What’s Eating Brazil’s Rapid Growth Rates?

A demonstrator tries to stop the riot police during one of many protests around Brazil's major cities in Rio de Janeiro June 20, 2013. Tens of thousands of demonstrators marched through the streets of Brazil's biggest cities on Thursday in a growing protest that is tapping into widespread anger at poor public services, police violence and government corruption. REUTERS/Sergio Moraes

A demonstrator tries to stop the riot police during one of many protests around Brazil’s major cities in Rio de Janeiro June 20, 2013. Tens of thousands of demonstrators marched through the streets of Brazil’s biggest cities on Thursday in a growing protest that is tapping into widespread anger at poor public services, police violence and government corruption. REUTERS/Sergio Moraes

Only a few years ago Brazil was on the rise. Both a BRIC country and economic the superstar of Latin America, Brazil enjoyed fantastic growth rates as it rode the wave of a commodity boom. With a young population and many untapped growth opportunities, Brazil seemed poised for continued growth and prosperity.

Unfortunately, even the commodity king of Latin America is not immune to an economic malaise. In contrast to its impressive 7.5% growth rate in 2010, Brazil puttered along at a meager 0.9% in 2012. While growth rates are forecast to rise in 2014, social unrest abounds. Just last year, protesters took to the streets in response to hikes on bus fares and corruption scandals in addition to a general outrage for exuberant government spending on stadiums for the upcoming World Cup and Summer Olympics.

The protestors’ indignation is understandable but would be better directed at failed policies and excessive government spending than at publicized scandals. A whopping 11.3% of Brazil’s GDP is spent on public pension plans, comparable to OECD European nations with much older populations. Its public spending, which amounts to 38.5% of GDP, rivals that of many developed countries.

Opponents of austerity will counter that the anti-poverty policies embraced by former President Luiz Inácio Lula da Silva, or “Lula” for short, lifted nearly 25 million Brazilians out of poverty. Now close to half of Brazil’s population lives in the middle class, and while real income has increased by only 20% for the 10% wealthiest Brazilians, its poorest 10% have seen their real wages double in the last decade. So long as Brazil finds other paths to economic growth, such expensive state intervention can be sustained.

Brazil’s best shot at stimulating growth rates lies in meaningful reform. A disproportionate amount of Brazil’s education spending is lavished upon institutions of higher learning. More of this money should be spent on primary and secondary schooling, and less of it should go to teacher’s pensions, which are unsustainably high.

Reallocation of money from its inflated pension system to investments in infrastructure could pay enormous dividends to Brazil’s economy. While Brazil’s agricultural and commodity production is globally competitive, it is stymied by exorbitant transportation costs that eat up as much as 22% of the costs of production. Improved roads and developed transportation systems could work to alleviate this inefficiency.

Policy makers should also work to streamline its onerous tax code and customs procedures. Doing so would sharply curtail exportation and production costs, in turn bringing Brazilian products to a higher echelon of competitiveness. At the moment, manufacturing costs are continuing to rise while technological advances in production are stagnant. A concerted effort by policy makers to cut manufacturing costs does not need to be a priority, but should be on the backburner as a way of diversifying Brazil’s national income.

These barriers to economic growth are easily remedied. If President Dilma Rousseff or her successors adequately respond with sound economic policies in the coming decade, Brazil will be well on its way to solidifying its place as a world economic power. With a high national birth rate, copious amounts of land and resources, and countless opportunities for reform and infrastructure development, Brazil’s prospects are excellent. In the end, it is not a question of whether Brazil’s economy will continue to grow, but whether its government will allow it to.

