The Brazilian Economy

Confronting Structural Challenges

Edmund Amann

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000245400
• Edition: 1
• Topic: Commerce
• Subtopic: Comptabilité gouvernementale

The Brazilian economy has long been defined by its enormous potential. Over the past 30 years, some of this has at last been realised. Latin America's largest economy has rapidly risen in global importance while poverty at home has declined. Yet, despite periods of progress, Brazil remains prone to economic crisis. It is also beset with stubborn inefficiencies and income disparities. This book considers the structural challenges which will need to be overcome if Brazil is to break with the past and finally embark on a path of sustained, inclusive growth.

This book aims to give the reader a clear knowledge of the nature of these structural challenges, why they exist and the effectiveness of attempts to overcome them. Through this, readers will gain a deep understanding of the contemporary Brazilian economy. The challenges discussed fall into three areas: those centring on competitiveness and the supply side, those arising from critical macroeconomic issues and those connected with environmental sustainability and social inclusion. This volume systematically examines each of these domains, highlighting such vital topics as export competitiveness, human capital formation, environmental policy and the role of financial market reform. Where appropriate, this book sets Brazil's experience in aninternational comparative context. It points out that many of the challenges faced by Brazil are shared by other emerging economies. In this sense, the policy lessons which stem from this volume have broader international relevance.

This book will be vital reading for all those seeking in-depth understanding of one of the world's most important, yet troubled, economies. This readership is likely to include undergraduate and postgraduate students on development economics and Latin American area studies programmes, policymakers wanting an up-to-date and coherent analysis of Latin America's largest economy, and financial professionals.

1
INTRODUCTION – FRUSTRATED POTENTIAL

Brazil’s economic performance in the long term

Introduction

The Brazilian economy presents a series of superlatives, paradoxes and contradictions. Since World War II, it has risen to be one of the world’s most important centres of production, especially in agriculture, basic industries and hydrocarbons. Brazil ranks among world leaders in such esoteric technological fields as deep-water oil exploration, genomic sequencing of plants and civil aerospace. Its multinational corporations have extended their reach far beyond home shores into North America, Europe and even Sub-Saharan Africa. Brazil-based investors now lie behind such Western corporate icons as Budweiser, Burger King and Heinz. In fields of cultural production, thanks to the country’s vibrant film and television sector, Brazil has exported popular drama series – telenovelas – which are enjoyed from Mexico City to Moscow. Up until very recently Brazil became renowned for its felicitous combination of rapid economic growth, poverty alleviation and narrowing income inequality.

Yet for all of these positive attributes and achievements, there is a very real sense in which the Brazilian economy’s potential is far from being fulfilled. As will be later illustrated, economic performance in Brazil compared to many emerging market counterparts (notably in East Asia) has been disappointing. This is borne out whether one employs metrics on poverty alleviation, productivity growth, infrastructure, educational attainment or export growth. The sense of a failure to live up to potential could not have been more clearly encapsulated by recent events. Between 2012 and 2016, the country endured the sharpest recession since the dark days following the Wall Street Crash of 1929. In 2020, the global COVID-19 pandemic was threatening to push Brazil into deep recession once more.

The severity of recent downturns is directly attributable to the nexus of paradoxes which have long characterised the structure of Latin America’s largest economy. Well documented and celebrated centres of excellence – as described above – do of course exist. Still, as if in gravitational opposition, there also sits a long tail of uncompetitive sectors marked by paltry productivity growth, low innovation and weak skills. Where strengths do exist – principally around natural resource-based (NRB) products – their ability to deliver resilient growth is necessarily constrained by volatile global commodity prices. This last observation resonates down the decades; indeed, as we shall see, it provided a key impetus behind the structuralist revolution in Brazil’s economic policymaking in the early post-war years. The dualism characterising Brazil’s productive sector finds its analogue in yawning spatial disparities, whether these relate to income and poverty, employment or export intensity. The development gap between the poor North and North East and the affluent South and South East remains stark. Equally, despite undoubted progress, on an interpersonal basis, deep poverty and income inequality are still facts of life.

