January 10, 2012 7:13 pm
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A high-flyer now flags
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In pursuit of progress: Brazil’s President Dilma Rousseff, a tough economist known as a tropical Margaret Thatcher. Voters warm to her no-nonsense approach
In her year-end address, Dilma Rousseff struck the sort of optimistic note that Brazilians have become used to after nearly a decade of economic growth. “Nothing is better for a mother or a father of a family than to be able to say on Christmas Eve that in spite of its challenges, this year was good and the next will be even better,” the president told the 200m citizens of Latin America’s most populous nation. “The majority of Brazilians can say that of this new year.”
Ms Rousseff and other Brazilians certainly have much to celebrate. Once an economic problem child, Brazil is today more of an onlooker in the world’s financial crises than a participant. It is believed to have overtaken the UK last year as the world’s sixth-largest economy. On a personal level, Ms Rousseff is one of the country’s most popular presidents ever at this stage of her term.
Yet the upbeat televised address masks serious difficulties that Ms Rousseff and her Workers’ party-led ruling coalition must overcome this year. Brazil’s Asia-like growth rate of 7.5 per cent in 2010 slowed to less than half that level last year – even stalling on a quarterly basis in the three months to September – as the country’s historic enemy, inflation, staged a stubborn revival. Even Mexico, whose fortunes are dictated by the struggling US economy, is expected to have achieved faster gross domestic product growth than Brazil in 2011. On the political front, Ms Rousseff has endured a string of corruption scandals that have threatened to destabilise her unwieldy coalition.
This year, she will have to revive the economy and show that Brazil deserves its reputation as a high-growth member of the “Brics” club of large emerging markets that also includes Russia, India and China – or risk losing the confidence of investors. “The outlook is still quite constructive and the opportunities are there but I think slowly they are realising they have to work to make it happen,” Alberto Ramos, an economist with Goldman Sachs, says of the Brasília authorities. “Potential GDP growth is way too low.”
In tackling that task, Ms Rousseff has an array of the necessary attributes. A development economist and voracious reader with a bureaucrat’s eye for detail, she is known to be a tough taskmistress, unafraid publicly to humiliate officials or even ministers who turn up at meetings poorly prepared. It is an attitude that has earned her a reputation as a tropical Margaret Thatcher.
Although the first female president of Latin America’s emerging global power may lack the charisma of Luiz Inácio Lula da Silva, her wildly popular predecessor, voters seem to have warmed to her no-nonsense approach. “People identify in her a seriousness of purpose and a reserved style that is kind of a relief after the often very narcissistic and loud years of Lula,” says Paulo Sotero at the Woodrow Wilson International Center for Scholars in Washington.
These qualities helped her weather a string of corruption cases last year that would have destroyed other presidents. Her most senior minister, chief of staff Antonio Palocci, was the first to fall in an ethics scandal. He was followed by her agriculture, transport, tourism, sport and labour ministers who were accused of corruption. All vigorously denied the allegations. But in each case Ms Rousseff eventually dismissed the office holder, delighting a public used to seeing its politicians ride out such charges.
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Perhaps for this reason, the scandals seems to have helped rather than hindered her presidency. Her personal approval rating as president was 72 per cent at the end of last year and that of her government 56 per cent. “She is the right president at the right time,” says Christopher Garman, analyst at Eurasia Group, a political risk consultancy. He points to her appeal to a new middle class that wants politicians who focus more on public service delivery rather than infighting.
Sceptics warn, however, that Ms Rousseff will need to put an end to the corruption scandals this year, amid concerns that they are disruptive to a government whose legislative agenda is already crowded with slow-moving and contentious bills. These include the forestry code – an environmental law whose passage is crucial for the country’s agricultural industry, as well as significant pension, mining and oil royalty bills.
“Beyond cleaning up corruption, it is difficult to ascertain what the Rousseff government’s long-term strategy really is,” says João Augusto de Castro Neves, writing in The Brazilian Economy, a publication of the Getulio Vargas Foundation, a local academic institute. “The administration seems to have abandoned any impetus for major reforms and legislation overhaul.”
Perhaps the greatest challenge, though, will be to return the economy to higher levels of growth. During the third quarter, GDP contracted 0.04 per cent from the previous three months and grew only 2.1 per cent compared with a year earlier. For all of 2011, economists estimate growth at less than 3 per cent. The performance of important industries such as the automotive sector, which in 2010 overtook Germany as the world’s fourth biggest by unit sales, plunged in the third quarter. Others such as textiles and shoe manufacturing have been squeezed by soaring Chinese imports and the strength of the Brazilian real against the US dollar.
“When I go to trade shows in Paris, Milan or New York, people always ask me where I’m from,” says Geane Silva, manager of Cavage, a luxury shoe manufacturer in Novo Hamburgo in Rio Grande do Sul, the traditional heartland of Brazil’s shoe industry. “When I reply Brazil, they always say ‘wow, the market must be great over there’, but I tell them they have completely the wrong idea about Brazil. I don’t know where this idea came from that everything is wonderful here. It’s not.”
Economists argue that the rapid deceleration has exposed the structural limitations of Brazil’s economy. The fast growth of 2010 was mostly the result of fiscal stimulation to counter the effects of the 2008 financial crisis but that was carried over into 2010, an election year.
