In the past three years, Dilma’s Brazil has been rudely awakened from a nice dream. Government and society have had to face up to a hard reality: contrary to what they assumed, Brazil hasn’t come up with a miraculous formula that combines high growth with social inclusion.
The country doesn’t have the pillars of a new development model. Given the low rate of domestic saving, Brazil continues to depend on a big influx of financial capital and also foreign direct investment (FDI). That’s why “tapering” (the reduction of monetary stimulus measures in the USA) and renewed expansion in the OECD (Organization for Economic Cooperation and Development) countries cause apprehension in the Brazilian government. Without the certainty of automatic and inevitable growth – an illusion nurtured by the senior leadership of the Lula-Dilma governments during the period when the country was the “market darling”, and only got hit by a “small wave” in the 2008 crisis – Brazil has started to get off its high horse. And so Dilma, who is notably uninterested in international affairs, chose to go to Davos.
Many of the factors that gave rise to the previous enthusiasm have lost their shine. The prospects for biofuels and “pre-salt” oil are not as encouraging any more. Governance and planning in the Brazilian energy sector are drifting. The effects of credit and consumption expansion don’t have the same multiplier effect. China’s appetite for commodities in which we have comparative advantages no longer seems so gargantuan. Additionally, because of Brazil’s well-known logistical problems, the Chinese have been looking to diversify their range of suppliers.
So, there were four key points of interest regarding what the Brazilian delegation had to say:
1) Protests. This is a fact of life in a democracy, and Dilma stressed that strongly in her speech. There remains a worry, however, about what could happen during the World Cup.
2) Change in the international liquidity situation. Dilma also mentioned this and underlined Brazil’s more than US$ 370 billion of currency reserves. Much of what is expected in terms of monetary policy loosening in the USA in the next few months has already been priced and incorporated into the current level of the exchange rate in Brazil (and the depreciation of the past few days reflects the collateral effects of what’s happening in Argentina).
3) Management of economic policy. Brazil will for a long time suffer the effects of the combination of the departure from the [policy] “tripod” [fiscal discipline, inflation targeting, and flexible exchange rate], the micro-management of concessions, expensive mistakes in industrial policy (those “national champions”), as well as the fiscal burden of incentives for specific sectors and the vast payroll. Here, the numbers don’t agree with Dilma’s speech. Moreover, from the trade point of view, the country doesn’t have a bloc. Mercosur has become a platform for political like-mindedness, and Brazil hasn’t negotiated access to the world’s main consumer markets. Its emphasis on multilateral negotiations within the scope of the World Trade Organization (WTO) has been shown up as naïve, given that body’s ineffectiveness and slowness. All these errors of foreign policy in the economic sphere are today having a noticeable negative impact on Brazil’s balance of payments.
4) Structural reforms. This was the most disappointing part of Dilma’s speech. She didn’t say anything about tax, labor or social security reform. In terms of improving the business environment, Dilma merely announced the setting up of a “Simple Company” website, which envisages a reduction to 5 days in the average time that it takes to set up a business. Although important, this kind of measure favors mostly small companies. It’s not of much interest to the kind of businessperson/investor who goes to Davos. These people suffer the direct and indirect costs of Brazil’s byzantine labor and tax legislation. They have to hire veritable armies of accountants and lawyers, instead of people dedicated to their business’s actual purpose. Even when he mentioned the need for “changes” in a panel discussion about the BRICs, the Finance Minister Guido Mantega went on to talk more in conceptual terms than about a plan of work to be carried out in the next few months. Perhaps he was trying to give some clues about what the direction of a second Dilma government would be, but the likelihood of that process beginning this year, especially given the electoral factors, is zero.
The salient fact about Brazil’s current place in the world is that the country is saving and investing less than 22 percent of GDP – the Latin American average. That, for its part, is much lower than the investment percentage in Southeast Asia. Brazil will not be able to invest more without breaking various eggs in the areas of labor, government spending and social security.
Dilma doesn’t seem to have the taste or even the vocation to lead reforms. Her coalition presidentialism aims to perpetuate her own stay in the Planalto [presidential palace] more than being directed at the institutional modernization of the country. Thus, Dilma’s Brazil used Davos essentially to give an achievements report, voice a commitment to some macroeconomic orthodoxy, list mobile frontiers of consumption, and underline the continuation of the concessions program.
At the most, her trip to Davos shows that Dilma and her team have been persuaded that Brazil also needs to be sold, and not simply bought. They are realizing that the global scenario has changed. And it’s not favorable to the “de-globalizing” choices made by the country in the past 11 years in terms of trade and investment.
Thus, having lived in the safe ivory tower of her convictions about the country’s supposedly utopian trajectory, Dilma made her trip into something of an “In Search of Lost Time.” It didn’t, however, represent a watershed. It didn’t put forward anything about the essential structural reform agenda.
Rather than disappointment or enthusiasm, the response of “Davos man” to the Brazilian delegation’s journey through the Alps is probably merely to hit the “pause” button. In terms of building the future, Brazil is on hold until January 1, 2015.
Marcos Troyjo, an economist and social scientist, is a professor at Columbia University Email: firstname.lastname@example.org