Why Brazil is growing slowly and what to expect from now on

While Brazil’s GDP has fared well in the post-pandemic period, with 5% growth in 2021 and an expected expansion close to 3% for 2022, the story is not the best.

Data from the International Monetary Fund (IMF) show that between 1980 and 2022, Brazil grew at an average pace of 2.3% per year, just the 92nd rate of GDP expansion among 135 countries with complete data. During the same period, the world economy grew by an average of 3.4% per year. In these 43 years, the annual growth of Brazilian GDP has been lower than the world’s on 31 occasions and higher on only 12.

One of the reasons that explain the numbers worse than the world average, according to the chief economist of MB Associados, Sérgio Vale, are the macroeconomic instabilities of this period. “Initially we had problems with hyperinflation. And more recently, with the tax issue,” he says.

Sílvio Campos Neto, economist and partner at Tendências Consultoria, also says that, during this period, Brazil has made decisions that are not compatible with medium- and long-term economic growth. “No choices have been made to ensure productivity growth,” he says.

But there are exceptions, the economist quotes. The periods of greatest progress, in terms of reforms and changes, were during the Real Plan and in the governments of Michel Temer and Jair Bolsonaro.

Gabriel Fongaro, senior economist at the Julius Baer Family Office (JBFO), points out that to ensure long-term growth it is necessary to have a “house in order”. Which, according to him, implies a predictable economic policy. “Important progress has been made on the monetary side, with the independent CB. On the fiscal side, you need to signal towards a fiscal framework,” says Fongaro.

But, according to him, the tax issue is a necessary but not sufficient condition to ensure growth. Other relevant factors are skilled labor and a sufficient capital stock, such as, for example, access to innovative technologies.

“Currently, we have a number of obstacles to growth: low-quality education, a closed economy, a lot of legal uncertainty, low investment rates and little attractiveness for investors,” quotes economist JBFO.

After two years of good performance, the country appears to be on the verge of returning to a low-growth model. The midpoint of advisors’ and banks’ expectations point to progress of just 0.8% of GDP in 2023.

Uncertainties and lack of continuity discourage investment

One factor that weighs against the country, according to the national accounts coordinator of the Getulio Vargas Foundation (FGV), Claudio Considera, is the uncertainty regarding Brazilian institutions. “This ends up scaring off foreign investors and discouraging domestic ones,” he says.

One of the examples reported by the FGV expert is the tax issue. A study conducted by the Brazilian Institute of Tax Planning (IBPT) shows that the country changes an average of 2.26 tax rules per hour of the working day, in the sum of municipalities, states and the Union. “This ends up taking away investor confidence,” Consider says.

He underlined that continuity is also needed in the development of public policies. “We also have to think long-term,” says the expert. A positive example in this sense is education in Ceará. “The government comes in, the government leaves, the strategy is maintained,” he says.

Poor quality of education inhibits growth

One of the factors that has contributed to inhibiting the growth of the Brazilian economy over the past 40 years has been the issue of education. “We have a historical problem of qualification of the workforce. It is a reflection of the decision-making process in Brazil,” quotes Campos Neto, of Tendências.

Remember that Brazil and South Korea had roughly the same per capita income in the late 1960s. The Asian Tiger has invested in education and job qualification programs, making it one of the most dynamic economies. In 2021, according to the World Bank, South Korea’s per capita income was $32,600, 3.8 times that of Brazil.

“We have low and stagnant productivity, which prevents long-term sustainable growth. And this difficulty is associated with the lack of quality in education,” says Cláudia Costin, director of the Center for Excellence and Innovation in Educational Policies (Ceipe) at FGV.

Productive investments are lower than those of other emerging Latin American countries

Another problem is the low saving capacity in Brazil. In the third quarter, it corresponded to 16.2% of GDP, according to the Brazilian Institute of Geography and Statistics (IBGE), one percentage point more than in the same period of 2021.

This causes the rate of productive investment to fluctuate greatly. “In the last seven years it has reached a level close to 15.5% of GDP, but it has improved in recent years,” says economist Rodolfo Margato, of XP Investimentos. In the third quarter it closed at 19.6% of GDP.

Even so, the Brazilian number is lower than that seen in other emerging Latin American countries. In Chile, investments amount to 21.5% of GDP; in Peru they are 21.7%; Colombia, 22.7%; and, in Mexico, 22.3%.

Margato attributes Brazil’s performance to frequent changes in the conduct of economic policy and the country’s institutional weaknesses, which contribute to increasing uncertainty among businessmen.

Another aggravating factor is that the state’s investment capacity is minimal. “Compulsory expenses make up more than 90% of the total,” Campos Neto points out. This results, for example, in the reduction of investments in transport.

Data from the General Budget of the Union processed by the National Confederation of Transport (CNT) show that in 2021 investments were made in the area for R$ 9.23 billion, adding up the disbursements of the public sector and the private sector. It is the lowest value, adjusted for inflation, since 2006. And it represents a real drop of 68.3% from the peak, recorded in 2010.

Reforms are essential to ensure stronger growth

One of the challenges of ensuring stronger growth in the Brazilian economy is the implementation of reforms. “We have an extremely complex business environment,” notes XP’s Margato. The country ranks 133 on the Heritage Foundation’s Index of Economic Freedom, which rates 177 countries. It is regarded as “unfree majority”.

One major bottleneck is tax. Campos Neto, of Tendências Consultoria, describes the Brazilian system, which dates back to the late 1960s, as bad: “It is complex, creates insecurity and favors litigation, as companies find it difficult to know what is right to do.”

Experts consulted by People’s Gazette they underline that tax reform is the most mature to implement. Two proposals are under discussion in Congress, PEC 45 and 110. The creator of the first, Bernard Appy, has been appointed to the special secretariat for tax reform by the Finance Minister, Fernando Haddad.

Another important reform is the administrative one. However, Tendências’ partner sees no room to advance, due to the new government’s ties to the public administration.

Deindustrialization also favors low growth

Another problem, according to Consider, is the rapid deindustrialization of the Brazilian economy. The weight of the national processing industry, which in 1985 reached 36% of the GDP, today does not represent a third. It has lost space both abroad and in the domestic market. And one of the countries occupying these spaces was China.

“You cannot grow without a strong industry and only on a service basis,” he stresses. The problem is exacerbated by rising interest rates, which make it more difficult to purchase durable goods and create uncertainty about creating job opportunities with a formal contract.

Vale, from MB Associados, points out that the industry has been more closed since the 1980s and has remained virtually outside global production chains.

The coordinator of the FGV underlines that the recovery of the Brazilian manufacturing industry will be difficult and long-lasting: “Continuous measures by various governments will be necessary to regain an important role in the economy. It will be necessary to equip itself with modern technologies to increase its international competitiveness and, together with the universities, to innovate and improve the technology acquired”.

One way could be to exploit the potential generated by Brazilian agriculture. Agribusiness already accounts for nearly a quarter of national GDP, according to the Center for Advanced Studies in Applied Economics (Cepea) at the University of São Paulo (USP).

This is the first text in the series of reports “Country in slow motion”, which seeks to show the obstacles to the country’s economic growth and what to do to accelerate this expansion.

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