Milken Institute Review 2Q10 Page 16

The Milken Institute Review

reach developed-country living standards,
and a reading of the global record of the last
half-century suggests that international capi-
tal flows are fickle that Brazil would do well
to generate a lot of that capital from domestic
savings.

Yet the country seems to be headed in the

other direction: Brazilians don't seem aware
that the savings rate must rise to meet the
ambitious spending plans of the government
without crowding out private investment.

Changing the perception that Brazil can

grow rapidly without sacrifice won't be easy.

For one thing, it flies in the face of recent ex-
perience: Brazil, after all, coasted through this
last recession on the strength of government-
induced consumption. For another, the focus
on the primary deficit as a measure of the

government's impact on aggregate demand is
becoming increasingly misleading. It has
been all too easy for policymakers and the
public to forget that the public sector is a
net drain on national savings.

In any event, it wouldn't be easy to alter the

government's fiscal stance, even if the need

were more widely understood. Brazil already
collects 36 percent of GDP in taxes almost
double the percentage of Mexico and close to
the percentage raised by Europe's welfare

states. Indeed, higher taxes at this point might
undermine incentives for private investment
and kill the golden gosling. Of course, tax
hikes seem a political nonstarter: the public is
bitterly opposed.

The most plausible place to start on a

quest to raise domestic savings is the public
retirement system. It runs huge deficits, and
simply requiring it to keep revenues in line
with outlays would increase national savings
as a portion of GDP by 4 percentage points!

What's more, some cuts in outlays seem only

fair: on average, public-sector pensions are an

astounding 10 times larger than retirement
benefits in the private sector.

education as catalyst
If savings rates can't be raised, perhaps the re-
turn on public investment in particular, on
investment in education can. Brazil spends
a larger percentage of its income on educa-
tion than most other developing countries.

Yet its ranking in educational outcomes re-

mains at the lower end of the spectrum, even
among countries in Latin America. The coun-
try has managed impressive gains in primary
and secondary enrollment in recent decades,
but without a corresponding advance in qual-
ity. Equally important, Brazil needs to rework
its priorities within the public education bud-
get priorities that now favor investment in
higher education over the provision of decent
schools for the masses.

* * *

Brazil's recent economic success has been

built on a foundation of paradoxes. The
economy is better governed today that it has
been in the past. A center-left government has
made great strides in correcting the injustices
that stranded millions of Brazilians on the
edge of subsistence in the midst of a culture
that celebrates material excess and it has
managed that task so far without undermin-
ing the economy's stability or productivity.
Enduring evolutionary change in the 21st
century, under a democratic Nova República,
no longer seems an impossible dream.

It has become increasingly clear, however,

that Brazil's future prosperity won't come
cheaply. If it is to achieve European or East

Asian living standards, it will have to alter the

deeply engrained habit of consuming today at
the expense of producing more tomorrow.

And thus far, no government conservative

or populist seems prepared to ask for the
requisite sacrifices.

t r e n d s