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Of the four BRIC economies, Brazil has consistently underperformed in terms of real GDP growth. This is due to outstanding structural impediments, notably the need for an overhaul of the public sector. Without greater commitment to reform, Brazilian economic growth will continue to under-perform, constraining consumer markets and reducing investment opportunities.
The root cause of Brazil’s slow growth has been the inability of governments to implement structural reforms that would allow the economy to reach its full potential. The cost of this is borne by the private sector, in the form of high taxes and interest rates. This hinders both investment and consumption growth.
It is widely agreed that Brazil, Russia, China and India, four of the world’s largest emerging economies (BRICs), have massive growth potential:
The implications of this and the shift in demand from the developed to the developing world will be significant for businesses:
Being invested in these consumer markets will be of fundamental strategic importance to international companies, particularly as leading Western economies become less important to global demand.
However, the average growth of the BRICs is being held back by Brazil, which has consistently posted the lowest rate of real GDP growth:
Brazil’s weak performance is largely due to outstanding structural impediments that result in high interest and tax rates, which effectively block faster growth. Chief among these is a massively bloated public sector, in addition to an outmoded labour system and an overtaxed and overregulated business environment.
The root cause of Brazil’s consistently slow growth has been the inability of successive governments to implement structural reforms of the public sector (pension and labour reform) that would enable the economy to reach its full potential.
The cost of this failure is borne almost exclusively by the private business sector and Brazilian consumers, in the form of a high tax burden and high interest rates. This hinders both investment and consumption growth:
High public spending also has the effect of crowding out much needed capital investment:
A prolonged dearth of capital investment has left Brazil with a crumbling infrastructure, meaning that it has not been able to fully leverage the recent commodities boom to achieve stronger growth.
In the absence of greater market liberalisation, Brazil will continue to grow below the rate needed to alleviate poverty. Moving forward, this could see Brazil losing global market share not only to the other BRICs but also other rapidly expanding Asian and Eastern European markets.
Despite sluggish growth, Brazilian domestic demand has rebounded strongly since 2003, thanks to a period of macroeconomic stability, bolstered by favourable external conditions and successful new government policies to redistribute income:
However, this is not sustainable without faster and more diversified growth, which would enable Brazil to wean itself off its reliance on commodity exports (accounting for 40% of the total) and avoid another boom-bust scenario once the current commodity run ends. There is an urgent need for the government to facilitate this by enabling the private sector to invest and expand.
The government has begun to implement reforms:
Unfortunately, there is little political appetite for more radical measures such as pension and labour reform. Until these are tackled, Brazil’s structurally high expenditure burden will remain entrenched, and with that the need for above average tax and interest rates.