Brazil believes that tackling social inequality is paramount to guarantee sustainable development. To accomplish this goal, the country is undergoing a deep restructuring of its economic and social structures. This follows the decision to modernise the economy rationally and pragmatically, by using part of the proceeds of increased tax collection – brought about by stabilisation and growth – to invest in human capital.
This is enabling the poorer segment of society to enjoy the results of economic growth for the first time, since consistent lower inflation is protecting real wages. At the same time, job creation is now substantially higher than in the difficult stop-and-go years that characterised the Brazilian economy in the past. Brazil is creating an average of 1.3 million new jobs a year, the total wage bill is growing at about 8% in real terms, and household consumption is growing at 6% per annum.
Purchasing power
All of this has happened with a benign social distribution effect whereby the lower the income, the higher the growth. Official data show that income distribution is improving considerably. In 2005, for instance, while total income grew 4.6%, the income of the bottom 50% on the income distribution scale rose by 6.6%. At the same time, statistics demonstrate that poorer people are increasing their purchasing power substantially.
For three consecutive years (2004 to 2006), inflation for families who earned up to six minimum wages was consistently below the inflation of those families earning up to 40 minimum wages. In 2006, these inflation rates were 2.81% and 3.14%, respectively.
Social progress has also been helped by the fact that, as a result of a strong commitment by President Luiz Inácio Lula da Silva towards his constituency, minimum wages have risen substantially and a social safety net has been expanded countrywide through a programme that provides minimum income to those not in the formal job market. This alleviates poverty and provides better education and health conditions for about 11 million families.
Two important changes in Brazil’s economic fundamentals are allowing it to reduce social inequality through this new approach.
First, unlike previous experiences of debt-led growth, Brazil has a current account surplus that has enabled it to build international reserves higher than the international sovereign debt and that are now approaching its total external debt, while public debt has fallen as a share of gross domestic product (GDP).
Second, inflation expectations for the next three years are slightly below the inflation target, and the real market interest rate has been falling steadily as a result of the improvement in perceived risk.
These two conditions result from the implementation of consistent fiscal and monetary policies, which finally led to stabilisation after 2003. Since then, and following a year of low growth, the economy began to take off. In 2003, Brazilian GDP grew around 1%. Nevertheless, for the following three years, growth averaged 4.1%, double the average of the 1980s and 1990s. The central bank’s forecast for 2007 is 4.7% and this time growth is mostly anchored in very solid ground.
Little stability
In the past, Brazil had not experienced a long period of economic stability. In the past few decades, it enjoyed periods of high GDP growth funded by increasing money supply or by external sovereign borrowing. The result was high inflation and, in the end, a foreign exchange debt crisis in the early 1980s. Only after 1999, when Brazil reached an agreement with the International Monetary Fund, did it make a serious fiscal reform.
The new Brazilian model involves a responsible and pragmatic approach to macroeconomic management, with a strong social priority, aimed at promoting job creation and lowering inflation, so increasing the purchasing power of the average worker. Economic stability has brought faster growth, and had a favourable impact on public finances. This allowed the increase in tax collection to be partly used for an important income distribution programme, which, for the first time in a century or so, is substantially improving the income distribution ratios.
Henrique de Campos Meirelles is governor of the Brazilian Central Bank.
