After 3 years of sluggish growth, Brazil needs to change its economy

By Fabio Gehrke *

Back in November 2009, Brazil was recovering rapidly from the financial crisis. In 2010, the country was already growing fast. Commodity prices were reacting to the Chinese speeding up, capital was flowing back and internal demand was the needed fuel to the economy. It looked like a dream come true. But now, after three years of sluggish growth, we can be sure something went wrong. And it needs urgent fixing.

In 2011 Brazil’s economic growth was below 3 percent, much less than other developing nations. In 2012, it barely reached one percent. This year it is likely to be at about 2,3%. Forecasts for next year: 2% growth.

Many are tempted by the idea that demand, both internal and external, are to blame for the Brazilian economy’s cooling. That is not the case. Data on imports of Brazil’s main economic partners show that external demand presented no significant decrease since 2011. And the steady growth of the national average wage, combined with a full-employment scenario, still demonstrate the strength of domestic demand.

So what is it?

The receding market share and the rise of foreign imported products show that the Brazilian economy lost competitiveness. The rise in commodity prices and the return of foreign investment made wages and domestic consumption more expensive. Real wages have risen above productivity gains and that increased the costs of production of the domestic industry. That makes the Brazilian economy depend more on the service sectors, which are naturally protected from foreign competition — real estate, for example.

The economic growth praised by The Economist in 2009 was based on the expansion of the national labor market, but that source dried out. Now, economic growth will have to go through productivity gains and/or capital increases. Brazil will have to overcome historical bottlenecks such as lack of infrastructure, poor labor quality, high tax burden and complexity, bureaucratic delays to thrive again.

To ensure sustained growth, Brazil will have to plan on the long term. Despite significant advances in macroeconomic stabilization (reductions in real interest rates and public debt), the “Brazil cost” will have to go so productivity and competitiveness gain track.

The modernization of roads, diffusion of railways, expansion of ports and airports are essential to bring Brazilian products to international markets less costly. It is necessary to attract private capital into long term financial markets. To simplify and unify indirect taxes is essential, since it would reduce costs with tax lawyers and accountants. Highly skilled workers are also essential to increase the productivity of domestic industry.

It is true the last four years have not been lost. Government investments were critical to reduce the housing deficit and expand the fight against poverty. The government’s infrastructural initiatives can still make an impact. But Brazil needs more. President Dilma Rousseff (or her successor) will have to bring more private capital.

* Fabio Gehrke is an external consultant at OECD (Organization for Economic Cooperation and Development). 

About Mauricio Savarese

I am a Brazilian journalist who got tired of reporting only in Portuguese. Politics and football, these are my turfs. Twitter: @msavarese. Email: savarese.mauricio@gmail.com

Posted on 27/12/2013, in Uncategorized and tagged , , , . Bookmark the permalink. 2 Comments.

  1. It seems a popular topic these days discussing what Brasil must do in order to step up to the next level in terms of a becoming a “developed” nation capable of supplying the needs of its population with domestically manufactured goods and energy resources at reasonable prices, while exporting commodities as a reliable source of revenue and employment. Changing its economy would certainly help pave what is now a dirt road to developed status. I would love to see that happen, but, like a boulder rolling down a mountain suddenly reversing course on its own, I doubt it will happen any time soon. The reason, I believe, is simple. It isn’t just the economy which would have to change, it is the culture and the people themselves where change must first occur.

    Many fail to realize the task which Brasil confronted as it emerged from over 20 years of military dictatorship. Granted, that happened almost 30 years ago, but remnants such as the Policia Militar still exist, as do some of the same economic attitudes despite having elected Lula and Dilma, who herself was arrested and tortured by the military government. Few in Brasil have forgotten the massive inflation, and the corruption and economic and political blunders which occurred. In comparison to then, Brasil is in fact “developed”, it just lost about 30 years in comparison to Japan, the US, Europe and now China, and isn’t catching up as quickly as some hoped it would.

