Brazil creates its own economic woes
BY SUSAN KAUFMAN PURCELL
Brazil’s economic future does not look nearly as bright as its recent past. Since 2010, when the country registered GDP growth of 7.5 percent, its economy has slowed dramatically. Last year, the country’s GDP growth reached only 2.7 percent. Brazil’s central bank expects growth for 2012 to reach only 1.9 percent, while Credit Suisse projects only 1.5 percent growth.
The most obvious cause of Brazil’s poor economic outlook is the collapse of the commodities boom, which had greatly benefited Brazil — a major exporter of energy, raw materials and food. The boom had been driven by China’s increasing demand for these commodities as a result of a decade of annual GDP growth of 9-11 percent. Brazil became a major exporter to China. Unfortunately, the U.S. recession reduced U.S. demand for Chinese exports, which in turn caused the Chinese economy to contract. Europe’s economic meltdown exacerbated China’s problem. As a result, Brazil’s exports to China decreased by more than half during the first six months of 2012.
New breakthroughs in energy technology also have begun to raise questions about Brazil’s ability to become an energy superstar, despite the country’s discovery of billions of barrels of offshore “pre-salt” oil and gas reserves. For years, energy experts have known that vast quantities of oil and gas were trapped between the layers of shale rock deposits. A process called horizontal drilling has brought down the cost of recovery from between the layers of shale.
As a result of horizontal drilling and a process called “fracking,” whereby large amounts of water and chemicals are injected under pressure into the shale, the recovery costs have dramatically decreased.
The estimated cost of producing a barrel of oil from shale is $70. This currently is less than the cost of producing a barrel of oil from Brazil’s pre-salt reserves, which some analysts have placed at over $100 per barrel.
Furthermore, shale exists in abundance. The largest deposits are in the United States, whose production of crude oil has increased 15 percent since 2008, making it the world’s fastest-growing oil and natural gas producer. The U.S. Energy Department projects that the daily U.S. output of oil could reach almost seven million barrels per day by 2020.
Others think that it could ultimately hit 10 million barrels per day, which would place the United States in the same league as Saudi Arabia. Brazil currently produces about 2.5 million barrels per day of oil.
The accessibility of oil from shale means that there will be abundant oil for years to come. This also means that world oil prices will continue to decline. Given this situation, Brazil needs to quickly begin reducing the cost of producing its pre-salt oil. Unfortunately, Brazil is going in the wrong direction, as the government continues to insist on demanding a high percentage of local content in the production of ships, drills and other assets needed to exploit its pre-salt reserves.
Growing Brazilian protectionism is also making Brazilian products increasingly less competitive. Brazil recently backed away from an automotive agreement with Mexico, forcing Mexico to limit the number of cars it exports to Brazil. The reason — Brazilian cars could not compete successfully with those produced in Mexico because of higher Brazilian costs, despite the cost of transportation and delivery from Mexico.
In addition, Brazil remains locked in Mercosur, a dysfunctional and increasingly protectionist common market in which political criteria take precedence over economic ones regarding trade decisions within the bloc. Compare this with the recent decision by Chile, Peru, Colombia and Mexico to form a “Pacific Alliance” to reduce trade barriers among themselves while trying to increase their trade with Asia.
Some of Brazil’s economic problems have external causes. Nevertheless, Brazil’s growing economic protectionism and its failure to adapt more quickly to a changed global economic environment are problems that Brazil could and should solve.
An obvious place to start is to reverse its protectionist policies and instead implement the long-delayed labor, tax and education reforms in order to reduce the cost of doing business in Brazil and increase the country’s international competitiveness.
Susan Kaufman Purcell is the director of the Center for Hemispheric Policy at the University of Miami.
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