We posted a preliminary work from our colleagues Franklin Serrano and Ricardo Summa about the recessionary conditions in the Brazilian economy. The work is a continuation of one published in the Revista Circus 5 (Spanish) La Desaceleración Rudimentaria de la Economía Brasileña.
Ricardo Summa also exhibited in Buenos Aires on the same subject in 2012. Here
1.
Introduction
The Brazilian economy experienced
a period of faster growth from mid-2000s to 2010, after nearly a
quarter-century with very little growth in GDP per capita, due both to a major
change in external conditions combined with a smaller but very important change
in the orientation of domestic macroeconomic policy. The average growth of GDP
in the period 2004-2010 was 4.4%, slightly more than twice that observed in
period 1995-2003 (Serrano & Summa, 2012)1. However, the average growth rate
of the period 2011-2014 drop considerably to 2,1% and in 2014 the economy grew
close to zero (0,1%).
The purpose of this paper is to
argue that this sharp slowdown in the growth rate of the Brazilian economy
since 2011 can be explained predominantly as due to changes in the orientation
of domestic macroeconomic policy, rather than to changes in the external
conditions of trade and finance. Moreover, we shall argue that, as the economy
was neither constrained by foreign exchange nor by the general scarcity of
labor or capital, these changes in macroeconomic policy led to a substantial
decrease in the rate of growth of aggregate demand and are chiefly responsible
for the lower growth of both output and business investment.
In the period 2004-2010, after
the marked improvements in external trade and financial conditions since 2003,
the government gradually (and initially with some hesitation) took
responsibility for directly generating growth through the expansion the domestic
market. This was done through a series of policy measures boosting aggregate
demand in order to promote economic growth, measures which were quite
successful in attaining it. However, since 2011, despite the continuity of the
ease in financing the large current account deficits, the government changed
the orientation of macroeconomic policy. The new strategy was first to make
space and then provide macroeconomic incentives for the private sector to lead
the growth of investment and of the economy. This was done in two phases. The
first was through a strong and deliberate contraction in aggregate demand
growth rates in 2011 (whose effects lasted until 2012), including a very large
reduction in public investment, to open space for the presumed private
investment and export boom that was expected to come with lower interest rates
and an exchange rate devaluation. As investment and exports did not respond to
these interest and exchange rate changes and the exchange rate devaluation
began to accelerate inflation, interest rates were increased again. After that
the government tried to revive private sector investment mainly through large
tax breaks to firms, hoping for the private sector to respond by expanding
investment and aggregate demand. As the measures taken since mid-2012 did not
significantly increase final aggregate demand (increasing neither the internal
nor the external market), private investors naturally found no reason to expand
investment and in the end the new strategy reduced considerably the growth
trend of the economy.
The contraction of the Brazilian
GDP growth rates since 2011 was sudden and considerable. After growing 7.6% in
2010, the Brazilian economy grew 3.9% in 2011 and only 1.8% in 2012. Growth
increased modestly to 2.7% in 2013, but the economy entered in technical
recession (two consecutive quarters of negative growth) in 2014 and grew only
0.1% in this year. In addition, manufacturing industry exhibited the same
pattern: average growth rates of 3,6% in 2004-2010 and -0,9% in 2011-2014.
Finally, formal employment creation was on average 1,46 million jobs a year in
2004-2010, which was reduced to 829 thousand 2011-2014 and only 152 thousands
in 20142.
Our argument will proceed as follows. Section 2 and 3
discuss, respectively, the possible role of external and internal causes of
this marked reduction in growth rates. Section 4 critically evaluates both the
initial policy decisions made to supposedly make space for growth in 2011-12 and
the phase of stimulus through incentives to investors since 2012. Brief
final remarks will be made in section 5.
1 This happened with inflation near the target and with improvements in
income distribution (personal and later also functional) and a large reduction
in poverty rates (see also Barbosa-Filho and Souza (2010), Vernengo (2011),
Hallack Neto and Saboia (2014)). See also Weisbrot et alli (2014) for an
overview of the recent Brazilian economic and social performance.
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