BRAZIL: SUSTAINING ECONOMIC GROWTH

By Jose Ricardo Braga Aguilar

The world economy has changed faster than what we would have expected 10 years ago ( this article was originally written in 2013). People stopped believing that a country such as the United States or the European Union alone had the power to lead the world economy. After the economic crisis of 2008, we like to think we grew wiser, and for that reason, higher skepticism became a recommended attribute. All of sudden, things are not how they used to be. Those working on Wall Street are not so “cool” anymore and asking the government to increase regulation in certain industries is a reasonable request. Signifying even more this world change, there is China which cannot seem to stop growing its economy. Right bellow, there is also India growing its workforce in an incredible pace. In another 10 years, the country is expected to have more than 130 million.

While this is all happening, we have seen Iceland stumble and the almighty Euro prove it is not so powerful anymore. In a more general sense, but still helping reshape the world, there is Global Warming always hitting on the same note followed by globalization, which cannot stop flattening the surface of the Earth. Looking back at the big picture, we should be aware that things are changing quickly. This statement is not meant to announce the coming of The Post-American World , but we should be aware that other economies are growing faster than the powerful ones. This does not mean that the “big boys” gave up on growth. They are still moving on, but the emerging ones are simply moving on in a faster pace.

of the top ten biggest economies of the world and is (somewhat quietly) demanding the status of “Developed” instead of “Developing Nation,” as found in the textbooks. While growing its economy at a reasonable speed, the country is also becoming an active player on the world stage. Here is a young democracy daring to say it does not need permission to try to solve international disputes. When the country is not voting against sanctions in the UN, it is lending money to the IMF or calling for the world’s attention by hosting the upcoming World Cup and Olympic Games.

Many economists and scholars recognize the change Brazil is going through, but very few have taken the time to elaborate on what the country must do in order to maintain and sustain this growth. Even though the country has so much growth to be expected, the reality is that Brazil is not quite there yet. All indicators show that the country will eventually become an “emerged force,” and there is little doubt to it, but before the country can get there, it has to go through the phase of sustainability. It is extremely crucial that Brazil not only aims for rapid economic growth, but the country must figure out the right formula to maintain this continuing growth.

Robinho in England, Daniel Alves in Spain, Kaka in Italy and Juan in Germany is a few examples of Brazilian soccer players success in the most important soccer leagues around the globe. But, Brazil’s soccer industry is no longer only an exporter of soccer talent. It continues to produce some of the best players of the world, but now also keeps them at home, if not buying them back as occurred recently with Ronaldinho and Adriano. From a macroeconomic perspective, this is a sign of economic growth.

If futebol is finally making good money domestically, then that must be because people are capable and willing to spend more money for good soccer. Obviously, this is more of a lagging economic indicator than anything else – but nevertheless, a positive indicator of the present economic progress. Before Brazilians can enjoy a stable and developed economy, they have to go through the process of managing sustainability.

Sustaining such a growth requires fixing up many different factors/areas. Some areas in need of improvement are healthcare, agribusiness, government spending, infrastructure, tax reform, need of political reform, and education. As of now, some of these areas are already going through major investment and development, but other areas just as important (if not more) are still lagging behind. Before this article addresses the sectors in need of reform, here is one way each individual directly influences the economy.

Consumers are a major force of economic growth. Throughout recent years, their “tools” of purchase have improved significantly. In addition to increasing their buying habits due to job security and extended line of credit, the increase in the minimum wage has also been helping push the economy forward. Since 1995 during FHC’s administration, the minimum wage has only been increasing. It certainly did not increase as much many would have liked, but some improvement is always better than no improvement.

Playing with minimum wages is always a tricky task. Not only there is public opinion involved (which rarely is expressed as satisfactory), but there is also inflation, especially in Brazil – always looking for an opportunity to raise its head. Since 2002, the last year of FHC’s presidency, the minimum wage went from the equivalent of US$ 86 (monthly) to around US$ 325 today, an increase which has been matched well to the economic development and will most likely increase during the next couple of years. Rumor is that the minimum wage will increase during the next two years potentially reaching a value of R$650 by 2013. The following graph shows greater detail on the increase of the minimum wage up until today.

Another factor that has allowed economic development is how the government has been involved domestically and has guided the economy during the last several years. In this case, government spending and social programs were significantly responsible for the growth Brazilians experience today. On the other hand, those on the right are not as happy that the public sector often acts as a private enterprise and crowds out private participation.

Some of the arguments against government involvement (and valid ones) are that personal savings rates are too low and, in the near future, these rates will not match the high public spending. Many people would have expected Lula’s government to be more to the left than to the right, but this administration certainly stood out because of its neoliberal tendencies. It is not every day that a former union leader without a university degree can jump an economy from 17th to 8th or is able to lead a country out of a recession before almost everybody else. This should certainly not sound as an offence, but as an example and inspiration for many other emerging players. During Lula’s eight year administration, he surprised us all by mixing his democratic socialist views with capitalistic practices. In his own words, Lula says that “before being a socialist, you have to be a capitalist… first build capitalism, and then make socialism. We must have something to distribute before doing so.” This is a very interesting approach, which mirrors most of the European social-democratic governance.

