SAO PAULO – Brazil has lost its arrogance. According to the growth forecasts for this year, the largest economy in Latin America will hardly grow more than Venezuela and El Salvador in that region, and the prospects for next year are not better. Brazil's currency, the real, has fallen to its lowest level against the dollar in more than four years, forcing the government to pump billions of dollars into futures markets and raise interest rates to stop capital flight – just a few years after a new tax was put in place to curb inflows. So what is really happening in Brazil and what can be done to ensure a prosperous future?
Without a doubt, Brazil has excelled when it comes to some indicators of economic performance in the last decade. For example, its extensive social programs, coupled with past GDP growth, have markedly improved the country's income distribution.
However, over the same period annual GDP growth averaged a modest 3.5% and productivity growth turned negative. Brazilian labor productivity represents a fifth of that of the United States and is lower than that of Mexico or Chile. As a result, Brazil may not be as well positioned to take advantage of its demographic dividend – when a growing share of people of working age creates new opportunities for economic growth – as its leaders think.
One factor limiting Brazil's prospects is its low productivity, which can be explained in part by its anemic investment rate of 18% of GDP – low for Latin America and tiny compared to East Asia. Underinvestment has translated into inadequate infrastructure. So despite massive spending on stadiums for next year's World Cup, logistics costs remain high, undermining Brazil's competitiveness and limiting its growth prospects. Meanwhile, corruption scandals and widespread frustration over the poor quality of public services are fueling social unrest and dampening investor confidence.
Brazil's economic boom was largely due to exorbitant prices for raw materials. Despite the push by the Brazilian development bank, BNDES, to strengthen competitiveness and promote the formation of larger multinational industrial companies, Brazil's manufacturing position has continued to decline. While there have been some productivity gains in the agricultural sector since 2000, high logistics costs have lessened their impact. Brazil continues to search for new engines of growth.
The administration of President Dilma Rousseff, like that of her predecessor, Luiz Inácio Lula da Silva, has clearly failed to assimilate the main lesson of the East Asian economic boom: while industrial policy can increase economic development, it does not. it can 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 wasted on social programs and constitutionally stipulated expenditures, which produce little return due to poor implementation by the public sector. . Meanwhile, high domestic credit costs are undermining private investment. According to the World Bank, Brazil ranks 130th out of 185 countries in terms of ease of doing business.
Under these circumstances, perhaps the Rousseff government was unwise to censor the entry of "undesirable capital" in recent years and establish barriers to imports in order to protect domestic industry by limiting competition in the market. A strategy of stimulating investment through financial intermediation to allocate these funds to companies that are being left out of the internal capital markets due to the excessively high costs of credit would have been more intelligent.
In fact, the Brazilian government's approach only served to exacerbate the country's problems of low capital investment, weak competition, and relatively little innovation—problems that have prevented the country from reaping full factor productivity gains in recent years. Two decades. Most local analysts now project Brazilian growth rates well below potential output. If they are right, it will be difficult to sustain the hard-won economic and social gains of the past decade.
To avoid such a scenario, Brazilian leaders have to increase the efficiency of government spending and use the freed-up resources to alleviate infrastructure bottlenecks. Success should be measured, for example, according to the impact on the quality of education and the acquisition of knowledge, and not according to the mandatory level of public spending.
In addition, policymakers should undertake comprehensive reforms aimed at eliminating the privileges of local firms, and boosting competition, including with foreign companies. In order to strengthen the competitiveness of Brazil's export industry, industrial policy must support the transition to high-value products and services. To this end, BNDES credits must be reallocated from current holders to innovative companies.
Success in all of these areas depends on effective enforcement, monitoring, and cooperation between government and business. In the next 10 to 15 years, Brazil will have a great opportunity to capitalize on its demographic dividend. Unless you have achieved high enough levels of productivity and growth, that opportunity will be wasted.
Manufacturing, which fell from 30% of GDP in 1980 to 15% in 2010, must become an engine of innovation and GDP growth. At the same time, the services sector, which is growing rapidly – and which accounts for 90% of newly created jobs in Brazil – must be made more productive, which requires a greater emphasis on services linked to manufacturing and the exports.
After a decade of reforms and spending cuts under President Fernando Henrique Cardoso in the XNUMXs, and a decade of policies that favored social inclusion under Lula, Brazil needs a decade of economic growth. His government has no time to waste.
Translation of Kena Nequiz
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