Brazil as a Role Model for Latin America (Part IV)

Over the last 15 years, Brazil has successfully improved the lot of those on the lower rungs of the social ladder without drastic institutional change or political volatility.

The 1988 Constitution enshrines the country's post-democratization commitment to redressing chronic social ills.

Most of Brazil's quality-of-life indicators have consistently improved over recent decades. Yet, a significant reversal of the country's notorious Gini curve had to wait for two relatively recent breakthroughs.

The first was the continuous improvement in the public sector's fiscal health, thanks to the taming of double-digit inflation and macroeconomic prudence. The other was a willingness to allocate a growing proportion of the state's 35% stake of GDP to raising the minimum wage, the institution of universal health care and other income transference policies, such as the now well-known Family Allowance Program (Bolsa Família).

Critics in the affluent middle class and much of Brazil's business community questioned this "handout" as no more than a doubtful palliative in the face of long-term structural problems. At best, it was argued, it would generate a morally perverse and fiscally unsustainable dependency — given the beneficiaries' meager educational and labor skills. At worst, it would serve to buy votes.

The subtext of this argument is the belief that mobilizing the poor is always dangerous — as they supposedly vote solely with their pockets, whereas the affluent few vote with the national interest at heart. The issue here, as always, is who defines the national interest.

In Brazil, it is the urban and rural proletariat that has most benefited from a virtuous cycle of low inflation, easier consumer credit and the government's income transfer policy. This emerging middle class, which now numbers 97 million, has begun to assert itself as the major arbiter of national public opinion against the older, established middle-class and its representatives in the mainstream press.

Just as important in turning the tide in the debate over the government's social engineering policy has been its undeniable contribution to the Brazilian economy's recent favorable performance. This point has been brought home forcefully during the current downturn, when income policy has helped sustain domestic consumer demand.

The fundamental upshot — which the crisis has served to highlight — is that economic growth and income distribution to alleviate poverty can go hand in hand. They generate a virtuous cycle of rising salaries and employment that are the foundations of a truly robust mass market.

Since 2004, GDP growth has averaged above 4% in Brazil, notwithstanding a significant reversal in income concentration. In addition, 13 million Brazilians have been raised out of poverty, and a further 30 million have moved up into the emerging middle class.

Just as important in reversing initial opposition to Bolsa Família has been the government's commitment to improving efficiency and oversight, allaying somewhat the fears of electoral manipulation.

Brazil's recent social and economic achievements reflect, in part, the country's ability to make the best of globalization. Brazil's privileged position within Latin America — and especially in South America — is part of this success story.

Yet, regional integration has not been as efficient a path to hitching a ride on globalization for others. Forty years of integration projects centered almost exclusively on tariff reduction have done little to overcome the region's fundamental handicap.

The dearth of transport, communications and energy links goes a long way to explaining the region's long history of economic fragmentation and meager trade. Even today, Latin America has nowhere as dense an infrastructure grid as that enjoyed by the United States or Western Europe in the mid-19th century.

Brazil's answer has been to champion a series of infrastructure projects. They aim at spawning a continent-wide mass market, which is required for truly world-class competitive industrial and agricultural sectors to evolve.

Yet, some of its neighbors fear that regional integration will only magnify Brazil's competitive advantages of scale, productivity and strategic location. The region's highly asymmetrical trade and investment flows — largely due to Brazil's advantage given its comparative size and industrial competitiveness — would seem to vindicate admonitions about unequal trade relations.

The difference is that, this time, the part of the villain is played by another developing country. The nationalist backlash against integration on these terms is inevitable.

As a result, unsurprisingly ambitious proposals to integrate production lines, to share sensitive technology and share strategic energy grids have become enmeshed in ethnic, class and political tensions that add fuel to latent national rivalries inherited from colonial times.

This disconnect is visible along porous borders where illegal immigration and drug trafficking are a permanent sore. It is equally present in the abrasive strategies adopted — most notably by Bolivia and Paraguay — to extract higher payments for their energy exports (gas and hydroelectricity, respectively).

In both cases, the subtext has been a struggle to overcome what is felt to be foreign control over these countries' natural resources. Without a doubt, the dramatic — albeit temporary — rise in global energy prices in recent years provided the immediate impetus.

But there is no denying that recovering control of the nation's sovereign wealth resonates powerfully with the man in the street in La Paz and Asunción. This happens despite the fact that, in Brazil's case, it is the major outlet for energy exports that often pay for the very economic solvency of these countries' energy industries.

Editor’s Note: Read Part III here and Part V here.