Even the IMF rebuts Meirelles: priority should be combating inequality.

Do Red Portal - Lagarde's comment came during their participation in a panel at the World Economic Forum, which is taking place in Davos, Switzerland.

When questioned by the moderator about how to convince the working class to accept reforms that will require "great sacrifices" from them, Meirelles had said that Brazil, unlike rich countries, does not have a tradition of a solid middle class, which would make the package of measures necessary - which includes the establishment of a ceiling for public spending, affecting areas such as health and education.

"In developing countries, we have a different dynamic; we don't have a history of a growing middle class or a large part of the population being middle class, as is the case in developed countries. This is a recent phenomenon in Brazil," the minister stated.

"Over the past fifteen years, we've seen the proportion of the middle class in the population double. And this happened over the last decade. Because of the recession we've seen in recent years, this dynamic has reversed, but that's a short-term problem," Meirelles said.

Lagarde responded next.

"I don't know why people didn't listen to the message (that inequality is harmful), but certainly economists revolted and said it wasn't their problem. Even in my own institution, which has now converted to accepting the importance of social inequality and the need to study it and promote policies in response to it," said the Frenchwoman.

Inequality in focus

Meirelles had also argued that Brazil's problems are recent.

"This is due to the recession of recent years and is affecting the middle class and, in particular, the low-income class. In short, the way out for an economy like Brazil's is to start growing again, creating jobs again and modernizing by opening the market in order to become more efficient," he stated.

"We are at a different point than the rich economies. We are establishing the middle class, making it grow with the opening of the economy," he argued.

In her speech, however, Lagarde stressed that social inequality needs to be at the center of economists' attention if they want sustainable growth and, as a consequence, a strong middle class.

"Our argument is that if there is excessive inequality, it is counterproductive to the sustainable growth that G-20 members aspire to," he said.

"If we want a bigger piece of the pie, we need to have a bigger pie for everyone, and that pie needs to be sustainable. Excessive inequality is putting obstacles in the way of sustainable development," he stated, reiterating the central message of his opening speech at the 2013 Forum.

Unemployment and the Fourth Industrial Revolution

A 2013 study by the IMF itself, authored by experts Jaejoon Woo, Elva Bova, Tidiane Kinda, and Y. Sophia Zhang, indicates that policies controlling public spending result in short-term unemployment, which contributes to the contraction of the middle class and the widening of the social gap between rich and poor.

The study shows that fiscal adjustment packages like the one adopted by Brazil can have adverse results, depending on the strategies chosen in public management.

"Packages of cuts in public spending tend to worsen social inequality more significantly than packages of tax increases," the survey states.

The 2013 document reviewed fiscal adjustment policies implemented over the past 30 years by developed and developing countries.

The conclusion was that the first consequence of cuts in public spending is an increase in unemployment and a consequent increase in social inequality, an indicator measured by the Gini index - a Gini coefficient of 0 represents full equality, while 1 is the maximum inequality.

On average, a spending cut of around 1% of GDP generates a 0.19 percentage point increase in the unemployment rate during the first year, while the increase in inequality as measured by the Gini index ranges from 0,4% to 0,7% in the first two years, the study states.

Broadly speaking, the unemployment generated by spending cuts is the main culprit.

"Approximately 15% to 20% of the increase in social inequality due to fiscal packages is due to increased unemployment," the report says.

Public policies

In the Davos debate, Lagarde recommended the cautious selection of public policies in the context of the fourth industrial revolution, so that governments like Brazil's not only look at the immediate challenges of globalization, but also prepare for the long-term future.

"We are now at a very opportune moment to put into practice the policies that we know will work (...) A moment of crisis, as the minister (Meirelles) said, is the time to evaluate the policies that are in action, what more we can do, what kind of measures we take to reduce social inequality?", questioned the IMF president.

"What kind of social support networks do we have for people? What kind of education and training do we offer? What actions are being taken not only to respond to globalization, but also to the technologies that will disrupt and transform the work environment in the long term?" he added.

"There are things that can be done: fiscal reforms, structural reforms, and monetary policies. But they need to be gradual, regional, focused on results for people, and that probably means seeking a greater distribution of income than currently exists," Lagarde emphasized.

Speaking to BBC Brasil, professor and former Minister of Planning and Labor Paulo Paiva stated that productivity is the great challenge Brazil faces in resuming growth, and judging by recent history, demographic trends are not in the country's favor.

"Economic growth is composed of growth in the workforce and productivity. We've had two distinct periods in our recent history: from 1950 to 1980 and from 1980 to the present," he introduced.

"From 1950 to 1980, the Brazilian economy grew at an average rate of 7% per year. If I break down that number into workforce growth and productivity gains, there was a 2,8% increase in GDP due to population growth and a 4,2% gain in productivity, which includes better worker qualifications and a better work environment."

"From 1980 onwards, breaking down the growth in the same way, 0,9% was due to population growth and 1,5% to productivity gains. So that gives an average annual GDP growth of 2,4%," he added.

"The problem is that from 2015-30 onwards, the population will no longer grow, so if Brazil does nothing (to increase productivity gains) it is doomed to grow at 1,5% per year. This is the most dramatic scenario we have ahead of us, and you can imagine the impact of this fourth industrial revolution in such a situation."

Selling Brazil

After the panel, Meirelles participated in a joint press conference with the president of the Central Bank, Ilan Goldfajn.

In his meeting with the press, he sought to promote the idea that Brazil is in full recovery – and that it is a good time for foreign investors to come to the country.

The minister reinforced the idea that the pension and labor reforms will allow Brazil to benefit even more from globalization.

"In the case of emerging economies, globalization has definitely been positive. In the case of Brazil specifically, what we need to do is reform the economy to obtain greater advantages from globalization, because that hasn't been the case so far," he stated.

"Brazil's growth in the past was largely based on the domestic market. We need to take better advantage of globalization, as other emerging economies have done, and we are moving in that direction."

The President of the Central Bank, Ilan Goldfajn, made a point of noting that Brazil has reserves of around 20% of its GDP and should use these resources to keep exchange rates within expected levels, cushioning any unexpected attacks or volatility in relation to the real.

Meirelles also stated that the inflow of foreign capital remains strong and that, unlike other emerging markets, there is no risk of capital flight on the Brazilian horizon, a conclusion that weighed heavily in the decision to cut the Selic (basic interest rate) by 0,75 percentage points, announced last week.

"We are not seeing a capital outflow that requires Brazil to use its reserves to safeguard the value of its currency. Quite the contrary, we are in a balanced position. We are in an economic recovery," he stated.

"Just to give you the numbers that support this: foreign direct investment in the country is close to 4,4% of GDP and the current account deficit is just over 1,1%, so there is a big difference, one is four times larger than the other," Goldfajn concluded. 

 Source: BBC