For Companies and investment funds Following the Brazilian economy, there are many current and short -term indicators. But in order to interpret the data, the hood needs to be raised and the operation of the economy, which requires a longer -term perspective, needs to be investigated.
Since 2014, growth has made an average of 0-1% per year in the Brazilian economy. In practice, it has to increase by 4-5% a year to meet various social and economic challenges. We examine the underlying causes of this underperform.
Although there are many possible interpretations of this result, we believe Brazil is the full outstanding world in the developing world The state share of the economy:
So Brazil has a state share of the economy Similar to France or Scandinavian countries but unknown in the developing world.
Two main reasons for the high state share of the economy – (i) high real interest ratesand (ii) Public pensions– Let’s look at each one in a row:
The table above shows Public debt was 73.5% of GDP in 2022 And the figure below shows that the debt service cost was 7.9% of GDP in 2022, which is equivalent to an interest rate of 10.75%. Note that the debt of GDP is about 100% in the United States and the UK, and the interest rate is about 3%.
Brazil has a long story High real interest rates – See the figure below.
In our report we quote a IMF -paper which attributes the cause of high real interest rates in Brazil as the basis High state share in the economy, And this leads us to our second topic that pensionsOr
In many European countries, there is a pension system for state income under which workers contribute to the Social security During their work and then their consent, retire. This means that the cost of pensions is borne by the state, and it is contrary to private pension systems that contribute to private funds and are responsible for paying benefits.
In Latin America, the following pension systems (Chatgpt) has to be demolished:
For countries with purely public pension systems, we will deal with Argentina in a later post and can be considered a failed state Venezuela, where public pensions are worthless due to hyperinflation of the years.
In Brazil, workers pay 7.5 to 14% of social securityfrom income and Employer contributes an additional 20%– Nevertheless, social security funds and pension funds are very incomplete. Contributions cover 61% of pensions, and this scenario will worsen with the aging of the population.
Beyond social security, Brazil taxes are very high and the state budget is very little for investment; Rather, almost all the current editions.
If Brazil wants to break this cycle of small or non -growth then it is necessary:
- Increase the national savings rate
- Invest in increased savings into infrastructure to reduce business costs
- Reduce state stake in the economy to reduce real interest rates
In our opinion, the only way of these goals is that Take the pension supply system to the private sector. From a political point of view, this would be very difficult to achieve, as it is almost impossible to return to people’s promise in democracy. However, there are things that can probably be done within the existing constitutional framework:
- Young people Entering workforce is more likely to contribute to individual retirement accounts rather than state social security to privatize the system over time
- Companies Allowed to reduce social security reduction provided that savings are paid to private pension funds
Both steps increase the national savings rate and, over time, would reduce state stake in the economy. The Brazilian political system ties the hands behind it because of the ongoing fiscal burdens, and there is no way out unless they move in this direction.
Read our full report Brazil Economy 2024 For more information.
About the author: Paul Dixon founder of the Latin report. Economic articles are read very widely on a wide range of topics, and often ranked search results for months and even after the first publishing.
Latin report It attempts to interpret the huge amount of information available to understand the country economies. We write our reports from a long -term point of view and the country has been monitoring the country’s development for decades. We most of all let the data tell the story with the commentary of political events to illuminate the characteristics of the data. The purpose of the Latin meaning is the purpose of expression Views that keep their value over time and therefore need to help companies make long -term decisions. This is comparable to competitors’ reports with current analysis reports that are continuously reviewed.
