The Mirage Behind Brazil's Economic Miracle

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Joe Nocera discusses Brazil's approach to economic development in his most recent New York Times column:

"What I saw was no illusion. Though its starting point was quite extreme, Brazil is a country that has seen income inequality drop over the last decade. Unemployment is at near record lows. And the growth of the middle class is quite stunning. By most estimates, upward of 40 million people have been pulled out of poverty in the last decade; extreme poverty, says the government, has been reduced by 89 percent. Per capita income has continued to grow even as G.D.P. growth has slowed.

"Nevertheless, the economists I spoke to were uniformly bearish about the short-term future of the Brazilian economy. They pointed, for starters, to that slowdown in G.D.P., which they didn't expect to pick up anytime soon. Despite the country's enormous economic gains since the beginning of this century, there has been very little accompanying productivity gains. Indeed, several economists told me that the main reason unemployment was so low was that the economy was terribly inefficient. ...

"As I listened to the economists, though, I couldn't help thinking about our own economy. Our G.D.P. growth was more than 4 percent in the third quarter of 2013, and, of course, our productivity has risen relentlessly. But, despite the growth, unemployment can't seem to drop below 7 percent. And the middle class is slowly but surely being eviscerated -- thanks, at least in part, to those productivity gains. Income inequality has become a fact of life in the United States, and while politicians decry that fact, they seem incapable of doing anything about it. Which made me wonder: Whose economy runs better, really?"

This is a fair point. Economic growth is not an end in itself; it is a means to human flourishing. The upward march of numbers on the tables at the Bureau of Economic Analysis doesn't matter, unless the well-being of ordinary Americans is also being elevated.

This is probably the part of the post where you expect me to point out all the ways in which life has gotten better ... smartphones, Google, etc. And that would be a good post! But it's not the post I'm writing.

Rather, I'm thinking about the cases of Venezuela and Argentina, which, along with Brazil, won praise in some quarters for bucking the neoliberal consensus and focusing on their own poor, rather than mindlessly pursuing economic growth that primarily benefited the rich. When Argentina went off its dollar peg 12 years ago, they took a very hard line with international investors, telling them to accept deep losses on the debt they held or get nothing at all. Venezuela diverted investment funds from its state-owned oil companies to "social investments" in services for the poor.

And for quite a while, it was plausible to argue that the quality of life improved at the bottom, and their economies grew. Neoliberals could mutter that these economies were eating their seed corn -- that disinvestment in Venezuela's oil sector was causing production to decline, and Argentina was choking off the flow of international capital that should be funding its growth. But during the long commodity boom that led up to the Great Recession, their opponents could fairly respond that there was no evidence of these problems in the growth numbers.

But as soon as the commodity boom slowed down a little, the problems showed up. Venezuela has been reduced to instituting an ever-more-desperate series of price controls and currency restrictions as oil prices moderate, leading to recurrent shortages of basic goods such as toilet paper, and a boom in airline tickets that give people the right to buy goods abroad. Argentina, too, has taken desperate measures as the want of capital became severe. A few years ago, the government seized Argentina's version of 401(k) accounts and rolled them into the government pension system -- ostensibly because the accounts were mismanaged, but really because the government needed the cash infusion. Now they're forcing everyone to pick up their e-commerce shipments at central depots, the better for the government to heavily tax foreign currency transactions. These are the acts of governments whose finances, and currencies, are in very bad shape.

Brazil is not in this class of malfunction. Its economy, too, has slowed along with the global demand for the commodities it sells. Inflation is stubbornly high, and the currency will be vulnerable when the U.S. Federal Reserve finally tapers off its monetary stimulus and investors stop "reaching for yield" in emerging markets. And Brazil engages in various forms of unwise market meddling such as holding down the price of electricity and petrol. But Brazil's policy makers have not taken an ax to capital investment in the way that Argentina and Venezuela have, and so Brazil is not vulnerable to the megaproblems that those countries face.

But if Brazil's policy has not been actively terrible, it has also failed at important tasks: raising the economy's productivity, weaning it off excessive dependence on commodity prices. Like much of Latin America, Brazil's growth is extremely dependent on commodity exports.

Exports: Top 5 Goods Cumulative Share:

Source: COMTRADE and BBVA Research

When global demand booms for raw materials, these economies do very well indeed. When it slows, the internal growth necessary to pick up the slack is hard to generate.

Ultimately, this sort of growth will matter more for Brazil's poor than redistribution will. It's quite possible that this is not either-or: Maybe you can foster sustainable growth and invest in social services. But if Brazil had to pick one, they have picked the one that will ultimately leave their poorest citizens worse off.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Megan McArdle at