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On Monday, July 13, 2020, Arminio Fraga joined Princeton’s Bendheim Center for Finance for a discussion of Brazil’s economy leading up to COVID-19. Fraga is a member of the Group of Thirty and the former president of the Central Bank of Brazil.

Watch the full presentation below and download the slides here.  You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

Unlike the U.S. or Europe, Brazil was only just emerging from a massive recession when the pandemic hit. In the lead-up to the 1980s, Brazil suffered from an economic growth model that was based on a closed economy with no focus on education or structural inequality. In addition to macroeconomic instability, there was also an excessive presence of state in the economy. While there was some progress made on these issues in the 1990s, things reverted when “spending is life” became the slogan for government policy. As a consequence Brazil suffered a massive fiscal collapse starting in 2014. See chart of Brazil’s budget balance.

Education is a major driver of extreme wealth inequality and poor economic outcomes in Brazil. The average years of schooling in Brazil is about half that in the U.S., despite the fact that spending on education is about 6% of GDP. The quality of governance, difficulty of doing business, and limited social mobility also play a role in poor economic outcomes. Brazil ranks quite low in these areas on a worldwide basis. See charts on inequality in Brazil.

The COVID-19 health crisis, another massive recession, a political crisis, and weak leadership have all combined to create a “perfect storm” for Brazil’s economy. Brazil’s three branches of government are at war with each other. Moving forward, major risks include rising debt, slow growth, massive social tensions, and the quality of Brazil’s democracy.

Massive COVID emergency spending in Brazil was necessary, but might have been done earlier and better. The majority of fiscal outlays were directed toward workers and relatively little credit was given to firms. As a result, Brazil’s primary budget balance deficit this year will be 12-13% of GDP. See charts on budget deficits and government debt as share of GDP.

Brazil has engaged in a form of “tropical QE” by shortening the maturity structure of its debt. This makes sense given the steep yield curve if one wants to build a bridge to a world where the problems plaguing Brazil are fixed. Unfortunately, those reforms have yet to materialize.

A deficit in leadership is creating a crisis, but Brazi’s institutions are responding and there’s reason to be hopeful. A free press, while under attack, is also doing it’s job. Young people are engaging in politics and some reforms are underway. Fraga notes that Brazil is in need of a more efficient and progressive tax system.