CHALLENGES 2007-2008:
Brazil Seeks Formula for
Continued Growth
By Mario Osava
RIO DE JANEIRO (IPS) -
The Brazilian economy is
finally coming close to
the dream of creating
the "broad mass consumer
market" announced in
2002 as a campaign
promise by President
Luiz Inácio Lula da
Silva. But several
hurdles still lie ahead.
Gross domestic product
(GDP) grew 5.3 percent
in 2007 and nearly two
million formal sector
jobs were created.
However, full employment
remains a distant goal,
there are fears of a
resurgence of
inflationary pressure,
and there is a risk of a
repeat of cycles of
economic growth and
stagnation if
international market
conditions deteriorate.
In his year-end address
to the nation last week,
President Lula said
Brazil is experiencing a
"virtuous circle" in
which rising consumption
foments investment,
bolsters production and
drives the generation of
employment, thus leading
to an expansion of the
domestic market.
Holiday sales were the
highest in a decade. In
2007, Brazilians bought
some 2.45 million new
cars, trucks and buses,
nearly 30 percent more
than in 2006.
From January to
November, 1.93 million
jobs were created,
which, added to rising
wages and a steady
expansion of credit,
expanded people’s buying
power.
Social programmes like
the "bolsa familia",
which provides financial
aid to 11 million poor
families on condition
that their children stay
in school and be
vaccinated, are also
driving up consumption
of basic goods.
Brazil "is becoming a
country of many, and
will not rest until it
belongs to everyone,"
now that "it has
discovered how to grow
with social inclusion,"
said Lula.
The president is
confident that the
growth will continue
over the next few years
thanks to the heavy
investment projected by
the government’s
"accelerated growth
plan", mainly in the
areas of transportation,
energy, housing and
sanitation.
The Brazilian economy
thus seems to be moving
towards the goals set
out by Lula in his 2002
election campaign. But
first he yielded to the
requirements of the
financial market,
abandoned his radical
rhetoric, and accepted
the economic stability
policies of his
predecessors.
These included fiscal
austerity policies and
low inflation targets
set by a conservative
Central Bank which is
autonomous in practice.
Reconciling that
economic approach --
which Lula, a former
trade unionist, used to
criticise as "neoliberal"
-- with the broad
generation of
employment, production
incentives, and income
redistribution
programmes based on cash
transfers was the
strategy his government
hit upon to expand the
domestic market as a key
condition for growth.
However, in Lula’s first
few years in office, the
economy did not grow
much, and the growth
that did occur was
largely driven by
exports. Lula’s
reelection in 2006 was
chiefly attributed to
the government’s social
programmes and other
initiatives that
benefited the poor, as
well as the low
inflation rate.
The creation of four
million jobs in the
formal economy and of
mechanisms making small
bank loans available to
retirees, low-wage
earners, and others
previously unable to
obtain credit modified
the situation in the
last two years,
increasing consumption
rates among millions of
people in this country
of 188 million.
But Brazil remains far
from the full employment
dreamt of by many
economists, including
those who continue
supporting the
government and others
who now criticise it
from the left.
Unemployment stood at
8.2 percent in November,
the lowest rate since
2002, when the official
statistics agency
adopted a new
methodology to calculate
this figure -- which at
any rate is of little
significance in a
country where a large
proportion of the
population works in the
informal sector of the
economy and where there
are still a substantial
number of cases of
modern-day slave labour.
In any case, last year’s
economic growth is a
result of domestic
market demand, which
along with its nearly
180 billion dollars in
foreign currency
reserves, makes Brazil
less vulnerable to the
impact of possible
stagnation in the U.S.
economy and
international
turbulence.
But there is a risk of a
repeat of the short
bursts of growth
followed by slowdowns
which have been
occurring since the
1980s. The immediate
threat is inflation,
which was around 4.3
percent at year-end,
compared to 3.14 percent
in 2006.
Agricultural prices have
risen substantially in
the last few months, a
trend that may begin to
be seen in other
sectors, given the huge
increase in internal
demand, warned the
Central Bank. The Bank
may again raise its
basic interest rate --
which is already at
11.25 percent, one of
the highest in the world
-- to cool things off
and control inflationary
pressures.
The government faces the
immediate challenge of
adjusting its budget to
the loss of the
Provisional Contribution
on Financial Movements (CPMF),
the so-called "cheque
tax", which the Senate
decided two weeks ago
not to renew for the
next four years.
This represents a loss
of 22 billion dollars to
the government coffers.
Lula has promised to
compensate for this lost
income by means of
spending cuts, which
would affect public
investment in
infrastructure and,
therefore, economic
growth.
There are also internal
hurdles, such as the
lack of technically
qualified people to
attend to certain
sectors, and
insufficient electricity
generation to support a
lengthy period of
economic growth.
Large projects for power
plants, like the
hydroelectric and
nuclear stations which
are concentrated in the
Amazon jungle region,
take many years to build
and face criticism from
environmentalists, as do
thermoelectric stations
fuelled by coal or
natural gas.
Some economists are also
concerned about Brazil’s
premature
deindustrialisation, a
consequence of
overvaluing the national
currency. It is a
feature of the "Dutch
disease", according to
Luiz Carlos Bresser-Pereira,
former finance minister
in the 1980s and 1990s.
The large trade surplus
from agricultural and
mineral commodities, and
the influx of
speculative capital
stimulated by high
interest rates, without
neutralising measures,
causes overvaluation of
the real, which in turn
undermines the
competitiveness of
national industry,
resulting in lower
exports and an invasion
of cheaper imported
goods.
Brazil maintains a huge
trade surplus, of close
to 39 billion dollars in
2007, which was however
12 percent below the
2006 level.
The exchange rate had
its most serious impact
on the transformation
industry, whose trade
balance shrank 40
percent between January
and September 2007,
according to the
Institute of Studies for
Industrial Development (IEDI).
Initially, said Bresser-Pereira,
an overvalued local
currency increases the
buying power of workers,
and therefore
consumption of national
products, promoting
prosperity. But this is
temporary, as gradually
locally-made products
are displaced by
imported goods, he
noted. |
