Brazil’s Stability is Success

In the most recent July/August issue of Foreign Affairs, many people including Richard Lapper, Larry Rohter, Ronaldo Lemos, and myself respond to Ruchir Sharma’s May/June article “Bearish on Brazil,” which predicted that Brazil’s rise would end as soon as global commodity prices leveled out. In my piece, “Stability is Success,” I argue that while it is true that challenges remain for Brazil, its recent reforms and social programs have helped develop the economy and middle class in such a way that the country will no longer rise and fall solely on the basis of external market fluctuations.

Ruchir Sharma ("Bearish on Brazil," May/June 2012) argues that Brazil’s incredible rise over the past ten years has depended on the sale of commodities, and that as commodity markets begin to slow, so, too, will Brazil’s growth. Sharma correctly notes that in the coming years, Brazil will likely need to confront a decline in commodity purchases from China. But he fails to recognize that economic stability has also driven Brazil’s growth.

Throughout the late twentieth century, Brazil suffered from failed stabilization policies and devastating bouts of hyperinflation. In 1994, however, Brazil introduced a new currency, the real, which has kept inflation in check. Around this time, the government also began lowering tariffs, opening up markets, and privatizing industries, policies entrenched over the next decade by former Brazilian President Luiz Inácio Lula da Silva. These reforms convinced local and international skeptics that Brazil would not return to the days of closed markets and inflation—an evolution that, more so than the commodity craze, has spurred Brazil’s economic boom over the last decade.

Sharma argues that the very measures Brazil has taken to reach this stability will hold the country back. In particular, he claims that Brazil’s spending on welfare programs, such as Bolsa Família, an initiative that provides cash transfers to low-income parents who get their children vaccinated and keep them in school, has reduced inequality at the expense of development. Yet history suggests that to achieve sustainable growth, governments must care for the young, the old, and the less fortunate. European countries and the United States began building their own social safety nets at far lower levels of per capita income than those of emerging-market states today, thus expanding productivity and boosting demand. Indeed, numerous studies conducted by the World Bank and others suggest that the reduction of inequality in middle-income countries, such as Brazil, actually boosts economic progress.

What is more, several studies of Brazil itself, performed by Fundação Getulio Vargas, a Brazilian research institution, demonstrate that Bolsa Família has increased self-employment and domestic consumption. Other studies, such as ones conducted by the International Food Policy Research Institute, show that the children of the families that receive aid from Bolsa Família are healthier and spend more time in school—offering the best hope for the increase in skilled workers that Sharma prescribes.

Meanwhile, Sharma compares Brazil to China, arguing that Brasília has restrained development whereas Beijing has promoted it. Yet in making that contrast, Sharma overlooks the disparate levels of average income between Brazil and China, especially for the poor. According to the International Monetary Fund, per capita income in China, where GDP has risen rapidly over the past two decades, remains less than half of that in Brazil. And over the past ten years, the average income of Brazil’s bottom 20 percent has grown by around 10 percent, the same rate as China’s total GDP growth.

Brazil has also outperformed China in enlarging the size of its middle class. According to a study performed by the Brookings Institution, roughly half of Brazil’s population is now considered middle class, compared with less than ten percent in China. Brazil has brought so many people out of poverty not just by selling commodities but also by diversifying its economy, expanding its financial and service sectors, and reducing inequality. Such policies have created a strong base of domestic consumers that has helped power Brazil’s economic rise and tempered the effects of external shocks, such as the 2008 global financial crisis. Despite all of this, Sharma mentions the Brazilian middle class only once.

Brazil faces many problems, from poor education and infrastructure to a complex bureaucracy and complicated tax regulations. The question is whether the country can solidify its gains and attain long-term growth—an outcome that will depend on far more than commodity markets.

Click here to read Ruchir Sharma’s response to this piece, as well as his reaction to Richard Lapper’s, Larry Rohter’s, and Ronaldo Lemos’ articles.