Brazil’s biggest economic risk is complacency - Otaviano Canuto (Brookings)

Brazil’s biggest economic risk is complacency

Otaviano Canuto

Brookings Institution, Thursday, January 30, 2020

Brazil’s economy has endured a difficult few years: after a deep recession in 2015-2016, GDP grew by just over 1 percent annually in 2017-2019. But things are finally looking up, with the International Monetary Fund forecasting a 2.2-2.3 percent growth in 2020-21. The challenge now is to convert this cyclical recovery into a robust long-term expansion.

Two problems have undermined Brazil’s economic dynamism: anemic productivity and a bloated public sector. As weak productivity growth has constrained the economy’s overall growth potential, steadily rising public spending has become increasingly unsustainable.

This is not a new problem. But in the first decade of this century, it was obscured by the commodity-price super-cycle, which drove annual growth above 4 percent. In 2012-2014, pro-cyclical fiscal and (public-bank-driven) credit expansion fueled growth further, but exacerbated imbalances that would come back to haunt Brazil when the commodity boom ended.

Now, Brazil is shifting to a new economic model, in which lower-for-longer interest rates and increased private finance and investment make up for more restrained fiscal policies and reduced public-bank credit. This year could bring substantial progress in this transition, but only if the government remains committed to fiscal and structural reforms.

On the fiscal front, Brazil has already taken significant steps. In 2016, the government passed a 20-year public-spending ceiling. Last year’s pension reform is an important example of this new regimen.

But the pension reform alone is not nearly enough to restore fiscal health, not least because the associated reductions in public spending will be spread out over several years. Meanwhile, other mandatory public expenditure continues to rise.

To enable needed discretionary spending, such as on public infrastructure, all levels of government will have to curb mandatory expenditures. At the federal level, the World Bank has identified two additional areas where significant spending cuts would be possible.

First, Brazil has many subsidies and tax exemptions that bring no macroeconomic or social benefits. Second, the public-sector wage bill is high by international standards, owing not to an excessive number of employees, but to public officials’ disproportionately high salaries, relative to their private-sector counterparts.

Here, progress may be on the horizon. Last year, the government unveiled a reform package—yet to receive congressional approval—that includes sweeping changes to the terms and conditions of federal employment.

If Brazil’s government respects the public-spending cap, real interest rates (now at record lows) do not rise significantly, and annual GDP growth averages around 2 percent, the public-sector gross-debt-to-GDP ratio could decline from over 77 percent in 2018 to 66 percent in 2030. If GDP growth averages 3 percent, that ratio could fall to just 49 percent. The extent to which the government manages to make space for pro-growth discretionary spending will play an important role in determining which scenario prevails.

Financial markets offer further reason to hope that Brazil’s macroeconomic recovery will succeed. Beyond low interest rates, the country’s risk spreads have fallen to their lowest level in nearly a decade. While capital flowed out of the country in net terms in 2019, that mainly reflected the unwinding of the interest-rate premium paid on domestic debt, as well as prepayment of foreign debt by Brazilian corporates.

Meanwhile, domestic funding to Brazilian non-financial corporates has returned to pre-recession levels, and corporate-debt securities and equities have grown significantly. Capital markets have begun to compensate for the decline in subsidized credit from the Brazilian Development Bank (BNDES), and bank lending to businesses has picked up.

In addressing weak productivity gains, Brazil has a longer way to go. Over the last two decades, labor-force expansion has accounted for more than half of Brazil’s per capita income growth. But as Brazil’s demographic dividend ends, continued progress will require existing workers to become more productive.

Since the mid-1990s, productivity has been increasing at an average annual rate of just 0.7 percent. Inadequate physical investment has contributed to this inertia, but the main culprit has been a lack of progress in total factor productivity (TFP)—a result of poor education, weak infrastructure, and a challenging business environment.

To spur TFP growth, Brazil’s government should use concessions and privatization to convince the private sector to channel its large savings—now in search of yields—toward infrastructure. To this end, fine-tuning the regulatory framework governing private investment in areas like transport and sanitation is essential.

