Brazil: Good Policies and Good Luck

The discussion of the recent Brazilian economic performance brought by Rigobon and  Canuto sort of inspired me to move a bit further in the discussion.  

On one side, I share some common thoughts with Rigobon. More espefically, Brazil has been very lucky on the profiting from the commodity windfall, given the buoyant external scenario.Even the Brazilian citizens were surprised with the trade balance performance after the FX market crises on January 1999. A plausible hypothesis for this fact was that during our “wrong” policy period 1994-1998 with fixed exchange rate and easy fiscal policy, the private sector has taken advantage of that unrealistic exchange rate and has improved its productivity. In this particular case, this is not only a matter of luck but also of entrepreneurship. Also, even having some discordance the way the privatization process was undertaken, the results are here and there is a great contribution to the current trade balance results.  

Brazil has improved its fiscal position since the end of the fixed exchange rate regime. It is hard to disagree with Canuto’s explanation that the country has implemented a second best fiscal adjustment, not an optimal (or first best) solution. Unfortunatelly, reality is a set full of second best economic policies, and it is better to have implemented a sub-optimal fiscal adjustment than none.  

Our inflation targeting regime suffered from enormous problems since its creation (in 1999) until now. First, Brazil has an inertial culture (due to years of indexation). Second, it is hard to institute the creation of forward looking perspective for inflation. Yet, for those who experienced the previous heterodox regimes (from 80´s, first half of 90´s and even the first years of the Real Plan) our current framework (flexible exchange rates, primary surplus sufficient to maintain the public debt over GDP ratio in a slowdown path and a decrease in the external vulnerabilities through the end of the so-called original sin) should be granted some credit.  

All in all, I must say that I also share some fear that Brazil is surfing this enormous economic prosperity wave (or we should say: a bubble???) without having done much effort. But when I look backwards I see the progress (in terms of conscious and non-populist) the country has achieved in terms of economic policies currently being implemented. These policies and measures entitled Brazil to being consistent and performed relatively well. Indeed, the best aspect is that I don’t need to compare with any other Latin country; instead it is suffice that the country could have repeated the same mistakes from the past. Somehow, I noticed that policy makers in Brazil learned from previous mistakes.  

Nevertheless, I foresee a lot of “painful” measures regarding some structural reforms we need to implement and we are still postponing: a truly fiscal reform (an incipient one is to be released these days), the social security reform, the labor legislation reform and, more important than all, in my opinion: an educational reform, also already initiated, but that should be accelerated.

5 Responses to "Brazil: Good Policies and Good Luck"

  1. Vitoria Saddi   July 5, 2007 at 7:28 am

    Ricardo, Agreed with the fact that Brazil is better off today than when we were growing up. Question: Do you really think that any of those strutuctural reforms will in fact be implemented? If yes, do you think we will live to see a less unequal country?

  2. John H.   July 5, 2007 at 7:36 am

    If it is good policy, what if there is a slowdown in the world? Brazil will be fine?

  3. Lance Smith   July 5, 2007 at 7:50 am

    Not sure if you agree more with Canuto or with Rigobon? In other words, is Brazil underperforming or not?

  4. Jamal Kandal   July 5, 2007 at 7:53 am

    What do you mean by: “even the Brazilian citizens were surprised with the trade balance performance after the FX market crises on January 1999”?

  5. Ricardo Meirelles   July 5, 2007 at 4:38 pm

    Dear all, thanks for your comments.  Vitoria, regarding the structural reforms, a project of fiscal reform is to be released at the end of this month (at least, they have promised) but it seems to me, still very incipient. Worst: they are proposing the financial transaction tax (CPMF) to become permanent (unbelievable). The other ones, social security, labor legislation, and so, will be probably left to the next presidential mandate. The recent educational package was well received by specialists. Even with these postponements, on the balance, I am optimistic with the Brazilian future.  John H., depends on the level of slowdown. I discuss this matter on my blog “Latin America (Brazil): three scenarios for the global markets correction.” What I can certainly say is that we are less vulnerable (better off) than decade ago. And that was the central argument of the this blog. Lance Smith, I tried to point out that, in a broader perspective (let´s leave aside the stupid and ‘minor’ mistakes, for example, the decision of 4.5% inflation target level for 2009), Brazil is performing relatively well and that´s due to good choices made in the last twelve years. Saying that we are underperforming or overperforming needs a comparison parameter. Comparing to our last decades, Brazil is performing really well. Even if we compare to some of the other latam countries we have today better policies than they have. That´s why ‘good policies and good luck’ opposing in a certain sense Rigobon´s emphasis on the lucky without effort. Jamal Kandal, sorry for not been clear. I just wanted to say that the good surprise, the robust trade balance surpluses since 1999, unexpected or forecasted by anyone, was not only a matter of luck but also consequence of good measures such as privatization and good and robust investments by the private sector along this period.