Lessons from Brazil

Paul Sweeney28/06/2011

Paul Sweeney: While the recession shows no sign of ending here, it is good to look abroad at other counties which had hard times and are doing well today. Brazil's GDP grew 7.5 percent in 2010 and is expected to grow approximately 4 percent in 2011. Brazilians are benefiting from stable economic growth, low but rising inflation and improvements in social well-being.

When Brazil elected the Workers Party leader Luiz Inácio Lula da Silva as President in 2003, many western commentators predicted that with left politics and even worse, equalitarian economics, the country would soon collapse again. A founding member of the Workers Party (PT – Partido dos Trabalhadores), Lula had run for President three times unsuccessfully, before the was finally elected in 2003.

In the late 1970s, when Brazil was under military rule, Lula helped organize union activities, including major strikes. The strikes were deemed to be illegal, and Lula was jailed for a month. He was a trade union activist and in 1975, he was elected president of the Steel Workers' Union, in the region where the major car makers’ plants are. In 1980, he and a group of academics, intellectuals and union leaders founded the Workers' Party, a progressive left party to struggle against Brazil's military government.

Less than 30 years later, in 2009, Newsweek called Lula “the Most Popular Politician on Earth” as he addressed the UN in New York. “With his leadership, Brazil has withstood the global crisis better than almost any other nation: not a single bank went under, inflation is low, and the economy is growing again. "People doubted it when I said we would be the last to fall into recession and the first out," Lula told Newsweek in an exclusive interview. “Brazil is looking pretty good compared with most places; it's outpacing Russia and joining India and China — the other big emerging powers tagged collectively BRICs — to lead the way back to global economic growth” Newsweek concluded

Even the right wing Economist magazine more recently confessed, in its 4th June edition “A decade of faster growth and progressive social policies has brought a prosperity that is ever more widely shared. The unemployment rate for April, at 6.4%, is the lowest on record. Credit is booming, particularly to the swelling numbers who have moved out of poverty and into the middle class. Income inequality, though still high, has fallen sharply. For most Brazilians life has never been so good.”

Lula’s successor is President Dilma Rousseff who took office on 1st January. Ms. Rousseff, the first woman President, has vowed to eradicate extreme poverty and keep the country on a sustainable development path. However, the economy does appear to be overheating. This is an important and difficult challenge for all politicians, because when Ireland economy was overheating in the 2000s, those of us who said taxes should be raised were ignored or at best ridiculed. In short, most politicians do not want to deal with pro-cyclical trends.

The tight labour market may push up prices and workers will seek higher wages as inflation takes off. Brazil’s minimum wage will rise by 7.5% in real terms next year, which is in stark contrast to the decision to cut our minimum wage by the Green / Fianna Fail parties, which has happily been reversed by this government. With the boom, foreign investors have poured in and the currency is overvalued, causing industrial production to dip a little.

The population is over 186 million and its fertility rate is below replacement, with an employment rate of 68%. Its GDP per head is €10,427 on a PPP basis in 2009. It is largely Roman Catholic (74%), and life expectancy is 69.4 years (men), 77 years (women). Brazil was one of the last to fall into recession in 2008 and among the first to resume growth in 2009.

Ms. Rousseff depends on a wide and fractious coalition. Her main partner is the populist Brazilian Democratic Movement which is squabbling on issues. The Government is tightening the booming economy with the rate of interest raised a little – three times this year to 12%. Booming tax revenue has improved the primary surplus, but the government has tightened up spending though, mainly on the capital side.

The Growth Acceleration Plan (PAC, in its acronym in Portuguese) launched in 2007 to increase investment in infrastructure and provide tax incentives for faster and more robust economic growth. It has worked and contributed to the country’s 5.1 percent growth in 2008 and its quick recovery from the crisis in 2009, when it had one of the smallest downturns among developed and emerging economies.

There are important infrastructure challenges. The country will host the World Cup in 2014 and the Olympic Games in 2016, demanding massive investments in areas such as urban and social development and transport infrastructure.

Brazil experiences extreme regional differences, especially in social indicators such as health, infant mortality and nutrition. The richer South and Southeast regions enjoy much better standards than the poorer North and Northeast.
Poverty (PPP US$2 per day) has fallen greatly, from 20 percent of the population in 2004 to 7 percent in 2009. Extreme poverty (PPP US$1.25 per day) has also dropped dramatically, from 10 percent in 2004 to 4 percent in 2009.

Between 2001 and 2009, the income growth rate of the poorest ten percent of the population was 7 percent per year, while that of the richest ten percent was 1.7 percent. This disparity on income rise helped decrease income inequality (measured by the Gini index) from 0.596 to 0.54 in the period. Key drivers of this have been low inflation, consistent economic growth, well-focused social programs, and a policy of real increases for the minimum wage. However, despite these achievements, inequality remains at relatively high levels for a middle income country.
Yet overall progress has been good. Who says you cannot have economic growth through egalitarian economics?

Posted in: InequalityInequalityLabour market

Tagged with: incomeinequalitybrazilWages

Paul Sweeney     @paulsweeneyman


Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.



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