Ms Rousseff withdrew the stimulus last year and the central bank began raising interest rates to tackle rising prices. But inflation still ended 2011 at 6.5 per cent and the economy lost steam. “The sudden reversal ... raises doubts about Brazil’s underlying sources of growth and its ability to sustain an expansion such as the one in 2010,” Alfredo Coutiño at Moody’s Analytics writes in a recent report.
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The public has yet to feel the slowdown. Unemployment, at 5.2 per cent as of November, remains at record lows. The government is helping, with a 14 per cent rise in the minimum wage.
Most economists believe the slowdown is no more than cyclical, with the economy expected to grow about 3 per cent this year and slightly more in 2013. The question is whether the country can achieve higher growth rates than the 4 per cent or so it has averaged over the past decade, let alone regain the 2010 peak.
To do this, economists say Brazil has to make the “hard fixes” needed to improve its long-term competitiveness. Its tax system is notoriously burdensome and more spending is needed on education, training, research and development, and infrastructure. Investment, at about 19 per cent of gross domestic product, is well short of the country’s needs and of levels in China and India.
However, Marcos Troyjo, director of BricLab at Columbia University, argues that instead of focusing on international competitiveness, the Lula-Dilma administrations are quietly pursuing an updated version of the import substitution policies that former governments implemented between the 1950s and 1970s. The government is using a variety of measures to protect and encourage local production, including currency controls, higher taxes on imported goods (such as a 30 per cent tax increase on foreign-made cars last year) and stringent local content requirements, notably in the oil industry.
But this time the policy, which Mr Troyjo calls “import substitution industrialisation 2.0”, does not only benefit Brazilian companies – foreign ones that establish plants in Brazil are also eligible for the benefits. The project is being underwritten by the boom in the energy and agricultural sectors, particularly the promise of the country’s discovery of immense deepwater oil reserves that will come on stream in the next decade. Proponents of such policies point to the high volume of foreign direct investment pouring into Brazil last year – a record $60bn as of November, up 82 per cent on a year earlier – as evidence that external investors are buying into the policy.
“It is as if the promise of Brazil is going to be so huge, everything’s going to be so marvellous and wonderful, that all of the [investment] coming in will allow the government to not take the steps it has to in the short run,” says Mr Troyjo.
Ms Rousseff may not be a reformer but she has shown herself to be a pragmatist. Faced with difficulties overhauling state-run airports in time to host the soccer World Cup in 2014 and the Olympics two years later, she tendered the projects to the private sector. She is a long-time advocate of infrastructure investment and recognises the importance of controlling government spending.
But in a world in which the traditional US or European economic models are broken while Brazil is looking resilient, it will be hard for her government to push through painful reforms. Easier is to engage in hubris.
“We can overtake the large economies in the coming years, principally because Brazil continues to grow at an accelerated rate,” said Guido Mantega, finance minister, after a study last month estimated that the economy had surpassed the UK’s in size. He predicts an expansion of 5 per cent this year, well beyond most forecasts.
Márcio Gomes Pinto Garcia, associate professor of economics at the Pontifical Catholic University in Rio de Janeiro, offers a blunter prognosis: “I think we are still going to do well, although we will do much worse than we could be doing, unless we do the things we know we have to do.”
Amid pragmatic diplomacy, a steelier side emerges
An unusual map hangs on Antônio Patriota’s office in Brasília. On it, the southern hemisphere sits atop the subordinate northern nations – an illustration, says the foreign minister, of the country’s pragmatic “co-operative multipolarity”, which gives equal weight to all nations, writes John Paul Rathbone.
Sceptics may scoff. Yet Brazil took this world view long before the era of President Dilma Rousseff, who came to office a year ago, or Luiz Inácio Lula da Silva, her predecessor. Henry Kissinger, US secretary of state, wrote in the late 1970s: “The interest of Brazil in world affairs – [strategic arms limitation talks], the opening to China, detente, the Middle East – is the interest of serious men ... for they think they have a world role to play.”
How serious a role is hotly debated. Certainly, Brazil’s “rainbow” strategy has delivered dividends since developing economies began to outstrip the north following the 2008-09 financial crisis. It now has more embassies in Africa than does the UK. Commercial interests, led by domestic companies such as miner Vale, have rarely been far behind. At the same time, leadership of the UN peacekeeping force in Haiti has earned praise for a “peace and love” approach that has, more controversially, also embraced Cuba and Iran.
While there is little sign these policies will change much under Ms Rousseff, there might be subtle variations. Brasília now feels less need to thumb its nose at the US. “We don’t want to waste time in futile engagement over issues of minor relevance. The value of the US relationship is clearer under President Rousseff,” says a senior diplomat. An early love affair with China has cooled following industry’s complaints about cheap imports. Significantly, Iranian president Mahmoud Ahmadi-Nejad will not visit Brazil on his regional tour this week, as he did in 2009.
Meanwhile, at home, a steelier side is emerging. Brasília has led the creation of regional alliances – notably the union of South American nations, excluding the other regional power: Mexico.
Combined with pan-continental infrastructure projects, which will draw the rest of South America tighter into the country’s economic orbit, this has lead to calls, by some, of “yellow and green” imperialism. Mr Kissinger also foresaw this 40 years ago, when he observed, that among its neighbours, Brazil’s size and sense of greatness could make it more feared than loved.
Additional reporting by Samantha Pearson
Copyright The Financial Times Limited 2012.
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