Wetzel analyzes Brazilian economy: Jaguar, or capybara?


Kreable Young | Staff Photographer
Deborah Wetzel, World Bank director for Brazil, speaks about the Brazilian economy during the morning lecture on Thursday in the Amphitheater.

In her analysis of the Brazilian economy at 10:45 a.m. on Thursday in the Amphitheater, Deborah Wetzel, the World Bank director for Brazil, posed a simple question: Is Brazil’s economy more like a jaguar, or a capybara?

Lean, solitary and ruthless, the jaguar hunts its competition and eats it for dinner, Wetzel said, whereas the capybara, the world’s largest rodent, is social and herbivorous with a penchant for naps.

Brazil’s economy is somewhere in between, Wetzel said, but despite its size, it leans more toward the character of the capybara.

“If Brazil is a global leader anywhere, it’s in social policy and in reducing poverty and in reducing inequality,” she said.

According to Wetzel, Brazil is a country of enormous opportunities and enormous contradictions.

“It’s no doubt a rising global power,” she said, “but Brazil kind of does things on its own terms.”

Geographically larger than the continental United States, Brazil is home to 200 million people, two-thirds the size of the U.S. population. That size is important, Wetzel said, because it has wielded influence over the nation’s governance since the colonial era. Until the 20th century, Brazil’s central government had little control over its 27 states, which contain over 5,500 municipalities.

The Amazon rainforest, located in the northwest region of Brazil, is actually larger than Western Europe, Wetzel said. São Paulo’s metropolitan area is the fourth largest in the world, home to 22 million occupants. And Brazil is not just the Amazon and cities: in Southern Brazil, a region called the Cerrado has a culture of cowboys and a similar landscape to the Great Plains in the U.S.

In the northern part of the Amazon, about three dozen indigenous tribes have remained uncontacted by their volition, a stark contrast to the nation’s huge cities.

The sheer size of the country and its regional and demographic diversity, Wetzel said, means that the ability to meet the nation’s economic and social needs is difficult.

After the fall of the military government in 1988, a new constitution was passed, which focused on decentralizing the roles and responsibilities of the states.

Fernando Henrique Cardoso, Brazil’s president from 1995 to 2003, implemented the Real Plan, which instituted a new currency that restored fiscal equilibrium, brought inflation down to 1 or 2 percent, and helped to stabilize the exchange rate. This plan formed what Wetzel called the “policy tripod”: fiscal surpluses, targeted inflation and flexible exchange rates.

This tripod was important, Wetzel said, but still, not much was happening in the investment arena. The director added that Brazil’s lack of investment can be attributed to its experience of investing under the dictatorship.

What many call Brazil’s “economic miracle” took place between 1965 and 1978, which included growth rates from 6 to 9 percent. But that growth only benefited the upper end of society. Inequality remained high, Wetzel said, and services remained poor.

In 1979, the Brazilian economy saw stagnation and a debt crisis. International financing dried up, and in 1982, Brazil defaulted on its debt, starting a period of instability, hyperinflation and default.

Then, from 1986 onward, high inflation turned to hyperinflation with rates of up to 2,000 percent per month.

This period of hyperinflation, she said, left “indelible marks” on Brazilians. Those who lived through it became accustomed to spending money immediately before it lost value. That mentality has survived among that generation, which remains, to some extent, more focused on consumption than investment. Brazil’s financial markets, similarly, lean toward the short term.

When Luiz Inácio Lula da Silva was elected president in 2003, he surprised onlookers by focusing on social inclusion rather than structural reforms. As Lula took office, Wetzel said, Brazil’s super commodity cycle was also starting to take off. The increase in prices helped to buoy Brazil’s economy.

Then, in 2007, Brazil discovered massive oil reserves underneath a deep slab of salt in the ocean. At this time, growth in Brazil was up to 3.6 percent per year. An emerging middle class was beginning to buy things like cars and refrigerators, Wetzel said. Thanks to sound macro policies and Lula’s efforts, Brazil weathered the financial crisis of 2008 and roared back with 7.5 percent growth in 2010.

But in the last five years, Wetzel said, things have changed.

