Brazil’s Economy

In 2001, Brazil was viewed as one of the up and coming, fastest growing economies in the world. In fact, Jim O’Neill wrote a paper titled, “Building Better Global Economic BRICs”, which is about the emerging economies in the world. The acronym BRIC represents: Brazil, Russia, India, and China (Smith). These global leaders have lived up to expectations and have grown at a much faster rate than the rest of the world. They have been able to lift millions of people out of poverty, including 40 million in Brazil alone. Will Brazil continue to be part of the BRIC in years to come? A 2010 Goldman Sachs report predicted by the year 2030 the BRIC countries would account for an astounding 41% of the world’s market share (Smith). But we now see that those predicted numbers are very far from certain. Many believe if Brazil does not improve some of its problems plaguing its society, the BRIC could easily become the RIC group. Without the necessary changes being made, Brazil’s annual compounding rate of 4.4% could be washed away. Recently the GDP numbers show their industrial output lingering around recession numbers. It is also predicted that the Brazilian economy will grow less than the U.S. economy this year (Rapoza). Brazil was originally able to secure its spot in the fastest growing nations in the mid to late nineties by bold privatization and economic liberalization policies by then president Fernando Henrique Cardoso. Cardoso’s successor, “Lula” da Silva continued the reforms once Cardoso left office in 2001. Between the terms of Silva and his hand-picked successor and current president, Dilma Rousseff, government spending became excessive and their government controlled pension system now needs to be reformed(Llosa). One of the main economic issues is the push for protectionism must be limited by President Rousseff. She knows it is an uphill battle, because of the Brazilian economic downturn, which has caused a huge protectionism uproar throughout the country. This uproar even includes other Brazilian politicians, whom are now making the necessary economic reform much more difficult. These protectionists believe the cheap products they have been purchasing from China and Mexico make it impossible for Brazilian companies to compete in their market. They also believe that due to the very loose monetary policies in Europe and the United States the Brazilian companies are at a huge disadvantage. The loose monetary policies were even enough for President Rousseff to meet with President Obama to discuss the issues (Llosa). The protectionists have already pushed for a minimum of 100 new tariffs. These “necessary” tariffs could last as long as 12 months, affect the areas of steel, petrochemicals, pharmaceuticals, and capital goods. The government said, “The duty hikes were needed to ease price differentials caused by the ever weakening global economic outlook” (Rapoza). They believe the tariffs will help boost domestic manufacturing, which is considered to be one of their economy’s weaknesses.
The protectionism has come under fire from many different places. Particularly from the British Prime Minister, David Cameron, who said, “To try to isolate and protect industry from competition may benefit the local industry, but it has long-term costs and will block the development of a truly competitive and innovative industrial base” (Guerrero). He warned the Brazilian people and the government that the protectionist policies could potentially backfire. Unlike Brazil, the UK is actually ridding themselves of their trade barriers. They are also cutting taxes on partnerships and providing tax breaks to new businesses, along with providing more work visas. They are making all of these changes to encourage talented international workers to relocate to the UK. Cameron said by making all these necessary changes it will proved “more jobs, growth, and prosperity” (Guerrero). As we see Brazil is heading in the exact opposite direction. President Rousseff said that these tariffs are a “legitimate trade defense” against developed countries. She said this after there was an official complaint from the United States government and allegations from the European Union members (Guerrero).
It is predicted that inflation will reach 5.5% while GDP growth forecasts will be a mere 1.5%, which is down from 4% originally. Despite Brazil’s Central Bank’s attempts to keep inflation down it will eventually be uncontainable. The domestic prices will rise due to the significant drop in competition due to the tariffs. This will in turn make the amount of household debt levels among the lower and middle class citizens, which is already at record levels, increase (Fisch).
Theses trade policies have also further damaged the already weakened regional trade among Brazil’s neighboring nations. The Argentinian government began the trade restrictions which broke the South American free trade block. Now Brazil is following along and reducing the amount of regional trade significantly. Due to the market size of Brazil in comparison to its neighbors Brazil is considered to be the leader of the neighboring nations responsible for maintaining stability in trading and cooperation among the neighbors. Free trade is the best way to grow and succeed and the new protectionism will not only have a negative impact on the Brazilian economy in the long run, but also Brazil’s neighboring nation’s economies. Many people blame President Rousseff for Brazil’s current path toward protectionism and avoidance of diversifying regional trade.
