What’s Eating Brazil’s Rapid Growth Rates?

A demonstrator tries to stop the riot police during one of many protests around Brazil’s major cities in Rio de Janeiro June 20, 2013. Tens of thousands of demonstrators marched through the streets of Brazil’s biggest cities on Thursday in a growing protest that is tapping into widespread anger at poor public services, police violence and government corruption. REUTERS/Sergio Moraes

Only a few years ago Brazil was on the rise. Both a BRIC country and economic the superstar of Latin America, Brazil enjoyed fantastic growth rates as it rode the wave of a commodity boom. With a young population and many untapped growth opportunities, Brazil seemed poised for continued growth and prosperity.

Unfortunately, even the commodity king of Latin America is not immune to an economic malaise. In contrast to its impressive 7.5% growth rate in 2010, Brazil puttered along at a meager 0.9% in 2012. While growth rates are forecast to rise in 2014, social unrest abounds. Just last year, protesters took to the streets in response to hikes on bus fares and corruption scandals in addition to a general outrage for exuberant government spending on stadiums for the upcoming World Cup and Summer Olympics.

The protestors’ indignation is understandable but would be better directed at failed policies and excessive government spending than at publicized scandals. A whopping 11.3% of Brazil’s GDP is spent on public pension plans, comparable to OECD European nations with much older populations. Its public spending, which amounts to 38.5% of GDP, rivals that of many developed countries.

Opponents of austerity will counter that the anti-poverty policies embraced by former President Luiz Inácio Lula da Silva, or “Lula” for short, lifted nearly 25 million Brazilians out of poverty. Now close to half of Brazil’s population lives in the middle class, and while real income has increased by only 20% for the 10% wealthiest Brazilians, its poorest 10% have seen their real wages double in the last decade. So long as Brazil finds other paths to economic growth, such expensive state intervention can be sustained.

Brazil’s best shot at stimulating growth rates lies in meaningful reform. A disproportionate amount of Brazil’s education spending is lavished upon institutions of higher learning. More of this money should be spent on primary and secondary schooling, and less of it should go to teacher’s pensions, which are unsustainably high.

Reallocation of money from its inflated pension system to investments in infrastructure could pay enormous dividends to Brazil’s economy. While Brazil’s agricultural and commodity production is globally competitive, it is stymied by exorbitant transportation costs that eat up as much as 22% of the costs of production. Improved roads and developed transportation systems could work to alleviate this inefficiency.

Policy makers should also work to streamline its onerous tax code and customs procedures. Doing so would sharply curtail exportation and production costs, in turn bringing Brazilian products to a higher echelon of competitiveness. At the moment, manufacturing costs are continuing to rise while technological advances in production are stagnant. A concerted effort by policy makers to cut manufacturing costs does not need to be a priority, but should be on the backburner as a way of diversifying Brazil’s national income.

These barriers to economic growth are easily remedied. If President Dilma Rousseff or her successors adequately respond with sound economic policies in the coming decade, Brazil will be well on its way to solidifying its place as a world economic power. With a high national birth rate, copious amounts of land and resources, and countless opportunities for reform and infrastructure development, Brazil’s prospects are excellent. In the end, it is not a question of whether Brazil’s economy will continue to grow, but whether its government will allow it to.

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