To readers: I made closing remarks by way of summary following an event entitled “Brazil: Global Partner in a New Economy” held in New York City on March 16, 2009 and sponsored by the Business Council for International Understanding and Dow Jones. President Lula was in attendance for most of the day along with almost every senior member of his cabinet. The text of my closing remarks follows.
It is a pleasure to be with you this afternoon yet also intimidating. I am charged with making a few personal remarks by way of summary and conclusion following an exceedingly complex conference in which so much has already been said about how this perplexing global crisis is affecting Brazil. What have we learned today from the distinguished group of Brazilian authorities who have addressed us? Three summary themes come to mind. What are the main concerns of the Brazilian authorities? What are the sources of an apparently remarkable resiliency of the Brazilian economy in the teeth of the crisis? Finally, what lies ahead for Brazil and for the United States? Let me touch briefly upon these three points.
First, it is clear that the global crisis has hit the Brazilian economy with surprising force and suddenness in the last few months and the downtrend in leading indicators may just be beginning. The channels of transmission of the global crisis, perhaps better referred to as open floodgates, are clear in every recent indicator concerning the Brazilian economy. Brazil’s exports and imports have declined precipitously in recent months after years of steady expansion; external credit flows have suddenly stopped, forcing an adjustment in the pace of domestic bank lending, making export financing suddenly difficult, and creating many difficulties for even the most creditworthy Brazilian firms to roll over their debts; finally, the confidence of Brazilian businesses and consumers has been almost totally undermined, further propagating the recessionary impact of the global shock.
All of this has robbed the Brazilian economy of an economic growth momentum that many of the Brazilian government officials who addressed us today had worked so hard to build through consolidation and extension of a long-term process of economic reform.
A short few months ago, the Brazilian economy was growing at the fastest rates in more than 30 years. That has suddenly changed.
The Brazilian economy, in fact, may not grow at all in 2009, or very little, and per capita incomes will almost surely decline. The consensus forecast for GDP growth in 2009 is converging on zero and some of the bolder analysts are expecting a large contraction. Who can say what lies in store for Brazil in 2010?
This change in growth momentum would be a distressing development in any economy rich or poor, yet it is particularly alarming in the Brazilian context where 20 to 40 million citizens live in conditions of poverty or extreme poverty defined as less than $2 per day per capita.
These most vulnerable citizens will see little or no progress in material welfare at least until the global crisis can be resolved, and a painful descent back into even more grinding poverty is a glaring possibility for the additional 20 million Brazilians who have moved out of poverty during the last six years of the Lula administration.
This is the human face of the global crisis in Brazil and why the Brazilian authorities have conveyed to us today the urgency they feel to respond to their citizens. It also explains Brazil’s renewed drive, evident in Lula’s brief visit to the United States, with which they press the case for G-7 and G-20 leadership in the shared search for a solution to the global crisis. Brazil knows that its voice, while tolerated and even indulged in a somewhat patronizing way, is often little heeded in actual practice. Brazil is starting to raise the volume in international fora and that is a welcome development.
Second, I leave this conference also more convinced than ever that Brazil is relatively well prepared to withstand the rigors of the global economic crisis which it did nothing to provoke. At Columbia University, I direct several seminars which look into the problems of economic growth in Brazil, yet I know that these lectures need to be complemented by an understanding of the factors that help explain resiliency of the Brazilian economy in 2009, factors which I believe are closely related to the depth of its material and human resources, a reasoned and reasonable economic management, and as talented and deep a civil service as that of any emerging market in the world today.
We have spoken today at this confrence, and President Obama himself has emphasized, how much we as a people in the U.S. can learn from Brazil, especially in the field of energy, and especially in biofuels and renewable energy.
That is fine as far as it goes, yet it strikes me that Brazil has many important lessons for the United States which go beyond the field of green energy. These include the astounding expansion of its agricultural sector which has become the world’s farm, the dynamism of Brazil’s entrepreneurial class, its justly renowned targeted programs to reduce poverty of which Bolsa Familia is the best known example, and tenacity over the last fifteen years in dealing with the legendary fiscal and monetary problems inherited from its troubled past.
Yet I would stress in addition to all of these lessons to be learned from Brazil several others receive less attention than they should. These lessons in the Brazilian way of doing things are, in my view, very relevant to the United States and to the world today in this crisis.
I would include here Brazil’s experience over many decades with the management of a mixed economy in which an active role for government is combined with ample space to accommodate the institutions and private firms and banks that are the basis for a market economy. Surely the United States must learn to look more closely at the Brazilian model of a mixed economy as we here sort through the consequences of our excessive faith in deregulation and collective willingness to believe that government economic management is always inept. .
Among the striking characteristics of this mixed public-private Brazilian economy are a banking sector which reserves a large role for private banks within the context of robust government supervision and an important role for state-owned banking institutions, including the BNDES, Banco do Brasil, and the Caixz Economica Federal.
The success of Brazil’s tradition of a mixed economy is evident in the quality and productivity of its leading firms, including Petrobras, but also Embraer and Vale and others whose representatives have addressed us today. Some of these firms, Vale is perhaps the best example, were privatized after successful launching by the public sector.
Looking beyond economic management, something else is uniquely Brazilian and important to the whole world in this time of economic crisis. It is a longstanding cultural tradition based upon the peaceful resolution of conflicts, of holding the civilized process of international negotiation and diplomacy as a value to be pursued in its own right above and beyond more narrow considerations of national benefit or loss.
