Brazil's Travails, And Ours

By the end of 2015, Brazil’s economy may be 8%

smaller than it was in the first quarter of 2014,

when it last saw growth.  GDP per person could

 be down by a fifth since its peak in 2010.

- The Economist, 2 January 2016 

What has gone wrong with Brazil?  And how do their economic and political problems compare with ours? [1]

1. The Brazilian economy is similar to ours in a number of respects.  Although it has a surface area seven times ours and a population four times ours, it has almost the same gross domestic product (GDP) in dollar terms per capita as we do, when ruling exchange rates are used.  Brazil’s GDP per capita in purchasing power parity terms is between 20% and 25% higher than ours, which means that a dollar goes further in Brazil than in South Africa and that average living standards are higher.  Brazil is a high inequality country (with a Gini index of 52.9), though not as unequal as South Africa (Gini index 63.4).  The composition of output is similar, though the shares produced by agriculture and services in Brazil are higher than in South Africa, and the share of industrial output is lower.  Gross fixed capital formation as a percentage of GDP (the gross investment rate) is higher in South Africa than in Brazil. 

2. South Africa has a higher rank in global competitiveness comparisons.  The difference in rank is marked.  South Africa is also considered less corrupt than Brazil, but the gap in ranks is smaller than in competitiveness.

3. Brazil has higher government debt in relation to GDP than South Africa, and a higher rate of inflation, but monetary policy is tighter in Brazil.  Brazil has a more rigid system of public finance than South Africa, with most of its federal budget ring-fenced by either the constitution or by legislation, as well as more extensive indexation, which creates greater opportunity for inflation to propagate itself.  Even so, the increases in public debt in relation to GDP since 2010 (about 15%) have been broadly similar in the two countries.  The difference between the short-term interest rate and the inflation rate is currently about 3.5% in Brazil, compared with 0.5% in South Africa.  The gap between the short term interest rate and the ten year government bond rate is about 1% in Brazil, but over 3% in South Africa.

4. Both countries have suffered a negative development in terms of trade since 2010.  The reason is broadly similar: the change from commodities boom to commodities bust.   The deterioration is greater in South Africa.  This has been accompanied by substantial and very similar exchange rate depreciations in both countries.  In both cases, a local currency unit buys just under half of the dollars than it did in 2010.  In both countries, foreign direct investment has fallen to very low levels.  Brazil has a positive balance of trade at present, whereas South Africa’s is negative.  Both Brazil and South Africa have negative current balances, though South Africa’s balance is more sharply negative. 

5. In terms of net assets in relation to GDP, South Africa is in a worse position than Brazil.  External debt as a percentage of GDP is markedly higher in South Africa, and foreign reserves in relation to GDP are markedly lower.

6. Labour market conditions differ between the countries.  The labour force participation rates are slightly higher in South Africa. However, unemployment is much worse in South Africa, and the employment rate is markedly lower.  The labour cost index in real terms declined significantly in Brazil between 2010, but increased marginally in South Africa.  Overall, the labour market appears to be much more flexible in Brazil.

7. Business confidence has dropped further in Brazil.  The Manufacturing Purchasing Managers Index is currently similar in the two countries.  Moreover, rating agencies have put Brazil and South Africa in different positions: two of the three main agencies have placed Brazil in the junk category, whereas South Africa hovers uncertainly just above this level.  In both countries, pro-growth reforms are needed to improve ratings.  

8. Political conditions are quite different in some respects, but similar in others.  To begin with, Brazil has a presidential democracy, while South Africa has a parliamentary democracy.  Whereas South Africa has a dominant party, there are many parties in Brazil, none of which have a majority anywhere.  Coalitions of the left and right are to be found in the Brazilian House of Deputies, but the executive finds relations with the legislature much more complex than in South Africa.  The consequences are twofold.  First, political contestation is much more public in Brazil.  Secondly, a particular form of corruption is endemic in Brazil: cash payments to members of the legislature to facilitate the passing of legislation.

But there are similarities.  Both countries have controversial and unpopular presidents.  In fact, President Rousseff currently seems less popular than President Zuma.  She is in danger of impeachment, whereas he is protected by a dominant party. Although both are at risk of ousting, if it were to happen, the mechanisms would be significantly different in the two countries.  President Rousseff may be completely stymied by executive/legislature gridlock, and she would have to be impeached if she did not resign.  Any ousting of President Zuma would be behind closed doors, and only the ANC itself can do it. In essence, political conflict will be predominantly inter-party in Brazil, but intra-party in South Africa.  

The current configuration makes intervention by the International Monetary Fund inadvisable for two reasons.  Both countries are some distance away from a balance of payments crisis, though South Africa is admittedly more vulnerable.  And the IMF cannot intervene in heightened political conflict, even though this will result in more policy confusion in both countries.  Political conflict would have to produce substantial deterioration in one or both countries’ international economic relations before necessitating international financial institutions enter the scene.  

Of course, political pressure is possible now.  The geopolitical situations of Brazil and South Africa are different.  Political pressure will be exerted on Brazil mainly by the United States.  Political pressure on South Africa will be more diffuse, originating from the West, Russia and the East.  There will undoubtedly be a South African attempt to play different sources of political pressure off against each other, but the government may well find that there is less room for manoeuvre than it currently hopes for.

9. Prospects.  Both countries are vulnerable to developments in commodity prices and to world growth.  It may be that modest improvements in either or both are possible, but the risk for further deterioration remains.  Moreover, it is unlikely that modest economic improvement will de-escalate political tensions in either country.  As a result, domestic political pressures may lead to further economic unravelling and poorer democratic performance over time.  If that happens, years of stagnation await both Brazil and South Africa.

Charles Simkins

Senior Researcher

charles@hsf.org.za

Bibliography:

[1] A statistical appendix forms the basis of the economic analysis. 

[2] Trading Economics (with some supplementation)