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GDS - lecture 3
Global Development Studies (Rijksuniversiteit Groningen)
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Economic development in Brazil: past, present and future – lecture 3
Can Brazil really take off (potential for socio-economic development) or will it always experience vôo de
galinhas?
 Vôo de galinhas  ‘chicken flight’ which is not a really impressive or long flight
The story in 2009 (optimistic)  positive things that would suggest that Brazil has taken off + would
achieve the type of development that South-Korea etc. had experienced in the past
 High growth rates since the mid 1990s  rapid economic growth
 Brazil was hardly hit by the 2008 (financial) crisis compared to other countries and forecasted to
grow rapidly in 2010
 Big new oil-field discoveries  potential to become large oil-producing economy + wealth
 Bolsa família  conditional cash transfers from the government for poor families + two main
conditions  if families do this, they would receive cash transfers  lift people out of poverty
(successful)
- Children need to go to school
- Children need to go to regular health checks
 Sensible (macro-) economic policies  taming inflation (keep at a low rate), autonomy central
bank (make own choices away from politicians) and ability to control / stable capital flows etc.
 Open to foreign investment  many countries invest in Brazil
 No major social or ethnic divisions  as e.g. in India
 Awarded the 2014 World Cup organization  Brazil was awarded to organized the event that
year
So, many positive things happened at that time  suggests that the country has taken off and that Brazil
could achieve the type of rapid socio-economic development that South-Korea, Japan and Taiwan had
experienced in the past
The more recent story (2014-2015)  Brazil has blown it  all optimism was gone
 Stagnant economy  growth rate / GDP growth close to zero or even negative, so no positive
growth any longer
 Crippling business regulations
 A bloated (a soft not a developmental) state  criticism on role of the state + issues
- Absurdly generous pensions  to those who are employed by the state; you can go for
retirement at 54 years + 70% of your pay
- Infrastructure spending is as skimpy as its swimsuits  poor quality, very limited % of the
GDP and below global average (4% of GDP)
- Corruption and political instability
- Poor public services
 Don’t mention the 2014 World Cup  especially if you are German, do not mention it (7-1)
GDP per capita in Brazil + slide 6
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Red line  growth rates + right axis  below zero (economy is contracting) and above zero
(growth)
Blue line  GDP per capita
- 1950 - 1980  relatively quick growth
- 1980 – 2000  stagnant
- 2000 onwards  take off
- 2014  drop, because Brazil has blown it
Several vôo de galinhas (‘chicken flights’) + concepts / theories  role development
 High inequality
 Import substitution industrialization
 Debt crisis
 Technology and linkages
 Epidemiological transition  health
The origins of high inequality in Brazil
 16th century  Brazil sparsely inhabited by nomadic Indians + Portuguese set up extractive
institutions (settlers)
- Extractive institutions  type of colony setting where they wanted to extract the wealth
from particular locations  still recognizable by the country’s railways
- Versus inclusive (more favorable)  type of setting where they want to try to mimic the type
of institutions they have at home
- No favorable conditions to live there  diseases etc.
 First major export product?  sugar
- A single commodity dominated Brazil’s growth cycle (vôo de galinhas) until 20th century
- Only product available to export / dominated the exports  price fluctuations in this
commodity tend to have a big impact the overall income  higher risk
 Decentralized political-economic organization  large coastal sugar plantations (close to the
coast  easier to export the sugar) + concentrated assets and income
Gini index – income disparity since world war II + slide 9
 X-axis  time / years
 Y-axis  measure for income inequality
 The higher the index, the more inequal the income is distributed in an economy
 Brazil has the highest index  highest inequality (+ Mexico)
 ‘Bel-India’  part of Brazil has living standards compared to Belgium and a part has standards
compared to India  shows how badly the income is distributed  high income inequality
 Origins in the 16th century
Industrialization drive from 1946 till 1961 (after WOII)  one of first periods of Brazil taking off
 Drive for establishing an industrial sector  importance of this sector, see lecture 2 + Lewis
model
 Many developing countries pursue this type of industrial drive after WOII
Focus on industrial sector
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Dependency theory  not only focus on the agricultural sector which was the ‘core’, but focus shift
 especially in Latin-America
Shift export composition from sugar and other agricultural products towards manufacturing
products (could bring welfare as well) and as people grow richer, they also demand more
manufactured goods  (higher) demand driver of structural change + income elasticity
They implemented this by large-scale investment  ‘big push’
 Infrastructure + public expenditure programs  government set up major infrastructure spending
programs + establishment of major industries + focus on heavy industry
- Embraer  also established during this period
 Industries
Wide range of government planning and intervention
 Credit allocation  BNDE (national bank of economic development
- Government involvement  telling state-development bank how they should allocate their
credit; ‘give it to this firm and this industry etc.’
