The 2024 Nobel Prize in Economics, awarded to Daron Acemoglu, Simon Johnson, and James Robinson, highlighted the importance of institutions in economic development. These economists demonstrate that the quality of institutions is directly related to the prosperity of nations. Institutions created to exploit the population are detrimental to long-term growth. At the same time, those that guarantee fundamental economic freedoms and the rule of law are essential to promoting a growth-friendly business environment. This concept is especially relevant for Brazil, which is facing more than four decades of economic stagnation, aggravated by institutional and political uncertainties that have undermined its growth potential.

A clear example of the practical application of these theories in the Brazilian context is the study carried out by Rivool’s Head of Research on the so-called “lost decade,” the 1980s, a period in which Brazil’s economy suffered a significant collapse that culminated in hyperinflation that remains in the memory of many Brazilians. The study’s central hypothesis is that the Brazilian economic stagnation, which has dragged on since then, is a direct result of the deterioration of the rule of law and economic freedom. During this period, Brazil faced serious property rights violations, a growing disrespect for contracts, and instability in the economy’s rules. This created a hostile environment for private investment, discouraging foreign and domestic capital and, consequently, harming the country’s economic growth.

By analyzing the causes of this stagnation, it was clear that the policies adopted by Brazil from the 1980s onwards played a crucial role in the deterioration of economic institutions. Instead of promoting reforms that would strengthen the business environment, the government opted for interventionist and heterodox policies to deal with inflation and other economic challenges. Increased state participation in the economy, restrictions on international trade, and attempts to control prices and exchange rates have devastated investor confidence. Instead of seeking a more competitive and open market environment, Brazil closed its doors to foreign trade and foreign capital, further aggravating the crisis.

The theory defended by Acemoglu and his colleagues proposes that prosperity depends on inclusive institutions, which guarantee legal certainty and create incentives for investment and innovation. In Brazil, however, the opposite was seen: increased state control over the economy, accompanied by instability in the rules and an environment of legal uncertainty. The direct consequence of this institutional deterioration was the disincentive to private investment, which severely compromised the country’s growth potential.

The study uses an econometric model of counterfactual analysis, a synthetic control model, to assess what Brazil’s growth trajectory would have been like if the country had adopted stronger and more inclusive institutions, as Chile, Colombia, and South Korea did. The result is surprising: Brazil’s Gross Domestic Product (GDP) per capita could have been practically double in 2000 if we had a more stable and predictable business environment. The loss of growth over the two decades after 1980 was estimated at 48.19%, which is clear evidence that the deterioration of institutions had a direct and significant impact on economic stagnation.

Figure 1. Observed and synthetic GDP per capita of Brazil (US$ 2017)

During the 1980s, Brazil faced severe external shocks, such as the oil crisis and rising international interest rates. Instead of taking advantage of these challenges to implement structural reforms that would strengthen institutions and restore investor confidence, the Brazilian government adopted policies that further aggravated the situation. Price controls, successive currency devaluations, and state intervention measures have made the economic environment even more unstable. The uncertainty generated by these policies prevented entrepreneurs and investors from having enough security to allocate resources to long-term projects.

In addition, the Federal Constitution of 1988 brought more complications to the institutional environment. Although it consolidated principles such as free enterprise and free competition, it also established clauses that compromised economic freedom, such as the social function of property and privileges for national companies. These measures were an additional disincentive to private investment, as they weakened property rights and introduced uncertainties in the performance of contracts. The study clarifies that the country has paid a high price for the lack of reforms promoting economic freedom. Instead of growing like other nations that chose to strengthen their institutions, Brazil followed a path that took it away from progress.

The work of Acemoglu, Johnson, and Robinson brings an important warning to Brazil. Interventionist policies’ deterioration of institutions has weakened and undermined the country’s ability to grow and develop. Despite the need for reforms, Brazil’s economic institutions, which could promote greater economic freedom, remain fragile. Countries with greater economic freedom tend to stimulate more entrepreneurial activities and have a positive correlation with higher per capita income and economic growth.

However, the most recent indicators place Brazil at worrying levels in economic freedom rankings, occupying the 113th and 127th positions in the 2020 Frasier Institute and 2023 Heritage Foundation indexes, respectively. For example, the Heritage Foundation’s 2023 report highlights Brazil’s low scores on corruption and property rights and the vulnerability of the judicial system to political interference.

In this context, what is necessary, therefore, is an agenda of structural reforms that strengthen Brazilian institutions. It is essential to ensure legal certainty, respect for contracts, and the stability of the rules of the game to create a business environment that is favorable to investment. These reforms are desirable and essential for Brazil to finally break the cycle of stagnation that prevents it from reaching its true economic potential. Only in this way can we transform Brazil from a constant promise of being the “country of the future” into a prosperous reality in the present.

The Rivool Finance Market Review for 2024 is available at this link: https://dub.sh/rivool-mr24

Cristiano Oliveira — Head of Research at Rivool Finance