In 2012 economic growth (GDP) was quite weak (probably around 1%) and inflation rates might reach levels near 6%. Basically the macroeconomic management this year has been led by government measures through a combination of BRL depreciation, interest rate cuts (even with 12-month inflation persistently higher than the central target) and tax deduction measures affecting primary surplus. As for next year, there are still many uncertainties on the global economy. However, after the change in level of both USDBRL and interest rate since 2011, there might be stabilization of both variables for a long period. In the case of FX rate it might keep fluctuating within the range slightly above 2.00 and below 2.10, reaching the latter by end-2013. In the case of fiscal policy, government again may not reach the fiscal target (primary surplus) on next year and the main reason is the extent of tax deduction measures. Different from this year in which weak activity has also contributed negatively for tax revenues, we expect recovery on next year, although fiscal policy remains as the expansionist terrain in order to stimulate activity and curb short-term inflation.

However, Brazilian economy needs more than this macroeconomic management if it wants to grow at higher pace on a sustainable way. Brazilian economy is lagging behind on the main structural drivers of long-run growth rate: physical capital (such as infrastructure, machinery and equipment), human capital (education) and technology. In this sense, there are a couple of structural reforms that should be on the agenda for the next years. The diagnosis on what should be done to reduce the Brazil cost is correct. See the government measures to reduce energy costs, improve Brazilian physical infrastructure through concessions of ports, airports, roads and railroads, and some other tax measures like tax deduction on payroll and the debate on the ICMS single rate for all Brazilian states. However, there is still much that should be done. The design of some measures might be enhanced in order to attract large investors/businessmen with expertise on focal sectors. Although Brazilian economy is rated as investment grade by rating agencies, it still needs to be granted a "business grade" by creating a better business environment for the private sector.  Lastly, investment on the quality of education also needs a very long-term policy and mainly long-term view decoupled from short-term political interests since the most significant return may be for the next generations if there is significant improvement on the quality of education on elementary schools.

My view on the concession model - critics and short suggestion

In my view the excessive government intervention to the economy reflects the lack of a long-term and planned view on the best way to boost brazilian growth rates on a sustainable fashion. Basically, government is right on addressing the main bottlenecks of the economy, however, it fails to address the best model to tackle them.

In this sense, government measures like the anticipated renewal of power concession has the good willingness of energy costs reduction. However, I do not agree with the fast way those measures have been implemented, since it creates more uncertainty for the investors.

“The recent need of urgency” for the country to catch up on investments cannot lead to a bunch of sudden measures that may potentially affect private returns. Even considering the current government did not broke up the contract rules, only the expectation that government may change the rules certainly jeopardize experienced investors that have money and expertise to invest adequately on a specific sector. Investors are ruled not only by government speech, but mainly by government attitudes. If investors have doubts about government posture, then they avoid running the risks of a sudden future change.

I see a great difficulty for the government to define the concession model that balance the attractive private returns to compensate the risks related to those investments and the social objectives of low tariffs. This is very clear by looking at the delay on the definition of the model concession for roads, railroads, ports and airports.

Short Suggestion: In my opinion, government should weigh more on the attractiveness of those concession models for the private sector, by offering competitive returns and allowing private investors even having 100% of some concessions. In order to avoid abusive tariff charges, it should reinforce the role of regulatory agencies. Unfortunately it seems some of those agencies are composed by people nominated by political rather than technical criteria.

Over the latest 18 years, Brazilian economy has made significant progress in many areas, but we highlight two main socioeconomic issues:
i) the stabilization of the economy since 1994 (note Brazil faced a severe hyperinflation from the 80´s up to 1993)
ii) the inequality reduction trend, in which millions of families left out poverty benefitted by the stabilization of the economy (inflation affects more heavily poor families), increase on minimum wages and social programs such as the so-called 'Bolsa-Familia' which is a conditional cash transfer program designed to help the poorest families.

The current hot topics are based on the need to improve the quantity and quality of physical infrastructure and education in Brazil, as well as the need of structural reforms on issues such as tax, labor and social security. It is a common sense that Brazil lags behind on those areas and the country needs to catch up as soon as possible if it really want to gets higher sustainable growth rates, as well as to tackle development issues.

However, at this moment I´m afraid these let´s say reforms on education, physical infrastructure, tax, labor system and so on will not be implemented on the velocity needed. It is important to have in mind that these investments take a very long time (in case of education, the more substantial perceived changes surpass generations, I mean, it might take more than 20 years).The returns of those policies are not rapidly perceived by the population, and the short-term political interests is one of the obstacles to effectively achieve continuous advances on those areas which requires long-term policy view.

In terms of investments in physical infrastructure I share a slight more optimistic view. It´s commonly known the deficiencies of Brazilian transport system, which adds a high cost for local producers, and it is one element of Brazilian competitive disadvantage. I see great difficulties in attracting private investors (domestic and foreign ones) due to the uncertainties on the expected costs and returns of those direct investments. However, although those investments might start later than currently planned by the government and expected by businessmen, I think it might take place over the next five to ten years and it might improve at least a relevant share of brazilian physical infrastructure.

There is so much to be done. During my one year study stay in Germany I had the chance to visit the Hamburg harbour, which is the second largest harbour in Europe (the largest one is the Roterda harbour in Netherlands). The harbour is really huge, and it makes Santos harbour a very tiny one. I spent my childhood in Santos, and the harbour is the biggest one in Brazil, but I´ve been told that many big ships cannot dock at Santos harbour, and I sometimes can observe many ships on the horizon, and I imagine many of them are lined up and stay there for a long time (days, weeks, or even months).

Democracy Party...political parties

Although this blog is devoted to express my opinions on economic and public policy issues, I have decided that my first post will be about politics (I might do that once in a while). The reason is that today is the day of the first round of municipal elections in Brazil and I have gladly came back from the voting place. The last time I had registered my vote was in 2004 because coincidently I haven´t been in Sao Paulo in electoral years since then.

There are about 5.500 cities in Brazil and more than 15.000 candidates running for the mayor post. I live in Sao Paulo, the largest city in Brazil with more than 10 million people and about 8 million voters. As traditionally happens, the electionin Sao Paulo  has been quite competitive and three candidates have good chances to move to the second round, according to opinion polls:

i)                 Jose Serra (from PSDB party): he was mayor and governor of Sao Paulo state, as well as senator and he has run twice for the presidency, in 2002 (defeated by Lula) and in 2010 (defeated by Ms. Dilma Rousseff).

ii)                Fernando Haddad (Workers´ party…in portuguese so called PT ): he was ministry of Education during Lula´s mandate and before he served as subsecretary of finance and Development of Sao Paulo prefecture.

iii)               Celso Russomano: he was deputy and he is mainly known as a journalist in which he hosted TV program supporting consumers who felt themselves in trouble against bad public or private services.

According to opinion surveys, the four main problems stressed by the population of Sao Paulo are: public transport (on a general basis, transport venues since traffic jam is a daily problem), followed by health, safety and education. Actually these public policy issues  are concerns expressed by  most Brazilians, and I intend to make remarks on them on a regular basis.

One of the objectives of this blog is to evaluate the current public policies objectively, therefore I will avoid being influenced by personal political view. Furthermore, I challenge myself to make proposals to improve the quantity and quality of those policies, in terms of cost-benefit analysis at socioeconomic point of view not just looking at the short and medium run, but at the long-run “heritage” for the next generations of Brazilians.