A Booming Brazil? Just Another Myth Created by the Press

    Paraisópolis, Paradise City, a favela inside the super rich Morumbi neighborhood in São Paulo, Brazil

    Paraisópolis, Paradise City, a favela inside the super rich Morumbi neighborhood in São Paulo, Brazil The international media is infatuated with the Brazilian economy. Almost every week there is a new article adulating the Brazilian economic ‘miracle.’ Although these newspapers make accurate claims they also tend to frequently embellish the truth.

    A good example is in a recent online article published by The Guardian South American correspondent Rory Carrol, on Brazil, stating that, “Fiscal prudence and market-friendly policies have delivered economic stability and solid, if unspectacular growth (1).”

    The assertion that Brazil’s economy, under Lula, experienced “solid, if unspectacular growth” lacks merit with no statistical evidence to support such claims but such statements are frequently touted by most mainstream newspapers.

    Many articles are correct to note the improvements to the economy. A growing number of Brazilians are purchasing goods on credit stimulating economic activity in various sectors. The minimum wage is growing and prices are relatively stable. Most of the economic improvements have been relegated to the external economic sector.

    Unfortunately, this sector is distant from the reality of average Brazilians. The stock market and financial market have undergone spectacular growth led by the rapid infusion of foreign investment. The growth in the financial sector does not in correlate to the increase experienced by the Brazilian economy.

    Since 2003, the export-led economy produced very strong results. For the first time in its history, Brazil holds slightly less than 200 billion dollars in its foreign reserves far surpassing its total external debt (2). Brazil is a net creditor (3).

    The Lula government made early repayments to both the IMF and to the Paris Club. In 2007, Brazil had 64 Initial Public Offerings (IPOs) raising US$ 42.8 billion with much of inflow originating from abroad. Since 2002, the São Paulo stock exchange, Bovespa, grew by 1,250 percentage points (4). Recently, Bovespa surpassed the 70,000 benchmark for the first time ever. Even CNN’s news ticker mentioned this historic feat.

    For the past five years the trade surplus has comfortably exceeded US$ 35 billion helping to push the current account from deficit to surplus. The risk of default on Brazil’s external debt has dropped to historically low levels (5). Last year, international investors sent Brazil over US$ 35 billion in foreign investment.

    The international debt agencies, of Fitch and Standard & Poor’s, raised Brazil to the safest “investment grade” level securing it a new reputation as a low risk place for international investors (6). Petrobras, Vale do Rio Doce, and Embraer are just three Brazilian multinationals active in the global economy of today.

    These achievements did not go unrecognized by the likes of the Los Angeles Times. Like the Guardian article, it extols that, “After several boom-and-bust cycles in recent decades, Brazil is in the midst of its best sustained economic growth since the 1970s.” Brazil’s economic growth rate in the 1970s averaged 7 to 8% per year, a number almost three times the current economic growth rate. More importantly, Brazil is not experiencing a sustained economic growth worth noting.

    The author goes on to write that, “Economic growth will come in at 5.3 % this year, lower than the hemisphere’s 5.7%, but quite a feat for a country that over the previous 10 years averaged only 2.5% annual expansion” (7). Although the figures cited are accurate, it provides a distorted impression that an economic boom is taking place by using the economic growth figure for only one year.

    The article then recites how the financial-stock sector boom is developing rapidly, which is true and positive, but it only furthers the perception that a new Brazilian miracle is occurring. Surprisingly absent is what percentage of Brazilians own stocks or how many purchased IPOs last year? I wonder why these figures are missing?

    By noting these improvements many journalists logically conclude that Brazil’s economy is entering a period of unprecedented growth. For the financial sector, it is undeniable that there is growth bringing about relative economic stability but there is another economy, arguably more important, that is at best stagnant. A closer assessment of Brazil’s internal, or domestic, economy is seriously lacking. The belief that economic growth is expanding rapidly is mistakenly absent.

    The economic truth is more somber. Since 1996, economic growth has been mired in a cycle of one year boom followed by years of stagnation. The external accounts, frequently touted as success by Western journalists, are beginning to show signs of fragility. Also, the lack of serious investment in the future deters economic development.

    The economy stagnated throughout President Lula’s first term in office (2003-2006). Lula’s first-term average growth rate is equal to Fernando Henrique Cardoso’s, his predecessor; a lethargic 2.6% (8). During Lula’ first term in office, the economy only grew more than 4%, in 2004, reaching 4.9% (revised to 5.7%).

