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Washington, D.C.- A new research paper from the Center for Economic and Policy Research examines the causes of Brazil’s recent economic slowdown and finds that policy choices rather than external factors have been the most important cause. The paper shows that the sharp slowdown that Brazil has experienced since 2011 is overwhelmingly the result of a significant decline in domestic demand that resulted from policy choices made by the government. It concludes that this decision to slow the economy was not necessary as there was no external constraint, such as a balance-of-payments problem, that warranted it.

“There have been enormous economic and social gains since the Workers' Party took office in 2003, in terms of reducing poverty (by 55 percent) and extreme poverty (by 65 percent), increasing employment, income growth, and some reduction in inequality,” CEPR Co-Director Mark Weisbrot said. “However, these gains are being eroded and are seriously threatened if the government continues on its current path.”

The paper, “Aggregate Demand and the Slowdown of  Brazilian Economic Growth from 2011-2014,” by CEPR Senior Research Associate Franklin Serrano and economist Ricardo Summa, looks in detail at the sharp slowdown in the Brazilian economy for the years 2011-2014, in which economic growth averaged only 2.1 percent annually, as compared with 4.4 percent in the 2004-2010 period. The authors argue that the slowdown overwhelmingly results from a sharp decline in domestic demand led by government policy, rather than from a fall in exports or from any change in external financial conditions.

The paper notes that the Brazilian economy had room to expand after 2010, but the government chose to reduce aggregate demand through changes in monetary, fiscal, and macroprudential policies. These included:

•    The Central Bank began a cycle of interest rate increases after February 2010 that lasted until August 2011, raising the basic nominal interest rate from 7.5 percent to 13.5 percent. Nominal interest rate increases and macroprudential measures reduced the growth of credit, and helped to end the consumption boom.

•    At the end of 2010, the government promoted, through a sharp reduction in the growth of public spending, a strong fiscal adjustment in order to increase the primary surplus and to meet the full target of 3.1 percent of GDP in 2011.

•    In 2011, public investment, both of the central government and state-owned companies, fell dramatically, by 17.9 percent and 7.8 percent in real terms, respectively.

The government’s contractionary policies led to a pronounced decline in private investment as well, so that total investment (public and private) fell sharply.  

The paper explains that even though the economy was already slowing in 2010, the argument was made that fiscal tightening was necessary in order to have a large reduction in interest rates. The lower interest rates, combined with tax cuts and other incentives for businesses, were expected to then allow the private sector to lead growth by stimulating private investment and also export-led growth as the real exchange rate depreciated due to the lower interest rates. However, as the pro-cyclical policies shrank aggregate demand, private investment plummeted; and for reasons explained in the paper, export-led growth did not occur either.

“It is clear from the data that efforts to convince the private sector to lead economic growth, while cutting public investment and taking other measures that reduced aggregate demand, have not worked in Brazil,” Weisbrot said. “The government urgently needs to implement counter-cyclical measures in order to bring about an economic recovery.”