Contrary to official propaganda, Brazil’s economy is still vulnerable

Brazil, as part of the BRICs (Brazil, Russia, India, and China), has in the last years been seen as a “hope” for the global economy. These “emerging” economies would supposedly be the new motor for the world economy as the old powers, Europe and the US, slow down.

Despite the Brazilian economy also being hit by the world economic crisis in 2008, the prevailing logic was that with the intervention of the Lula and Dilma governments (both from the Workers Party – PT), the worst case scenario was avoided and a fast rate of economic growth would return to the country. After a fall in GDP of 0.3 percent in 2009, there was a recovery in 2010, with 7.5 percent growth.

The PT and Lula exploited this fact heavily during the elections of 2010 to attempt to sell the idea that the country had changed, that the policies of the government were correct, and that Brazil was now an emerging world power – the sixth largest economy on the planet. But despite some advances, the weaknesses of the Brazilian economy are revealing themselves, and the effects of the crisis are becoming more evident.

Growth for whom?

It is important to remember the limits of the “reduction of poverty” that Brazilian leaders are boasting of.

It is true that there has been some improvement for the poorest layers of people during recent years: the raising of the minimum wage has increased income for the lowest-paid workers and the “family allowance” has had some effect for the poorest families.

However, what took place was primarily redistribution of income from one section of workers to another, as many workers with higher salaries, mainly public servants, have lost out. Looking at the balance of wealth between labour and capital, there has been no redistribution. In fact, the opposite have taken place. Profits have broken all records and the richest become even richer, with a Brazilian billionaire, Eike Batista, now ranking among the ten richest people in the world. In 2011, Brazil was ranked number one among the larger economies in terms of the relative growth in the number of millionaires (as measured in US dollars).

The basis of Brazil’s growth the past decade

Brazilian industry passed through decades of weak growth. From 1981 to 2003, the average yearly growth was only 1.4 percent. From 2004 to 2010, the growth leaped to 5 percent per year. The principal motor behind this was the growth of exports of primary products, mainly to China.

In ten years (2001-2011) the trade volume between Brazil and China grew from US$3.2 billion to US$77.1 billion. But 85 percent of the exports to China have been primary products, mainly iron ore, soy, oil and cellulose.

This has taken place at the expense of other aspects of industry. The manufacturing industry’s share of GDP in 2011, for instance, was only 14.6 percent, returning to the level of mid-1950s.

In the context of the favourable world economic situation during the 2000s, Brazil reached an average growth of 5 percent in GDP. Together with an increased minimum salary, lower unemployment, and growth of credit lending, this led to an increase in consumption.

But the industrial motor of the economy didn’t follow this growth. Instead, there has been an increase in imports of manufactured goods, chiefly from China, boosted by the strength of Brazilian currency (the real). The relatively stable growth, abundance of speculative capital worldwide, combined with the highest interest rates in the world led to an inflow of capital that strengthened the real. This has increased the price of Brazilian goods worldwide.

The logic was that Brazil exported primary goods to China, and imported cheaper industrialised goods, to the detriment of domestic industry.

The government’s reaction to the 2008 crisis

When the world economic crisis exploded in 2008, Brazil was not as badly hit as other countries. One factor was that Brazil’s banks were not thrown into crisis (the banks had already gone through a crisis and restructuring with state help in the 1990s and were now making huge profits due to high interest rates), nor was there a flight of capital. The government pumped money into the credit system and stimulated consumption through reduced taxes on cars and some other products. Another important factor was increased exports to China (with China overtaking the US as Brazil’s main trading partner).

This was a totally different situation than the crisis of 1999, when Brazil suffered from a flight of capital and the real dropped in value.

New Slowdown

However, in 2011 the contradictions of the economy began to show themselves. The real increased in value again, almost returning to the peak levels of 2008. This has a deleterious effect on industry, which began stagnating even as consumption continued to grow, sending inflation surging past 7 percent. The government pulled the brake, increasing interest rates and implementing barriers to the inflow of dollars – what president Dilma called “financial tsunami”.

The result was that GDP grew only 2.7 percent, far below the government’s target of 4.5 percent. The fact was that Brazil had the slowest growth in South America last year. Since the second half of last year the economy has almost stagnated, as it has been affected by the crisis in Europe and the slowdown in China.

Recently there has been a rapid change with respect to the real. The government continued to implement measures to hold down the value of the real up through March 2012. But in May there was an outflow of capital, and the real has lost 30 percent of its value compared to the most recent peak in June of last year. Still, this has not helped revive Brazil’s manufacturing industry, as the main competitor, China, is still cheaper.

