Friday, 24 January 2014 09:14

Hello 2014: time for a new ‘Letter to the Brazilian People’


By Prof. Marcos Troyjo, Director of BRICLab at Columbia University

Professor Troyjo was a Keynote speaker at innovaBRICS & Beyond 2013

As a new year begins, uncertainties generally abound. But that is not true about Brazil in 2014. Quite the contrary. The world can clearly see what is coming Brazil's way: a country treading below potential.

When Luiz Inácio Lula da Silva was campaigning for president in 2002, he wanted to signal his willingness to stick to the tenets of economic stability established by Fernando Henrique Cardoso and yet push for change in other fronts. He did so by writing a 'Letter to the Brazilian People'.

In that historical document, Lula adhered to fiscal responsibility and inflation targeting but also vowed to face social inequality head on. Contracts would be honoured and the country's debts paid down. A new industrial policy based on sacrosanct "local content" would arise. Surprisingly, he also promised to push for the reform of Brazil's outdated labour laws. He pledged to make its tax and social security systems simpler and less burdensome.

Policies implemented these past 11 years by Lula and by Dilma Rousseff, his successor, seemed to do fine for a while. Brazil benefited a lot from the world commodity boom. A few chosen entrepreneurs delighted at privileged credit lines offered by official banks to foster "national champions". FDI flowed intensely to set up local production plants and thus take advantage of an overprotected domestic market. Fiscal incentives to automobile or home appliance manufacturers helped Brazil minimize the effects of the 2008 world crisis. Structural reforms were forgotten along the way.

But the economic model producing such accomplishments is exhausted. Privileging consumption over investment, sectoral over horizontal policies, the domestic market over global trade, has ceased to work wonders.

Brazil's so-called "national-developmentalism" now seems limited in its capacity to lift the country out of the middle income trap. Continued social policies depend on sustained growth over the years. Isn't it therefore time to draft a new 'Letter to the Brazilian People'?

Brazil has yet to find its place in the "reglobalisation" now in the making: a world shaped by pluri-lateral trade and investment deals such as the Trans-Pacific and Transatlantic Partnerships, as well China's new growth model, supposedly less dependent on the import of mineral and agricultural commodities.

In 2014 Brazil won't see growth climb any higher than 2.5 per cent. This comes on top of disappointing numbers throughout Dilma's term – 2.7 per cent in 2011, 1 per cent in 2012 and an estimated 2.3 per cent last year. Inflation will edge close to 6 per cent and therefore drift far north of its 4.5 per cent target.

As the effects of monetary tapering in the US settle in, the Brazilian real will continue to depreciate and likely reach R2.50 to the dollar by the end of 2014. Interest rates will hover above 10 per cent and further weaken Dilma's discourse of being the first president in Brazil's history (for as long as there have been credible economic statistics) to bring the price of money down to a single digits.

In search of good news to deliver, the government hopes to continue pushing its "concessions" programmes forward in areas such as energy and highways. After a long process of ideological soul-searching – the ruling Workers Party (PT) never wanted "management concessions" to be conceptually equated to unholy "privatisation" – the president and her closest aides decided concessions were a good way to both continue to attract FDI and show a "market-friendly" face.

But bureaucracy, micromanagement (like trying to define profit margins in advance of concession auctions) and the prospect of further government meddling take some of the allure out of concession opportunities.

The ineffectiveness of Brazil's red tape can be easily identified in the preparations for the Fifa World Cup. Although Brazil knew as early as October 2007 it would host the tournament, almost nothing in terms of an "infrastructure legacy" has so far been accomplished. When it comes to improving the airport system, urban mobility and hotel facilities, Brazil will fall short of what a towering event such as the World Cup demands.

In terms of sports infrastructure however, despite the many setbacks in the (wildly expensive) construction or refurbishing of stadiums, the country will be ready. In any given weekend, Brazil holds hundreds of official matches attended by millions of people. Still, hosting the World Cup should have ignited much more in terms of long-lasting benefits beyond the football world.

This whole set of inefficiencies is well-known. So the great uncertainty about Brazil in 2014 is: will continued under-performance result in inertia or change?

When millions took to the streets in June 2013, they were protesting about more than just fare hikes in public transportation. Nor was it solely about denouncing the poor quality of public services offered by a state that collects 36 per cent of national income but only invests 3 per cent of it. Perhaps unknowingly, they were in essence crying out against Brazil's current model of state capitalism and its self-serving appetite.

For some, the way forward should feature more state, less capitalism. This may seem like a viable option, especially if Brazil's most productive sectors, such as its world-class agribusiness, continue to generate the surplus resources to cover for state-led inefficiencies.

For others, it is time to cut loose from the current model and truly reinvent Brazil. That is why the October 2014 presidential elections are key. In order to charter a new course, either incumbent Dilma Rousseff or opposition candidates such as Senator Aécio Neves (Minas Gerais) or Governor Eduardo Campos (Pernambuco) must bring to life some of the untouched objectives listed in Lula's 2002 'Letter'.

Committing to – and thoroughly enacting – labour, tax and social security reforms will represent more than just living up to the 'Letter'. It will mean making the future triumph over the present. And whoever leads that process will write the first chapter of Brazil´s much-desired development history.