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A Real War on Inequality

The world could learn a lot from Brazil's fight against poverty.

Bashing the BRICS is all the rage these days -- I've done my share -- and it may even be time to abandon altogether this grouping of five big but exceedingly different economies. Yet one BRIC has come in for an unfair degree of criticism. Though Brazil may still be somewhat corrupt, its growth fueled by a temporary boom in natural resources, the country's future is getting brighter by the day. Just as important, the nature of its economic progress offers a valuable lesson for countries both rich and poor.

Up through the 1990s, Brazil was known as the country with the worst income inequality in the Western Hemisphere, and one of the most unequal countries in the world. The frightful conditions in its slums, cane fields, and mines were emblematic of a deep and apparently ingrained poverty that belied Brazil's ambitions of modernity. Poverty is still a serious problem, but for the past decade Brazil has been laying the foundation for a stunning new phase of growth.

No doubt, natural resources have helped Brazil to become richer. Revenues from selling minerals and fuels rose from 2.5 percent of the economy in 1990 to 5.3 percent in 2010, after peaking at 7.2 percent in 2008, according to the World Bank's figures. This resource boom won't last forever, even with Brazil's new offshore oil fields. But Brazil has invested some of these proceeds, along with other tax revenue from its sustained economic growth, very wisely indeed.

When Luiz Inácio Lula da Silva took office as president in 2003, public spending on education had fallen to 3.8 percent of GDP. His predecessor, Fernando Henrique Cardoso, had already set the stage for Brazil's surge by installing the bedrock of sound economic policies: a fiscal surplus, tight monetary policy, and a floating exchange rate. Lula, despite his association with leftist populism, committed to continuing these policies. But crucially, he also legitimized them by promising to share the gains of the resulting growth among all Brazilians.

By the time Lula finished his second and final term as president, spending on education had increased to almost 6 percent of GDP. School enrollment in Brazil has always been high, but the quality of education is climbing steadily, resulting in higher test scores and college graduation rates. Health spending also rose in both the public and private sectors, and here the progress is plain to see: mortality for children in their first five years has been cut in half, from 31.5 per 1,000 in 2002 to 15.6 in 2011.

Healthier and better-educated people can earn higher incomes, and the policies of Lula's government, along with Brazil's rapid urbanization and growth, have made a huge dent in inequality. Its Gini coefficient for income stood at 61 in 1990, according to the World Bank, and was still above 59 in 2002; by comparison, the United States had a coefficient of about 47 in 2010. This year, estimates from the Central Intelligence Agency put Brazil's number at 51.9, about the same as Chile and Mexico. Research by the International Monetary Fund suggests this enormous reduction in inequality could itself offer Brazil a further boost to economic growth.

Brazil's strides against inequality are even more remarkable when considered in context. In the past decade, the forces of globalization were at their apex. Though globalization has narrowed inequality between countries, it has aggravated inequality within them more often than not. Emerging economies like Brazil have seen millions escape poverty, but existing elites have also used their wealth, education, and international connections to exploit lucrative export markets and foreign investments. As a result, income distributions have polarized in countries ranging from Costa Rica to Côte d'Ivoire.

Brazil has shown that globalization need not be synonymous with burgeoning inequality -- in fact, quite the contrary: the benefits of globalization can be harnessed to reduce inequality. By bolstering the middle class and creating a workforce capable of competing globally, Brazil is equipping itself to take advantage of globalization to the fullest.

To be sure, times are tough right now. Brazil's economy likely grew just 1 percent this year, adjusted for inflation, after bouncing back from recession in 2010 and 2011. Moreover, the combination of a slipping exchange rate and a reliance on foreign cash has made investment in new capital especially difficult. The attractiveness of the Brazilian market is starting to dim, and domestic finance isn't picking up enough of the slack.

Yet to the degree this change in fortunes reflects short-term shifts in commodity prices and problems with liquidity, investors who are bearish on Brazil are missing the point. Brazil is on a much stronger path to long-term growth than its recent malaise would suggest, perhaps strong enough even to justify the flood of capital that entered the country beginning in the late 1990s. Its economy is sure to expand and diversify as its workforce becomes healthier and more educated. The changes won't occur in a few months or years, but they will happen. If investors can't look far enough into the future to see this, it'll be their loss.

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Daniel Altman

Cameron's Leap Off the Fiscal Cliff

Britain embraced austerity instead of following the advice of its own economic giants. What was David Cameron thinking?

How did Britain end up with such a terrible economic policy? The birthplace of John Maynard Keynes, John Hicks, and other economic giants was just starting to recover from the global financial crisis when its new leaders forced it back into recession with enormous cuts to the public sector. Two years into their government, the failure of the Tories and their coalition partners, the Liberal Democrats, looks like a case of overriding ideology mixed with naïve mistakes.