Another problem evident in the Brazilian economy is the rapid increase in government spending. In 1995, social welfare in Brazil was a mere 234 billion real ($115 billion), but has since increased to an astounding 638.5 billion real ($315 billion) in 2010. Federal spending has doubled in just 16 years. The average amount of money spent per person was $726 per person in 1995 to $1642 per person by 2010, which is a 172% increase in spending (Staff). By 2012, spending had increased by another 10.7 percent. These numbers include spending in 11 different social areas, particularly education and healthcare, but also including including general welfare, benefits to civil servants, social assistance, food and nutrition, housing and urban planning, sanitation, employment and income, rural development and culture. President Rousseff wants this increase in spending to stimulate the country’s economy. Along with the overregulating previously mentioned, the Brazilian government is also hurting the economy with their overspending and overtaxing. But in order for the spending to continue, the government has also raised taxes. Carlos Caicedo, a political risk consultant, went as far as calling the Brazil tax system a “monster” (Collins). The government is making it difficult for businesses, investors, and entrepreneurs to succeed. This spending has led to a 6% inflation rate (Rapoza).
The government has come up with programs that are very costly. For example, there is the “My house, my life program” which helps low income Brazilians buy or build their first house (Lavin). In addition to the programs, because all of the added money in the education field there have been increases in education, but skilled labor is hard to come by which pushes wages up and productivity remains low. This can ultimately be a problem for any economy.
A key economic expectation for the Brazilian economy is the upcoming 2014 soccer World Cup and the 2016 Summer Olympic games. These functions require large amounts of government spending in preparation. Not only do stadiums need to be built, but also areas around the stadiums need to be remodeled and cleaned up. In order to get these particular events, the countries must pitch their ideas to committees on how their plans for these huge events are better than the other ideas submitted by other countries. The government knows that during these events Brazil will be under a microscope due to the fact that people from all over the world will be visiting to support their particular country. This can be detrimental for some economies, if not handled the right way. In the 2010 World Cup, the government spent nearly $4 billion to build stadiums and improve transportation and other aspects of the country. Brazil will have to do the exact same thing, but it is estimated, for the two events, they could spend as much as $31.3 billion on building as many as 12 new stadiums, redoing roads, and expanding their 12 existing airports, among other things also (Zimbalist). Most of the money will come from tax money that the government will be happy to spend. These capital investments put the country at risk of inflation, and poor quality construction. This massive project could lead to problems rather than growth. Brazil currently has a successful unemployment rate at around 6% (Zimbalist). When governments take on major, long-term infrastructure investment programs, like the ones Brazil is currently taking on, and with their unemployment rate, there is a threat of over pressing the economy. This is a primary reason why Brazil is currently experiencing rising inflation, which is currently at over 6 percent per year. Because of the amount of construction going on throughout Brazil the construction workers are fully employed, especially the top, high skilled construction workers. One report that came out said, 80% of São Paulo’s construction projects are being delayed because there aren’t enough skilled workers to proceed. With large capital projects, such as those for the World Cup and Olympics, there are strict deadlines, which unfold to severe time pressure; it ultimately forces the construction workers to go forward without a properly skilled and trained work force. This could lead to a lot of potential problems down the road in the form of low-quality work, low-quality materials and wage inflation (Zimbalist)
The huge event could lead to a result that isn’t quite up to par with what is predicted. While many sports enthusiasts and loyal fans will be swarming to Brazil for the events, it could potentially not be quite what they are expecting. This happens because when huge event like the World Cup and the Olympics occur there are crowds of people. Because of these crowds some of the people who normally travel to Brazil during that particular time of year will be less inclined to actually travel to Brazil like they normally do. Many people like to avoid crowds and higher costs that come with the crowds at all costs. It is hard to estimate the actual drop off in the estimations. The 2004 Olympics in Greece led to a 10% drop off in tourism due to the Olympics, while the 2002 winter Olympics in Salt Lake City kept 50% of non-residents away from Utah. The greatest surprise is that there was a drop off in tourists in Beijing In August 2008(Olympics) in comparison to August of 2007. Rio de Janeiro is not a well-kept secret either. It is one of the most visited cities in the world and gets approximately 2.8 million visitors per year (Zimbalist). One mistake during the two events could lead to a drop in that number, much like the pollution in Beijing was spotlighted during the Beijing Olympics.
