Brazilian economy – on the way to the “old normal”

Christiana Carvalho's photo


While inequalities are accentuated, and the economy remains in perspective of low recovery, the economic agenda seems to be built as if, in 2021, the country had already recovered and immune to the pandemic

The Brazilian economy, like most economies in the world, was heavily affected by the crisis associated with the Covid-19 pandemic. This was stagnant before the health crisis, with a high unemployment rate and a contingent of more than 40% of the economically active population in informal or “uberized” work, in addition to having seen a worsening of social inequality in the period 2015/2019 : the Gini Index increased from 0,525 in 2015 to 0,543 in 2019 (Barbosa et al, 2020). The Brazilian government had a hesitant response – often pushed by the unfolding events and/or initiatives of the national congress – in the face of a crisis that turned out to be quick and acute. In view of this, there was a need to face problems related to the drop in income of the informal sector, the increase in unemployment, the solvency of companies, the drop in revenues of states and municipalities (responsible for operating health services), the restriction of liquidity in the banking sector, in addition to the social and health consequences of the pandemic.

In fact, the effect of the coronavirus crisis on the economy was immediate, with a strong outflow of portfolio capital, which generated a currency devaluation of 27,3% between March 11th and May 14th; credit rationing that hit small and medium-sized companies; a strong reduction in the GDP growth rate, hitting the economy in particular in the 2nd quarter, driven by the service sector and the industrial sector; and a strong increase in the unemployment rate (from 11,0% in December 2019 to 14,4% in August 2020).

The Brazilian government's initial response to the economic/social crisis that resulted from the pandemic was quite ambiguous. Initially, the first reaction of the Minister of Economy, Paulo Guedes, was that “reforms are the best response to the coronavirus crisis”. Also in March 2020, the federal government adopted a set of countercyclical measures without fiscal impact, which included: the postponement of corporate tax payments, such as FGTS and Simples; the anticipation of the 13th salary for retirees; the reallocation of resources to the SUS; the adoption of measures to reduce the queue for the “Bolsa Família” program; and the provision of financial assistance to states and municipalities in the total amount of R$16 billion. Such measures proved to be insufficient to face the economic and social crisis. This forced the federal government, after a strong civil society campaign and at the initiative of the National Congress, to implement an emergency income support program for the most vulnerable population, given the existence of a huge portion of the population made up of informal workers.

A fundamental step in combating the economic crisis that resulted from the health crisis was the approval by the National Congress of the state of public calamity in the country, effective until 31/12/2020, which allowed the Brazilian government to breach, in 2020, the targets for fiscal results governed by the Fiscal Responsibility Law and the Budgetary Guidelines Law, thus enabling it to increase its expenditures to face the effects of the crisis in a context of sharp drop in tax collection. In a second step, Congress approved the so-called “War Budget”, on 07/05/2020, intended exclusively for measures to combat the crisis associated with Covid-19, not being restricted to the so-called “golden rule”, which prohibits issuing public debt to cover current expenditures.

There was strong social and political pressure for the implementation of an emergency cash transfer program for informal and unemployed workers. Initially, the federal government was reluctant to implement an income transfer program and ended up proposing a voucher of R$200,00 for three months, while the National Congress pressed for the approval of a minimum amount of R$500,00. This pressure led to the approval of an emergency aid program, on 02/04/2020, establishing an emergency aid in the amount of BRL 600,00 initially for 3 months, and then extended for more than 2 months (reaching approximately 67,9. 1 million beneficiaries, about 3/5 of the Brazilian population), aimed at unemployed workers, informal workers and those enrolled in social programs. Once the payment of the 1000 installments was concluded, the continuity of the Emergency Aid began to be debated, which led the federal government to institute Provisional Measure no. 4, establishing an aid with 300,00 installments of R$ XNUMX (until December).

Regarding the preservation of formal employment, once again the ambiguities of the measures adopted by the federal government were clear. President Bolsonaro initially proposed suspending the employment contract and reducing the working day without paying any salary; however, due to strong political pressure from the National Congress, he subsequently proposed some income compensation to reduce working hours and wages. Thus, on 01/04/2020, the Emergency Program for the Maintenance of Employment and Income was instituted, which authorized employers, temporarily, to reduce wages and hours or suspend employment contracts (up to 60 days), with the right to temporary stability of the employee and receipt of an emergency benefit paid by the Brazilian government. The reduction in working hours and salary could be 25%, 50% or 75% by individual or collective agreement with a maximum period of 90 days, or any percentage, including 100%, only by collective agreement. Due to the permanence of the pandemic throughout 2020, the program was extended three times, ending in December.

