Brazil: Economic Boom – Political Gloom

A Brazil Carrefour supermarket cashier

I recently went into a big supermarket in a down-market shopping center in
São Paulo on a Sunday afternoon to buy a laptop computer. The place was teeming.
On one side, families were queuing up at the cash desks with trolleys filled
with food and other items. The electronics section, where I bought my computer,
was so busy that I had to wait 45 minutes to get a receipt as sales staff were
literally queuing up to type in their orders in the sales system.

Looking around I saw that customers were buying large, expensive items like televisions and DVD players and smaller things like toasters and irons. Most were paying in installments, taking advantage (if that is the right word) of the credit, which is so widely available these days.

In fact, if you walk down some streets in São Paulo you will practically be assaulted by people offering credit on behalf of Brazilian and foreign banks. Indicators show that unemployment and interest rates are falling while real income is rising and people are benefiting. Car sales rose to record levels in June and July, for example.

On the other hand, the country is stagnating politically and, once again, we are bogged down in corruption scandals which are holding back reforms that need to be made in other areas, such as improving the infrastructure and reforming the political system itself.

President Luiz Inácio Lula da Silva is neither a hands-on leader nor a good administrator but we have known that for decades. He was elected to the House of Representatives in 1986 but could not be bothered with the ins and outs of parliamentary procedure and set his hopes on the presidential race in 1989.

At the same time, he is a ditherer and hates to be pushed into taking decisions. The result is that he is unable to react swiftly when a crisis arises and this delay means that the crisis often gets worse and is left unresolved. Sometimes it gets overtaken and overshadowed by another crisis.

At the moment we are facing two long-running crises: the situation of Brazil’s airports and air control system and the ongoing refusal of the chairman of the Senate, Renan Calheiros, to stand down and face allegations of corruption.

The air traffic crisis has been marked by two crashes in less than a year in which over 300 people have died and the crisis in the Senate threatens the budget which must be approved by Congress by law. While the country was coping with these two crises at the beginning of August, Lula was far away on his one of the many foreign trips.

This time he was on a tour of Central American and Caribbean nations which included Mexico, Honduras, Nicaragua, Jamaica and Panama. Just what he achieved is difficult to see since he signed no agreements of any value and made no political breakthroughs.

Obviously we could not expect much to come from the trips to the smaller countries but Mexico was different. Mexico and Brazil are the two largest economies in Latin America and there is room for an increase in bilateral trade even though they belong to different blocs.

Brazil is in the Mercosul, along with Argentina, Uruguay and Paraguay while Mexico is in the North American Free Trade Association, along with the United States and Canada. Lula appealed to Mexico’s shared Latin American heritage and called on it to move closer to the Mercosul and consider being an associate member but he must have known that this was impossible.

The idea that Mexico would give up unfettered access to the American and Canadian markets in exchange for membership of a feeble outfit like Mercosul is unthinkable. Despite this, Brazil enjoys a healthy trade surplus with Mexico and trade has doubled since the two countries reached a preferred tariff agreement in 2002.

Brazilian businessmen are confident that trade could double to US$ 10 billion. Brazil exports high added value products to Mexico, such as cars and electronic goods. Both countries also have powerful state-owned oil companies, Pemex and Petrobras, and there is room for cooperation in developing biotechnology.

Mexican billionaire, Carlos Slim, has huge investments in Brazil, particularly in the telecommunications sector. Lula called on Mexican businessmen to take part in the Accelerated Growth Program (PAC) which aims to invigorate Brazil’s creaking infrastructure. However, he came back with nothing concrete from his meeting with Mexico’s President Felipe Calderon.

Still we should be grateful that Lula’s hands-off style has not jeopardized domestic growth. The crisis, which has gripped markets across the globe as a result of the problems facing the US’s sub-prime mortgages collapse, has had little of the effect on Brazil it would have had some years ago. The São Paulo stock market, the Bovespa, has been hit and shares have lost ground but that was inevitable.

Brazil’s economic fundamentals are now much stronger than they were and Lula can take the credit not because he has been a driving force for economic reform but because he has left the monetary and budgetary policy in the hands of non-political experts at the Central Bank and the National Treasury.

These technocrats have managed to oversee a fall in inflation to around 3.5% which has taken Brazil closer to rates in developed countries. Foreign debt has also been drastically reduced and stood at just under US$ 50 billion in July 2007 compared with around US$ 190 billion when Lula assumed office in January 2002.

At the same time, interest rates have fallen and are converging to levels of other emerging markets. The nominal rate is 11.5% but when inflation is taken into consideration they are around 7%. This is certainly still high but compares with around 10% between 1999 and 2005. GDP is growing strongly and one big bank is projecting growth of 5.2% for this year, an idea which would have been unthinkable even a year ago.

The result of this growth is that the government is raking in huge amounts of money in tax from company earnings, income tax from the larger number of people in employment and taxes on consumption. Unfortunately, instead of learning the lessons and encouraging greater economic growth and taking this opportunity to cut government spending, the opposite is happening.

The finance minister, Guido Mantega, showed this when he told a meeting of businessmen in São Paulo that the taxes from company profits would be “returned to society”. Not surprisingly, based on this government’s record of maladministration, seen in the current air crisis and prospects of an energy blackout in the coming years, this comment was met with hollow laughter.

One businessman put it aptly when he said: “Society knows very well that the government does not return services which are in line with the higher taxes collected which have risen year after year.”

In his view, the higher tax burden has led to worsening services to support the bloated state and maintain an outdated administrative machine. “If the minister had said the government would dismantle this machine and cut costs, he would have received applause,” he added.

In the words of the great Buddy Holly: “That’ll be the day!”

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site He can be contacted at

© John Fitzpatrick 2007



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