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Brazil's Economy: From Zombie to Walking Dead

03/05/2018 - 12h48

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JOE LEAHY
"FINANCIAL TIMES"

The OECD published its Brazil 2018 survey just as the country released figures showing its economy grew 1 per cent last year, its first year of expansion since 2014.

But before celebrating the revival from economic zombie to high-growth economy, it is worth looking at some of the distortions illustrated in the survey. They hint at the deep malaise that still lies at the heart of Brazil's economy.

Exhibit one is how much Brazilians overpay for consumer goods and services, a factor that increases inequality and costs in the economy.

For instance, a humble Toyota Corolla in Brazil, which produces the vehicle, costs more than $45,000. This compares with Mexico, which also produces Corollas but where they cost just over $30,000, or in the US, where they cost $20,000.

Other Brazilian price distortions include mobile voice services, which in Brazil are nearly twice as expensive per minute as those in Argentina and eight times US rates.

The list goes on. Manufacturing companies in Brazil spend an average of nearly 2,000 hours a year preparing their taxes compared with 800 for Venezuela and less than 200 for the US.

Brazil has the highest applied import tariffs of the countries listed in the report, about double the level of China and four times that of the US.

Brazil has not gained new markets for its exports in recent years. In terms of imports and exports as a percentage of gross domestic product, Brazil is the least open country on the OECD's list, less even than Argentina.

On the fiscal side, Brazil's budget is a study in how not to develop a country. In 2016 it spent 16 per cent of its budget on interest payments on government debt, which is held by investors, business and upper middle class savers.

This was more than on education (12 per cent) and health (12 per cent). In fact, interest payments were the second biggest outlay in the budget, beaten only by social benefits (35 per cent), which were mostly pensions.

Given that Brazil's pension system is one of the world's most unjust, benefiting disproportionately relatively better off public servants who can retire in their mid-50s, Brazil's budget actively benefits the wealthy over the poor and leaves no money for investment.

The OECD report predicted Brazil's GDP growth would pick up to 2.2 per cent this year and 2.4 per cent in 2019. This is a walking dead recovery for an economy emerging from its worst recession in history and looking to at least return to its previous size.

Brazil has undertaken some reforms, says Jens Arnold, one of the authors of the report. These include reducing the subsidy implied in loans from development bank BNDES.

If Brazil is to rediscover its animal spirits, the next government will have to become a champion at unwinding more of the economy's terrible distortions, starting with pensions.

Copyright The Financial Times Limited 2018

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