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03.28.2017

Tough times may be ahead for Brazil, says World Bank Country Director

During a talk at the Sanford School of Public Policy on Wednesday, March 22, World Bank Brazil Country Director Martin Raiser shared his perspectives on what lies ahead for the country.

Although Brazil has risen to the world’s ninth largest economy over the past several decades, Raiser said deep reforms need to be enacted to ensure the country's future growth.

The talk was sponsored by the Sanford Latin American and Caribbean Group (LAC), the Duke Center for Latin American and Caribbean Studies, and the Duke Center for International Development (DCID).

Latin America’s success story

Brazil was long heralded as Latin America’s biggest economic success story. It enjoyed one of the fastest rates of economic growth in the world between 1930 and 1980, and grew again during the commodity boom in the 2000s. In this latter period, growth was felt by all levels of the population, not only those in the upper class. 

“Shared prosperity is one of Brazil’s biggest achievements,” Raiser said. “This measures how much growth benefits those who are worse off.”

In the last years, however, the economy has come to a standstill. Brazil is in the middle of its worst recession, eclipsing even the recession of the 1930s.

What went wrong? For one thing, Raiser said, Brazil mistakenly interpreted its latest growth spurt as the result of its own economic policies. Instead, he said, the credit belongs to China.

“Brazil is a commodity exporter,” he said. “As a result, when China entered the world economy, prices for Brazil’s products went through the roof and suddenly Brazil was in a commodity boom.” Since that time, however, prices for Brazil’s major products such as oil, sugar and coffee have plummeted.

In addition, Brazil’s growth was driven by an influx of people leaving school and entering the labor force. Now that these people are aging, growth will not continue at similar rates without measures to boost productivity. Moreover, the dependency ratio per worker in 10 years is expected to be twice as high as today.

“Brazil is now at the end of its demographic bonus,” Raiser said. “We’re going to have a country that gets gray before it gets rich.”

What can be done

In order to jumpstart its once thriving economy, Brazil needs to open itself up to trade and ease the process of doing business, Raiser said. By putting more liberal trade policies in place, he said, Brazil would see immediate gains in its services and manufacturing sectors because of the stimulus of competition and the access to new technologies.

At the same time, burdensome regulations make the process of becoming a business owner next to impossible today.

“Brazilians have absolutely no incentive to be entrepreneurs,” he said. “It’s tough and it doesn’t pay.”

Brazil also needs to find ways to cut spending. Pension reform will be key, Raiser said. Brazil’s pension spending is around 80 percent of its social spending, while the percentage of population drawing a pension is 7 percent. Compare this to Japan, were pensions account for less than 70 percent of spending and benefit nearly a quarter of the population.

Subsidies for industry, amounting to 4.5 percent of the country’s GDP, have blunted competition and created a culture of complacency among Brazilian businesses, Raiser said. While some argue that these subsidies have done some good, there is no evidence that there has been any substantial positive impact.

“Essentially [these subsidies] were political patronage,” Raiser said. “The motivation may have been laudable but the result has been persistent rent seeking.”

Without deep fiscal adjustment, Raiser said, Brazil’s debt is expected to jump to 90 percent of GDP. But the adjustment is complicated by the fact that the vast majority of spending is mandated by constitutional rules. Hence constitutional changes will be required to reduce social entitlements and target spending to those who really need support of the state.

“The next government is going to have to do a massive fiscal adjustment,” Raiser said. “This is going to be really difficult politically.”