Analysis: Nimble neighbors outshine Brazil on growth

MONTEVIDEO Mon Mar 19, 2012 12:41am EDT

Related Topics

MONTEVIDEO (Reuters) - Swift growth by nimble Latin American countries like Chile, Colombia and Peru has put renewed focus on regional heavyweight Brazil, whose relatively closed, high-tax economy is now sputtering below its potential.

The three Andean countries grew more than twice as fast as Brazil last year and are expected to outpace it again this year. Brazil has also lagged its peers in the BRIC club of emerging market heavyweights that includes China, India and Russia.

Officials in the Andean countries say they have benefited from low public debt loads, fiscal surpluses that allow them to invest heavily, and an aggressive pursuit of free-trade deals with big countries that have made their economies among the most open in the world.

In Brazil, politics have at times stymied ambitious fiscal reforms to eliminate the deficit in a country with powerful public sector unions.

Strong business groups anxious to protect their lucrative positions in the domestic market of 200 million people have resisted free-trade pacts. That has left consumers in the lurch: the iPhone 4S was retailing for $1,250 at an outlet in Brasilia in February. They sell for half as much on

"There are two visions," about which economic model to follow: an open one or a closed one, Colombian Finance Minister Juan Carlos Echeverry said at the weekend at a meeting of the Inter-American Development Bank in Uruguay's capital Montevideo.

"The message we send to our producers is you are in the world, not just Colombia. The future is about being competitive and this is as painful as giving birth."

The three Andean countries grew between 6 and 7 percent last year, well above Brazil's 2.7 percent.

Brazil's economy has expanded steadily over the last decade and it grew 7.5 percent in 2010, leading some economists to say it had finally buried its history of slow growth. But with last year's sharp decline, those worries are back.

Most economists now say Brazil will grow only around 3.3 percent this year. Peru expects to grow up to 6 percent and Colombia is so confident of its expansion that the central bank has been boldly raising interest rates.

"In open economies like Peru there are fewer market distortions, unlike economies which tend to close themselves and create new artificial barriers," Peruvian Finance Minister Luis Miguel Castilla said in Montevideo. "That also means the capacity of companies in open economies to adapt in a context of international competition is much greater."

Castilla said the risk for small countries that rely on commodities exports is that they can suffer shocks when prices fall, but that they also can recover quickly.

Echeverry and Castilla declined to explicitly pinpoint Brazil's challenges but touted the success of their efforts to streamline taxes, lower tariffs and ramp up public investments.

Brazil lacks a major free-trade agreement despite exports that have surged over the last decade. Its Byzantine tax code soaks up about 34 percent of gross domestic product and requires companies to hire armies of accountants.

Its debt load of 37 percent of GDP, though it has fallen from more than 50 percent over the last decade, is costly to finance because of interest rates that are among the highest in the world and a net public sector deficit that historically has crowded out investment by the private sector.

Years of shortfalls have left infrastructure bottlenecks that contribute to inflation and which the government is racing to eliminate before Brazil hosts the World Cup in 2014 and the Olympics two years later.

Brazil's companies have been mostly sheltered from competition for years. Now, what the government has dubbed a global "currency war" has left its currency, the real, near all-time highs and undermined the competitiveness of Brazilian industry.

Economists worry that 75 percent of Brazil's exports are tied to commodities prices.

"This leaves us vulnerable. We need to diversify our exports and we must make our industries more competitive," said Elcio Gomes Rocha, chief economist at state-owned Banco do Brasil.

He said capital investments make up only 19 percent of Brazil's GDP and that the minimum the economy needs is about 24 percent. Brazil also has a relatively low domestic savings rate.

"You grow when you save," Colombia's Echeverry said. "The Asian countries keep on growing because they have savings rates of 30 or 40 percent and investment rates of 40 to 45 percent. It's not like this if you just consume and don't save."

Mauro Leos, regional credit officer for Latin America at the ratings agency Moody's, said it is a medium-term worry for Brazil.

"Brazil is a large economy, it's a BRIC. However it's one of the few countries in the sovereign universe where you have investment rates below 20 percent. Those countries that have low investment rates tend to be poor, small or not rich. It's something that's strange."


Though Brazil has made enormous progress over the last decade - lowering the poverty rate and joblessness to record lows - its reforms never went as deep as those in Chile and Peru, where right-wing authoritarian governments in the 1980s and 1990s slashed tariffs and overhauled public pension liabilities.

Pension and social security liabilities have long been a major cause of Brazil's continuing public sector deficit, which governments since the return to democracy in 1985 have narrowed to 2.4 percent of GDP by making piecemeal changes.

But talk of sweeping fiscal reforms has run into political resistance. The ruling Workers' Party has close ties to public sector unions, which were instrumental in helping it win the presidency in 2002.

