Here’s the math: a Selic rate of 14.25% alongside inflation of 4.72% works out to a real interest rate of 9.53%. In its latest Monetary Policy Report, COPOM put the “neutral” interest rate — the theoretical rate at which policy neither speeds up nor slows down inflation — at 5%. That’s a useful yardstick: it tells us just how tight policy still is, even after the latest cut. A real rate of 9.5% against a neutral rate of 5% means borrowing costs are running 4.5 points above neutral.

Inflation has kept bouncing between running hot and sitting right at the ceiling of its target range — a sign that Brazil’s inflation-targeting framework isn’t working as it should. The problem has only become more visible since the Central Bank won its formal independence in 2021. In the years since, COPOM has failed to steer inflation back to the center of its target, despite keeping real rates well above neutral for years on end.

Why has the Bank fallen short, even with rates this high? That deserves a closer look. But there are some clues. In recent days, COPOM’s latest statement has drawn heavy media coverage — and plenty of confusion. The Committee left the door open to multiple readings: it flagged an uncertain outlook shaped by shocks, while also pointing to “different possible paths” for interest rates, and pushed back its inflation-convergence target all the way to 2028. Economists were left scratching their heads.

Inflation targeting itself is a legacy of the rational-expectations revolution of the 1970s. Until then, the conventional view was that inflation came from either too much money in circulation or a tug-of-war between workers and businesses over wages and prices. The rational-expectations idea changed that: inflation, in this view, depends on the information people and firms have when they set prices and wages. A company setting its prices today is essentially betting on what it expects the economy to look like tomorrow. Inflation, in other words, stopped being a purely monetary phenomenon and became partly psychological.

That shift put information at the heart of pricing decisions — and in the 1990s, it changed how central banks operate. Previously, they steered the economy by controlling the money supply directly. From the 1990s on, they shifted to managing interest rates instead, adjusting them to meet the market’s demand for liquidity. It wasn’t just a change of tool, from money to interest rates — central banks also started being upfront about how they’d react, laying out their playbook publicly under formal inflation targets.

The whole system runs on one thing: the target itself is a signal. If people form rational expectations and firms price based on the best information available, and if they trust the central bank, they’ll set prices around the announced target. That’s where communication comes in — it’s not just PR, it’s a core policy tool, filling in the information gaps that help businesses and workers decide what to charge and what to pay.

Seen that way, a statement like COPOM’s latest one backfires: it stirs up the very uncertainty it’s supposed to calm. And this isn’t a one-off. Since 2021, the Bank has repeatedly pushed back its own timeline for getting inflation under control — and that keeps chipping away at the credibility the whole system depends on. If the Bank doesn’t sound convinced inflation will converge, why should anyone else be? People will start pricing based on other cues instead — and at that point, the interest rate itself stops doing much of the work.

Bottom line: the Central Bank’s struggle to hit its inflation target since gaining independence in 2021 probably has less to do with how high rates are set and more to do with how it talks about them.

The above article by Benito was originally published in Portuguese in the Correio Braziliense

In the mid-1970s, a new approach emerged in the economic literature seeking to explain this phenomenon: the theory of political electoral cycles. Pioneers in this field, such as William Nordhaus, Douglas Hibbs, and Alberto Alesina, argued that in democratic societies the economy is influenced by political institutions, including electoral calendars and competition for office between incumbents and opposition forces. These elements, they argued, help explain economic outcomes — including the very existence of economic cycles.

Models designed to theorize electoral cycles are generally divided into two groups: (i) opportunistic political cycles and (ii) partisan (or ideological) political cycles. In the first group, whose pioneering model was developed by Nordhaus (1975), a politician currently in office seeks to remain in power and uses traditional monetary and/or fiscal policy tools to increase the likelihood of re-election. In other words, driven by personal political incentives, the approach of an election triggers a reduction in interest rates, leading to higher GDP growth and lower unemployment, while creating an inflationary legacy that emerges after the election — when the politician has already secured another term. The main criticism of this model is that, if expectations are rational, voters will eventually anticipate such opportunistic behavior by politicians in future elections.

The second family of models approaches electoral competition through ideological differences between right-wing and left-wing parties regarding economic policy. In Alesina’s (1987) model with rational expectations, voters form inflation expectations based on the probability that either right-wing or left-wing parties will win. The assumption is that right-wing governments are more concerned about inflation, while left-wing governments place greater emphasis on reducing unemployment and are therefore more tolerant of higher inflation. Since there is uncertainty about who will win the election, public inflation expectations are treated as a weighted average based on each party’s probability of victory.

The consequence, in a rational expectations framework, is that regardless of the election outcome, rational voters will be surprised. In other words, because expectations are a weighted average, if a left-wing party wins and implements its government program, inflation will be higher than expected and unemployment lower (an expansionary cycle). If the election is won by a right-wing party, inflation will be lower than forecast and unemployment higher (a recessionary cycle).

It is important to note that in Alesina’s (1987) model, the driving force behind the cycle is uncertainty about which government program will be implemented after the election. If right-wing and left-wing parties converge ideologically on economic policy issues — or if one party has a very high probability of winning — uncertainty disappears and, consequently, no economic cycle emerges. The opposite is equally true: elections marked by sharp ideological divisions between the right and left on economic issues, and/or by very close races in terms of each side’s probability of victory, tend to intensify economic cycles. These cycles become more recessionary in the event of a right-wing victory and more inflationary if the left wins.

In short, the model’s central message is that uncertainty generated by the electoral process has consequences for economic well-being. This appears to be a particularly relevant issue in Brazil as the country approaches another election, with polls indicating a close contest between two groups with significantly different views on economic policy. Understanding the candidates’ positions on these issues seems even more important in the current environment, in which inflation has once again moved away from its target and public debt has reached worrying levels.

What strategies do the candidates have for addressing the country’s real problems?

This article by Benito has first appeared in Portuguese in the Correio Braziliense.

A slow squeeze

The present condition is one of vulnerable stagnation. Since the hidden debt crisis of 2016, real GDP growth outside the extractive sector has hovered around 2% — barely matching population growth. In per capita terms, the non-extractive economy has flatlined for a decade.

Fiscal deficits of 4–6% of GDP have been financed increasingly by domestic banks, but that model is hitting its limits. In March 2025, S&P classified local-currency debt as “selective default.” By late 2025, arrears had extended to short-term treasury bills. Meanwhile, bank credit to the private sector has fallen from 26% of GDP in 2021 to under 19% by end-2025. The state is absorbing the resources that could otherwise fund private investment, while commercial lending rates exceed 12% in real terms — prohibitive for most productive activity. Survey evidence confirms the picture: manufacturing productivity has stagnated over two decades, 70% of firms face credit constraints, and enterprises cope through cutting jobs rather than expansion.

A decade of muddling through has crowded out any serious growth strategy. The wage bill and debt service dominate spending, leaving chronic underinvestment in infrastructure, education, and agriculture. Schools and health facilities lack supplies, roads deteriorate, and social protection has weakened sharply. Payments under the basic social subsidy program have become highly irregular, with many elderly beneficiaries receiving only a fraction of what they are owed. Poverty has increased, with around two thirds of the population now below the poverty line.

Demographic pressures are intensifying. Mozambique needs to absorb roughly 500,000 new labor market entrants annually by 2030, yet the formal sector generates a small fraction of new jobs. Informal work dominates and without a step-change in growth, it will only expand. Each year of stagnation adds another youth cohort to an already strained labor market. Delay does not preserve stability — it makes eventual adjustment larger and more costly.