    A more accurate growth measure is the per capita growth rate, which factors in the growth of population. Under Lula’s tenure per capita grew by 1.2%, a slight improvement from Cardoso’s overall average of 0.8% (9). In fact, over the past 10 years, per capita growth has averaged 0.7% (10). In contrast, in the 1960s and 70s, average per capita went up by 4.5% (11).

    Last year, the economic statistics were revised under a new methodology. Average economic growth for Lula’s first term was revised upward to 3.35% (12). Lula’s overall average growth rate from 2003 to 2007 is 3.76%. Although this average economic rate is faster than Cardoso’s average growth rate of 2.3% over his 8 years in office (13).

    Since 2003, growth in Brazil can only be described as lackluster when compared globally. Since 2003, Brazil’s average 3.8% economic growth is dwarfed by the global average of 39 developing nations who recorded a 5.6% growth rate during the same period according to Austing Rating (14). In fact, since 1996, Brazil’s growth rate has consistently remained below the world’s average until last year when Brazil finally surpassed the world average (15).

    Most experts agree that Brazil needs economic growth of at least 5 or 6% to create just enough jobs for those entering the labor market. The consistent failure of inducing economic growth likely caused Lula’s administration to launch the PAC (the Program to Accelerate [Economic] Growth) a major public works program to improve the country’s infrastructure and hopefully accelerate economic growth.

    If the real economy was in fact booming the Brazilian people would not be voicing their overwhelming discontent. A recent PEW poll indicated that 59% of Brazilians said the economy was going badly for them. This is an improvement from last year when 70% of Brazilians indicated such feelings (16). The strong growth, achieved in 2007, must have improved the economic outlook for a few Brazilians but the benefits of this economic boom has not trickled-down to the majority of the population.

    The once strong external economic sector is starting to show signs of distress. As of April 2008, the trade balance dropped by 79% in relation to last year (17). In the same month, the current account registered a deficit of US$ 14 billion, larger than the US$ 12 billion that the Central Bank predicted for all of 2008 (18). Although foreign investment is covering the current account deficit Brazil’s economy for now, making Brazil more dependent on global inflows as the current account deficit grows.

    A prolonged global economic recession would likely be detrimental to Brazil. International investors tend to punish third-world nations that consistently run large current account deficits. The current account deficit was a significant component of Brazil’s economic vulnerability, and instability, from 1997 to 2002 (19). A few years ago Turkey experienced economy difficulties under the weight of its current account deficits.

    The external conditions are likely to deteriorate further. Brazil’s currency, the real, will continue to gain, in the short-term, against the dollar pushed upwards by higher domestic interest rates that attract massive speculative inflows. This ‘strong real’ policy cheapens imports, lowering inflation, while limiting Brazilian exports and economic growth.

    Also the costs of producing is growing rapidly causing industry to depart from Brazilian shores. The Financial Times (FT) explored the growing possibility of ‘de-industrialization’ taking hold in Brazil. The chief executive of Marcopolo, an international bus company, told the FT ‘that it’s too expensive to produce [in Brazil] that is why industry is leaving’ (20).

    Domestic and international industry finds it profitable to relocate production operations, thus potential jobs and income, to countries with a more competitive exchange rate policy like Argentina. Former Communication Minister, Luis Carlos Mendonça de Barros, under Cardoso’s administration (1995-2002), also warns of the increased risk of de-industrialization especially as the ethanol industry increases export earnings. More exports will bring in more dollars to Brazil causing the currency to become even stronger than it is current high levels (21).

    China, on the other hand, is a competitive place to produce goods, in part, because it artificially keeps its currency devaluated at roughly 8.23 yuan per dollar making its exports artificially cheap and its imports expensive.

    Higher interest rates will cause growth to fall to about 4% for this year and growth for 2009, and probably for 2010, is already condemned to its usual stagnant rate.

    Growth is vitally important for any nation. Lula’s administration comes with many excuses for the lack of growth yet one likely culprit is its own ultraconservative political economy. The Brazilian Central Bank consistently implements abusive interest rates, which remains the highest real interest rates in the world. There is no doubt that higher interest rates were needed to halt inflation but it has become a dangerous obsession within the government.

    What journalists consistently overlook is that Lula’s government, led by the president himself, has sacrificed economic growth for lowest possible rate of inflation. Lula even said that he would make “any sacrifice” against the return of inflation (22). Somebody should tell him that there is a difference between hyperinflation, which Brazil suffered from in the past, and inflation.

    Most international commentators assumed that it was Lula’s former finance minister, Antonio Palocci, who convinced President Lula of the importance of keeping inflation very low. International investors shuttered when Palocci resigned from his position under intense scrutiny.