Perhaps a lesser-known paradox in Brazil’s contemporary political economy centres on the macroeconomic dimension. The country has rightly been celebrated for its vanquishing of hyperinflation in the 1990s. Despite the economic turbulence buffeting the continent in the latter half of the 2010s, Brazilian inflation has remained in single digits whereas in Argentina and Venezuela, it has risen vertiginously. This accomplishment, under the auspices of the Real Plan, has rested on carefully elaborated frameworks of exchange rate and, later, inflation targeting. As will be seen later, Brazil’s Central Bank has proven to be a technically excellent steward of monetary policy. Yet contrastingly, in terms of fiscal policy, the track record has been distinctly unfavourable. Fiscal reform proceeded energetically in the early days of the Real Plan, with two waves of measures introduced in the decade after its launch in 1993. Subsequently, under the Lula and Rousseff administrations (2003–16), the pace of reform slackened; fiscal imbalance and the accumulation of public debt contributed to the onset of an economic crisis in the middle of the 2010s. Brazil’s fiscal challenges are multi-layered and complex, as becomes abundantly clear in Chapter 5. Two of their most central components relate to the rapidly increasing cost of public sector pension provision and the byzantine and inefficient tax system (especially where indirect taxes are concerned).

Taken together, these factors have contributed to the emergence of a structural primary deficit and an associated situation in which the central government’s scope for discretionary spending has increasingly been squeezed out. Following the impeachment of President Dilma Rousseff in mid-2016, the interim administration of Michel Temer (2016–18) enacted a radical measure which imposed a real-term spending freeze on the Federal government for 20 years. This has further constrained the scope of much-needed discretionary expenditure in growth-promoting areas such as education and infrastructure. Consequently, the Bolsonaro administration (2019–) has placed higher priority on pursuing a comprehensive pensions reform. This has as its objective the compression of pension costs for public sector employees, to be realised principally through the introduction of less generous entitlements. Likewise, Brazil’s current administration has committed itself to reform of the indirect taxation system. The principal aim here centres on harmonising and unifying Brazil’s elaborate range of sales taxes; if realised, this would not only support revenue generation but would also significantly reduce compliance costs for the private sector.

Consideration of the latter issue leads us to ponder another paradoxical feature of Brazil’s contemporary political economy; the sharp divide which often exists between the economic efficiency of the public sector entities and their counterparts in the private sector. Allusion has already been made to the dualism that characterises the supply side of the Brazilian economy. Here, world-class sectors and firms coexist alongside those positioned well behind the global frontier, whether in terms of technological sophistication, productivity or competitiveness more generally. This dualism also characterises the contrasts that exist between leading elements of the Brazilian private sector and large swathes of the public sector.

While processes of economic opening and liberal reform have often succeeded in stimulating private sector competitiveness (see Chapter 2), there is widespread acknowledgement that the public sector, despite efforts at reform, remains beset by inefficiencies and processes which inhibit timely delivery of critical services. As it became starkly apparent as a result of the Lava Jato (Car Wash) scandal, public sector entities are also vulnerable to penetration by corrupt, politically connected interests who directly benefit from such “inefficiencies” as overbilling for contracts or appointment of suboptimal suppliers.

These issues form part of a broader constellation of concerns surrounding the interface between the state and the private sector. On the one hand, for many years, it has been apparent that legitimate interactions between the state and business – for example, environmental licensing or tax filings – entail far more complex bureaucratic procedures than would be typical in OECD economies. The high compliance costs so generated have come to be termed the Custo Brasil or Brazil Cost and are cited by industry associations such as the National Industrial Confederation (CNI) as systemic factors in retarding the country’s international competitiveness.

On the other hand, thanks to the harsh light shone on business—government relations by the Lava Jato inquiry (led by Brazil’s former Minister of Justice, Sergio Moro), it has become apparent how some of Brazil’s largest multinational enterprises (for example, Odebrecht, Petrobras and JBS) were locked into corrupt relationships with state entities, members of Congress and the executive branch. A divide now appears to exist between “insider” and “outsider” enterprises, those who managed to survive or thrive without the patronage (corrupt or otherwise) of the state, and those whose development was intimately conditioned by it. As this volume later argues in Chapter 4, one of the most significant challenges facing Brazil’s economy consists of resetting business-government relations such that they become less clientelistic, so eroding the binary divide between insider and outsider firms.

