by John Fitzpatrick
 
GDP growth is a bit of an obsession in Brazil. You can´t attend a seminar or presentation without GDP growth grabbing the center of attention and the same old arguments and comments being made. Everyone agrees that the country needs to grow if it is to increase its wealth and bring an end to the social inequality which is a sad hallmark of what is otherwise one of the world´s most convivial countries. Everyone knows how this is to be done – remove the heavy hand of government, cut bureaucracy, reduce taxes, open the economy and, hey presto, growth will appear. If it was that easy why have the governments of Fernando Henrique Cardoso and Luiz Inacio Lula da Silva been unable to do so?

The answer is equally simple – because the Brazilian political scene is so complicated and the Constitution such a dead weight, dragging everything down with it, that any meaningful reform requires an effort which would be unthinkable in a more mature democracy or, of course, in a dictatorship like China. This was the lesson the PT learned when it came to power. To deal with this situation, the PT bought votes and, by doing so, showed it was as corrupt and unethical as other political parties and vested interests. 

Growth has been unimpressive over the last decade and there is little prospect of Brazil reaching consistent annual rates of 6% or 7%, the levels at which analysts feel the country needs to make the kind of leap forward we have seen in China. This fact shows that much of this debate is academic and of little relevance to the real world.  

Back in the days of Brazil´s “economic miracle” between 1969 and 1973, GDP rose in annualized terms by an average of 11.2%. In 1973 alone, it soared by 13%. This growth rate slowed down to a still impressive average of 6.7% between 1974 and 1978 before things started to go wrong and the country entered what became known as the “lost decade”. This era was marked by rising inflation which ended with Brazil defaulting on part of its foreign debt. It also led to the military handing power over to civilians two decades ago. Some Brazilian observers look back with nostalgia at these fantastic growth rates. Even Lula has spoken admiringly of some of the economic achievements carried out by the military regime which jailed him at one point. 

Growth has not approached these previous levels over the last decade even though the Real Plan, launched in 1995, ended high inflation. With the exception of 1994 and 2004, when growth came to 5.9% and 5.2% respectively, GDP has risen sluggishly. In some years, such as 1998, 1999 and 2003, there was barely any growth at all. For this year, most analysts are forecasting growth of around 3.5% while government ministers and supporters are talking of 4%. Opposition supporters and the anti-Lula media are trying to use these estimates to show that things are not going as well as the government is claiming.

For example, the business section of the Estado de S. Paulo newspaper recently featured an article entitled “O PIB e a política econômica” or “GDP and the economic policy”. This piece discussed the latest Central Bank survey which showed that market analysts had revised their estimate for GDP growth this year downwards to just under 3.5%. The article said that the government was not doing enough to boost the economy and that policies to encourage economic growth, such as making credit more available were not working. It also criticized rising government expenditure which it claimed was preventing Brazil´s sky-high interest rates from being cut further. It called for a “courageous” reform of the costly social security system and for priority to be given to infrastructure.

This article, which appeared on August 22, is a good example of the academic approach mentioned above and ignores what is happening in the real economy. First of all, the formal economy is performing well and Lula is banking on this feel-good mood among ordinary people to give him a landslide victory in the upcoming election. Formal employment and real wages are rising. Recent surveys show that 95% of pay negotiations held in the first quarter of this year brought pay increases equal to or higher than inflation. Another crucial point is that the Central Bank is continuing its policy of cutting interest rates.

Although Brazilian interest rates are among the highest in the world, the Central Bank has been cutting them consistently since September 2005 and they are expected to fall to 14% by the end of this year. It is worth pointing out that the current base rate is the lowest since the Real Plan.

Secondly, inflation is well under control and is likely to be within the government´s target of 4.5% for this year and next. Thirdly, and Brazil is still enjoying an export boom despite the fact that the Real has appreciated considerably against the dollar. The treasury has seized this opportunity to pay off practically all of Brazil´s outstanding foreign debt. (This comes on top of the repayment of the country´s debt to the IMF and Paris Club.) This rtade surplus created by the export boom has allowed the Central Bank to build up foreign reserves of around US$ 70 million.This is a war chest which could be used to face any speculative attack on the currency.

Fourthly, there are no signs that whoever wins the presidential election in October – Lula or challenger Geraldo Alckmin of the PSDB – will alter the economic policy in any radical way. Lula stated recently that he would maintain the primary surplus at 4.25% of GDP.

There are certainly many problems facing Brazil and it would be foolish to pretend otherwise. The Estado article is right to point to rising government expenditure and the need for the money to be spent on improving infrastructure. However, it is futile to call for a “courageous” reform of the social security system since there is simply no political will for any such reform in any quarter – left-wing, right-wing or center. A statement like this makes no positive contribution to this vitally important debate. Unfortunately, the sheer size of Brazil and its large number of political parties means this subject is practically out of bounds. The country will have to face it one day but for the moment, the problem has been brushed under the carpet.

Finally, one of the reasons why a difference of half a percentage point or even a whole percentage point in GDP growth is not as worrying as it would be in a developed country is because of the huge size of the informal economy in Brazil. It is impossible to get accurate figures and I have seen estimates ranging from 35% to 70%. You just need to walk down any street to see the informal economy in action whether it is someone peddling CDs and DVDs, setting up a fast food stall or offering to carry your shopping from a market.

This black economy has many negative points since it thrives on crime, corruption, smuggling and counterfeiting, and deprives the government of tax revenue. On the other hand, it provides a social safety valve to bridge the gap between the better and worse off. It allows middle class and rich Brazilians to sleep (more or less) soundly at night knowing that there are no bands of revolutionaries controlling large parts of the country and posing a threat to their way of life, as is the case in Colombia and was the case in Peru until recently.

© John Fitzpatrick 2006