Brazil’s Growth Imperative

SÃO PAULO – Brazil has lost its swagger. Growth estimates for this year put Latin America’s largest economy above only Venezuela and El Salvador in the region, and the outlook for next year is not much better. Brazil’s currency, the real, has fallen to its lowest level against the US dollar in more than four years, compelling the government to pump billions of dollars into the foreign-exchange futures market and raise interest rates to deter capital outflows – just a few years after imposing a new tax to deter inflows. So what is really happening in Brazil, and what can be done to secure a prosperous future?

To be sure, Brazil has done remarkably well on some measures of economic performance over the past decade. For example, its extensive social programs, combined with past GDP growth, have improved the country’s income distribution markedly.

But, over the same period, annual GDP growth has averaged a modest 3.5%, and productivity growth has slipped into negative territory. Brazil’s labor productivity is one-fifth that of the United States and lower than that of Mexico and Chile. As a result, Brazil may not be as well positioned to take advantage of its demographic dividend (when a rising share of working-age people creates new opportunities for economic growth) as its leaders believe.

One factor limiting Brazil’s prospects is its low productivity, which can be explained partly by an anemic investment rate of 18% of GDP – low for Latin America and paltry compared to East Asia. Insufficient investment has meant inadequate infrastructure. Thus, despite massive spending on stadiums for next year’s World Cup, logistics costs remain high, sapping Brazil’s competitiveness and limiting its growth prospects. Meanwhile, corruption scandals and widespread frustration with the low quality of public services are fueling social discontent and reducing investor confidence.