Mixed Bag for Brazil

Slowing growth elicits misguided policy responses from Brazilian government.

Milton Ezrati of Lord AbbettFor the last 80-plus years, Brazil has been perpetually on the verge of becoming the next economic powerhouse but never quite made it. It is easy to see the potential. The nation is large and rich in natural resources and arable land. It has a sizable, active, some might say hyperactive, population and well-developed trade relations in the Americas and with Europe and Africa. Brazil has failed to realize its potential less for economic reasons than because of misguided government policies. So too today, after great expectations built up over the last decade, Brazil seems to be disappointing again, and for much the same reasons. Not everything is negative and policy is nowhere near as misguided as in the past. It would be a mistake to count Brazil out. But the picture is worrying nonetheless.

During the last decade, Brazil very much looked as though it would at last fulfill its promise. Both the real economy and industrial production grew at a vigorous 4% a year. Even after the global recession of 2008-2009, Brazil seemed to sustain its promise. The year 2010 saw the country’s real gross domestic product (GDP) expand 7.5%. But then things stalled. Real GDP expanded only 2.7% in 2011. During the first half of this year, the most recent period for which complete data are available, real GDP barely registered positive, expanding a mere 0.25% compared with the same period in 2011. Business investment, critical to an emerging economy, actually dropped 0.7%. Brazil’s central bank now forecasts a disappointing 1.6% overall growth rate for this year as a whole.

Questions about past success are not the only source of worry. Even more troubling are the policies Brazil has instituted in response to the country’s current economic troubles. Instead of a coherent program for recovery and long-term development, the government, as so often in the past, has settled on a mélange of ad hoc measures. The Rousseff administration, suddenly awakening to the need for economic infrastructure, has, it seems, set out to catch up all at once for past neglect with the equivalent of $66 billion in new building programs for everything from soccer stadiums to support the 2014 World Cup games and hydroelectric plants in the Amazon, to miles of new toll roads and rail links. While infrastructure investment is usually a good idea, especially in an emerging economy, the government has piled so much on so fast that it is having trouble spending money at all, much less effectively. Meanwhile, the massive size of these projects, almost pharaonic in the words of one journalist, all but guarantees delays and waste, though the government has tried to avoid past inefficiencies by privatizing recent efforts.

The disappointing nature of the policy response isn’t limited to the infrastructure effort. In rapid succession, the government has announced payroll tax cuts; lower taxes on electricity; sector-specific tax breaks for politically connected industries, autos and appliances among them; subsidized loans, also for politically connected industries; and, despite rising inflationary pressures, dramatic interest rate reductions, from a 12.5% benchmark rate a little over a year ago to less than 8% at present.

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