Brazil has lost its swagger. Growth estimates for this year put Latin America’s largest economy above only Venezuela and El Salvador in the region, and the outlook for next year is not much better. Brazil’s currency, the real, has fallen to its lowest level against the US dollar in more than four years, compelling the Brazilian government to pump billions of dollars into the foreign-exchange futures market and raise interest rates to deter capital outflows — just a few years after imposing a new tax to deter inflows. So what is really happening in Brazil, and what can be done to secure a prosperous future?
To be sure, Brazil has done remarkably well on some measures of economic performance over the past decade. For example, its extensive social programs, combined with past GDP growth, have improved the country’s income distribution markedly.
However, over the same period, annual GDP growth has averaged a modest 3.5 percent and productivity growth has slipped into negative territory. Brazil’s labor productivity is one-fifth that of the US and lower than that of Mexico and Chile. As a result, Brazil may not be as well positioned to take advantage of its demographic dividend (when a rising share of working-age people creates new opportunities for economic growth) as its leaders believe.
One factor limiting Brazil’s prospects is its low productivity, which can be explained partly by an anemic investment rate of 18 percent of GDP — low for Latin America and paltry compared to East Asia. Insufficient investment has meant inadequate infrastructure. Thus, despite massive spending on stadiums for next year’s soccer World Cup, logistics costs remain high, sapping Brazil’s competitiveness and limiting its growth prospects. Meanwhile, corruption scandals and widespread frustration with the low quality of public services are fueling social discontent and reducing investor confidence.
Brazil’s economic boom was largely a product of skyrocketing commodity prices. Despite a push by Brazil’s development bank, BNDES, to shore up competitiveness and promote the formation of larger, multinational industrial firms, Brazil’s manufacturing position has continued to decline. While the agricultural sector has shown some productivity gains since 2000, high logistics costs have constrained its impact. Brazil is still searching for new drivers of growth.
Brazilian President Dilma Rousseff’s administration, like that of her predecessor, former Brazilian president Luiz Inacio Lula da Silva, clearly has not absorbed the primary lesson of East Asia’s economic rise: While industrial policy can augment economic development, it is no substitute for investment in infrastructure, human capital and export-oriented industries.
Although Brazil boasts effective tax collection and its central bank has a reputation for prudent monetary policy, fiscal resources are squandered on social programs and on constitutionally mandated expenditures that produce low returns, owing to poor public-sector implementation. Meanwhile, high domestic borrowing costs are undermining private investment. According to the World Bank, Brazil ranks 130th out of 185 countries in terms of the ease of doing business.
Against this background, Rousseff’s government was perhaps rash to decry the inflow of “unwanted capital” in recent years and to erect import barriers aimed at protecting domestic industry by hampering market competition. A wiser strategy would have been to boost investment by using financial intermediation to allocate these funds to firms that are being crowded out of domestic capital markets by excessively high borrowing costs.
In fact, the government’s approach served only to exacerbate Brazil’s problems of low capital investment, weak competition and relatively little innovation — problems that have prevented the country from achieving any gains in total factor productivity in the past two decades. Most local forecasters now put Brazil’s growth rates well below potential output. If they are right, it will be difficult to maintain the hard-won economic and social gains of the past decade.
To avoid such an outcome, Brazil’s leaders must increase the efficiency of government spending and use the freed-up resources to clear infrastructure bottlenecks. Success should be measured according to impact on, say, the quality of education and skills acquisition, rather than according to the mandated level of public spending.
Furthermore, policymakers should pursue comprehensive reform aimed at eliminating domestic firms’ privileges and boosting competition, including with foreign firms. In order to enhance Brazilian industry’s export competitiveness, industrial policy must support a transition to high-value products and services. To this end, BNDES loans should be reallocated from incumbents to innovative firms.
Success in all of these areas depends on effective implementation, monitoring and cooperation between government and business. In the next 10 to 15 years, Brazil will have a tremendous opportunity to capitalize on its demographic dividend. Unless it has achieved high enough levels of productivity and growth, it will miss its chance.
Manufacturing, which fell from 30 percent of GDP in 1980 to 15 percent in 2010, must become an engine of innovation and GDP growth. At the same time, the rapidly growing services sector — which accounts for 90 percent of Brazil’s newly created jobs — must be made more productive, which requires a stronger emphasis on services linked to manufacturing and exports.
After a decade of reforms and retrenchment under former Brazilian president Fernando Henrique Cardoso in the 1990s, and a decade of policies favoring social inclusion under da Silva, Brazil needs a decade of economic growth. Its government has no time to waste.
Danny Leipziger is a professor of international business at the George Washington University and managing director of the Growth Dialogue, was a vice president of the World Bank and served as vice chair of the Spence Commission on Growth and Development.
Copyright: Project Syndicate
Could Asia be on the verge of a new wave of nuclear proliferation? A look back at the early history of the North Atlantic Treaty Organization (NATO), which recently celebrated its 75th anniversary, illuminates some reasons for concern in the Indo-Pacific today. US Secretary of Defense Lloyd Austin recently described NATO as “the most powerful and successful alliance in history,” but the organization’s early years were not without challenges. At its inception, the signing of the North Atlantic Treaty marked a sea change in American strategic thinking. The United States had been intent on withdrawing from Europe in the years following
My wife and I spent the week in the interior of Taiwan where Shuyuan spent her childhood. In that town there is a street that functions as an open farmer’s market. Walk along that street, as Shuyuan did yesterday, and it is next to impossible to come home empty-handed. Some mangoes that looked vaguely like others we had seen around here ended up on our table. Shuyuan told how she had bought them from a little old farmer woman from the countryside who said the mangoes were from a very old tree she had on her property. The big surprise
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices. The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and
Former president Ma Ying-jeou’s (馬英九) trip to China provides a pertinent reminder of why Taiwanese protested so vociferously against attempts to force through the cross-strait service trade agreement in 2014 and why, since Ma’s presidential election win in 2012, they have not voted in another Chinese Nationalist Party (KMT) candidate. While the nation narrowly avoided tragedy — the treaty would have put Taiwan on the path toward the demobilization of its democracy, which Courtney Donovan Smith wrote about in the Taipei Times in “With the Sunflower movement Taiwan dodged a bullet” — Ma’s political swansong in China, which included fawning dithyrambs