When it comes to huge events, there are a lot of problems that could arise. For example, the violence, which is common for Brazil, could affect the amount of people who attend. There is also the huge possibility of corruption. Brazil Is in between 40 and 49 on the Corruption Perceptions index (Transparency). Basically they are in the middle of the pack. Their score, although not terrible, the door is definitely left open for the distinct possibility. That corruption could severely affect the final result of the events on the economy. There are things completely uncontrollable by the government, which include traffic and weather, both of which can have a dramatic effect on the tourism levels. In addition to the money being spent, as many as 1.5 million Brazilians are scheduled to be relocated from their extremely poor favelas in Rio de Janeiro. They must do this because their favelas are in a very convenient spot for a new stadium that will ultimately replace the favelas. A huge problem is Brazil’s land particularly in Rio is very scarce. Each Stadium will take up approximately 15 to 20 acres. With 12 stadiums being built, that is approximately 204 acres of urban land being taken up. Theses stadiums, although beautiful, will probably end up being useless after the actual events. In Beijing, their stadiums are beautiful, important monuments, but they are now mostly sitting unused. These empty stadiums are now sucking away money from the government and the economy. In 2010 the Wall Street Journal analyzed the 2004 Summer Olympic Games’ stadiums. An astounding 21 of the 22 stadiums built in preparation for the games are sitting empty (Zimbalist). Brazil will be no exception to this pattern. They are forcing over a million poor people to move from their homes, for what could be seen as an eventual monument.
Then we must look at the long term effect these events will have on the economy. It is evident that Brazil will have a short term boom in their economy due to the amount of money that will be crammed into the economy. But the long term is much more important than the short run. Brazil will see an initial boom in GDP which will lead to higher prices for the short run. In the long run the GDP will level off and end up resulting in inflation. We saw this exact thing happen in Norway, who hosted the 1994 winter Olympics. Forty percent of the hotels built for the games were bankrupt by 1999. Two skiing factories were also sold very cheaply to avoid bankruptcy. The 1994 Olympics ended up providing little to no benefit for the Norwegian economy and was a huge disappointment in comparison to the economic predictions made prior to the games (Zimbalist). Even if the events are a “success” and make profits, in the long run that all could change. The expensive costs of the stadiums could quickly drain all the money made, particularly with low grade materials, and shoddy work being done initially. There will be expensive repairs to make in the two years in between the World Cup and the Olympics which will drain some of the profits and after the Olympics are over the profits will be forced to maintain these “monuments.” To give an example of this occurring we will look at the 2000 Olympic Games in Sydney, Australia. It was reported that the games wound up breaking even. But the Australian state auditor found, the long-term costs to be $2.2 billion dollars. Most the costs were from the $30 million per year to maintain their Olympic stadium (Zimbalist). The government is currently in a tailspin with spending, with these huge events coming up it is evident the spending will only be getting worse.
The last economic issue worth noting is the crime rate in Brazil. Many foreign companies are beginning to avoid doing business in Brazil due to the crime and violence. Investors are afraid for their own security and well-being. One of the biggest crime concerns have been the increase in kidnappings and ransoms. Thomaz Favaro a security and political risk analyst said, “The security environment has failed to keep pace with gains in the economy” (Collins). He also said, the bulk of the issues are petty crime and robbery. The amount of theft is also increasing, due to the inadequate police force on the roads. Thieves are stealing cargo from trucks, even on major highways (Collins). Crime has been an increasing problem in São Paulo, one of Brazil’s largest cities. The amount of murders has increased dramatically over the past year. The period of time between October 24, 2012 and November 12, 2012 there were 154 murders and 1127 murders from the beginning of the year to November 12th, which exceeded the total for all of 2011. Violent crime rose 7.8 percent in 2012 in comparison to 2011 (Cawley). Criminals are randomly targeting and shooting people, in particular police officers. It is believed they are targeting police officers in response to a recent crackdown in drug trafficking. Criminals are even buying and selling the names and addresses of police officers, so they can find and kill the officers (Jordan).
