Post Covid 19 Brazil

Technical Team: Institute For Applied Economic Research (Ipea)
 

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In early 2020, even though the global economy was not at a time of exceptional performance, it was possible to notice signs of a momentum recovery (Souza Júnior et al., 2020). Although in February, in Brazil, growth expectations of the gross domestic product (GDP) were decreasing slightly, there was a sign that a broader and sustainable recovery movement was coming in 2020 and over the following years (Bastos, 2020).

However, in March the confirmation of the pandemic situation caused by the new coronavirus (Sars-COV-2), as well as the need for substantial parts of the global economy should be deliberately put in a hibernation state, given that the very decrease of infection by the virus would be contingent to the expressive reduction of social and economic interactions. Thus, a complete reversal of the expectations for that year took place, given the still present uncertainties regarding the possibilities of a safe resumption of the economic activity: social isolation or quarantine actions cover almost every country, on a scale and speed never seen before, even in war periods (Souza Júnior et al., 2020). The International Monetary Fund (IMF)1 expected a contraction of the global economy in April this year, at 4.9% at least.

Since then, Brazil has been living with the pandemic and its health, social and economic implications. The moment scores a crisis characterized by the confluence of simultaneous challenges.

Naturally, the State had the emergency burden of managing the crisis and its impacts. Similarly to the movement adopted by most governments, Brazil’s initial priority was the fight against the pandemic, as well as providing assistance to people and companies in situations of greater vulnerability. Obviously, this movement led to extraordinary expenses, almost entirely temporary, yet high, after the approval by the Brazilian National Congress of the so-called “war budget”.2 In fact, this refers to a set of emergency and urgent measures.

If the country already had a very strict fiscal scenario, the immediate consequence of this action – an inevitable one, it should be noted – was a high increase in public debt, and an even more acute financial unbalance of the states and municipalities, which limited the use of new domestic financing at the same time.

Thus, in a few months, we changed from a reasonably promising scenario to the current context, in which forecasts indicate the possibility of a retraction of the Brazilian economy by up to 6%.3 Evidently, there is great uncertainty on the exact magnitude of the economic activity decrease, but there is no doubt it was significant

The impacts were known to be heterogeneous, pervading various segments of productive activities. The most affected sector was the services sector, which accounts for 70% of the national GDP. The industrial sector was next in line, namely the manufacturing, while the agricultural sector, due to its own features, still managed to sustain a positive growth, although lower than the forecasts of the beginning of the year. The resumption process will definitely be heterogenous in these different segments – an important aspect, which must be considered by the State’s action during the recovery process.

The investment rate remains relatively stable at 15%, but it is insufficient to ensure the growth of potential productive capacity above 3% per year (Y.Y.). Therefore, attention should be given to measures that stimulate capital formation. A particularly harmful component of this crisis is the simultaneous occurrence of a supply shock (paralysis of a large part of productive activities) and a demand shock (strong falls in employment and incomes) at a global level, which caused price indicators to reach the lowest levels in economic history, well below the inflation targets forecasted by the government.

In Brazil, the external sector was somewhat protected from the worst consequences of the crisis, with significant growth in exports, namely agricultural products, but with a strong concentration in Chinese importing markets; in turn, as it was reasonable to assume, imports have undergone a contraction, which benefited the trade balance. However, there were net outflows of external resources, due to the effects of the crisis itself or to the sharp reductions in interest rates, which practically nullified the so-called carry trade

This scenario bolsters the relevance of strengthening Brazil’s economic integration with the world, within the structural agenda of the Brazilian economic reforms. These were already proposed by the government, and they focused on productivity gains, reducing market concentrations, as well as the country’s international competitiveness.

Also regarding this aspect, it is worth highlighting that the aggravation of fiscal constraints, due to the crisis, makes the increase in investment capacity depend even more intensely on the lure of external investments in Brazil.

The current context’s complexity indicates that the country is experiencing a critical moment and a potential inflection for the national development trajectory. To this end, public policy Propositions, as well as robust and objective evidence, are critical inputs for guiding government action in the short, medium and long-term.

It is precisely in this sense that the Ipea, as a fifty year-old institution and a government think tank, and as the State’s main agency for public policies research and proposition, takes on the initiative of compiling several contributions in the present document. Our intention is to provide subsidies, so that the government is able to plan for the economy’s recovery. The goal is to improve the terms and conditions of employment, income and living conditions of the most vulnerable populations, as well as providing real opportunities for social protection and public policies for sectoral and regional development. These are useful for companies’ survival, particularly those most vulnerable due to their size and sector of activi

In the present document, the focus was on presenting Propositions for concrete actions that would act at the public policies’ tactical and executive level. This was done in such a way that this document emphasizes specific programs or instruments, and not on generic strategies, due to the sanitary, social and economic emergency.

They are indicative and propositional contributions, which can motivate decisionmakers to make significant choices, since these are based on a unique institutional accumulation of knowledge on public policies in Brazil, which of Applied Economic Research are both feasible and compatible with the available public and private resources.

As already widely reported in analyses carried out by the institute since the beginning of the crisis, the pandemic and its necessary coping mechanisms affect more fiercely the most vulnerable social segments and territories. These tend to have less capacity to absorb the various impacts that crisis’ coping mechanisms may cause.4 Thus, this set of contributions has highlighted specially the public policies’ suggestions, focused on the need of mitigating the inevitable increase in the Brazilian society’s already extreme inequalities. We believe that the set of policy responses should be able to preserve the health of the population and pointing the best possible way to the economy, simultaneously considering the inequalities’ issue.

Special attention was also given to the foreign sector, especially in view of the restrictions that may arise from the global economy’s new conditions, as well as possible disruptions of global chains of production; likewise, the institutional aspects that could favor or hinder the full recovery of economic activity were also focused on.

Finally, in the macroeconomic context, Ipea has developed projections and indicative simulations for the recovery trajectories, with special emphasis on longer-term trajectories, in addition to elaborating short-term scenarios of conjunctural character. To this end, macroeconomic modeling exercises were used, largely already purposely developed. However, these were updated and “calibrated” for the current circumstances of the Brazilian and global economies.

We stress that this document presents short- and medium-term Propositions, yet still essential at the present time, given the severity of the crisis. This effort adds to more than forty specific publications already carried out by Ipea since the beginning of the pandemic,5 and all acting areas of the Institute are involved in it.

This current contribution, of a more “surgical” nature, so to speak, does not hinder our understanding of the country’s need, beyond the crisis, of continuing to seek a national development project based on raising the productivity of production factors and allocation efficiency. The reforms and Propositions already carried out by the federal government are examples that point to this direction, regarding the social security system and the “federal pact”.

It is a project that certainly transcends the pandemic and its effects, but is the founding path of a sustainable growth and development trajectory. Ipea’s contribution with Propositions of a more structural and cross-section nature should also be highlighted, materialized in hundreds of publications made available to society and the State.6

We wish you all a good read.

Post Covid 19 Brazil - Contributions Of The Institute For Applied Economic Research