    In actuality, it was Lula who taught Palocci that lower inflation was needed. According to Palocci’s latest book, Lula argued for an inflation target of 4% while Palocci advocated a more manageable 5%. They eventually settled on a compromise figure of 4.5%. Although this figure kept inflation low it also inhibited economic expansion.

    Palocci warned Lula that keeping the inflation target this low would stunt economic growth. Lula understood this argument, but believed that inflation was clearly the greatest evil, a lesson he learned from his days as a union leader (23).

    A few government officials opposed these interest rates. The Institute of Research and Applied Economics (IPEA) economist, Marcio Pochmann, said that “we want to step on the accelerator [of economic growth], but the problem is the Central Bank” (24). The vice-president, José Alencar, is one of the leading critics calling the interest rate policy as ‘fiscally irresponsible’ because it drives up interest payments costs thus Brazil runs a higher budget deficit (25).

    Also the current governor of São Paulo, José Serra, has been another vocal critic of the interest rate policy. The ex-Secretary of the Political Economy of the Finance Ministry, Gomes de Almeida, left his government position, when he criticized the hyper-valuation of the currency, which he noted, was prejudicial to the country and a result of the high interest rate policy (26).

    The economic tools used to contain inflation, and keep interest rates low, have largely failed. In 2004, the Brazilian economy finally rebounded at a brisk 5.7% pace but the central bank wanted to reach its targeted inflation rate (27). So interest rates began to rise in September of 2004. Lula correctly worried that future growth would be compromised. In response, Lula raised the primary budget surplus (budget surplus that excludes interest payments on the debt) from 4.25% to 4.5% (28).

    Lula was told by government officials that a higher primary budget surplus would keep inflation low thus keeping interest rates lower. In theory, further cuts to the budget, raises the primary surplus, increasing the domestic savings rate by soaking up the excess money within the economy, lowering inflation. Unfortunately, he underestimated the central bank’s commitment to low inflation at-all-cost.

    In fact in 2004, the government’s official primary budget surplus ended at 4.6% but the domestic interest rates did not stop rising until later into the following year (29). They went from 16% in September 2004 to 19.75 a year later when the central bank ceased hiking interest rates.

    The effect of this policy stymied economic growth. In 2005, growth fell to 2.3 (revised to 2.9%), the second lowest rate among Latin American economies, beating only war-torn Haiti (30). Government officials, like ex-finance minister Palocci, blamed the political scandals that erupted that year for the anemic growth rates.

    In 2006, the official rate of economic growth was marginally better, at 2.9% (revised to 3.7) once again only surpassing Haiti (31). It is obvious that Brazil’s economic growth is shackled. Although 2007 was another boom year, like 2004, the economy of 2008 and 2009 are likely to disappoint many foreign observers.

    Once again in April 2008, domestic interest rates are on the rise. They will continue to increase as Brazil experiences higher bouts of inflation. The government, once again, repeated its previous act by swiftly boosting the primary budget surplus from 3.8 to 4.3% of the GDP (32). Lula once again believes that this will somehow stop the central bank from raising interest rates.

    Clearly, he did not learn his lesson from 2004. Back then, even the central bank president openly declared that the hike in the primary surplus would not stop interest rates from going up (33). Inflation is growing in Brazil, above the excessively low official target of 4.5%, but this inflationary burst is arising from outside global forces not an overheating Brazilian economy.

    Brazil’s growth alone never caused inflation to grow uncontrollably. Oil, commodity and energy prices are escalating everywhere. Interest rates will now be going up to contain the current global spike in inflation. Inflation will stay above its target for the foreseeable but it is not raging out of control as in the past.

    The Central Bank’s ultraconservative policy is used against increasing inflation. It is what PhD economics programs all around the world teach their pupils: “the only role of the central bank is to keep inflation as low as possible”. Any other intervention in the economy breeds horrendous inefficiencies and, is at worst, “Marxism”. If it proven in the classical theoretical world of economics, then you know it must be true in the real world!

    The central bank’s policy is also hypocritical. It easily moves up interest rates when inflation grows but refuses to lower it when inflation is very low. For example, in 2006, Brazil’s yearly inflation rate (IPCA) accumulated to a mere 3.14%, below its 4.5% target, and was the 3rd lowest in all of Latin America (34). Although an important achievement, interest rates trickled down in an excessively cautious manner. Brazil still had the highest interest rates in the world.