At the same time, the government must improve the business environment. Reforms that simplify tax administration, including by harmonizing the tax base across levels of government, are particularly urgent. Moreover, trade-opening measures and agreements—which may run up against political obstacles abroad relating to environmental and other concerns—must be pushed forward.

This year can be a decisive one for Brazil’s transition to a more robust and sustainable growth path—but only if the government commits to reform. If, instead, Brazil’s leaders simply reap the short-term benefits of improved macroeconomic performance without laying the foundations for long-term prosperity, it may not be long before the economy stalls again.

Brazil’s current macroeconomic stage - Adilson Santos de Proença (Medium)

Uphill momentum: Brazil’s current macroeconomic stage

Adilson Santos de Proença

Medium Sep 7 2019 · 8 min read

By the end of the 2017–2018 period Brazil’s Effective Gross Domestic Product (to be defined later on the text), on an average yearly basis, had not fared better than it had during the pre-crisis years, 2010–2013. That is: while the quadrennium that preceded the 2015–2016 downturn (when Real GDP plummeted 6.8%) witnessed, on an average yearly basis, growth rates of 4.10%, the ensuing rebound starting in 2017, albeit sluggish, has brought in an average yearly Real GDP growth of 1.10%.

From a macroeconomic standpoint, thus, a reading the currently available statistics suggests a timid, underperforming, slow-paced recovery. Nonetheless, optimism remains high as some economists even forecast a 2020 GDP spike of +2,20% compared to this year (2019)mere 0,95%. Having said that, just how seriously can a +2% expected growth be taken, considering Brazil’s — and the world’s — current state of affairs? Let us talk some basic economics.

GDP vs. Real GDP vs. Nominal GDP

First off, some elementary definitions. Gross Domestic Product (GDP) is a macroeconomic measure of a country’s total output. It’ll tell you the market value of all final goods and services produced within a defined (generally a year) period of time. GDP can be either measured nominally or in real terms. What that means is that a nominal GDP (N-GDP) measures output at current prices while Real-GDP (R-GDP) assesses output from a base-year price.

For macroeconomic purposes, R-GDP is generally preferred over the nominal one because it factors out inflation. As it does so, R-GDP thus provides the reader with a real sense of output without the distortions caused by price fluctuations.

Let me offer you an example. In 2010 a hypothetical country produced ten loaves of bread. It was all sold at a market price of US$ 1,00/a loaf. It follows, then, that this country’s GDP is US$ 10,00. Time lapses and 2015 kicks in. For numerous reasons, the price per loaf of bread rises to US$ 2,00. The economy is now capable of producing fifteen loaves of bread. Assuming it was all sold, it follows that now GDP is US$ 30,00. It won’t take a wonk to tell that GDP has doubled, but has it really?

While production increased 5% (from 10 to 15 loaves of bread), GDP boasts a 200% increase at current (2015) prices! That’s nominal GDP. On the other hand, however, counting in at a base-year price will show us how much GDP would be today at a given past year’s prices, that is: inflation factored out. Then, 2015’s production of fifteen loaves of bread at 2010’s prices puts out a GDP, discounted for inflation, of US$ 15,00. A 50% difference that shows us how much output, not prices, has really grown. That’s Real GDP.

Having stated those differences, let us appreciate some real stats:

The author’s rudimentary power point skills with data from Business Monitor International (BMI)

What you see is Brazil’s R-GDP over the past eight years (2010–2018) plus two forecasts: the current year’s (2019), and the upcoming one (2020). A closer reading of the numbers sheds light on the fact that, on an average yearly basis (and as stated earlier), the rebound started in 2017 plus 2018’s accumulated growth is well below the average yearly growth seen during the pre-crisis years. What that effectively tells us is that Brazil is faring less well than it potentially could. Comparing what a GDP can potentially be and what it effectively is is another paramount lens in macroeconomic analysis.

