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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
Jun/02
Sep/02
Dec/02
Mar/03
Jun/03
Sep/03
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Mar/04
Jun/04
Sep/04
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Mar/05
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Mar/07
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Sep/07
Dec/07
Mar/08
Jun/08
Sep/08
Dec/08
Mar/09
Jun/09
Sep/09
Dec/09
Mar/10
Jun/10
Sep/10
Dec/10
Mar/11
Jun/11
Sep/11
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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