To be more specific, Brazil’s role in Latin America and in the world outside the club of the richest nations is unique – a broadly popular government of the left which pursues moderate economic policies, promotes broad hemispheric integration on the basis of shared economic and political interests, and is a powerful voice in favor of multilateral (rather than unilateral or bilateral) approaches to international problems.
In the realm of Western hemispheric politics, Brazil’s role in discouraging the spread of attractive, yet ultimately self-defeating policies of resource nationalism, fiscal nationalism, and reflexively anti-U.S. foreign policies is clear for all to see. Brazil for every Latin American country is a silent rebuke to politicians reflexively inclined to blame outside forces, and the U.S. in particular, for economic and social ills. When the successful candidate for the presidency in El Salvador, the leftist Mauricio Funes, sought to reassure worried voters on the eve of the election, he assured the public that he would govern in the style of President Lula.
More than that, we see Brazil’s behind-the-scenes approach to building consensus in the G-20 (and even the G-77) in favor of practical solutions to the global crisis that keep in mind not only Brazil’s own desired outcomes, but which also favor the emerging economies more broadly, especially the vast majority of economies which has few or none of Brazil’s advantages.
Third, and finally, let me return to the issues which consume us today – the implications of the global crisis for Brazil and the future of the Brazilian economy.
In this regard, yes, it is true, Brazil has an extensive toolbox of economic policies with which to engage in counter-cyclical policies. We have heard much about these policies today from the government officials who design and implement them, including President Henrique Meirelles of the Central Bank, Finance Minister Guido Mantega, and BNDES President Luciano Coutinho, among others. Yet, as important as these measures may be, Brazil also faces limits in its ability to ward off indefinitely the impact of the global crisis on domestic demand
Some of the counter-cyclical measures are worth emphasizing.
In terms of monetary policy, short-term interest rates have been reduced substantially – 300 basis points in the last two meetings – and more cuts are likely in the base right of 11.25%. Bank reserve requirements have been reduced substantially as well, a form of quantitative easing, and this is freeing up more lending. The Central Bank in a variety of ways has intervened intelligently in the foreign exchange market using its impressive reserve stock of $200 billion. The Brazilian real has depreciated significantly since late last year, and yet wider economic damage from this unavoidable process has been minimized.
Fiscal actions are somewhat more limited in the case of Brazil which, after all, has no China to purchase its sovereign debt at close to zero interest rates. It lacks in addition a deep domestic capital market of its own that it can rely upon when international credit freezes up. It has no ability to run U.S. style deficits of 15% of GDP or to carry out mega-stimulus packages. Above all, Brazilian authorities are gravely constrained by the fact that the debt to GDP ratio is still high, that credit spreads have risen sharply, and that increased fiscal spending to boost the real economy can have a devastating impact on long-run inflation expectations. The inflation genie in Brazil is back in the bottle, and no one wishes to be complicit in its escape.
Yet still important fiscal actions have been announced by Brazil, including 2009 stimulus plans amounting to about 2.5% of GDP, including new housing finance, and an expansion of $40 billion in BNDES’ already formidable lending capabilities. The U.S. may actually press Brazil in the London G-20 meeting for even more stimulus, but the Brazilians know they are at the outer limits of the possible.
The simple truth is that Brazil, along with many of the world’s leading emerging economies, simply cannot manage recovery on its own. Domestic demand will inevitably crumble as the global crisis grinds on absent assistance from abroad in some form.
So what is to be done?
I envision certain actions that seem within the realm of the G-20, yet my main message is to emphasize Brazil not as a passive recipient of some sort of international largesse, but as an active and indispensable participant in the process. Indeed, it will be difficult for the world economy to recover without Brazil’s involvement both in the sense of helping to devise intelligent global policy responses and reactivating its own economy. Brazil is important in its own right as the tenth largest economy; more to the point, it is important along with China and India as one of the leading voices, if not the leading voice, of the emerging economies.
What assistance does Brazil need, in addition to the partnership with foreign direct investors, the main topic of today’s conference?
In the short-run, I would suggest vastly increased access to IMF funding and to funding from multilateral sources, including the World Bank and the IADB. These financings would have as their priority focus the maintenance of vital social programs to prevent the ranks of the extremely poor from expanding; it would also involve greater provision of credit to small and medium-sized companies which are especially starved for credit; facilities to help roll over debt obligations of private companies, and lines of credit to support international trade. I would emphasize as well that Brazil is in urgent need of infrastructure financing to address the single most important obstacle to its continued emergence on the global scene which is the weak state of economic infrastructure.
In the medium-term, Brazil needs to find in the U.S. a reliable partner in terms of completing the Doha Round and its long-term promise of agricultural liberalization. The Brazilians came close to restarting those talks late last year; those efforts must be renewed in partnership with the U.S. The U.S. and Brazil must also find common ground in building a global market for ethanol and other green fuels, one that goes well beyond trade just between the Brazil and the U.S. which has been the source of endless conflict.
And for the reasons to which I have already alluded to, the U.S. needs vital assistance from Brazil to forge consensus in the G-20 around short-term recovery global recovery prospects, to promote actively a new spirit of hemispheric economic cooperation at the Summit of the Americas conference in Trinidad in mid-April, and to identify the needs of the poorest nations in the context of the G-77 meetings in June.
In the medium-term, the U.S. may also learn the many other lessons that Brazil has to teach us and that go beyond the energy field, including the sound management of a financial system and its experience with managing a mixed public-private economy. Somehow, I doubt the U.S. will listen or care very much, but it should.
Brazil’s voice must be heard more loudly and clearly not just here in the U.S., but around the world in the many fora convened around the global crisis. Today’s event has contributed to this process. May there be many more Brazil Days to come.