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Two numbers sent a jolt through the government of Brazilian President Dilma Rousseff in March. The first was the gross domestic product figure for 2011: Brazil GDP grew only 2.7 percent last year, vs. 7.5 percent in 2010. That sorry statistic made Brazil the laggard among the BRICS nations (Brazil, Russia, India, China, and South Africa). The second number hurt, too: January industrial output contracted 3.4 percent from a year earlier. Rousseff’s strategy—to leverage Brazil’s strength to build up a world-class manufacturing power—is threatened.
Rousseff’s impulse is to protect Brazilian industry. In that respect she hasn’t strayed far from her days as a graduate student studying developmental economics with some of Brazil’s most left-wing professors. Many of Brazil’s companies from the textiles, shoe, electronics, and other industries are urging her on, as she’s imposed tariffs on shoes, chemicals, textiles, and even Barbie dolls. Under pressure from automakers, which saw imports jump 30 percent last year, the government renegotiated a trade deal in March that caps car imports from Mexico for three years.
Rousseff has also been quick to condemn the loose monetary policy of the U.S. and Europe, which, she said in a speech in Germany on March 5, forced a “monetary tsunami” on Brazil. European and U.S. investors turned off by low rates at home have been buying higher-yielding Brazilian bonds. The influx of foreign capital has strengthened the real, which reached a 12-year high against the dollar last year. In recent weeks, Finance Minister Guido Mantega has threatened to unleash an “infinite arsenal” of measures against investors driving up the real. That blast has weakened the currency somewhat, but it remains much stronger than during most of the administration of Luíz Inácio Lula da Silva.
Strong currencies make exports more expensive. Brazil’s trade deficit in manufactured goods was $92.5 billion last year. Strong currencies also make it cheaper to buy foreign goods: One in five industrial products consumed in Brazil was imported in 2011, according to the National Industry Confederation.
While the currency is having an impact, Brazilians in industry say the problem is much bigger. Rousseff’s moves don’t address inefficiencies in the world’s sixth-largest economy, says José Augusto de Castro, vice president of the Brazilian Foreign Trade Association. He argues that the government has used the currency as a scapegoat to hide the lack of progress in fixing infrastructure. The government also must reduce the second-highest interest rate (9.75 percent) in the Group of Twenty nations and relieve a tax burden that totals 34 percent of GDP. “It’s no good blaming others. We’re at fault as well,” he says.
Inflation has also been pernicious, driving up the costs of energy, raw materials, and wages. Operating costs in Brazil are now higher than in many developed countries, says José Velloso, vice president of the association of machine builders. “If you were to take a factory by helicopter from Germany to Brazil, your costs would jump 48 percent as soon as you touched down,” says Velloso. “Those of us producing in Brazil are doomed not to be competitive,” he adds. Bank loans at double-digit rates are much more expensive than in Germany, and steel costs 30 percent more in Brazil, says Velloso. Because of wage inflation, a treasury director at a multinational company in Sao Paulo earns 285,000 reais, compared with 185,OOO in New York and 249,000 in Shanghai.
The government has granted tax credits and low-cost loans to boost domestic production and promote research in such areas as digital tablets, automobiles, and offshore oil production. It also intends to cut payroll taxes in up to five industries to push down labor costs. Julio Gomes, economist at the industry-funded think tank Iedi, thinks manufacturers will still struggle. In a worst-case scenario, Brazil’s industry could lose another 20 percent share of its market and 1 million jobs, Gomes says.
The decline of its industry could force Brazil to reassess its strengths—and that could be a good thing, says Alberto Ramos, chief Latin America economist at Goldman Sachs (GS). “What is the comparative advantage of Brazil? I doubt it is industry. It’s services, agribusiness, and commodities,” says Ramos. “The economy needs to redirect resources to where it’s competitive. That’s actually a healthy process.”
The bottom line: With a trade deficit of $92.5 billion in manufactured goods, Brazil faces an uphill battle in making local industry competitive.