ECONOMY-BRAZIL: Gradual Growth, but at What Price?

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 25 2003 (IPS) - The Brazilian economy could begin to see growth by the end of the year, with a gradual acceleration that might achieve a good pace in 2005, or perhaps be interrupted early on by the imbalance in foreign accounts, depending on which of the divergent forecasts one chooses to believe.

The most optimistic prediction is the one touted by Brazilian officials and the economists who support the economic policy of President Luiz Inácio Lula da Silva, one of sharp reductions in government spending and high interests rates aimed at containing inflation.

The critics of this approach – which goes beyond even the goals and recommendations that the International Monetary Fund established for Brazil in 2002 under the previous administration of Fernando Henrique Cardoso – fear that their long-held objective of sustained economic growth will only be frustrated.

Brazil needs the economy to grow five percent a year “at minimum”, and for many years, if the country is going to tackle problems like unemployment and poverty, Antonio Carlos Macedo e Silva, professor at the State University of Campinas, near Sao Paulo, told IPS.

The prediction with broadest support is that gross domestic product (GDP) growth this year will be less than 1.5 percent, recovering from a recession in the first half of the year, and unlikely to surpass three percent growth in 2004.

The Central Bank decided Wednesday to cut the basic interest rate from 24.5 to 22 percent, as a means to allow Brazilians to finish out the year “a little better”, but Macedo says this is “insufficient for assuring a virtuous and sustainable growth process.”

In the Brazilian economy, “strangled by its need for foreign financing,” low-level growth increases the need for imports and restricts exports, which tips the trade balance in a negative direction and forces a further contraction of the domestic market, he explained.

For the same reason, any turbulence or alteration of the global economy could trigger a crisis in Brazil, with capital flight or a fall in foreign credits for companies operating here, as has occurred several times in the past six years, noted the economist.

In order to deactivate that “low growth trap” a trade surplus is essential, said Macedo, but it requires stimulus for exports and the substitution of imports. And the government took just the opposite action this year, with a policy that increased the exchange rate of the Brazilian currency, the real, he complains.

Carlos Thadeu de Freitas, former president of the Central Bank and current adviser to the National Commerce Confederation and professor in Rio de Janeiro, says Brazil’s GDP could grow “five percent or more” beginning in 2005, after a “recovery period” in 2004.

In his view, public debt thwarts growth, so the Lula administration’s fiscal effort to achieve a primary surplus of 4.25 percent GDP is justified.

To reach that goal, he says, Brazil must keep public spending far below revenues, not counting interest on the debt, which is currently the destination of a big portion of government expenditures.

The idea is to prevent an increase in state debt in relation to the GDP in order to maintain the international finance market’s confidence in Brazil’s solvency. “Sustainable growth, in a healthy cycle, will only be possible with the reduction of the net public debt,” Freitas said in an IPS interview.

Social security reform, already backed by the Chamber of Deputies and with final approval by the Senate considered a done deal, will not immediately improve the situation of the Brazilian treasury.

But it does point to a future reduction of the debt, “improving the perception of the state’s solvency,” which will contribute to economic recovery, said the former Central Bank chief.

Achieving the 4.25-percent fiscal goal and reducing inflation, by increasing interest rates, will allow the economy to recover, he says.

As of year-end, low inflation will stimulate economic activity and consumption more than a cut in interest rates will, commented Freitas.

But there will no quick recovery because high inflation – 15 percent accumulated over the last 12 months – plus high unemployment cut into the population’s income, and that can only be recuperated slowly, he added.

Current inflation indicates a tendency of at least seven percent for the next 12 months, say experts. Unemployment rose from 10.5 percent in December to an unprecedented 13 percent in June, falling slightly to 12.8 percent in July, according to the Brazilian Institute of Geography and Statistics (IBGE).

The average salary for workers in Brazil’s metropolitan areas last month was 833.5 reais (approximately 278 dollars), 16.4 percent less than in July 2002, reflecting continued high rates of unemployment and inflation, say IBGE studies.

With this panorama, economist Fernando Cardim, professor at the Federal University of Rio de Janeiro, told IPS just the opposite of what some of his colleagues said: renewed economic growth will require more government spending.

Economic growth demands investment in businesses, but nobody is willing to boost production when demand is limited. Government action is needed to get beyond this stagnation, which is unlikely given the insistence on tight fiscal purse strings, he said.