Brazil’s Much-Hyped Stimulus Package Destined for Infrastructure

on Aug 16, 2012
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Two years have passed since Brazil impressed the world with 7.5 per cent growth, a pace not seen in the country for at least two decades. But rising inflation, inadequate infrastructure and shortages of skilled labour have all contributed to a staggering slowdown in growth since. In 2011 Brazil barely managed to achieve a 2.7 per cent increase in GDP and this year it might be even worse with forecasts of only 2 per cent. GDP grew by an annualised 0.8 per cent in the first quarter, industrial output fell 5.5 per cent in June compared with the year before and retail sales in May fell 0.8 percent from April.

The economy has decelerated to the point where Mexico is once again a very likely candidate to regain its place as the largest Latin American economy. In fact, by using a growth model framework, analysts predict that Mexico will possibly overtake Brazil again as early as 2022. Should this scenario eventuate it would be a historic lesson of how liberal economic policies combined with high manufacturing productivity can surpass a massive commodity-exporting country.

To counteract the slowdown, president Dilma Rouseff and Brazil’s government have prepared and launched a R$133bn (£42bn) stimulus package with the purpose of encouraging investment in the country’s infrastructure and regaining investor confidence in what is, for now, the second-largest emerging market economy. From the total R$133bn (42£bn), R$79.5bn (£25.1bn) is planned to be spent in the next five years with the remainder spread out over 25 years.

!m[](/uploads/story/255/thumbs/pic1_inline.png)With more announcements and details to be expected in the coming months, President Rouseff said the government intends to begin allocating the stimulus by selling concessions for 12 railways and nine highways. Approximately 7,500km of roads and 10,000km of railways will be given over to private companies to build and manage. Leaving the private sector to operate the infrastructure projects is perhaps a wise choice given the Brazilian state’s previously dubious record in road building with the country’s highway infrastructure compared by many to a huge bottleneck preventing the huge country from flowing smoothly. According to transport minister Paulo Passos, the new measures should double the capacity of Brazil’s main highways. There are rumours that money will also be invested in a Rio de Janeiro to Sao Paolo bullet train, which Brazil has been considering for a very long time.

Sceptics say the new stimulus package will not solve Brazil’s problems. According to Royal Bank of Scotland:
“Contrary to consensus, financing for infrastructure spending is not the critical barrier for increasing potential GDP growth in Brazil. Speaking to the different layers of government, it becomes evident that structural and institutional issues are serious bottlenecks i.e. lack of skilled labour, inadequate legislation, excessive micro management of budget and concession processes. We do not envision infrastructure spending in its current form to be a game changer for Brazil.”

Encouraging is the fact that despite its centre-left position in the political spectre, Ms. Rouseff’s Workers’ Party that currently leads the government and is traditionally against privatization, has proven to act pragmatically when faced with infrastructure bottlenecks. Earlier this year projects were awarded to private sector companies for the redeveloping and the operation of three major Brazilian airports. These prompt actions have been taken in light of the approaching World Cup in 2014 and the Olympics two years after that.
According to logistic experts goods in Brazil take twice as long to move the same distance as they do in China and other more efficient markets. If the new infrastructure projects are successful, Brazil might finally get rid of one of its largest limitations and manage to boost its GDP back to previous higher levels.

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