Commodity prices have come down, external demand has waned, and efforts to boost the domestic economy through increased credit have begun to falter. But despite this drop in growth, Brazil’s reduction of poverty and inequality have been ongoing, and the country has continued to make efforts toward environmental sustainability.

Brazil’s economy is the seventh largest in the world, and closely resembles the U.S. economy, Wetzel said. Brazilian government revenue and spending are much higher than in any other Latin American country, but the country’s social services are low-quality, Wetzel said, quoting another economist in calling it “five-star prices for two-star services.”

Protests in June 2013, she continued, reflected Brazilian discontent with the quality of the services.

Brazilians, like their U.S. counterparts, are “good consumers,” Wetzel said, showing a photograph of one of the many malls in Brazil. Retail accounts for 13 percent of the country’s economic activity.

Since 2003, Brazil has lifted 25 million people out of poverty, Wetzel said, a population as large as Ghana or Texas. At the same time, inequality has fallen significantly, making Brazil the only large emerging economy to have reduced inequality in the last decade. It is still the 12th-most unequal country in the world, but the increases in income attributable to minimum wage and salary hikes as well as social programs have reduced poverty levels and broken an intergenerational cycle of poverty.

Reducing inequality has has a psychological impact, too, making the disenfranchised poor feel that they are part of Brazil for the first time.

Wetzel sees the country’s economy as more similar to a capybara than a jaguar. She left the audience with a Brazilian proverb that she sees as applicable to Brazil’s economy: “Everything is going to be alright in the end. And if everything is not yet alright, that is because we have not yet reached the end.”

Q&A

Q: You touched briefly on the point about corruption, but corruption and safety are two points that the speakers have been talking about in the course of the week. I wonder if you wouldn’t go back to those points and give us your perspective about their relative importance and what, if anything, what directionally speaking is going on in Brazil in those areas.

A: So corruption has come up a lot in the discussions this week, and I’ve spent a lot of my career working on governance and corruption issues. The way that the World Bank focuses on these issues around the globe — not just in Brazil — is we think of them, they’re embodied in three different aspects of the system. So the first aspect is the structure of the government, and how does that structure either help or hinder corruption? The second aspect: What kind of institutions exist to counter that corruption, and then the third area is civil society — how much of a role is there in terms of transparency and shedding light on these types of issues? Now for Brazil, it’s quite an issue in terms of structure of the institutions because in the 1988 constitution, they put into place what’s called a multi-party presidential system. So Dilma the president has an awful lot of power, but she’s got about 154 political parties to deal with. Quite a lot — it’s very pluralistic — and she needs to build a coalition. And so, in these types of systems, what you see is that presidents typically use positions, ministries, pork[-barrel] legislation; they have all sorts of tools to try to keep that coalition together. And so part of what we see in Brazil — which sometimes might just be seen as normal government but sometimes crosses over to the other side of being corruption — is how the structure of government breeds corruption in some sense and the type of system in Brazil really lends itself to. The system would not function if she were not able to allocate what political scientists call “coalition goods,” but the rest of us call “pork” or “jobs” or whatever. Now in order to counter that, the constitution put in place a few big institutional entities. The first is a branch of government. It’s the fourth branch of government in Brazil, and it’s called the public ministry. And the job of the public ministry is to hold the government to account on the part of society — on the part of citizens. So they’re kind of like a public prosecutor that’s constantly looking out over what is happening in Brazil and what the government does. And then there are other institutions that are more similar to our own, there are external auditing agencies and there are internal auditing agencies. And so there’s an interplay between what the government does and these entities, which are constantly calling the government to account, and that’s one of the reasons it takes so long to get things done in Brazil. So if you have a public procurement, something goes out, someone has a problem with it, they go to the audit entity and they say, “Hey we have a problem with this,” and the process immediately gets shut down. And so one of the challenges for Brazil is finding the right balance between the public powers and keeping a coalition together and the roles and the rights of those institutions meant to hold accountability and what’s happening now is we see a big move to bring civil society into the picture. So protests were part of that. Brazil was a founding partner with Hillary Clinton of the Open Government Partnership, which was really about creating access to information laws, getting information on budget on procurement and other such things out there. So corruption’s a problem. Some of it is what keeps things going, but institutions are increasing growing to try to create the checks and balances to make that work so is it the worst in the world? No. Is it perfect? No, but it’s on a road and things are improving.

