Looking beyond the global financial and economic crisis towards sustained growth

Brazil’s economic fundamentals have improved considerably in the ten years following the abandonment of exchange rate management in 1999 and adoption of a policy framework combining inflation targeting, rules based fiscal management and a flexible exchange rate. The economy is therefore weathering the effects of the unfolding global financial and economic crisis rather well, and an incipient recovery is getting under way. The policy responses to the crisis have been appropriate: measures were taken to enhance liquidity and prop up credit, the monetary stance began to be relaxed in January 2009, and the tax burden on selected financial transactions and activities was alleviated. The banking sector is sound, and Brazilian households and firms do not suffer from the financial imbalances that have been at the core of financial distress in other parts of the world. The largest payoff from macroeconomic consolidation over the last few years has been improved growth outcomes. The fruits of higher growth have also been fairly well distributed, contributing to falling income inequality, which has been traditionally highly skewed. But further progress will be needed in several policy areas to sustain high growth over the long term, once the deleterious effects of the global crisis have waned. In particular, initiatives to raise labour productivity and to maintain the current dynamism of private investment could have the largest payoffs in terms of raising the economy’s growth potential.