 Product licensing
- Some entrepreneurs got an exclusive license to produce particular products  profitable
 Set up of state owned (big) enterprises
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Import-substitution industrialization policies  aim to achieve industrialization by substituting those
manufactured products that you used to import by domestic firms producing those products
Principle mechanism (in Brazil) of restricting such imports of manufactured goods  foreign
(currency) exchange controls / money has to be exchanged as it flows from country A to B
5-category system of priorities  prioritize particular goods that people wanted to buy from abroad
- 1. Medicines, insecticides and fertilizers  essential, so it was made easy to exchange + trade
- 2. Fuels, essential foodstuffs, machinery
- 5. ‘Superfluous’ (‘overbodig’) consumer goods  goods that are difficult to buy from abroad +
difficult to exchange currency in order to import these type of products  products that, for
example, are easy to produce at home
Law of Similars (registering of similar products) was used as basis of tariff protection and to classify
products in a high foreign exchange category
- If a Brazilian entrepreneur could indicate that he/she was able to produce a similar product to
what was being imported, the product could be classified as category 5  discourage the import
of the particular goods and promote producing it domestically
Favorable policies towards foreign capital  attraction of a large and highly protective market
- They wanted foreign capital to come in to Brazil, establish the firm in their economy and use
those profits to reinvest and expand that manufacturing industry within its economy  foreign
firms could come in and produce in Brazil
- They did not want foreign firms to compete with domestic firms
Post-war industrialization drive resulted in very high growth rates + slide 12
 GDP per capita (blue)  rapidly increased at some point + positive for a period of time, however it
did not last + chicken flight
 GDP growth rate (red)
Why did the rapid economic growth not last?  although there was a growth to some extent, there were
already underlying problems!!
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From stagnation and boom to the debt crisis (1961 – 1985)
 Issues building up in 50s already
- Neglect of agricultural development  important to have productivity growth in agriculture as
well, especially in early stages of development  there was an unbalanced growth strategy
- Rapid rural-urban migration  swelling of cities which was difficult to manage
- Increase in inflation
- Rising inequality  protection of some entrepreneurs (benefitted)
- BOP (‘balance of payments’) pressures  drive for industrialization + ‘big push’ was mainly
financed by investment from abroad and by loans which were taken from abroad  majority
short-term debt + high interest rate  pay to foreigners + the foreign firms that came in
transferred the profits they made back abroad  Lewis model + reinvestment of profits (key),
but many foreign firms did not do this  capital was flowing out the economy which led to
problems with the BOP
- Brazilian firms were not really competitive on the international market as the quality was often
too poor (entrepreneurs protected by the policies)  import-substitute strategy, but you would
also want them to export those products in order to compete on the world market
Led to stagnation
 1961-1964  politic crisis, military coup  until 1985
 Stabilization measures + lower pressure on the BOP  curtail government expenditure on
infrastructure, increase tax revenue, credit tightening (gave less credit) and squeeze wages (slow
down increase in wages for workers)
 Boom from 1968-1973  helped to some extent as there was a GDP growth until 1973 for example
From now on, situation worsened and got really problematic
1973  1st oil shock, impact and reaction of Brazil
Yom Kippur war (surprise attack of Arabic nations on Israel) and OPEC oil embargo  price of oil rose
from 3$ to 12$ per barrel (4-fold)
Brazil had two options to choose from
 Accept lower growth rate + rapid increase in the price of oil that they imported and thereby diminish
its non-oil import bill  impact on purchasing power / foreign exchange was used to import oil
(category 2)
 Continue to achieve high economic growth / drive to industrialization, by depleting foreign exchange
($US) reserves and piling up foreign debt / more loans from abroad  in order to purchase the oil
from abroad  Brazil had chosen this option
1979  2nd oil shock and rise in interest rate by US
 Iranian revolution (1979) and Iran-Iraq war  oil shock + major impact on supply of oil
 Tightening of US monetary policy  US responded by raising its interest rates + contractionary
policy within the US
- Most of Brazil’s foreign debt was contracted on flexible interest rates  short-term debt
outstanding in $US and now they had to pay much higher interest rates on those loans  too
much to handle as they did not have enough financial resources to pay the interest
- Brazil tried to avoid a complete collapse of the economy, but was eventually submitted to an IMF
austerity program  IFM gave Brazil the help they needed, but only in return of implementing
an austerity program
Austerity program
Washington Consensus  1980s – 1990s
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Brazil had to curtail their expansion for loans and government expenditures
Implemented voluntarily or by ‘conditionalities’ attached to IMF and WB support  and in the WTO
rules  follow a type of voluntary conditions of the IFM and World Bank in return for financial help
In order to they had to increase specialization and become more technical efficient, lower
involvement of the government; reduce red tape, market distortions and corruption
Conditions set up by IFM
- Reduce qualitative and quantitative restrictions on trade
- Allow more FDI with fewer conditions
- Reduce domestic bank (financial market) regulation beyond stability concerns
- Allow free international capital movement  easier movement
- Privatize industry  get rid of state-owned enterprises
- Free exchange rate  get rid of foreign exchange controls
Structural adjustment programs
Socio-economic consequences of the Washington Consensus
 Decline public employment  employed by the state
 Increased prices of food and energy
 Cutback on health, infrastructure and education expenditure
Losers
 Domestic industry owners (entrepreneurs) as their products often had poor quality, so they could
not compete in the world market
 Role of unions was diminished
Winners
 Exporters
 Agriculture as farmers could easier sell their products abroad + increase in income
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Industrialization drive in Brazil was potentially beneficial, but underlying issues eventually led to a
collapse  help from IFM and World Bank  structural adjustment programs
Many other developing countries have similar experiences
Oil price shock has also led to technological change in Brazil
Theories on technology and growth  how does technological progress influence growth?
