The Economist, 12/23/2012
Following dismal GDP figures for the third quarter, driven by the fifth consecutive contraction in investment, the question of what is hampering investment in Brazil has come to the forefront of the policy debate as its performance will be one of the key aspects shaping the country’s economic outlook in 2013 and beyond. The Economist Intelligence Unit has recently revised down its estimates for GDP growth for 2012 (to 1%) and 2013 (to 3.5%), on the back of Brazil’s lacklustre performance so far this year and a weaker outlook for both private and public investment.
There are several theories about the reasons for the fall in private investment in Brazil. Prominent among these are the structural problems facing the productive sector, such as the lack of infrastructure; the high burden of the tax system; costly and relatively unskilled labour, coupled with rigid labour legislation; and an overvalued exchange rate in recent years (although this has eased somewhat since March), with imported goods supplying a greater share of consumer demand than locally produced goods. There is also a growing view that the government’s hyperactivity—it has implemented a spate of apparently unrelated stimulus measures since mid-2011 (many of which have been announced shortly after the publication of disappointing data)—is increasing uncertainty and causing companies to hold off on their investment plans. Another factor is that Brazil’s macroeconomic policy mix is changing, and this is also creating uncertainty. Despite the authorities’ assertions to the contrary, there is mounting evidence that the exchange-rate regime is moving to a quasi-fix with an adjustable band, rather than the floating regime that has been pursued for over a decade. Uncertainty over exchange-rate policy is problematic as many companies need to import capital goods in order to invest. Last but not least, there are the concerns over the government’s protectionist stance, including the adoption of local-content requirements that affect major exporters such as Embraer, Brazil’s aviation company, which needs to import most of its production inputs.
One often overlooked issue in this list of factors that may have contributed to the recent fall in the investment rate (to below 19% of GDP, from 22% before the 2008 Lehman crisis) is the extent to which Brazil’s institutions have been eroded in the last few years. During the 1990s, the government of Fernando Henrique Cardoso (1995-2002) promoted a major overhaul of the economy, not only laying the foundations for macroeconomic stability, but also creating the institutional framework to sustain a favourable business environment following the ambitious privatisation programme undertaken at the time. The creation of regulatory agencies, staffed by technical rather than political appointees, was an important achievement. The appointment of managers and directors with extensive private-sector experience to head major public-sector financial institutions, such as Banco do Brasil, was also a step forward, following Brazil’s previous record of highly politicised public financing decisions, which had led to a series of losses and recapitalisations of the public banks.