Brazil: more than just potential

Economics Department

For years Brazil was said to be a country forever condemned to having a great future. That future may be approaching at last.*

At the end of 2000, Brazil – one of the world’s largest countries – was finally benefiting from a virtuous economic cycle of falling inflation and buoyant growth. Following a large exchange rate fall in early 1999 after the peg to the US dollar was broken, growth – initially export-led – gradually became broader-based, reaching a healthy 4.5% for 2000 (see chart). This in turn led to higher tax revenues, helping fiscal adjustment. Inflation and the currency, the real, remained stable, while interest rates progressively fell, supporting both investment and a reduction in public debt.

But over the last few months, growing contagion originating in neighbouring Argentina, another country with “potential”, has put continuing pressure on the exchange rate and, in due course, interest rates. And another year of low rainfall underlined how reliant Brazil is on hydropower, raising the spectre of energy shortages acting as a brake on growth. All of this undermined expectations and led to falling investment. The ability of the region to achieve sustained growth was called into question.

Yet look at the longer term and the signs for Brazil are encouraging. Indeed, the country may have crossed that threshold from volatile to at least the beginnings of durable growth. For the first time there is a critical mass of reform on the table. Although the economy remains vulnerable to external shocks – it must continue to attract significant capital inflows to cover its current account deficit and debt servicing – there are a number of positive points illustrating how far Brazil has changed.

A particular strength of Brazil’s reform programme has been the success of its macroeconomic stabilisation programme. Hard budget constraints have been imposed at all levels of government – a remarkable achievement in light of the strongly federal (and sometimes fractious) structure of Brazil. States and municipalities are effectively now obliged to balance their books: new budget rules that will have to be strictly enforced if Brazil is to reduce the burden of its debt.

But a number of pieces of legislation, culminating in the 2000 Fiscal Responsibility Law, provide good reason for confidence. In a parallel supporting track, the federal government has also signed legal contracts with state governments by which the latter will benefit from debt restructuring and preferential interest rates on outstanding debt in return for a commitment to fiscal probity. Encouraging indeed, though to sustain these improvements, tax reform (difficult in a federal system) and contentious pension reform for civil servants must still be tackled.

Another plus in Brazil’s favour is its new framework for monetary policy, which has given the central bank greater authority in setting interest rates to achieve lower targeted inflation. The recent volatility is subjecting this new structure to a stiff test. In order to help overcome what is likely to prove a difficult period, central bank independence could be legally entrenched, bolstering the framework further.

The fundamentals in the enterprise sector have improved too, thanks to several ongoing reforms. First, the reduction of tariffs and trade barriers, that started in the late 1980s, has helped to make the Brazilian market more open and competitive. In this regard, Brazil’s flexible exchange rate is an asset. Over time, though, more competition, both at home and from abroad, will be needed to enhance firms’ competitiveness and generate sustained export revenues.

Reform in the financial sector has also come a long way. A number of state-level banks have been restructured and privatised; prudential constraints have been tightened and supervision improved. Nevertheless, the costs of borrowing are still kept high, partly due to weaknesses in the legal system. There has been success in large privatisation (for instance, the telephone monopoly, Telebras, and state banks like Sao Paulo’s Banespa), though the competition and regulatory regime has yet to be tested. In particular, rules for the energy sector must be clarified and developed if private investors are to make commitments on the scale needed.

However, economic reform is only part of the story. Brazil faces a plethora of social challenges, though significant advances have been made in the last ten years. Social policy in Brazil has been gradually improved, and social indicators such as poverty, school enrolment, and infant mortality are now closer to what could be expected given its level of per capita income.

That said, Brazil remains a strikingly unequal country: the richest 10% of the population account for nearly half of national income, compared with less than 1% that goes to the poorest 10%. The Gini index (see chart page 21), which measures income distribution, does not cast Brazil in a favourable light. And yet, Brazil cannot simply grow its way out of poverty, since a large part of its social outlays do not go to the most needy. Social spending must become better targeted both in terms of choosing the right kind of spending (education rather than civil service pensions, for instance) but also by making sure that the poorest benefit.

On top of concerns about the impact of a world economic slowdown, short-term events have drawn attention away from the fundamentals in Brazil. Even if it is affected by a turbulent economic climate, the bottom line is that the country is manifestly not the place it was ten years ago. Reforms are taking hold and, assuming there is continued political commitment, should progressively favour growth and even smooth out the rather exaggerated stop-and-go pattern of expansion that has typified the region up until now. This is more than just potential, and a better environment in which to face the daunting social challenges of inequality and poverty may now be within reach.

BRAZIL: some basic indicators

Population (official estimates, 2000): 170 million

GDP (official estimates 2000, US dollars): 588 billion

GDP per capita (1998, US dollars PPP): 6,937

Trade (goods & services 1999 % of GDP): 22

Current account (% of GDP, 2000): -4.2

Short-term benchmark interest rate (end-2000): 16.25

Inflation (CPI, end-2000): 7.0

Life expectancy (1998, men/women): 64/72

* The OECD published its first Economic Survey of Brazil in June 2001. Through its Centre for Co-operation with Non-Members (CCNM) the OECD funds work with countries such as Brazil that are not members of the OECD. There are ongoing programmes with other major non-OECD countries. In this context, the OECD’s fourth Economic Survey of Russia and a comprehensive review of trade and investment in China are forthcoming.


• OECD Economic Survey: Brazil, 2001 

©OECD Observer No 228, September 2001 

Economic data

GDP growth: +0.6% Q4 2017 year-on-year
Consumer price inflation: 2.2% Jan 2018 annual
Trade: +2.7% exp, +3.0% imp, Q4 2017
Unemployment: 5.5% Jan 2018
Last update: 12 Mar 2018


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