By Xavier Cirera
I have just returned from Brazil, where I have been working on my project on firm export diversification. In the present climate of economic pessimism in Europe, where all seems bad news, it is refreshing and inspiring to visit one of the BRICs. You can feel the dynamism and optimism of a country that has been growing substantially in the last decade, and a city, Rio de Janeiro, preparing to host the football World Cup and Olympic Games.
Commodity prices have played an important role in Brazilian growth. While we always focus on consumers who are experiencing the hardship of high food prices, the other side of the coin includes large food and agriculture exporters like Brazil. This growth allowed Lula da Silva’s government to implement some quite successful social programmes. Some of these started under Fernando Henrique Cardoso’s government, but Lula’s government significantly enhanced and expanded them. The success of some of these programmes is transforming the country and reducing its endemic inequality.
So what better legacy for Dilma Rousseff’s government? The challenge for the new government is to consolidate these reforms. This will not be an easy task. The economy is clearly overheated. There has been a boom in domestic consumption. Public sector wages have increased substantially. While this has been positive for domestic firms, it has created substantial inflationary pressure. I have visited the country twice in the last two months and prices of transport and services have increased more than 10%. In addition, the Brazilian Real continues to appreciate against the dollar, damaging manufacturing exports and increasing imports.
The challenge for Rousseff’s government is, therefore, to deal with the overheated economy and avoid a hard landing. The best socially responsible macroeconomic policy is one that smoothes the business cycle and avoids adjustment turning into a recession. The poor suffer disproportionally more during recessions due to their lack of assets and insurance, and some of the shocks they experience can have long lasting effects, that would jeopardise some of the achievements regarding social transformation. Balancing the current needs for adjustment with economic growth and expansion of social programmes is a very difficult task indeed, but real social transformation can only be achieved through sustainable measures.