Otaviano Canuto writes: \u00a0After decades of rapid economic growth and\u00a0per capita\u00a0<\/i>income gains, Brazil is struggling. According to the International Monetary Fund, the country\u2019s GDP is\u00a0poised to contract\u00a0by more than 7% in 2015-2016. No single factor explains this reversal of fortune. Four do.<\/p>\n
For starters, there is the structural trend of rising primary government expenditure as a share of GDP, which reached 36% in 2014, up from 22% in 1991.<\/p>\n
The second factor shaping Brazil\u2019s fortunes is the commodity-price super cycle. The upswing in commodity prices that began in 2004 brought many benefits for Brazil: external surpluses, the accumulation of foreign-exchange reserves, positive wealth effects, and higher investment in natural-resource-related sectors. Add to that exchange-rate appreciation and rising minimum-wage floors \u2013 not to mention public-sector disbursements indexed to the latter \u2013 and Brazil enjoyed a virtuous domestic cycle featuring positive feedback loops between demand for services and formal employment.<\/p>\n
The problem is that Brazil allowed high commodity prices simply to reinforce the underlying growth model, instead of preparing its economy for the inevitable bust. Profitability levels in the manufacturing industry were crushed by exchange-rate appreciation and rising domestic production costs, and levels of production practically stagnated from 2008, before starting to decline in 2014. When world metal prices began to fall in 2011, followed by food prices in 2014, Brazil\u2019s economy lost its growth engines.<\/p>\n
Brazil\u2019s government did make adjustments to its growth pattern following the global financial shocks of 2008-2009. But it took a shortcut, relying on counter-cyclical fiscal and monetary policies to boost growth. This is the third key factor contributing to Brazil\u2019s current travails.<\/p>\n
Given structural factors, however, the main outcome of this second round of stimulus was fiscal deterioration.<\/p>\n
Over the last year, Brazil has been struggling to unwind that attempted shortcut. The realignment of regulated prices with market prices, together with that of foreign and domestic prices (through exchange-rate depreciation), produced an inflation shock, with the consumer-price index reaching a 13-year high last year. In order to contain the shock and control inflation expectations, Brazil\u2019s central bank was driven to increase interest rates.<\/p>\n
The fourth factor undermining Brazil\u2019s economic performance arose unexpectedly last year, when a multibillion-dollar corruption scandal engulfed the state-controlled oil company Petrobras, prompting a far-reaching investigation of high-level politicians and triggering a collapse of private investment.<\/p>\n
The medium-term silver lining is that the Petrobras investigation demonstrates Brazil\u2019s commitment to the rule of law, implying that the country\u2019s reputation among investors will recover.<\/p>\n
In an effort to minimize the budget deficit, the authorities have proposed new tax measures, including new rules on capital gains and the reenactment of a tax on financial transactions. Given the current dependence of taxation on consumption and the ongoing current-account adjustment, the tax on financial transactions, in particular, will be vital to buy time for mandatory public expenditures to be reviewed. Among the expenditures that will come up for review are pensions, as social security expenditure probably reached close to 8% of GDP last year. Efforts to make the labor market more flexible and reduce the cost of tax compliance will also help to improve Brazil\u2019s investment climate.<\/p>\n
To recapture strong and reliable growth, however, the key will be improved confidence \u2013 and that hinges largely on the government\u2019s capacity to overcome the current political crisis. If it fails, Brazil\u2019s current economic rough patch could well turn into a swamp.<\/p>\n
Otaviano Canuto writes: \u00a0After decades of rapid economic growth and\u00a0per capita\u00a0income gains, Brazil is struggling. According to the International Monetary Fund, the country\u2019s GDP is\u00a0poised to contract\u00a0by more than 7% in 2015-2016. No single factor explains this reversal of fortune. … Continue reading ![\"Swamp\"](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2016\/02\/Swamp.jpg\")
<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"