Brazil's Alternative to Austerity

From 2004 to 2010, the Brazilian Economy grew at an annual average rate of 4.4%. This result was double the average growth of the 1981-1993 period, although it did not reach the exceptional average of 7.5% registered between 1947 and 1980. Growth slowed in the aftermath of the global financial crisis, despite the 30 year record high growth achieved in 2010. After decades of stop-and-go growth, the recent period has been exceptional for the marked improvements in employment and the reduction of income inequality. The current unemployment rate averaged an exceptional 6% in 2011 and inequality as measured by the Gini Index has been reduced in each of the years from 2004 to 2011, falling by a total of 10%. This exceptional performance has made possible the long-awaited emergence of Brazil as a significant player in international economic affairs.

The main characteristic of the recent period is the steady return of the role of the state in the design and implementation of longer-term measures to support economic development. The impact was particularly evident in President Lula’s second term when GDP growth accelerated, the number of households below the poverty line decreased and millions of new consumers joined the middle class as the result of stable employment conditions and the development of a large scale expansion of domestic consumption. This new development model integrated growth and employment into an approach to macroeconomic stability, defined as control of inflation, lower public sector indebtedness, and lower external vulnerability. The initial measures introduced in the government's first term were focused on demand, including increasing incomes and incentives for family consumption that were complemented in the second term by supply-side measures to support investment and increase productivity. This recent success notwithstanding, in the first 18 months of President Dilma’s administration the model has failed to maintain previous performance, and appears to be less appropriate to the new international economic conditions.

This paper presents an overview of the economic policies that led to the exceptional results of the Lula administration, highlighting the main elements of this “new development model.” It also presents an evaluation of the use of the economic policy instruments that had an impact on growth, price stability and income redistribution. It concludes with an assessment of the current situation as well as the main challenges ahead, especially those concerning international competitiveness, public finances and investment in fixed capital and innovation.

Click here to read the full paper, "Brazil's Alternative to Austerity: Increased Employment and Reduced Inequality," by MINDS.