The exchange rate question

The metical has been held stable against the US dollar since 2021, but in real terms it has appreciated by over 20%, eroding export competitiveness. Foreign exchange shortages are now pervasive. The parallel market premium reached around 14% by late 2025 — and even this likely understates true scarcity, as firms report severe and lengthening delays in accessing FX through formal channels.

The policy response has been administrative: raising exporter surrender requirements, tightening banks’ FX position limits, restricting overseas card usage. These measures treat symptoms, but the underlying misalignment only deepens.

The overvalued exchange rate functions as a tax on the non-resource economy. Non-megaproject exports have fallen from over 11% of GDP in 2022 to under 8% in 2025. The IMF’s assessment finds the non-megaproject current account deficit 5.4 percentage points wider than the estimated norm. Recent fuel shortages and panic buying — driven in part by importers’ inability to secure foreign exchange — provide a visible demonstration of the mounting costs.

The politics of adjustment

The Mozambican state functions, in part, as a *de facto* social protection mechanism for the urban middle class. Our research shows roughly half of all university graduates find employment in the public sector, and having a public sector job is one of the best predictors of not being poor. The wage bill underpins political legitimacy — which is why attempts to cut discretionary 13th-month salary payments were quickly reversed once key workers threatened to strike.

Exchange rate adjustment poses a parallel dilemma. A depreciation would raise the cost of imported food and fuel, hitting urban households directly, and any price increase would spark calls to hike minimum wages. With the memory of popular violence still fresh, there is a strong bias toward the status quo.

But as pressures mount, there is a growing risk of compounding distortions. So far the temptation has been to respond with new administrative controls, including import restrictions, tighter capital controls, and preferential credit allocation. The handling of the fuel price shock illustrates the pattern: rather than adjust pump prices promptly, the government has held prices fixed, leaving distributors to manage the shortfall through supply rationing. The cost has not disappeared — it has been transferred to consumers, who pay in hours lost to queues, unpredictable supply, and knock-on disruptions.

Each temporary fix may ease immediate pressures, but tends to deepen the underlying misalignment, push activity into informal channels, and narrow future options. The paradox is that by shunning adjustment in manageable doses, policymakers increase the likelihood of the disorderly correction they are trying to avoid — and simultaneously weaken prospects for growth.

Feasible pathways

Path 1:

Muddle through and wait for LNG. This is the current trajectory. Fiscal adjustment occurs passively, driven by financing constraints rather than strategy. The assumption is that LNG revenues could materialize from the early 2030s. Even if that timeline holds, continued stagnation would further erode public services, weaken institutions, and deepen social frustration — and another general election must be managed. By the time resource revenues arrive, the state may lack the capacity and public trust to deploy them effectively.

Path 2:

Gradual, growth-first adjustment. The most economically coherent path, though politically demanding. The central premise: restoring non-extractive growth must take priority, even at the cost of short-term macroeconomic discomfort. Key elements would include a phased depreciation of the metical to restore competitiveness, supported by clear communication and strengthened social protection; acceptance of temporarily higher inflation, with policy focused on preventing second-round effects rather than suppressing the initial price shift; a fiscal framework centered on spending quality and revenue efficiency — at over 21% of GDP, the tax ratio already exceeds the African average and is high for the income level; wage bill containment through hiring restraint and attrition; re-engagement with external partners under a credible program framework; and a focused, financially viable growth strategy targeting agricultural productivity, labor-intensive exports, and a predictable regulatory environment.

Path 3:

Forced adjustment. If domestic banks further reduce sovereign exposure or external shocks bite deeper, adjustment may be imposed suddenly — involving disorderly exchange rate movement, abrupt fiscal contraction, and potential banking sector stress. The longer gradual adjustment is postponed, the higher this probability.

The narrow path

There is no easy option. Every adjustment has visible losers, while the benefits remain uncertain, delayed, and diffuse.

But one priority stands out: boosting growth beyond extractive sectors. Without it, fiscal consolidation is self-defeating, job creation will remain grossly inadequate, and social pressures will only intensify. Stabilization pursued in isolation, or at the expense of growth, could be bad medicine.

This growth strategy must be grounded in evidence. Mozambique has not lacked for projects or initiatives, but it has lacked consistent use of rigorous data to identify what drives productivity and job creation. Despite widespread recognition that youth employment is the central challenge, the country lacks regular instruments to monitor labor market outcomes. The school-to-work transition surveys implemented under the IGM program — tracking over 3,800 graduates from classroom to labor market — were the first of their kind, built from scratch because no systematic data existed. Without such discipline, public spending risks undermining instead of stimulating inclusive growth. The task is not to design another set of projects to maximize donor engagement, but to build serious evidence about what works — and stop doing what doesn’t.

The window for a controlled, policy-driven adjustment is narrowing fast. The alternative is not stability. It is adjustment under worse conditions, at higher cost.

This article by Sam has originally appeared in The Conversation.

Two key questions emerge from this issue. First, what are the causes behind such an unsustainable trajectory of public indebtedness? Second, how can this trajectory be corrected? This article will focus on the first question.

Some economists argue that the rapid growth of public debt is primarily the result of fiscal imbalances. But is that really the case? Between 2023 and 2025, the federal government’s primary deficit fell from 2.4% to 0.4% of GDP. Over the course of three years, the budget registered a fiscal adjustment equivalent to 2% of GDP. One would have expected this effort to influence the trajectory of public debt growth.

A recurring explanation offered by market economists is that the fiscal deterioration is not reflected in the primary balance itself, but rather in the supposedly “unsustainable” trajectory of public spending. Once again, the data tell a more nuanced story. In real terms, public expenditure did indeed rise from R$2.118 trillion in January 2023 to R$2.439 trillion in January of this year — a real increase of just over R$300 billion. However, when measured as a share of GDP, the increase was far more modest: primary expenditure rose from 18.4% of GDP in January 2023 to 19.1% in January 2026. In other words, the increase amounted to little more than half a percentage point of GDP over the three-year period.

From virtually any perspective, it is difficult to sustain the argument that an 8-percentage-point increase in the debt-to-GDP ratio over three years can be explained by a deficit that shrank by 2 percentage points of GDP during the same period. Nor can this dynamic reasonably be attributed to public spending, which rose by only 0.6 percentage points of GDP over that span. In short, while Brazil undoubtedly faces a fiscal problem, it has been overstated in the public debate and is certainly not the principal driver of the recent expansion in public indebtedness.

This brings us back to the original question: what, then, explains the rise in debt? A definitive answer would require deeper investigation, but the evidence suggests that the phenomenon is linked to the refinancing cost of the DBGG. One striking feature in the data is that the average implicit interest rate on the DBGG between 2023 and 2026 stood at 11%. The implicit interest rate serves as a useful proxy for the cost of rolling over the debt, since it condenses interest payments and financial charges relative to the stock of debt into a single figure.

As noted, the average implicit rate over the three-year period beginning in 2023 remained at 11%. It stayed at this level even during the brief period between August 2023 and September 2024, when Brazil’s Central Bank lowered the Selic benchmark rate from 13.75% to 10.5%. This indicates that the refinancing cost of public debt barely responded to the monetary easing cycle experienced during that period. The finding introduces additional uncertainty into the debate, particularly as the Central Bank embarks once again on a new cycle of monetary easing. It appears increasingly likely that lower interest rates may not significantly reduce the government’s financing costs.

