December 2013 Issue
Since the turn of the century, the Brazilian economy has been something of a success story. In 2010, while the majority of the world’s major industrialised nations were struggling to stay above water, the Brazilian economy expanded by 7.5 percent, registering the country’s strongest economic performance for over 25 years.
The foundations of Brazil’s economic prosperity were laid during the mid-1990s. Under the leadership of President Fernando Henrique Cardoso the Brazilian economy stabilised, before accelerating in the early 2000s under Mr Cardoso’s successor Luiz Inácio Lula da Silva. In light of Brazil’s economic resurgence, the 2014 FIFA football World Cup and the summer 2016 Olympic Games were awarded to the country in quick succession.
Furthermore, under President da Silva and the economic boom he presided over, 40 million Brazilians escaped from poverty and joined a new, emerging lower middle class, a group of people known officially as ‘Class C’. As a result of the country’s newfound economic prosperity, many Class C citizens, who now make up more than half of the country’s population, were able to purchase luxury items such as their first mobile telephones, computers and cars. More or less overnight, Brazil had created a new middle class army of consumers, armed with great swathes of cheaply available credit. The previously marginalised ‘poor’ stratum of Brazilian society quickly began to play a confident and central role in Brazilian culture, helping Brazilians to become one of the largest groups of consumers in the world.
The appreciation of Brazil’s domestic currency, the real, against the US dollar also facilitated the growing desire for consumer goods in Brazil. In recent years, newly wealthy Brazilians have been travelling and shopping abroad, particularly in the US. Unfortunately, this trend has continued despite the real now depreciating massively against the dollar.
Brazil has often been lauded as one of the nations which will help drive global economic growth in the future. Of all the emerging market economies it seemed that Brazil had the most potential for development. However, despite the country’s successes, in recent years the Brazilian economy, like many of its emerging BRIC compatriots, has faltered badly. Accordingly, some analysts have started to question whether the Brazilian economic boom of the last 20 or so years was nothing more than a vôo de galinha or chicken flight – a brief, unsustainable growth spurt followed by a rapid return to earth. Over the years Brazil has seen more than its fair share of false dawns. According to forecasts in October, Brazil’s economy slowed to a near halt in the third quarter of 2013, after accelerating to its fastest pace in more than three years in the period between April and June.
Slow domestic growth is not the only major issue facing the Brazilian government, however. In June, hundreds of thousands of Brazilian citizens poured onto the streets to join protests that were initially prompted by an increase in public-transit fares. However, these protests escalated quickly, becoming a forum through which angry citizens could air broader grievances around rising costs of living, weak and insufficient infrastructure, failures of the nation’s education system, political corruption, and government spending on big sporting events like the World Cup.
Despite the protests and the portents of doom, President Dilma Rousseff has rejected out of hand any criticism of the country’s recent economic performance. “We are the only major country with full employment. We have posted the third-best growth figures in the world during the second quarter,” said President Rousseff. “Whoever bets against Brazil will always lose.” Whether this confidence is misplaced remains to be seen.
In recent years, Brazil has benefited significantly from enormous rises in commodity prices. However, analysts have suggested that these price increases were entirely artificial, driven by record low interest rates in the US and the huge demand for commodities from China. The commodity price boom is over and, with the prospect of the US Federal Reserve stimulus package soon being phased out, there is likely to be a great deal of concern across all emerging economies, including Brazil.
Further contributing to the county’s domestic woes, strong local demand for commodities served only to push prices upward, while inflation is approaching the upper limit of the official target set at 6.5 percent. President Rousseff, who faces re-election in 2014, has passed numerous tax cuts and incentive packages to try to stir Latin America’s largest economy back into the fast growth that made it an investor favourite during the 2000s. However, with industry shrinking rapidly, household consumption growing at its worst rate since the third quarter of 2011 and inflation now running at 6.46 percent on an annual basis, the Brazilian Central Bank has found itself in the uncomfortable position of needing to raise its base interest rate to 9 percent despite slow economic growth, highlighting imbalances in the economy.
As a response to the continuing economic strife, many business leaders have called upon President Rousseff to undertake far more ambitious reforms of the country’s tax and labour codes so factories can regain their competitiveness both at home and abroad. Brazil, like many of its emerging brethren, has acted very softly in terms of genuine reform since the onset of the boom years. However, the Brazilian economy has to carry a burden that other emerging nations do not – the State. Brazilian companies face the world’s most onerous tax code; payroll taxes add 58 percent to salaries. If the country’s economy is to turn itself around and begin to fuel genuinely sustainable growth, there needs to be a concerted effort to implement structural reforms and reduce government bloat.
