Instituto Jacques Maritain do Brasil | BRAZIL AT CROSSROADS | Instituto Jacques Maritain do Brasil
2867
single,single-post,postid-2867,single-format-standard,ajax_updown_fade,page_not_loaded,

BRAZIL AT CROSSROADS

11 out 2013

Conferência do Embaixador Rubens Ricupero
Presidente do Conselho do IJMBr 
proferida em Frankfurt – Alemanha, na Feira Internacional do Livro

“The Brazilian economy is fine but the people are in bad shape”. Those famous words were uttered by one of the military presidents of Brazil in the early 1970s, when the country was experiencing Chinese rates of growth, at one point over 13 per cent a year. However, at the time of the so-called “Brazilian economic miracle”, poverty was widespread, income concentration had reached very high levels and democratic rule had been replaced by a military dictatorship that lasted for almost 21 years.

Forty years later, Brazil has apparently inverted the terms: the people are feeling well but the economy is in trouble. Production has been sluggish, growing just a little bit less than one per cent in 2012 and perhaps a little more than two per cent this year. At the same time, there is practically full employment with the jobless rate at 5,3 per cent and workers’ average income has improved by solid 8 per cent over the last two years.

Consumption has been growing by two to three per cent a year; personal credit, mainly for automobiles, electric appliances and family homes, has boomed; a new and rapidly expanding middle class has made its appearance. On the negative side, inflation has stubbornly hovered near six per cent, much above the middle goal of 4,5% a year set by the Central Bank; the fiscal situation has deteriorated with the country posting in August its first primary deficit in many years; the current account deficit has been approaching a number close to 4 per cent of GDP (compare to Germany’s current account surplus of almost 6 per cent of GDP!).

The translation of those cold numbers into political attitudes produced results that were exactly what one should logically expect. Economists, businessmen, the majority of the press are sharply critical and unhappy whereas the population as a whole has already given back President Dilma Rousseff most of the support she had lost during last June popular manifestations.

What are we to make of those apparently contradictory tendencies and opinions? Is it possible to overcome the seeming paradox and make social improvement and mass democracy compatible with economic performance?

Going beyond the short term journalistic portrait such as the recent report published by the Economist magazine, we must explore in a contemporary historic perspective how Brazil reached the current stage of its evolution. It should then become easier to gauge whether the recent rate of social and political advance will prove sustainable and if not, what are the indispensable policies to make it so.

A good starting point would be the 1988 Constitution, which has commemorated its 25th anniversary on October the 5th, a few days ago. Approved by a Constitutional Assembly three years after the military left power in March 1985, it has been called “the citizen’s Constitution” or “the Constitution of citizenship” to indicate that it granted most Brazilians the first opportunity to become true citizens.

The Constitution gave shape to a new social compact that embodied Brazilian’s dream about their country’s ideal future. It was a dream heavily biased toward social-political goals, a combination of full political participation and social improvement with much less attention paid to the economic means to make it work. The tension between social-political dreams and economic constraints has remained the central feature of Brazilian evolution since those early democratic days.

In a sense what the Constitution did was to take the military’s approach to development and to turn it upside down. During the two decades of military rule, the technocrats at the service of the generals had more or less consciously followed the so-called “sequencing approach”. It consisted in dividing the road to democracy into three successive stages: first, the modernization and development of a productive economy; secondly, the spread of social welfare to all sectors of society and thirdly, the introduction of a democratic system only when the population would be “ready” for it. Allegedly, that was what the Japanese and South Koreans had done and the Chinese would hopefully replicate some day.

Well, this would not do in Brazil’s case. Tired of waiting for the concrete results of the “trickle down” effect to materialise, Brazilians demanded everything immediately as spelled out in the campaign slogan of “diretas já”, that is, “democratic elections immediately”. All the rest, popular participation in decision-making, better wages, land reform, social security even for agricultural workers who had never paid a contribution for retirement, everything had to be available at once, irrespective of the costs.

As surprising as it may appear, it has worked less perfectly than politicians imagined but less disastrously than rationalist economists feared. Of course there was a price to be paid, as in each and every trade off. Thus consumption has thrived at the expense of savings; the expansion in social expenditure left little or no resources for infrastructure investment; gains in the minimum wage and real increases in wages in general did little to improve weak economic productivity; the wellbeing effect of currency appreciation had to be financed by growing current account deficits and deindustrialization.

However, it would be unfair to deny that the sacrifices, hopefully temporary, of some desirable economic efficiency goals helped attain equally important and arguably more desirable political and social achievements. As a matter of fact, the amount of truly historic conquests that democratic governments rendered possible in less than three decades is quite impressive.