1. Solow model  basic model of economic growth
 Technology grows at a stable rate + freely flows across countries  countries will converge towards
each other in terms of income per capita
2. Advantages of backwardness  conditions for technology diffusion
 Backwards  you do not need to invent the technologies yourself, but you should create the right
conditions; educate people, rights policies, increate socio-economic capabilities  take advantage of
/ absorb technologies created elsewhere  opportunity to rapidly develop
3. Evolutionary and endogenous growth theory  investment in R&D and spillovers
 If you actively invest in developing technology yourself, this will accumulate and technological
progress will come more rapidly
Could lead to difference in GDP per capita between countries over time!
National systems of innovation
Technological innovation  sugar cane + its potential to produce ethanol
Brazil’s ethanol program
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1970s
 International decline in prices and demand for sugar  23% of exports in 1974
 Rapid increase in oil prices (consequence of war in the Middle East)  40% of imports in 1974
 balance of payments problems; amount of foreign currency reserve a country has to purchase
goods from abroad
 1979  ProAlcool (National Alcohol Program) reinforced and turn sugar into alcohol / ethanol which
can be used as fuel for vehicles  technological development which had a positive impact on Brazil’s
development in general
How to do this?
Linkages in Brazil  fuel and transportation became more complex
 Economy in the first place + slide 21
 Economic structure became more complex + new industries developed which produced a new type
of manufactured products
 Technological innovation  sugar was not only grown for sugar export any longer
 Oil price shock + its positive effect
 Oil price shock + its negative effect 
conditionalities set up by the IFM etc.
Brazil’s alcohol program
Policy actions
 New technologies
 Fiscal and credit advantages for buying ethanol – vehicles
 Guaranteed demand for ethanol
 Cheap capital for distilleries and sugar cane plantations
 P(other agri) < P(sugar cane) < P(ethanol) < 0.65* P (gasoline)
Huge success  in 1984 ethanol accounted for 43% of fuel consumption, and over 75% of car sales
By 1990  oil price down, sugar price up  shortage of ethanol + rationing
1995 again  shift back to petrol engines and blends (up to 22%)
2000s  second chance, based on ‘green advantages
+ slide 24-25
Great example of how technology can influence economic growth (!!)
A brief digression on population and health  in the context of Brazil
Malthus’ curse  model
 Earn more, eat more  eat more, multiply  resource scarcity & production declines
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If population grows faster than income grows, moving to higher per-person income levels is not
possible
Trap  countries can be stuck at a low level of
GDP per capita due to the dynamics with
respect to the population growth and total
income growth
(Initially) low level of development  grow
richer / higher income per capita if your
population growth is close to zero (high deathand birth rates) + increase in income is higher
than the increase in population growth 
towards point S
Slight increase in income could lead to the population growing more rapidly  improve in
income leads to less people dying, but the birth rate remains high  population grows faster
compared to the income growth  income per capita will move towards an equilibrium S (trap)
Only beyond point T  income grow is higher than the population growth and the income per
capita would continue to increase + birth rates dropping such that the population growth could
decline  income growth > population growth  Y / P is increasing over time
Income per capita is the growth rate of the income divided by the growth rate of the population
How can you affect this?  birth control mechanisms; bring down the population growth
China + birth control mechanisms  increase the number of people working relative to the
number of people depended on those who do work  favorable effect
X-axis  level of economic development which is income per capita
Y-axis  growth rates
Line 1  growth rate of the population
Line 2  growth rate of total income
How does income per capita relates to economic development?
