Brazil: The Perils of Commodity Driven Inclusive Development

    In this entry, Teichman discusses the Brazilian crisis, drawing on some of the ideas developed in The Politics of Inclusive Development. Policy, State Capacity and Coalition Building, 2016.

    Brazil appears generously endowed with attributes that should contribute to the achievement of equitable and inclusive development: its ample agricultural land and mineral wealth affords a wide array of commodity exports while the country’s a large domestic market can support the development of industry and manufacturing. Nevertheless, Brazil’s historical development trajectory has been far from inclusionary, involving high levels of inequality, persisting poverty (reduced substantially only fairly recently), and exclusion. In the early 2000s, the World Bank identified the social exclusion of blacks, children, youth and indigenous people as one of the country’s most pressing development challenges. Brazil has had historically high levels of socioeconomic inequality, a feature sometimes linked to a dependence on commodity exports—one of the implications of the so-called resource curse. However, inequality and exclusion also arise from a history of highly unequal political power relations and the operation of exclusionary institutions. 

    The central role of politics in exclusionary forms of development means that the developmental consequences of the “resource curse” is not an immutable law. In The Politics of Inclusive Development,  I discuss Indonesia’s use of revenue from the sale of petroleum resources to reduce poverty in rural Java, and I contrast this case with the Mexican one, in which access to abundant petroleum resources during the petroleum boom years of the late 1970s had no such impact on poverty reduction. 

    In Brazil, the election of a left government in 2003, led by Workers Party (PT) candidate Luis Ignácio da Silva (Lula) augured well for a more inclusionary development process. In many respects, the Brazilian case fulfills the requirements of “getting the politics right” for inclusive development. Lula garnered a solid base of support from both the lower and middle classes, and left office in 2010 with an 80 percent approval rating. In addition, he had been fairly successful at maintaining the tolerance (if not the support) of the upper class and business groups. His administration channelled significant amounts of public spending toward poverty alleviation programs. Of particular importance was the country’s now-famous Bolsa Familia program. This program came to cover some 50 million low income Brazilians--about one quarter of the population—and reduced extreme poverty by one-half. As a conditional cash transfer program, Bolsa provided a cash stipend in return for keeping children in school and taking them for health checkups. There is no question that it contributed substantially to the alleviation of hunger, and increased school enrolment. Furthermore, since 2003, there have been other programs, including income support for those over 65 whose household income is less than a quarter of the minimum age. The Lula presidency substantially expanded affirmative action programs to ensure that those excluded from the best universities, by race and/or income level, obtained access. Brazilian federal social spending as a percent of GDP increased from 13 percent in 2003 to over 16 percent by 2011.  Brazilian success in reducing poverty and social exclusion was, in large part, propelled by economic growth fueled by commodity export expansion. Although rising consumer demand was also an important ingredient in the country’s economic expansion, this was itself linked to the government’s policy of cheap credit, large infrastructure projects, and price controls on oil and gas,—all made possible by the commodity driven economic boom. Between 2004 and 2008, Brazil enjoyed economic growth and macroeconomic stability, as GDP grew at an annual rate of 4.8 percent. 

    Today, the promise of inclusive development is under serious threat. The government of Dilma Rousseff, who succeeded Lula as president in 2011, confronts both a slumping economy and a growing political crisis. Inflation has surged above 10 percent, unemployment has increased, and economic forecasts predict an economic contraction of 4 percent this year, followed by a 3.3 percent shrinkage next year. The country’s currency has experienced a dramatic deterioration—a drop of 60 percent from 2011 levels. The jobless rate doubled in the first five months of 2015 alone, and consumer demand is declining.

    This economic deterioration has precipitated a growing political crisis. The popularity of President Rousseff government stands at a dismal 8 percent and the Chamber of Deputies has opened impeachment proceedings against her.  In June 2013, massive protests, which erupted over a 9 percent increase in bus fares, were transformed into large-scale demonstrations demanding less corruption, better public services, and control of inflation. Anecdotal evidence suggests that those with newly acquired middle class status are rapidly withdrawing their support from the Workers Party. In 2015, middle and upper middle class protesters took to the streets across Brazil demonstrating against Rousseff and the Workers party. While the economic dynamism of the commodity boom allowed many Brazilians to enter the middle class, this newly acquired status is now severely threatened particularly given the very precarious nature of their middle class status to begin with. 

