Lessons from a neighbour

Trinidad and Tobago, despite the shutdown of ISPATT, has to be commended for the resource based industrialisation strategy and the development of the Vision 2020 long term Macro-economic framework that was supposed to chart the country’s economic development. As a young country we have had mixed experiences with the policy choices that we made. Here we can pay attention and learn valuable lessons of some of the bad policy choices made by our bigger neighbors to the south.

Brazil was a member of the emerging cohort of BRICS (Brazil, Russia, India, China and South Africa) countries, and there were those who held the view that she was closer than China to achieving entry into the ranks of the world’s richest nations. The economic data shows that Brazil’s income per person grew 12 percent after inflation, wages soared, the poverty rate plummeted, and even income inequality narrowed. For a time this was very impressive.

Despite these achievements, based on estimates of the International Monetary Fund (IMF), it is anticipated that between 2015 and 2017, the Brazilian economy will shrink by some eight percent. We must note that this is deeper than this contraction of the early 1980s. Unemployment in the first quarter of this year has now hit 11 percent. The progression of Brazil towards advanced economy status seems more like an elusive dream.

Brazil’s economic decline presents a number of complicated lessons. At the outset we must realize that economic development is difficult and requires considerable effort. Both Brazil’s economic rise and decline, and the Great American Meltdown of 2008 offer lessons: the former pointing to government’s inherent limitations, and the latter provides a good example why we have to exercise care about allowing markets to operate unfettered.

We in Trinidad and Tobago can easily understand the mistaken hopes the average Brazilian haboured that were inspired by high commodity prices. With China buying Brazilian iron and soybeans in large quantities, policy makers may have easily become caught up by the boom conditions and could easily be forgiven into feeling on top of the world as low interest rates in the United States pushed a wave of money into higher yielding Brazilian bonds.

However, there was no new economic paradigm from the commodity boom. The hubristic belief that Brazil developed from rapid economic growth and development led to critical policy mistakes. The economic boom delayed policies that were costly to implement: judicial reforms, tax reforms, education reforms, labor market reforms, and opening up to foreign trade.

It has to be remembered that Brazil’s economy has long been notably closed to the world. Its average applied tariff of 10 percent, according to the World Trade Organization, was the highest among the BRICS. Despite this, the Brazilian government increased subsidies and protection for favored sectors, like the auto industry. There were three federal development banks that engaged in large amounts of subsidized lending that by 2015 they were responsible for well over half of all lending in Brazil. This resulted in the Brazilian economy being strangled by the fast-rising public debt that was fed by billions in loans that had gone bad.

Certainly we in this country can appreciate that there is nothing inherently wrong with government action to spur the economy. Historical antecedents in Trinidad and Tobago allow us to appreciate government being an active participant in the economy. Unfortunately, the Brazilian government did not know where to draw the line in its participation in the economy. Often, the government’s interventions appeared to be political opportunism rather than an ideological position. Increases in the minimum wage were extremely popular and served as a critical benchmark used to index wages, pensions and a host of prices. There were also caps on regulated prices for gasoline and electricity, which kept the inflation rate from rising above its official target. This should be all too familiar to us: government dispensing contracts, subsidies, preferred financial and other forms of assistance and protection.

Then came China’s slowing demand for Brazil’s commodities, and the gradual tightening of monetary policy in the United States that slowed the Brazilian economy. But what turned the downturn into a crisis was bad policy-making that under gird the Brazilian economy.

There are a number of common sense lessons that arise from the Brazilian experience that we in Trinidad and Tobago can look at and learn from. For us in a small open economy with rapidly depleting hydrocarbon resources we need to pay attention to issues like investment in human capital, the need to manage a commodity bonanza (if they occur in the future) with caution, recognize that openness to foreign competition is necessary to development. The US President Obama argued just don’t do stupid stuff.

One important lesson is that the choices faced by governments in developing nations do not necessarily pit free markets against policies to combat poverty and foster social and economic inclusion. Brazil’s anti-poverty strategy started in the 1990s, long before the era of state control. It is interesting to note that most of Brazil’s subsidies over the last few years went to large corporations, not the poor. Have we computed who benefitted the most from gas subsidies? Let us learn from our neighbor’s mistakes and carefully watch those policy choices.