GDP per capita versus life expectancy at birth + slide 28
 Circles are proportional to population size
 Curve  relationship / correlation between life expectancy and GDP per capita
 Life expectancy rises rapidly at low levels of GDP per capita, but tense to flatten as the countries’
GDP per capita grows
 Assumption: as you grow richer (higher GDP per capita), your life expectancy (growth?) starts to
flatten
 Assumption: almost no relationship between life expectancy and richer countries  however,
this is wrong; life expectancy could still increase as a country grows even richer (?)
Epidemiological transition
 Countries on the left of China are in a phase of epidemiological transition + infectious diseases
- From a situation with infectious diseases
- High child mortality rates, low life expectancies, high fertility / birth rates
 Countries on the right of China are in a phase that is characterized by chronic diseases
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To a situation with chronic diseases  predominance of heart disease and cancer
Low child mortality rates, high life expectancies, low fertility rates
Related to  global factors (spread of technologies) and domestic factors (health care systems and
income)
Same observations as graph in slide 28  different scale
GDP per capita versus life expectancy at birth + slide 30-31  more linear
 All countries do see an increase in life expectancy  positive correlation between growing richer
and having an increase in life expectancy
 South-Africa  comparable to the status of Brazil as being Bel-India  given its level of
development, one would expect a much higher life expectancy, but this is not the case as so
many people that live at low levels of GDP per capita
 Russia is below the line  excessive alcohol consumption
 All observations of 2010 are above all the observation of 1960  for a given level of
development (GPD per capita) in 1960, a country would have a lower life expectancy compared
to the life expectancy a country has with the same level of GDP per capita in 2010
- Suggests that there is another factors that is responsible for driving this increasing in life
expectancy  diffusion of medical knowledge  has led to the same level of GDP per capita in
combination with a higher life expectancy
Relationship between health and development
Progress on health in Brazil + slide 32
 Life expectancy at birth and infant mortality
- Northeast of Brazil has a lower life expectancy compared to the Southeast
Factors affecting health
 Role of income and nutrition
 Education  of mother
 Improvements in medical technology
- Curative
- Preventive
- Combating vectors
 Health care access
 Role of hygiene, sanitation and water supply
Sources of health improvements / mortality reduction + slide 34
 Income
 Educational level of adult females
 Generation and utilization of new knowledge
Epidemiological transition in Brazil
 Still an epidemiological pattern  country is still in this phase
 Infectious and parasitic diseases (e.g. cholera, malaria) due to lack of adequate sanitary
infrastructure
 Why? inequality (characterizes Brazil)  middle and upper class can afford health care as in highincome countries; urban poor and rural population have limited access to public health services
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Vôo de galinhas
1946-1961
Industrialization drive
1961-1964
Stagnation
1968-1973
Boom
1973-1985
Debt crisis + adjustment program
1985-1994
Inflation and economic drift
1994-2012
Brazil takes off
2012-now
Brazil has blown it
1985.1994 inflation and economic drift
 (Hyper)inflation runs out of control  rapid increase in prices
- Characterizes Brazil and other developing countries, for example Turkey
 Two views  what leads to hyperinflation
- Monetarists (orthodox / standard)  MV = PT  inflation rate is a function of the money
supply in your country / how much money a country brings into its economy  printing
more money would lead to inflation
- Structuralists (heterodox)  inflation results from monopoly power of firms, unions and the
state  government should put in price controls in order to control the inflation
 Different policy implications  tighten monetary policy vs price control in monopolized sectors
 Factors that influenced inflation  inflationary finance (government expenditures being financed
by putting the printing presses on  orthodox view), oil price shocks (import prices had risen?),
US monetary policy, currency devaluations and natural disasters
1994
– 2012  the real plan and take off
 The real plan successfully ended hyperinflation in Brazil
- Fiscal adjustment  commitment by the government to not finance its expenditures by
putting the printing presses on again
- New currency was being introduced + fixed conversion to $US  Real
 Ah, and yes, in 1994 Brazil won the World Cup  beating the Dutch, 2-3 in the quarter final
New policies + rapid economic growth after the defeat of hyperinflation  conditional cash transfers,
Bolsa Familia, more restrained monetary policies etc.
After 2012
Some of the impulses behind Brazil’s previous boom played themselves out
 The pay-off from ending runaway inflation
 Opening up to trade
 Commodity price rises
 Big increases in credit and consumption
What is holding back Brazil’s take off / sustained economic development?
 It is difficult for entrepreneurs to do business  Brazilian firms face on of the world’s most
burdensome tax codes hampering competitiveness (in international market) and investment
(expand)  ‘to my friends, everything, to my enemies, the law’
 Government spends too much on pensions (should be reformed) and too little on infrastructure
(increase expenditures)
 Political reform  ending patronage and making legislators (government) more accountable
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Many factors hinder the economic development of Brazil, but the factor that is binding is the lack of
invest by entrepreneurs in its economy
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