In summary, the government’s implicit debt cost has remained virtually unchanged at around 11% per year in nominal terms. It did not decline in response to the clear improvement in the primary balance described above, nor did it react to periods — however brief — of monetary easing. Furthermore, there is no guarantee that another round of fiscal adjustment, capable of moving the economy from a deficit of 0.4% of GDP to a surplus of 2% of GDP — a total fiscal effort of 2.4 percentage points — would have any meaningful effect on the debt-to-GDP ratio if the refinancing cost of the debt itself remains unresponsive to fiscal conditions.

This phenomenon deserves deeper academic investigation. Yet, given that refinancing costs are determined by equilibrium in the bond market — where the government issues debt securities and investors purchase them — there appears to be a disproportionate premium demanded by holders of public debt in order to finance the Treasury. This may reflect a widespread belief among these market segments, albeit one only weakly supported by the data, that the current fiscal policy framework is unsustainable.

If this hypothesis holds true, solving Brazil’s fiscal problem will require a profound reversal of these expectations and a reassessment of investor sentiment, particularly among those who purchase Treasury debt. Ultimately, addressing the fiscal challenge will require a broad pact around public debt — one that demands from the government a substantial effort to rebuild credibility and reputation on fiscal matters, but also greater goodwill from the market participants who finance that debt.

This article has originally appeared in Portuguese in the Correio Brasiliense.

Does economic growth matter? Oh yes, it does. By using the 70/g rule we can predict that an economy growing at 2% per year doubles its income per capita every 35 years. Furthermore, growth tends to raise all boats and reduce inequality. So, growth matters for economic welfare.

What does economics tell us about growth in South Africa? Well, classical papers by Solow, Romer, Mankiw, Romer and Weil, Barro, and Hall and Jones provide us with models and empirical evidence suggesting that savings and physical capital, technology, human capital, macroeconomic stability and institutions play positive roles on economic growth.

To fix ideas, by making use of standard undergraduate economics textbooks, we learn (in my case, I teach) that growth is determined by:

1. savings (higher savings finance investment)

2. fertility (lower fertility increases capital per worker)

3. rule of law (institutions facilitate physical and human capital accumulation)

4. government consumption (low nonproductive government consumption is not detrimental to growth)

5. international openness (it encourages the spread of ideas and technologies and learning)

6. public goods provision (an educated and healthy population can use new technologies and also create new technologies)

7. inflation (low inflation is not detrimental to economic growth)

8. finance (finance is needed for all sorts of investment).

In addition, Easterly and Levine suggest infrastructure, that is, telephones per worker, paved roads and the quality of the electric power system, as an extra growth driver.

Well, now can collect data on those eight/nine textbook drivers to see how they fare in South Africa. With data on those drivers we can try to understand why South Africa, a developing country, does not grow at, for instance, Chinese, Indian, Brazilian rates. Furthermore, by looking at those drivers we can set our expectations to what our modest growth rates can actually do for, in this case, unemployment and inequality.

First things first, income per capita is lower than in 2010 and the overall trend has been flat since 2007. And income per worker (a crude measure of productivity) has been flat since 2007 as well. Savings is hovering around 12% of GDP and fertility rates have been decreasing over time which illustrates South Africa’s demographic transition.

Government spending as well as public sector corruption are up. Government spending on health and education, however, has been rather stable over time.

Trade openness is slightly higher than in 1990, but not much higher than in 1980. Access to credit has been declining since 2005. And electricity supply has actually decreased since 2008.

Taking the above at face value, and bearing in mind that economic policy needs more than just some descriptives, what can we say about the growth drivers in South Africa? Let me answer the question with some research questions. Why do we save and invest so little in South Africa? How come government corruption is on the rise? About government consumption: is the government engaging in nonproductive consumption? Or instead, spending productively on health and education and consequently improving welfare and also productivity? The variable for finance indicates that South Africans do not have much access to credit. Why is that so?

In a nutshell, just by looking at the data one can speculate that we do not grow much because we do not invest much in productive activities, or because rule of law is less than ideal. Or perhaps because the government is consuming unproductively, or because we have too many people still dying of TB and AIDS (which is unfortunately the case). Or because prospective entrepreneurs do not have enough finance to invest in productive activities. Or simply because the infrastructure is not up to scratch. Hall and Jones (1999) synthesize the process of output production well when they state “and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure.”

After identifying what the growth drivers are and how they fare in South Africa, we can then think about policies. I am not a policy maker (although I like to believe that I teach some future ones), but economics is an intuitive subject and it must make sense to anyone, so one could ask: can’t the government modernize its bureaucratic procedures so that entrepreneurs (small and big, nationals and foreigners) can invest more in productive activities? Institutions are about how governments behave as well. What practices can the government adopt to improve its quality and consequently incentivize growth? Automation of procedures is one, investment in a better civil service is another. Are there policies, or incentives, that can be implemented so that our (highly concentrated) financial sector starts providing South Africans with savings accounts and also fulfill their primary function, that is, provision of finance for investment in productive activities? Lastly, but not leastly, about infrastructure: (sadly) the Eskom debacle comes to mind: what can be done so that Eskom does not make the same mistakes (mistakes here is an euphemism for corruption and bad governance) again? Yet again, to design sound policies we need more than just the descriptives above and the cheap speculation that I engaged in the previous two paragraphs. We need solid data and economic analysis, nevertheless, having the growth drivers in mind might help to put things, at least, in perspective.

All in all, identifying the growth drivers and looking at the data is a valid preliminary exercise that helps us understand why our economy does not display Chinese, Indian or Brazilian growth rates. If we can not display those growth rates, then we can not expect too much from our modest growth rates in reducing unemployment and inequality. Needless to say that modest growth is much better than stagnation (the 70/g rule illustrates the point well). To conclude, the examples of Bernanke and Yellen, top academics who became top policy makers, illustrate the importance of solid economics and sound policy well. I hope this article encourages students, economists and policy makers to look more often at the data (and also at the papers, or perhaps just at the textbooks) of growth drivers so that problems can be identified, intriguing research questions posed and better policies implemented.

Recent data show that Gross General Government Debt (GGGD) has reached 79.2% of GDP, up from 71.4% in January 2023. In just over three years, debt has risen by 8 percentage points of GDP—and the trend remains upward. With elections less than a year away, the identity of the next president is uncertain. What is clear, however, is that the incoming administration will have to confront fiscal adjustments.

To understand how today’s debt levels constrain tomorrow’s policy choices, it is useful to revisit the work of Lucas and Stokey (1983). Their model of dynamic inconsistency shows how a government’s tax structure—by affecting interest rates on debt of different maturities—shapes the trajectory of public debt. In a simplified barter economy with no money, and where debt carries over between governments, the fiscal and monetary decisions of one administration effectively limit the options of the next.

In such a setting, taxation is constrained by the real economy. Households’ preferences over work and consumption restrict how much governments can tax without causing distortions. These distortions, in turn, lead to socially suboptimal outcomes. Without money, governments also face limits on borrowing, since future taxation cannot be expanded indefinitely to service debt. In this framework, public debt is dynamically consistent: what one government does determines the fiscal space available to the next.

Introduce money, however, and the picture changes. The constraint on taxation is replaced by the temptation to finance debt through money creation—in effect, an inflation tax. A government that accumulates debt creates an incentive for its successor to inflate it away. This leads to dynamic inconsistency, as policymakers may resort to discretionary money creation to deal with inherited liabilities.

Of course, modern economies differ from this stylized framework. Inflation-targeting regimes and independent central banks weaken the direct link between money supply and inflation. Governments do not typically repay debt by printing money, but by issuing new debt. Even so, the model offers useful insights.

The barter analogy highlights a key point: real economic constraints limit both taxation and public debt. While inflation can ease these constraints, it comes at a social cost—and in Brazil, strong public aversion to inflation acts as a political check on such strategies.

