Milken Institute Review 2Q10 Page 13

Second Quarter 2010

school, has improved the lives of some 40 mil-
lion Brazilians and cut poverty by one-quarter.

The hope, in this country that has long toler-

ated outrageous levels of inequality, is that the
higher standard of living will pay dividends to
all in the form of greater economic mobility,
as poor families manage to invest more in
their own health and education.

Everyone expected the antipoverty initia-

tives. What is more striking is how Lula's sup-
port of macroeconomic fundamentals, com-
bined with a big dose of fiscal stimulus, allowed
the Brazilian economy to skate through the
worst of the global recession with relatively
little hardship.

Lula and his supporters were energized by

the crisis in particular, by the opportunity it
afforded to show that the left-center could
manage a market economy well even in diffi-
cult times. Activism was the order of the day.

The government created tax incentives to pro-

mote sales of automobiles and other con-
sumer durables. The National Bank for Eco-
nomic and Social Development filled the gap
left by the inability of private banks to offer
credit to businesses. The Programa de Acelera-
ção do Crescimento, Lula's flagship public-
investment program, increased spending. An
expanded version was unveiled in March 2009.

Not surprisingly, the combination of in-

creased spending and tax incentives blew a bit
of a hole in the budget. However, Lula paid
more than lip service to fiscal discipline: in

2009, the government could still report a pri-
mary fiscal surplus, albeit one that required

some accounting gimmicks to work.

economic insulation
Meanwhile, regulatory reforms put in place in
the 1990s successfully insulated the Brazilian
financial sector from the worst consequences
of the global meltdown. Two big banks, Itaú
and Unibanco, were merged to create Brazil's

largest financial institution; others were in-
corporated into the Bank of Brazil.

And thanks to international reserves of

more than $200 billion accumulated during
the years immediately preceding the global
recession, there was never much question of
domestic financial woes triggering capital
flight. In fact, Brazil remained a favorite of in-
ternational investors through the crisis so
much so that exporters worry appreciation of
the Brazilian currency (the real) is putting
them at a disadvantage in competing with

Asian manufacturers. Thus, while Lula's pro-

claimed goal of decoupling the Brazilian
economy's fate from that of its international
trade and investment partners could not be
entirely realized, the downturn did prove to
be mild and short in comparison with reces-
sions in developed economies.

While there is broad agreement that the

economy will expand at a healthy 5 to 6 per-
cent rate in 2010, predicting what will happen
thereafter is problematic. The forecasters at
the new bank, Banco Itaú Unibanco, argue that
an increase of 2 percentage points in interest
rates will be sufficient to contain inflation,
leaving enough room for healthy economic

the brazilian economy at a Glance

GDP ($ at official exchange, 2009): $1.48 trillion

GDP per Capita ($ of purchasing power, 2009): $10,200

GDP share lowest 10% (2007): 1.1%

GDP share top 10% (2007): 43%

life expectancy at birth (years): 72

total Fertility rate: 2.2

Population in Cities: 86%

literacy rate: 89%

infant Mortality (per 1,000 births): 23

Public Debt (% of GDP, 2009): 47%

exports (2009): $159 billion

imports (2009): $136 billion

oil Production (millions barrels/day, 2008): 2.4 million

oil Consumption (million barrels/day, 2008): 2.5 million

source: CIA World Factbook