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The China Temptation

Why Brazil should reject Beijing’s economic model. (You can read this article in Spanish here.)

by
Jaime Daremblum

Bio

August 10, 2012 - 12:06 am
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Meanwhile, in the World Bank’s 2012 Ease of Doing Business Index, Brazil ranks 126th, behind all but six Latin American and Caribbean nations (Honduras, Ecuador, Bolivia, Suriname, Haiti, and Venezuela). For that matter, it ranks well behind China (91st), both overall and in the category of paying business taxes (where Brazil ranks 150th and China 122nd).

The notorious “Brazil cost” — that is, the cost of doing business in South America’s largest country — reflects a policy environment urgently in need of improvement. To that end, President Rousseff should champion structural reforms aimed at making the Brazilian tax and regulatory systems more efficient and more supportive of entrepreneurship, job creation, and private investment. (Since 1988, the total tax burden has increased from 22 percent of the economy to 36 percent, with the tax code simultaneously becoming more and more Byzantine.) Rousseff should also push for the education reforms necessary to cultivate a more skilled workforce that can compete in a globalized economy. (In the 2009 Program for International Student Assessment test, which graded the performance of students in 65 different countries and school systems, Brazilian pupils finished 53rd in reading and science, and 57th in math.)

Admittedly, fixing Brazil’s infrastructure problems will require more effective government spending. But that does not mean Brazil should seek to emulate China. Quite the opposite, actually. The China model has produced wasteful spending and capital misallocation on a truly massive scale. Does Brazil really want ghost towns, ghost airports, and trains to nowhere?

Beijing’s economic strategy has also fostered rampant corruption, which is not surprising, given its reliance on state-owned enterprises. (China ranks below Brazil in the Transparency International Corruption Perceptions Index.) And it has created “pretty much the biggest emerging market property bubble ever” (in the words of MoneyWeek editor Merryn Somerset Webb), a bubble that may already be in the process of bursting.

Communist officials have responded to the recent Chinese economic slowdown by rolling out a new wave of government stimulus policies, including more gigantic infrastructure projects. While these stimulus measures “will succeed in keeping high single-digit growth going for a time,” writes Berkeley economist Barry Eichengreen, “they will do so by aggravating the economy’s imbalances and storing up problems for the future. This is not good news for those of us concerned with China’s longer run prospects.”

Such concerns are apparently shared by many of China’s wealthiest citizens. According to a newly published report cited by The Economist, more than 16 percent of all Chinese with personal wealth above $1.6 million “have already emigrated, or handed in immigration papers for another country,” and another 44 percent “intend to do so soon.” In addition, more than 85 percent “are planning to send their children abroad for their education, and one-third own assets overseas.”

Simply put, state-led capitalism is not a long-term solution for China’s economic problems, and it’s certainly not a long-term solution for Brazil’s problems. Let’s hope anxious Brazilian officials understand that.

(You can read this article in Spanish here.)

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Jaime Daremblum, who served as Costa Rica’s ambassador to the United States from 1998 to 2004, is director of the Center for Latin American Studies at the Hudson Institute.
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