13-19 June 2014 #711

Brazil’s own goals

Brazil needs to embrace more than football fans
Matt Slaughter and Janna Remes in RIO DE JANEIRO

Ready or not, Brazil is rolling out the welcome mat for sports fans from around the world. As soon as the clock winds down on the FIFA World Cup final match in July, the country will resume preparations to host the 2016 Summer Olympics.

Brazil is now the world’s seventh-largest economy, propelled by a commodities boom and rising consumption. Yet it ranks 95th in per capita GDP. This disparity is partly explained by its 43rd-place ranking for “connectedness” in terms of flow of goods, services, finance, people, and data and communications.

Sealing itself off from the bracing effects of global competition is sapping Brazil of much-needed momentum. Most households have experienced only modest income growth. While Brazil has halved its official poverty rate since 2003, prohibitively high consumer-goods prices and astronomical credit-card interest rates (avg 145 per cent) prevent many from attaining middle-class lifestyles.

In order to lift a still-vulnerable population into the middle class, Brazil will need 4.2 per cent annual GDP growth on average through 2030 – a target that can be met by tripling productivity growth. An assessment of how global connections affect economic growth suggests Brazil could boost its average annual rate of GDP growth by 1.25 per cent if it becomes more integrated in global markets.

Brazil’s economic policy has drawn on the strength of its huge domestic market and protected local industries through a complex system of subsidies, taxes, and tariffs.

But exports are equivalent to only 13 per cent of GDP, far below India (24 per cent) or Mexico (33 per cent). From 2005 to 2012, Brazil’s $20 billion trade surplus in manufactured goods swung to a $45 billion deficit.

Despite efforts to liberalise trade, reform has been uneven. In the heavily protected automotive industry, high import tariffs encouraged foreign automakers to establish factories in Brazil. But their productivity remains low; auto plants in Mexico produce twice as many vehicles per worker. This contrasts with Brazil’s success in developing innovative and globally competitive aerospace and agricultural sectors. One critical difference was the authorities’ emphasis on boosting R&D in these sectors before reducing the government’s direct role.

Brazil’s trade in goods suffers from the country’s inadequate transportation and communications networks. The rail system is limited, and only 14 per cent of roads are paved. A large share of the population lacks Internet access. Brazil’s connectedness agenda should also include efforts to attract more foreign talent. Today, only 0.5 per cent of Brazil’s workforce is foreign-born.

And of course tourism also offers significant growth potential if Brazil can build on the rare opportunity presented by hosting both the World Cup and the Olympics.

However, with its large and growing consumer markets combined with the possibility for demonstrative international growth, is there a place better than Brazil to incubate the next Facebook? If that sounds farfetched, consider that Instagram co-founder Mike Krieger is a Brazilian who left home to find his fortune in San Francisco.

This month, the World Cup is bringing the world to Brazil. It is up to Brazil to invite it to stay.

www.project-syndicate.org

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