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Brazil: Sustaining Economic Growth


           Ronaldo from Real Madrid, Ronaldinho from AC Milan, now Adriano from Roma. Brazil’s soccer industry is no longer only an exporter of soccer talent. It continues to produce the best players, but now also keeps them at home (if not buying them back). From a macroeconomic perspective, this is a sign of economic growth. If futebol is finally making good money domestically, then that must be because people are capable and willing to spend more money for good soccer. Obviously, this is more of a lagging economic indicator than anything else—but nevertheless, a positive indicator of the present economic progress. Before Brazilians can enjoy a stable and developed economy, they have to go through the process of managing sustainability. Sustaining such a growth requires fixing up many different factors/areas. Some areas in need of improvement are healthcare, agribusiness, government spending, infrastructure, tax reform, need of political reform, excessive bureaucracy, and education. As of now, some of these areas are already going through major investment and development, but other areas just as important (if not more) are still lagging behind. This report will address some of the factors necessary to sustain growth in Brazil, starting by discussing the importance of active consumer behavior.

            How people live their everyday lives has everything to do with how the economy is doing. People only do things when the economy allows them or asks them to do so (either directly or indirectly). An example is feeling confident enough to buy a $50 pair of pants (random amount). If a consumer can spend without worrying about the temporarily absence of this $50, the economy flourishes. To a more significant degree, another example would be having a businessperson know it is a smart decision to take a loan and open a new business, which can then create jobs and have an effect on the community as a whole. This elevated level of consumer confidence (plus the creation of new jobs) is helping push the economy forward. This is happening in Brazil because the economy is asking/allowing it, and as a result, consumer spending is fueling back economy.
Today, the “rest” of the people (ie. what Brazilian economists classify as Classes C and D) can finally exercise their power of purchase through credit. The interest rate average has decreased significantly during the last 16 years. Interest rates went from 54.51% in 1995 to 10.44% by the end of 2010. Lines of credit are now easily obtained and not only businesses are making good use of this, but consumers as well. The middle class (also called “C Class” in Brazil) is the one group significantly increasing its consumption, and this is mostly because of the greater availability of credit. Economists and critics are curiously just now beginning to express their concerns on bubble risks from the abundance of easy credit. At the moment, maybe the federal government does not want to worry its citizens about financial risks, but the Finance Minister seems to be catching up to the possibility of future risks. The house-market crash in the U.S. is a good similar example not to be forgotten.

 People from lower-income classes (below C class) are also starting to utilize credit to their benefit. Let us take the favelas of Rio de Janeiro as an example. After the Unidades de Policia Pacificadora (UPPs—which are special police units) managed to take control of a number of these sites, businesses began viewing these residents more as consumers then favelados. With the presence of the police, the level of violence has dropped and other benefits are coming as a result. In direct relation to the line of credit, banks have finally recognized these “below C” residents as real consumers and installed bank agencies in these sites. Many of these community residents are now opening their first checking/savings accounts and even taking small loans. These microloans are showing amazing results. They are helping inject more money into the economy as people are buying new appliances, replacing their old TVs, and more. Electronic stores, such as Casas Bahia, are feeling more confident and continue to offer their in-store credit to customers from all types of income classes. Today, the demand for credit by consumers has reached its highest in history. According to the Serasa Experian, during the year of 2010, the demand for credit increased a solid 16.4%. Three factors indicating (and explaining) the reason for this growth is 1) sense of higher job security (in combination with the increasing number of jobs being created), 2) higher consumer confidence, and 3) the greater availability of credit. Later in 2011, the Finance Minister, Guido Mantega, intends slow down the number of loans taken out by individuals and businesses. Decreasing the percentage of loans will help cool down the economy. This will be done by slightly increasing interest rates. In addition to lowering the amount of loans taken out, Mr. Mantega has already raised bank-reserve and capital requirements. Going back to what was mentioned earlier, this is a smart and necessary initiative not to over-heat the economy and prevent a possible credit bubble from bursting.

The following chart shows how consumers are increasing their purchases of appliances and electronics. As mentioned before, the consumers increasing their purchases are mostly middle class shoppers taking advantage of a stronger job security and extended credit.

     Increasing Consumption in %

Source: IBGE
Going back to the consumers as a significant force of economic growth, throughout recent years, their “tools” for purchase have improved significantly. In addition to having greater confidence in the economy and keeping their buying habits sharp and active, the increase in the minimum wage has been helping improve all these and other areas. Since 1995 during FHC’s administration, the minimum wage has only been increasing. It certainly did not increase as much many would have liked, but some improvement is always better than no improvement. Playing with minimum wages is always a tricky task. Not only there is public opinion involved (which rarely is expressed as satisfactory), but there is also inflation—especially in Brazil—always looking for an opportunity to raise its head. Since 2002, the last year of FHC’s presidency, the minimum wage went from the equivalent of US$ 86 (monthly) to around US$ 325 today—an increase which has been matched well to the economic development and will most likely increase during the next couple of years. Rumor is that the minimum wage will increase during the next two years potentially reaching a value of R$650 by 2013. The following graph shows greater detail on the increase of the minimum wage up until today.

