Brazil, Land of the Past?

Barring major corrections in economic policy, economic growth in Brazil is likely to remain low.

Brazil has achieved, over the last years, a position of international prominence like never before. There were even those who were tempted to believe that Stefan Zweig’s prophecy – Brazil, land of the future [1] – had finally become true. But the country’s recent disappointing performance, especially the last two years low growth (2.7% in 2011 and 0.9% in 2012), begs the question if, still far from reaching desired higher social and economic development levels indicators,  Brazil is already losing track.  The threat is that, over the next decades, instead of glimpsing an even better future, we, Brazilians, end up looking at the recent years as the best we had.

On the economy side, the diagnosis seems pretty clear. The several reforms undertaken from the 90’s up to the mid 2000’s have apparently exhausted their potential to raise productivity. Alongside the demographic change that reduced workforce’s rate of expansion, economic growth has stalled. The general feeling is still good, thanks to the labor market’s dynamism and cash transfer programs to the poor, but the outlook is far from brilliant.

Activities intensive on commodities production, particularly in agriculture and mining, do well. The service sector on its own, the biggest of them all, does relatively well, too. Yet, industry does badly: it has not even returned to its pre 2008 crisis production level.

After the 2002 crisis, there was a long spell of robust GDP growth, averaging above 4% per year, during 2003 to 2010. This growth spell has benefited from more intensive use of labor input. Unemployment rate plunged from 12.3% to 6.7%, and the labor force expanded at a 1.6% yearly rate. The full employment achieved since then has caused problems in both industry and inflation fronts. The mechanism is simple. A buoyant labor market raises wages. The services sector, protected against external competition, passes on the higher labor costs to prices, hence raising inflation. Given that different productive sectors compete for the same pool of workers, subject to certain specificities, higher wages increase industry costs. Unable to increase its prices, industry has to cope with the reduction of competitiveness and thus reduces investment.

Government’s policies to help industry have lacked a long term coherent strategy. The subsidized credit from BNDES, the rise on protection against external competition and the tax relief policies undertaken, distributed in a rather discretionary and little transparent way, create other distortion that hamper productivity growth.  Moreover, the resulting uncertainty has been curbing the very animal spirits that government wishes to stimulate.

Infrastructure bottlenecks have increased over the years. Apparently, numbed by some sort of ideological prejudice, it has taken years for the government to finally call back the private sector to invest. Although measures recently adopted are a step forward, they are ill conceived and will probably not be enough to significantly improve Brazilian roads, railways, ports and airports.

But the main long-term threat is fiscal. It is always important to bear in mind that hyperinflation was conquered less than two decades ago. And, in order to get there, major long-lasting fiscal effort was needed. Without states’ debt renegotiation and the closing of the fiscal drain represented by states’ banks, the Real Plan would not have succeeded.

What we see today is a continuous deterioration of fiscal policies. Despite the basic interest rate (Selic) substantial drop; government interest expenses (as a % of GDP) did not fall much, due to the sharp rise on gross public debt. Non-investment expenditures keep rising faster than the GDP, and tax relief policies harm the government’s tax revenue. These policies have stopped the declining trend of the public sector net debt, which will probably start growing again, despite all the accounting gimmicks that jeopardize the credibility of fiscal accounts. And one still needs to take into account long-term issues, such as the social security deficit, which, if growth remains mediocre, will rise inexorably in the absence of further reforms.

On the external front, Brazil has been receiving lots of foreign capital inflows. However, the current account deficit now surpasses 3% of GDP. This should raise a red flag, especially considering the country’s low investment rate (18% of GDP). That is, both inflation and current account deficit indicate that the economy does not suffer from lack of aggregate demand. Nevertheless, the government persists on the diagnosis that counter-cyclical expansionary policies are in order, as if raising public expenditure would solve the problems, which clearly stand on the supply side. Without facing the severe problems that restrict Brazilian productivity growth, the haphazard solutions provided by current policies will not bring back the eagerly awaited sustained robust economic growth.

To sum up, the static picture of Brazilian economy is still appealing. However, watching the full economic dynamic movie, one is lead to the conclusion that, barring significant changes on screenplay and direction, the movie is headed to a melancholic ending.


[1] Brasilien. Ein Land der Zukunft; Bermann-Fischer, Stockholm 1941.

One Response to "Brazil, Land of the Past?"

  1. kiers   May 31, 2013 at 1:16 am

    Brazil is fighting currency appreciation! All countries outside of the US face the same problems. Look at the Euro: $1.30=1Euro.

    A depreciation would help all. But that won't happen. Dollar has priviliege.