Why Brazil doesn´t grow? In addition to rampant corruption, stifling bureaucracy and other growth disincentives

Although it thinks it does. And when, as at present, things appear a little too slow for the government´s wishes, we are quick to blame others. This time it´s the excessively easy monetary policies of advanced economies that is causing a “liquidity tsunami” which brought about an undesirable appreciation of the real – the “currency wars” thing – and hardship for industry in Brazil, reviving talks of deindustrialization and the need for industrial policies. But since there´s no time for developing a set of coherent plans, we slap protectionist measures through taxes, subsidies, exchange controls and even requests for “voluntary export restraints” from some of our major trading partners.

But we have been down that route before. So what I´ll do is compare and contrast Brazil with Korea and China over the past 35 years and show how costly it is to adopt protectionist measures.

Before doing that, I´ll like to show that during times when the external environment is extremely favorable we mostly miss “hoping on the fast moving train”. Everyone remembers Lula´s favorite quip: “Never before in the history of this country ‘something’ has been so good”, usually  referring to some positive economic aspect. But let´s examine things with care.

As will become clear, the “big thing” at the start of the 21st century, was China´s entry in the WTO, thus becoming a “card carrying” member of the “Club of Nations”. Immediately, growth in China accelerated and this “pulled up” many countries. Although Brazil benefited – and that´s the reason why Lula could say the things he said, in fact he was doing the utmost to counteract the pull from Chinese growth.

That becomes clear when we look at the chart below which shows the path of industrial production in Asia (heavily weighted by China), in emerging markets in general and in Brazil. That´s what I call a “nonperformance”. While since China entered the WTO at the end of 2001 Asia´s industrial production went up by a factor of 3.1, emerging markets (includes Brazil) by a factor of 2.1, Brazil´s industrial production increased by a measly 34%!

So Mr. Lula, this is what you should have said: “Never before in the history of this country have we failed so completely from taking advantage of an enormously favorable environment”.

As seen in the chart above, after recouping it´s pre-crisis level, industrial production is faltering, giving rise to clamors for protectionism.

As the saying goes, if you disregard history you´re bound to repeat the mistakes of the past. So let´s have an idea how much protectionism in the past has cost us.

Interestingly, in 1980 the dollar value of Brazil´s exports and imports was almost exactly the same as those of China and Korea. That starting point is interesting because right after that Brazil decided that the best way it could confront the problems associated with its external debt was to close the economy – maybe you remember the “Lei da Informática” – that outright prohibited imports of hardware and software so that Brazil could develop its own tech industry uninhibited by foreign competition.

The charts below show what happened to trade in Brazil, China and Korea from that moment.

Notice that Chinese trade growth after becoming  a member of the WTO increased spectacularly. So did Brazil´s trade, since by then we had adopted more free trade policies. Unfortunately, we were late into the game! Worse, now we want out!

What did being late into the game cost us and what damage “wanting out” can bring? One measure is to see what happened to total economy output or income per capita.  And this story is shocking!

Between 1980 and 2001, per capita income in Brazil was stagnant. Coinciding with our increased trade, since 2001 incomes in Brazil increased by almost 30%! Surely, looking at what happened to incomes in both China and Korea over the whole period that cannot be a simple coincidence.

Yes, in 1980 Brazil was slightly richer than Korea  and almost 8 times richer than China. But China has caught up and Korea is a little over 3 times richer! Yes, minister, the surest way to impoverish your country is to increase protection. Have your feast!

9 thoughts on “Why Brazil doesn´t grow? In addition to rampant corruption, stifling bureaucracy and other growth disincentives

  1. Interesting post. I fear for all of Latin America, where government as Gong Show appears the norm. Latin people are warm and hard-working, but when it comes to administration….hire a lot of Germans.

  2. If Germans were running Brazil, as it is designed by government, we should have a Stasi already.
    When people here think about Deutschland, government still idealizes the other side of Berlin’s Wall. The problem is too much state interference not lack of competence in the private sector, which in some degree exists too.

  3. Pingback: The other currency war: Mexico vs. Brazil - Diverging MarketsDiverging Markets

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