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Brazil: Economic Challenges
in 2012 and Beyond
Monica Baumgarten de Bolle
Galanto Consultoria
19/01/2012
And the crowds kept looking for
pharmacies
where the bitter tropics could be
found...
Federico García Lorca
The Brazilian Elixir...

Sustained growth, even in the midst of an
extremely difficult global environment.

A resilient consumer, spurred by income growth,
favorable labor market conditions, the availability
of credit, and income transfer programs.

A government with the ability to ease policies to
boost growth, if needed. A rarity these days...
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But Recent Changes in the Policy
Framework are Worrisome

2011 – a substantial shift in economic
policy, motivated by:



An increasingly hostile external environment;
The desire to promote growth, despite the
existing structural bottlenecks.
Fatigue with the so-called policy triad,
particularly with the “strict” inflation targeting
regime adopted from 1999 until 2010.
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In a Hostile Environment…

Preserving growth is a sound and
legitimate objective. But:


Too much emphasis on how the international crisis might
affect activity in Brazil (understandable); an unduly “modest”
concern about inflation.
Inflation is symptomatic of a number of structural problems
which are not being addressed; it is not just the result of a
series of idiosyncratic shocks:


Very low labor productivity in an extremely tight labor market –
bad price-wage dynamics, particularly in the labor-intensive
services sector.
Lack of infrastructure and onerous tax structure – high production
costs and low competitiveness.
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Structural Problems Affect The
Cost of Living
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Structural Problems and
Competitiveness
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Mar/02
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Mar/11
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Productivity and Real Wages
Labor Productivity and Real Wages -- Services Sector
Base: 2002 = 100
140
135
130
125
Real Wages
120
115
110
105
Productivity
100
95
90
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Desire to Promote Growth

In this context, the desire to promote growth
without regard to the existing structural
impediments will tend to amplify these
imbalances.

Particularly since the government´s “growth
formula” appears to be a mix of income transfer
policies + cheap public credit, and a model of
growth fueled by consumption. The stock of
household debt is not high, but flows are
compromised by high and rising debt service
obligations.
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Inflation Targeting Fatigue
without a Growth Agenda

The Central Bank is operating a de facto dual mandate: growth
and inflation (or “flexible inflation targeting”). Change is driven by
concerns over the external outlook, particularly the effects of the
European crisis.

But change has also been influenced by the government´s
disappointment over the very slow reduction in nominal and real
interest rates. Hence the revision of the “policy mix” – less fiscal,
more monetary.

Big and looming questions over “less fiscal”.

Piecemeal policies to boost growth, monetary and credit easing,
and difficulties in maintaining fiscal restraint = entrenched
inflation.
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Despite all of this...

...in a deteriorating global environment, driven
by a contracting and highly indebted Europe, a
still weak US economy (not to mention political
difficulties in key countries), and a decelerating
China...

The crowds will still flood the pharmacies, looking
for that bitter tropical elixir.

(And only a few will fret over the worsening
growth-inflation trade-off).
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Obrigada!
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