It seems just about every business article written about Brazil in the last five or so years has painted a highly optimistic portrait of the country. Of course, there has been some recognition of Brazil’s high taxes, overbearing red tape, enduring crime, etc., but these facts almost come across as minor exceptions to a narrative of progress.
Much of the good news is deserved. In 2001, I moved to South America – to Chile – where I worked as a journalist in the business press for nearly four years. At the time, I remembered seeing an article that said hunger was experienced by some 25% of Brazil’s children. I once cited that statistic to help a friend understand how much prosperous Santiago contrasted to the “third world” Latin America of the US imagination.
What a difference a decade makes. The government’s flagship social program, Bolsa Familia, launched in the early 2000s, mostly eliminated the hunger problem. Home-grown multinationals such as CVRD, Natura, and Embraer have become leaders in their respective industries. Brazil won international competitions to host not only the World Cup, but also the Olympics. Some 30 million people entered the middle class, so that 50 percent of the population now fits in this income category. Finally, a few months ago, Brazil overtook the UK to become the world’s sixth largest economy.
And yet, it is still difficult to shake off that notorious expression, most frequently cited by Brazilians themselves: “Brazil is the country of the future… and it always will be.”
Despite all the positive news coming out of Brazil, too much of the country’s growth depends on exports of oil, copper, iron ore, and other commodities, Ruchir Sharma, head of emerging markets at Morgan Stanley, argues in this month’s Foreign Affairs. According to Sharma, Brazil has not made the investments in people, infrastructure, or better governance that are required to make the current boom a lasting one.
Sharma backs his case with a number of facts, which I paraphrase below:
- To protect its citizens from the economic turmoil that plagued it throughout much of the late twentieth century, Brazil developed two signature policies: high interest rates to control inflation and a welfare state to provide a social safety net. The result of this is a “hidden cap” on expansion that keeps GDP growth, at best, under 4 percent. Even in the last decade, Brazil still grew only half as fast as China, India, and Russia.
- Brazil has funded its growing safety net by increasing public spending, from roughly 20 percent of GDP in the 1980s (a typical ratio for the emerging markets) to nearly 40 percent in 2010. It has underwritten this expansion by raising taxes, which now equal 38 percent of GDP, the highest level among emerging-market countries.
- Between 1980 and 2000, Brazil’s productivity grew at of 0.2 percent annually, compared with four percent in China, where businesses invested much more heavily.
- Brazil’s total investment has remained under 19 percent of GDP, one of the lowest figures among emerging markets. Brazil spends only 2 percent of its GDP on infrastructure, far less than the emerging-market average of five percent.
- Underspending on schools has resulted in a massive shortage of skilled workers. Normally, as a country grows richer, students stay in school longer. But in Brazil, they remain in school for an average of just seven years, the lowest rate of any middle-income country; in China, which is much poorer, the average is eight years.
- Brazil is one of the most protectionist economies in the world. Thetrade share of its GDP is just 20 percent, the lowest among all emerging markets.
To Sharma’s list of observations, I can add a few other facts:
- Despite Brazil’s growth, contrasted with Mexico’s relative stagnation and exploding drug violence, Brazil has the higher murder rate of the two countries.
- In Brazil, cars are 50% more expensive to own than in Argentina, which itself is hardly a poster child of free markets. Numerous taxes and fees raise the costs of a wide variety of goods and services in Brazil, and help explain how Brazilians have taken on twice as much consumer debt (as a percent of disposable income) than Americans.
A closer look at the data suggests Brazil’s hardest reforms have yet to be made. The country is the 120th ranked place in the world to do business, according to the World Bank. Of the 10 “doing business” categories, Brazil cracks the top 100 in only three.
To move up on the rankings, Brazil’s government must become less intrusive. Regulations, taxes, fees, and restrictions need to be reduced and simplified. At the same time, however, the state must achieve a better record in education and infrastructure.
In Brazil’s democracy, vested interests will fight to preserve the status quo, so it could take a long time for reforms to change the system. Until then, however, Brazil’s “magic moment” will remain precariously linked to high commodity prices.
Written by David Gates for Emerging Markets BlogFollow @davidegates