So I thought I would take a quick break from blogging about my work to talk a bit about some of my personal thoughts about the Brazilian economy. I certainly don't consider any of this to be definitive analysis as I have not been researching this much here or looked at detailed statistics. I have been reading lots of articles though, and been trying to make sense of all the information coming at me. So this post is basically about my impressions so far.
The Brazilian economy has certainly been on a roll for the last decade or so, and the excitement is palpable here. Even outside of the country, Brazil has been making a name for itself as a new "it" country. With lots of positive international media coverage (is anyone else getting sick of the word BRIC?) glowing about strong growth rates, rising investment and new government programs designed to cut poverty, along with a more robust, outward-focused foreign policy, the common assumption is that Brazil is a country of the future.
While the successes of the last few years and the contagious optimism should not be ignored, I think a few words of caution are in order. After all, this is not the first time that people expected Brazil to catapult onto the world stage. A famous saying here is, "Brazil is the country of the future, and it always will be." This nation has so many advantages - an agreeable climate, rich natural resources, a history of industrialization, a young, diverse population, etc, that it is hard to imagine why it wouldn't be successful. But historically, like most of Latin America, it has been subject to numerous boom and bust periods that tend to ebb and flow based on commodity prices. Is this time different? It seems to me like a mixed bag.
In a recent report, the Council on Foreign Relations identified four pillars of future Brazilian economic growth: agriculture, extraction (mining), energy (offshore oil), and domestic consumption. Note that three out of those four sectors are exports of primary goods. This means that Brazil is really continuing to do what it has always done: export its natural resources and hope that market prices are good. For now, the signs are that market prices are indeed quite promising: surging demand from China (and now India) has driven prices for soy, ore, and oil way, way up for a prolonged period of time. For now, that demand shows no signs of abating, and some economists have talked of a "supercycle" in commodity prices. This has really been the main motor of Brazil's growth over the last decade. As China and India continue to boom, so boom the countries that send them raw materials. Brazil's economic future is thus inexorably linked to its trade with these two countries. This is hardly a recipe for dynamic economic development.
With demand from the East looking strong at least for the near future, Brazil has a unique opportunity to leverage the extra income it is getting from high commodity prices to really transform its economy. Domestic demand has indeed risen, and millions of Brazilians are growing out of poverty and causing a consumer boom (though one that is starting to resemble a dangerous consumer bubble). Bolsa Familia, the largest conditional-cash transfer program in the world, has also helped reduce extreme poverty in the rural interior. The government has announced lots of new investment aimed at combating poverty and promoting infrastructure, health, and education. These are all efforts that should be celebrated, and nothing to be taken lightly. But ultimately, these gains will be fleeting if they do not translate into a new, more dynamic model of economic growth. As soon as commodity prices crash and everyone comes back down to Earth, government investment will dry up and the consumer bubble (especially in real estate) will pop. And then Brazil will be back to square one. This is a story all too common in Latin American history.
The key is not to get complacent. There is a lot that can be done to put Brazil on a more stable economic footing over the long term. The education system needs to be drastically improved. This is not simply a question of throwing more money at the issue, it is about structural reform to improve the quality of teaching and education. As in the U.S., it is not a simple issue, but that does not mean it can be put on the back burner. The public primary education system is terrible, and the differences between public and private education exacerbate the deep societal inequalities that are part of everyday life here.
Corruption is also deeply endemic, from the national level on down to local municipal governments. The recent number of corruption scandals in Dilma's cabinet serves to prove this point. When times are good and the government is flush with cash, people have extra incentives to pocket money for themselves. If Brazil does not make an intense effort to tackle this problem head on, it is going to have a difficult time improving its governance.
A perverse tax regime that protects special interests is another huge problem for Brazil. As I mentioned in a previous post, interstate transportation taxes are mindbogglingly high, which prevents integration of industry across the country. Import taxes designed to protect domestic manufactures make many consumer goods as well as input materials prohibitively expensive. Brazil is the most expensive country in the world for buying a car, not because production costs are so high (the country has a long history of car manufacturing) but rather because of stratospheric taxes. All this money then flows to the government, which uses a good chunk of it to pay very generous salaries and benefits to well-connected government employees. When in Brasilia, everyone I talked to said they hoped to work for the government because they would make so much more money. While I have nothing against rewarding government employees for good work (my parents both have worked for the federal government, after all), the corrupt "who-you-know" patronage system means that privileged insiders are essentially able to reap huge monetary benefits from a government tax structure that hurts the lower classes and creates a huge drag on economic growth.
Overall though, the biggest issue I see is this. Successful capitalist economies have historically depended on one key sector to sustain their development: manufacturing. In fact, if you trace the history of large-scale manufacturing throughout the world, from England to the U.S. North and later to the U.S. South, followed by Western Europe and then East Asia to present-day China, you can see a nice path of the most economically dynamic areas over the last 150 years. In the U.S., the steady eroding of our manufacturing sector due to mechanization and outsourcing has caused a crisis in our middle class, temporarily masked over the last several decades by several credit bubbles, but now painfully laid bare during the current recession. Brazil, and Latin America in general, have largely been bypassed by this process. As great raw material exporters to the manufacturing titans, their success has gone up and down as newly industrialized countries go through rapid growth periods and then peter out. If Brazil and its neighbors want to take their place among the industrialized countries of the world, they cannot continue to play this secondary role. They must become manufacturing titans themselves.
For now, industry in Brazil is heavily concentrated in São Paulo, easily the most economically dynamic region of the country. While the poor North-east of Brazil has experienced strong growth recently, this has reflected mainly new routes for raw material exports, not new industrial manufacturing strength. The strong real has hurt Brazilian manufacturing recently, and a new industrial policy will help to cushion the blow for domestic producers. But ultimately, this is not a new policy to promote dynamic manufacturing growth but rather a continuation of benefits to domestic special interests (not unlike the failed Import Substitution Industrialization wave of the 60s and 70s). Until Brazil finds new dynamic engines for future growth, principally in manufacturing, I would be cautious about getting too optimistic. I guess we will all see what happens, but it seems to me like history may be about to repeat itself here in the perpetual country of the future.
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