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In Latin America’s most promising country, income per capita grew 2.7% per year in 2002-2010. In 2011-2013, it slowed to 1.8% per year and in 2014-2015 it will contract 2.4% per year. In 2014-2016 alone, income per capita will contract more than 8%. Our projections (at University of Brasilia) suggest that the income per capita is unlikely to recover to the 2013 level before 2022. So, rather than a recession, Brazil is more likely to be in an economic depression.
Despite the low long-term growth when compared to other emerging economies and the current strong growth deceleration, many in Brazil insist that the crisis is of a political nature. For them, the economy requires, apart from a solution to the political crisis, more ‘adjustments’ than reforms to get back on track and regain investors’ confidence.
Indeed, political collapses create and feed uncertainties and foment populism and poor policies, reinforcing the economic crisis. But a look into Brazil’s case suggests that the crisis goes beyond the political nightmare and that political solutions are a necessary, but not a sufficient condition for the economy to resume growth.
In the last 15 years or so, growth relied on a ‘low-hanging fruit’ growth model, i.e., commodity prices boom, easy credit and fiscal activism helped explain economic performance.
A deeper look would suggest that this model would be short lived and that the cracks were of a structural economic nature. After all, there is evidence that the stagnation is a symptom of the decline in potential output.
The first, and perhaps most critical, is associated with the demographic transformation. Brazil is approaching the end of the demographic bonus by mid-2020s but, until now, it has not really benefited from it. On the contrary, real wages have increased significantly, savings have declined and firms have lost, not gained, international competitiveness.
More worrying, all these are happening in a perspective of a modest growth of the already very low and stagnated labor productivity. To compound to the problem, the dependency ratio, social security and health spending are increasing rapidly, adding to the already highly problematic fiscal forecasts.
Second, a combination of premature deindustrialization, large, but less productive service sector, poor capital to labor ratio, poor infrastructure, poor human capital, little investment in innovation and technology development, and re-primarization of exports have inhibited the country’s competitiveness.
Third, the modest interest in trade and investment accords has kept Brazil among the most closed economies and isolated from global value chains.
So, one has plenty of reasons to believe that that improvements in the political arena and approval of fiscal adjustments and new proceeds, including the tax levied on financial transactions – the CPMF – seen by the Government as a panacea, are unlikely to suffice to significantly alter the prospects of growth.
For Brazil to grow, it will have to carry out a vigorous reform agenda that increases productivity and competitiveness and encourages investment. For that to happen, the State will have to be smaller, but more efficient and strategic, develop pro-growth institutions, improve governance and transparency, promote an environment of trust and intervene smartly in areas such as education, science, technology, health, social policy and infrastructure.
Increased productivity, competitiveness and investment will also require reforms to ensure well-defined regulatory frameworks, promote competition, strengthen markets, enhance manufacturing value added, modernization of the service sector, reallocation of resources from lower to higher productivity activities, promotion of economic diversification, and increase of savings.
Finally, and above all, knowledge integration to the global economy will have to be at the center of the growth strategy.
A new development model is long overdue and the more Brazil procrastinates to recognize it, the greater will the challenges be to ensure a competitive and vibrant economy in the 21st century. A political consensus will definitely help, but, at this juncture, it will contribute, but will not determine better days ahead.