Trying to repeat the fix of 2008

2012 began in the same way as 2011 ended. GDP grew only 0.2 percent during the first quarter. The government still has a target of 4 percent growth this year, but few believe it will actually be achieved. In fact, most economists believe that the result will be worse than last year. The average estimate is now 2.18 percent. Credit Suisse bets on a growth of only 1.5 percent. Besides weak industrial performance, the bank points to the low level of investment, which they project will only grow by 0.3 percent this year.

Dilma’s government is trying to repeat the measures implemented in 2008: incentives to consumption through tax breaks, lower interest rates, and expansion of credit, especially for investment in big projects linked to the World Cup, the Olympics, and infrastructure.

Accumulated debts put a limit on consumption

While it is true that the reduction in taxes has helped to keep up consumption on certain goods, such as cars, domestic appliances, and building materials, overall the effects of the new measures will be quite limited compared to 2008. Indebtedness and debt arrears have increased, which has served to limit the capacity of families to increase consumption based on credit.

The debt-to-GDP ratio has increased constantly during the last decade. In 2002, total private debt was equivalent to 22 percent of GDP. By the beginning of 2012, it had increased to 49.3 percent of GDP. While this is still relatively low compared to other countries, the effects are multiplied by the extremely high interest rates.

In March of this year, families spent 22.3 percent of their income on servicing debts, compared with 15.5 percent in January of 2005. This is an even higher level than in the US, where debts are certainly restricting consumption.

Despite historically low unemployment rates (5.8 percent in May, according to data from the six biggest metropolitan areas), debt arrears have been growing; as of May they were 21.4 percent higher than 12 months ago. Imagine what could happen in this context if unemployment started to grow.

Debt defaults on car loans hit new record levels in April. Debt arrears on credit cards, the main form of debt for households, responsible for 32 percent of debts, have also increased. 27 percent are at least 90 days late in paying credit card debts. Despite the huge propaganda campaign touting lower interest rates, the reality is the lowered rates have only benefited a limited section of the population. Credit card interest rates, for instance, are at the same level as they have been for the last two years: 10.69 percent per month. The average interest rates are the lowest since 1995, but they are still at 6.18 percent per month – in many countries that is the yearly rate!

Public investment also has its limits. Corruption and bureaucracy make the whole process very inefficient, and public investment only accounts for 10 percent of all investment in the country.

Brazil is still vulnerable to external shocks

No matter what the official propaganda says, Brazil’s economy is still quite vulnerable. The government usually mentions the historically high currency reserve, at the moment standing at US$370 billion. It is true that this reserve can act as a cushion, to a certain extent. The reserve has grown significantly as the Central Bank has been forced to absorb the huge inflow of dollars to avoid an even stronger real. It’s a costly operation, as those dollars are invested in US bonds, with very low interest rates, and paid with Brazilian bonds, which are very expensive.

Unlike other countries with large currency reserves, such as China, this reserve is not the result of an accumulated current account surplus. Even if Brazil still has a trade surplus, that surplus has been falling, and deficit on the rest of the current account is increasing as a result of foreign corporations and investors sending profits and interest on investment back to their countries of origin. This is only covered because of the inflow of speculative capital.

Brazil’s “external liability” – that is, capital invested in Brazil that belongs to foreign owners – has increased. A part of this is constituted in fixed assets, such as mines, factories, and shops. But the majority is invested in bonds, shares, and other financial instruments that can rapidly be withdrawn from the county. This “external liability” has grown from US$343 billion in 2002 to US$1.294 trillion. If there is a flight of capital, the currency reserve will be small change.

Besides that, and also in contradiction to the official propaganda, public debt is still a huge problem. The real public debt is now equivalent to 78 percent of GDP. In the federal budget for this year, 47 percent of government spending is allocated for debt service and refinancing of the debt, equivalent to 22 percent of GDP!

Increase in class struggle

All this shows that we must prepare for a turbulent period ahead. Patriotic propaganda about Brazilian “marvels” aside, we see how governments and bosses are preparing for more social conflicts. Police and courts are used more and more to repress social movements and strikes.

There has been a significant growth in strikes over the last two years. In the private sector, workers have struggled to get a share of the economic growth and huge corporate profits, strengthened by low level of unemployment. Many struggle for very basic rights, like the workers in the huge infrastructure projects who revolted against a lack of basic accommodations such as toilets, and who demanded the right to see their families at least once every three months! But also in the public sector we see important strikes, against wage austerity and lack of funding for public services, like the huge student strike at the national universities at the moment.

These struggles are still fragmented, however, and the left have still not managed to build instruments that can unify the struggle and break the dominance of the movements that are linked to the government, like the trade union federations CUT and Força Sindical. Together with the necessity of building a coherent socialist political alternative, (for which the relatively new left party PSOL is an important but still incipient tool), these are fundamental tasks for socialists to prepare for the huge battles to come, just like the ones we are already seeing in countries throughout Europe and Latin America. These movements can and will arise in Brazil as well, more quickly than many imagine.

Committee for a workers' International publications


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