Potential GDP vs. Effective GDP

A country’s potential is what it can be based on a handful of variables that go well beyond this text’s purpose. Let us bounce back to the 10-loaves-of-bread economy. We saw that in a five-year span the country grew its output potential from ten to fifteen loaves of bread. Given that it can now produce fifteen loaves of bread, it follows that if, for whichever and numerous reasons, the country produces fewer than that, it’ll be producing below its potential. If it puts out 12 loaves instead of 15, we’ll say that while its potential output can be 15, it effectively put out 12. It is underperforming!

The same reasoning applies to GDP. If, for instance, any given country’s GPD has on average been at a yearly growth rate of 4% , it’ll be underperforming if its GDP consistently and continually falls short of delivering those yearly 4%. Strictly assessed from this perspective, Brazil’s recent R-GDP growth rates shows crystal-clear evidence of underperformance because recent growth rates lag behind when stacked up against pre-crisis growth rate leves. Do you find that mind-boggling? Carry on reading.

Business Cycle Analysis

The author’s rudimentary power point skills once more

From all the graphs and equations I’ve come across throughout my college years (which as of this date haven’t finished), few have been so mind-opening. The Business Cycle graph is by far one of them. It depicts long-term economic growth and allows for a visual reading of an economy’s current stage within the business cycle.

The Y and X axes account for GDP growth over the long-term. The definitions of Potential vs. Effective GDP come in handy now. In an ideal scenario, GDP would have a linear and ascending growth pattern, represented by the blue line (i.e. potential GDP growth). Not surprisingly, however, the growth pattern that is generally observed over the long-run is represented by the green wavy line (i.e. actual/effective GDP growth). One has to keep in mind that it’s all theory. It does not depict the economy as it always is, but as it has historically been over the long-run.

The dotted square zooms in on a section of effective vs. potential GDP growth over time. What stands out, starting from left to right, are four stages, namely: (1) expansion, or recovery; (2) peak; (3) contraction, or recession; and (4) trough, followed then by expansion. Ideally, from an economic standpoint, a country’s policy-makers should aim at achieving sustainable potential GDP growth because it has historically been observed that when effective GDP distances itself too much upwards from potential GDP an inflationary gap comes about and, conversely, when effective GDP distances itself too much downwards from potential GDP a recessionary gap ensues.

The economic dynamics are cyclical, so ups and downs are not the exception , but, rather, the norm. Persistent and further-reaching fluctuations, though, are the exception of that norm and have consistently been fought back by policy-makers worldwide. That is so because in an inflationary gap scenario, resources — labour, capital, and land — are under pressure due to higher aggregate demand. In a recessionary gap scenario, much the opposite tends to happen: suppressed aggregate demand spurs mass layoffs, which slashes salaries and once more upsets demand. It seems that even in economics achieving a balance is the key. The Business Cycle analysis shows that keeping it means maintaining effective GDP the closest possible to potential GDP.

Having covered the definitions of Gross Domestic Product, its variants (Real vs. Nominal and Effective vs. Potential), as well as explained the Business Cycle theory, we are now prepared to assess Brazil’s current macroeconomic stage and even comment on the 2.20% GDP growth forecast for 2020.

Uphill momentum: Brazil’s current macroeconomic stage

Myself, again.

Real GDP growth in 2017 signals the early stages of economic rebound. However, the 2017–18 growth rates (1.10% average) below the 2010–13 average of 4.10% outlines a sluggish recovery (see previous picture).

A week ago (last week of August), the Instituto Brasileiro de Geogragia e Estatistica (IBGE, the body in tasked with all that is to do with stats) released the GDP quarterly results (Q2) which brought in a growth at 0,4%. That is good news, for had Brazil showed negative growth in Q2 the country would officially have entered again in a technical recession which is when GDP falls for two consecutive quarters.

When we transport all this info onto the Business Cycle graph, it follows that the “end of fall” in GDP yearly rates in 2017 coupled with a current scenario where effective GDP is below potential GDP (Effect.-GDP < Pot.-GDP), plus 2019’s growth forecast of a mere 0.95%, the country’s current macroeconomic stage is clearly placed at the very beginning of an uphill ascending path (see picture above).

