The crisis in Brazil

Spending a week in Brazil in the middle of this crisis is really interesting.  There is so much going on and so many layers.  As an academic told me today, there are quite a few actors following their own agenda and nobody thinking about the national needs and priorities.  You have:

• An unpopular president in the midst of a serious corruption scandal that she probably knew about.
• A former president coming back to the government for different reasons (some more justified than others).
• A judge who is behaving in the worst possible way: spying on the President of the Republic and then publicising conversations is unprecedented.

The lack of social trust is particularly striking: nobody is willing to give others the benefit of the doubt or respect the institutional framework.  As a result, you have the left warning against a coup, a judge behaving unethically in his thirst for glory and the press adding fuel to fire.

A very interesting aspect of the last few days is the characteristics of the demonstrators.  I realise that there were millions in the street and that Dilma's opposition goes beyond class lines.  Nevertheless, it was clear walking in the Avenida Paulista and watching TV that a large share of the people in the demonstration are part of the upper middle class.  They may have two agendas (anti-PT and anti-corruption).  One is obviously much more positive than the other.  In fact, I wonder if we can place a  the preferences of this group and others in the following two axis:

	Pro-redistribution	Anti-redistribution
Highly concerned with corruption	“Idealised” middle class	Upper middle class
Less concerned with corruption	Non-organised poor	Traditional elite

My hypothesis would be that the current protests are driven by the upper middle class, who has no interest in redistribution and will vote against it.  Moreover, I wonder how big and how mobilised the "idealised" middle class (which is the one we tend to imagine appearing and contributing to democracy and equity) is and whether they will play any role in upcoming months.  In fact, a deeper crisis of the PT could further weakened the chances of having that kind of middle class in the future... or not?

Three key steps in policymaking

I had a great conversation with people from IPEA today (more on social policy trajectories later) and one thing became clear.  When thinking about policymaking, I think we should consider three different steps:

1. Agreeing in the objectives we want to achieve (e.g. universal social policy).

2. Agreeing in the existence of different trajectories to achieve that result but also on the right one in each specific case.

3. Identifying the KEY constraint (binding constraint in the terminology that Rodrik and others introduced about growth a while back) and begin by trying to overcome it.

These steps are probably very clear in the policymaking academic literature... but they are too many times missing in real life debates!  In fact most often there is lack of clarity about objectives and instruments and, more importantly, about the best way to start.

China's problems could hit Latin America hard

During the last few years, China was a mixed blessing for Latin America (see here and my own views here). On the one hand, China's demand for commodities was behind the Latin America's boom. China also offered an alternative development model for the region and financial support.  On the other hand, it helped to consolidate primary specialisation and to accelerate deindustrailasation even in Brazil. 

Worryingly, China's crisis can move all these various impacts in the "wrong" direction:

a. The pending devaluation of the Chinese renminbi could further erode Latin American competitiveness at a time when competing through prices is particularly important in the region.

b. Exports to China will not expand and commodity prices will remain low.

c. China is still lending to Latin America, but it is likely to think harder about how much to lend and in what conditions in the future.

d. The crisis could strengthen neoliberal's hand in Latin America by questioning the Chinese alternative.

Am I missing something?  Is there anything positive for the region coming out of this?  

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.

Los problemas del sistema de salud costarricense

La Caja Costarricense del Seguro Social fue durante décadas el soporte de uno de los sistemas de salud más inclusivos no sólo de América Latina sino de todo el mundo en desarrollo. Sin embargo, lleva años con problemas derivados de distintas reformas equivocadas... pero también de la negligencia de actores internos que se han aprovechado de ella para su propio beneficio.  Mi colega, coautora y amiga Juliana Martínez Franzoni explica con enorme claridad y contundencia este problema en la siguiente entrevista televisiva.

Se trata de un caso significativo para entender mejor cómo nacen los problemas del Estado y cómo estos tienen muchas veces nombres y apellidos.  Por desgracia, la falta de respuestas en este momento muestran también la debilidad de la administración de Luis Guillermo Solís que prometía mucho y ha tenido muy pocos resultados.

What is development and developing countries?

In the last few weeks, I have had several conversations with colleagues and friends about the meaning of development and the usefulness of the distinction between developed and developing countries.

