BRASILIA – Large emerging economies were hit hard in the past year – particularly in the first half – by the crisis in developed countries, with Europe in recession and the United States staging only a meager recovery. But 2012 will also be remembered as the year when structural changes in the Brazilian economy were consolidated.
The global economic crisis that began in 2008 is similar to the Great Depression of the 1930’s not only in terms of its depth and duration, but also in view of advanced countries’ policy errors and hesitation. It is worrying that European leaders find it so difficult to agree on fiscal adjustment policies that make room for the stimulus measures needed to revive economic growth. Until now, European countries with fiscal leeway have insisted on spending and investment cuts that, together with tax increases, have reduced economic activity and increased unemployment, ultimately compromising tax collection – and thus fiscal consolidation.
In the US, despite a slight improvement, uncertainty lingers. In addition to the risk posed by the “fiscal cliff” in 2013, the main problem remains: the lack of effective counter-cyclical fiscal policies – for example, a public-investment program – to boost economic activity. Instead, the US has placed all of its chips on monetary easing, unleashing what I have called a currency war, in which global investors, chasing higher yields, flood into emerging countries, driving up their exchange rates.
The poor international environment hit Brazil’s economy mainly via foreign trade, aggressive competition in the Brazilian market, and echoes of the negative expectations prevailing in advanced countries.
To combat the downturn, Brazil’s government implemented measures that are now yielding clear dividends. The main change was a large reduction in interest rates, in line with an inflation-targeting framework, which has led to a more competitive exchange-rate policy. This was combined with a counter-cyclical fiscal policy has that kept deficits and public debt under control.
More important, the government’s policies will have a permanent – indeed, revolutionary – impact on Brazil’s economy. This will become more obvious throughout 2013.
For a long time, Brazil’s interest rates were among the highest in the world. Besides damaging public accounts and imposing a severe fiscal sacrifice on the country, the abnormally high level of the Selic rate (the Brazilian overnight interbank rate) inhibited the “animal spirits” of entrepreneurship, distorted resource allocation, and impeded the development of the real-estate and capital markets, while causing currency appreciation.
Over time, the persistence of these conditions undermined the competitiveness of domestic industry, impeding sales of Brazilian products not only internationally, but also in the robust and growing internal market. The government’s macroeconomic stabilization efforts, coupled with policies that increased the country’s growth potential, allowed the interest rate to fall over the last decade.
Nevertheless, until 2011, the Selic remained at levels that were incompatible with the economy’s clear strengths and low risks. Reducing borrowing costs without unleashing inflation was one of the main challenges faced by President Dilma Rousseff when she took office at the beginning of that year. The resurgence of crisis conditions, particularly in the eurozone, had halted the resumption of global growth – and provided an added incentive to accelerate domestic reforms.
The process of reducing interest rates – anchored on a solid tax policy and enabled by the removal of institutional obstacles (such as the rule of remuneration of savings accounts) – was extended to the second half of 2012, leading to a real annual rate under 2%. This resulted in a significant reduction in the interest-rate differential with other countries, which, together with a more active intervention policy in the spot and future markets, brought the exchange rate to a much more competitive level, despite the global currency war.
While these two fundamental changes are here to stay, Brazil’s government has gone even further. We have pressed ahead on reducing the tax burden by decreasing various rates, particularly on payroll taxes, thereby reducing hiring costs without harming workers’ purchasing power – one reason why Brazil is now one of the world’s few major economies with low unemployment.
The fiscal bureaucracy, too, is being modernized, with the deployment of electronic tax notifications and other administrative reforms boosting revenue collection while diminishing the size of the informal economy.
To accelerate economic growth, the priority has been to stimulate investment and recovery in manufacturing, the sector that was hardest hit by the international crisis. We have launched a program worth more than $60 billion for highway and railway concessions, to be followed by a similar program for ports and airports.
As a result of these measures, the Brazilian economy is returning to an annual growth rate of around 4%, which should be sustained in 2013. More important, the structural changes that we have implemented still have much to contribute to future growth. With low interest rates, price stability, a more competitive exchange rate, a lower tax burden, plentiful resources for investment, and the reduction of electricity tariffs, Brazil is strengthening its potential for more rapid expansion.
Here, it is also important to note our efforts to end the fiscal war among Brazil’s states. With the ongoing reform of the interstate ICMS (a tax levied on the circulation of goods and services), investors will have greater legal clarity and security. We will also seek to finalize the unification of the PIS/Cofins taxes, Brazil’s overly complicated – and much-criticized – federal taxes levied on businesses’ invoicing.
With these initiatives, Brazil’s government has sought to ensure that annual growth remains above 4% for many years, regardless of the challenges – which will certainly persist in 2013 – posed by the international environment. Only through such sustained growth can per capita income approach the levels prevailing in the developed world.
What we hope for most is that rich countries – and not only the BRICs (Brazil, Russia, India, and China) – also contribute to global recovery. If we act together and pull in the same direction, we all will win.