A final paradox surrounding the contemporary Brazilian economy concerns its degree of openness. As discussed in section 2 of this chapter, the period since the end of the debt adjustment crisis of the 1980s has generally been one of liberal reform. Like its BRIC counterparts over the period, Brazil has adopted far-reaching measures which have liberalised trade, opened up new sectors to foreign investment and incentivised exports. Although the Lula and Rousseff years (2002–16) saw some policy reversals in this area (notably around the capital goods sector), it is fair to characterise Brazil’s approach over the past three decades as one aligned with progressive globalisation. Despite this, surprisingly, Brazil remains one of the world’s most closed major economies. In 2017, Brazil’s trade accounted for just 24.1% of GDP, by contrast China’s stood at 37.8%. At the same time, the number of exporter firms in Latin America’s largest economy was approximately equal to that of Norway, a country whose population is 40 times smaller than that of Brazil (Picanço et al., 2018).

The relatively closed nature of Brazil’s economy reflects, among other things, the fact that tariff and non-tariff barriers remain high relative to international norms. In 2017, according to World Bank data, average trade-weighted tariffs in Brazil stood at 8.59%, compared with 3.8% in China and just 1.79% in the EU. The comparatively accentuated nature of Brazilian trade barriers compounds issues of poor supply-side competitiveness that have already been referred to. These, in turn, have restricted export growth outside the NRB sector. The fact that Brazil has remained such a closed economy, despite the apparent embrace of globalisation, means that it has proved to be highly vulnerable to downturns in domestic demand. This was illustrated very clearly during the 2013–16 crisis; had alternative sources of export demand been available to offset the collapse in domestic consumption and investment, there is no doubt that the recession would have been shallower and short-lived.

Having briefly discussed the achievements, frustrations and paradoxes surrounding the contemporary Brazilian economy, it is time to set out the conceptual and theoretical approaches which will inform our analysis in subsequent chapters.

Analysing the contemporary Brazilian economy: an overview of conceptual and theoretical approaches

From the discussion so far, it should be evident that Brazil has consistently faced deep-seated challenges which have frustrated attempts to place its economy on a trajectory of sustained, inclusive growth. As consecutive administrations have tried to wrestle with these issues, Brazil has often resembled a laboratory for the evaluation of new (or sometimes recycled) economic ideas (Amann, 2017). Thus, the 1980s witnessed attempts to restrain inflation through the use of heterodox measures derived from the Post-Keynesian theory (Bresser Perreira, 2018). A decade later such approaches had been abandoned in favour of more orthodox counter inflationary measures, notably monetary restraint and exchange rate targeting. These fresh policy initiatives were strongly influenced by monetarism and rational expectations theory.

Turning away from the pursuit of macroeconomic stabilisation to that other great challenge, the attainment of global competitiveness, Brazil has witnessed similar experimentation. During the 1960s and 1970s the then military administration attempted to build new sources of comparative advantage through state-driven industrialisation strategies (Bielschowsky, 1988). These were in turn influenced by the rise of structuralist and dependency schools of economic thought, both of which had been flourishing in Latin America since the end of World War II (Ocampo & Ros, 2012). By the 1990s, with the return to civilian rule, and the Collor administration now in power, the intellectual tide had reversed completely. Market-friendly, Chicago school approaches had gained ascendancy, with Brazil rolling out comprehensive trade reforms and the world’s largest privatisation programme (Baer, 2013).

The tide was to turn once more in the first decade and a half of the millennium with the PT (or Workers’ Party) administrations of Presidents Lula and Rousseff embracing interventionism. Industrial strategies came back into vogue with sector-specific initiatives launched for oil & gas and shipbuilding, for example. With the impeachment of President Rousseff in 2016, the intellectual and policy climate had shifted radically once more. Under President Temer (2016–18) and his successor, President Bolsonaro (2019–), free market solutions to Brazil’s long-stand...