Biggest Challenges Ahead: Infrastructure and Education

• Infrastructure

An efficient and well developed infrastructure is a basic requirement for any country seeking long-term economic growth. Fortunately, the poor level of infrastructure in Brazil is finally being acknowledged as a problem. During the runoff round of the last presidential campaign involving Dilma and Serra, the topic of infrastructure reform was brought up a good number of times. The only problem here is that the one candidate who seemed to know it best ended up losing the election: José Serra.

This does not mean that Dilma will not address the issue of infrastructure. She has announced she is continuing with a program called PAC (Growth Acceleration Program), which was created by the Lula administration in 2007. This program has the goal of increasing the coverage and quality of infrastructure networks together with better access to water, sanitation, housing, electricity, transport, and energy. Since its launch, the program raised R$504 billion in investment for the 2007 – 10 period. The money was allocated as follows: R$171 billion for social infrastructure, R$275 billion for energy-related projects, and R$58 billion for logistics.

Even though it has been three years since the creation of PAC, meaningful results are yet to be seen. Infrastructure in Brazil becomes an even bigger problem when talking about hosting the World Cup and Olympic Games in the upcoming few years. There is so much work to be done and the amount of time left is only getting shorter. Brazil’s government needs to step up its game and manage to get the private sector involved in remodeling the infrastructure of the country.

While PAC meetings are taking place and money is being allocated, the situation in Brazil is this: more people are spending the night at airports, bad roads are continuing to cause accidents, ports still look like they did in the 80’s, heavy rain continues to cause floods and mudslides, and energy blackouts still happen once in a while. According to the Latin Business Chronicles, while Brazil has improved eight places since 2008 for the overall quality of its infrastructure, it still ranks a middling 62nd in this regard.

Other areas have ranked the following: transport and electricity (67th) and telephony infrastructure (65th). The most problematic areas, as highlighted by the GCI, are the quality of port infrastructure (123rd), roads (105th), air transport infrastructure (93rd), and, to a lesser extent, railroad infrastructure (87th) and mobile telephony (76th). These numbers show how the country still has a long way to go if it wants to keep up and sustain economic growth.

The solution to this is would be a combination of first, sense of urgency, and second, the involvement of more private investment. The truth is that the federal government cannot take on this issue alone, especially considering that this is not the only problem needing solution in order to maintain growth. Private entities (including FDI) have both the capital and the expertise to get the job done. From a personal viewpoint, a good idea to start off with some progress would be to privatize Infraero (governmental organization in charge of airport administration) before the entire industry falls apart.

It is pretty clear that the government does not want to pass on all the glory to private investors, so the best option here is to give more confidence to private investors and expand the so called PPPs (Public-Private Partnership) and work together. But before this can happen, Brazil has to attract more private investment – and this must be done soon. The government is the only entity capable to incentivize the private sector to jump in and participate. Private investment in infrastructure can be easily marketed by emphasizing the protection of return on investments and having more predictable regulations. Brazil already offers low political risk and a stable currency. All it needs now is to attract more FDI and its own domestic investors.

• Education

With so much growth expected for the next few decades, it is scary to think of who will be there to lead the country through development. A well prepared executive branch is a good start, but it is not enough. A country needs talented professionals to lead the way. The United States, for instance, is noticing a drop in the number of engineers and scientists (numbers are higher in parts of Europe for the first time). Today, the government is right at it trying to motivate young students to study math and science again. In the case of Brazil, lack of motivation is not the actual problem in the educational system. The problem is made up of the combination of bad institutions and bad teachers. In addition to that, 20 years ago, there was little government spending on education—now, there is too much mismanaged spending.

The educational system in Brazil is made up of private and public schools covering all levels of education. The average American would expect any public school to be better funded and better prepared, but in Brazil, it is the complete opposite. Private schools are better prepared than public ones, but they still do not meet the wished average. During his presidency, FHC decided to enter the country into the PISA (Program for International Assessment), which is a program created by the OECD (a group of mostly rich countries) with the purpose of measuring how much their children were learning.

At the end of 2009, the fourth PISA study, which involved students averaging the age of 15, was published and Brazil showed gains in all three subjects: mathematics, reading, and science. The test now involves 65 countries and Brazil came in 53rd (in reading and science). The following chart shows the improved performance of Brazilian students considering the OECD score average is 500 points.

Although improved, it is still a small progress – the average 15 year old in Brazil scores much lower than the average student from OECD countries. The cause of this is not just the students alone, but the teachers as well. It is known that Latin American teachers tend to be poorly educated. Teachers in Brazil are mostly trained on the philosophy of education, whereas teachers from OECD countries are mostly trained on the basis of subject matter or teaching skills (on top of their background education).