The military left behind not only a tragic record of human rights violations and a systematic destruction of democratic institutions. When they reluctantly abandoned power, their economic “miracle” of the 1970s was already a thing of the past. Two “fateful legacies” of the military days would burden Brazil’s democratic governments for years to come: the foreign debt crisis and a chronic high inflation combined with an all pervasive indexation system that made it immune to usual remedies.

It fell to democratic governments to finally overcome those dangerous challenges after several unsuccessful and costly trials. This they did without having at their disposal the vast array of arbitrary powers that the military had usurped for themselves. The restoration of foreign credit worthiness and the reintroduction of price and currency stability were achieved in parallel to the establishment of the first democracy of masses in Brazilian history. It had to cope with unexpected challenges and tensions such as the death of the first democratically-elected President, the impeachment for corruption of another President and intense pressure from social movements, sometimes developing into direct action and land invasion.

The two first of those conquests were painfully attained over the initial 15 years of the New Republic. They provided the material basis, the condition of possibility for what came next: the consolidation of a democracy of masses through the inclusion as citizens and consumers of millions of Brazilians liberated from extreme and absolute poverty. If the unprecedented increase of popular participation in political life did not bring about destabilisation and conflicts, as feared, the reason is to be found in the reduction of poverty, the decrease in inequality and the massive accession of people to minimum levels of consumption.

For a time there was even the delusion that Brazil had finally discovered an infallible formula for irreversible progress. Fighting the twin social scourges of poverty and inequality, it was thought, could be made to work as the opportunity to provide the dynamic factor to accelerate growth. A generous array of social programmes articulated around Bolsa Família, a conditional cash transfer programme that reached about 50 million people, a quarter of the population, would create a mass consumption market. This in turn should supply an ever expanding demand capable in time of generating the necessary investment to increase production and satisfy that additional demand.

It worked for a few years but then the 2008 global financial crisis hit the country and macroeconomic policy lost its balance. The Brazilian reaction to the crisis was broadly successful but it relied heavily on stimulating the economy through credit granted by official banks – the Economic and Social Development Bank (BNDES), the Bank of Brazil, Caixa Econômica Federal – with resources provided by the Treasury. It was the Brazilian version of Quantitative Easing. In a very short time, the amount of resources coming from the Treasury jumped from less than one per cent to close to ten per cent of GDP, with the gross public debt soaring to almost 60 per cent of GDP.

By the last quarter of 2009 the economy was heating and the stimulus package had outlived its usefulness. Nonetheless the government kept it in place to create the euphoria feeling that helped elect Dilma Rousseff in 2010. The new administration intensified the practice bringing about heightened inflation, this time with diminishing returns in terms of growth. Domestic industry became less competitive, partly on account of a sharply appreciated currency, partly because real increases in wages were not matched by productivity gains. As a result, more and more of the additional demand created by an expansive fiscal policy was captured by cheaper manufactured imports.

Even at the height of the commodities prices boom set off by Chinese growth, Brazil began to post a current account deficit, joining the ranks of vulnerable emerging economies such as India, Indonesia, South Africa and Turkey. More worrisome, the greatest proportion of foreign capital attracted by the country ended up by financing current consumption, not investment, which stagnated around the 18 per cent level, much below the average of comparable Latin American economies, not to mention Asian highs of 30 per cent or more.

Most of the symptoms of the current difficulties were already present in 2009 when the Economist published its famous cover and report endorsing the mainstream conventional perception of Brazil’s success story. As a matter of fact, some of us had been long on the record warning that it was dangerously premature to hail as a success a growth model deeply flawed as the Brazilian one. Alas, the world needs heroes and stories that have a happy end and Brazil seemed to provide both.

Anyway, this is now a moot point of discussion as it became clear that the mix of economic and social policies adopted by the Brazilian government over the last few years is unsustainable and has a relatively short time to live. Even before the June mass protests against the poor quality of underfunded public services in contrast to the exorbitant sums spent for the World Cup, it had already been apparent that economic fundamentals were fast deteriorating in the context of a much more dangerous economic external environment.

The two most ominous signs of the overall worsening of economic conditions are the fiscal situation and the balance of payments. The first has recently prompted two of the credit rating agencies to downgrade Brazil’s credit and to signal that the country could lose its positive investment grade in case fiscal and growth prospects do not improve. If the loss materialise it could have very negative consequences as it would arrive at the worst possible moment. In effect, the Brazilian economy has been growing increasingly dependent on external financing as the current account deficit widens, the trade balance moves from surplus into deficit territory and foreign direct investment is no longer sufficient to fill the gap.