Q: So let’s talk about Brazil’s West. How has the shift of population and agriculture to the West affected the overall Brazilian economy, and how does Brazil secure its access to the Pacific coast?

A: So there hasn’t been a huge shift of population to the West, to those western states. What you find is that most of the big agriculture is done by large industrial firms, and then you have small municipal communities, so it the techniques and the technologies that they’ve used have helped the family agriculture in other parts of the country but there hasn’t been a big movement. The movement has actually been out of the rural areas into the urban areas. Still, Brazil is about 85 percent an urban country. Access to the Pacific is an interesting question. There is now a big discussion underway over whether they should build a road from Cuiabá, which is in the western part of the country, up through Peru to get them to the Atlantic. It’s a project that is under discussion and we, the World Bank have not been asked to be part of that. It’s straight through the Amazon, so it will presumably be controversial, but there are questions under way over how do they get better access. Brazil is indeed building a lot of infrastructure from the West of the country across to the East so that a part and in addition to the big port of Santos in the South. There are more ports being built along that coast up in the North.

Q: Would you talk a little bit about China’s involvement with Brazil? And let me also add the question of how does Brazil’s economy relate to its largest neighbors with Argentina and Chile, for example, Peru?

A: So interestingly, apart from Argentina, Brazil is not all that connected. Latin American integration is pretty limited, and that’s an issue. As an institution, we’ve been trying to work with the region on [that]. Argentina is a big export market for Brazil, but right now Argentina’s having its own little crisis so those exports have gone down, particularly automobiles, and that’s contributed a bit to Brazil’s slow growth. China and Brazil have a really interesting relationship so as we’ve discussed this week, China is a big commodity consumer and a lot of Brazil’s exports, particularly soybeans, have gone to China. But as China shifts its own economy from an investment-based economy to a consumption-based economy, that creates opportunities for Brazil to come in and take up some of those markets that China might be leaving. Brazil is a consumption-based economy, and needs to move to an investment-based economy. So I often joke with some of my government counterparts that we need to create, we call it “Chizil.” Which is a connection, a breed of China plus Brazil. If we could get China to have sort of Brazil’s social and environmental sense of things and if we could get Brazil to have China’s planning capacities together it’d be perfect. But China’s a big player in Brazil and Brazil is important to China, so there’s a very strong relationship there. You see that more and more with the BRIC’s Bank and a few other things that are coming about.

Q: What influence does the military have in the development of policies and the governing of Brazil, and could you compare that to other Latin American countries?

A: So since the fall of the dictatorship in the mid-‘80s, Brazil’s military has been quite contained and relative to other South American countries. From my perspective, the colleagues in the back corner might know a little more than I. It’s a relatively benevolent military. It covers the border. It helps out in Haiti. It does almost public service. It’s never had a war since the late 1800s with its neighbors, and so while some elements of deep sea research etc., etc., are carried out by the Navy, there’s not a great engagement by the military with the broader economy at large.

Q: So what is the health care spending relative to United States and Europe, and how do citizens fund their health care?

A: Okay, so health care in Brazil: There is a universal healthcare system. It’s funded publicly. Different levels are provided by different, so big hospitals are provided by the federal government, smaller hospitals by states, and then clinics and things like that through municipalities. About 10 percent of expenditures go down through the system to these different entities, but what you find is that the services in some places are very good — you can always get attended to, but a lot of people have turned to private hospitals. And so there is a burgeoning industry of private health care. What we find is that the way the public system is managed, directors of hospitals usually don’t have much control over resources, over staff, over how things are done, and that is starting to shift. It’s not quite as controversial a topic as it is in the U.S., but it is a topic in which there is a lot of discussion. And again, this notion that it’s reasonably well-funded — it’s meant to be universal — but the provision of services, according to what the original intentions were, leaves a lot to be desired.

— Transcribed by Carson Quirós

 

Editor’s Note: Deborah Wetzel offered to answer some unasked questions from her lecture after the fact. Below are those questions and her answers, provided by email.

