Brazil on the Short End of a 7-1 Score

In economic growth and development there are mysteries that get a lot of attention.  And then then are deeper mysteries, the puzzling lack of puzzlement over certain facts.  Brazil is a country that has always puzzled me a bit.  Here’s a recent article from the Economist:

The unemployment rate is low. But with job prospects dimming, consumers, who have pulled the economy along in the past few years, are growing more downbeat. Last month 11.4% were more than 30 days behind on their debt payments, up from 9% a year earlier. Retail sales have flagged.

Sagging confidence poses the biggest threat to President Dilma Rousseff’s chances of a second term in an election this October. In an effort to prevent voters from feeling the pinch, Ms Rousseff has loosened the fiscal reins. In May public spending was 16% higher than a year earlier and revenues 8% lower. As a result Brazil posted its second-worst monthly primary budget deficit (ie, before interest payments) ever. “They are trying to mask the problem until after the election,” says Ms Maurício.

I checked online and it looks like Brazil has averaged 1.5% RGDP growth over the past 3 years.  In contrast, RGDP in China has been rising at about 7.5% per year. In per capita terms that’s a roughly 7-1 advantage to China.  Ouch.  (Sorry to my Brazilian readers for mentioning 7-1, but I just couldn’t resist.)  What could explain such a vast difference?

1.  Perhaps it’s because Brazil is about 20% to 25% richer, and richer countries tend to grow more slowly.  But that would explain only a slight difference.  Both are solidly middle income countries, thus the two growth rates should not differ that much.

2.  It sure doesn’t seem like “austerity” can explain the slow Brazilian growth.  Indeed the article suggests that fiscal policy has been expansionary.

3.  The business cycle?  Perhaps, but the unemployment rate is described as “low.”

4.  Ethnic differences?  Possibly, I’ve argued that for cultural reasons North Korea would have a much easier time growing 10% a year for 30 years in a row than Afghanistan or the Congo.  (Assuming North Korea adopted capitalism.)  But even so, I still have doubts about the ethnic argument.  Here’s a comparison of the US and Brazil:

Brazil:  48% white, 43% “pardo”, 7.5% black, 1% Asian, 0.5% Amerindian.

USA:  62% white, 17% hispanic, 13% black, 6% Asian, 2% mixed, 1% Native American

The US has fairly wealthy states like California and Texas where the white population is less than 50%.  I’m certainly not saying ethnicity has no role in the wealth differences, but the IMF estimates Brazilian per capita GDP (PPP) at $12,200, compared to $53,100 in the US.  That gap seems way too wide to be explained by the ethnic/cultural differences between the US and Brazil.  Even black and hispanic Americans have average incomes at least double the level of Brazil.

5.  Government policies?  Brazil does have a big government, at least for a developing country.  Government spending is 39% of GDP, which is considerably higher than other Latin American countries.  As a libertarian I’d like to pin all the blame on that data point, but of course many of those other Latin American countries with “small government” are also quite poor.

6.  If not size, then perhaps quality of government?  The Heritage ranking of economic freedom puts Brazil only 114th in the world, which is below average.  But China is #137, which is even further below average.

7.  The one thing that really stands out with government is that Brazil spends lots of money on pensions and not much on infrastructure.  And China spends LOTS of money on infrastructure, and spends it reasonably efficiently.  (China does build some unneeded infrastructure, but they also build a lot of needed infrastructure, very quickly and at low cost.)

The last item is the one I find most plausible, but even I don’t think it can come close to explaining the 7-1 growth gap between Brazil and China.

And to return to the opening—there’s the deeper mystery of why more people don’t talk about Brazil as a failed state.  Why this continual hyping of Brazil as the country of the future?  Recall it’s one of the original BRICS.  Here’s Bill Clinton in 2012:

Clinton, speaking at a forum of bankers in Sao Paulo, acknowledged some problems but said Brazil still “looks really good” compared to crisis-ridden economies in Europe and the United States.

He said Brazil also compared favourably to India, which is struggling with a stagnant economic reform agenda, and China, which has tensions with some of its neighbours and is at risk of suffering from water scarcity and other depletion of natural resources, he said.

Remember that Brazil is a sophisticated country that has been exporting products like commuter airliners to the US for many years.  They have a huge internal market and a fabulous agricultural sector. Waterpower and lots of resources.  Modern big cities.  We aren’t talking about Lesotho or Laos.

And their per capita income is $12,200 and going nowhere.  It’s a mystery to me. And it’s also a mystery as to why they get such a good press.  Why aren’t they expected to grow like China?  The soft bigotry of low expectations?  Is the mental image of Brazil the beach life in Rio, whereas the mental image of China is hard-charging, sharp-elbowed businessmen in Shanghai and Shenzhen? What do you think?

PS.  Paul Krugman recently had this to say:

You might be tempted to dismiss this notion as wishful thinking, a sort of liberal equivalent of the right-wing fantasy that cutting taxes on the rich actually increases revenue. In fact, however, there is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.

Brazil has tried that approach under the new government (and the previous center-right government as well), and in fairness inequality has fallen somewhat.  But I just don’t see the growth payoff.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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