Is that good news? Having a half full glass is better than having a fully empty one, but not as good as having a fully filled glass. Similarly, it undoubtedly is good news that R-GDP has stopped falling as much as it had nosedived during the most acute years of the crisis, but it isn’t as great a piece of news to know that the glass is half full. We want it filled to the top (because that would mean that we’re the closest possible to our potential GDP), but not overspilling (because that would mean an inflationary gap).

Whether or not the projected growth for 2020, at 2.20%, will come about is a sensitive matter. I personally believe that 2.20% is naïvely optimistic. The incumbent government is aware, just was former ones, that key structural reforms are fundamental for a fully and faster-paced economic rebound. So far, circumstances suggest that the reforms will follow through. Internally, whether or not the reform agenda will really bring about much needed and deep changes is, by far, the one variable that poses the most threat to the timid recovery we have been witnessing.

On top of that, external factors also weigh in considerably. Regionally, Argentina’s upcoming (October 27th, 2019) presidential elections poses a threat if Peronism bounces back. The primaries, held in early August, suggest that very scenario. As Brazil’s third main trading partner, a comeback of an anti-market administration could worsen the economic turmoil which the country has faced and thus negatively impact Brazil’s exports to its neighbour. The USA-China trade war can also affect Brazil’s projected 2.20% forecast. If the conflict’s tit-for-tap escalates, the global economy may be impacted and that, in turn, has serious spillovers in emerging markets like Brazil.

To put it all in a nutshell: considering how sensitive the external scenario presents itself and how much Brazil’s reform agenda lingers on the fate of its volatile and corruption-ridden political caste, a 2.20% GDP growth forecast for 2020 is all, but sound. As an aspiring economist with yet tonnes to learn, I would bet that, all things considered, Brazil’s GDP growth rate would possibly fall within a 1 and 1.5% range. Definitively not above past the 2% range.

Brazil: The Challenges Ahead - Antony Mueller (AIER)

Brazil: The Challenges Ahead

By Antony Mueller

American Institute for Economic Research, Friday, October 26, 2018

https://www.aier.org/article/brazil-challenges-ahead?fbclid=IwAR0x68yrArN3qLVUpR5dgnOmxCAj3dbTpIhUmT6afMmgVeIwlJRXJZRlvlM#.W9R1HnvpkRY.facebook

Whoever wins the Brazilian presidential election on Sunday, October 28, will face tremendous challenges. The economy is in depression, the unemployment rate is in the double digits, and the fiscal situation is bleak. A sharp polarization has characterized the election campaign. The disapproval of each of the two leading candidates is higher than the support they get from the electorate. In the years to come, the political uncertainties and economic doldrums might not go away.

Public corruption scandals have led to political chaos. Former President Luiz Inácio "Lula" da Silva of the socialist Workers' Party is in prison because of corruption. His successor, Dilma Rousseff, continued Lula's populist agenda but was impeached and removed from office. 

Michel Temer, who followed her in the presidency, has never gained popular support. He has been unable to consolidate the country’s public finances or revive the economy. A heavy burden will fall on the next president when he takes over the helm on January 1, 2019. 

Much Potential, Little Accomplishment

Brazil is the largest country in South America with a size like that of the United States without Alaska. The country has a population of 207 million, and in terms of gross domestic product, its economy ranks number eight. The author Stefan Zweig called Brazil a land of the future, while cynics added that it always will be. Throughout its history, Brazil has experienced a series of spurts of growth, all of which ended in prolonged stagnation. This has also recently happened. After a period of high growth rates and much exuberance in the decade from 2002 to 2012, the economy fell into an ongoing deep recession.

Brazil suffers from many political barriers that stifle its economic progress. The country’s bureaucracy is the main force of obstruction along with its judicial system. Brazil’s political leadership enjoys the dubious privilege that, because of Brazil’s immense natural wealth and its favorable overall geographic conditions, they do not get much punished even when they make severe blunders. Many incompetent and corrupt politicians enjoy frequent reelections.

