Brazil’s economy stagnated from 2011 through 2014 and economists surveyed by the central bank expect it to contract 0.66 percent this year. The currency has fallen by almost 50 percent since 2011, when President Dilma Rousseff rose to power. Business and consumer confidence in January reached the lowest level in more than a decade. Sovereign debt was downgraded last year to one level above junk. By March, Petrobras had lost more than three quarters of its market value since 2007. Inflation has been running above the official 4.5 percent annual target for 4½ years, reaching its fastest pace in nearly a decade. The worst drought in a generation hurt the grain harvest, and the specter of water and electricity rationing looms. Rousseff barely won a second term after a campaign in which she pledged to preserve social progress while fighting inflation. Upon taking office with a record budget deficit, she chose a banker as finance minister to raise taxes and cut government spending. Her approval rating fell to 13 percent, her lowest ever, after March 15 protests drew more than a million people to the streets. On March 31 she said she would “carry out a huge cut” to narrow an $18.6 billion deficit.
Brazil has suffered boom-and-bust cycles and political instability for the better part of two centuries, since independence from Portugal in 1822. Half its 2014 exports were raw products, meaning its prosperity is sensitive to the vagaries of commodities markets. On paper, Brazil looks like a powerhouse. It’s the fifth-largest country in the world, by land mass and population. Its offshore oil reserves include the Western Hemisphere’s biggest discovery since 1976. It has the second-largest iron ore reserves, is the second-largest producer of soybeans and third-largest of corn. As much as 80 percent of its electricity comes from hydroelectric dams and it produces ethanol, meaning it has one of the world’s least carbon-intensive economies. On the other hand, its wealth distribution remains among the most unequal. Good times provided cash to beef up the Bolsa Familia social welfare program that became an international model for poverty eradication. The new middle class went shopping, boosting growth. Now, with commodity prices dropping and industry sputtering, that model appears to have run its course. Investment that would make the economy more efficient has remained well below half that of China as a percentage of GDP.
In her first term, Rousseff blamed Brazil’s modest economic performance on slow international growth after the financial crisis. At the start of her second, she endorsed austerity and promised that it wouldn’t impair social gains that include falling poverty, narrowing inequality and United Nations praise for advances in life expectancy, educational attainment and income. To shore up accounts and maintain investment grade bond ratings, the government announced tax increases on items ranging from gasoline to lipstick and crimped some pension and unemployment benefits. Critics say that Brazil has yet to ignite the next stage of growth by reducing the tax burden, the bureaucracy and steep tariffs. These would boost investment, they say, and more flexible labor laws would improve productivity. They want Brazil to shift reliance away from consumption, which along with government spending still accounts for nearly 85 percent of GDP.
The Reference Shelf
- The Brazilian Institute of Economics, a think tank, finds Brazil’s tax breaks too costly.
- Bloomberg Markets magazine published an article in June, 2014, about Brazil’s swinging economic pendulum.
- Bloomberg Businessweek recounts how Brazil’s richest man, Eike Batista, lost his $34.5 billion fortune.
(This QuickTake includes a corrected label for the vertical axis of the current account chart.)