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).