Economy & Trade, Headlines, Latin America & the Caribbean

CHALLENGES 2007-2008: Brazil Seeks Formula for Continued Growth

Mario Osava

RIO DE JANEIRO, Jan 2 2008 (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.