The emergency aid program (AE) for vulnerable individuals contributed to a rapid improvement in income distribution, as it avoided the reduction in income of low-income families, in comparison with other segments of the population, in particular the segment that earns less than half the minimum wage. When EA is included in total income, the first and second deciles have an average gain of 76% and 32%, respectively, evidencing the strong distributive impact of EA on low-income segments. In the other deciles, the gain declines with the increase in income. Gonçalves et al. (2021) also calculate the Gini Index without EA (0,5429) and with EA (0,4972), showing a significant variation of 8,4% in a short period of time. In addition to the reduction in social inequality, there was a strong reduction in poverty and extreme poverty due to the EA: the percentage of the population below poverty reduced from 23,7% in May to 18,4% in August 2020, while the percentage of extreme poverty fell even more: from 4,18% to 2,29%, a reduction of almost half.

The performance of the Brazilian economy in 2020 (-5,3% in the year) compared to the largest economies in Latin America, it is observed a much better performance than the average of Latin America (-7,7%) and of the largest economies in region, such as Argentina (-10,5%) and Mexico (-9,0%) (ECLAC, 2021). In the 1st quarter of 2021, there is a new drop in Brazilian economic activity due to the second (and strong) wave of the pandemic, which resulted in partial stoppages in several Brazilian states and the negative effects on income due to the increase in the inflation rate caused by supply shocks (increase in commodity prices and currency devaluation).

The problem of the Brazilian economy for the year 2021 and beyond is related to two issues: (i) President Bolsonaro's denialist strategy in relation to combating the pandemic, which favors the growth in the number of cases and deaths related to COVID-19, as occurred in the period from January to April 2021, and the delay in the vaccination program in the country, causing the Brazilian economy to have, in the first half of 2021, a recovery well below that of most other economies (OECD, 2021) ; (ii) the return by the Brazilian government to orthodox economic policies in 2021, based on the “expenditure ceiling”, which, by freezing public spending in real terms, prevents it from implementing countercyclical fiscal policies.

Hence our assessment that there is no federal government strategy to implement a credible sustainable growth agenda; for example, there is no government program focused on investments in infrastructure. There is only a return to the “old normal”: an agenda of liberal reforms, contrary to what has been implemented in other countries; and in line with the “Plano Mais Brasil”, defended by the Bolsonaro government, in 2019, and composed of three Proposals for Amendment to the Constitution (PECs): Emergency PEC, PEC of the Federative Pact and PEC of Public Funds. Among the measures already approved by the government, in 2021, are the Autonomy of the Central Bank and the Emergency PEC; the latter has undergone a number of changes since its initial proposal.

The resumption of the agenda of liberal reforms and fiscal austerity intended by the Bolsonaro government is in line, as seen, with the economic strategy that was being implemented before the pandemic, called by Oreiro and Paula (2021) as “Tatcherismo Tupiniquim”. However, the shock caused by the COVID-19 crisis has accelerated trends in the international economic debate that point in another direction, which contradicts fundamental precepts of the agenda defended by Paulo Guedes. In this article, we use Fiscal Monitor documents, a semi-annual publication by the IMF, released in 2020 and 2021 as a proxy for this debate. around the world, to recover from the crisis.

Indeed, these agendas already diverge in their respective starting points. This is because the IMF – as well as other multilateral organizations – presupposes the occurrence of lockdowns in the most acute moments of the pandemic, in order to structure its recommendations on phases of greater or lesser restrictions on economic activities in the countries (IMF, 2020, p. 2). How the Bolsonaro government takes an anti-scientific stance towards the positive effects of lockdown in controlling the pandemic, this fundamental stage is sabotaged in advance. Furthermore, in view of the delay in the vaccination program that occurred in the country, it is important to mention that the IMF (2021) emphasizes the importance of vaccination on a global scale, which, in its words, could be the public project “with the greatest return ever identified".

In any case, let's see what the IMF proposes for the management of national economies in this context. At the Fiscal Monitor: Policies for recovery, launched in October 2020, a central point in its recommendations is the need for fiscal expansion and public investment in this process, both for advanced and emerging economies. To make it viable, governments should, according to the study, resort to greater debt issuance and taxation of the richest strata of society – depending on their respective fiscal and tax conditions. At first, the focus should be on transferring income to the most vulnerable sectors of society, ensuring the survival of both people and companies.

As already suggested, emergency aid, between April and December 2020, was efficient in this regard, guaranteeing income to informal workers and, at the same time, a smaller drop in GDP. According to Sanches, Cardomingo and Carvalho (2021), if it had not been implemented, the drop in Brazilian GDP could have been from 8,4% to 14,8%. But the IMF (2020) is also emphatic in saying that this aid should not be abruptly withdrawn, which contrasts with what happened between January and March 2021, a period in which the aid was canceled in Brazil, to be later resumed with reduced value. Furthermore, a more progressive tax system was never on the government's horizon, despite the notorious regressiveness of the Brazilian tax system (Morgan, 2018).

