Brazil still face same old problems

On 26th December 2011, Brazil overtook the UK as the world’s sixth largest economy, according to an economic research group, Centre for Economics and Business Research. The country’s strong economic growth and high interest rates make it an attractive destination for foreign investors. Furthermore, Brazil’s large capital inflows over the past year have contributed to the rapid appreciation of its currency and led the government to raise taxes on some foreign investments. Although, at face value, the Brazilian economy seems unstoppable, there are some old notable problems; weak transport, poverty, high taxes and crime.

Brazil’s economic growth last year was enough to see it overtake the UK as the world’s sixth-largest economy, according to Centre for Economics and Business Research. This was not due to financial innovation or state capitalisation but simply an exploitation of its vast domestic labour potential – being a population of 195 million – which has helped to protect the economy from any global economic storms. Despite being six times smaller than China’s 1.3 billion population, Brazilians have much higher purchasing power. This is because Brazil’s exports accounts for 13%-14% of its economy, whereas China is 40%. While exports are important for Brazil, and it wants to increase them, it is not dependent upon them. Mr Itzaina, boss of an engine-maker Rolls-Royce, said “God blessed Brazil with huge amounts of natural resources”. Brazil always had minerals, fresh water and recently, discovered huge reserves of oil and gas, attracting more foreign money as the world’s natural resources slowly run out. With substantial oil and gas reserves continuing to be discovered off Brazil’s coast, the country is now the world’s ninth largest oil producer, and the government ultimately aims to enter the top five. However, Brazil must resolve certain issues.

Firstly, they lack a public transport network in the busiest capital, Rio de Janiero. The city has just one underground train line for its 6.1 million population. As a result, traffic jams are a serious problem on the city’s roads, and travelling around by bus or taxi is time consuming. In order to build a successful economy, the ‘hub’ of the country’s most concentrated economic activity must improve its transport, considering the 2014 World Cup and Rio being home to the 2016 summer Olympics. Instead of digging new underground lines, the city is creating a Bus Rapid Transport (BRT) scheme with four new dedicated bus lines. Around $1.4 billion is invested in BRT, which is 10% of the cost of building a new underground network of the same length. Building a BRT system is much swifter than building more underground lines and hopes to open first stages in July or August of next year. It would seem the benefits outweigh the financial costs.

Secondly, it must resolve its poverty issues. Brazil is continuing to work with the federal government to build hundreds of new houses for the country’s poor, under a nationwide scheme called My Home, My Life. The aim is not to force people out of Rio’s many favelas (shanty towns). The council’s efforts come as the police, backed by marines, continue to force out drug gangs and take control of favelas. The substantial economic growth in the global economy over the past decade has created many additional jobs in Brazil, pulling people out of poverty without the government having to intervene. Hence it is vital for Brazil that economic woes in the Europe do not result in Brazilians, who have become middle class, falling back down again. In short, it seems poverty in Brazil has reduced but the rate of poverty reduction is partly dependent on global economic outlook.

Another main weakness is the country’s “extremely complex tax system” with more than 60 different types of taxes. When it comes to food and consumer goods, the level of VAT varies widely, from 17% for tomatoes, up to 50% for an iPod. This reduces consumer disposable income who will be less able to maximise their utility. In the long run, consumer confidence will decrease as they are less willing to spend. In short, the tax system must be simplified and improved to improve economic welfare despite it hasn’t deterred firms from coming to Brazil.

Brazil, however, is most notable for its high crime rate. Brazil’s crime rate remains high in most urban centres, including the cities of Rio de Janeiro and Sao Paulo, and is also growing in rural areas within those states. Brazil’s murder rate is more than four times higher than that of the United States, and rates for other crimes are similarly high. Brazil has seen a recent increase in reported cases of rape. Firms will ultimately be discouraged to set up business or factories due to safety fears. Its high crime rate will force the government to invest in more security such as the National Security Force and BOPE. Whether the country has the fiscal manoeuvre to facilitate such costs is uncertain.

Brazil, like any country, has its own problems but has already taken steps to minimise those problems. Brazil’s production possibilities will increase because it has discovered new resources and has increased the efficiency of using these resources to produce consumer goods. In the long run, this will increase Brazil’s GDP and thus, boost economic growth. Furthermore, it will decrease the unemployment rate, meaning more people will be taken out of poverty, reducing the incentive to turn to crime, and thus, will lead Brazil closer to Pareto optimisation of social welfare. Brazil is very well placed for the future if and only if, it can resolve its same old recurring problems.

Contributed by Wafiq Islam

Leave a Reply

Your email address will not be published. Required fields are marked *