For Brazil, the sweet dream is over

Marcos Troyjo

The timid expansion of Brazil’s GDP in the past 12 months at under 1 per cent deals a hard blow to the notion that its policy makers had devised an economic model uniting high growth with social inclusion. This sweet dream is over. It is wrong to assume that the set of policies Brazil has put in place in the past few years to boost its economy and upgrade its social data are pillars of a new development model.

What does exist in Brazil, stretching back beyond current President Dilma Roussef and her predecessor Luiz Inácio Lula da Silva (2003-2012), is a cyclical attempt to promote growth that constitutes a “pattern”. It is based on the appetite of Brazil’s domestic market for high levels of consumption. The pattern has indeed been accompanied in the past 10 years by income distribution mechanisms that lifted the lives of millions. They are however targeted at poverty alleviation – not increasing productivity – and therefore are not engines for sustained development over time. This pattern made Brazil fall in love with the present. It is time to end this affair. We have to go back to being the “country of the future”.

Economic “models” and “patterns” are quite different things. The former are strategic and dynamic in nature. They include a plan, a well-structured vision of the future. The latter are tactical and recurrent – they react to changes in the global economy. Models are about development. Patterns are about growth.

In policy-making quarters, many seem to feel it is possible for Brazil to keep expanding its economy at impressive rates by fostering domestic consumption. Brazil has already applied such mechanisms in the past. Although the economy does respond positively to one or another stimulus, there are many constraints for such a growth pattern to become a development model. Brazil has low levels of savings and investment, outdated labour and tax legislation and infrastructure bottlenecks. It lags behind its competitors in education, science and technology.

Brazil has to choose a development model and adopt it wholeheartedly. Brazilian authorities cannot fool themselves. It is useless to quixotically gear up against ‘currency wars’, build walls to restrain the ‘financial tsunami’ and denounce the ‘monetary protectionism’ practiced by advanced economies. If truth be told, a more stable scenario in Europe and a larger availability of capital worldwide are essential to Brazil’s ambitions of growth. Brazil only saves about 16 per cent of its GDP and thus depends heavily on financial flows as well as robust foreign direct investment.

Interest payments, pensions, public sector wages, government inefficiencies and Kafkaesque business regulations keep Brazil from pursuing a development road paved by science, technology, innovation, start-up capital and entrepreneurial spirit. The country has a hard time putting together a priority list and sacrificing for it. But Brazil presents clear potential for the old economy of commodities to build new competencies in tech-intensive sectors.

This would necessarily involve the many areas in which Brazil has comparative advantages, such as agribusiness, mining, deep-water oil and biofuels. These should be the bases for a new economic platform to generate surpluses and service the construction of new competitive advantages in nanotechnology, bioengineering, biotechnology, high value chemicals, new materials and robotics. These are the vehicles that could drive Brazil to the forefront of emerging markets.

The current reinterpretation of import substitution policies in Brazil is a good example of the difference between a development model and a growth pattern. Nearly all experiences in industrial development around the world have resorted to some sort of import substitution. This is almost a necessary stopover to local capacity building. Import substitution however cannot be seen as an ever-lasting golden rule. It is only to be applied at an infant-industry level so as to enable a particular sector of the economy to compete internationally.

Building a development model requires at least three ingredients. Political will, capital availability and a good diagnosis of what the world is today. Brazilian politicians have always been criticized for lacking the political will for change.

But it would be unfair to think of someone like President Rousseff as deprived of the will to build a shortcut to development and thus propel Brazil towards a much higher socio-economic status. She is eager to make a difference. President Rousseff is increasingly aware of the importance of innovation and of how crucial it is to reposition Brazil competitively in the realm of the so-called “knowledge economy”.

Nonetheless, contemporary Brazil continues to confuse the growth pattern brought about by specific incentives for consumption and industry protection with a model that allows for productivity gains and sustained economic development. Brazil should worry instead about the gap between its huge potential and its low capacity to compete globally. Over the past 25 years, Brazil’s productivity grew at just 0.2 per cent a year, while the annual change in China was 4 per cent.

Brazil must raise domestic savings and investment as a percentage of GDP and direct more resources to education, science and technology – the indispensable tools to fight crises and promote sustained prosperity. Embarking on a serious effort to enact much-needed structural reforms will free Brazil from the current microeconomic straitjackets. They would be the best stimulus the Brazilian government could offer all those willing to help the country develop its potential to the fullest.

Marcos Troyjo is director of the BRICLab at Columbia University, where he teaches international affairs, Financial Times, December 17, 2012