Should Brazilians cheer if they lose the World Cup?
As the World Cup kicks off in Sao Paolo this week, the home team is the runaway favorite, with a 45 percent chance of winning the tournament, according to Nate Silver on FiveThirtyEight and 48.5 percent probability according to the statistical boffins at Goldman Sachs. But apart from the bookmakers — who stand to lose a fortune if Brazil wins, since they are offering odds of around 3 to 1, instead of the 1 to 1 suggested by Silver’s and Goldman’s calculations — another, more surprising, group is secretly rooting against the favorite: Brazil’s own financial and business community, along with much of the country’s middle class.
That, at least, was my strong impression after two weeks visiting companies and financial institutions in Brazil. This unusual reversal of national spirit does not represent a breakdown of patriotism. Rather the opposite.
Brazil’s next presidential election is in October, and virtually everyone in business and finance believes that President Dilma Rousseff, the incumbent, must be defeated to save the economy. Whenever a new opinion poll shows a narrowing lead for Dilma (as Brazilians invariably call her), share prices jump. Yet still she remains well ahead of both her opponents.
The problem for Rousseff’s detractors is that, despite Brazil’s deteriorating economic performance since 2011, she represents the same party and ideology as her predecessor, Lula da Silva, who was president from 2003 to 2010. Rousseff is credited with the achievements of da Silva’s eight-year tenure, when Brazil was probably the world’s best performing “middle income” emerging economy.
Average growth of Brazil’s gross domestic product during this period was more than 5 percent. This growth was accompanied by great social advances: social security programs that helped raise 35 million Brazilians out of poverty; an easing of credit conditions that created a dynamic consumer economy for the middle class and, above all, an aggressive demand expansion that brought down unemployment from 13 percent in 2003 to just 5 percent in 2010.
Under Rousseff, by contrast, GDP growth is expected to average only 1.5 percent. As a result, hopes have been dashed that Brazilian living standards might pull decisively ahead of Mexico, and narrow the gap with the richest of the big middle-income countries, Russia. Moscow has instead extended its lead over Brazil from 47 percent to 59 percent, according to the estimates of income per head at purchasing power parity published by the World Bank.
The question now is what must be done to restore the more dynamic conditions of 2003 to 2010 — and whether this really requires a change of government. The answer depends on diagnosing correctly what went wrong in 2011.
The improvement in economic performance after 2003, according to a persuasive analysis by two World Bank economists, Otaviano Canuto and Philip Schellekens, could be attributed to three forces: rising commodity prices; the delayed effect of tough macroeconomic policies introduced by President Fernando Henrique Cardoso, who broke Brazil’s chronic inflation, stabilized the currency and imposed budget discipline; and the supply-side improvements in business conditions, labor markets, infrastructure and competitive conditions, which also built on Cardoso’s pro-market policies.
The first factor is clearly outside the government’s control. But luckily it turns out to have been the least significant. While many investors and economists outside Brazil believe that its fortunes are closely tied to global commodity prices, Chinese demand or U.S. interest rates, this is a misconception. Brazil is, in fact, less vulnerable to external shocks than any major economy — with a ratio of trade to GDP lower than any other country apart from Sudan.
Under Rousseff, macroeconomic policy has become both more lax and more unpredictable since 2011. But, again, the amount of deterioration is easily overstated. While Brazil’s inflation has accelerated somewhat, budget deficits have widened and the currency weakened sharply last year, nobody sees any risk of returning to the rapid inflation of the pre-Cardoso period.
The currency is also still considerably stronger than it was, on average, in 2003-10. If anything Brazil’s main monetary problem is a currency that is too strong and is driven up by excessive international inflows.
If we exclude macroeconomic mismanagement and declining commodity prices, what is left to explain Brazil’s poor performance in the past few years? The answer lies, ironically, in the very success of the Lula government in reducing unemployment. When unemployment is rapidly falling, the creation of all this extra work automatically guarantees rapid economic growth. But once full employment is achieved, further growth depends on raising productivity — and weak productivity is the Achilles’ heel of the Brazilian economy.
Improving productivity requires supply-side measures: better education and training, improved transport infrastructure, rationalized tax laws, increased private investment, intensified competition and more openness to trade. Policy reforms of this kind are now urgently needed — and will probably prove unavoidable, regardless of who is elected president in October.
The bad news is that supply-side policies often generate strong political opposition — especially when they challenge labor practices and corporate vested interests. The good news is that such controversial policies are easier to implement in an economy that has reached full employment than one still mired in recession.
By focusing first on expansionary demand policies that created full employment and only then turning to supply-side reforms designed to increase productivity, Brazil has been wiser than many other countries, which tried to do the opposite. They start out with austerity policies that suppress demand and then press for productivity improvements that remove even more jobs.
In an economy at full employment like Brazil’s, by contrast, reforms that increase productivity and thereby raise living standards should prove extremely popular. Just like winning the World Cup.
PHOTO (TOP): Brazil’s President Dilma Rousseff attends the launching ceremony of sectoral plans for the mitigation of climate change at the meeting of the Brazilian Forum on Climate Change in Brasilia, June 5, 2013. REUTERS/Ueslei Marcelino
PHOTO (INSERT 1): Brazil’s President Dilma Rousseff walks on the pitch during the opening ceremony of the Arena das Dunas stadium, which will be one of the stadiums hosting the 2014 World Cup soccer matches, in Natal, January 22, 2014. REUTERS/Sergio Moraes
PHOTO (INSERT 2): Brazil’s President Dilma Rousseff participates in a session to honour the 25th anniversary of the promulgation of the Brazilian Federal Constitution at the National Congress in Brasilia, October 9, 2013. REUTERS/Ueslei Marcelino