Deciphering The Third Plenum Report

The Key to Addressing Reforms When You Have No Intention of Implementation

18th National Congress of the Communist Party of China

18th National Congress of the Communist Party of China. By 东方 [Public domain], via Wikimedia Commons

The hardest thing about running an authoritarian regime is assuaging the population’s desire for reform without actually doing so. It’s a tricky tightrope act that only the most agile of leaders can master. China’s recent Third Plenum of the 18th Party Congress captured this balancing act in action. Unlike the Third Plenum of the 11th Congress in which Deng Xiaoping clearly articulated a set of free-market, economic reforms, this most recent meeting was a charade. The document released after their three-day meeting, known as the Plenum Communiqué, contained some legitimate calls for change. The only problem was that even in its original language the document is incomprehensible; it lacks coherent solutions and legitimate policy reforms. A drug addict with a monkey stenographer might have been able to pound out a piece of similar – or perhaps greater – substance.

To be fair, identifying necessary reforms in a country plagued by environmental issues, social and economic inequality, and political malfeasance is no easy feat. If Xi Jinping, Li Keqiang and their band of merry men released a statement with too many calls for reform and policy changes, the bar would be set unreasonably high. At the same time, if in the Third Plenum they called for insufficient changes there would be tremendous public outrage that might precipitate political activism.

In this case, being vague is the best approach. If China’s leaders prescribed legitimate reforms for their economy and political systems, just think of the instability it might prompt. The millions of migrant workers who are denied health insurance, educational opportunities, and economic freedom would get overexcited. Calls to curtail environmental pollution would give the millions of Chinese who live in cities with toxic PM 2.5 levels such a sense of relief that they might pass out on the streets during rush hour, dying of asphyxiation from exhaust fumes. Discussing democratization or even more transparency in government might distract Foxconn workers from assembling iPads. It is clear that rushing into reforms without proper thought and consideration is a bad decision for a country still in the early phases of development.

Engaging In Premature Reform is Dangerous

For now the safest way to engage in reform is by avoiding said reform at all costs. They say the longer you wait for policy changes the better they feel. The right time for reform implementation, however, remains unclear. One can’t simply engage in pre-hegemonic reform. At the moment, the party is simply waiting for that special generation to come along. The wait of course will be worth it.
China’s 18th Party Congress can’t be upfront about the fact that reforms may be only attainable in the far-away future. China’s 1.3 billion people are bursting with all kinds of desires to experiment politically, economically and socially. If China was too upfront about its intention to postpone reform, there might be a nasty schism and nationwide protests. And it isn’t that the Communist Party doesn’t want to reform with its people. It just doesn’t feel ready.

How to Lead on Your Population in the Most Effective Way

Sure you can’t engage in it, but you definitely can talk about it. Even just saying the word over and over can excite your countrymen enough without succumbing to their desires. It’s for this reason that in the Plenum Communiqué there was a lot of mention of reform and other words that are sure to excite its disgruntled, frustrated citizens. According to a press release by the Beijing News, no prior Third Plenum report had as many uses of the word ‘reform’.

The Plenum stressed that to comprehensively deepen reform, we must hold high the magnificent banner of Socialism with Chinese characteristics, take Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the important ‘Three Represents’ thought and the scientific development view as guidance, persist in beliefs, concentrate a consensus, comprehensively plan matters, move forward in a coordinated manner, persist in the reform orientation of the Socialism market economy, make stimulating social fairness and justice, and enhancing the people’s welfare into starting points and stopover points, further liberate thoughts, liberate and develop social productive forces, liberate and strengthen social vitality, firmly do away with systemic and mechanistic abuses in all areas, and strive to open up an even broader prospect for the undertaking of Socialism with Chinese characteristics.

Chinese readers must have gotten excited just reading this. “Persist…”, “concentrate…”, “stimulate…” This proactive language would leave any reform-deprived person brimming with optimism, if only for a while. One Chinese blogger wrote, “In the end it’s not important whether the document is consistent from beginning to end, because everyone can find what they need in it.” So long as Chinese citizens are satisfied with their government toying with reform, the Communist Party may be able to kick the can down the road and refrain from true policy changes for some time. Sure, citizens’ reform frustrations will continue, but at least everyone can be assured that no one is rushing into any big decisions.