What’s happening in Brazil? Round up from a quick visit

September 22, 2009

     By Duncan Green     

I spent last week racing round Brazil launching the Portuguese-language dapobrezaaopoderedition of From Poverty to Power (Da Pobreza ao Poder, the publishers are looking for distributors in Portugal, Angola and Mozambique – any suggestions?). Here are a few impressions:

A year after the Lehman’s collapse hit the global panic buttons, there’s a striking level of optimism about Brazil’s handling of the global crisis. Last week’s issue of the main weekly magazine, Veja, was entitled ‘The post crisis world is born’, with features on ‘why Brazil was last to enter, and first to leave’ and ‘emerging economies will overtake the rich within 5 years.’ Employment started to rise early in the year and is accelerating, demand has rebounded, brazilian piband growth projections for 09 and 10 are for a sharp V shaped recovery (see graph), much as in China and India (see previous blog). GDP in the second quarter of 09 was up 8% over the first quarter, behind only China and South Korea.

How did it manage this? In a speech last week, Lula, as Brazil’s President is universally known, put it down to countercyclical measures, including increased government investment in agriculture, housing and infrastructure channelled through the state banks, tax cuts, and increased spending on social programmes such as the renowned Bolsa Familia cash transfer programme. But that all comes to only 1.2% of GDP, small compared to fiscal stimuli in countries like China, the US or South Africa (or the UK), so clearly some other explanations are needed.

One is Brazil’s solid financial system with its bigger than average capital reserve requirements and public banks that kept lending after the crisis hit. Another (which Lula unsurprisingly didn’t mention) is that prior to the crisis, interest rates and tax rates were high, giving lots of room to stimulate the economy through cuts – ‘financial repression’ has its uses, it seems!

Lula also puts the recovery down to the increasing focus on Brazil’s domestic market, and is stressing the need for a more hands on industrial policy, criticising the big iron and steel company, Vale, for not processing its ore like the Chinese do. He also wants to make sure Brazil’s recent big offshore oil finds are used to develop a petrochemical complex, rather than just poured into tankers and exported.

This resurgent confidence is also reflected in Brazil’s foreign policy, with more assertiveness in international fora and increased interest in development issues. Asked what he plans to do after standing down as president after next year’s elections, Lula replied ‘help Latin America and Africa implement better social policies.’ One northern aid official was struck by how the foreign ministry’s traditional hostility to being patronised by aid donors changed to real enthusiasm once the discussion turned to facilitating exchanges between African and Brazilian social policy experts.

The legacy of Lula’s government is impressive: real progress in absorbing and improving the millions of migrants who have flocked to Brazil’s cities in recent decades; stronger and more stable institutions; managing to combine the commitment to economic stability and low inflation inherited from his predecessor, Fernando Henrique Cardoso, with a commitment to social policy (cash transfers, minimum wages etc) that seems to be bequeathing Brazil a basic welfare state, rapidly reducing both poverty and inequality.

But little of this seems to benefit his party, the Partido dos Trabalhadores, whose lilywhite reputation has been battered by repeated corruption rows in Congress and its choice of a lacklustre PT candidate, Dilma Rousseff, for next year’s presidential election. Asked if he plans to stand again at the following election in 2014 (he’s only allowed two successive terms in office, but can return after a decent interval), Lula says he won’t stand if Dilma wins, but if she loses, is open to offers next time round. Latin American presidents often say they’ll do this, but I can’t think of a case where anyone’s managed it. Still, the PT has always been full of surprises – Lula 3.0 here we come?

September 22, 2009
Duncan Green