 This is obviously important for those of us who work in Departments of International Development and have been brought on the belief that there were structural differences between various types of societies. Yet as soon as one walks in the streets of Mexico DC or any Brazilian city, the problematic nature of the categories becomes clear. Despite all its problems, Mexico and Brazil have high quality infrastructure, a strong middle class and high consumption patterns. They have GDP per capita that are closer to Spain than to some low income countries.

 The "DFID solution" (influenced by prominent economists like Paul Collier) is to leave the term "developing country" only for very poor countries in post-conflict situations. Development is about fragile states and the bottom billion. Yet this seems totally unsatisfactory for many reasons: most poor people are in middle income countries and in many emerging economies, institutions are weak; the middle class is still small and much of the territory away from big cities suffers from poor infrastructures and the absence of the state (and well functioning markets).

 But we are still left with the question of what separates developing countries and developed ones or, in terms of specific examples, what distinguishes, say, Mexico from Greece. There are many potential answers, but let me emphasise a few:

 a. The concept of vulnerability at the household and country level is particularly important. When there is a crisis in a developed country, the middle class may suffer but has some insurance mechanisms. As a result, most of the middle class maintains its living standards. When the same happens in a developing country, much of the middle class ends up among the poor and have difficulties to rebuild their lives. This also happens at the country level: any shock has more negative implications in a developing country.

 b. The sustainability of the growth patterns: it is not only about how fast you grow but about how sustainable those growth patterns are. c. At the same time, however, it is more important than ever to compare different groups among various countries to understand better what a "poor" and a "middle class" person means in different contexts.

 Other factors I am forgetting?

A conversation on universalism and taxing the private option

My colleague and friend Ken Shadlen and I have begun a conversation on how to deal with the private option in social policy (much influenced in my case by my joint work with Juliana Martínez). Here you have the initial exchange. Feel free to join the conversation!

Ken: When I was in Brazil I was talking with someone about the "problem" of wealthy people leaving the SUS [the public health system] for private options and then coming back to the state system for expensive treatments. It got me thinking.... Why not put a special sales tax on private health care plans (like a higher VAT or something like that), and earmark the money for public health system. After all, if the rich people are leaving public sector for basic stuff, that actually could be good as it allows public resources to be used on smaller number of people, and the point that the rich people come back to public sector for expensive stuff is sort of irrelevant, because they'd be covered in the public sector anyway if they didn't leave. So those who want to go can go, but at a higher price, so there are not just fewer people left to treat in the pub sector but there's more money to treat the with too.

Diego: I think you are totally right and it is something that can be expanded to education. Expanding taxes on the private option is a way to expand revenues (although we had not thought about earmarking and I think it is a great idea) and reduce demand. However, this is much easier to do if the only ones leaving are the top 10% (or 15%) than if large parts of the middle class (say the top 40% of the population) are both in the private and public sector. In those cases, a tax on the outside option will be rather unpopular and very difficult to implement. At the end that is why confronting the outside option requires a commitment of the middle class to public services, which also require that those services are of relatively high quality.

Ken: I understand what you write, but if the top 40% of the population is leaving that suggests that the pub sector needs to be improved, which only makes a tax to acquire the revenues that much more important. I’m less sure about this line of reasoning for education, because the effects of segregation on those left behind less clear in education. The poor people in the public health system may benefit from the rich people not being there consuming doctors’ and nurses’ time and resources, and, provided the resources are available, the poor people left can be treated well. In contrast, the poor people in the public education system do benefit from having the richer people in their classroom, and the quality of education being delivered in a public education system that is almost all poorer kids will be worse. So here I think everything is different. To put it simply, I don’t think exit from the public system has to damage the system in health, but I do think it does so in education.

Diego: I agree that in terms of the delivery, the exit from the middle class is worse in education than health. Yet it is also quite problematic in health for two reasons: (a) The creation of tax specifically for these services will become politically challenging. The middle class will argue that "not only the public health is weak but we also need to pay for our private insurance! It is double payment!" If this tax affects the middle class, then it may be impossible to implement it. (b) Much of the argument about involving the middle class in public services is about voice: if public health care is poor, they are more likely to protest individually and collectively than the poor. This is why letting the middle class simply leave is quite problematic (the very rich are likely to leave almost by definition in much of Latin America).