The China Temptation
What a difference a year makes.
In August 2011, as the European debt crisis raised fears of another international financial panic, Brazilian officials were bragging about their country’s impressive economic strength and record-low unemployment rate. “This is the second time that a crisis affects the world,” said President Dilma Rousseff, “and it is the second time that Brazil doesn’t shake.” The perception of Brazil as a booming economy that was insulated from the global turmoil had prompted an influx of foreign businessmen hoping to get rich (or richer). “If the rest of the world is cratering,” a Rio-based American banker told the New York Times, “this is a good place to be.”
In August 2012, amid a slowdown in China and other developing countries, Brazil is teetering on the brink of recession, largely because of an overvalued currency and sluggish exports. Its economy barely grew at all (0.2 percent) in the first quarter of this year, and its persistent weaknesses have suddenly been magnified. Even the Brazilian services sector, which had been buoying the economy, is now slumping: Its activity index (as measured by the financial giant HSBC) hit a three-year low in July. As for Brazilian industrial production (approximately one-third of the national economy), it has “failed to respond to government stimulus measures and a series of aggressive interest rate cuts,” notes the Wall Street Journal. Writing in the Miami Herald last week, Latin America expert Susan Kaufman Purcell declared that “Brazil’s economic future does not look nearly as bright as its recent past.” Indeed, while unemployment remains relatively low (for now), Brazil is no longer seen as an unstoppable economic powerhouse.
In other words, the country has arrived at a crossroads. The good news is that Brazil has an opportunity to strengthen its economic fundamentals by adopting certain long-overdue structural reforms. The bad news is that many Brazilian policymakers would rather embrace the type of state-led capitalism practiced in China.
“It used to be that all of Latin America looked to Europe as its ideal model,” a Brazilian diplomat recently told the Financial Times. “But now, given the eurozone crisis, that is no longer the case. And, increasingly, China is becoming a more attractive or plausible model.”
Of course, the Brazilian government already plays a large role in the economy, and Brazil ranks much lower than Chile, Peru, Colombia, and Mexico in the Heritage Foundation’s Index of Economic Freedom. The current Brazilian economic model is somewhere between the free-market Chilean model and the state-led Chinese model, but closer to the latter, albeit with a fully democratic political system and the rule of law, both of which are conspicuously absent in China.
The question is: Will Brazil become more like Chile or more like China? The answer will have profound implications for a country of nearly 200 million people that fashions itself a rising superpower.
To understand the best course for Brazil, simply consult the World Economic Forum’s 2011–12 Global Competitiveness Report, which lists the seven “most problematic factors for doing business” in Brazil as follows: (1) “tax rates,” (2) “tax regulations,” (3) “inadequate supply of infrastructure,” (4) “restrictive labor regulations,” (5) “inefficient government bureaucracy,” (6) “inadequately educated workforce,” and (7) “corruption.” The report affirms that such factors “hinder [Brazil’s] capacity to fulfill its tremendous competitive potential.” In the Global Competitiveness Index, Brazil ranks behind Chile, Puerto Rico, Barbados, and Panama.
Okay, just exactly who should Brazil emulate? The US, with our less than stellar growth rate of under 2%? They certainly shouldn’t use the Eurozone as a model! Who does that leave? Regardless of their obviously slowing economy, and their other problems, China’s economy is still expected to grow at a respectable 7% for the foreseeable future.
Chile is clearly suggested.
I was going to post this separately, but your comment caused me to post this here.
“The China model has produced wasteful spending and capital misallocation on a truly massive scale.” This is why they shouldn’t, their growth is not real. And it shouldn’t say “produced” it should say “is”.
It is impossible to escape economic realities. The State will never make good economic decisions. It’s the old “The widget cost me a dollar and I’m selling them for 99 cents. I hope I’ll make it up in volume”. Because China has no accountability it’s a big shell game, with debt being shifted around, factory misuse, they can’t raise profit margins because all the factories will move. I.e., I just bought a $19 box fan . . . Made In The USA.
