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How Brazil’s economy can bounce back after the pandemic

. Jul 30, 2020
economy

The Covid-19 pandemic has thrown the world into a deep recession, the true extent of which remains to be seen. For Brazil, experts project economic depression, perhaps the worst on record, with a complex path toward recovery. Brazil is facing a job crisis, with massive underutilization of the labor force and a rising number of informal workers — who earn less money and enjoy fewer (if any) protections and benefits. Meanwhile, Brazil’s public debt — currently over 80 percent of GDP — will hamper the government’s ability to throw money at the crisis as a way to recover the economy.

The Central Bank forecasts a 6.4-percent fall in Brazilian GDP for the year, which almost seems positive compared to the U.S.’s 32.9-percent contraction in 2020’s second quarter.

</p> <p>Yet, not all is lost, as much of the country’s economic recovery can still be shaped by the government’s planning moving forward.</p> <p>According to the federal government’s<a href="https://www.ipea.gov.br/portal/images/stories/PDFs/relatorio_institucional/200521_riI_o_brasil_a_pos_covid_19.pdf"> Institute of Applied Economic Research</a> (Ipea), implementing the right recovery policies could see Brazil almost double its projected GDP growth over the next 10 years, going from the current mid-pandemic projection of 25.1 percent to a 42.5 percent increase by 2030.</p> <p>This “transformative” scenario, as Ipea labels it, would not only fast track economic growth but also overtake the slow pre-pandemic growth trajectory observed in 2019.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3339188" data-url="https://flo.uri.sh/visualisation/3339188/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>If Brazil somehow manages to control the Covid-19 pandemic – and that’s a big “if” given the<a href="https://brazilian.report/business/2020/07/23/economics-second-covid-19-wave-brazil/"> increasing likelihood of a second wave of cases that would worsen Brazil’s economic crisis</a> — here’s how an effective economic recovery could take place.</p> <h2><strong>Protecting small and medium businesses</strong></h2> <p>Small and medium enterprises (SMEs) make up over 95 percent of Brazilian businesses and are responsible for the creation of about 60 percent of all formal jobs in Brazil, according to<a href="https://datasebrae.com.br/totaldeempresas/"> Sebrae</a>. Their survival is of vital importance to maintain the current market infrastructure and prevent worsening Brazil’s economic crisis even further due to a business shortage.</p> <p>As of early July, at least<a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/07/16/pandemic-at-least-716000-businesses-have-closed-for-good/"> 716,400 companies shut up shop for good</a> during the pandemic, of which 99.8 percent were SMEs, according to the Brazilian Institute of Geography and Statistics (IBGE). This showcases the greater vulnerability of these businesses to the pandemic’s negative effects.</p> <p>Furthermore, as of May, only 13.2 percent of SMEs had access to credit lines from banks, due to their higher likelihood of going out of business or defaulting on repayment. The first round of<a href="https://www.congressonacional.leg.br/materias/medidas-provisorias/-/mpv/141415"> government measures</a> to assist struggling businesses also excluded enterprises with an annual income below BRL 360,000 (USD 69,000), creating a blind spot that mostly left the smallest businesses to their own devices.</p> <p>It was not until late June, with<a href="https://www12.senado.leg.br/noticias/audios/2020/06/mp-libera-r-20-bilhoes-para-credito-a-pequenas-e-medias-empresas"> the creation of a BRL 20 billion credit line</a> specifically for SMEs, via the National Program for Support of Micro and Small Businesses (Pronampe), that the federal government finally provided a significant lifeline to struggling small businesses. The results were felt instantly.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3339487" data-url="https://flo.uri.sh/visualisation/3339487/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>“In a few days [after its implementation], 100 percent those resources were taken up. So, there were many businesses that took advantage of this opportunity, with a low interest rate never seen before,” says Guilherme Dietze, economic advisor of the São Paulo Commerce Federation (Fecomércio), in an interview with <strong>The Brazilian Report</strong>. “[The credit] provided great freedom and ease to small and medium businesses [at a difficult time] … It was the main axis of the government’s aid to avoid greater disruption among SMEs.”</p> <p>One of Ipea’s suggestions to continue addressing the issue would be creating another credit line destined towards SMEs, but with distribution given through monthly installments instead of a lump sum, much in the way that the federal government’s<a href="https://brazilian.report/newsletters/brazil-daily/2020/03/27/brazil-to-pay-emergency-salary-to-informal-workers/"> emergency salary</a> aids low-income households and informal workers.</p> <p>The program could be designed to run for two or five months, with an initial cost of BRL 17.4 billion (0.24 percent of Brazil’s GDP) or BRL 71.2 billion (0.98 percent) respectively, with the federal government initially acting as the guarantor of credit provided by banks.