The second moment in which the role of the State is essential is that of economic recovery. In this regard, public investment is seen as an important channel for stimulating the economy, with its substantive impacts on the generation of growth and employment, especially in times of uncertainty, which have already been documented in the academic literature. In this sense, the IMF (2020) considers that the priorities of the State should be the improvement of the health network, the expansion of the digital infrastructure – given the demands and trends of the service sector – and the transition to a more sustainable development model, in line with the challenges of global warming and environmental protection. According to the study, the increase in public investment in these areas would also have rapid positive effects on the dynamics of private investment, causing the economy to enter a virtuous cycle of growth.

The April 2021 Fiscal Monitor follows the same line. Firstly, it is important to note the emphasis that the study gives to the importance of fiscal actions adopted during the Covid-19 pandemic, to mitigate its social, health and economic effects. In addition, it should be noted that the pandemic is not yet under control, which would reinforce the importance of maintaining fiscal support, although it may be reformulated, for example, through improved segmentation of support. Although, in fact, the document gives importance to the risks associated with the increase in public debt, the institution points out that it would be necessary to balance them with the risks arising from the extinction of current support.

In addition, the study places special emphasis on social inequalities, both those prior to the Covid-19 pandemic that, according to the institution, caused the effects of the pandemic to disproportionately affect certain social groups, as well as the expansion of pre-covid-2021 inequalities. existing ones caused by the pandemic (IMF, XNUMX). Thus, it suggests the need for measures that guarantee access to basic services, such as health and education, and the strengthening of policies that reduce inequalities, as well as strengthening the State's taxation capacity.

The IMF recommendations are part of a trend in the international debate around the management of national economies, which has been giving greater prominence to the role of the State (Cherif, Engher and Hasanov, 2020). Martin Sandbu (2021), based on the recent positions of the IMF and the World Bank, suggests that there would be a “new Washington Consensus” which, in turn, would be less fiscalist, since the focus of these institutions would now be on efficiently carry out public spending and not reduce it.

In conclusion, it is still too early to say whether there is a deeper and more permanent shift in the IMF's positions or whether this change in the institution's posture will only remain as long as the most perverse effects associated with the Covid-19 pandemic last. However, it is important to point out that while the IMF – an institution that has historically pressured countries in their adjustment policies aimed at guaranteeing fiscal adjustment measures when there is an increase in public debt – has highlighted the importance of an expansive fiscal policy during the pandemic period; the Brazilian government has been concerned with the opposite, as if the pursuit of a fiscal adjustment and the reduction of the State's role in the economy would guarantee the resumption of the country's growth, something that has not happened.

Thus, despite the beginning of 2021 being marked by the second wave of Covid-19, the center of the government's agenda was to forward new proposals for fiscal adjustment. While inequalities are accentuated, and the economy remains in perspective of low recovery, the economic agenda seems to be built as if, in 2021, the country had already recovered and immune to the pandemic. Thus, while the spending ceiling remains the main economic concern and there is no clear long-term growth strategy for the Brazilian economy, it does not seem possible to us that the country will be able to adequately face the effects of the pandemic, nor achieve a long-term development trajectory.

* Luiz Fernando de Paula is a professor at the Institute of Economics at the Federal University of Rio de Janeiro (IE/UFRJ). author of Financial system, banks and finance of the economy (Campus).

*Camila Vaz is a doctoral student in sociology at the Fluminense Federal University (UFF).

*Pedro Lange Netto Machado is a doctoral candidate in Political Science at IESP/UERJ.


ECLAC (2021). Statistical Yearbook for Latin America and the Caribbean 2020. Santiago: CEPAL.

Cherif, R.; Engher, M. and Hasanov, F. (2020). Crouching Beliefs, Hidden Biases: The Rise and Fall of Growth Narratives. IMF Working Paper, WP/20/228.

IMF (2020). Fiscal Monitor: Policies for the Recovery. Accessed March 14, 2021 and available at .

IMF (2021) Tax Monitor: A Fair Shot. Washington, April.

Gonçalves, R., Nascimento, JC, Oliveira, AA, Michelman, C., Guidolin and P., Melo, G. (2021). Impacts of emergency aid on income and the Gini index. Note from Cecon n.16, April.

Morgan, M. (2018). Income inequality, growth and elite taxation in Brazil: new evidence combining survey and fiscal data, 2001–2015. IPC-IG Working Paper at the. 165, Feb.

OECD (2021),, accessed on 05/04/2021.

Oreiro, JL and Paula, LF (2021). Macroeconomics of Brazilian Stagnation. Rio de Janeiro: Alta Books.

Sanches, M.; Cardomingo, M.; Carvalho, L. (2021). How much deeper could that well have been? Analyzing the stabilizing effect of Emergency Aid in 2020. Economic Policy Note n.007, MADE/USP, February.

Vilella, C., Vaz, C., and Bustamante, J. (2020). Survey and analysis of economic measures adopted during the COVID-19 pandemic.  Economic Policy Note GESP IE/UFRJ, June.


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