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Growth Slows In Brazil as Protectionism Stirs

Remember those dynamic, world beating BRICs?  Russia, China and India have all stumbled recently; now comes Brazil.  From FT comes this story on Brazil’s slowed growth:

Gross domestic product was unchanged in the three months ended September 30, from the previous quarter, as weakness in the industrial sector spread to Brazil’s once vibrant consumer…

For Brazil, the fall in annualised growth in the third quarter to 2.1 per cent compared with a year earlier – the lowest quarterly reading since the third quarter of 2009 – is particularly pronounced, coming after 2010 when the economy grew 7.5 per cent.

China, which since the early 2000s has been an important (read: vital) purchaser of Brazilian commodities, is also struggling with slow growth. News that the Chinese manufacturing sector, which contracted for the first time since 2008, is slowing had a big impact on Brazil.

Lula da Silva’s successor Dilma Rousseff, as Nicholas Lemann describes in a lengthy but engrossing profile in this week’s New Yorker (paywall alert), has turned to “a frankly protectionist” economic program: “tariffs on imports, subsidies for exports, special government benefits for favored domestic industries”, etc.

Hoping that a strong domestic consumer market can help protected industries grow, Rousseff has launched two grand initiatives.  The first is an ambitious poverty-alleviation program that aims to move lift all Brazilians currently below the poverty line — 16 million people — out of poverty by 2014 when her current term ends. The second initiative is an industrial-economic program designed to protect Brazil’s domestic manufacturers from the consequence of weak currencies in China, the US and Europe.

Today’s moment demands courage and daring. We need to protect our economy, our consumer market, our employment. It’s imperative that we protect Brazilian industry from the disloyal competition of the exchange-rate war. Our manufacturers and Brazilian industry workers can be sure that this government is on their side. Just as we do not imagine our development without social inclusion, we do not imagine it without strong, innovative, and competitive industry.

The combination is not good.  While international currency movements, and a flood of hot money into commodity rich Brazil have driven the real to punishing levels from the standpoint of Brazilian manufacturers, historically protection and social spending have been a ruinous combination for the country.  Years of persistent inflation that occasionally surged into hyperinflation devastated the country and slowed its growth decades.

Brazil needs to look to the future, writes Professor Marcio Garcia (PUC, Rio de Janeiro) in the FT today. Protectionism and oil wells won’t save Brazil:

To boost productivity, many reforms must be undertaken. Taxation is very heavy and distortionary, promoting informality. Labour laws are outdated and harm job creation. Justice is extremely slow and property laws are poorly enforced. Competition is weak in many areas and protectionism is always a threat. Above all, education is still found wanting. Although universal coverage has been achieved at the fundamental level, Brazilian children learn very little, as evidenced by the standardized international tests results. Its poorly educated labour force is Brazil’s Achilles heel. This is changing all too slowly, despite social policies that have reduced income inequality.

Growth is hard, even in sunny Brazil.

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  • Kris

    “If a flame among the Cedars fall, what avails the lichen on the wall?”

  • Luke Lea

    I agree with everything WRM says here except the implication that tariffs on imports from China are a bad idea for Brazilian working people. Why should Brazilians “compete” with Chinese factory workers making fifty cents an hour? The Brazilian elites would prefer it that way, of course, just like the elites here in the U.S. and for the very same reasons: lower wages spell higher incomes and standards of living for them.

    What do the social classes owe each other? Nothing if you are a free-trade globalist. A lot if you’re not. Does Prof. Mead have children and grandchildren? I sometimes wonder.

  • Toni

    The Resource Curse at work again. Oil prices are cyclical. If they fall, Brazil will have to try to drill even faster.

    Meanwhile, protectionism probably means drillers will have to buy Brazilian oil tools and services. This is a formula for expensive inefficiency.

  • Toni

    Luke, here’s how protectionism fails.

    In 1982, I had to pay thousands more for a Toyota Corolla than for a similar Big Three model because the US effectively barred Japanese makers from importing enough vehicles to meet demand. The idea was to give Detroit time to bring its products up to the same quality.

    Over time, Toyota, Honda, etc. built US plants and continued to turn out exceptional vehicles. They went upscale with Lexus, Acura, etc. Nearly three decades and three bankruptcies (Chrysler twice) later, Detroit still turns out mostly lower-quality autos that sell for thousands less.

    All the 1980s Japanese import quotas did was to allow UAW members to keep sucking premium wages and benefits from their employers, who had to pass the cost along to car buyers. Meanwhile, the UAW now has maybe 100,000 more members than in 1982.

    Protectionism means lower quality for a higher price.

  • Kris

    Luke: “What do the social classes owe each other?”

    Absolutely nothing. That’s why the rich factory owners should advocate tariffs on imports, protecting their profits at the expense of a higher cost of living for the lower classes.

    What’s that? The issue is much more complicated? You don’t say!

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