Friday, May 21, 2010

The Economist: Brazil - Too Much Government Spending?

On the heels of a potential $20B spending spree ahead of the 2014 World Cup (not to mention the 2016 Olympics), The Economist has an interesting story on the levels of government spending behind Brazil's economic bounce.
  • Brazilian sports minister Orlando Silva says the country must invest $20 billion in infrastructure projects and public transportation to prepare for hosting the 2014 World Cup. Silva said Wednesday that 53 transportation projects were in the planning stage and some had already been contracted.
In a world where Keynesians have gone wild, I am aghast that such a fine publication would dare question the goodness of uninterrupted and ever higher government spending ;) As we see in America if you throw a few trillion into the economy you can juice economic figures and tell the sheeple everything is fine, no one really has to pay for it*. Unless you cannot print currency to pay your debts I suppose.

*except those sucker savers and their 0.2% saving accounts

Brazil still remains the most interesting economy in the Western hemisphere and as long as China continues to suck in U.S. dollars by the trillions and executes its 'centrally planned capitalism' without huge hiccups, Brazil should be in good shape.

Via the Economist

  • NEW skyscrapers are going up along Avenida Faria Lima in the business district of São Paulo. Sales of computers and cars are booming, while a glut of passengers has clogged the main airports. Brazil created 962,000 new formal-sector jobs between January and April—the highest figure for these months since records began in 1992.
  • Everything indicates that over the past six months the economy has grown at an annualised pace of over 10%. Even allowing for an expected slackening, many analysts forecast that growth in 2010 will be 7%—the highest rate since 1986.
  • The problem is that while it may be growing at Chinese speeds, Brazil is not China. Because it still saves and invests too little, most economists think it is restricted to a speed limit of 5% at the most, if it is not to crash.
  • The growth spurt is partly the result of the stimulus measures taken by President Luiz Inácio Lula da Silva’s government when the world financial crisis briefly tipped the country into recession late in 2008. The trouble, say critics, is that much of the extra government spending is turning out to be permanent (shocker!)—and so the economy is starting to resemble a Toyota with the accelerator stuck to the floor.
  • The strain is showing. Businesses are chasing after scarce skilled labor. Inflation for the 12 months to April reached 5.3%, above the Central Bank’s target of 4.5%. Imports are set to top exports this year, for the first time since 2000, and the current-account deficit should widen to 3% of GDP.
  • The government’s critics say that lax fiscal policy is making the Central Bank’s task harder, increasing the risk of the boom ending in a sharp slowdown next year. When he became president in 2003, Lula stuck to the sound fiscal policies he inherited from his predecessor, Fernando Henrique Cardoso. Thanks to faster growth and higher tax revenues, between 2003 and 2008 Lula’s government managed to keep public debt in check even while expanding spending. By treating the recession as “a licence to spend”, the government is now undermining the credibility it piled up, says Raul Velloso, a public-finance specialist in Brasilia.

These are interesting developments below, the first one especially - I can only assume Goldman Sachs advised on this strategy as helping countries hide things seems to be their bread and better, right Greece?
  • The government is still injecting money into the economy in two controversial ways.
  1. First, the National Development Bank (BNDES), whose loans cost about half the Selic rate, has expanded its lending by almost half. It has been able to do this because the treasury granted it two long-term credits totalling 180 billion reais. Those credits, for which the BNDES has offered IOUs, have led to accusations of creative accounting. While adding to the government’s gross debt, they have not driven up the more closely watched figure for public debt, net of assets: at 42.7% of GDP, this is back to its level of mid-2008, and is much lower than the debt burdens of European countries.
  2. Second, the government has jacked up its payroll spending. The number of federal civil servants has increased fairly modestly since 2003 (by around 10%). But they have been treated generously: the total federal wage bill more than doubled in nominal terms between 2003 and 2009, while inflation was less than 50%. Lula has pushed up the minimum wage much faster than inflation too. That has helped to make the income distribution less skewed, and boosted consumer demand. But it has a knock-on effect on pension benefits.
Hmm, this all sounds so familiar - apparently it is not just in the U.S. where being a federal government employee is like honey. No worries about layoffs, sustained pay increases every year no matter what happens in the private sector, and pension expansion. Must be nice to run an entity without worry about profitability; it's a wonderful life.
  • Certainly many Europeans would love to have Brazil’s problems. Its economy has acquired underlying strength. Companies are scurrying to satisfy the demand for consumer goods of a rapidly expanding lower-middle class, while China continues to suck in Brazil’s exports of raw materials. Productivity is rising. Costs per unit of labour are increasing at only about half the rate of real wages.
[Oct 20, 2009: Ben Bernanke's Money Printing Parade Forces Brazil to Slap a Tax on Outside Investors]
[Oct 27, 2009: Goldman Sachs - "Hazardous" to Underweight Brazil]
[Sep 23, 2009: Brazil's Credit Rating Raised to Investment Grade]
[Aug 11, 2009: BW - Brazil's Coming Rebound]
[May 16, 2008: Brazil is Sexy]

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