Brazil: Latin America’s Big Success Story?

Matias Vernengo

The global media has hyped the performance of the Brazilian economy as an example of successful economic development.  The Economist magazine referred to it as Latin America’s big success story.  Lula was seen as a positive left-of-center leader, in contrast to the negative leadership of Hugo Chávez and other lefties.  Also, Goldman-Sachs lumped Brazil together with Russia, India and China into the so-called BRICs, a group that supposedly would take over the world economy by mid-century.  Further, according to The Economist: “Unlike China, [Brazil] is a democracy. Unlike India, it has no insurgents, ethnic, religious or hostile neighbors. Unlike Russia, it exports more than just oil and arms, and deals with foreign investors with respect.”  In other words, Brazil is in the best of all possible worlds! Or is it not?

In 2009, when the world economy spiraled into a deep recession, the Brazilian economy had a small rate of growth, close to 0.6%, which amounted to a minor (0.2%) fall in GDP per capita, and started the recovery relatively fast.  Yet, when one looks at the Brazilian performance during the good years from 2003 to 2008 the picture that emerges is considerably different.  Brazil grew during the Lula administration (up to last year) at around 2.4% in per capita terms, according to the Economic Commission for Latin America and the Caribbean (ECLAC), which is around the average for the whole Latin American region (2.6%), and well below the growth rates of the star performers (e.g. Argentina grew 6.3% in the same period, and Venezuela 4.1%, to cite two examples that have been usually disregarded or criticized by the media).

Even more troublesome than the relatively poor performance of the Brazilian economy is that the current account of the balance of payments turned from barely positive in 2007, before the global crisis, to about -1.5% of GDP in 2008 and 2009.  This implies that counter-cyclical macroeconomic policies do not have much space to restart growth, since more growth would lead to increasing imports and an exacerbation of the current account deficits.  It should be noted that Brazilian growth, or lack of, was not particularly pushed by exports, which fell from 16.4% of GDP in 2004 to 11.3% in 2009.  Also, even though Brazil is a more diversified exporter than other Latin American economies, it is still fundamentally a commodity exporter (approximately 55% of the exports in 2008 were primary commodities).

The good performance of other Latin American economies was fundamentally associated with the commodity boom, and Brazil’s poor export performance should be partially blamed on exchange rate appreciation, which, in turn, is the result of monetary policy.  For most of the period discussed, Brazil has maintained the highest real interest rate in the world.  While most countries, including the US, have a negative basic real rate of interest, the Brazilian economy has a rate of roughly 4% in real terms, which attracts capital flows and leads to an appreciated Real.  This is the reason Brazil implemented controls on inflows last year; it was not because of a critical stance by the Lula administration with respect to international financial markets.

But the worst effect of the high interest rate has not been the appreciated exchange rate and the diminished external competition, but the impact on income distribution.  The average real wage of the workers employed in the largest metropolitan areas has not changed significantly during the Lula administration, and remains roughly 30% below its level in the mid-1990s, and half of the mid-1980s value.  In other words, the government of the Workers’ Party, led by an ex-trade union boss, has been incapable (or unwilling) to promote the recovery of real wages, while maintaining the highest real rate of interest in the world!

Not everything is bad in Brazil, of course, and there have been some positive developments during the Lula administration.  The expansion of the Bolsa-Família program covers around 11 million needy families, and together with programs to expand consumer credit, has allowed domestic demand to be maintained.  The small expansion of consumption and the fact that commodity prices did not fall significantly (see Jayati Gosh post in this blog) explain why the Brazilian economy has recovered swiftly from the global crisis.  But that is a small consolation for those who had big expectations for Lula’s government.