PROGRESS IN THE STRUGGLE FOR MORE MEANINGFUL DEVELOPMENT There are two faces of development in Brazil. World-competitive industry coexists with stagnant, protected sectors. Modern agriculture coexists with low-productivity traditional practices. But Brazil is in the midst of a spurt of economic development that might herald a lasting transformation for a country often considered synonymous with inequality and unmet potential. Economic growth has returned, health and education have improved markedly, the country's democratization has proved durable, and inequalityamong the highest in the worldhas at long last started to fall. But there is still a long way to go to achieve genuine development in Brazil. Many Brazilians have been frustrated with the uneven pace of development and are known for telling self-deprecating jokes such as "Brazil is the country of the futureand always will be." Brazil has even been cited as an example of a country that has experienced "growth without development." But despite huge inequities, Brazil has made economic and social progress and should not be tarred with the same brush as countries such as Pakistan, Saudi Arabia, or Gabon that have had less social development for their levels of growth and investment. Extremely high economic inequality and social divisions do pose a serious threat to further progress in Brazil. But there are growing reasons to hope that Brazil may overcome its legacy of inequality so that the country may yet join the ranks of the developed countries. Brazil is of special interest in part because its growth performance from the 1960s through the early 1980s was the best in Latin America, with at least some parallels with East Asian export policy and performance, although Brazil had a larger role for state-owned enterprises, much lower education and other social expenditures, and much higher inflation. Brazil's performance is followed widely in the developing world, as it is the largest and most populous country in Latin America with some 193 million people, it is the world's fifth-largest country in both area and population. Brazil is consolidating its role as the lead country in the Latin America and Caribbean region it is a key member of the G20 leading economies addressing the aftermath of the financial crisis and one of a group of developing countries pushing for fairer international trade rules. It is one of four influential countries referred to by financial analysts of emerging markets as the "BRICs" (Brazil, Russia, India, and China). Although over two decades of military rule ended in Brazil in 1985, an ongoing debt crisis, years of stagnant incomes, and extremely high inflation followed. It took drastic policies to reduce inflation, and incomes continued to stagnate in the aftermath. The 1980s and the 1990s have been described as "lost decades" for development. So the recent signs of palpable progress, especially since about 2004, have been welcomed with relief and growing enthusiasm among many Brazilians. Although the country remains politically divided between the center-left and the center-right, a striking convergence has been achieved on policies agreed to be necessary for equitable and sustained growth, ranging from active poverty reduction programs to relatively orthodox monetary policies. The economy has been booming, in part due to commodity exports to China, including soybeans and steel. One persistent worry is whether the economy could continue to grow rapidly if commodity prices, which have been much higher in recent years, revert to their very long term trends for decline. But despite the nation's early and now resumed growth, other indicators of development in Brazil lagged, eventually undermining growth prospects. Benefiting from much higher incomes than Central American countries and spared the destructiveness of civil war, Brazil, it would seem, should have been in a much better position to fight extreme poverty and improve economic equity and social indicators. Instead, the country has continued to see a higher percentage of its population in poverty than would be expected for an upper-middle-income country, and despite some recent improvement, Brazil remains one of the countries with the highest levels of inequality in the world. So how should Brazil's development performance be evaluated and future priorities chosen? Income and Growth Growth is generally necessary, though not sufficient, for achieving development. In 2007, Brazil's per capita income was $5,860. Using purchasing power parity, its average income was $9,270, about one-fifth of that of the United States but more than eight times that of Haiti (World Bank data). Growth has been erratic, with substantial swings over time. Data for growth of gross domestic product (GDP) per capital are sometimes presented for the periods 1965-1990, when for Brazil it was 1.4%, and for 1990-2000, when it was 1.5%. This appears to suggest a remarkable stability. But the former figures combine the booming years from 1967 to 1980 and Brazil's "lost decade of development" of the 1980s. Nevertheless, performance through this period was still better than most other countries of Latin America. And in 2000-2008, annual per capita growth rose to 2.6% (World Bank data). Brazil has had an export policy stressing incentives for manufacturing exports, as well as protections for domestic industry, with numerous parallels with Taiwan and South Korea in their earlier formative stages Its percentage share of manufactured exports in total exports grew dramatically, reaching 57% in 1980, although it dropped dramatically during the lost decade of the 1980s. Although the share of exports increased again to reach 54% by 2000, these still largely represented processed foods and ores. By 2007, this figure had fallen to 47%, reflecting in part an increase in commodity prices manufactured exports also continued to rise. Brazil's prolonged status as a highly indebted country was a substantial drag on growth performance, as were continued problems with infrastructure. Today, however, the Industrial, Technological and Foreign Trade Policy (PITCE) program is actively working to upgrade the quality and competitiveness of Brazilian industry. High and growing taxes may have also slowed formal-sector employment growth. The overall tax burden increased from about 25% of gross national income to nearly 40% in the decade from 1993 to 2004. Payroll taxes are high and as many as half of Brazil's labor force now works in the informal sector, where taxes may be avoided (and labor rights and regulation circumvented). However, Ricardo Hausmann, Dani Rodrik, and Andrs Velasco argue that Brazil does not lack for productive investment ideas, nor is concern about government behavior the factor holding back investment. Using their decision tree framework to identify the most binding constraints on economic growth Hausmann, Rodrik, and Velasco argue that Brazil has high returns to investment and is most constrained by a lack of savings to finance its productive opportunities at reasonable interest rates. In raising domestic savings, Hausmann has emphasized the importance of "creating a financially viable state that does not over-borrow, overtax or under-invest." Technology transfer is critical to more rapid growth, competing internationally, and beginning to catch up with advanced countries. Brazil has made notable progress. The country is viewed as being at the cutting edge of agricultural research and extension in commercially successful export crops such as citrus and soybeans. After a disastrous attempt to protect the computer industry in the 1980s was abandoned, Brazil has begun to see the expansion of a software industry, as also seen in India. But Brazil has not absorbed technology to the degree that East Asian countries have. Source: A supplement to Michael P. Todaro and Stephen C. Smith, Economic Development, 8th Edition, Boston, MA: Addison-Wesley, 2003.

QUESTION 2 (20 Marks)

Brazil has had an export policy stressing incentives for manufacturing exports, as well as protections for domestic industry, with numerous parallels with Taiwan and South Korea in their earlier formative stages. Its percentage share of manufactured exports in total exports grew dramatically, reaching 57% in 1980.

2.1 Discuss the importance of such an export policy in line with the five macro-economic objectives or policies. (10 marks)