So, an economic turbo boost for the Brazilian chicken on Wednesday evening, as the central bank surprised most economists (and some traders) by cutting its policy interest rate by 75 basis points to 9.75 per cent a year. Brazil’s soaraway economy, which grew by 7.5 per cent in 2010, has come back to earth and the central bank, at the government’s urging, is determined to get it airborne again.
But should authorities be fixated on GDP? Some commentators say they shouldn’t. Surely, they ask, 2.7 per cent growth and 6.5 per cent inflation in 2011 don’t reflect the reality of Brazil? Yes, we reply, they do.
That was Jimmy Greer of Brazilintel tweeting in reaction to this week’s GDP figures and linking to his piece from January arguing Brazil had achieved ‘Gain without growth’.
And as one commentator remarked on Joe Leahy’s post for beyondbrics on Wednesday:
If a 2,7 % growth is a chicken flight which metaphor would you use for the UK growth in 2011??
Note: Brazil number 6!
We answer that for a developed economy such as the UK, 2.7 per cent growth would be exhilaratingly, even dangerously fast, while for Brazil it is not much and for China it would be outright disaster.
You have to know what a country’s “neutral” rate of GDP growth is – the amount needed to keep up with, say, population growth or urbanisation and the associated demands on the economy – before you can decide if the actual rate is too little, enough, or too much.
You also have to know whether a country spends its resources wisely, on things like productivity and high-quality public services, or squanders them on things like corruption and a bloated public sector.
Knowing these things, the rate of GDP growth is a very good indicator of how well an economy is doing.
Brazil has widespread poverty and public services of poor quality. Indeed, many people in the country’s rising middle classes must pay twice – once in taxes and a second time to the private sector - for basic public goods such as security, education and health services.
Fortunately for the government, the Brazilian people don’t complain much. They are proud of their country’s emergence onto the global stage and happy with a supply of cheap credit provided by loose monetary policy in the developed world and a flood of cheap imports to spend it on.
Given Brazil’s circumstances, we can say that 7.5 per cent growth in 2010 amounted to overheating and 2.7 per cent last year wasn’t enough. Brazil’s “potential” or non-inflationary growth rate is about 4 per cent a year – double what it was a decade ago but still not enough to solve the country’s social problems at much more than a snail’s pace.
Brazil laid out its road map to sustainable, faster growth almost two decades ago, with reform of taxation, labour laws and the public sector top of its list of priorities. Those things still haven’t happened. Until they do, Brazil will go on flying like a chicken.
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