There needs to be an attempt made to prioritise the country’s badly underfunded infrastructure rather than to control the private sector – Brazil spends just 1.5 percent of its gross domestic product (GDP) on infrastructure, down considerably from the global average of 3.8 percent. Furthermore, the Brazilian public sector imposes a particularly heavy burden on its private counterpart.
Undoubtedly, living standards have improved for many Brazilians. More than half of the country’s population of 200 million now belongs to the lower middle class, living in households with a monthly income of between $127 and $446 per person. Tens of millions of Brazilians live in more solid houses equipped with modern amenities such as cookers, fridges and washing machines. Children of illiterate domestic servants have jobs in the formal economy and study part time for degrees at night. Yet despite all of the advances made by the Brazilian people since the 1970s and 1980s there is still a great deal of work to be done on the public front. As noted, the number of cars in circulation has exploded, more than doubling over the last decade, yet the vast majority of Brazil’s road network remains unpaved and few new routes have been created to compensate.
Public transport also remains woefully inadequate, consisting mainly of overcrowded and dilapidated buses operating on heavily potholed and inadequate roads. Air travel is also a bone of contention – although air traffic has more than doubled in the past 10 years, the nation’s networks of airports have barely been touched. The Brazilian school system has also been neglected in terms of genuine investment. Children often attend schools that are not fit for purpose. Brazil’s school system ranked lower than Mexico, Russia and Mongolia in the World Economic Forum’s 2013 Human Capital Index.
Although the Brazilian constitution guarantees the right to free, state-provided healthcare, around two-fifths of Brazilians citizens are not covered by local primary care. Instead, many rely on chaotic and overcrowded emergency facilities. Furthermore, around a quarter of all citizens opt to go private in order to receive more comprehensive coverage. In Brazil, the proportion of total public healthcare spending is actually lower than in the US, a nation which does not provide universal healthcare. As a response to unrest surrounding the country’s education system, the Rousseff government has opted to relax immigration rules to allow more doctors in, including up to 4000 from Cuba, in order to combat a shortage of around 168,000 physicians.
Before the onset of the country’s economic boom, Brazil’s precarious financial state and high levels of unemployment were the primary concern of the underprivileged classes. However, since the creation of the Class C strata, the calamitous state of the country’s infrastructure and woeful public services has been at the forefront of the Brazilian psyche. This affect has only been amplified by lavish spending on enormous sporting venues which could easily become expensive white elephants. Brazil is spending in the region of $3.5bn to build or refurbish 12 stadiums for the month-long football tournament next summer. A similar amount is expected to be spent on the Olympic Games which follow two years later.
The million-strong marches witnessed during the summer served as a testament to the level of ill feeling among many Brazilian citizens desperate for genuine economic reform. The protests first witnessed in June are becoming increasingly commonplace in Brazil. Nationwide protests against political corruption, the continual failings of the national health and education systems, as well as a continuation of protests against public spending on sports, show little sign of abating.
However, the government’s best efforts to address the growing unrest have been largely unsuccessful. Many of the landmark infrastructure schemes included in the Growth Acceleration Programme, announced in 2007, are running years behind schedule and well over budget.
Brazil’s Secretariat of Civil Aviation announced in mid-October renovation and expansion works at around 50 regional airports, which will launch by February 2014 as part of a $3bn development plan for 270 regional airports in 2014. Concessions to run three airports were auctioned at the beginning of 2012, but auctions for more airports, as well as ports, roads and railways, were delayed while the government quibbled over the terms. Despite her optimism about the country’s economic prospects, it would appear as if President Rousseff is beginning to heed calls for reform and has accepted that the country will need significant private sector involvement to get the roads, railways, ports and airports it needs.
The failure of the Brazilian economy is far from certain; indeed, the country still has considerable strengths. Brazil is the world’s third largest exporter of food and is becoming a large scale exporter of oil. It is also becoming a key biotechnology and life sciences hub. However, in order to drive the country forward, alongside much needed infrastructure investment and reform of the nation’s education system, there must be reforms to help make Brazilian businesses more competitive and encourage investment. Brazil imposes high import duties and taxes that inflate the price of many goods and services; removing these will help to alleviate some of the so-called ‘Brazil Cost’ – the excessive operational costs associated with doing business in the country which act as a barrier to increased growth through private sector investment.
© Financier Worldwide
BY
Richard Summerfield