    Why did not the Central Bank drastically slash interest rates in 2006 for inflation to reach 4.5%? Growth could have been faster than pathetic 2.9% and thousands of new jobs could have been created. In 2007, interest rates could have been even lower than they were because inflation ended at 4.14% once again below the 4.5% target.

    Nobel Prize winning economist, Joseph Stiglitz, has repeatedly reiterated that Brazil’s economy could grow by lowering interest rates without fear of inflation (35). Obviously, his frank advice is ignored in the halls of Brasília. Not to mention that many mainstream economists now accept that an inflation rate below 10% has no negative impact on economic growth. Two World Bank economists even found that there is no consistent correlation between a country’s inflation rate and growth rate when inflation stays below 40% (36).

    Conditions for many workers remain difficult. Average real income has been static throughout the past six years although unemployment has been slowly falling. According to the IBGE (Brazilian Institute of Geography and Statistics) as of April 2008, real average income was 1,208.10 reais, its highest point since October 2002, when it stood at 1,224.48 reais. This demonstrates that the average worker is, in real terms, still earning less than it did back in 2002 (37)!

    So who are the biggest beneficiaries of the Brazilian economy? The clear winner is the financial-agriculture complex.

    Each year, the Brazilian government pays billions in interest on its internal debt. Each year, well over 100 billion reais, is transferred to public, domestic and international banks who own a majority of government debt. Yet, interest payments only display a part of the picture. Billions are paid on the principal of the country’s debt.

    In 2002, the last year of the Cardoso administration, the government dispensed 349.6 billion on the amortization of its debt. This was equal to 46% of the budget. On the other hand, in 2003, Lula spent over 412.9 billion reais, 54.61% of the total budget. The consequence of this increased spending on the debt is a collapse in public investment in an infrastructure or public education.

    Cardoso, in 2002, made 11.6 billion reais in public investment, or 1.5% of the budget, while Lula, in 2003, invested 1.8 billion reais, a mere pitiful .24% of the budget for the year (38). Brazil’s internal debt is approaching 1.3 trillion reais with 30% of it due in less than one year (39). The need to extend the maturity of the internal debt and limit its growth is real, all of which requires lower interest rates.

    The United Nations Conference on Trade and Development (UNCTAD) chief economist Heiner Flassbeck warns Brazil that it is a victim of “international casino”. The financial markets are making billions in the short-term by taking loans in Japan, with almost no interest, and placing it in Brazil’s financial markets. They are making billions of this process as Brazil rewards them with the highest interest rates in the world (40).

    So it is not surprising that Brazil’s financial market has grown astronomically. But when US interest rates begin to tick-up again foreign investors will return their short-term fortunes to safer US securities. Brazil continues to be a place where investors make immediate profits and then flee towards safer investments. Unfortunately, there continues to be minimal investment in actual long-term production in the Brazilian economy that could generate new employment, transfer technology and usher internal development.

    Industrial organizations, led by the powerful São Paulo Industrial Federation (FIESP), rightfully lashes out against the current interest rate policy of the central bank which frequently unites government allies and the opposition camp in the Brazilian Congress. In fact, most industry-led organizations, that produces millions of jobs, consistently plea with the government to be more flexible in enacting interest rate policy.

    In many respects, Brazil’s economy is as a rent-seeking economy, one where the rich see their money grow at astronomical rates without lifting a finger. Little is actually invested in a productive manner that could spur innovative industries that could improve the lives of Brazilians. Loans to small businesses and average Brazilians can range from 30 to 100%.

    How can any business invest in the future and generate jobs in such an environment? Most interest rates are charged on a monthly basis. It is not surprising then that credit remains a small component of the economy although a growing one.

    Lula’s administration has also regularly pursued direct support of big agriculture. In May 2008, President Lula held a meeting with his ministers defining future plans to consolidate its unique role as a world leader in agriculture production (41). Back in 2006, the government destined 50 billion reais for commercial agriculture while only giving 10 billion for family agriculture (42).

    In the growing season of 2007-2008 the government released 58 billion reais in aid and reduced interest rates for agriculture loans from 8.75% to 6.75% per year (43). Once again, in May of this year, Lula signed a provisional measure (MP) renegotiating 75 billion reais of debt accumulated by large-scale rural producers (44).

    With this type of government intervention, it is not surprising that big agriculture has performed so well in the past five years. Agriculture is thriving in part because the special interest rates are significantly lower than those in the rest of the economy.

    Lula’s administration actively pursues trade negotiations with developed nations. The goal of the administration is to force rich countries to end agriculture subsidies. Many experts predict that Brazil would widely benefit from this move. Except that, in exchange reducing agriculture subsidies, first-world nations would demand that Brazil, and others, drop their stiff tariffs on industrialized goods. This would likely decimate domestic industry and small businesses. According to one study the net impact of a WTO deal would be a loss of 160 million dollars for Brazil (45).

