A mix of
- unsustained economic policies
- widespread corruption
- political scandals
- poor productivity
- crucial dependency on natural resources
- high consumption instead of competition and investments
- excessive bureaucracy
could lead to the greatest recession in over 100 years for the country.
If you think, this country is Romania, you’re not completely off track.. But, however, the above mentioned downfall is the sad story of Brazil in recent years.
So, if you didn’t care about Brazil since the ‘World Cup’ in 2014 and next time you intend to watch news from Rio or Sao Paulo is during this year summer Olympics – then you missed quite a drama.
Until 5 years ago, Brazil was a star among the newly advanced economics called ‘BRICs’ (for Brazil, Russia, India, China). Thanks to rising oil- and other commodity-prices, Brazilians’ purchasing power increased – as did the per-capita GDP – between 2000 and 2011 from 3’700 to 12’400 USD and South Americas largest country became the darling of both investors and rating agencies.
The steep downfall since then is based on:
During the commodity-boom from 2004 to 2014, the state-run energy firm Petrobras, Brazil’s largest company, was engaged in one of the most astonishing corruption schemes ever to be uncovered. It involved three main groups of players: leaders at Petrobras, top executives at Brazil’s major construction companies and Brazilian politicians.
Huge sums of money would be hand-delivered by an elderly gentleman who flew around the world with bricks of cash. Sometimes bribes would be distributed in the form of Rolex watches, 3’000 USD bottles of wine, yachts, helicopters and ‘special ladies’. All in all, somewhere upward of 5 billion USD changed hands as part of this scheme.
It’s true that the country’s problems stem partly from the fall in prices of typical Brazilian commodities such as oil, iron, ore and soy. But since the bust has hit economies around the world, the root of Brazil’s problem lies deeper in its structural weaknesses as poor and unaffordable productivity, misdirected public spending.
President Dilma Rousseff and her left-wing Partido dos Trabalhadores (Workers’ Party) have made a bad situation much worse.
During her first term, in 2011-14, she spent ‘extravagantly and unwisely’ as ‘The Economist’ described it, on higher pensions and unproductive tax breaks for favored industries. The fiscal deficit swelled from 2% of GDP in 2010 to 10% in 2015.
Consumption instead of competition
The assumption over ever rising commodity-prices led to fatal economic decisions.
A typical left wing state-run capitalism to gain votes was set in place: A consume-driven domestic market, sealed against international competition, ‘organized’ with excessive bureaucracy and financed only through the proceeds of commodity exports. It only took a dive in commodity-prices to let this house of cards collapse.
In the recently published annual World Bank-report ‘Doing Business’ (more about in ‘The Proteins and Minerals of an Economy’ in a post from earlier this month) Brazil only makes a lousy 116th rank out of 189 countries worldwide.
This brings us back to Romania where some could see ‘Brazil’ in many aspects: unsustained economic policies (as the debt relief, rising salaries, lower taxes) amid structural weakness (low productivity, poor competiveness) or a consumer-driven economy with rising imports, while Foreign Direct Investments and exports of goods are sinking.
This will result in an even higher current account deficit that sooner or later will create inflation and affect the RON negative.
Government of Romania, please step aside
”Romania has two major challenges: the dependence of the European Union in terms of finance and strategy and its lack of self-confidence” said George Friedman, founder of Stratfor, a geopolitical forecasting firm based in Austin, Texas, this week at a conference in Bucharest.
According to Friedman, Romania’s great weakness is that the country has too much oil and too much natural gas. In some ways, energy and minerals helped Romania, in others these resources held the country captive and something must be added to the relevant operations.
“You are now in circumstances where you need to keep the minerals operations, but it is absolutely necessary to supplement them“, Friedman warned.
Romania’s should try to expand its businesses in Ukraine, the Balkans, and the eastern Mediterranean region. In addition he proposed that the banking system must be built to serve the needs of the small enterprises. The size of a company is unrelated to its appetite for service. “Americans are looking for places to invest, Romania being one of them, but the Government must step aside for a while”, Friedman stated.
With regard to Brazil’s recipe ‘How To Destroy A Country And It’s Economy’ it should be a top-priority for Romania to change its strategy and avoid ingredients like unsustained economic policies, widespread corruption, poor productivity, lousy competitiveness, dependency on natural resources and excessive bureaucracy and follow Friedmans advice.
Brazil’s rise and fall seen through covers of ‘The Economist’ in November 2009 and January 2016