Suzano Klabin Leading firms strengthen their internal R&D after the end of the IPEF/ESALQ external Aracruz’s breakthrough innovation in forestry with worldwide recognition (Marcus Wallenberg Prize) Suzano completes a six- year research project and becomes world’s first paper maker from eucalyptus pulp Leading firms draw on their forestry innovative capabilities to explore new technological and market opportunities Leading firms re-organize their forestry research activities after the Genolypus project Leading firms engage in the Genolyptus project Aracruz structures its forestry R&D centre to tackle eucalyptus diseases 1950s-1960s 1970s-1980s 1990s 2000s Brazil is the 4th largest producer of forestry-based pulp and the 9th largest producer of paper
- 11. Finding 7: Social policy has focused on inclusion & productivism Innovative antipoverty transfers have: 1)Explicitly targeted human development, rather than simply acting as a more traditional safety net for the sick and old. 2)A productivist element, concerned with economic inclusion. 3)A focus on citizenship- and rules-based transfers, avoiding clientelism.
- 12. Finding 8: Rising tax revenues have been redistributed The tax system prioritises revenue raising over efficiency. Supporting the expansion of public transfers and other social policies.
- 13. Finding 9: Human capital accumulation improved average wages, while labour market institutions reduced earnings inequality Brazil has invested significantly in formal education – but also ensures that effective vocational training is provided, particularly through SENAI. Rises to the minimum wage have helped to reduce inequality since 2005. The main factors behind the decline of earnings inequality were reduced gender, racial and geographical differentials. 0.59 0.50 0.58 0.47 0.52 0.40.4 .45 .5 .55 .6 GiniIndex 1995 2000 2005 2010 year Labor income 95% CI Household per capita income 95% CI Reduced household incomes and labour earnings inequality
- 14. Finding 10: There are limitations to the ‘model’ Slowdown in growth Lack of investment in infrastructure & unstable regulatory frameworks stifle development Exposure to world commodity markets Institutional reforms did not extend to the political system (corruption) Increasing strain on the social contract
- 15. So what went wrong? 15
- 17. A Brazilian Crisis? • Between 2011 and 2013 annual GDP growth slipped from 3.9 to 2.7%, • GDP contracts by 3.8% in 2015. • Rising unemployment • Extreme poverty rose between 2012 and 2013 (from 10.08m to 10.45m), a first since 2003 • Accompanying this, social unrest in the run up to FIFA 2014 and 2016 Olympics 17
- 18. Is the crisis rooted in a commodities bust? • A key leg of the model – high commodity prices - has been removed • During the high growth years Brazil became relatively more dependent on commodity exports • This is a source of structural weakness which has afflicted Brazil at many points in history, even before independence from Portugal • Since 2012, key commodity prices have plummeted 18
- 19. Roots of the Crisis I: Commodities IMF Primary Commodity Price Index (2005=100) Source: IMF 19
- 20. But there are other causes….
- 21. Roots of the Crisis II: debt 21
- 22. Roots of the Crisis III: Fiscal discipline lapses Red and blue lines: respectively net and gross public debt as a percent of GDP Problem is partly constitutional – 90% of federal spending is ring fenced. Main spending is on pensions, social security, transfers to states & municipalities and debt servicing (the latter approx 20% of GDP) Source: Treasury/IPEA 22
- 23. Roots of the crisis IV: Infrastructure bottlenecks 23
- 24. Roots of the Crisis V: Low Productivity Outside NRB sectors Source: Palma, 24
- 25. How to exit the crisis? The obvious (but hard to do…) • On the supply side, improve competitiveness and diversify the economy away from commodities. • For the public sector, restrict spending in non- pro-growth activities, e.g. pension reform • Reinforce Fiscal Responsibility Law. Transparency in large infrastructure contracts • Diversify capital investment financing • Reconfigure Mercosur customs union But ….They all involve tackling vested interests 25
- 26. • All require effective policy design and a clear political pathway for rapid implementation • Neither seem likely
- 27. Why is the political system failing? • Party system is very fragmented, PT only had 13 deputies coalition government is vital • Open lists with proportional voting, party funding and television time regulations – all favour small parties • See-saw of centralization and decentralization since the restoration of democracy has led to a complex tax system while the earmarking of spending limits the power of the executive • Estate governors have strong influence on who is elected to the senate because of local spending on projects
- 28. And progress will be made harder by the Lava Jato Scandal 28
- 29. What might be achieved in the short term in the absence of deep structural reform? • Fundamentals may favour Brazil once commodity prices rebound – there is some sign of this • Social programmes have been scaled back but not abolished so potential for inclusive growth has not vanished • Short term fiscal adjustment and a new administration has triggered a mild rebound in investor confidence • A weaker Real has already turned around the trade balance
- 30. Conclusions • Sustainable recovery will require real structural reforms and the disciplined pursuit of realistic macro targets • Achievement of the former is very unlikely in the short to medium term given levels of political turbulence • All this raises a much broader question: are Brazil and other key emerging economies locked in a middle income trap? 30
Editor's Notes
- Brazil has lifted an estimated 40 million people out of poverty in the last ten years. The Economist attributed this progress “thanks largely to government policy”. Most social indicators have improved significantly. Growth has been steady – but inclusive. While all sections of society saw their incomes rise, the poorest benefited most. Unlike most other countries, Brazil has reduced levels of inequality over the last 10 years.