Thus, the need to tap foreign financial markets is increasing at a time when the markets are tightening on account of the hopes of the American expected recovery and the approach of the inevitable end of Quantitative Easing. To avoid being caught in the trap, the Brazilian Finance Minister has been promising an additional effort to generate a primary fiscal surplus and to give up the reliance on “creative accountability” tricks that did much to destroy the government’s credibility. The trouble is that domestic observers doubt that the Administration can deliver on its promise as it has become addicted to Treasury financing and the BNDES is pressuring for fresh and urgent resources.

Right now, Dilma Rousseff’s government seems a victim of a tricky dilemma. In order to win the presidential and general elections of 2014, it needs to maintain full employment, real wages gains and a constant expansion in consumption. Under the current Brazilian conditions, the pursuit of those goals has proved incompatible with the readjustment of the economy and has been aggravating the fiscal deficit and the dependency on foreign savings to sustain the gap in the balance of payments. If the government decides to deal at once with the fiscal and the external situations, it risks jeopardising the social and political conditions of electoral success. This is why scepticism is widespread about the possibility of an adjustment programme before the elections.

By the way, the government denies that an adjustment programme is or will be necessary and tries to bet against time, hoping that it will reach election time in October 2014 before something more serious happens. In purely electoral terms, Mrs. Rousseff’s hopes are not unreasonable as recent polls have shown that she is again the favourite to win a second term. This requires, though, that the external environment will not pose dangerous challenges like the market turmoil set off by the premature Federal Reserves’ announcements and that the World Cup will be a success, not the occasion for a return of the mass protests of June.

Even electoral success harbours its risks. One can argue whether Mrs. Dilma Rousseff’s government is market-friendly or not; there is no doubt, however, that markets are not friendly to Mrs. Rousseff. If at some point in the campaign it appears unmistakably that she is going to win or after her victory is confirmed, there is a worrying possibility of a repetition, albeit in a weakened form, of the market panic that unwelcomed Lula’s triumph in 2002.

It took a lot of political wisdom and the invaluable help of the then Minister of Finance and the then Governor of the Central Bank to bridge that dangerous period of turmoil and to recover the trust of economic actors. That was perhaps Lula’s finest hour, the moment when he began to be seen no longer as a successful trade-unionist-turned-politician but as a statesman. It tells a great deal about the difference of personal and political qualities of Lula and her successor that a return of such risk is again looming in the back of peoples’ minds although no one wants to mention it aloud for fear of being accused of a self-fulfilling prophecy.

This, one suspect, is one of the main reasons why the Central Bank is intent in keeping its powder dry, that is, in not squandering Brazil’s principal asset for avoiding a repetition of the 2003 panic: the $350 billion in foreign reserves that could be put to good use if it becomes necessary.

There is not much more that can be said for sure about the short term future. Elections are still one year ahead and it is too early to try and risk predictions about the outcome of an electoral campaign whose full set of candidates is not defined yet. Just a couple of days ago, the decision by Marina Silva to join Pernambuco’s governor Eduardo Campos’ party and run as his team mate in 2014 elections took everybody by surprise and has shown how unexpected changes can totally overturn the conventional calculations.

In a longer time framework, the next two to three decades, in my age more than enough time to avoid the humiliation of seeing my predictions contradicted by facts, as Raymond Aron would say, Brazil’s prospects do not seem unfavourable. Three or four long term structural trends that appeared to work against Brazilian development in the past have turned into neutral or favourable territory. They are demography, urbanisation, energy and commodities markets.

Demographics and urbanisation go hand in hand. For over a hundred years they had been exploding at a breakneck speed, making it near impossible to raise per capita income or to provide education, health and public services for the newly arrived. When I was born in 1937, Brazil’s population was 39 million people. Now it is 203 million! How many individuals have had a similar experience in their lifetime? For most of my adult life, Brazilian population was growing by a 3,5 per cent rate a year. The fertility rate, that is, the average number of children by woman, reached 6,3 in the mid-sixties, a level nowadays hard to find even in Central Africa.

Very quickly and in absence of any explicit birth control programme, the annual population growth rate fell to less than one per cent and the fertility rate shrank to 1,8 children by woman, under the 2,2 per cent level indispensable for reposition sake. The population is rapidly ageing and at some point this will pose problems for social security financing and labour markets. Before that, the country will enjoy for 15 to 20 years a favourable demographic bonus that will alleviate population pressure on services and render much easier to raise per capita income and improve the quality of education, health, housing and sanitation.

The same applies to urbanisation. Brazil is now a fully urbanised nation, with 86 per cent of the people living in cities above 20.000 inhabitants. It already has 20 urban centres with more than one million dwellers. Cities are expanding at a much more leisure pace, regional migrations have dwindled and for the first time the swollen peripheries of great cities are receiving improvements in urban infrastructure.

