Brazil’s Economy Booming, but Backsliding

Mario Osava

HAVANA TIMES, Dec 10 (IPS) — Although the Brazilian economy is now one of the fastest growing in the world, it cannot claim an entirely clean bill of health. Declining industrial output threatens to put the country’s development into reverse, and no short term remedy is in sight.

This is reflected in trade. China has become Brazil’s main trading partner, importing from this country almost exclusively commodities and exporting manufactured goods.

The United States, its former number one trade partner, is buying more industrial products from Brazil, partly because the two countries’ agricultural sectors are competitors.

In its trade with China, Brazil enjoys a rising surplus, which reached 5.1 billion dollars in the first 10 months of this year. However, the trade balance with the United States has reversed since 2009. After peaking at a record surplus of 9.9 billion dollars in 2006, this year the balance showed a deficit of 6.8 billion dollars for the January to October period.

Nevertheless, several indicators still support the views of those who downplay the importance of the swift decline of the manufacturing industry’s contribution to GDP. The economy has grown by more than seven percent this year, and exports for the January to November period were up by 30.7 percent over the same period last year.

But imports have grown at the considerably faster rate of

43.9 percent so far this year, as part of a trend that has held steady since 2007. In 2006, Brazil had a 46.1 billion dollar surplus of exports over imports, which has decreased every year since; as of November this year the balance in Brazil’s favor was only 14.9 billion dollars.

Furthermore, the trade surplus is based on exports of agricultural and mineral commodities. The manufacturing trade balance is negative, to the tune of some 35 billion dollars this year, a figure that could grow five-fold in two years’ time, Rogerio Souza, chief economist at the Institute of Studies for Industrial Development (IEDI), told IPS.

The industrial sector in Brazil was hit hardest by the global financial crisis in 2009, when its output fell by seven percent. After rallying early this year, production dropped again in the second quarter and remained stagnant in subsequent months, alarming manufacturers.

Industrial production has stagnated in the context of a fast-growing economy, which accentuates the fall of its share of GDP, already six percentage points lower than in 1970, when Brazilian industrialization was in its infancy and the country’s main export was coffee, Souza said.

The industrial sector as a whole contributed 25.4 percent of GDP in 2009, but manufacturing’s share of that total was only 15.5 percent. Meanwhile, the contribution from services rose to 68.5 percent of GDP.

Such a huge role for the service sector is normal in high- income countries, but not in Brazil, where “industry still has to consolidate in order to raise incomes,” Souza said.

Brazil is still a middle income country, he pointed out.

In Souza’s view, this change is “the most outstanding factor” at present and has a negative impact on the competitiveness of Brazilian industry, reflected in a “flood of imports” above and beyond what could be expected, given Brazil’s economic boom.

Other longstanding problems include inadequate infrastructure, the high cost of borrowing, the heavy tax burden and the high price of energy, all of which drive up the costs of industrial production in Brazil. And these costs will only be reduced over a long period of time, so emergency corrective action needs to be undertaken now.

Paulo Francini, head of research at the Federation of Industries of the State of São Paulo (FIESP), said on Nov.

30 that the extremely undervalued Chinese yuan, together with a Brazilian real that is overvalued by an estimated 42 percent against the dollar, make it impossible to compete, since no one can halve their production costs.

That day, Francini presented a study which describes the increasing replacement of national inputs and products by imported ones in factories in Brazil’s industrial heartland.

The government must do everything in its power to combat overvaluation of the real, including restrictions on inflows of speculative capital attracted by Brazil’s high interest rates, said Souza.

The textile industry provides another illustration of the problem. Five or six years ago, exports exceeded imports by 400 to 500 million dollars a year.

This year, however, a deficit of 3.5 billion dollars is projected, with imports worth some five billion dollars, said Fernando Pimentel, supervising director of the Brazilian Textile Industry Association (ABIT).

The sector has fought back with hefty investments in new technology and equipment, but there are too many factors against it, like high taxes and interest rates, poor infrastructure and little technological innovation, said Pimentel. “Change makes everything more difficult; if we hadn’t been creative, we wouldn’t have survived,” he said.

Textiles in Brazil, including the apparel industry, are growing, but at a slower rate than the rest of the economy, because of “the flood of imports” which takes a large bite out of the growing domestic market, Pimentel complained.

He said Brazilian industry is suffering not only because of what is happening at home, but also as a result of what is happening abroad, such as exchange rate manipulation, and zero interest rates and subsidies, which he said constituted “illegitimate” competition.

There is a global “employment war” going on, and the textile industry’s job-creating capability puts it on the front line, he said. According to Pimentel, some eight million Brazilians earn a living from the textile sector, which provides jobs for 1.7 million direct workers, the remainder being indirect or subcontracted employees.

In Brazil, labor contracts are rigidly uniform throughout the country. No tax breaks are awarded to labor-intensive sectors, as they are in other countries, and this reduces the competitiveness of Brazil’s textile industry, he argued.

A study by the National Confederation of Industry (CNI), released Dec. 1, found that pay received by Brazilian workers — including wages, social security and other labor benefits — is four times higher than for Chinese workers, and 10 times higher than that received by workers in India.