The Savills Blog

5% Growth for Brazil in 2019?

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I may be wrong, but I see a wave of economic opportunity on the horizon for South America's largest country.

The Brazilian economy has been through a lot of ups and downs over the past 16 years. Mostly downs. Former President and current inmate Luiz Inácio Lula da Silva was credited by many with pulling millions of Brazilians out of poverty, but it turns out that he gave them credit cards with a 45% interest rate instead. Gee, obrigado.

Despite all the occasional “miracles” that have been declared about Brazil’s economy, the annual growth rate in gross domestic product over the last 20 years has averaged a paltry 2.3%. Recent results skew much worse.

Today’s Brazil is a sick patient, having suffered from not only negative growth, but high unemployment, losses of entire industries, continued high duties and taxes, and a level of violence that compares unfavorably to some war-ravaged countries in the Middle East.

So why the optimism?

Two words: “economic liberalism.”

Economically free countries enjoy high standards of living without much central planning or government interference. Countries like Hong Kong, Singapore, Switzerland…and to a lesser extent the US and Canada, are extremely productive and have a high per capita GDP. Life expectancy in economically free countries is significantly higher than in economically restrictive countries. Political and civil liberties are higher as well. Did you know that the income of the poorest 10 percent of the population in the most economically free countries is eight times greater than the income of the poorest 10 percent in the least economically free countries? A rising tide lifts all boats.

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Brazil is not currently economically free. Based on simply concepts like size of government (bigger is worse) property rights, sound money, freedom to trade, and government regulation, Brazil ranked among the least economically free countries by both Simon Fraser (#144) and The Heritage Foundation (#155). Economic liberalism is the ultimate measuring stick for a country’s economic progress. Without it, countries are destined for failure - and that's certainly the direction Brazil has been headed until now.

In the photo below, Jair Bolsonaro, elected on a campaign of economic freedom and security (property rights), poses with two classic economics books by Frederic Bastiat and Ludwig von Mises, given to him by heavyweight investor and free market proponent, Winston Ling. Although he has admitted to not being an economic expert, he has made some great hires and recruited competent people to his team. His Finance Minister, Paulo Guedes, is a University of Chicago trained economist who studied under the likes of Milton Friedman. Guedes plans to follow the playbook for any economically free country and privatize several inefficient, money losing, state-owned enterprises, reduce tariffs, cut regulations and open markets. This has been music to the ears of investors and a flood of new investment was announced in the weeks after the election result.

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The President-elect and his team recognize that government spending is far higher than the country can afford and plans to immediately find ways to pare down debt. Just an example of this is Bolsonaro’s plan to reduce the number of Ministries from 29 to 15. Did you know that Brazil has a Ministry of Culture? What about a Ministry of Sports? Yes, that too. If things had kept going on the same path, soon you would see a Ministry of Risk Reduction – similar to one I saw on a recent trip to Cuba.

“Privatization” has unnecessarily been viewed as a dirty word in Brazil for decades, but it’s an absolute necessity for economic freedom. Most people would be surprised to hear that Brazil has 418 state owned enterprises. Besides a handful of public-private partnerships of rundown airports, the most recent impactful privatization occurred two decades ago, when the state telephone system was split into pieces and sold. Phones and phone lines were highly valuable possessions in the 1990's. Most people would even include them in their wills! I still remember paying $1,000 (the USD/BRL exchange rate was almost 1 to 1 back then) for a black market mobile phone line before the privatization, because via official ways, it would have taken one full year to receive the phone number from Telebrás. Back then, only 4% of the population owned mobile devices. Today, despite a highly regulated market, it’s easy and fairly inexpensive to obtain a smartphone and over 80% of Brazilians have them.

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Besides privatizations, the new administration can lead the way to reducing outrageously high import duties while knocking down trade barriers. For example, the Apple Watch 4 starts at $399 in the US. In Brazil, the same watch costs well over a $1,000.

There are so many areas to improve that one could almost throw blind darts and hit one of the targets. I will talk about some of the other economic opportunities next week, but you heard it here first. Expect over 5% growth in 2019 - and perhaps over the next several years in Brazil.


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