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Brazil tomorrow: Consumption must share the spotlight with Investments
By Leonardo Cardoso
Brazil has survived the global recession relatively unscratched and it has enjoyed a period of economic growth not
seen since the Vargas and Kubitscheck eras (40’s and 50’s respectively). However, this time around consumption
increase has been on the forefront of the economic expansion. It is not a secret that Brazilians prefer to spend
today instead of save for tomorrow. Who is going to blame them? After all, years of stagflation and economic
disarray left Brazilians thirst for new gadgets, fashions, trends and fads. The problem is that consumers are
spending like a developed nation.
Most of the consumption increase is due to credit expansion; which has been fueled by relatively lower interest
rates, a stable and predictable economy and some improvements in the legal and regulatory framework of credit
(thus, lower credit spreads). In addition, extensive social programs such as universal health care, free education,
and a profuse entitlement program that includes full pay for early retirement, also has influenced the spend vs.
save decision.
During the last ten years, Brazil savings rate has averaged 17% of GDP while China averaged 45% to 50%. From
2005 to 2009, household debt to income ratio almost doubled from 18% to 35% and currently, households are
spending about one quarter of their income to service their debt (amortization of principal and interest).
Nevertheless, consumption may still increase, but it will require faster income growth, lower interest and longer
debt maturities.
Another reason for the consumption growth is the fact that millions of Brazilians have now been lifted from misery
and poverty. During the last few years, growth in income for the bottom 30% of the population has been almost
twice as fast as the growth income of the top 30% of the population. I have nothing against consumption growth
and I do believe it to be an important drive of prosperity, but by itself is not sufficient as a condition for sustained
economic growth. Brazilians will need to save and invest more!
During the last fifteen years, gross investment as a percentage of GDP averaged 16.5%. Brazil is country number
118 on the global rank for investments as a percentage of GDP. China is number 6 with 40.2%, India is number 8
with 39% and Russia is number 54 with investments of 34.7% of their GDP. In the past, pundits justified those low
level of investments to the threat of left leaning parties controlling the country. However, since moderate left
leaning1 President Lula took office in 2002 and showed to the world his intentions to keep macro economic
stability, fears of socialism and anarchy subsided. A jump in the level of investments was expected, but it never
materialized because of the government’s stretched finances, high interest rates and poor regulatory framework in
some areas.
Problems with infrastructure are evident and if nothing is done soon, they will frustrate the optimistic expectations
of financial markets. To justify the status of emerging economy, especially a place among the so‐called BRIC, Brazil
will have to invest in infrastructure and education. The presidential campaign that is underway will help us to
understand where things are going. The next president will face tough political decisions related to government
expenditures, how to attract long‐term private capital and how to boost the population savings rate. If the country
wants to increase its rate of economic growth, these decisions will have to be made in a timely fashion.
1
The term moderate left is used to indicate the fact that president Lula has moved from the farther left towards the center of the political
spectrum throughout his career.
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