</p> <p>SMEs would be able to repay the loans gradually through commitments attached to a percentage of their total revenue. The Ipea report projects that the total debt should be paid, on average, within two years for a two-month program and within five for a five-month program.&nbsp;&nbsp;&nbsp;</p> <h2><strong>“New money” through foreign investments</strong></h2> <p>Despite the much-needed injection of capital in the market to restart the economy,<a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/06/23/brazils-federal-tax-revenue-down-33-percent-in-may/"> dwindling federal revenues</a> and the still-growing public debt greatly limit the government’s ability to generate public investments.</p> <p>A good way to make up for the lost capital is by attracting private investments to strategic segments of the economy. With a limited pool of domestic investors capable of extensively investing during the Covid-19 pandemic, the large part of private investment resources lie outside of Brazil.</p> <p>“We need new money. Public sector investments got complicated with the deficits in revenue that limit the state’s capacity to invest. You have a few national investors that could bear [large spending], but the largest chunk of money comes from abroad. It is super important for you to attract these investments, to put Brazil on the radar of global investments,” says Sandro Cabral, an economy and public policy professor at the São Paulo-based Insper Business School, speaking to <strong>The Brazilian Report.</strong></p> <p>“For example, in infrastructure, we could have capital coming in, new players arriving to operate infrastructure while generating competition and avoiding capitalization of some sectors (…) Foreign investments would be really important to bring Brazil back on a course of much-needed sustained growth.”</p> <p>&nbsp;The current economic scenario, with benchmark interest rates slashed to just 2.25 percent, could be especially inviting to private investments in infrastructure projects such as revitalizing roadways, creating new railway networks, and boosting Brazil’s public health system, for instance. In theory, this would fast track much-needed infrastructure improvements while also creating job opportunities.</p> <p>“There is a big demand across the country for investments [in infrastructure], which tend to be profitable now. A low benchmark interest rate should facilitate many investments. The focus of investors now is going to new businesses and infrastructure,” says Josilmar Cordenonssi, an economics professor at Mackenzie Presbyterian University.&nbsp;&nbsp;&nbsp;&nbsp;</p> <p>However, poor environmental policies and an unwavering alignment by President Jair Bolsonaro with his U.S counterpart Donald Trump — often to the<a href="https://brazilian.report/power/2020/06/07/brazil-wasting-golden-opportunity-in-us-china-feud/"> detriment of Brazil’s economic opportunities</a> — have left Brazil more isolated instead of welcoming international partners.</p> <iframe src="https://open.spotify.com/embed-podcast/episode/3nyYw0CidCtfoMbx5v23yn" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <p>In late June, a group of 30 investment funds — which manage a combined fund of USD 4.1 trillion — sent an open letter to Brazilian embassies criticizing the lack of commitment by Mr. Bolsonaro’s administration to environmental protection policies and<a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/06/26/deforestation-in-brazil-poses-growing-investment-risks/"> threatening to pull investments from Brazil</a> if the<a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/07/10/amazon-deforestation-rises-for-14th-straight-month-in-brazil/"> record-breaking deforestation rates in the Amazon continued</a>.</p> <p>“How are you going to — in the current scenario — attract long-term investments that require institutional maturity and credibility when you have question marks such as the Amazon situation? [Brazil] is turning its back on international public opinion [with its handling of the Amazon],” Mr. Cabral says.&nbsp;&nbsp;</p> <h2><strong>Simpler tax regulation</strong>s for a healthier economy</h2> <p>Long overdue <a href="https://brazilian.report/newsletters/brazil-daily/2020/07/30/5g-united-states-big-stick-diplomacy-brazil-ban-huawei/">tax reforms</a> could successfully redistribute the tax burden from the most vulnerable groups to the richer sections of society in a more equitable way, while also boosting the balance of the public coffers.</p> <p>Ongoing tax reform talks between Congress and the Executive could provide this extra financial relief to public accounts and alleviate taxes which are disproportionately weighted on consumption, moving to a more income-based model.</p> <p>“If we could have a more ambitious tax reform to simplify taxes it would be a step towards a recovery plan (…) I believe Brazil would need more ambition and to reduce consumption-based taxes and raise taxes on income,” says Mr. Cordenonssi. “You would have a fairer system, as consumption-based taxes are retroactive and affect more poor people than the rich.”</p> <p>Yet, current proposals seem too modest<a href="https://brazilian.report/power/2020/07/22/brazil-promised-tax-reform-overhaul-more-tweak/"> to truly overhaul Brazil’s tax system</a>.</p> <p>There is no shortage of effective paths to recover from the Covid-19 economic crisis. It remains to be seen whether the federal government will follow any of them.

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Rafael Lima

Rafael is a Communication student at Wake Forest University, and a student fellow of the Pulitzer Center on Crisis Reporting.

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