Trends of the Brazilian Economy
Former and Current Trends: The Brazilian Economy
January 21, 2015
Primary Article Contributors
Victoria Bikowski – Domestic Policy Analyst for Brazil
Editors
Omar Mashnuk – Team Leader
Key Words: Brazil, Latin America, Economy, Trends, Environment, Infrastructure
Economic uncertainty is no foreign concept to Brazilians. For years, the country has experienced times of economic downturn and crisis, as well as economic resiliency; but rarely has it ever experienced any consistency. In recent years the Brazilian economy has displayed notable progress, but is it stable yet? Not quite. Brazil is an emerging market economy (EME), which means that it is a dynamic economy that has attracted considerable investor interest and is gaining economic and political clout on the global stage. However, this notion of “emerging” also suggests that there are a number of factors hindering its progress. Inflation, foreign investment and poverty have been significant sources of this; all of which can be attributed to a history of poor economic discipline and shoddy economic policy schemes.
During the 1980s, Brazil experienced a major debt crisis brought on by the military-run government that forced vast amounts of spending on infrastructure for industrial production. The 1980s Debt Crisis eventually resulted in Brazil undergoing substantial external debt restructuring and turning to the International Monetary Fund (IMF) for assistance. Fortunately, the budget deficit was eventually lowered, but high inflation could not be curbed. Visions of a more promising economic future began to emerge in the 1990s, especially with the introduction of the “Real Plan” in 1994. The “Real Plan” , designed by Finance Minister Fernando Enrique Cardoso introduced a new currency (the “real”), de-indexed the economy, increased taxes, cut spending, tightened monetary policy, and introduced a managed-floating exchange rate system. What was key here was that for the first time Brazil was showing the kind of economic discipline necessary to attract foreign investors, and inflation fell from just over 50 percent in June 1994 to less than one percent in September 1994.
Fast-forward a few years to the 2008 Global Financial crisis. The crisis was characterized by a contagion effect that affected the credit and capital markets, as well as international trade; especially to those countries dependent on commodity exports. Sound economic and macroeconomic policies could not shield many countries from external fragilities. As the crisis deepened, Brazil began to succumb to this financial contagion. There was concerns that decreased global demands would diminish the price of raw materials, which happened to constitute nearly half of Brazil’s exports at the time; the other half largely being manufactured goods. Nearing the end of 2008 and into 2009, Brazil, as well as a number of other countries in Latin America, had fallen into recession and showed negative GDP growth. However, Brazil showed some resiliency with a year-on-year growth rate of 6.1 percent in the second quarter of 2008. In addition to this, and in despite of recession, Brazil experienced a strong recovery in 2010 with the GDP increasing to 7.5 percent. In 2010 Brazil secured a position that was much more stable and secure than it ever was during the 20th Century. By 2011 Brazil overtook the United Kingdom’s position as the sixth-largest economy in the world. Unfortunately for Brazil, this did not mean that it was totally clear of future economic uncertainty and instability.
Since Dilma Rousseff entered into power in 2011, a number of corruption scandals ensued and have shifted attention away from economic reform. In addition to this, economic growth slowed to below 3 percent and inflation rose and remained well above The Central Bank of Brazil’s yearly target. Other current dangers to the Brazilian economy include, but are not limited to, heavy reliance on commodity exports to drive growth, eccessive spending, and inefficient regulatory and legal frameworks. This poses problems not only for Brazilians, but also for investors abroad. In fact, the National Federation of Industries terms extra cost of doing business with Brazil as the “Custo Brasil” (the Brazil Cost). The principal cost is the high tax burden. There are a number of different taxes to account for when doing business with Brazil; so many that it took World Banks hypothetical company over 2,600 hours to fully comply with tax laws. Even starting a business in Brazil is considered to be such an ordeal that the World Bank ranked Brazil 120th in the world for ease of starting a business.
Social inequality and poverty is also a major hindrance for Brazil’s progress as it can also ward off potential investors. The well-known program Bolsa Familia, may have lifted millions of people out of poverty, but it is not enough to close social divides. Indeed, initiatives like Bolsa have surely improved the quality of life for many Brazilians by eradicating extreme poverty, providing access to education, and improving the health system. These improvements may be conceptualized in observation of the gradual increase of Brazil’s human development index levels, which have gone from 0.522 in 1980 to 0.730 in 2012. Yet, inequality is still a major issue today. For example, Brazil houses a number of Favelas: illegal squatter settlements that have grown into entire neighborhoods, where hundreds of thousands of people live with almost no government services, electricity or running water. Drug gangs often run these neighborhoods, which house millions of Brazilians who live under the poverty line and are continuously excluded from formal economic participation. Brazil increasingly relies on consumerism to maintain its economy. Thus, in order for the Brazilian economy to be more resilient and reliable, it needs to broaden its own consumer base by lifting more of its people out of poverty. Criminal organizations and drug gangs also consistently undermine the rule of law and corrupt legal and political authorities, which in-turn contributes to a questionable economic and political climate that rarely appeals to any serious investors.
There is no doubt that Brazil has been progressing economically over the years, but there are a number of issues that it continues to struggle with. In addition to the problems already mentioned, Brazil increasingly faces the following risks and challenges: the financing and development of vital infrastructure projects, contestable energy solutions and energy costs, growth in social protests rooted in the dissatisfaction of government conduct, as well as climate change that poses as a serious threat to Brazil’s enormous agriculture industry. Furthermore, Brazil is nearing the end of its commodity super cycle, which is especially concerning considering that its economy heavily relies upon commodity exports. It will be experiencing more falling prices for the exports of iron ore, soybeans, and most recently, oil. Infrastructure problems are also on the rise as its largest construction firms are alleged to have bribed Petrobras, Brazil’s semi-public energy corporation that has recently entangled itself corruption scandals, for contracts and are likely to get caught up in legal proceedings and therefore barred from public work. This puts 870 billion reals (US$325 billion) of infrastructure projects at risk; including those needed for the 2016 Olympics.
To conclude, it may also be worth noting that as of November 2014, Brazil’s account deficit was estimated to be US$8 billion; the government is spending more than it is bringing in. The latest Finance Minister Joaquim Levy has announced four tax increases to address this deficit, but investors and economists believe that the reversal of tax breaks in a weak economy does not seem like a viable solution. In addition to this, Brazil’s current tax burden is 36 percent, which is far higher than that of any other middle-income countries. According to the IMF, the outlook for Brazil is now below the 1.3 percent average growth outlook for Latin-America Caribbean countries for 2015; it has been revised to 0.9 percent now. The World Back has also lowered its forecasts for Brazil and expects growth to be 1 percent in 2015, after predicting growth of 2.7 in June 2014. Considering all of the variables discussed, Brazil will certainly struggle in 2015 to move beyond, or let alone improve upon, its EME status.
