Brazil in the long term – 12/23/2023 – Samuel Pessôa

On Wednesday last week (20), I participated in the long-term panel at the 51st meeting of Anpec (National Association of Postgraduate Centers in Economics).

My presentation had four parts. First, based on the review of Brazilian growth from 1900 to 1980 by Bacha, Tombolo and Versiani, I documented that Brazil had, in 1900, 20% of the American GDP per capita – more or less what we have today. Hence the title of my presentation: “Perennial Mediocrity”.

A little noticed fact is that the acceleration of Brazilian growth did not occur after the 1930 revolution, but after the first war.

Although the growth in per capita product between 1918 and 1980 was lower than imagined – 3% per year, instead of 3.9% –, our performance in the following period was much worse. Between 1980 and 2019, we grew at a per capita rate of 0.8%.

Why was our growth between 1918 and 1980 so good? This is a period during which the world economy initially closed, and in which the opening that occurred, after the second war, took place with governance that favored us. Transnational companies set up shop in emerging countries –mainly in economies with scale, such as the Brazilian one– to produce locally and take advantage of the local consumer market.

In the second part of my presentation, I analyzed our great stagnation. Why, after we resolved the problems with external debt, did we not grow again? Even after stabilizing the economy with the Real Plan, we were unable to resume faster growth.

Three factors seem to me to have aggravated our difficulties. First, our inability to engage global value chains. Between 1990 and 2010, international trade went from 15% of world GDP to 25%. This growth occurred due to the construction of global value chains, in which the increase in trade was in goods in processing. We were completely left out of this movement.

Second, our social contract of redemocratization (large increase in social security in reaction to the electorate’s demand) reduced domestic savings –after controlling for demographics–, putting pressure on interest rates, exchange rates and increasing the perception of risk. My calculations suggest that our excess pension spending, after controlling for demographics, in relation to the international average, reduces the savings rate by 5% of GDP.

Third, the tax structure built in the late 1960s did not adapt to the changes in the way of producing that occurred shortly afterwards. The trend since the 1970s has been for production activities to be outsourced. This is the trend mainly in the manufacturing industry. Our tax complexity and the separation of the goods base, ICMS, from the services base, ISS, make the outsourcing process very difficult. In this sense, the recently approved tax reform, even with its concessions, is a step in the right direction.

In the third part of my presentation, I decomposed the period from 1981 to 2019 into five stages: from 1981 to 1993, redemocratization and hyperinflation; from 1994 to 2006, stabilization and liberalization; from 2007 to 2013, interventionism; from 2014 to 2016, our great crisis; and from 2017 to 2019, slow recovery. The gains of the period of interventionism were almost entirely eliminated with our great crisis. It represented a permanent loss of 10% of GDP.

In the fourth part, I presented several evidences that the economic policy practiced between 2007 and 2013 was not sustainable. Over the period we had: fiscal worsening; wages growing beyond productivity; falling private sector profitability; reduction in net exports; and rising inflation. Clearly the economic policy regime was unsustainable.

Our democracy has not yet managed to find a sustainable economic policy package that generates growth while reducing inequality. For those interested, the presentation file can be found at this link.

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