In my recent seminars at US universities, Brazil’s disappointing growth in the last three years (2.7% in 2011, 1.0% in 2012 and 2.3% in 2013) have often been a surprise to many. Apparently, the good years of 2003-2010, in which Brazil grew an average of 4% per year, created the idea that Brazil was not only the B in BRICS, but also a country that could grow at Asian rates.
A little knowledge about the Brazilian economy would have been enough to dispel the illusion that the official propaganda tried to create after 2010, when growth peaked at 7.5%, a rate clearly linked to the election that year. Nevertheless, many foreign investors were tricked by the propaganda, only realizing their mistake when it was too late. But for competent analysts of the Brazilian economy, the low average growth rate of president Dilma’s first three years, 2%, despite being disappointing, is less surprising than it may seem.
The reasons for the low growth are related to the economic policies undertaken since 2006, conducted by Minister Mantega, with the support of president Dilma, based on the expansion of the consumption, both public and private, the latter powered by credit expansion.
While demand expansion could count on the reduction of the unemployment rate, as well as the quick expansion of the labor force, Brazil grew at a 4% rate. Since 2010, however, Brazil reached what seems to be full employment. This means that labor’s growth contribution is limited by the labor force growth rate, which has been lower than the rate of population growth of 1% per year. Ilan Goldfajn estimates that by the end of the decade, the expansion of the labor force will contribute only with 0.6% to GDP growth (Para onde vai o desemprego?, O Globo and OESP, 3/4/2014).
Regarding capital accumulation, despite the considerable resources allocated to subsidized BNDES loans, investment rates have not even reached 20% of GDP (18.4% in 2013 and 18.2% in 2012), below the Latin American average and short of those needed to keep the 4% average growth rate of 2003-10.
No longer being able to count with the falling unemployment rate nor with the high investment rates, the only way Brazil could grow at higher rates is if the total factor productivity (TFP), i.e., the amount of output produced with the same quantities of capital and labor, were expanding. However, the only sector that exhibits robust TFP growth is agriculture. EMBRAPA (Brazilian Agriculture and Livestock Research Enterprise) is a rare case of successful long-term public policy. The other sectors, especially manufacturing, are unable to overcome the Brazilian economy’s structural bottlenecks: inefficient infrastructure and education; extremely high and distortionary tax burden, in order to finance exaggerated public expenditures; labor laws that encourage informality; slow and expensive justice system; high protectionism, hindering international integration and lowering competitiveness.
None of those is news. The problem is, since 2006, Brazil has been surfing the Chinese wave and has stopped undertaking the reforms, which are imperative to long-term growth. It was said that the “new” economic policy would end with the ephemeral growth, represented by the chicken’s flight. Reality showed that the chicken’s flight has been replaced by a turtle’s crawl. There is nothing to complain about and it is no longer credible to blame international crises. It’s our fault and it’s up to us to change this scenario. For now, we have to live with foreigners’ irony, asking once more if Brazil will forever remain as the country of the future.