How Brazil can jumpstart its growth by NOT following France’s example

time in Brazil, the world is looking to Brazil with enthusiastic eyes since it
will be hosting soon the World Cup and the Olympics in 2016 that seems as
recognition of its ascending influence in the international markets.
it has many reasons to celebrate.  The
country has made remarkable economic and social progress in the last decade. It
has raised 22 million people out of poverty since 2003 and built a stable
economy. It fought successfully against the big scary ghost from its past, the
hyperinflation, by granting autonomy to its Central Bank that in turn,
implemented the inflation targeting during president Fernando Henrique Cardoso
government (1995-2002) which drove annual inflation down from 916,46% in 1994
to 5,97% in 2000 and by creating the Law of Fiscal Responsibility that sought
to control municipal and states expenses and promote more transparence in
public spending. It’s an economy with full-employment (unemployment rate of
5,5%, OECD Economic Surveys Brazil, October 2013) and strong internal
consumption. Moreover, many state-owned companies were privatized and
flourished as a result of being allowed to operate at arm’s length from the
government and became strong global players as Vale, a mining giant and
Embraer, an aircraft-maker.
Brazil has not seemed to have done all his homework to boost economic
development. Three years of weak growth shows clearly that Brazil needs to
review its economic model. In the last “Global Competitiveness Report
2012-2013” released by the World Economic Forum, structural reforms were cited as
the main pillars to drive productivity and competitiveness. And it seems that
Brazil is not following the guidelines as we would expect from a country that
wants to sustain its economic growth in the long-term.

The first pillar is
government attitudes toward markets and its capability of maintaining an
efficient management of its operation. In Brazil, there is a lack of
transparence and trustworthiness in the government. This can be illustrated by
an incident that was in the international press recently, the case of the OGX,
a company engaged in the oil & gas exploration and production, that was one
of the most negotiated stocks in Brazil, it appreciated 78,94% 4 years after
its IPO and now its stock worth last than 0,1 €. This was a consequence of a
company that was highly leveraged and promised unrealistic potentials for its
reserves, revealing a regulatory bottleneck that enabled a CEO from a public capital
company to make excessive statements which in the end damaged many investors.
Furthermore, there is an excess of government intervention in the economy. The
government created a cap for electricity prices in 2012, aiming to reduce
overall production costs in the economy and control inflation. Nonetheless, instead,
these new terms of the concessions caused several of Brazil’s largest power
companies to suffer significant decreases in profitability and investors
experienced a long-lasting detrimental effect on shareholder value – which will
probably cause underinvestments for the future. Also, as an anti-inflationary
measure, the government forced Petrobras, a mixed capital oil company, to hold
down the price of petrol, which in turn, made it had losses of US$ 1,1 billion
from January to October 2013, as it was importing oil at a higher price than it
sold on the domestic market. In addition, the tax burden is extremely high,
between 2010-2013, the government revenue weighted 37% of its GDP, much higher
than its Latin America counterparts (chart below):

other pillar is infra-structure and the absence of a rebound in investment
(currently at 19% of GDP) reflects the current challenge to rebalance the
economy and maintain the country’s economic growth. We can observe in the
following chart that the level of Gross Capital Formation as a % of GDP
(average 2009-2013) is lower than in other emerging countries:

The country
dealt pretty well with the global financial crisis of 2007/2008 achieving a GDP
growth rate of 7,53% in 2010. This achievement was based on its good
macroeconomic stability but it was also a consequence of China growing at
fantastic rates and being hungry for Brazilian commodities. In addition, there
was a sluggish  America that was seeking
for the Emerging markets risk premium. Nonetheless, the international economic
scenario changed. But is it sustainable? Maybe not, according to Israel Malkin
and Mark Spiegel from the Federal Reserve of San Francisco, China is facing a
“middle-income trap” in which rising wages erode global competitiveness,
leading to a marked slowdown. Furthermore, the US
investors might reduce their exposition to the Emerging Markets as the Fed
reduces its asset buying programs and besides, the American stock market is
enjoying an uptrend.

But what is the best path for
development from now on?

Short answer is: Brazil needs reforms. But a longer
answer is more political: these reforms will not come until voters value policies
that will generate good results in the long-term. We already could observe that
a combination of slower growth and an assertive new middle class is forcing
political change.  Brazilians are tired
of a system which has a Scandinavian tax burden and a third world country
public services. A country which is serious about a long-term solution should
improve the level of education and create a plan to fills the current
infrastructure gaps.  A model that only
stimulates the consumption is clearly not a long-term solution, on the other
way around, it can imposes deep problems as the country can face higher inflation
due to an internal supply that no longer satisfies the demand and an increase
in its current account deficit as the country will need to import more to
respond to gaps in the supply side.

The government have announced recently measures to
tackle those constrains, as offering higher returns for investors to persuade
them to build a US$ 93 billion of infrastructure on road projects, ports and
rails works. During the 2000’s France enjoyed a high growth, reducing
unemployment but failed to undertake structural reforms (pensions, labor
market, tax level & structure, public spending…). Unsurprisingly, these
reforms proved much harder a few years later. Brazil has to take advantage of its
current phase of low unemployment and rising real incomes to tackle its missing
points in order to jump-start economic growth.

Monica Vaisman-Pinto, economist.
À propos

Dédié à l'analyse des questions économiques, sociales et environnementales de long terme, L'Observatoire du Long Terme se fixe pour objectif de donner davantage de visibilité à ces enjeux dans le débat public. Dans ce contexte, il donne la parole à des contributeurs variés, avec pour seul critère le caractère étayé des arguments présentés.

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