EdExcel Paper 3 Synoptic Essay Question on Brazilian Growth and Development
Last updated 13 May 2022
In this video we walk through a 25 mark synoptic essay question on growth and development in the Brazilian economy.
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic advantages of policies that could be used to stimulate economic growth and development in Brazil. (25 marks)
Figure 1 tracks a slowdown in average real GDP growth with trend growth dropping below 0% after a 4% decline in 2020. One fiscal supply-side policy the Brazilian government might introduce would be an increase in tax-funded government spending on education. This policy might help close the gap that exists between expected and means years of education which has a 1/3rd weighting in the Human Development Index. Conditional cash transfers might be offered for parents whose children attend nurseries. And scholarships / apprenticeships could be offered to help build the human capital available to Brazil’s fast-growing financial services sector including the digital lender Nubank. At a macroeconomic level, successful education investment has the advantage of improving skills and capabilities across the economy and consequently causes an outward shift in both AD and LRAS. This will help to increase trend economic growth, lift employment and real wages in the formal economy and perhaps contribute to lowering Brazil’s Gini Coefficient of 0.59 which is one of the highest in the world.
Figure 2 shows that personal income taxes in Brazil account for only 9% of tax receipts - much lower than the average for high-income OECD countries. The top rate of income tax is only 27.5% contrasted with 45% in the UK. One possible macroeconomic disadvantage of this policy is that higher marginal tax rates on top income earners designed to make the tax system more progressive might lead to a partial brain drain from the Brazilian economy. For example, many workers in hi-tech financial services including banks such as Nubank are likely to be geographically mobile, so an exodus of high productivity labour could damage the supply-side potential of the Brazilian economy since it would lead to a fall in the active labour supply and a drop in per capita incomes. Laffer Curve analysis hints that a higher tax burden can sometimes reduce tax yields.
A second policy approach might be an increase in government borrowing to fund critical infrastructure projects. Extract 1 points to “poor infrastructure” as a barrier to growth. Brazil ranks 108th among 137 economies in terms of the general quality of its infrastructure. At a microeconomic level, weak infrastructure in areas such as trade logistics, telecoms, energy supplies and basic health and sanitation systems increase supply costs for businesses and therefore damages export competitiveness. The Brazilian government might target long-term borrowing as a way of funding projects or given their savings gap, aim to attract inflows of FDI. The involvement of FDI might help to increase the share of taxation that comes from corporations from the current level of 9% (Figure 2). A microeconomic advantage of improved infrastructure is that supply costs fall leading to lower prices for consumers and higher supernormal profits for Brazilian firms. This is shown in my analysis diagram.
In evaluation, Extract 1 points to high rates of corruption in Brazil which increases the risks from infrastructure projects since multi $ billion contracts might be embezzled by fraudulent officials. When corruption is endemic, projects are delayed and cost-over runs lead to even higher levels of government borrowing and debt. It is a clear cause of government failure. Given that Brazil must pay high yields of around 7-10% on new bonds, this can lead to pressure on higher taxes in the future, including indirect taxes which as Figure 2 shows, account for 43% of total revenues and which (overall) tend to be regressive in their impact on inequality. Corruption in Brazil involves high levels of tax avoidance and tax evasion. So, even if capital spending projects successfully drive faster economic growth and reverse the trend shown in Figure 1, then the government is unlikely to see the fiscal dividend needed to fund improved basic health and education services – both pivotal to better development outcomes
FINAL REASONED JUDGEMENT
Figure 1 shows that economic growth in Brazil has slowed appreciably. From a high of 7.5% in 2010, there have been 3 years of recession in the six years up to and including 2020. Growth has lagged below 2% pa in each year since 2014 causing per capita incomes to stagnate. Macroeconomics has micro foundations, so I would argue that to sustain inclusive growth and development, Brazil needs to return to the successful strategies of the past including an increase in spending social assistance programmes, such as the Bolsa Familia cash transfer scheme. Key to this will be tackling corporate tax avoidance and growing the size of the formal labour market so that tax revenues as a share of GDP can rise.