Brazil’s Development Strategy Nelson Barbosa November 7,

Brazilian Opportunities Trade and finance: increase in the terms of trade pulled by the Asian demand for commodities Demography: reduction in the overall dependency ratio (children + elderly) Institutional development: democratic environment with political stability and low jurisdictional uncertainty 2

Terms of trade and development: periods of favorable terms of trade have usually allowed fast growth and structural change in Brazil. High terms of trade are not necessarily a “development curse” 3

Terms of trade and development: periods of favorable terms of trade have usually allowed fast growth and structural change in Brazil. High terms of trade are not necessarily a “development curse”. 4

5

Brazilian Choices Growth and distribution: the Lula administration started a new phase of economic policy, more focused on accelerating economic growth and reducing income inequality Financial fragility: the Lula and Dilma administrations also chose to reduce the economy’s exposure to external shocks through foreign-reserve accumulation and high primary surpluses 6

Brazilian Economic Growth 7 Source: IBGE

Income Distribution 8 */ Gini index of household per capita income. Source: IBGE.Elaborated by: MF/SPE.

Financial fragility * 9 */ Estimated data – September/2011. Source: BCB.Elaborated by: MF/SPE.

Beyond the Washington Consensus Macroeconomic Policy A pro-growth policy is consistent with macroeconomic stability, provided that one avoids extreme choices in the policy trade-offs – Inflation targeting with a reduction in the real interest rate – Floating exchange rate with reserve accumulation – Fiscal targets with an increase in income transfers and incentives to investment 10

Inflation 11 */ BCB’s forecast. Sources: IBGE and BCB.Elaborated by: MF/SPE.

Real interest rate (“ex ante”)* 12 */ Ex-ante (Swap 360 / Market Expectations for Inflation). Sources: BCB and BMF.Elaborated by: MF/SPE

Beyond the Washington Consensus The Role of the State Economic development requires an active role from the State – Market regulation (from investors’ to consumers’ protection) – Long-term planning and finance (infra- structure and innovation) – Universal public services – Income distribution 13

The Brazilian Growth Model First phase: wage-led expansion Increase in income transfers through a higher minimum wage and minimum-income programs to reduce poverty (Bolsa Família). – Increase in private consumption – High capacity utilization – Recovery of investment – Increase productivity and real wages – Reduction in income inequality 14

15 Sources: MF/STN

16 Sources: MF/STN

The Brazilian Growth Model Second phase: investment-led growth Increase in public investment and tax and financial incentives to private investment – Higher investment in economic and social infra-structure (PAC) – Expansion in long-term finance (BNDES) – Industrial policy (PDP and PBM) – Increase in residential investment (MCMV) 17

Public Investment 18 */ Excludes foreign investments. **/ Accumulated in 12 months up to August. Sources: MF/STN and MP/DEST.

Investment and Saving (% of GDP) 19 Source: IBGE.Elaborated by: MF/SPE.

A Keynesian-Structuralist View Increase in investment through incentives to investment rather than through disincentives to consumption Why? Because potential output can growth faster through many productivity gains that could only be made through faster growth – Increase in the “modern” formal sector of the economy, catching up and economies of scale 20

The Brazilian Growth Model Third phase: education and innovation Increase in public investment in education and tax and financial incentives to R&D, innovation and “digital inclusion” – Higher investment in education (PROUNI, REUNI e PRONATEC) – Tax and financial incentives to innovation “in company” (through BNDES and FINEP) – Increase in investment in ICT (REPNBL) 21

Old and New Challenges International situation Slow growth and financial uncertainty from advanced economies Increasing competitiveness from other emerging economies, especially China Trade specialization of Brazil in primary products due to high commodity prices and exchange-rate appreciation 22

Old and New Challenges Domestic situation Increasing demand for public services and public investment with a stable tax burden – The new middle class and the hierarchy of needs Reduction in production costs through tax reform and financial development – Structural and incremental reforms And a still high real interest rate. 23

Economics and Politics High rent from commodities can finance structural change (ex: new oil reserves) Demographic trends will remain favorable until the mid 2020s And there are still many more productivity gains to be made Success depends mostly on the maintenance of a political consensus over the development strategy 24