Brazil’s economic progress suffers from the country’s flirtation with the welfare state that came with the new constitution of 1988 after the country had shed the military dictatorship of 1964 to 1985. Brazil’s democracy has fallen victim to a process of competition in social handouts. The political game requires an endless process of coalition making, with each of the individual political parties expecting a special treatment for their clientele as the price of supporting the government.

Brazil’s integration into the world economy comes through the country’s wealth of natural resources. During commodity booms, Brazil’s currency is overvalued, and when the boom is over, its industry often lies in tatters. As for everything other than natural resources, Brazil’s international competitiveness is weak. Domestic industry speaks loudly in demanding protectionism.

Brazil’s governments follow a tradition of focusing on the short term and neglecting structural reforms. All knowledgeable observers agree about the fundamental challenges. Yet a kind of paralysis keeps the Brazilian government from addressing the fundamental deficiencies of the country in infrastructure, innovation, and education. 

Obstacles to Development

There are many problems that inhibit the Brazilian economy from achieving steady economic growth. These problems go beyond short-term macroeconomic management. Brazil is a country notorious for its intricate web of irrational regulations, its complicated tax structure, its overly powerful judicial system, its vast bureaucratic inefficiencies, and corruption at all levels. These are nightmares for those doing business in Brazil. There has been a profound negligence of basic education, and widespread professional incompetence spreads throughout the whole society. The result is a low level of productivity, even by Latin American standards (see figure).

A lack of capital formation results from a low savings rate. Low productivity and innovation characterize Brazilian businesses. Private companies spend little on research and development. There is a huge governmental apparatus in place, which should promote scientific progress but works as a bureaucratic web and hampers more than it promotes innovation. Instead of doing away with these burdens, the Brazilian government prefers monetary stimuli, implements ad hoc interventionist measures, and leads a confusing public discourse about utopian plans and fantastic measures.

The deplorable macroeconomic condition of Brazil — with insufficient savings and a weak industrial base — comes with a rotten political system and Brazil’s heavy bureaucracy. Brazil’s public administration is a gigantic apparatus that holds down the country’s economy with a myriad of useless and senseless regulations and their foolish execution. Brazilian bureaucracy represents a major blockade to economic modernization. Brazil has one large macroeconomic bottleneck — lack of savings — and it has a large structural hole where the country’s energy evaporates in the form of over-regulation of its economy. 

The country’s leadership has never abandoned the corporatist development model of the 1930s. The result is that Brazil has a large but inefficient industrial sector ranging from vehicles and small airplanes to agricultural machinery and chemicals. Yet these industries are sleeping giants limited in flexibility and innovation because of a tight web of governmental regulations and direct interventions.

Paths to Prosperity

It is not enough for Brazil to consolidate its macroeconomic policy. To advance its economy, the country needs to take serious steps toward better governance. As of now, however, not only have the governments of the past been doing little to improve governance, but there also has been a lack of understanding about the urgency and importance of fundamental reforms. 

With more privatization and deregulation, huge investment opportunities would emerge on the horizon. The development of Brazil's gigantic agricultural potential has only just begun. Beyond that, there is the need for privatization and deregulation in infrastructure. Everything from ports and airports to the road system offers tremendous opportunities. With the help of foreign direct investment, Brazil’s metal-mechanical sector could be brought to a world-class level, as is also the case with the country’s food-processing, pharmaceuticals, and chemicals industries. All it would take for this to happen is to take some courageous steps toward de-bureaucratization; Brazil could emerge as the economic miracle of the 21st century.

State of the Economy

Brazil’s economic freedom score is 51.4 according to the index of the Heritage Foundation. With this score, Brazil ranks as the 153rd freest country in the 2018 index and falls into the category of “mostly unfree.” It ranks 27th among the 32 countries of its region, and its overall score is below the world average (see table).

