1639) Countercyclical Policy Measures in Brazil

Latin America: Counter-Cyclical Policy in Brazil: 2008-09
Nelson Barbosa
Brazilian Ministry of Finance and Federal University of Rio de Janeiro
Journal of Globalization and Development
Volume 1, Issue 1 2010 Article 13
DOI: 10.2202/1948-1837.1052
Available at: http://www.bepress.com/jgd/vol1/iss1/art13

Brazil was one of the last major economies of the world to be hit by the 2008 financial crisis and so far it seems to be one of the first ones to recover from it. Up until the third quarter of 2008, Brazil was showing a strong growth performance and the main macroeconomic problem faced by the government was the control of inflation in the face of a booming domestic demand and rising world commodity prices. The crash of September 2008 changed the situation abruptly. The international credit crunch led to a sharp reduction in the domestic supply of credit, thus dealing a negative supply shock to the Brazilian economy.
The fall in commodity prices and world-trade flows also hurt Brazilian exporters and, together with the increase in capital outflows, they pushed up the real/US dollar exchange rate substantially at the end of 2008. The combination of depreciation, liquidity constraints, and falling international demand dragged consumers’ and business’ confidence down, which in turn resulted in a sharp fall in private aggregate demand, especially investment. The inevitable result was a “technical” recession in the last quarter of 2008 and the first quarter of 2009, during which Brazil’s GDP dropped 4.3%.
The Brazilian government responded to the world crisis with a sequence of unprecedented expansionary actions in the country’s recent economic history. Contrary to what happened during the international crises of the 1980s and 1990s, this time the Brazilian authorities adopted a sequence of monetary and fiscal counter-cyclical actions to stop the international crisis from contaminating the Brazilian financial system and to resume growth as soon as possible. After one year, one can say that these two objectives have been achieved, that is, the worst of the crisis has been absorbed without any major disruption in the Brazilian banking system and, most importantly, the economy resumed growing in the second quarter of 2009, the unemployment rate did not shoot up, real wages continued to grow, and consumers’ and business’ confidence are back up. In fact, despite the intensity of the crisis, the Brazilian economy is still expected to have a positive GDP growth rate in 2009, and to return to the pre-crisis situation in 2010, when GDP is expected to increase 5%.
The objective of this note is to present the main policy initiatives that allowed this economic performance.

Read the paper at: http://www.bepress.com/jgd/vol1/iss1/art13