China is growing faster than the well-to-do industrialized countries because it is poorer than they are. Poor countries have further to go, they can grow fast even with mediocre institutions as long as they are not bad.
Brazil needs to emulate a successful country whose income level is not far below its own. Chile might work. China does not qualify.
Who should Brazil follow? How about the U.S. circa 1985? That’s pretty much the same country the U.S. should follow, btw.
I know at least two local industry owners who invested in Brazil, but found manufacturing there to be far too bound up in state interference to be efficient. One of them is a political leftist with an MBA from Duke, who, the longer he spends in charge of the company his conservative father built, the more conservative he has become.
Heck, another four years of Obama and my acquaintance will be voting a straight Republican ticket!
I heard Rush Limbaugh relate a story about the famous liberal George McGovern. Apparently he opened a bed and breakfast and then went out of business. Why? Government regulations choked his business, some of which he was responsible for!
I notice a problem with BRICs (Brazil,Russia,India,China). They are all the rage up until problems occur. They are boom, and then bust, badly. China has a lot of problems that they have hidden okay by kicking the can down the road like Japan did during the 80s. Guess what? The can finally kicked back and Japan is still paying the cost of that kick. Now it is starting to kick the BRICs now and they are not doing too good.neither are we, but how much of that is because of zero or the can kicking us for being idiots remains to be seen after nov 6.
Brazil has had 7 (including current version, as of 1988) Constitutions. Not a one of them resulted in a satisfactory, viable system of governance. Coupled with these governing failures, are its economic failures. These economic disruptions, follow on the footsteps of its Constitutional Failures, every time.
Recently, a once strong, unified Brazilian Catholic Church was a refuge for 90% of Brazilians (practicing and non-practicing). With the Catholic Church’s succumbing to Gramscian revolutionary theories, this refuge has become a mere shadow of what it once was and represented.
Education, has always been a festering sore in Brazil’s “socio-political” daily expression. It harbored every leftist party, organizer and radical thinker worthy of their marxist/leninst stripes.
Brazil’s 60′s military revolution was aimed at ridding the country of this cancer – once and for all. These marxist fled like rats, only to form little “cells” around the country. Laterm these commies got rid of the dictatorship in 1980-84 and now have their idols Lula and Dilma firmly elected and enconced in Brazils – heart and soul, Brasilia.
Yes, Brazil has followed both Cuban and Chinese forms of governance…with predictable results, abject failure and chaos. Upcoming Olympics and World Cup are going to be “verrry interresting.”
Left, is a tattered Judicial system a handmaiden to constant revolutions, endemic corruption and out-and-out greed and corruption by far left, marxism/leninism.
Current cabal of Brazilian marxists, with “Central Committee Party President” -Dilma Rouseff has signed treaties with every left leaning regime of the 197 memebers represented in the United Nations…most importantly, China.
See, corrupt, greed and power politicos in Brazil will not allow Brazilians liberty and freedom. The napleonic Code is pervasive, with a twist, not only is a person guilty (having to prove their innocence) but the weight of red tape, twisted laws and absurd regulations inhibit any sane understanding of a citizen’s rights and justice. Because a Brazilian has no rights therefore hasn’t any access to any justice.
Good insight into a country few of us understand.
Chinese is successful not because they have a fixed model. It’s because they are pragmatic. They learned from everybody regardless ideology. This is the key to China’s success.
“It doesn’t matter whether it’s a white cat or a black; a cat catches mice is a good cat.”” – Chinese way.
No country is perfection, so as China. But the pragmatic way which Chinese deal their issues is impressive. All country should learn from them.
as the author suggests, we’ll soon see.
Brazilians are addicted to massive bureaucracy
They cannot even tax their own citizens due to simple disorganization
Crime is endemic
Incompetence is endemic
Corruption is endemic
Expanding a population is not the same as productivity
Recent years have been an expansion based on fluff
They are still a Third World country
2 Reais to the dollar, 3.5 a decade ago
A backpacker’s hotel was 4 dollars a night for an American in 1988
Today it is at least 10 times that
Bubble burst