The British economy is the same size now, roughly speaking, as it was at the end of 2006, well before the onset of the global financial crisis. Since the most recent peak in early 2008, GDP has shrunk by about 3 percent, after adjusting for inflation.

Clearly, the United Kingdom's problems are not all the fault of its current government, which took office in May 2010. After a promising start in economic policy -- independence for the Bank of England and "golden rule" budgeting, which eliminates deficits over the economic cycle -- the governments of Tony Blair and Gordon Brown lost their fiscal discipline and went along too easily as their American counterparts embraced financial deregulation instead of addressing systemic risk. Mervyn King, the governor of the Bank of England since 2003, and the Financial Services Authority, the industry's independent regulator, must also share the blame for the UK's travails.

Yet in the past two and a half years, the current government of Conservatives and Liberal Democrats, led by David Cameron as prime minister and George Osborne as chancellor, has chosen to inflict unnecessary economic pain on its people. The economy was on the cusp of its fifth straight quarter of growth when the government took office, but total employment had fallen for 7 of the past 10 quarters. The new government decided that the time was ripe for massive cuts to public services and employment. Over the next three years, 628,000 government jobs -- about 10 percent of the entire public sector -- would disappear.

As followers of the "fiscal cliff" debate in the United States surely know, a huge cut to government spending at a fragile moment in an economic recovery can risk sending a country back into recession. And indeed, this is what occurred in the UK: three straight quarters of economic shrinkage starting in 2011 and anemic growth thereafter.

How did this happen? Even in 2005, long before their alliance with the Liberal Democrats, Osborne and his cohorts in the Conservative Party were calling government spending unsustainable. As many right-leaning parties had done before them, they called for a combination of tax cuts and spending cuts that would, in theory, reduce the government's deficits.

At the time, the Lib Dems called the Tories' plans "flaky and unrealistic." In retrospect, the rhetoric on both sides was somewhat overblown. The UK's overall debt in the public sector did climb over the next couple of years despite the growth of the UK economy - apparently the result of a political choice to abandon the "golden rule." But the change in debt was only slight, to 36.4 percent of GDP in the 2007-08 fiscal year from 35.1 percent two years earlier.

By the time Cameron took over in May 2010, the situation was very different. After two years of crisis, the country's debt had shot up to 53.1 percent of GDP because of lower tax revenues, greater demand for public services, and some costly bank bailouts. The first two of these factors were to be expected in an economic downturn; the government used its ability to protect people, to the extent possible, from the full pain of recession. The third was unusual, but unlikely to recur anytime soon.

Nevertheless, the new government remained committed to the plans it had set down five years earlier, in a completely different economic situation. Rather than thinking twice about making deep cuts to the public sector while unemployment was still high, Cameron and Osborne doubled down. They had already decided that 35 percent of GDP was too high for the UK's national debt, even though only Canada had a lower number among the G-7 economies in 2005. Naturally, debt over 50 percent of GDP made them even more determined to wield the axe.

Their main mistake, of course, was in timing. At some point, the UK would have to cut spending and reduce its debt. But 2010 was not the right time. The recovery was young and still precarious, and the increase in debt had not resulted in higher borrowing costs for the government. On the contrary, rates were lower than what they had been in 2005.

So why did this happen? Perhaps, for a start, because the leaders of the governing coalition had little training in economics. Cameron's tutor in Oxford's Philosophy, Politics, and Economics program was Vernon Bogdanor, an expert on British history, constitutional issues, and political systems. Osborne may have had even less exposure to the fundamentals of economic policy; his degree is in Modern History, which sounds quite recent but ends at Oxford somewhere around 1914.

In retrospect, it seems likely that the Conservative Party's current leaders chose their economics via their politics. Their time at Oxford spanned the late 1980s and early 1990s, when Thatcherism and its laissez-faire doctrines were in full force. Embracing the party meant believing in small government and a diminished role for the state in the economy as a whole, with little consideration for the economic circumstances of the moment.

Starting in 2005, Osborne wrote repeatedly of the need to cut taxes and spending in order to compete with other advanced economies. Yet he and Cameron allowed these long-term goals to drive what should have been a short-term economic policy designed to mitigate the UK's recession. Today, most economists accept the importance of fiscal policy as a short-term stabilizer in the economic cycle, and few would recommend the sort of fiscal austerity that Cameron and Osborne inflicted on the British people in the middle of a severe downturn. In essence, they were trying to treat a gunshot wound with diet and exercise. The patient is still waiting for intensive care.

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