Opposition to shrinking the state became a rallying cry during President Luiz Inacio Lula da Silva's re-election campaign in 2006, when the party seized on a plan by the economics advisor to opposition challenger Geraldo Alckmin to drastically cut spending 10 percent across the board.

Lula's aides said the Alckmin plan would throw the economy into a tailspin.

But Miriam Belchior, Brazil's planning minister under President Dilma Rousseff, says that is changing and that fiscal and monetary policy now work together to help reduce the lofty benchmark interest rate, which has contributed to an overvaluation of the real and undermined the competitiveness of Brazilian exports. The Selic benchmark rate is currently at 9.75 percent after a series of cuts over the past six months.

"Right now it's possible to have this new mix between fiscal and monetary policy," she said. "This is the big change."

Rousseff froze 55 billion reais ($32 billion) in spending this year, mainly on administrative and discretionary costs, while preserving outlays for public investments. That followed a 50 billion reais reduction last year.

Belchior said the government has also sent a bill to Congress that over the long-term would help control pension costs for public sector workers, a major drag on fiscal accounts. It has cleared the lower house but not the Senate and relations between the government and Congress are strained.

Brazil's economy grew at an annual average of 3.8 percent over the last decade, but Peru had an average rate of 6.4 percent.

Brazil's former central bank chief, Henrique Meirelles, tried to downplay worries about modest growth. "Brazil still has a reasonable trend growth rate," he said. "The country has the conditions to grow but has challenges."

He said Brazil's economy was not driven only by exports. "It's very important that the domestic market is kept strong and that has been one of the reasons for strong growth."

Rousseff's government was criticized as protectionist by policymakers at the IADB meeting for pressuring Mexico last week to restrict its auto exports to Brazil.

Chile and Peru - and to a lesser extent Mexico and Colombia - have arguably the world's most ambitious free-trade agendas.

Their free-trade pacts stretch from China and Japan and South Korea, to the United States and Europe. More pacts with smaller trading partners have been signed or are in progress with countries like India.

EU trade ministers agreed on Friday to approve a free trade pact with Colombia and Peru.

"Once the EU accord, is ratified 90 percent of our trade will be covered by some kind of preferential accord," Peru's Castilla said. "I think this an advantage that our country has relative to our neighbors who don't."

(Additional reporting By Guido Nejamkis, Antonio De la Jara, Krista Hughes and Felipe Llambias; Editing by Kieran Murray)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see
Comments (7)
clavi wrote:
One thing that would help brasilian´s growth is to quit the corruption in all levels of the government.

Mar 19, 2012 6:54am EDT  --  Report as abuse
OrSpeeder wrote:
Brazil government has a very serious flaw (beside corruption):

It does not understand, that you need NATIONAL INDUSTRY if you want a strong economy.

Brazil mosly exports commodities, and imports industrialized products… The government tax those imports to oblivion, but the result is the national industry instead get even worse as they have no competition, and people still import everything.

Want a videogame? Well… a PS2 (yes, PS TWO, not three), is 400 USD in Sony store. A national videogame, the Zeebo, is so much bad near the PS2 that it is not even funny, and it is 300 USD. It is no wonder that the Zeebo never had a significant success here, those who can spend money in expensive videogame legally, buy a PS2, not a Zeebo (legally, because here about 90% of the videogame market is smuggled stuff, I know a thousand places to buy a PS2 for 120 USD here…)

Want a cellphone? Like the article said, a legal iPhone is 1250 USD. People just buy smuggled one too. Oh, Foxconn opened some factories here… But the smuggled versions of those Foxconn products is still cheaper.

Or a car! Car is the most striking example…

In Brazil, car importation is prohibited unless you have a company with special permission and whatnot. If you come from Argentina for example driving your Argentina-bought car, the government forces you to send the car back if you are not a tourist.

This mean that you HAVE to buy the local cars (and smuggling a car is not easy like smuggling a iPhone)

So, Brazillian Astra GT version: 2.0 engine, no airbag, no air-conditioner, 30.000 USD.

Argentinian Astra GT: 2.4 turbo, airbag, air-conditioner, electric windoes, whatnot… 20.000 USD.

The funny thing? The Argentinian Astra GT is made in Brazil, in the same factory as the Brazillian Astra GT. Since Brazillians are FORCED to buy the national crap, companies charge whatever they want.

Then the government complains of “fiscal war” when brazillians buy imported stuff.

Mar 19, 2012 10:47am EDT  --  Report as abuse
clavi wrote:
OrSpeeder,I´ve been training to explain what you did,but as a matter of fact, you were great.I do not have the same english level as you.I hope that the foreigners got the main idea hat what is happening over here.Thanks a lot.

Mar 19, 2012 2:28pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.