As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on Brazil, check back throughout this week for entries from the other countries.
By Arminio Fraga
Brazil is thought to be the most western of the Brics—a democracy full of life, an open society, porous to global fads and tastes.
One feature that supports this view is that Brazil’s consumer seems to be totally American, and I mean this neither as an insult nor as compliment, even after the global economic mess we are still digesting. Brazilian households like to buy the newest gadget and prefer to spend on items that will enhance their short-term wellbeing rather than save for a rainy day. This partly explains Brazil’s low saving rate – which has fluctuated around 17 per cent of GDP over the last decade, a number that contrasts sharply with China’s 45-50 per cent.
This massive discrepancy is also driven by the difference between the social safety nets in the two nations: Brazil’s being extensive in coverage (universal health care, education and social security) and extravagant (early retirement with full pay, for example), whereas China’s is very modest.
Recently a good bit of the growth in consumption has been based on the rapid growth in consumer borrowing. The ratio of household debt-to-income has risen from 18 per cent in the beginning of 2005 to 35 per cent as of the end of last year. This expansion has been driven by lower interest rates, a more stable and predictable economy and legal and regulatory improvements in credit markets (that have led to lower credit spreads). Going forward, this source of expansion may have reached a temporary limit because the debt service burden on households (amortisation plus interest) is now a quarter of their income, a high number. Further accelerated consumption growth may still happen, but it will require faster income growth, lower interest rates and longer debt maturities.
Another key driver of demand growth has been the growth in the income of the poorest strata of the population. Over the past six years, the annual growth in the income of the bottom 30 per cent of the population has exceeded 9 per cent, while the top 30 per cent has grown at around half that rate. The China-like growth we see at the bottom is certainly welcome as Brazil’s distribution of income is one of the most skewed in the world. With additional effort on the education front, this pleasant simultaneous growth cum distribution pattern may go on for a while. This is likely to support the further deepening of political stability in Brazil, an important feature that tends to create a virtuous circle with economic prosperity.
So far I have been discussing some of the drivers of consumption growth in Brazil. Consumption is of course crucial to growth and recent developments have put it on a prominent position on the Brazilian map. But it is not a sufficient condition for sustained growth, far from it. Brazil needs to save and invest more. For the last 15 years, investment has averaged a very low 16.5 per cent of GDP. Recently, on the back of the recovery it has gone up a bit, to around 19 per cent of GDP. This increase has been largely financed by the capital markets and by expanded long-term lending from the National Development Bank (BNDES). Still, if Brazil is to move its growth rate up to sustainable 5-7 per cent rate it must invest more, especially on infrastructure, and do better on education.
Here a contrast with Chile’s experience is interesting. After General Pinochet left there was great fear that a return to democracy would bring back populism and macroeconomic instability. When the social democrats took over and did extremely well in managing the economy, the ratio of investment to GDP quickly jumped up by some 5 percentage points. Since then Chile has been the darling of Latin America.
In Brazil, similar fears concerning a Labor Party win were forever thought to be a key factor in explaining the modest rate of investment and growth. Once President Lula took office and quickly and credibly demonstrated that he intended to defend the hard-earned macro stability, expectations calmed down and a similar jump in the investment rate was thought to be on its way. But it never happened, for a variety of reasons including the government’s stretched finances, the high interest rates the follow from that, and a still inadequate regulatory framework in some key areas.
Despite this shortcoming, Brazil has managed to take its growth rate up to a 4-5 per cent range in the last few years, thanks to a few years of global boom and to a very efficient private sector. But the strains on the decaying infrastructure are visible to a naked eye, and are likely to frustrate the highly optimistic expectations now prevailing in financial markets unless something is done soon.
Brazil is now going into an election campaign that could provide a sense of where things are likely to go. Many over here feel that the recent crisis provided a blank cheque for a return to the old model of a large presence of the state in the economy. That the state must play a key role no one disagrees. But our state is already quite large. The overall tax burden is approaching 38 per cent of GDP, a very high number for a middle-income country.
If a jump up in the rate of growth is to take place some difficult political decisions are going to have to be made, including a switch in government expenditures towards investment. But that alone will not get the job done, so private sector investment and saving will have to play a key role. This will require a more credible and pragmatic approach to regulation and coordination.
Arminio Fraga is the chairman of Gávea Investimentos and BMF-Bovespa and former president of the Central Bank of Brazil.