The judiciary, although independent in a formal sense, is overburdened with lawsuits. Inconsistent and imprecise legislation makes judicial processes uncertain, protracted, and subject to special-interest influences. Corruption has become an integral part of political life. Only with the recent judicial actions and convictions of prominent politicians, the former President Lula da Silva among them, has a signal been sent to elected officials that bribery will no longer be tolerated.

Despite a high tax burden, the fiscal situation of the country has deteriorated. The budget deficit reached over 10 percent in 2015 and stands at 7.8 percent in 2018. From around 50 percent in 2010 and 2013, the ratio of public debt to gross domestic product climbed to 70 percent in 2016 and stands now at 74 percent. 

The personal income tax rate is 27.5 percent while the standard corporate rate is 15 percent, but specific transaction taxes lift the effective rate to 34 percent. The overall tax burden equals 32.0 percent of total domestic income. The effective tax burden is much harsher than the numbers suggest because of the complex and contradictory tax code. Many companies use the lack of simplicity to enter legal disputes, which then may last for decades. 

While salaries are low by international standards, the economy is burdened with a heavy load of non-salary labor costs, business-unfriendly labor laws, and a judiciary biased against private enterprise and in the hands of the trade unions. 

The low labor productivity is only in part the result of the low quality of the labor force. The bureaucracy, the poor infrastructure, rigid labor laws, many non-tariff trade barriers, the complex tax code, and a plethora of diffuse regulatory requirements stifle economic efficiency. 

Conclusion 

In order to put the Brazilian economy back on track, economic policy must move forward with key reforms. The Brazilian government should recognize that the country must improve its infrastructure and its system of education. It is high time to deregulate the labor market and to cut red tape. The country must end the horrendous privileges and absurd salaries in the public sector and in the judiciary. Brazil must adapt its pension system to the conditions of the future, as Brazil faces an aging population. 

To improve its position in the world economy, it is not enough for Brazil to consolidate its macroeconomic policy. Brazil needs to take serious steps toward better governance. The governments of the past have done little to improve the workings of the political system. There has been a lack of understanding about the urgency and the importance of fundamental reforms. Future governments must end this negligence. 

The next government has much to accomplish. Yet it is not impossible. Most of the reforms do not require new laws, new institutions, and much higher spending. On the contrary: what must be done is to cut many of the superfluous items of public expenditure, eliminate the many harmful regulations, and scale down the bureaucracy. Improving the infrastructure does not require new massive spending, but a better administration, effective cost control, and ending corruption. 

Sign up here to be notified of new articles from Antony Mueller and AIER.

O Estado brasileiro: um Robin Hood ao contrario: reportagem especial do Financial Times

‘Robin Hood in reverse’: the crisis in the Brazilian state

Jonathan Wheatleyand Andres Schipani in São Paulo

FINANCIAL TIMES, September 13, 2018

The winner of October’s election will have to address a budget dominated by special interests

Um relatório absolutamente essencial para compreender o que representa o Estado brasileiro, atualmente e sempre, na sua missão de transferir recursos coletivos para quem já é rico...

Leiam esse relatório neste link: 

http://www.academia.edu/37422966/Robin_Hood_in_reverse_the_crisis_in_the_Brazilian_state

As razoes do otimismo brasileiro - The Economist

Brazil isn’t growing—so why are Brazilians so happy?

The Economist, May 7th 2013, 23:50 by H.J. | SÃO PAULO

In the decade after Jim O’Neill of Goldman Sachs coined the acronym “BRICs” in 2001, grouping together four big countries with the potential for sustained growth, the “B”, Brazil, really put itself on the economic map. Having grown by 2.3% a year between 1995 and 2002, it grew by 4% annually in the following eight years. But Brazil then ran out of puff. It grew by a disappointing 2.7% in 2011, and a dismal 0.9% in 2012. Yet Brazilians seem blissfully unconcerned. IPEA, a Brazilian research institute, regularly finds that two-thirds to three-quarters of families say their financial situation improved during the past year, and that they expect it to get even better in the year ahead. In December Gallup, a global pollster, found that those optimistic about the economy outnumbered pessimists by a wider margin in Brazil than in any other large economy. Given that growth has stalled, why are Brazilians so happy?