    Brasil, and Brasilians, excel at certain things. In Rio, the annual beach party on New Year’s Eve, with 2.3 million people (about 800k being tourists) expected to attend this year, typically has three or four large stages with a variety of live music, a huge fireworks show using up to six separate barges, and it all happens like it was a weekly event. Same with Rock in Rio, the Papal visit, Carnaval and other major events. That sort of thing just seems to come naturally to Brasilians. Sewage treatment? Highway improvements? Public transportation? Health care? Education? None of those happen at nearly the level of dedication a Rolling Stones show brings out. Why? My only answer is priorities. Brasilians, and Cariocas especially (those who are from and/or live in Rio) simply have different priorities. Living in the moment is a natural way of life for a generation which had no idea what tomorrow might bring. It may take yet another generation, or longer, for things to change. And then, perhaps the economy will change too.

    To me it seems that Brasil is currently only capable of doing business with the largest of the mega corporations, all the others simply have no ability to negotiate through the maze of Brasilian government bureaucracy and regulatory absurdity which is in and of itself considered a job security asset for Brasilian government employees. They don’t want anything to change. It might cost them their job. Or, worse yet, their life +1 pension. Few merely “large” businesses have the capacity to endure the bureaucratic process here. Only the biggest of the biggest can deal with it. And that only helps continue the environment in which corruption thrives, while impeding any economic changes.

    To change the economy, Brasil needs more small and medium sized businesses of the “formal” variety, which collect and pay a simple and fair tax on goods and services but which means a drastic change in the tax system. Currently, something like 40% of the Brasilian economy is “informal”, basically unlicensed and untaxed. There are a few “carrots” for being formal, but not so many “sticks” for being informal. And, being formal is a real pain in the you know what, it takes a skilled accountant just to figure out the tax and licensing liabilities and responsibilities for a small or medium size business. To truly change the economy, the entire business structure and tax system must be simplified in order to convert as much of the informal economy to formal, in my view. But, who wants to give up buying fresh fruits and vegetables from the guy with the cart on your street corner, a guy you have known for years and chat with regularly? To truly change the economy would require eliminating him, replacing him with the cold and impersonal supermarket.

    And, there is a real question as to whether today’s Brasilians even want to be or become a “developed” nation. There seems to be a growing negative attitude regarding foreigners here, sometimes expressed in the phrase “o petróleo é nosso”, (“the oil is ours”). Brasilians want to develop at their own pace, and it is true that pace seems to be barely any pace at all currently. Foreign investment is actually impeded by conditions imposed by the Brasilian government, despite what they may say about wanting and/or needing it. The Libra field oil auction was a prime example. Supposedly there were initially 21 bidders who expressed interest in seeking the rights to develop that offshore oil, but in the end there was only one partnered bid and it was mostly Petrobras, which is 64% owned and controlled by the Brasilian government.

    Today more Brasilians than ever are leaving Brasil for shopping vacations abroad. They return with flat screen TV sets and baggage packed to the bursting point with consumer goods purchased in the US, Asia or Europe. Brasilians spend more in the US than any other tourist nationality. Brasil is one of very few Countries I know of which, by law, requires airlines to allow two free checked bags weighing up to 70lbs/32kg each, for economy class passengers. That law allows for a large influx of foreign goods into Brasil, mostly duty free and with no benefit whatsoever to the Brasilian economy, and is in fact harmful to that economy. I am sure it was enacted as a benefit to the elites who were the only ones able to afford travel overseas by air until perhaps 5-6 years ago, but now it benefits a much larger number of Brasilians who resell those goods in Brasil to subsidize the cost of their trip, or even profit from it. This is basically an industry created by the “Brasil Cost”, and benefiting mostly foreign airlines while harming Brasilian retailers.

    The next few years will be critical for Brasil, just as the next few years have always been critical for Brasil no matter which point in time you go back to. But with the Copa and Olympics putting Brasil in the spotlight, the key will be whether Brasil rises to the occasion. I truly believe Brasil will rise to the occasion, but only just barely in terms of infrastructure requirements. In terms of putting on a party, and those attending the mega events having the times of their lives, Brasil will exceed all expectations in my opinion. That is simply the Brasilian way…..get the job done but only just barely, then having the best time possible. In fact, I have proposed the Brasilian National phrase (Ordem & Progresso) be altered somewhat, “Ordem & Progresso, Just Barely and While Enjoying Life to the Fullest Despite it All”. After these major events, private capital will shake its head in wonder, and likely remain just as skeptical as it is today.

  1. Pingback: Everything you always wanted to know about Brazilian elections (according to me) | A Brazilian Operating in This Area

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