• Mathieu Provencher

Brazil has to pay the tab

Hi again Guys! Let's talk a bit about Brazil...

A number of years ago, Brazil was identified as one of the next big economic opportunity (part of the BRICs) in the less developed countries. It was called a rapidly industrializing country, which simply meant that it was going from agriculture-intensive activities to manufacture-intensive activities.

Jim O'Neill was broadly right in his analysis and Brazil, as well as the other countries, flourished for a time... now, however, it may be entering a recession (we will know for sure in two years).

What seem to have happened in Brazil may be happening in Peru as well... and perhaps Venezuela and Argentina if you want more extreme examples. The government, and economic agents in general, had high spending thanks to commodity booms (which benefited Brazil quite considerably). The government, and again various economic agents, took on big loans in order to invest in what we call vanity projects... which are usually infrastructure projects with high Veblen effects (in other terms, they look good but they are fairly useless).

One of these was indeed the world cup coming to Brazil. The country was absolutely not prepared for this type of investment. Many international commentators deplore the lack of professionalism as well as the state of much of the infrastructure (same thing happened when the Cop 20 came to Peru... all representatives I talked to complained about the complete lack of support and readiness for the event).

All these "mis-investments", as Hayek would put it, lead to high debts with no significant increase in long-run economic activity. That leads to something very simple: more to pay back and not more to pay back with... this is now happening where the government needs to implement austerity measures (reduction in spending for example) and individuals will need to consume less.

That's a classical Keynesian Aggregate Demand decrease, leading to less economic activity and higher unemployment. Adding to the general decrease in economic activity Brazil's structural problems, such as disastrous income inequality (still one of the worst in the entire world), poor education quality and quantity, and poor infrastructures (to name a few), this is a clear example of a missed opportunity.

As you guys may know, I am from Canada. A student told me once that Canada is boring when compared to Brazil (she actually said it in a more absolute way but let me smooth her words a bit). I think she was actually right... Canada chose in some way to have an economy that would be better structured and give more opportunities to everyone, which brings less social frictions and more stability, while Brazil chose somehow to have a more "emotional" economy with high informality and almost no social mobility (a high proportion of Brazilians are not even connected to sewers for example, and they stay like that for generations)...

Many other factors also explain our current economic situations but remember that in Economics, there is double-causation between almost everything... it's a continuous virtuous or vicious cycle of dynamism!!!!

Have fun guys!

#Brazil #Debt #Austerity #BadInvestment