    The question is whether different policies could have contributed to an attenuation of the unfortunate outcome we now see—could have left Brazilian social achievements less vulnerable to the drop in commodity prices and the ensuing political crisis. One aspect of the Brazilian development trajectory that did not change in any fundamental way during the Lula and Rousseff years was the insufficient employment generating capacity of economic growth. Formal jobs were certainly produced, but not in sufficient numbers and they were very closely linked to commodity-led export growth. While the non agricultural informal employment rate in Brazil declined from 2009 to 2013 from 42 to 39 percent, it still remains high by international standards and remains above the figure in the late 1990s, of 35 percent.

    While the Workers Party regimes were aggressive in expanding government spending, particularly social spending, the same cannot be said about employment generating industrial policy—defined broadly to include productive transformative activities, beyond simply manufacturing. Indeed, the absence of sufficient employment was one of the concerns raised in the evaluation of Bolsa Familia. Graduates of Brazil’s Bolsa Familia, who did find work, remained employed for periods of no more than eleven months while attempts to foster self-employment met with only limited success. Indeed, growing concern on the part of the Brazilian government for “productive inclusion” was reflected in its 2012 program, “Brazil without Extreme Poverty,” which calls for a “productive inclusion strategy” that entails policies to extend employment and income opportunities to the poorest in the population with a focus on access to professional qualifications, employment, and income. 

    In addition, both the governments of Lula and Rousseff introduced industrial development programs, which although marking a notable departure from the earlier neoliberal bent to maintain a minimal role for the state, were generally timid, and particularly in the case of Rousseff initiative, defensive in nature. Lula’s 2004 “Industrial, Technological and Trade Policy,” program called for the promotion of four strategic sectors: software, electronic components (such as computer chips), capital goods (machinery and equipment), and pharmaceuticals, promising to channel some US$5.2bn in credit towards these sectors through the state development bank. The program also involved measures to explicitly promote domestic content. In 2008, it was supplemented by a program that aimed to increase innovation and support the expansion of small and medium enterprises. Most observers agree that the measures were largely ineffective.

    While the economy rebounded following the 2008 financial crisis, by this time the serious difficulties faced by industry were abundantly clear. Buoyant commodity prices, which caused an appreciation of the national currency, had caused industrial products to lose competitiveness. The worsening situation of industry, particularly manufacturing, prompted President Rousseff to introduce a new industrial program in 2011. To its credit, the new program aimed to expand employment and to expand into international markets as well as domestic ones. The policy instruments for achieving these goals, were, however timid; the new program involved a tax cut (the abolition by 20 percent of the main payroll tax) in four labor intensive sectors: clothing, footwear, furniture and software. Further, in other respects, the strategy was a defensive one, rather than one to forge new areas of innovation and new export markets. It sought to “defend” local producers, by raising import tariffs on some 100 items and instituted a buy Brazil policy that allowed the government to pay up to a quarter more than the lowest price in order to favor a local supplier. There have been no performance requirements for favoured business interests. Investment in research and development has been low: the percent of GDP invested in research and development in 2012 in Brazil stood at only 1.15 percent.

    We know that vigorous industrial policy was a key ingredient in the East Asian success stories. Further, the development of new productive activities with export potential could go some way to mitigating the impact of declining commodity prices. The issue of industrial policy is, admittedly, highly contentious with its detractors pointing to the high risk of wastage of resources, government corruption, and failure of the strategy to take hold. The Brazilian case, however, points to the high risk of not taking the opportunity of high commodity prices to develop employment generating productive activities with export potential. The challenge to inclusive development is not simply one of the negative social impact of a sharp economic downturn and a decline in the resources available for social protection. The bigger risk, as the Brazilian case demonstrates, is the disintegration of the political coalition that favoured a new redistributive direction and the emergence of a new one far less amenable to inclusive economic growth and development.