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The Great Recession and Developing Countries
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low public and external indebtedness, a flexible exchange rate regime, an improved government debt profile and net external asset composition, a strong and sustainable financial sector, substantial and increasing domestic demand, and trade diversification.
First, the return of productivity growth and capital accumulation to the levels prevailing during the precrisis economic boom suggests that the current recovery will be sustainable as long as domestic and external macroeconomic conditions remain reasonably stable. Productivity growth and capital accumulation are highly dependent on a stable macroeconomic environment, increased FDI flows, and access to external financing. Given Brazil’s strong reputation—a reputation that has only been enhanced by the crisis—these conditions seem to be highly probable, at least in the short run. Second, pending the resolution of several major fiscal reform issues, low public and external indebtedness may allow Brazil to maintain an active fiscal policy in the coming years. This will enable the country to sustain economic dynamism, even with low global economic growth and finance external deficits stemming from domestic demand expansion, without placing its fiscal and external sustainability at risk. Of course, as saving rates are likely to remain low, external liquidity conditions will affect Brazil’s ability to finance domestic expansion through external savings. Third, the flexible exchange rate has enhanced the country’s ability to accommodate shocks, while an improved government debt profile has attenuated the effects of exchange rate adjustments on debt sustainability, thereby freeing monetary and exchange rate policy from fiscal dominance. In addition, the newly enhanced composition of net external liabilities has made them pro-cyclical, thus preventing deterioration of the current account balance during adverse shocks and promoting external debt sustainability. Fourth, the solid financial system has been a key stabilizing factor, as the effects of the global financial crisis were not transmitted through domestic financial channels. While not immune to the effects of the crisis, the financial sector did not succumb to systemic risks—an