0 Can we say that there is sustainable growth in Brazil? 2011 PEGNet Conference 8th September 2011 Hamburg - Germany Fabio Veras Soares – IPC-IG (UNDP/SAE/IPEA)

Three key factors in the current pattern of equity and economic development:  Economic Stability  Expansion of Social Protection Programmes and Social Services  Institutional reforms that guaranteed economic stability and the expansion of social protection and social service 1

Economic Stability o 1980’s and 1990’s: low and volatile growth rates combined, successive failure of stabilization plans and hyperinflation – widespread indexation of contracts. o 1994: Plan Real – monetary reform (monetary anchor and overvalued exchange rate) o Institutional reform. o 1999: inflation targeting and fiscal surplus targets o 2000: Law of fiscal responsibility. o Continuity between Cardoso ( ) and Lula’s terms ( ) o Response to the crisis – fiscal stimulus package (minimum wages, credit expansion and Bolsa Família expansion. o Recent fiscal consolidation. 2

Social Protection and Inclusive Growth Expansion of Social Protection Programmes o Social Protection as social insurance: dual welfare system: formal/urban versus informal/rural sector workers o Incipient SP for informal workers (authoritarian regime to 1988 Constitution: rural pension and non-contributory pension (from Funrural to universal rural pensions) and disability grant (from RMV to BPC) o Universal Health System o Universalization of Primary education (school meals) o Expansion of the CCTs programmes and consolidation of them under Bolsa Família (coverage: 25% of the population) o Social assistance expenditure increases from 0.7% (0.08%) of the total social expenditure of the federal government (GDP) in 1995 to 6.8% (1.09%) in o Social security (including rural pensions) increased from 5% of the GDP to 7.28% in the same period. o Tax burden: 26% of the GDP to 35% ( ). 3

Features of the recent growth process in Brazil o Growth Rates: bottom of the table of the BRICS: 4.4% between Higher than the 2% observed between ( ) but well below of the one observed during ISI years: 7.5% ( ) o In Brazil, the poorest households have experienced a much faster increase in their income than the richest; the increase in the real income of the poor was higher than the GDP growth rates for India. Bringing both poverty and inequality down. Household income growing 2 p.p more than GDP rates according to household survey. o The internal consumption fueled by the emergence of a large lower middle class and the expansion of (expensive) consumption credit jointly with the anti-cyclical measures adopted in explains why the crisis was relatively mild in Brazil (-0.8% in 2008) and why growth bounced back so vigorously in the following year (7.5% in 2009). 4

Challenges of this growth process Constraints:  a) Highest interest rate in the world; b) overvalued exchange rate and its impact on the manufacturing sector; c) lack of private funds to finance long-term investment (increasing the fiscal burden for government); d) lack of domestic savings in an a credit-based mass consumption economy. New policies: a) Reduction of interest rates to ease private investment (specially in long term); b) reduce leakages – consumption credit without hindering redistributive policies; c) active industrial policy (innovation) to avoid specialization in the commodity sector; d) emphasis on less fiscal sensitive redistributive mechanisms like more progressive taxation and improving quality and distribution of social expenditure. 5

Many Thanks 6