Challenges for Brazilian Development: Investment and Finance

In the last decades, emerging countries economic growth has been strongly dependent on external markets, mainly on exports to advanced countries. The increasing participation in the international trade was supported by a massive influx of financial and investment flows, which promoted a subordinated insertion of these countries in the global value and production chains, as also a low capacity of innovation.

In the 2000s, there was a major change in the pattern of these countries growth. External was replaced by domestic demand as the economic growth driver. In some, just a few such as China, demand growth was led by investment in infrastructure and urbanization, and in others, such as Brazil, on household consumption. This movement accelerated and sustained emerging countries economic growth rates and allowed them to be in charge of the global output and income expansion in the post- crisis.

In Brazil, this process of growth pattern changing was marked by a rough patch. In the 1990s, the liberalization process and the resulting misguided productive, commercial and financial insertion in the international economy promoted a sharp slowdown in the economic growth, with negative impacts on industrial and technological development. In the 2000s, the brief economic rebound, initially supported by the agricultural and mineral commodities exports boom and lately by the expansion of household consumption, lost strength and exhausted. As a result, in the last three decades, the Brazilian industry poorly developed productive capacity and innovative strategies.

Given this context, the paper aims to analyze the change of growth pattern in Brazil in the 2000s, which was increasingly sustained by the domestic demand, mainly consumption and was stimulated by the dynamism of the labor market, the income transfer policies and the easier access to credit. We defend that, given the resulting restrictions of this type of growth pattern to the economic growth and development, the main challenge to the Brazilian economy is to shift from consumption to investment as the main force of the aggregated demand. A key point to this shift is the presence of long term financing mechanisms, which are, in Brazil, mainly organized by the Public Financial System.

With that purpose, the paper is organized into four sections, including this introduction and the concluding remarks.  In the second section, the change of growth pattern in emerging countries and the differences between those countries were treated.   The third section analyzed the current Brazilian growth pattern, sustained on consumption. The fourth section examined the modest evolution of the investment in general, and particularly of infrastructure. The following sections considered the importance of public funding for investment in Brazil. The main conclusion is that it will be not possible to achieve a new virtuous cycle of growth in the Brazilian economy without the expansion of public and private investments. In order to expand, the expenditure on infrastructure investments should gain more importance and the   decisive role of public financing of long-term should be emphasized.