Brazil needs to give its middle class a chance
Paweł Świeboda
Komentarz
„World scenario has come in Brazil’s way“, officials in Brasilia sigh with understandable relief. The prominance of state interventionism in the course of the global crisis vindicated the preferred operating procedure of the emerging countries where even a tacit reference to the liberal rule-book provokes an outcry. Brazil is proud to be the only BRICS country to have substantially reduced social inequalities and extreme poverty. Brazil has achieved in social policy what China has done across economic indicators. It has added a population of the size of Spain to the ranks of the middle class. The number of new jobs has doubled since 2003. Disposable income is growing at 4.6 percent, much faster than the GDP. In fact, 58 percent of the praised reduction in inequality, which has been taking place since 2000, is labour-income driven while only 13 percent is due to large programmes such as Bolsa Familia.
„The feeling of going to heaven comes from being in hell before“, one top Brazilian official puts it. True, the boom and bust features of the past economic policy seem to be gone for good as healthy fundamentals are seen as sacrosanct. Budget deficit is low and public debt declining. And yet, the Focus survey issued by Brazil’s central bank on New Year’s Eve confirms the grim picture of an economy slowing down to below 1 percent growth, one-quarter of what the government was hoping for. Brazil has lost steam and is unlikely to re-energize without more than trimming of the decade-old strategy.
The government’s answer is public investment and services. Possibilities there are enormous, especially prior to the football World Cup and then the Olympics. In August, the government announced a major new investment programme, to the tune of 66 bln USD. It is the quality rather than the quantity of growth that matters, one often hears. „Just look at the pace of deforestation which has decreased to one-quarter of its former level since 2004“. This is meant to be a clear sign that sustainability is now top of the agenda.
„People underestimate the durability of the Brazilian model“, says a government official. After all some pieces of the puzzle miraculously fall in place. Labour market legislation dates back to the 1930s and is not favourable to the hiring of employees but somehow they do increase employment. It is by far the big firms who are the driver of economic development. They can deal more easily with the complex legal issues and expand globally. The government likes to pick winners and give them hefty handouts while retaining strict controls.
Yet crowding out of the private initiative will only come at the country’s peril. Tax burden, which stands at 36-37 percent of GDP is high, and reduces the performance of the private sector. Trust and investor confidence are undermined by the government’s meddling in the economy, especially in the energy sector where it tries to micromanage prices in an intrusive fashion, demanding an over 20 percent cut in tariffs. „Brazil is not trustful enough“, say investors. The shares of Electrobras, the country’s leading energy utility, have suffered as a result, pushing them below those of the local soft drink market leader.
For the moment consumption rides high. There are streams of buses in hotels which only go to the shopping malls. Brazil in any case is not a savings country. The agenda has been to increase wages, not savings. Yet, if Brazil wants to rely on more than commodity exports in the future, and especially if it wants to preserve its manufacturing base, it will need savings.
The government claims it understands the need to open up the system. It will do it its own way, though. Entrepreneurship? Yes, it is on the agenda. A new ministry is to be created – alongside 38 existing ones – to deal with the small and medium-sized firms. „Brazil is not the country of big reforms. Changes here happen little by little. It is part of our social contract“. More of the same will be tried, hopefully with better results. President Dilma Roussef has launched a privatisation process, an anathema for her predecessor, the charismatic Lula da Silva. She started with airports and railroads. It turned out that the companies which won the bids do not have much experience in running strategic infrastructure. The price was more important than the quality of the offer.
The slowdown of growth points to the heightened urgency of up-grading the existing model. So far the government has used tax incentives, including payroll tax breaks, in its effort to revive growth. Sectors such as public transportation, tourism and call centres are set to benefit from. This is a significant departure from the policy of the former President Lula but it will not suffice. One way for Brazil to follow is to marry its own experience with what has worked in Central Europe where moving away from central planning has been accompanied by unleashing of the entrepreneurial spirit. Having just created a „new middle class“, Brazil has a huge opportunity to encourage its members to take things more into their own hands, rather than continue relying on the state. Brazil has about 10 to reinvent its model before the demographic trend begins to bear heavily on its growth potential.
The country clearly has enormous assets. Democracy is one of them. The level of unemployment is the lowest in history. Opportunities to develop infrastructure abound. Brazil is a big market and people are starving to consume. At 7.5 percent, the interest rate, although high by international standards, is the lowest in history. The financial sector is strong. Yet stifling the energy of the newly created middle class would be a catastrophic mistake.
„Middle ground“ is a popular term in Brazil. The country sees itself as having found the silver bullet of making the state a driver of progress. From now onwards, however, the wisdom of the Brazilian state needs to be combined with the creativity and initiative of the Brazilian people themselves. The state might be triumphalist today but alone it will not ensure the country bridges its distance to the most advanced economies in the world.