Some of the state governments are taking the problem more serious and trying to come up with innovative ways to fix their systems. The state of São Paulo created a career track for teachers who do well on tests and the city of Rio de Janeiro is giving bonuses for schools that are achieving goal targets. Another solution would be to make sure the existing teachers and up-comers are also tested and required to meet a minimum standard. Those who are not prepared should not be fired, but instead, they should be better trained with the support of the local government. Of course students should also be motivated (which starts at home), but teachers must know their material in order to teach effectively.

FHC, who was a former university professor himself, also began a program intended to influence poor families to keep their children in school (while also trying to give an end to child labor). Today, this program, as improved by former president Lula, is called Bolsa Familia. More than 12 million families are now enrolled and this program is generating positive results. Bolsa Familia works by paying low-income families (who register) a small monthly amount per child attending school. This amount varies from R$22 to R$200 (around US$15 to US$125).

Despite being an internationally recognized program, some people would argue against it by saying that social programs like these only create a dependency and helps politicians get elected again. This may be so, but at the same time, Bolsa Familia is producing very positive results. Millions of families have emerged from poverty and entered the middle class as a result of Bolsa Familia. On the other hand, it is just unfortunate that the Brazilian schools are not in a better shape to take care of these students.

Universities also do not escape the horror. Some major public universities tend to be academically better than most private ones. Universities such as USP (from Sao Paulo) or UFMG (from Minas Gerais) are great examples, but the students who were actually intended to go to these public schools are rarely seen around. Public universities (also called federal universities) are free of charge or sometimes they may have very low tuition. The original intention was to create public universities to mostly students from poor families. The problem is that, in order to get in, a student must take a rigorous test to compete for a limited number of seats.

Students who went to public elementary, middle and high schools in Brazil are much less prepared than students from wealthier families who attended private schools and have had private tutoring. Those who cannot score high enough to get a seat are left off with the option of paying for a private university (some students may just opt for a private university because they are better maintained and have better equipment). For these and other reasons, the educational system in Brazil is handicapped and it is pushing its own future professionals behind the line. The educational system ought to be fixed in order to help sustain the economic growth in Brazil in the upcoming years. And as we have seen so far, the challenges to economic sustainability do not stop here.

Brazil after Lula

Lula deserves a great amount of credit for all his administration achieved during the last eight years. Before him, former president FHC came in and introduced stability and the possibility of economic growth. Lula, in his own time, was able to realize the benefits of the policies he inherited and made them better.

Some of this progress is quantified into the 20 million Brazilians who have emerged from poverty and into the middle classes since 2003. Lula has a unique story that helps shape the “Brazil Brand,” and at the same time, remind the poor people in Brazil that they also have a voice. He has finally helped turn the page of the country and bring it into a new chapter.

Dilma Rousseff, chosen by Lula and now the first woman president of Brazil, also has her own unique style. Many still do not believe she will be able to deliver and keep the country on its current path. The new president lacks experience and charisma, which are qualities Lula has in abundance.

Ms.Rousseff must also acknowledge that the main reason she was elected because of Lula’s support, which is a fact the new president seems to accept with great respect. In part, voters chose Dilma because she represents the continuation of Lula’s work. She has already said many times what she intends to do during her campaign, and her words have been echoed over and over by her representatives in conferences all over the country. But investors and business leaders still wait.

During her first month as president, the most meaningful signs of how Dilma will govern have been made by her choice of 37 ministers. Amongst these choices, some of them are Alexandre Tombini from the Central Bank’s board, now governor of the Central Bank (decision which pleased investors looking for signals of economic orthodoxy). The popular Antonio Palocci, former Finance Minister, now taken away from the center role and made chief of staff. Thirdly, there is Guido Mantega, who is keeping his post as Finance Minister.

So far, President Dilma has generated no reasons for major complaint. With so little time in power and so little experience, it becomes hard to judge and foresee the president’s ideal in relation to the country. For now, the president has also clearly expressed her position towards the support of human rights.

It’s true that Dilma Rousseff lacks in experience, but the new president has shown she has potential and the heart to govern. For these and other reasons, it is expected that she will not take on major issues nor make audacious moves. In general, Dilma has an administration composed of experienced professionals and politicians who have been around for many years. Dilma’s team will assist her well and improve their understanding by learning from minor mistakes along the way. It is also foreseeable that during her administration, the country will continue to grow economically while expanding the middle class. We just hope that, while allowing growth, Dilma will prepare the country to sustain such progress in the future.

Brazil shows promise and character. It is a place where the poor is starting to feel motivated to rise to the middle classes. This is also the place where the music is powerful enough to inspire people whether they have jobs or not. The world is eager to see how well Brazil can mix its samba & bossa nova with attractive economic policies, but before the country can get there, Brazil must fix its major sectors in order to sustain the economic growth.

** Jose Ricardo Braga de Aguilar is a dual citizen (U.S and Brazil) and has a degree in International Business (University of Bridgeport) and MBA in International Economics (NYU).