Fernando Alcoforado*
The economic growth of a country or region is measured on the basis of the following formula:
GDP = C + I + G + X – M
Being,
GDP = Gross Domestic Product
C = Household consumption
I = Private and public investment in productive activity (agriculture, industry and services) and in economic (energy, transportation and communications) and social (education, health, housing and basic sanitation) infrastructure
G = Government expenditure
X = Export revenue
M = Expenditure on imports
According to the above formula, GDP may grow as long as household consumption (C), investment (I), government expenditure (G) and export revenue (X) increases and there is a reduction in expenditure with imports (M).
The contraction of 0.2% of GDP in the first quarter of 2019, the first decline since 2016, shows, on the one hand, the Bolsonaro government’s incompetence in not adopting the measures required to raise household consumption (C) and increase the public and private investment (I). One of the causes of the contraction of Brazil’s GDP is that household consumption (C), which represents 66% of GDP, grew by only 0.5% in the first quarter of 2019 in relation to the last quarter of 2018, but slowed down negatively by the mass unemployment that affects the Brazilian population.
Meanwhile, the government accumulates increasing public deficits due to the fall in tax collection resulting from the fall in GDP. Investments, on the other hand, fall for the second quarter followed due to the fall of the consumption of the families and the economic growth. The rise in the dollar, which pushed up imports of machinery and equipment, and construction, which had already had difficulty recovering, had a negative impact on investments, which slowed down. The Bolsonaro government’s incompetence in reactivating the Brazilian economy can be explained by the fact that its economy minister, Paulo Guedes, is a neoliberal fundamentalist, who does not admit that the State acts as an inducer of economic growth and focuses its efforts on Social Security reform as strategy to overcome the crisis whose results will not happen in the short term. The current crisis requires solutions that produce immediate results.
The solution to increase household consumption is to adopt measures that contribute to overcoming the mass unemployment of the order of 14 million workers. One of the reasons for the deceleration of consumption comes from the labor market. As demand for goods and services grows less, companies need fewer hirings. The country has difficulty creating new vacancies, especially with a formal contract. The new jobs that emerge occur through informal precarious work and self-employment. Since February 2015, work with a formal contract has regressed. The increase in informality, even if it represents some generation of employment, also prevents the increase of consumption, since the risk of being fired is greater. If income rises less, credit also does not leverage consumption even at lower interest rates. Lower GDP means, therefore, a higher unemployment rate.
For the Brazilian economic system to generate the necessary jobs for the economically active population, as a first step, the Bolsonaro government must immediately implement a broad program of investments in public works of economic infrastructure (energy, transportation, communications) and social infrastructure (education, health, housing, basic sanitation) with a public-private partnership to raise the population’s employment and income levels and, as a consequence, promote the expansion of household consumption resulting from an increase in wages and incomes of companies with investments in infrastructure. The federal government must take the initiative in investing in public infrastructure works that demand resources of around R$ 2.5 trillion. Investments in infrastructure would also contribute to reactivate the industrial sector and the services sector. As the federal government is faced with a major fiscal crisis it must execute these works together with the private sector based on PPP (public-private partnership).
Resources for federal government investments should be made possible by suspending the payment of public debt (R$ 3.87 trillion) for a certain period or by renegotiating the payment of this debt (R$ 343 billion in 2018) with the creditors aiming to reduce the burden with its extension, since almost half of the government budget is earmarked for the payment of interest and amortization of public debt. This would be the solution to the increase of public investment in the Brazilian economy that would contribute to raise household consumption, promote GDP growth in the short term and increase tax collection and consequent overcoming of the current fiscal crisis. In addition to the infrastructure public works program, the Bolsonaro government should draw up a long-term economic plan that will contribute to the resumption of Brazil’s development that presents a perspective for the population and the productive sectors to overcome the current crisis and to recover the economic growth.
To counter the current contraction of GDP, the Bolsonaro government intends to encourage consumption by liberating the FGTS for workers that would be insufficient to leverage the Brazilian economy. It should be noted that a full consumption-based economic expansion like the one that occurred during the FHC, Lula and Dilma Rousseff governments with a low level of investment is a measure that can work only in the short term. It was not by chance that the economic growth considered “chicken flight” during these governments was low. To grow in the long run, however, capital accumulation is necessary, and capital accumulation requires investment, which in turn requires public and private savings. The weakness of the Brazilian economy is not a big surprise. Another “chicken flight” would not be an exception, but rather the rule of the neoliberal model adopted in Brazil since 1990.
Sustained economic growth requires capital accumulation, which in turn requires investments, and investments require savings. Brazil’s low saving rate is not a recent phenomenon, but rather a typical characteristic of the Brazilian economy for a long time, a fact that has contributed to increase Brazil’s dependence on foreign capital. While emerging countries that have taken off in terms of economic development have savings and investment rates in the range of 30% and 40% of GDP, such as South Korea, Taiwan and China, the Brazilian savings rate has always been below 20%. With investment rates as low as those in Brazil, the country lacks the fundamentals needed for solid long-term economic progress.
Closely related to the little capital accumulation -due to the low savings – is the productivity of the Brazilian economy. Among 17 countries in Latin America, Brazil ranks 15th in terms of productivity and worldwide, the country ranks 75th among 122 countries. Brazil needs a long-term economic development strategy aimed at increasing productivity. However, this requires capital accumulation and innovation – something that is impossible without high savings and investment rates. In all sectors of the economy in which economic agents necessarily have a longer time horizon – such as savings and investment, infrastructure, innovation and education – there is total paralysis. Brazil suffers from a poor infrastructure, poor performance in innovation, and an ineffective educational system.
In addition to the proposed actions aimed at increasing consumption and investments, the federal government should devise strategies to address the impact on the country of the trade war between the United States and China by developing a consistent program of increasing exports of Brazilian products to which China applies a surcharge to the United States such as soybeans, beef and cotton and outlines strategies to deal with the predictable fall in world economic growth resulting from the trade conflict. It is important to increase export revenues to achieve a surplus trade balance and contribute to Brazil’s economic growth. Brazilian exports could benefit in the medium term, as the devaluation of the Brazilian Real leaves Brazilian products cheaper in dollars. The more expensive dollar has a negative impact on the industry, since it increases the price of imports and makes it difficult, for example, to buy machinery and equipment out there.
Therefore, what is lacking in Brazil to promote economic growth and overcome the problem of unemployment is the governmental planning that does not exist in the Bolsonaro government thanks to its incompetence and also of its economic team.
* Fernando Alcoforado, 79, awarded the medal of Engineering Merit of the CONFEA / CREA System, member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional Development by the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning and planning of energy systems, is the author of 14 books addressing issues such as Globalization and Development, Brazilian Economy, Global Warming and Climate Change, The Factors that Condition Economic and Social Development, Energy in the world and The Great Scientific, Economic, and Social Revolutions that Changed the World.
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