China Research

In 2016, Brazil has been affected by serious worries again. Last year, then president Dilma Rousseff was kicked out of office. GDP shrank by 3.6 percent, after a decline by 3.8 percent in 2015 – indeed a sharp recession. The annual budget deficit amounted to 9 percent of GDP. The need of major structural improvements became therefore very urgent.

For this reason, Rousseff’s conservative successor Michel Temer launched an economic reform programme but is now obviously confronted with major obstacles – obstacles that are directly tied to the president himself, the social consequences of the implemented and planned fiscal austerity measures (spending limit in real terms in the forthcoming two decades), and – above all – his suspected involvement in a dramatic corruption scandal. Bribery allegations are always serious.

Also the “timing” of Brazil’s new crisis is not encouraging since Brazil these days most probably was/is about to leave its long-lasting recession. In the past few weeks, a slight improvement of confidence in the future could be noted again. In vain?

To give an answer to this question urges for more political clarification and details we still do not know anything about. Here we get to another example of the intensifying link between politics and macroeconomic developments. Thus, it is crucial that economists/financial analysts are willing to improve their understanding of political events and trends substantially.

Exactly one year ago – before the impeachment against then president Dilma Rousseff – I wrote the following lines on this page:”… Brazil remains unable to achieve sustained good economic growth…It is really an up-and-down economy…This distorting phenomenon will not be wiped out before Brazil really can manage far-reaching and continuous reforms regarding a broad and good human capital formation, better institutions and a fairer distribution of income – accompanied by more effective and future-oriented political leaders all over the country…”.

Also now – before a possible impeachment against Rousseff’s successor, the unpopular Michel Temer – these lines are applicable. This will be the case as long as Brazil’s political leaders neglect the obvious correlation between well-working institutions and sustained economic growth. They should try to understand and apply the conclusions of Douglass North, Daron Acemoglu, and other institutional economists. According to North, institutional research also includes tradition and habits, both good ones and bad ones. Corruption can hereby serve as very important example for bad institutional conditions.

Unfortunately, the applied question remains in place: Will Brazil ever learn?

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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10-15 years ago, many analysts were hoping that Brazil finally was about to establish itself on the right track for more sustainability of economic growth.

Since 2001, the so-called BRIC markets (Brazil, Russia, India, China) received increasing attention by (international) investors, mainly based on good growth expectations for all four countries – despite the fact that they clearly had different fundamental preconditions. In the past few years, however, Brazil’s economy was more and more disappointing.

Having dealt with Brazil for quite some years, I had my doubts about Brazil ‘s economic growth prospects already around 2005 or so, i. e. during the latter part of the first Lula regime which altogether with the second term had a number of promising years between 2003 and 2010 all the same.

Unfortunately, Lula’s successor Dilma Rousseff never got on the right track with all necessary reforms. Real structural progress was not noted in the first 5 1/2 years of her presidency which in the past two years was determined by power conservation without major future-oriented changes, accompanied by a GDP decline of 8 percent in the past 24 months (however, also caused by declining global commodity prices).

No wonder that markets reacted positively when Rousseff recently was suspended from office the other day, now facing an impeachment. Brazil’s currently acting president Michel Temer on the other hand seems to be quite impopular already now and hardly able to win direct presidential elections, particularly if he really will implement tough measures against Brazil’s rapidly rising government debt. Sensitive areas such as labor markets, social benefits and pensions could be hit by possibly coming austerity measures.

Sorry to say: my long-time lasting experience has been confirmed again: Brazil remains unable to achieve sustained good economic growth. It is really an “up- and-down economy” – with variable periods of ups and downs.

This distorting phenomenon will not be wiped out before Brazil really can manage far-reaching and continuous reforms regarding a broad and good human capital formation, better institutions and a fairer distribution of income – accompanied by much more effective and future-oriented political leaders all over the country.

This is what both experience and economic research tells us.

In my early days as an economist, Brazil was often introduced as a country of the future. It still is! Forever?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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