The underlying reason is that even though the country as a whole is struggling, most families’ incomes are still rising fast. Unemployment is close to record lows and pay rises are comfortably outstripping inflation, partly because of big hikes to the minimum wage, but also because of that tight jobs market. Meanwhile, the gradual weaving of a social safety-net is rescuing many Brazilians from destitution. The result is falling inequality, a growing middle class—and a disconnect between GDP growth and most Brazilians’ actual experience.

To see how the distribution of growth affects incomes, imagine a country of just ten people, with one earning $1,000 a month, another earning $2,000 a month, and so on up to the tenth, who earns $10,000 a month. Between them, these ten people earn $55,000 a month. Now suppose that in a year the economy grows by a modest 1.8%, so that there is an extra $1,000 to go around each month. If the richest person captures all that growth, it will give him a 10% pay boost. But he will hardly feel it, because he is already rich, and the average pay rise across the entire population would be just 1%. But if the poorest resident got all the extra money, his income would double. That would make a huge difference to his life—and the average pay rise in our little country would be a whopping 10%, far higher than the meagre overall growth rate. In general, the more of the $1,000 that goes to those on lower incomes, the bigger the average pay rise it causes, and the more impact it has.

After many decades in which the spoils mostly went to the richest, more of Brazil's growth is now going to those on modest incomes. That is the long-term result of economic stabilisation and the universalisation of primary education in the 1990s, together with recent hikes to welfare payments and the minimum wage. So does it matter if overall Brazil's economy barely grows? The short answer is “yes”, though not necessarily straight away. Despite recent improvements Brazil is still a painfully unequal country, and it is poor Brazilians who pay the biggest share of their income in tax and get the least back from government spending. Reducing, or preferably reversing, regressive public policieswould allow most families’ incomes to grow, even if the economy continues to sputter. But if wages continue to rise, those Brazilians working in the tradeable sector—that is, those whose jobs could be done abroad—will be priced out of the global jobs market. Poor education and infrastructure, not to mention enterprise-killing bureaucracy, mean the average Brazilian worker is only a quarter as productive as an American one. And if Brazil is to join the ranks of rich countries, its GDP will have to get much bigger. At only $11,000 per capita, there will not be enough to go round otherwise—no matter how fairly it is shared out. 

Economia do Brasil: desaquecendo - The Economist

Brazil’s economy

A bull diminished

The economy has slowed, but there are still opportunities around

The Economist, May 19th 2012 | SÃO PAULO

FOR Brazil’s government recent weeks have brought some long-awaited victories. The overvalued currency has weakened to two reais to the dollar, from its peak of 1.54 last July. At 9% the Central Bank’s policy interest rate is near to historic lows and should fall further after President Dilma Rousseff’s brave decision to cut returns on government-backed savings accounts, which had previously acted as a floor. Both developments were welcomed by manufacturers, who have been labouring under a turbocharged currency and sky-high interest rates for years. Neither, though, was enough to reverse a recent shift in mood against Brazil.

Investors were initially sceptical about Brazil’s inclusion in the BRICs, the acronym devised in 2001 by Jim O’Neill of Goldman Sachs to group Brazil, Russia, India and China. But macroeconomic stability, falling income inequality and the global commodity boom ensured Brazil’s steady, politically harmonious growth. Strong banks and domestic demand made for a speedy rebound from the 2008 credit crunch. In 2010 Brazil’s economy grew by 7.5% to become the world’s seventh-largest. Brazilians, made vigilant by a history of hyperinflation and debt default, finally relaxed and accepted the applause.