Returning to the present, Brazil’s public debt has climbed sharply, reaching nearly 80% of GDP. A decade ago, in December 2015, it stood at 65.5%. That lower level was already central to the severe economic crisis of 2014–2016.

There are important differences between then and now, and there is no need for alarmism. Fiscal policy has absorbed multiple shocks since 2015, helping explain today’s higher debt levels. Still, one conclusion is unavoidable: the next government will not have the room to increase debt by another 8 percentage points of GDP.

In short, whoever takes office will inherit tight fiscal constraints. How to stabilize the debt-to-GDP ratio—an issue with direct consequences for society—should be at the center of the electoral debate.

This article by Benito was previously published in Portuguese in the Correio Braziliense.

Check the page and make use of the resources and, if useful, please spread the word to your colleagues and students, it is a public good.

To begin with, Africa experienced more than just the trans-Atlantic slave trade. Africa exported slaves to other destinations as well, not only to the American continent. Although the trans-Atlantic slave trade was the largest in terms of numbers, Africa experienced the trans-Saharan, Red sea and Indian ocean slave trades as well. Those routes, in fact, predate the trans-Atlantic trade. So, either the BBC text is inaccurate or the UN ‘forgot’ to vote for something like ‘to recognize the enslavement of Africans during the four slave trades’. Needless to say that, had the resolution been slightly different, including all four slave trades, some countries that voted in favor of the resolution, would probably abstain. Now let’s move to more interesting and important things than BBC sloppiness and UN politics.

First, there is evidence, provided by Nathan Nunn1, that areas that exported the largest number of slaves during the slave trades period present lower income per capita in 2000. That is essentially telling us that historical events, like the slave trades, translate into long-run effects such as contemporaneous underdevelopment. Second, Nathan provides evidence that the same areas have higher ethnic fractionalization. Third, he provides evidence that those areas also have lower state development/capacity. He also shows some comparative evidence, using 20th-century data, suggesting that areas that did not export slaves tend to be more developed than those areas exporting slaves during the slave trades period.

In another paper, Nathan and Puga2 show that terrain ruggedness, which is usually associated with lower trade, lower interactions and lower economic activity, in Africa is associated with higher contemporaneous economic activity. The channel here is that people would use the ruggedness as shelter from the raids taking place during the slave trades period. And in yet another paper, Nathan and Leonard Wantchekon3, show that Africans whose ancestors suffered with the slave trades have, now, lower social trust in general. The evidence suggests that the trades had long-run effects on social norms, which affect state formation, conflict, economic decisions and activity.

As an intuitive example (and maybe one day I will write a paper about that), Brazil, which was, as a colony, very much part of the slave trade for three centuries and that abolished slavery only in 1888, is an interesting example of the effects of slavery at the destination. The northeast, particularly the state of Bahia (dominated at the time by sugar cane plantations), received a large number of slaves during colonial times. That means a number of outcomes and institutional developments, such as land distribution, income inequality, state formation, public-goods provision and development in general took place in Bahia. And as we know, institutions are persistent. On the other hand, the state of Sao Paulo is also an interesting case, it was ‘colonized’ later in time and received a smaller number of slaves (coffee plantations). That probably led to another number of outcomes and institutional developments. As we speak, the state of Sao Paulo is richer and more developed than the state of Bahia.

In all, the literature on African development has been evolving nicely, with a bunch of papers making use of innovative datasets and ingenious research questions. This literature has been spearheaded by Nobel laureates and also by a bunch of young and resourceful researchers, and that can only enhance our knowledge of the continent and, hopefully, have a positive impact on policy implementation and outcomes. And the same is happening in Brazil, with more and more capacity and datasets being made available, our knowledge can only go one way, and with better knowledge we might get better policies/incentives and better outcomes. I very much doubt that the incomplete, to say the least, UN resolution will have much of an impact on outcomes, on people. There are other ways of driving growth, development and prosperity than resolutions.

Maintaining a benchmark interest rate at 15% in a context of declining inflation results in a higher ex ante real interest rate. Based on the latest data (the IPCA inflation rate for January at 4.4%), the ex ante real rate would stand at approximately 10.6%.

A more refined assessment suggests that whether the real interest rate is high or low should be judged relative to a benchmark—the so-called neutral rate of interest. The concept of the neutral (or natural) rate dates back to the seminal work of Knut Wicksell (1890). In contemporary terms, it is defined as the real interest rate that exerts no influence on inflation. In other words, if the real rate equals the neutral rate, monetary policy is neither stimulating nor restraining economic activity and, consequently, prices.

Recent estimates by the Central Bank itself indicate that Brazil’s neutral rate is around 5.5%. Against this backdrop, keeping the Selic rate at 15%, which implies a real rate of 10.4%, means that real interest rates in Brazil are approximately 4.9 percentage points above neutral. This reflects the degree of monetary policy contraction.

Had the Central Bank opted for a modest 25-basis-point cut at its previous meeting, monetary policy would still have remained in contractionary territory, albeit less intensely (around 4.7%). The issue, therefore, is not a change in the policy stance, but rather a recalibration. In its statement, the Central Bank justified its decision to maintain the nominal rate by highlighting two factors: (i) the resilience of the labor market and (ii) unanchored market expectations.

Starting with the first argument, by attributing its decision to keep rates high to labor market conditions, the Central Bank draws on the traditional literature surrounding the Phillips curve and its short-term trade-off between inflation and unemployment. However, the recent disinflation process has taken place despite the resilience of Brazil’s labor market. I raised this point in a recent column in Correio Braziliense, titled Inflation and the Labor Market. More recent refinements of the Phillips curve literature suggest that, under certain conditions, disinflation can occur without any cooling of the labor market. This appears to be the case in Brazil today. As such, the Central Bank’s concerns about labor market strength may reflect excessive conservatism.

The second point, however, is more problematic. Claiming that inflation expectations are unanchored based on median projections from the Focus survey may prove to be a mistake. In the first September report (05/09/2025), the median forecast for the IPCA stood at 4.85% for 2025 and 4.30% for 2026. The actual cumulative IPCA reading for December 2025 came in at 4.2%—well below forecasts made just three months earlier.

In short, the Central Bank effectively delivered in 2025 the level of inflation that had been expected for 2026 only months before. These data show that Focus projections have consistently lagged behind actual developments throughout the year. Calibrating monetary policy at its most contractionary level in 15 years based on such projections may therefore be a mistake—one with significant macroeconomic costs.

Another point that should be incorporated into this discussion is that Focus forecasts must be treated as endogenous. Put simply: why have these expectations systematically underestimated GDP growth while overestimating inflation? Is there anything the Central Bank can do—beyond maintaining excessively high interest rates—to better coordinate expectations?

In my view, the Central Bank could make greater use of communication tools—perhaps forward guidance—to counterbalance these projections. Put differently, does the Central Bank agree that IPCA inflation will reach 4.3% in 2026, or does it have arguments to challenge that outlook?

It is important to note that the Focus survey is constructed from aggregated median estimates and therefore incorporates divergent views. The Central Bank’s own assessment could play a crucial role in guiding expectations back toward anchoring. However, the monetary authority’s stance has so far been timid in this regard.

Ultimately, excessively high interest rates should not be normalized based on unanchored expectations that systematically fail to materialize ex post.

This article by Benito was published in Correio Braziliense just before the latest decision by the BCB to lower the Selic by .25 points.

Habermas was far more than an academic recluse. He embodied the role of the engaged public intellectual, whose interventions shaped key debates on Germany’s postwar identity, European integration, and the future of liberal democracies.

