A $900 billion programme to upgrade Brazil's ramshackle infrastructure is clearly a step forward.
Brazil, Latin America’s largest economy is forecast to have grown just 1 per cent in 2012 and 2013 threatens to be another disappointing year.
President Dilma Rousseff recognises the danger. Throughout 2012 her administration eased credit limits, raised import duties, spent billions of reals on buses, trucks and other home-made goods and cut payroll taxes and energy prices to encourage business.
Yet third quarter growth figures were startling. Tucked away in data showing growth of just 0.6 per cent in Q3 was news that investment spending had tumbled 5.6 per cent since Q3 2011. Given the glut of unsuccessful stimulus measures, it is increasingly difficult to escape the conclusion that the government is running out of ideas.
Raising purchasing power
The government’s defenders would claim that a decade of policies focused at raising ordinary Brazilians’ purchasing power have lifted millions out of poverty. Unfortunately its approach has also shrivelled the savings rate, starving industry of vital financing. While Chinese investment looks heavy at 47 per cent of GDP, investment of just 20 per cent in Brazil looks woefully inadequate. The result has been an economy incapable of absorbing domestic demand. The risk this poses to Brazil’s medium-term growth prospects cannot be overstated.
Investors are increasingly asking whether the hype around Brazil as a major foreign investment hub is warranted. Regional rivals such as Chile and Columbia are all raising their game. The recent growth of Mexico’s automotive sector should serve as a wake-up call to a country that produces 2.5 million vehicles a year.
What should Brazil do? On the monetary side, the strong consumer economy and Brazil’s tight labour market bar the way to further rate cuts. At least now policymakers can’t blame the strong real as it lost over a third of its value in step with interest rate cuts. The country’s failure to sustain investment spending, even in such favourable conditions, leaves little doubt that investors are rattled.
On the fiscal front, a USD $900 billion programme to upgrade Brazil’s ramshackle infrastructure is clearly a step forward. But a more fundamental change in the state’s approach is required to arrest the fall in private investment. Rousseff’s administration may be aware of the challenge but it has done little to change old habits.
Brazil would benefit from less government meddling, fewer policy objectives and a clearer business-friendly agenda.
The Brazil cost
First, it must tackle rigid labour markets, under-skilled workers, corruption, complicated taxes and arcane regulations known simply as “the Brazil cost”. These bottlenecks have already neutered the impact of growth acceleration programmes and relegated it to 126th place in a World Bank survey of where to do business.
Rather than micro-managing, the government should play a more modest role. Instead of burning through money to support growth with consumer tax breaks, it should cut total spending and ease the burden on business instead. Extending last year’s payroll tax cut right across the economy would be a good start.
The price for this more progressive policy would be weakened consumer spending in the short term for more sustainable, and higher, growth over the long run. In truth, the failure of the existing monetary and fiscal approach shows Brazil has little alternative if it wants to stay inside the exclusive club of BRIC nations.