TFF Associates & Themes Blog

By Jonathan Power

It was Charles de Gaulle, France’s Second World War statesman, who said, “Brazil has a great future, and always will”. Under the benign presidency of the ex car metal worker, Luis “Lula” Inacio da Silva, the adage seemed to be banished. But now under his successor, Dilma Rousseff, the tag has stuck once again. Brazil is back to its old ways, albeit with a difference.

An economy going down hill, incompetent economic mismanagement and massive corruption are frightening investors away. Brazil is now suffering its biggest recession since the 1930’s Great Depression. The difference is that this time the safety net of financial support built for the very poor by Lula remains intact.

Brazil, Latin America’s largest economy, is having it especially bad but most of the other countries are doing not so well. The 2004-2013 decade was exceptional. Inflation which for the region was 1,200% came down to single digits and a strengthening of the tax base as economies grew facilitated a well-financed expansion of social spending.

Countries built up large foreign exchange reserves. This allowed them to have extraordinary access to external financing. There was an investment boom as economies grew at more than 5% a year, and some, like Brazil, Peru, Panama, Uruguay and Paraguay, exceeded 6%.

Even the great recession of 2009, triggered by the collapse of major US banks, only caused a brief slowdown thanks to the resilience of their economies.

It wasn’t only Brazil that saw a great improvement in income distribution in a continent that had the most inequality of all the world’s continents, most of Latin America did. It was all the more remarkable as most of the rest of the world has been becoming more unequal.

It is called the “Latin American Decade” in contrast to the “Lost Decade” of the 1980s. The improvements in social services, health, education, employment opportunities for the workers and a spreading to nearly every country of Brazil’s policy of government subsidies to the poor if families put their children in school have led to a spectacular reduction in poverty levels- a decrease of more than 50%. There has also been a sharp growth in the size of the middle class. This has been characterized as the “democratic dividend” because it followed the broad-based return to democracy in the 1980s.

But last year growth per capita, after years of rapid increase, ground to a halt. The fall in commodity prices caused, not least, by China’s slowing growth, together with the slow-down in the world economy, has hit Latin America hard. Most countries have not used the good times to diversify their economies and build up their industry and services.

Now the average growth rate is down to 1.1%. (To that extent Brazil has the excuse that it is part of the general trend, albeit worst than the others- last week it entered a recession). All the above achievements are being seriously challenged, although so far unemployment has remained low.

However, there are significant regional differences. Mexico and the Central American economies (with the exception of crime-torn El Salvador and Honduras) grew last year by 2.5% and will grow at 3% this year. Paraguay and Bolivia grew by 4% and are expected to continue that rate or even higher this year.

It is low external debt ratios which permit these countries to avoid the need to contract and give them continuing access to private capital markets that are partly responsible for their well-being. Again Brazil’s performance makes for a sharp contrast with its rising interest rate and rising inflation.

But even for those less hurt by the fall in commodity prices and the slowdown of world trade, major reforms are needed if growth is to continue. This means upgrading technology in the production sector and the replacement of a commodity-based economy with a more industrialized one.

The present downward path of the Chinese economy with its shrinking hunger for Latin American and African raw materials is not going to cease soon. However, the rise of the Indian economy may compensate for this somewhat.

Regional integration is also necessary. This means overcoming the significant political divisions that have slowed economic diversification. Countries also need more competitive and less volatile exchange rates and macro economic policies that lean against booms and growth slowdowns to ensure a more stable and less uneven growth.

They also need major advances in the quality of education and infrastructure development. Without better education there will be bottlenecks in the supply of well-trained workers that will hold back technological advancement. There should be a doubling of investment levels in roads, airports and ports and, not least, more land reform in favour of the peasantry to unlock the potential of the agrarian economy.

© Jonathan Power 2015