Born on June 18, 1929, in Düsseldorf, on the eve of the collapse of the Weimar Republic and the rise of Nazism, Habermas grew up under the shadow of Hitler’s regime. That formative experience became the existential starting point of his work: the search for a society in which barbarism would be restrained by the force of argument, public reason, and democratic law. For him, democracy was not merely a political system—it was the guiding “magic word” of his intellectual life.

A Paradigm Shift: From Production to Communication

Habermas’s most significant contribution to contemporary social theory was what is often described as a shift from the paradigm of production to that of communication.

While the first generation of the Frankfurt School—most notably Theodor W. Adorno and Max Horkheimer—focused on labor, production, and a critique of instrumental reason rooted in a Marxist tradition, Habermas redirected critical theory toward language and communicative structures. He emphasized the role of communication in social interaction and highlighted the potential of constitutional democracy in shaping collective will and identity.

For Habermas, human beings are defined not only by their ability to transform nature through labor, but above all by their capacity to establish intersubjective relationships mediated by language. From this perspective, he moved away from traditional dialectical methods that treated society as a unified totality, instead interpreting it through the distinction between system and lifeworld.

The Architecture of His Work: Four Pillars

Habermas’s vast intellectual output—studied and debated across languages—rests on several key theoretical axes.

First, his analysis of the public sphere, developed in The Structural Transformation of the Public Sphere (1962), examined the historical evolution of public opinion in bourgeois societies and the role of rational debate in democratic life. He conceptualized the “public sphere” as a sociological category, showing how, from the 18th century onward, it became a space for political discussion grounded in rational argument. This shift marked a transformation in legitimacy: from power rooted in social hierarchies to one grounded in reason and law.

With works such as Technology and Science as “Ideology” and Knowledge and Human Interests (both 1968), Habermas emerged as the leading figure of the Frankfurt School’s second generation, steering critical theory beyond its earlier anthropological pessimism.

In 1981, he published his magnum opus, The Theory of Communicative Action, in which he developed an expanded the concept of rationality oriented toward mutual understanding among individuals capable of language and action. From this foundation, he also formulated discourse ethics—later expanded into discourse theory—in dialogue with Karl-Otto Apel, grounding moral norms in the possibility of rational consensus under ideal conditions of argumentation.

In later works such as Between Facts and Norms (1992) and The Inclusion of the Other (1996)—and more recently A New Structural Transformation of the Public Sphere and Deliberative Politics (2022)—Habermas refined his model of deliberative democracy, in which the legitimacy of law and political decisions depends on active citizen participation in processes of public reasoning.

Even in his late years, Habermas remained intellectually active. In 2019, nearing 90, he published Also a History of Philosophy, a monumental two-volume work tracing the genealogy of post-metaphysical thought through the shared Western traditions of faith and knowledge.

System vs. Lifeworld: A Diagnosis of Colonization

At the heart of Habermas’s theory lies a fundamental distinction between system and lifeworld.

The lifeworld (Lebenswelt) refers to the horizon of everyday experience in which society is symbolically reproduced through culture, social solidarity, and personal development. It is the domain of communication and mutual understanding.

By contrast, the system encompasses the economic and administrative subsystems governed by functional mechanisms—primarily money and power. These systems operate in technical, impersonal ways, often detached from communicative life.

Habermas’s critical diagnosis of modernity centers on the idea that contemporary societies suffer from the “colonization of the lifeworld” by the system. When market or bureaucratic logic invades cultural, social, and private spheres, individuals are reduced to clients or administrative subjects. The result is social fragmentation, crises of legitimacy, loss of meaning, and broader social pathologies.

Law as a “Hinge” and an Unfinished Modernity

For Habermas, modernity—born of the Enlightenment—should not be abandoned but understood as an “unfinished project.”

In contrast to thinkers often associated with postmodernism, such as Michel Foucault and Jacques Derrida, Habermas argued that the emancipatory potential of reason remains unrealized.

Within this framework, law plays a crucial role. He conceived of law as a “hinge” between system and lifeworld, translating normative demands from the public sphere into institutional structures capable of guiding state and economic action. Democratic law thus acts as a safeguard against the unchecked expansion of systemic power and market logic.

Public Intellectual in Times of Crisis

Habermas never confined himself to academia. He fulfilled the classic role of the public intellectual, intervening in major political and cultural debates in Germany and Europe.

In the 1980s, he played a central role in the Historikerstreit (historians’ dispute), opposing attempts to relativize the singularity of the Holocaust. He also spoke out on international issues, including humanitarian interventions such as the Kosovo War, criticized repeated U.S. violations of international law, and became a leading advocate of European political and constitutional integration, promoting the idea of a supranational democracy.

In his most recent writings, published in 2024 under the title Something Had to Change…, Habermas expressed cautious optimism but deep concern over the resurgence of war in international politics. He sharply criticized Western powers for failing to develop effective political responses to the escalation of violence following Russia’s invasion of Ukraine.

A Star That Continues to Shine

The death of Jürgen Habermas marks the departure of one of the last great architects of a comprehensive social theory that still upheld the possibility of human emancipation through reason. His philosophical and political legacy rests on the conviction that language and intersubjective understanding are indispensable foundations of democratic life—making rational public debate the primary antidote to authoritarian tendencies.

In this sense, Habermas can be seen as both a late heir and a critic of the intellectual tradition described by Fritz K. Ringer as that of the German “mandarins.” Like that academic elite, he upheld the normative relevance of theoretical reflection for social life. Yet by shifting the source of legitimacy from elite culture to democratic public discourse, he transformed that tradition’s elitism into a reflective project of communicative rationality.

His influence extends far beyond philosophy and sociology. In recognition of his intellectual legacy, an asteroid was named after him in 1999—a fitting metaphor for a star whose light will continue to guide political, legal, and social thought for generations.

The passing of this towering figure evokes a sense of estrangement similar to one Habermas himself described at the funeral of Max Frisch. Reflecting on modernity’s shortcomings, Frisch reportedly observed that “the enlightened modern age has failed to find an adequate substitute for the religious way of dealing with the final rite of passage that brings life to its end.”

Habermas, however, engaged deeply with religious interlocutors—most notably in dialogue with Pope Benedict XVI—and helped articulate concrete possibilities for dialogue between religious and secular worlds. Today, perhaps more than ever, his words resonate:

“There is a difference between speaking to one another and merely speaking about one another.”1

This article by Douglas and colleagues Georges Abboud and Matthäus Kroschinsky was first published in Portuguese in Consultor Juridico.

A good starting point is to examine key macroeconomic indicators. Beginning with GDP, the average economic growth rate between 2023 and 2025 stood at 2.9%, significantly higher than the rates observed in Brazil over the previous decade. In short, even in the face of shocks such as wars, trade tensions, and other disruptions, the country appears to have broken free from the low-growth trap that defined earlier years. Another noteworthy point is that, depending on GDP figures for the first quarter of 2026, Haddad may become the first—and only—Finance Minister since the Real Plan to avoid a single quarter of negative growth during his tenure. On a quarterly basis, Brazil’s economy has now expanded for 18 consecutive quarters (11 of them under Haddad), an unprecedented streak in the available data.

Economic growth is essential for any economy, particularly those at a middle-income stage. As Vilfredo Pareto observed more than a century ago, in the absence of growth it is impossible to improve the income or wealth of one individual without reducing that of another. In essence, the weak growth of the past decade—and the political resentment that emerged alongside it—was closely tied to the material constraints imposed on social groups by an economy that simply refused to expand, laying bare distributive conflicts.