Evolution of the Minimum Wage

Source: Banco Central
            Another factor that has allowed economic development is how the government has been involved domestically and has guided the economy during the last several years. In this case, government spending and social programs were significantly responsible for the growth Brazilians experience today. On the other hand, those on the right are not as happy that the public sector often acts as a private enterprise and crowds out private participation. Some of the arguments against government involvement (and valid ones) are that personal savings rates are too low and, in the near future, it will not match the high public spending. Many people would have expected Lula’s government to be more to the left than to the right, but this administration certainly stood out because of its neoliberal tendencies. It is not every day that a former union leader without a university degree can jump an economy from 17th to 8th or is able to lead a country out of a recession before almost everybody else. This should certainly not sound as an offence, but as an example and inspiration for many other emerging players. During Lula’s eight year administration, he surprised us all (including the PT—his own political party) by mixing his democratic socialist views with capitalistic practices. In his own words, Lula says that “before being a socialist, you have to be a capitalist… it was necessary to first build capitalism, and then make socialism. We must have something to distribute before doing so.” This is a very smart approach, which mirrors most of the European social democratic governance. Nowadays, it is not so easy anymore to criticize European socialism or even China’s “communism.” Capitalists cannot tell the Chinese anymore how to run their country when they are growing faster than all of us. It is certainly an exaggeration to say that we should mirror/follow radical systems as examples, but China’s economic success, for instance, says that the good-old-no-government-involvement-capitalism is not the only way to economic prosperity; mixture is always good. The problem is figuring out the right dose. Of course most will say that China is cheating its way up in the economic chain by seducing exports with an undervalued currency. Whether this is an absolute correct statement or a very accurate opinion, at the end of the day, China is climbing the steps.

            Creating jobs is another key factor for economic growth and its sustainability. Taking away some of the little credit given to communist systems in this report, not even they can keep a country going without obeying the forces of the market and having its people working and producing goods and services. Since after the economic crisis of 2008, the word “job” has become something more precious. The United States, for instance, has enjoyed for many years a stable and low unemployment rate (around 4%). Today, the U.S. cannot even keep up the number of new jobs with the population growth , and can only hope for better days in a couple of years from now when jobs may be showing up again. Brazil, on the other hand, is creating jobs like never before. Some of this is because of government spending, but in reality, most of them turn out to be long-term jobs. To make things even better, the number of jobs is only going to increase because of the continuing economic development (which will generate more jobs) and upcoming infrastructure investments for the World Cup in 2014 and the Olympic Games in 2016. Today, Brazil enjoys an average of 6.2% unemployment rate while the U.S. finds itself with an average of 9.4% . In gross numbers, this is a small difference considering the population size of both countries, but the fact is that Brazil has never created so many jobs before. As a side note, Lula is ending his administration with about 15 million jobs created, while FHC created five million jobs (FHC managed an amazing improvement considering the preceding years).  

Focusing on sustaining economic growth in Brazil, in addition to extending credit, creating more jobs, and having the government manage the economy intelligently, the to-do list is still pretty long. In the midst of this list, other two important factors that stand out are 1) the low level of infrastructure and 2) the decrepit education system in Brazil. This report will soon address these two factors/issues as challenges to sustaining growth, but before we do so, let us take a quick look at where they stand.

            The infrastructure in Brazil is incredibly bad, but this is because the existing level of infrastructure does not match where the country’s economy is today. Considering where Brazil is now and the promises it is making for the near future, its roads, ports, and airports, for instance, should be in a much better shape than what they are now. Yes, the country can deliver on its promises. If all fails, there is always the geitinho brasileiro (Brazilian way) to come and finish the job. But realistically speaking, it seems the country will drag along the way and, most likely, call for foreign help (in the form of Foreign Direct Investment) to come and finish the job on time. In addition to bad infrastructure, the critical mass of talented minds to continue to guide the country ahead is becoming scarcer. This does not mean that there are no smart people in Brazil—there are smart people everywhere—but well trained professionals with the right attitude is what Brazil will lack (or is lacking). To attain that, people must be well educated from elementary level through universities by institutions that are well prepared, which is not the case in Brazil. The country will continue to develop economically, but soon enough it will need both talented professionals to keep things going and better infrastructure to keep up with the intensified economic activities.


Brazil: Sustaining Economic Growth

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Brazil after Lula

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