Why The Bad Economic News From Brazil Is Not Just Cyclical

Why The Bad Economic News From Brazil Is Not Just Cyclical - Worldcrunch - All News is Global


WHY THE BAD ECONOMIC NEWS FROM BRAZIL IS NOT JUST CYCLICAL

Why The Bad Economic News From Brazil Is Not Just Cyclical
Dilma needs more than good will - (Planato)
By Patricia Campos Mello
FOLHA DE S. PAULO/Worldcrunch
-Analysis-
SÃO PAULO - Under Dilma Rousseff's government, Brazil is now slated to grow at a slower rate than previously forecast. What has happened? Simply put: the current economic model has stopped working, says Samuel Pessôa, researcher at the Brazilian Institute of Economics at the prestigious FGV university.   
His widely debated article, (which predates the latest annual growth projections) published in Interesse Nacional magazine, asks whether slow growth — less than 1% in the first semester, comparing to the same period in 2011 — is cyclical or structural. 
Under ex-president Lula, a member of Dilma’s party, Brazil bet on reducing unemployment and raising capacity thanks to two factors that are not going to recur, Pêssoa says.
He says that, from 2005 until today, credit capacity and the rising wages across social classes fed consumption, thus fueling overall economic growth. Summing the rate of growth and rate of investment — absorption rate — outpaced population grown.
This model has hit its limit because it pushes up wages too high, destroys competition, and generates an anti-industrialization dynamic in society. “Dilma is an ideologist, she thinks industry is a special sector and won’t let it keep going down.” 
Bráulio Borges, head economist of LCA Consultores, disagrees. "Those who believe in it say that expansion of consumption wasn’t followed by investments. But government data show that this was not the case: investments were a bit more than 16% of the GDP from 2000 to 2007. Now it’s above an average of 19% from 2008 to 2011.
According to Alexandre Schwartsman, professor at Insper and ex-director of Banco Central (Central Bank), this model was effective while commodities prices were rising —in 2011, they reached a historic peak. “Global deceleration won’t let us keep the same rate”, he says. “This model is not necessarily finished, but now we will grow much less than 3%, instead of last year’s 4.5%."
Armínio Fraga, ex-president of Central Bank and founder of Gávea Investiments, agrees with Pessôa's theory.
Supply must fulfill demand
"It is natural and desirable that consumption grows, and that part of it takes place through credit," he says. "However, rising demand should be followed by rising supply, which hasn’t been enough to keep up with past performances,” he says.
According to the Central Bank, family debt in Brazil represents 43.4% of household earnings.
Pessôa says that Dilma’s places too much value in the effectiveness of interest-rate reductions. Lowering costs of public debts will ultimately have little impact.
The public sector pays about 5% of GDP in interest. Discounting currency adjustments and taxes over interest, the earnings would not cross 1.5% of GDP. "This is not irrelevant, but it isn’t going to save us.".
Pessôa says measures to stimulate the economy taken in recent years are reducing the fundamental efficiency and productivity of the nation. Schwartsman affirms this is the same action taken after 2008’s crisis—but this time it isn’t working. "In 2008, it worked because we were leaving behind higher unemployment rates."
Luiz Fernando de Paula, president of Brazilian Keynesian Association and professor at State University of Rio de Janeiro (UERJ) disagrees. "Considering the current panorama, with the strong tendency to reduceindustrialization, this is better than nothing. We need to change high interest rates and currency appreciation, combined with smart industry policies that stimulate high-value exports."
Read the article in the original language.
Photo by - Planato
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