In this section

• »A bull diminished
• Carnation revolution
• Storm clouds with silver linings
• Come and see my villa

Reprints

---

Related topics

• Politics
• Government and politics
• World politics
• Brazilian politics
• Latin American politics

It did not last long. During 2011 Brazil grew just 2.7%. That sat ill with membership of the high-growth BRICs: Russia, India and China managed between 4.3% and 9%. Foreign investors and those who advise them are reporting a new, less starry-eyed approach. “The days of Brazil being given a free pass are over,” says Ivan de Souza of Booz & Company, a consultancy. Some go further: in an article in Foreign Affairs magazine called “Bearish on Brazil”, Ruchir Sharma of Morgan Stanley argues that the country rose with commodity prices and will fall again when they do.

A reassessment of Brazil’s recent performance is overdue. Between 2000 and 2010 Brazil’s terms of trade improved by around 25%; in the past five years private-sector credit doubled. Such tailwinds cannot continue to blow—and even with them Brazil has grown on average by only 4.2% a year since 2006. Only productivity gains, and more savings and investment, can provide fresh puff. Those are nowhere to be seen: IPEA, a government-funded think-tank, puts annual productivity growth for the past decade at a paltry 0.9%, much of it from gains in agriculture. Investment is only around 19% of GDP. Add soaring labour costs and a still-strong currency, and many analysts are lowering their sights for potential annual growth to about 3.5%.

Lower interest rates could give a fresh boost to credit. But not a big one: consumers are already overstretched. Serasa Experian, a credit analyst, says that demand for loans between January and April was nearly 8% lower than during the same period in 2011. Defaults are rising and banks are tightening their terms. Loans that are more than 90 days overdue are now 8% of the total. Itaú and Bradesco, two big banks, saw their share prices fall recently when they upped their provisions against bad loans. Banco Votorantim, which has lent heavily against cars in recent years, has posted three quarterly losses and is rumoured to be a take-over target.

Irritations that were overlooked with growth at 4.5% are likely to resurface when it is nearer to 3%. Taxes are hideously complicated, and take around 36% of GDP, a far higher number than in other middle-income countries. Guido Mantega, the finance minister, points out that the government has cut some taxes, and that tax collection is rising because more businesses are formalising their activities. But Raphael de Cunto of Pinheiro Neto, a São Paulo law firm, argues that the government’s ability to collect taxes has run far ahead of any effort to streamline them, increasing the burden on businesses.

For some, political intervention has supplanted an overvalued currency as the biggest risk in Brazil. Petrobras, a state-controlled oil giant, and Vale, the world’s biggest iron-ore producer, are now being run more to suit government aims than in minority shareholders’ interests, says Joseph Harper of Explorador Capital Management, a fund manager. Such concerns have weighed on both firms’ share prices. Explorador is gradually reducing its Brazil exposure in favour of Peru, Colombia, Chile, Panama and Mexico, where it sees similar opportunities at lower prices, and with less political risk.

Such worries have been amplified by Argentina’s expropriation last month of YPF, a Spanish-controlled oil firm. Though in private ministers are keen to stress that Brazil respects property rights, they are unwilling to irritate an important trading partner or jeopardise Petrobras’s Argentine interests by criticising their neighbour publicly. That is risky: Brazil is indeed different from Argentina, but outsiders may not realise that. The governments of both Colombia and Mexico openly distanced themselves from Argentina’s move.

The threat by a prosecutor to impose huge fines on Chevron, an American oil firm, and jail its executives after a small leak off the coast of Rio de Janeiro earlier this year raises concerns about the treatment of foreigners. Lawyers say that some clients are now asking whether a misstep in Brazil means risking having one’s passport confiscated, as happened to several Chevron executives. The answer is almost certainly not; that the question is even asked is an unnecessary own goal.

A little less Brazil-mania could be salutary. No country has yet been able to abolish business cycles, and some caution now might prevent exuberance from becoming irrational. Even better, it might persuade the government to remove some of the barriers that hold Brazil back. But although overall growth is likely to be modest for some years, there are still plenty of opportunities, particularly in agribusiness and mining, and in catering for growing demand for education, health-care and the like. The new mood, says Mr Harper, is “selectively bullish on Brazil”.

from the print edition | The Americas