Brazil and Economic Growth

The country of Brazil has one of the largest economies in the world and has had a meteoric rise in growth over the past 15 years. Much like the rest of the world economy, this accelerated growth has dwindled in the last year and the country is protesting the unexpected costs from the years of growth. The article, “Has Brazil Blown It?” in The Economist covers the current turmoil of the country (Friedel, Features, Berkely, 2013). This article also uncovers the issues with the Brazilian economy and how applying economic principles both explains the current state of affairs and provides for a future for the people of Brazil.

Brazil is one of the few countries that can boast of a robust economy over the last few years. While the rest of the world plunged into recession initiated by the Lehman collapse in 2008, Brazil took the hit in stride and still posted gross domestic product growth of 7.5% in 2010 (Friedel et al., 2013). The GDP is the value of a country’s economic activity and includes the value of private consumption, investment, government spending, and net exports. GDP is not a perfect measurement and can be calculated in several ways. One method of calculation totals personal and corporate revenues. By contrast, another way to calculate the GDP is to add up the money spent on goods and services produced across different market segments. GDP growth is important because it indicates the health of the economy. When growth is down, companies are producing lower profits and this has a cascading effect across all segments of the country. In addition, a constantly declining GDP can be the early indicator of a recession. Brazil’s GDP growth rate of 7.5% in 2010 is a sharp contrast with the 2012 growth rate of just 0.9% (Friedel et al., 2013). While this indicator does not put Brazil into the recession category yet, many policy changes will need to occur to put Brazil back on the track of economic prosperity.

During the years of economic growth, many benefits derived from government policy. These included policies that influenced “the pay-off from ending runaway inflation and opening up to trade, commodity price rises, and big increases in credit and consumption” (Friedel et al., 2013). The results of these benefits have tapered off and during that time of prosperity, Brazil failed to set some boundaries for spending that are challenging the economy today. One challenge faced by the people of Brazil is the extremely high tax rate. Brazil has the distinct and dubious honor of carrying “the world’s most burdensome tax code” (Friedel et al., 2013). A payroll tax rate of 58% is a staggering number and where the government chooses to spend that money is questionable for a flourishing economy (Friedel et al., 2013). For the government, priority is given to pension plans while very little attention is given to the infrastructure of the country. “The average Brazilian can look forward to a pension of 70% of final pay at 54. Despite being a young country, Brazil spends as big a share of national income on pensions as southern Europe, where the proportion of old people is three times as big” (Friedel et al., 2013). The infrastructure of a company supports economic growth and this heavy spending on pension plans leaves a deficit of spending on the infrastructure. Roads, schools, healthcare, public services, and other improvements receive only 1.5% of the GDP compared to a worldwide average of 3.8% (Friedel et al., 2013). When a country does not have a strong infrastructure, it places an unfair burden on the producer of a good to take that good to market. For example, a farmer in Mato Grosso will spend 25% of the value of his crop to take it to market compared to a farmer in Iowa who only spends 9% (Friedel et al., 2013). This expense leads to a more challenging business environment and discourages economic growth.

Another challenge government policy has placed on the economy of Brazil is the tradeoff of interest rates and inflation. As interest rates lower, consumers spend more money and this stimulates economic growth. When interest rates rise, it becomes more expensive for individuals and businesses to take out loans so economic growth pulls back. A country with a solid fiscal policy will balance this growth so that the economy does not experience hyperinflation on one end or a recession on the other end. The current president of Brazil, Dilma Rousseff, aggressively lowered interest rates to stimulate growth but now the economy is in a situation where interest rates must rise quickly to head off inflation (Friedel et al., 2013). As the money supply increases and the GDP decreases, the country becomes at risk of hyperinflation.

Another challenge for Brazil’s economic future lies in the current political environment. Years of prosperity have led to inefficiencies and government waste yet the group that benefits most from these patronage policies is the group also charged with making the corrections. Agency costs occur when the goals of the managers (in this case the politicians) are not aligned with the goals of the principals or voters. The politicians in Brazil have very little incentive to reduce wasteful spending when the spending benefits their interests or the interests of groups that have put them into office. Theoretically, the voters should be in charge of who runs the government and while Brazil is a democratic state, the influence of special interest groups causes the same unbalance in the relationships with Brazil and the United States. One example of Brazil’s government waste is a cabinet with 39 ministries as opposed to 15 in the U.S. Cabinet (Friedel et al., 2013). The people of Brazil will need to find a way to overcome this agency bias in order to change some of the damaging government policies.

