Saturday, February 13, 2016

Deja vu in Brazil (and the rest of Latin America)?

Last week my colleague Tim Power organised a great conference on Brazil at the Latin American Centre. There was a rather pessimistic discussion of Brazil's political and economic problems, but a recognition that the anti-corruption agenda was going in the right direction.

Something left me a little uneasy: the claim that Brazil's (and by extension Latin America's) economic management has been disastrous in recent years and that the country and the region suffer from exactly the same problems than twenty or thirty years ago.  Don't take me wrong: together with my coauthor Juliana Martinez Franzoni, I have been rather critical of the lack of policies in favour of structural change in Latin America (see, for example, this article).  Yet we can not simply assume that Brazil's problems are the same as in the past (and do a "cut and paste" from our analysis of other recessions) and fail to study what has changed.  A few things that we should consider and explore with more detail:

a. The formalisation of employment increased significantly: has this expanded protection for workers in times of crisis?  Could this have a positive effect on aggregate demand in the medium run?

b. The creation of new social programs that could, potentially, protect workers from the crisis: Bolsa Familia is the best well known one.  I realise that most of these programs have been recently cut in real terms... but are still important when comparing Brazil today with Brazil in the last two recessions.

c. Industrial policy: was Brazil's recent industrial policy really very interventionist? Did the role of the state really expanded that much? Didn't the policy try to promote new high tech activities? How much do we know about what was attempted and how successful it was?  We know that policies in some areas like intellectual property rights (see some of the recent work of my friend Ken Shadlen) were actually quite good. We must find ways to evaluate some of these policies independently of their impact on the very short run. Are they promoting structural change? Are the inefficiency costs too high?

d. Macroeconomic policy: I find the analysis in this area particularly frustrating.  As they figure below (that comes from this webpage) shows, Brazil's effort to reduce the external debt was impressive. The recent increases have more to do with the crisis itself that with poor macroeconomic management. Nevertheless, observers talk about Brazil as if were were in the 1970s... does that make any sense?

Of course, Brazil has plenty of economic problems and resolving them will take time.  The 2000s were a lost opportunity in several areas and development policy could have been more ambitious.  Inflation could accelerate in the future if the government is not careful (even if it is now rather sustainable and not the primary concern).  Yet simply arguing that the country faces some long term problems and that the same structural reforms than twenty years ago are required is unsatisfactory and not really useful.


Limoeiro said...

All interesting points. I would add that the crisis could be an important opportunity for the government to implement a more assertive policy for sustained exchange rate devaluation, as a way to improve export upgrading. What do you think?

Diego Sánchez-Ancochea said...

Danilo, I think you have a great point: over the long term this could be a great opportunity to rethink the exchange rate policy and maintain a weaker exchange rate. Yet in the short run this will be hard for two reasons: (a) inflation is a worry for the government and a weaker real exchange rate would make things harder; and (b) politically, maintaining a weak exchange rate is easier in periods of growth than now when the middle class is suffering from the crisis. But clearly it is something to watch!