During most of the 20th century, Brazil suffered from the acute lack of fossile fuels. At the height of the 1970s oil shocks, it imported almost 90 per cent of its oil needs. Today, after huge offshore oil deposits were discovered, self sufficiency is not far and in a few years the country could reach the status of middle sized oil exporter. Besides generating exports and alleviating the balance of payments, oil and gas will add to the vast hydroelectric and biomass resources that have already made Brazil the nation with the highest proportion of clean and renewable sources in its energy matrix among the largest economies.

In a similar way, commodities markets, until recently a serious disadvantage in international trade, have been completely changed for the better thanks to commodity-intensive economic growth in China and Asia in general. As late as the early 1950s, Brazil still depended on a single tropical commodity, coffee, for more than 70 per cent of its export earnings. Nowadays, a capital-intensive agriculture together with an advanced technology for tropical conditions turned the country into one of the major suppliers of a vast array of diversified products: coffee, naturally, but also sugar, sugarcane ethanol, cotton, orange juice, soya beans, corn, beef, poultry, pork, not to mention iron ore, other minerals, and increasingly, petroleum.

Over the next 20 to 30 years, according to the UN Population Division, India, China, other countries in rapidly-urbanising Asia, Africa and the Middle East will be adding one million and three hundred thousand rural people to their expanding cities each week! The Food and Agriculture Organization (FAO) recognises that most of the additional food and fibre for those hungry city dwellers will have to come from Brazil, the source for more than forty per cent of the increased supplies in some products.

In the light of these facts, it does not seem unreasonable to postulate that there will be no shortage of strong foreign demand for the exports of a country rich in natural resources, with plenty of available land without the need to destroy the forest, gifted with more than 11 per cent of world resources of fresh water, and, above all, extremely competitive in agriculture thanks to technological research and highly skilled managerial capabilities.

One of the challenges of Brazil in the years ahead will be to spread to the rest of the economy the high productivity and competitiveness nowadays confined to agriculture, construction services and a few technological industries such as the aircraft manufacturer Embraer. Productivity growth has slowed down to about one per cent a year lately, partly as a result of an accelerated expansion of the labour market with nominal wages increases above productivity, partly because of the poor qualification of many workers.

It is time now to go back to the 1988 Constitution and reach a few conclusions. A quarter of century ago, Brazil made the right choice: a “preferred option” for the poor, an absolute priority to redeem the secular social debt of a country built mostly by African slave labour and plagued by poverty and inequality. It is undeniable that significant results were achieved: about 25 million people have been lifted up from the most abject poverty and an equal number rose from a slightly better kind of poverty. It came at a price. From 1999 to 2012, not less than a staggering 84 per cent of the increase in non-financial governmental expenditure has consisted in income transfer to families in the form of jobless insurance, Bolsa Família, social security and a myriad of other social programmes.

The consequence was that public investment in infrastructure dwindled and fell to just a third of what it had been in the 1970s. Despite the lack of public investment and the weak private investment in production, the economy was able to grow for a while thanks to the sheer inclusion of millions of workers who had been unemployed or underemployed and the utilization of spare capacity in industry. Today this process is nearly exhausted as the country reached virtual full employment and the supply of additional labour has been slowed by a sharp reduction in population growth.

The inescapable conclusion is that from now on Brazil will only be capable of growing by improving overall productivity through quality education, health and research as well as by tackling the one trillion dollar backlog in urgent infrastructure projects through private investment from inside the country or abroad. At the same time, this government or the one that emerges from next year elections will have to implement a well-designed adjustment programme to control inflation, rein in the abuse of Treasury resources to replenish official banks, liberalise the trade regime, and undertake badly needed tax, labour markets and institutional reforms.

It is indeed a tall order but there is no other better choice. If Brazil wishes to keep and broaden the social and political conquests achieved over the last 28 years or so, it needs to learn how to make the economy grow again. According to Angus Maddison in “World Economic Performance since 1870”, Brazil expanded at an annual average rate of 4,4 per cent between 1870 and 1980, being the fastest growing among the ten largest economies in the world. At that time, Brazilian governments paid scant or no attention to social imbalances (the first two decades of that period were still dominated by slavery). Now that the pendulum has firmly moved toward the social end of the spectrum, it is time to rebalance social, political and economic goals in such a way that they reinforce, nor undermine each other.

Is it possible to do it with a political system plagued by dysfunctional evils, among them patronage, pork barrel politics, proliferation of parties and widespread corruption? Will Brazilians prove capable of such daunting tasks with the current poor level of public education? Well, no one can be sure but let me remind the pessimists that we have been able to reach the current stage with political institutions that were no better, less democratic and a level of illiteracy that attained 85 per cent of the population at the beginning of the 20th century. If in spite of those enormous shortcomings we have become the seventh largest economy in the world, why could we not prove capable of continuing to build a better and more balanced Brazil in the future?