- Brazil’s transition to democracy and the 1988 constitution forged a strong social contract. This was necessary to push through and sustain difficult and potentially socially disruptive reform programmes such the Real Plan. A desire to address the ‘social debt’ created during military rule was also key. The resulting social policies have reinforced political support. The model wasn’t the result of an overarching strategy or plan, but a mutually reinforcing set of policies and institutions, implemented with a medium-term focus and remarkable continuity by different coalition administrations.
- While all sections of society saw their incomes rise, the poorest benefited most. The GINI index fell from 60.13 in 2000 to 54.69 in 2009. Brazilian growth hasn’t been as spectacular as China or India – averaging 3% since the mid 1990s However growth hasn’t been pursued for its own sake – but as a means to an end.
- The cornerstone of Brazil’s successful economic transition has been a process of cumulative institutional reforms. These have affected the formulation of fiscal and monetary policy in addition to the operation of the financial sector. Taken together these reforms have underpinned the price and financial stability, which have in turn facilitated the pursuit of inclusive growth.
- The presence and legitimacy of administrative and taxation capacity necessary to raise revenues, including from a commodity price ‘boom’, and to deploy them in the national developmental interest. Tax / GDP ratio of around 35% - similar to most OECD countries. The centrepiece of the reform programme was the formulation of a fiscal targeting framework, an institutional innovation which would go on to prove very effective in ensuring the continuation of price stability, while building credibility among outside investors. The fiscal autonomy of states and municipalities was also reduced, providing an effective constraint on public spending.
- Graph = total factor productivity in agriculture. Brazil takes off in the mid 1970s. Brazil is currently the world´s largest producer and exporter of coffee, sugar and orange juice; and is the second largest exporter of soybeans. It is the largest exporter of beef and poultry, and has the largest commercial cattle herd. A combination of price support, investment in R&D networks and, latterly, a commitment to export promotion and market openness created the conditions for sustained productivity improvements and export success
- Brazil was never dependent on a single commodity and diversification under ISI met moderate success in broadening the productive base Brazil shows the effectiveness of exploiting underlying natural comparative advantages in agricultural and minerals as a platform to move up the value chain and develop a successful agro-industry. Government support of R&D has been important – particularly in agriculture through EMBRAPA. Its research into soya have been vital to opening up the Cerrado region and Brazilian soya famers are now more productive than their American counterparts. EMBRAPA has also helped to transfer technology – for example it has helped the pulp & paper industry to expand through a process of ‘creative imitation’. The size & openness of the country also helps.
- Social policy has been a core component of the Brazilian development model, making a significant contribution to inclusive growth. Transfers-in-kind, as in education, training and healthcare, and transfers in cash, as in social insurance and social assistance, have been the object of policy activism. The 1988 Constitution constituted a watershed, enshrining the principle that government has a responsibility to ensure a minimum income security to all citizens independently of their capacity to contribute to social insurance. Antipoverty transfers such as Bolsa Familia have rightly receive much attention. Much of its success is a result of: Prioritising human development objectives. Bolsa Familia was established on the understanding that without strengthening human development, especially among children, income transfers are unlikely to have sustained effects on the targeted households. Social assistance has been designed to address the intergenerational persistence of poverty. 2) Bolsa Família and the social pensions are more strongly productivist than most existing antipoverty transfer programmes in Africa. Assistance is provided to all households in poverty, not just those without it and this has boosted economic activity, particularly in rural areas.
- Between 1995 and 2005, social expenditure rose from 9.3 to 12.7 % of GDP, a significant increase in resources given that GDP increased by about 10% in the same period. Rising tax revenues have enabled a rise in social spending, which has helped reduce poverty & inequality – without having to reduce existing spending commitments. A combination of baseline conditions, namely strong bureaucratic capacity; and the process of democratisation, partisan competition, fiscally responsible centre-left coalitions, and executive power, has created the conditions in which strong preferences for redistribution became embedded in effective redistributive social policy
- Global Financial Crisis & the end of the commodities boom. There’s been chronic underinvestment in infrastructure since the 1980s. There continues to be a strong public perception of graft and corruption, which generates resistance to sustained infrastructure planning and investment The eruption of popular protests in mid-2013, if nothing else, serves to underline the fact that Brazil’s economic and social reforms are still very much a work in progress.