Brazil’s economy is sputtering. Two years ago it was one of the fastest growing in the world. This year, GDP growth will likely be barely 1%. A scattershot of measures from an increasingly interventionist government to stimulate growth is stoking inflation more than output. Third quarter GDP growth, at 0.6% quarter-on-quarter, was well below expectations while prices are rising at their fastest since May at an annualized rate of 5.8%.
Like those of its fellow Brics, Brazil’s economy is being buffeted by the strong headwinds of an uncertain global economy. But the country has made additional problems for itself. It needs to boost investment to overcome bottlenecks in infrastructure, loosen rigidities in its labor markets to raise productivity, and reform a burdensome and complex tax system.
This week the government said it was seeking private investment as part of a $9 billion plan to upgrade two of its international airport and hundreds of regional airports ahead of the 2014 FIFA World Cup and the Olympic Games two years later. Similar private investment has been sought for the country’s creaking railways, roads and seaports.
Yet private investment in Brazil has been falling for five consecutive quarters. Beyond the structural disincentives, there is growing uncertainty among investors about the frenetic, seemingly reactive and unsystematic range of government stimulus measures, and their uneven and often contentious implementation, from fuel subsidy cuts to tax revenue transfers to states.
In addition, the rial is being depreciated to make exports more competitive (and, more problematically, the capital imports Brazil needs more expensive), but in the process foreign exchange policy appears to be moving in the direction of creating managed peg within a band. Similarly, there are signs of putative protectionism, not as overt as Argentina’s, but increasing local-content requirements for manufacturers are raising warning flags for investors.
Most corrosively of all, the institutions that the Cardoso government built up in the 1990s to create a stable environment for business by de-politicizing them are starting to be eroded. Political appointments are again being made to the head of regulatory agencies such as ANEEL, ANP and ANAC, which cover the electricity, oil and gas, and aviation sectors respectively, to state-owned companies such as oil giant Petrobras and utility Eletrobras, and to public sector financial institutions such as Banco do Brasil, all of which for the past decade have been run by technocrats and professional managers.
President Dilma Rousseff may recognize the danger. The bidding process for the airport investment being sought this week has been redesigned from the last round, in which experienced international airport operators were passed over for local contractors. Successful bidders will this time have to show a track record of managing airports handling at least 35 million passengers a year.
Rousseff said after announcing the latest airport investment bids that Brazil was ‘improving the business environment.” But her critics see her government as putting the country’s regulatory agencies, state-owned companies and public-sector financial institutions into in the ring, not just holding it when it comes to creating a favorable environment for investment. They see it as a modern echo of Brazil’s 1970s’ model of state capitalism when the country was under military rule.
Brazil has come a long way politically and economically since then. That Rousseff is even seeking public-private partnerships for transport infrastructure is a reversal of the long-standing policy of her Workers’ Party and of her predecessor and mentor, Luiz Incio Lula da Silva, to keep such private investment at arms length. Foreign investment remains high, despite all. Brazil has attracted some $60 billion-worth this year.
That, though, may be for a lack of more attractive opportunities elsewhere. If Brazil wishes to restore its growth to the rates to be expected of a Bric, it do well to remember the advice of the late Citibank chief executive Walter Wriston, “capital goes where it is welcome, but stays where it is well treated”.