Yet the minister’s main achievement was not growth itself, but rather his contributions on the fiscal front. Brazil’s fiscal debate since the end of the pandemic has often been marked by a degree of unreality. Advocates of the spending cap continue to defend a rule designed to address an emergency situation in 2016—one that imposed significant social costs by effectively requiring the dismantling of the broad network of public policies and social protections envisioned in the 1988 Constitution.

What Haddad did during his tenure was to bring a measure of rationality to Brazil’s fiscal agenda. Fiscal discipline remains important, and progress has been made: the primary deficit fell from 2.43% of GDP in 2023 to 0.48% in 2025. A fiscal adjustment of roughly two percentage points of GDP over two years is no small feat. But the reduction of the deficit is not the most noteworthy aspect. What stands out is that this fiscal effort was carried out alongside a commitment to distributional goals. In other words, Brazil reduced its deficit while:

• the minimum wage resumed real increases;

• Bolsa Família’s share of the federal budget tripled;

• funding was restored for a range of public policies in sports, culture, science, and technology;

• the personal income tax table was adjusted, alongside a recent reform granting exemptions to workers earning up to R$5,000;

• federal civil servants received wage adjustments after years of accumulated losses.

These measures, among others, were incorporated into the budget. The data show that recent primary balances have been significantly stronger than those observed during the first three years (2017–2019) of the spending cap, when the average primary deficit hovered around 1.5% of GDP—this time without imposing the social strain associated with such a rigid fiscal rule.

The critical weak point of the Haddad era, however, lies in public debt—arguably its Achilles’ heel. In January 2023, Brazil’s Gross General Government Debt stood at 73.4% of GDP; by January this year, it had risen to 78.7%. This means that despite the fiscal consolidation efforts, debt increased by 5.3 percentage points of GDP over three years. It would likely have risen even further without the deficit reduction, but the upward trajectory remains a cause for concern. Moreover, as public debt reflects the interaction between fiscal and monetary policy, responsibility for its evolution lies with the government as a whole—including subnational entities—and should not fall solely on the Finance Minister.

The reality is that whoever takes over the Ministry of Finance in January 2027 will face a far more constrained environment. Allowing debt to rise by another five percentage points of GDP is unlikely to be an option. The challenge ahead will be even greater: to reconcile a fiscal policy capable of stabilizing the debt-to-GDP ratio while preserving the social programs expanded in recent years.

This article by Benito was previously published in Portuguese in Correio Braziliense

Modern economies do not simply use debt. They are organized around it. Households borrow to secure housing, education, and basic consumption. Firms borrow to invest and compete. Governments borrow to build infrastructure and maintain social stability. At the level of the entire system, debt is rarely eliminated. It is rolled over, refinanced, inflated away, or socialized during crises. In this sense, debt is not an anomaly of capitalism, it is one of its core operating mechanisms (Mian 2024; Mian 2026).

Debt exists because economic life unfolds across time. Farmers need seeds before harvest, companies need capital before profits, households need homes before lifetime earnings accumulate, and governments must invest in infrastructure before the benefits of development appear. Borrowing allows resources from the future to be used in the present. But in unequal economies debt also plays a second role: it compensates for structural imbalances. When the productivity of some rises faster than others, households increasingly rely on credit to maintain living standards. When tax revenues are insufficient but social needs remain high, governments rely on borrowing to sustain public spending.

This system produces clear spatial effects. Places with strong institutions, stable property systems, and developed financial sectors attract formal credit and investment. These are the regions where infrastructure expands, cities grow in planned ways, and formal employment dominates. Other places experience a very different trajectory. Where formal credit is inaccessible and institutions are weaker, households and entrepreneurs rely on informal systems of work, housing, and finance.

That is where the informal economy becomes essential. Informal labor markets, informal enterprises, and informal settlements are not simply economic leftovers. They are adaptive systems that allow millions of people to survive where formal institutions cannot absorb them. Informality provides jobs where formal employment is scarce, housing where formal property markets are unaffordable, and credit where formal banking systems are inaccessible (Ohnsorge and Yu 2021; ILO 2025a; ILO 2025b).

Importantly, the formal and informal economies are not separate worlds. They are deeply interdependent. Formal firms often rely on informal labor, subcontracting networks, and low-cost urban services. Informal households rely on formal supply chains, markets, and infrastructure wherever these are available. Even credit systems are interconnected. Development research shows that formal and informal finance often coexist because they perform different functions. Formal lenders have cheaper capital and regulatory backing, while informal lenders often have better local knowledge and greater flexibility (Jain 1999; Link et al. 2022).

This interdependence creates a powerful cycle linking inequality, debt, and informality. When incomes are low and unstable, households borrow simply to survive. When governments face large development needs but weak tax bases, they borrow to finance infrastructure and social programs. When financial crises occur, the burden is redistributed through inflation, austerity, or reduced public services. Many workers respond by turning to informal economic activities. As informality expands, tax revenues weaken further, forcing governments to borrow even more. Debt therefore stabilizes an unequal system, but it also perpetuates it.

The spatial consequences of this cycle are visible in urban development. Formal urbanization requires massive investment in roads, electricity, sanitation, transportation systems, and serviced housing. But in many developing countries public institutions lack the fiscal capacity to finance inclusive urban infrastructure at the pace required by population growth. Cities continue to expand anyway, but through informal settlements and self-built housing. Informal urbanization is therefore not simply a failure of planning. It is often the outcome of debt-constrained governments and exclusionary financial systems (UN-Habitat 2021; Cattaneo et al. 2021).

Artificial intelligence enters this landscape at a critical moment. Its importance lies not only in automation, but in coordination. Earlier digital technologies improved communication and information processing, but AI introduces a different capability: the ability to analyze massive datasets, detect patterns, make predictions, and optimize complex systems in real time. In economic terms, this means AI can help manage the enormous coordination challenges that characterize modern economies.

A large share of contemporary economic costs arises not from producing goods but from coordinating systems. Infrastructure networks are poorly synchronized, logistics systems are fragmented, public administrations are inefficient, and regulatory systems generate enormous compliance costs. Artificial intelligence can potentially reduce these inefficiencies by improving planning, forecasting, tax administration, infrastructure management, and service delivery. In doing so, it could significantly reduce the cost of providing essential goods and services (Calvino, Haerle, and Liu 2025; OECD 2025).

But this technological shift creates a critical fork in the road.

If artificial intelligence is deployed within the existing economic paradigm, it may intensify current inequalities. Productivity gains could concentrate among firms controlling advanced technologies, while labor income declines. Governments may struggle to tax increasingly automated economies. Households could remain dependent on borrowing if the cost of living remains high. Informal economies may persist as survival systems in a more technologically advanced but still unequal world.

In this scenario, artificial intelligence does not eliminate the geography of debt. It amplifies it.

A different trajectory is possible. Artificial intelligence could be used to lower the real cost of essential goods and services across society. If AI helps reduce the cost of housing, transportation, energy, healthcare, and administration; and if those gains are broadly shared rather than narrowly captured, then the structural need for debt could decline. Households would borrow less if basic needs were more affordable. Governments would rely less on borrowing if public systems became more efficient and tax collection improved. Informal economies would not disappear entirely, but their role as survival mechanisms could diminish as formal systems become more accessible and beneficial (ILO 2025b; ILO 2025c).

Such a transformation would produce advantages across multiple dimensions. Socially, it would reduce financial vulnerability and expand economic opportunity. Economically, it would increase productivity by reducing systemic inefficiencies rather than simply shifting burdens through credit. Environmentally, improved coordination of transport, energy systems, and urban planning could significantly reduce waste and resource consumption. Even businesses would benefit from more stable demand, better infrastructure, and lower systemic risk.