A fourth barrier to economic growth, in addition to government policies, unbalanced interest rates, and agency bias, is the lack of competition or free trade in Brazil. Free trade describes the process where a country that has a comparative advantage in a certain good or service can freely import and export that item without restrictions. With a comparative advantage strategy, Brazil would export certain goods and use the resulting income to trade for other goods. Free trade was a major economic boost to the economies of China and India but Brazil has not been able to overcome a government penchant for high tariffs. These tariffs were imposed to protect the corporations operating in Brazil but have had the effect of reducing healthy competition and prices. Brazil does belong to the free trade group Mercosur, but this group has been losing members and is not considered a force for economic stimulus (Frieder et al., 2013). Without opening up the protections placed on Brazilian corporations, the benefits of free trade cannot be realized and the growth of the Brazilian economy will continue to stagnate.

With all the challenges in the economic slowdown for Brazil, there are a few bright spots. The unemployment rate in Brazil is 5.4% and is one of the lowest in Latin America (Rapoza, 2013). Unemployment rates are primary economic indicators for a country because this number represents the percentage of the workforce that is willing to work and not currently employed. This indicator can help predict the direction of an economy. A low unemployment rate indicates that the general population is generating wealth, both personal and for corporations and points towards a strong economy. A high unemployment rate leads to reduced consumer spending and a downward trend for an economy due to limitations on personal revenue. For Brazil, the low unemployment rate indicates that the GDP may not be the only indicator worth reviewing. “Brazil’s economy is in a self-sustaining expansion,” said Bill Adams, senior international economist for PNC Financial Services Group in Pittsburgh. “A tight labor market fuels persistent wage gains even in a slow economy, and these wage gains fuel higher consumer purchasing power and domestic demand and sustains economic growth” (Rapoza, 2013). Brazil’s low unemployment is one of the factors pointing to a country with hopes of an economic rebound.

Another bright spot for the economy in Brazil is the rate of investment. The rate of investment indicates the level of interest by outside companies to do business in Brazil. A higher rate of investment will lead to more opportunities in Brazil. According to Brazil’s National Confederation of Industries, the group expects investment growth to rise 8% this year (Dow Jones, 2013). CNI said that although household consumption powered economic growth in 2012, investments should have a positive impact on Brazil's growth in 2013. "Sustainable growth comes from investment," said CNI chief economist Flavio Castelo- Branco. "When investment grows more than consumption, we have a favorable situation" (Dow Jones, 2013). Overall, Brazil’s rate of investment will remain under 20% and this puts the country behind other developing countries in terms of investment percentage but will have the effect of adding 1.5% to the GDP in 2013 (Dow Jones, 2013). A continued focus on the rate of investment for Brazil will be a second positive indicator for the return of the Brazilian economy.

Brazil’s early years of economic growth and prosperity have given way to a challenging time for Brazil’s formerly robust economy. Government policies that originally helped stimulate economic growth have led to an extremely high tax burden and a trend of government waste, however, the agency bias of politicians will make this a difficult situation to overcome. Government leadership has increased these challenges with a fiscal policy that fails to balance interest rates and inflation. Finally, the lack of free trade opportunities for corporations in Brazil and the protectionist nature of the tariffs imposed by the government will need to change if economic growth is to occur. By utilizing comparative advantage, Brazil can export products and use the resulting income to trade for items where the country does not have a comparative advantage. The bright spot for the country is two indicators of potential growth, the low unemployment rate and the increase in the rate of investment. These two measurements help to balance out the low GDP growth and portend a rebound for the Brazilian economy.

References

Dow Jones Business News. (September 25, 2013). Brazil’s economy to grow by 2.4% in 2013. Nasdaq.com. Retrieved from http://www.nasdaq.com/article/brazils-economy-to-grow-24-in-2013-industry-group-says-20130925-01085

Friedel, M., Features, R., Berkely, J. (September 28, 2013). Has Brazil blown it? The Economist. Retrieved from http://www.economist.com/news/leaders/21586833-stagnant-economy-bloated-state-and-mass-protests-mean-dilma-rousseff-must-change-course-has

Rapoza, K. (October 24, 2013) Brazil’s ‘blessed’ unemployment rate. Forbes. Retrieved from http://www.forbes.com/sites/kenrapoza/2013/10/24/brazils-blessed-unemployment-rate/