The PCC (First Command of the Capital) are believed to be primarily responsible for the actions against the police. This notorious group is formerly known as the Party of Crime and is feared throughout Brazil. The PCC was formed by a group of convicts serving in one of Brazil’s maximum security prisons. They have now grown to dominate organized crime in São Paulo, they have spread throughout Brazil, and they have managed to have a presence in the neighboring Paraguay and Bolivia. They have recently expanded their place in narcotics supply, specifically cocaine and marijuana, and illegal gun trading (Fox). The PCC is quickly becoming the biggest and most powerful gang in Brazil. Often they are even more powerful than the Brazilian police. This has sparked fear in many locals and tourists alike. If something isn’t done people will continue to avoid Brazil for business and travel. This can be very detrimental to the economic growth of the country.
To add to the discussion about government spending, the Brazilian government knows that crime is a huge problem that is why they have announced a $900 million investment toward security forces. It is their goal to make the upcoming World Cup the safest one ever. As part of the $900 million the Brazilian government is investing in hi-tech vehicles, helicopters, and surveillance equipment. Brazil is currently taking advice from other countries who have hosted the Olympics, for example Canada and South Africa. The government knows the importance of a safe environment in terms of protecting your citizens, and in terms of a growing economy.
The government has got to make necessary changes to get the Brazilian economy back on track. It is evident that Brazil’s economy has been growing extremely rapidly since the mid-90s; at least up until recently. In order to revamp this growth the government must go back to what originally got them success. They went away from free markets and started with their new protectionist ways, specifically the tariffs. The free market allows costs to be reduced, which help the consumers tremendously. Brazil has always been a consumer market and not a producer market, Brazil’s goods and labor are too expensive, which is why so many of their goods were from China and Mexico. The government also needs to cut their spending and cut taxes as well. They need to cut some of the newly formed, unnecessary social programs that could be costly down the line. Cutting costs will ultimately tough to do because of the World Cup and Olympics both being in the next 3 years which will require spending. The key will be limiting that spending while ensuring quality production. Because of the high labor costs and low quality work being done on the stadiums the government would smart to contract builders from another country, which could drastically reduce the production costs, while significantly improving the quality of work done. By improving the quality it will in turn reduce the upkeep of the stadiums, saving the government millions of dollars. After the Olympics are over it would be wise for the government to rid themselves of the stadiums. They should try to sell as many stadiums as possible to private owners, such as one of many soccer teams in Brazil. The private owners would be in charge of the upkeep of the stadium ridding the government of those costs. If the government can reduce their costs and spending they have the potential to at least break even from the international travelers coming to the events in Brazil. The last and possibly most important thing the government must get in check is reducing the crime levels. The safety and security of citizens should be the top priority of the government. With the violent crimes increasing drastically the past few years, people feel unsafe. The government must improve their police force beginning with improved equipment that can match the criminal’s equipment. It is said that there are areas in Brazil that even the police won’t go to which shows the difference in firepower between the police and criminals. It would also be wise for the government to weaken their stance on gun control. This would be the most cost effective thing to do for the government and possibly the most effective. People who are randomly being gunned down on the streets deserve the right to protect themselves. In Brazil you must be 25 to own a gun, and it is virtually impossible to obtain a carry permit in Brazil due to government regulations. Also the gun owners must register their guns and pay a tax on them every 3 years (gunpolicy.org). By weakening their stance criminals will be less likely to commit crimes due to the fact that more people would have guns and can protect themselves and their families. Brazil is in a unique situation they have experienced so much growth so quickly and they seemed to be doing everything right so quickly, but now thing have changed. The government must realize this and reverse some to the recent changes they made that hurt the economy. They can make these changes and quickly get back on the right path.

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