This possibility is particularly relevant today because the existing economic order is already under strain. Rising global debt levels, widening inequality, geopolitical instability, and ecological pressures are destabilizing the economic systems that have governed development for decades. Periods of upheaval often make institutional change easier because existing arrangements are already losing legitimacy and stability.

At the same time, artificial intelligence is evolving rapidly. For the first time in history, societies possess a technology capable of managing economic complexity at a very large scale. The question is not whether AI will transform development. It almost certainly will.

The real question is whether it will reinforce a more automated version of debt-driven inequality, or help build a world in which societies depend less on debt because they are organized more intelligently, provide essential services more efficiently, and distribute opportunity more broadly.

References

Calvino, F., D. Haerle, and S. Liu. 2025. Is Generative AI a General-Purpose Technology? Implications for Productivity and Policy. OECD Artificial Intelligence Papers No. 40.

Cattaneo, A., A. Nelson, T. McMenomy, et al. 2021. Economic and Social Development along the Urban-Rural Continuum: New Opportunities to Inform Policy. World Bank / FAO / EU / JRC.

International Labour Organization. 2025a. Informal Employment: ILOSTAT Statistical Update.

International Labour Organization. 2025b. Innovative Approaches to Addressing Informality and Promoting the Transition to Formality.

International Labour Organization. 2025c. Assessment for Designing an E-Formalization Platform for MSMEs and Informal Economy Workers.

Jain, S. 1999. Symbiosis vs. crowding-out: The interaction of formal and informal credit markets in developing countries. Journal of Development Economics 59(2): 419–444.

Link, A. C., M. A. Kose, F. Ohnsorge, and N. Sugawara. 2022. From Financial Development to Informality: A Causal Link. World Bank.

Mian, A. 2024. Breaking the debt supercycle. IMF Finance & Development.

Mian, A. 2026. The debt-inequality cycle. IMF Finance & Development.

Ohnsorge, F., and S. Yu, eds. 2021. The Long Shadow of Informality: Challenges and Policies. World Bank.

OECD. 2025. The Effects of Generative AI on Productivity, Innovation and Entrepreneurship.

UN-Habitat. 2021. Urban-Rural Land Linkages: A Concept and Framework for Action.

So, what to do? In the last two years some influential actors (specifically, the South African Reserve Bank, some financial journalists, some financial sector actors and even some academics) advocated for a lower inflation target, of three percent. Their main motivation for a lower target was that the new three percent target (much to be said about the proposed number) would work as a “miracle” that would drive economic growth in South Africa. From my part, I mentioned many times that countries can have low inflation and no growth. I also mentioned many times the role of institutions, broadly construed, in driving growth. To no avail, it was too late, the empty space had been occupied by the market.. (more on that later).

New year, new stories, new fads.. Institutional development now is the "silver bullet". Recently, Standard Bank’s chief economist has advocated that institutions is the "silver bullet" for economic growth. I was intrigued. The piece argues that "the rule of law and good governance have been on the retreat" "resulting in lackluster economic growth." By just looking at the data, rule of law has actually improved (a bit) wrt its 2019 data point. Government effectiveness, regulatory quality and control of corruption, however, are all down over time. Frankly, anyone who lives in South Africa has seen that institutional deterioration happening over time (recall when they abolished the Scorpions?).

What’s puzzling isn’t the deterioration of institutional quality, but the way the market deals with institutional deterioration. Let me explain. For at least two years, there was a significant lobby from the SARB, some financial journalists, some financial sector actors and even from some academics to make crystal clear, transparent, acceptable to society, that the inflation target would indeed be lowered to three percent (if you’re a macro-oriented person, forget for the moment Lucas, and Kydland and Prescott). The problem wasn’t the change in the target itself, or the new (random) chosen number, but the way the institutional framework of the country was disregarded.

I wrote many times (and received abuse many times) that the rule of the game was clear: the National Treasury of South Africa (the democratically elected body) decides what the target is and the SARB (independently) implements monetary policy to achieve it. Period. To be fair, during the last two years the NT remained quiet for some time wrt the new target. That quietness gave space and the ‘common knowledge’ that the SARB had the right to influence the debate in the way they did. At some point last year the NT issued a rebuke reminding the SARB and society of the rules of the game. But it was too late. By the time of the rebuke, the SARB was well entrenched in that territory of a lower target and it stood its ground effectively. The interloper, the NT, had to concede. And so it did. The target was lowered to the proposed three percent. (In addition, towards the end of 2024 the IMF raised the issue of “clarify the process…” as well.) With the benefit of hindsight, it seems that nobody was paying much attention to the institutional side of things..

Wait, what? But aren’t institutions the new "silver bullet"?

Exactly! More fundamentally, the above illustrates that the institutional framework was bent by those actors pushing for a new lower target without following the rules of the game. It seems that depending on the cause, it’s okay to bend the rules, anything goes. Now some of the same actors who advocated for a lower target and who bent the institutional framework come to society and say that, well, we need better institutions, we need the institutional "silver bullet". These actors bent the rules and therefore are very much part of the institutional deterioration taking place in SA. And that institutional deterioration isn’t any good for growth. Institutions rule! Right?

In short, central bank independence matters for monetary policy. And it’s fine that the central bank has the support of the market (just keep in mind that the market doesn’t have society in mind, but their shareholders..). But that doesn’t mean that an independent central bank(er), can go wild in the African savannah, disregarding the institutional body of a country. Institutions rule for growth, and for all!

I covered income per capita and growth, institutions and state capacity, cities and urbanization, fertility choices, public goods provision, structural transformation, and then touched on some policies such as e-procurement, schooling and labor market reforms.

I think the presentation went okay. After showing them some data, I just tried to make sense of it with some economics. Nothing fancy. I finished the talk by throwing some policy ideas at them. These policy ideas come from papers recently published in journals such as AEJ, JPE and Econometrica and use data from similar developing countries.

They include the (potential) implementation of e-procurement by the City of Tshwane Metropolitan Municipality, that’s where the capital Pretoria is, so that the conversation about low government effectiveness, regulatory quality and control of corruption could get started. In addition, I mentioned the importance of access to quality education to those living in slums, known as townships in South Africa. Specifically, the role of either “transplanting” the good city schools to the township or “transporting” township kids to the good city schools. That would allow the conversation about improving the quality of education to get started as well. It would also kick start the conversation about economic mobility. I also mentioned informality and asked them whether migrants from poor rural areas would be unemployed in cities. I didn’t wait for their answer, I only had twenty minutes. Well, the answer is ‘not necessarily’. It all depends on how flexible wages are, and minimum-wage laws came to mind.

After the above lunch was served, and it was good.

Then it was back to work. Two presentations followed. One on special economic zones and another on transformation in the automotive industry. Apparently the automotive sector isn’t very transformed. So the need for more transformational incentives1. The one on special economic zones actually caught my attention. There was a lot on the history of the automotive industry in SA and on the direct and indirect jobs created by the industry, and also on the need to somehow protect the industry. There was also something on the Mercedes-Benz plant, which is located in East London, Eastern Cape. I got from the presentation that most cars from that facility are, or used to be, exported to the US. Given the new American administration decisions on tariffs and other uncertainties wrt international trade, that Mercedes-Benz facility seems to be in trouble. I also noticed, but I’m happy to be corrected, a certain indifference towards EVs.

