What is the outlook for growth after the cyclical recovery?
Brazil is emerging from a long and deep recession, and for some time the monetary stimulus from low real interest rates will produce growth of actual GDP greater than potential growth. But what will happen afterwards? In this report we quantify the contributions of the sources of potential GDP growth: a) the labor force; b) fixed capital investments, determining the stock of capital, explicitly considering the limitation imposed by the fiscal adjustment on public-sector investments; and c) total factor productivity (TFP). Besides the constraint on growth imposed by public-sector investments, we consider two others. The first comes from the fact that Brazil has a low domestic saving rate, which requires partial financing of investments by absorption of foreign savings, in the form of current account deficits. The second comes from the growth pace of TFP, which is a highly pro-cyclical variable, so that its behavior during this phase of the economic cycle gives no indication about what it will be when the phase ends. For this reason, we examine the history of periods of growth without any cyclical recovery characteristic, when Brazil benefited from impulses from abroad or successful reforms.
The first conclusion is that potential GDP growth is low, on the order of 2% a year, and potentially lower. The second is that to achieve higher rates – which is perfectly possible – reforms are necessary that can raise productivity. Promises of higher spending and easy credit are not enough, nor are stimuli directed to sectors with strong lobbying power in Brasília. Submission to these pressure groups and the resulting errors of successive governments are the cause of the country’s current economic mediocrity, and society needs to demand economic policies that promote the common good and boost productivity rather than policies beholden to special interest groups.
Now read on...
Register to sample a report