On February 20, FGV Executive Education welcomed economist Armínio Fraga, former president of the Central Bank of Brazil, to give a lecture on “Brazilian Economy through an International Perspective”. The event discussed prospects for Brazil’s economy in the international playing field and was also attended by João Barroso, director of Executive Education at FGV RJ and BSB, and Oliver Stuenkel, coordinator of the MBA in International Relations in Rio de Janeiro and Brasilia.

Fraga spoke about Brazil’s choices in terms of economic policy dating back to the second half of the 20^th century and how they shifted the country’s course. The economist talked about the Bretton Woods conference, held shortly before World War II ended, which ultimately set the gold standard and created the International Monetary Fund (IMF).

“It was a great opportunity (for Brazil) to grow, because it was a time of industrialization and capitalization of the economy, which is usually accompanied by full-fledged growth. But Brazil chose a more isolated path at that time, which was quite common in the region. In other words, Brazil chose an internal industrialization process; a different import substitution path than the one later adopted in Asia”, he said.

He added that, from a monetary and currency standpoint, the adoption of this closed-ended model was marked by ironclad exchange rate control and focus on public banks and companies. Fraga mentioned the government’s massive influence over several sectors of the economy, such as energy, telecommunications, mining and banking, among others.

The economist also compared Brazil’s economic situation with South Korea. In the 1960s, Brazil almost doubled the Asian country’s per capita income. Fifty years later, the average income in Korea is now almost two times the average income in Brazil.

“What did Korea do to achieve that? First of all, they educated themselves. Average schooling in Korea is extremely high, reaching a total of 14 years. Ours is much lower, hovering around nine years. Korea also has very high quality education, while ours is extremely disappointing. In addition, Korea saved money and invested more than 30% of its GDP. We only made it over 20% a few times. There’s no way around it: there is no growth without education and investment. Especially if the country is not integrated with the rest of the world”, he said.

Fraga also mentioned the recent crisis, which involved economic, political and social aspects, as well as values. He also spoke about Brazil’s current political system, overly fragmented and polarized, but which also lacks a long-term outlook for the future.

Finally, the former Central Bank president talked about the challenge in implementing efficient tax adjustments on a massive scale. According to him, the government is struggling with its finances and the states have also proven to be particularly vulnerable, demanding urgent attention.

“We should make an adjustment of at least 5% of the GDP. In order not to make an adjustment of this magnitude, we would have to compensate by devising a very efficient economy policy and the structure around institutions. That’s how dramatic our current situation is. Brazil’s entire public payroll accounts for approximately 13.5% of the GDP. If we add this number to the country’s public and private pensions, we have another 14.5%. Although Brazil’s population is still relatively young, we spend more with pension plans than countries with older populations. These expenses add up to 28%. Compared to Chile, Mexico and Colombia, these countries spend 8 to 10 points less than Brazil”, he adds.

Besides this issue, Fraga also argued in favor of creating a reform agenda to boost Brazil’s productivity. According to him, the country’s current infrastructure is very lackluster and it is a key aspect to improve the country’s integration.

“That is part of the problem. We also need to reconsider some aspects of labor regulations and the tax system. I would include the social and distributive aspects, which seem to be out of the current administration’s spotlight. Brazil has a business grant of 7% of the GDP, which doesn’t make any sense. That’s not what good entrepreneurs need. They need a well-oiled economy and a simple tax system. But our economy is filled with clogged up bottlenecks. This is an area that requires attention and the very first item in any checklist should be to get rid of these foolish grants”, he said.