Rio De Janeiro

What’s Ailing Brazil?

After decades of rapid economic growth and per capita income gains, Brazil is struggling, with IMF forecasts indicating that the country’s GDP will decline by more than 7% in 2015-2016. This reversal of fortune can be explained by four key factors, some of which will be easier to address than others.

WASHINGTON, DC – After decades of rapid economic growth and per capita income gains, Brazil is struggling. According to the International Monetary Fund, the country’s GDP is poised to contract by more than 7% in 2015-2016. No single factor explains this reversal of fortune. Four do.

For starters, there is the structural trend of rising primary government expenditure as a share of GDP, which reached 36% in 2014, up from 22% in 1991. This increase reflected a political desire to address the poverty and inequality that had gone unaddressed during previous decades. To support the increase, Brazil’s government increased taxes on consumption and promoted progress toward labor-market formalization. Nonetheless, public investment, particularly in infrastructure, took a hit. In fact, with the exception of the 2005-2008 period, total investment as a share of GDP has remained below 20% since 1991.

The second factor shaping Brazil’s fortunes is the commodity-price super cycle. The upswing in commodity prices that began in 2004 brought many benefits for Brazil: external surpluses, the accumulation of foreign-exchange reserves, positive wealth effects, and higher investment in natural-resource-related sectors. Add to that exchange-rate appreciation and rising minimum-wage floors – not to mention public-sector disbursements indexed to the latter – and Brazil enjoyed a virtuous domestic cycle featuring positive feedback loops between demand for services and formal employment.