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Brazil, stagnation with recession

Long-term stagnation requires as much attention as the ongoing recession

Roberto Macedo, a Brazilian economist (Phd., Harvard), is consultant in Economics, and has served as dean of the University of São Paulo School of Economics, Business Administration and Accounting and as Secretary for Economic Policy in the Brazilian Ministry of Finance. A larger version of this text was published by O Estado de S. Paulo as an op-ed article on February 16, 2017


Opinion by Roberto Macedo

I patiently examined Brazil’s economy health chart from 1901-2015, focusing on the annual rates of real variation of its gross domestic product (GDP). For 2016 I used minus 3.5%, the latest available forecast  (bulletin Focus, Central Bank). The result was a series covering 116 years.
After calculating the average annual growth rates of each decade, I came up with another series of 12 key-numbers. What did they show? First, a trend of strong expansion in the eight decades between 1900 and 1970. In the first four decades of those years Brazil’s GDP grew at an average annual rate of 4.6%. In the last four,   this rate reached 6.8%!
However, after the 1980s this trend has radically reversed. The average annual rates for each decade were: 1980, 3%; 1990, 1.6%; 2000, 3.4%, and 2010 (up to 2016), 2.2%.  A bad performance and certainly incompatible with the perception Brazil has of itself, as an emergent country. The last two years in particular were disastrous, with a GDP’s total decline of 7%, taking 2014 as the base. What a pity!
Of those four decades, the first two (1980 and 1990) are usually regarded by Brazilians as “lost” . That of 2000 escaped this evaluation due mainly to a strong external force: China’s performance, which greatly favored Brazilian  exports of commodities. The results could have been even better, if it were not for the effects of recession that also came from outside, leading to a 0.3% GDP fall in 2009. The current decade, with still three years to go, will be maybe the worst in Brazil’s economic history There is no scenario ahead that could reverse this assessment.
Here we come back to this article’s title. Brazil is in a strong recession coupled with a long-lasting stagnation marked by very low GDP growth rates. In medical words, the country was already sick in stagnation and then came deep  recession. This time this is not an imported recession, but one ‘Made in Brazil’  by our incompetent  politicians, guided by what we have as the worst in Brazil’s history: populism with strong traces of patrimonialism.
What we are doing now in Brazil is focusing almost solely in overcoming the recession, the infection side. But we have also to deal to revert stagnation. The country is at the ICU for a shock-treatment of its fiscal crisis. Advances in this have been made, but a lot of work remains to be done.   In particular, Brazil has to solve the quandary of its Social Security, which successive governments have procrastinated for decades.
President Michel Temer has been acting more as a paramedic, but the intensive care must be extended to the structural problems linked to the stagnation.  Among them,  Brazil’s low rates of savings and productive investment. A large part of their decline  may attributable to heavy tax burden upon the Brazilians, what is detrimental to growth, since it takes from those who invest more to a public sector that invests very little. At the same time, the public sector has to borrow more and more, to cover its huge deficit, which turns private savings into government consumption and cash transfers to the private sector, such as pension benefits.
So when someone saves and places the money into a fixed income fund backed by government bonds, they fund a government that does not save and invest very little.
Thus, stagnation also has its political dimension, in the form of ineffective governments, as well as other ills. The political class badly represents the population and is not prepared for administrative challenges, The President’s chief of staff Eliseu Padilha said recently that the government chooses its ministers based on the number of votes they can guarantee in Congress. He also said that the government would like to have notable figures in the Ministry, but that those chosen by this other criterion are also regarded as  remarkable. Even if of remarkable mediocrity, I add.