Brazil breaks out

Jeffrey D. Sachs Professor of Economics Columbia University Project Syndicate

The biggest hidden story in international development these days may be Brazil's economic takeoff. Two years ago, Brazil's economy was left for dead, and the election of Worker Party candidate Luiz Inacio "Lula" da Silva as President was widely expected to trigger financial collapse.

Instead, Lula has governed with remarkable prudence, and Brazil is poised for rapid growth. But something more fundamental is at play: Brazil may finally be overcoming some of the deepest obstacles to its economic development, obstacles that held the country back for decades. If so, it could mark not only Brazil's economic ascendancy but also the recovery of other parts of South America.

In January 2002, American right-wingers were terrified of a leftist revolution in Brazil. Foreign investors were panicking over the prospect that Brazil would fail to roll over its foreign debts.

The IMF, for a change, did a good job, providing interim financing and throwing its political backing behind Lula after the elections. In turn, Lula adopted orthodox macroeconomic policies and moved to get the budget deficit under control, breaking the panic. Market projections for Brazil's growth are around 4 percent for 2004.

But something deeper is at play than the usual waves of euphoria and panic in international financial markets. Much of the credit for Brazil's turnaround belongs not to Lula but to his predecessor, Fernando Henrique Cardoso (FHC), who was Brazil's President from 1992 to 2000.

I credit FHC, as he is widely known, with making four key contributions.

o First, under his leadership, Brazil firmly embraced human rights, not only in the sense of democratic elections, but in terms of economic justice for African-Brazilians and indigenous Brazilians, people who had long been discriminated against. Like most of Latin America, Brazil was born in the crucible of conquest and slavery.

Even during the 20th century, neither the indigenous populations nor the African-Brazilian slave descendants had much chance in the economic and social order. That is changing fast. Public education is becoming universally available, including for groups that faced harsh discrimination in the past. Remarkably, indigenous groups also won a hard-fought struggle for land rights in their traditional Amazon homelands.

o Second, Brazil is finally embracing the global knowledge economy. For most of the 20th century, Brazilian elites thought that they could get by on natural resources - cattle ranches, coffee plantations, fruit juices, and soybean farms. Now they know that universal secondary education and extensive university- level training is also needed. Under FHC's reforms, enrolment rates in secondary education soared, from 15 percent in 1990 to 71 percent in 2000. Equally important, Brazilian universities are seeing an increase in quality and attendance as well.

Most of Latin America, including Brazil, ignored public investments in R&D for decades, while East Asian countries invested heavily. FHC appointed a series of outstanding Ministers of Science and Technology, and the government finally began spending more on research and development. Brazil is becoming known not only for orange juice, but for aircraft exports like the Embraer jets that now compete with American and European producers for the regional commuter market.

o Third, Brazil is coming out of its economic shell, competing in world markets rather than protecting national markets. For decades, due to rampant protectionism, the ratio of Brazil's exports to GNP was one of the lowest in the world. That is finally changing. The export/GNP ratio has risen from 8 percent in 1990 to 13 percent in 2001, a sign that Brazil is beginning to seek out world markets. Lula is traveling widely to promote Brazilian exports, another sure sign that Brazil's political economic orientation has become far more international.

o Fourth, Brazil is focusing on the health and productivity of its people. Under FHC, Brazil pioneered an effective response to the AIDS epidemic by guaranteeing access to antiretroviral medicines and to widespread counseling and viral testing. The hero of this effort, Dr. Paulo Teixera, is now at the World Health Organization helping to lead the global effort against AIDS.

Brazil has also dramatically improved child health, with mortality rates of young children falling sharply, from 60 per thousand in 1990 to 36 per thousand in 2001. Brazil's total fertility rate (average number of births per woman) has come down sharply as well, from 2.7 in 1990 to 2.2 in 2001.

With more children surviving to adulthood, poor families are choosing to have fewer children, and to invest more in their health and education. Population growth pressures are falling, providing a powerful long-term boost to Brazil's economic development.

Brazil's economic turnaround may have powerfully positive effects on its neighbors, especially the struggling countries of the Andean region. This is the most likely scenario, but it is too early to declare victory.

Brazil still faces huge challenges. Lula will have to build on the work of FHC. Macroeconomic stability must be consolidated, with budget deficits brought decisively under control. The political consensus in favor of universal education, outward- oriented trade, health for all, and a science-and-technology oriented economy must be strengthened.

Brazil must also pay more attention to environmental management, especially in the fragile yet critical Amazon region, if it wants long-term, sustainable economic development.

For Brazil to play a bigger role as regional economic leader, greater cooperation with its neighbors in suitable infrastructure projects and expanded markets will be needed. Great challenges, indeed, but Brazil seems to be in the mood to meet them.