1. What cultural and economic factors made it easier for Brazil to reduce poverty and inequality than the U.S.? 

Some of the factors that made it easier for Brazil to reduce poverty and inequality include: a dedicated focus to this issue on the part of the Brazilian government after 2003, following centuries of severe inequality in Brazil. The Federal government in Brazil was able to take the lead in designing a program that the states, but mostly municipalities, were able to implement. This included a detailed registry called the Cadastre Unico, which identified the name, address and telephone number of poor families– this registry allows them to both target other programs to the poor and to monitor and evaluate the program. The Cadastre Unico has been an important component of the success of Brazils’s program, which has low levels of fraud and corruption– 98 percent of the resources reach the intended recipients.

2. Could you describe how the World Bank’s activity in Brazil has evolved? What is the public perception of the institution? 

The World Bank’s program in Brazil continues to be one of the institution’s largest programs– financing projects and programs worth about US$ 2-3 billion per year in the public sector. Our private sector arm, the International Finance Corporation, invests about  US$ 2 billion in various private sector activities. Over the last five years our program has shifted from financing projects at the level of the federal government to working primarily with the states. the programs are also more concentrated in the Northeast, where the states are significantly poorer. All of our work is focused on support ingle forts to reduce poverty and supporting an increase in shared prosperity, and include a variety of areas such as helping to strengthen public and fiscal management; improving public service delivery in education, health and transport; supporting the reduction or regional and urban inequalities and in helping states improve their management of natural resources. The World Bank also carries out a significant amount of analytical work to help share global lessons of development and to play a convening role, bringing together different countriountries working on the same issues so that they can learn from each other’s experience.

3. Could you speak about why so many Brazilian companies are small, and how that affects the economy?

There are a variety of reasons why companies remain small in Brazil. First, there is a simplified tax regime for small firms and the regulatory environment can become much more complicated when firms increase in size. Second, because of relatively poor infrastructure and logistics, it is often easier to have a small firm servicing a smaller regional area than developing a firm that reaches a broader regional area, but may have difficulty in delivering its product. This is a common issues in many developing countries, where there are a some very large firms and many small firms, we refer to it as the “missing middle”.

4. What role does tourism play in Brazil’s economy?

Brazil has huge potential for its tourism industry, as highlighted by the recent World Cup, which drew hundreds of thousands of tourists. Given our focus on poverty reduction, the World Bank does not extensively on tourism in Brazil because it tends to be an industry focused on the high end of the market.

5. How would the leading presidential candidates differ in their strategy to restore economic growth? 

(As Paulo responded to this in the Q&A on Friday, I’ll leave this one.) Read Paulo Sotero’s Q&A here.

6. Is Brazil’s government pushing certain industries through subsidies or leaving it to laissez faire? What industries are being pushed? 

In recent months, Brazil’s government has provided incentives for a variety of industries including the automotive and consumer durables industries. This is part of a package of measures to support the economies continued growth.

7. There are reports that strong economic growth is happening in the northeast of Brazil. Are those reports accurate, and is the growth limited to the coastal capital cities? 

The Northeast of Brazil is indeed growing faster than other parts of the country, most states are growing between 3 to5 percent, which is higher than the national rate. Part of this is due to these states “catching up” with the rest of the economy. While coastal cities such as Recife,  Salvador, and Fortaleza are important urban centers and are growing,there is much growth in agriculture and in some cases industry in the non-coastal cities. Foreign investors are also seeing the opportunities in the Northeast and have started to bring large investments there.

8. Is Brazil one of the world’s leaders in the development of sustainable energy? Does the impetus for innovation come from the private or public sector or both? 

Brazil’s focus on sustainable energy comes from both the public and private sectors. Given the effect of the oil crisis during the 1970 and 80s on the Brazilian economy, there is a strong desire to reduce the country’s dependence on outside sources of eneof energy. Also given Brazil’s abundant  resources and significant environmental riches, Brazilians tend to be more attuned to the importance of environmental sustainability. There is a broad consensus across Brazil that there is a need to incorporate environmental sustainability into the development of its energy.