After those two presentations there was a Q&A session. I asked the gentleman presenting on the special economic zone some questions:

1. there’s been a number of policy interventions over time in the automotive industry, mostly import-substitution type policies. Are there data and studies, such as before and after interventions, so that we can actually see the clear, clean, effects of those policies, for example, on employment? (recall that SA has one of the highest unemployment rates this side of Mercury);

2. about automation: do you have data on number of robots in SA and how automation has been affecting employment in the sector?

   

3. about globalization, which has been in decline since at least 2016, is the slowbalization affecting the industry? If so, how? (the Mercedes-Benz example, a facility dedicated to exports, came to mind);

4. given that we live in the age of the car, why not incentivizing cheap, small, economical, EVs for the internal market? (most South Africans live in townships, which are far from where the jobs in services are and, on the top, public transportation is notoriously inefficient in the country);

5. I also mention the Brazilian case where Chinese EVs are used by all sorts of workers in the digital platform services industry;

6. finally, I mention that incentivizing exports without taking a brief look at general welfare is probably not an ideal way of implementing policies. (I was going to say not Pareto optimal..)

For answers I got a number of polite nods, some smiles, but never any information on data, studies, employment effects, general welfare.. I decided to shut up then.. Overall, I enjoyed the event but there is much to be done in Pretoria so that the city becomes a better place to live, for all. Data is certainly the first step so that we can actually say something about policies being implemented and their welfare effects, and then convince policy makers that the world changes for the better, or for the worse. Good economics also helps. Data and economic analyses are key.

The new Kaldor facts of growth, advanced by Jones and Romer, highlight the roles of ideas, institutions, population and human capital in the process of development. And unified growth theory, advanced by Galor, highlights how economies change over time.

Unified growth theory divides economies into three regimes. The Malthusian regime in which increases in income are temporary, say, shocks have no long-run effects on income. Then there is the Post-Malthusian regime in which some technological progress and industrialization take place, income increases and human capital formation starts taking place as well. During this transitional period, urbanization also takes place. Lastly, in the sustained growth regime technological progress and industrialization take off and demand for educated workers who can operate technologies increases. In fact, because of technological progress, human capital returns increase and it takes a central role in the production process. In addition, fertility rates see a reduction and the demographic transition takes place.

Let’s borrow from the above and see where South Africa is. The picture below depicts agriculture, forestry and fishing, value added (% of GDP). It illustrates the steady decline of that sector in South Africa. This is expected. As economies grow, develop and prosper, people migrate to cities, urbanization thickens and less and less people live out of the primary sector. In addition, the primary sector doesn’t demand people with skills to work there. The sector isn’t about brains, it’s about brawn. The primary sector doesn’t incentivize human capital formation. The primary sector is very unequal. It isn’t about good jobs.

Let’s see now how manufacturing has been doing in SA. A number of people in SA also advocate for policy interventions in order to ‘save’ South African manufacturing. The picture illustrates a decline over time. Differently from the primary sector, the decline in manufacturing starts in the 1990s. Is it expected? Yes, it is. Similar developments have been happening in the UK, US and even China. For the South African context, automation and globalization are changes to keep in mind.

What is then really playing an important role in the South African economy? Let’s take a look at services. The picture below illustrates the consistent increase in the share of services to GDP. Does it make sense? Complete sense. The services sector is a modern, soft, urban sector of any modern economy. In addition, it demands people with skills, brains, in order to work there. So, it incentivizes human capital formation. It’s about good jobs.

Let’s take a look at urbanization in SA. Urbanization has been on the rise for quite some time. And the number of people living in rural areas has been stable since the 1990s. South Africa is becoming an urban society, and that has serious implications for urban planning. Cities are places where people can acquire health and education more easily, schools and health centers are not too far, and (good jobs in the services sector are available). But recall, the services sector demands people with skills. So we need skills, brains. In addition, ideas and technologies spread faster in cities.

Last, but not least, let’s take a look at fertility rates and years of schooling in SA. The pictures below illustrate that SA is experiencing its own demographic transition. That’s also expected. Recall, as societies develop and become more urban, mortality rates decrease, the replacement effect is less of a priority, there’s an increase in returns and people start investing in the education of their own offspring, but education has opportunity costs. So the quantity-quality tradeoff. And the number of years of schooling has been on the rise, which is expected in a developing society, and great news. Recall, the services sector demands skills.

In all, SA isn’t a Malthusian economy. South Africa has a modern services sector, which could be even more modern, competitive and bigger (we have just to look at Rosebank and Sandton and the number of jobs being created there that require all sorts of skills). I don’t want this article to go for too long, but policy priorities should revolve around having better cities, with better and better located health and education facilities, better transportation systems integrating people with jobs, etc. Keeping people in the primary sector, including going down the mines, is certainly not the way forward for any developing country. Mines don’t need skilled people, mines demand brawn, not human capital. As Acemoglu highlighted, “it’s good jobs, stupid”!

In 2010 Chad Jones and Paul Romer updated the Kaldor (stylized) facts of growth1 with some ‘new’ facts. Let’s take a look at some of the facts they suggest as ‘new’ and their data to draw some tentative, although intuitive, conclusions.

Let’s start with institutions. A gigantic body of literature has developed in the last thirty years or so, which culminated with Acemoglu, Johnson and Robinson being awarded the Nobel in economics in 2024. In short, and ignoring all criticisms that AJR have received over time, quality of institutions matter, they create incentives for people to invest in physical and human capital.

I checked the Worldwide Governance Indicators provided by the World Bank and the picture that emerges is below. Some descriptive comments: government effectiveness is higher in the US than in China; regulatory quality is higher in the US than in China; rule of law is higher in the US than in China and control of corruption is higher in the US than in China as well. Overall, the US still have a better institutional framework than China, which is good news for American economic growth. (An extra comment: regulatory quality and rule of law have stagnated over time in China..)

I then checked ideas. Recall, ideas come from people engaged in R&D, and which sometimes become patents and then, all going well, become technologies, and technological progress drives growth. The US leads China on number of R&D researchers per million people and on R&D development spending as a share of GDP. China leads the US on number of patent applications per million people (but recall that some of those applications don’t become new technologies). Overall, it is fair to say that the US still leads science, say, the US seems still to be the technological frontier. That’s good news for American growth as well.

Now let’s look at human capital formation and urbanization. Human capital matters right? It does: more educated people can operate technologies, they can also adapt to new technologies, and they can come up with ideas, which sometimes become technologies. And in cities people can ‘easily’ acquire health and education, and ideas spread faster in cities as well. The data shows that the US is more urban than China and the US also have a higher average of schooling among adults than China. More good news for the US.

In addition, the size of the market matters as well, right? It sure does. Recall, ideas are non rivalrous and R&D is expensive. So, for example, Microsoft needs a large market for its ideas and technologies (the city of Seattle won’t do). Microsoft needs large quantities (and lower costs).. Interestingly enough, although China has become less open since 2005, China still does better than the US in that respect. Overall, slowbalization (not to mention the ‘recent’ trade wars) seems to be in the horizon, which is worrying, for all.

In all, Jones and Romer tell us that it’s not only stylized facts on themselves that matter, but the interaction of these new facts that matter for growth, development and prosperity. Population, human capital, ideas and cities are good examples of complementarities. And places where R&D is created, universities, are institutions themselves, which must keep evolving. And we have the size of the market as well. With all the noise we see nowadays, no doubt we have interesting times ahead, but the US seem to still be at the top, but for how long?

References

Charles I. Jones & Paul M. Romer, 2010. "The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 224-245, January.

Kaldor, N. (1961). “Capital Accumulation and Economic Growth.” In: Hague, D.C. (eds) The Theory of Capital. International Economic Association Series. Palgrave Macmillan, London.