    Specializing in ethanol, oranges, beef, poultry and soy beans will not be conducive in developing a dynamic economy that serves the need of nearly 200 million people. Large-scale agriculture depends on heavily mechanized equipment generating little employment. Numerous countries around the world produce similar agriculture goods causing agriculture exports, which is roughly half of exports, to fall.

    Brazil is repeating its historic failures of being the world’s efficient supplier of sugarcane, soy beans, coffee, rubber and raw materials. These agriculture interests promote the knocking down of the Amazon Rainforest as a model of economic development which the former environment minister, Marina Silva, labeled “an archaic development model” which will obviously not expedite industrialization (46).

    The mere fact the US and Europe obliterated their forests hundreds years ago did not induce industrialization. Industrialization requires a set of cohesive policies that are absent from the current political agenda.

    Some journalists will reiterate that there is no alternative to the current economic model. Why I will not purport to decide what kind of economy Brazilians need or want, there are alternatives to the current economic policy. History is not over.

    Lower interests and faster growth is a requisite to inducing any sustainable development strategy. Economic growth is necessary but insufficient to transform Brazil. Arguably economic justice is more, or as, important as economic growth.

    Several countries, like Peru and Kenya, have experienced economic growth above 6% in the past few years but remain mired in poverty, joblessness and trapped within perverse inequality. Thus collective action by social movements and civil society must exert pressure on their democratically elected officials to enact measures that encourage job creation, promote a decent livable wage, affordable housing, public education and even a substantial land reform that offers credit and technical assistance to millions of landless peasants.

    Only by pursuing economic justice can Brazilian society be more inclusive, reduce poverty and tackle the perverse inequality that scars the basic fabric of society. Real positive change of any economic or social policy must come from the bottom-up not from the top-down.

    Year   GDP growth (old methodology) GDP growth (new methodology)

    1996   2.7    2.2
    1997   3.3    3.4
    1998   0.1     0
    1999   0.8    0.3
    2000   4.4    4.3
    2001   1.3    1.3
    2002   1.9    2.7
    2003   0.5    1.1
    2004   4.9    5.7
    2005   2.3    2.9
    2006*   2.9    3.7 

    Source: “Revisão do PIB melhora posição do Brasil em ranking mundial, diz consultoria, Folha Online, 21.03.2007, accessed 3/25/2007 http://www1.folha.uol.com.br/folha/dinheiro/ult91u115388.shtml
    *-figures for this year were found in another article

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    (9) IBID

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    (40) Chade, Jamil. “Brasil está sendo vítima de cassino internacional,” Estadao.com.br, 21.03.2008. accessed 4/2/2008. http://www.estadao.com.br/estadaodehoje/20080321/not_imp143723,…..

    (41) Nunes Leal Luciana. “Reunião define que Brasil estará focado em ampliar agricultura,” Agência Estado 21 Maio, 2008. accessed 6/4/2008. http://int.estadao.com.br/Multimidia/ShowImpresSão.action?xmlPath

    (42) Salvador Fabiola and Fabio Graner. “Governo anuncia MP para renegociar R$ 75 bi em dívidas rurais,” Agência Estado 27 Maio, 2008. accessed 6/13/2008. http://int.estadao.com.br/Multimidia/ShowImpresSão.action?xmlPath

    (43) Graner Fabio. “Governo anuncia liberação de R$60 bilhões para a agricultura,” Estadao.com.br 25 Maio, 2006. accessed 5/25/2006. http://www.estadao.com.br/ext/inc/print/print/htm

    (44) Governo libera R$ 58 bi e reduz juros para safra 2007/2008, Folha Online 28/06/2007. accessed 6/13/2008. http://www1.folha.uol.com.br/folha/dinheiro/ult91u307883.shtml

    (45) Gallagher, Kevin P. “For All Its WTO Haggling Brazil Will Get US$ 160 Million – in Loss,” Brazzil.com December 13, 2005. accessed 5/14/2006, http://www.brazzil.com/content/view/9483/79/

    (46) “País tem modelo de desenvolvimento ultrapassado, diz Marina,” Estadao.com.br 19.05.2008. accessed 6/13/2008. http://int.estadao.com.br/Multimidia/ShowImpresSão.action?xmlPath

    Daniel Torres is a political science and economics major at the University of Massachusetts. Comments welcome at dftorres@gmail.com.


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