IMD International

“Brazil’s development model has run its course”

IMD Professor Carlos A. Primo Braga on Brazil’s future

September 26, 2014

On October 7 IMD will host a one-day conference with leading experts on the future of Brazil. The event, titled "Brazil: What Next?", will focus on the presidential election, doing business in the country, the impact of global sports events and more.

In this interview, one of the event's organizers, IMD Professor Carlos A. Primo Braga, takes a critical look at Brazil's current development model.

Why has there been so much disappointment with Brazil's economic performance?

Carlos Braga: Brazil's economic performance has been disappointing since 2011, and the country remains one of the worst performers among emerging economies. Since 2011, the economy has been growing well below its potential (which is typically estimated to be around 3.5 to 4% per year). GDP growth is expected to remain anaemic in the 0.3 to 0.9% range in 2014. As I wrote recently, the current consumption-led development model, driven by income redistribution and credit expansion, has run its course.
 
The potential of the Brazilian economy, however, remains very high. Brazil is one of the top five destinations for foreign direct investment in the world – attracting $64 billion of foreign direct investment inflows in 2013. Moreover, if Brazil is able to foster a private sector-led investment recovery, it will break the vicious cycle of below-potential growth rates feeding into negative expectations and vice versa. That is why the upcoming presidential election is so important.  

There has been a lot of criticism about Brazil hosting the World Cup and the Olympics while the country has so many social problems. Should Brazil not have bid to host the games? Were there any benefits?

Carlos Braga: This has led to mixed reactions in Brazil. Initially, granting the World Cup to Brazil and the 2016 Olympic Games to Rio de Janeiro led to positive reactions and was interpreted as further evidence of Brazil's growing influence on the world stage. As the economy slowed down, many Brazilians began to debate the value of such projects in a country with many social challenges. This debate led to mass demonstrations in 2013 against the hosting of the World Cup.

Ironically, despite the "poor" – by Brazilian standards – performance of the national team at the World Cup, in the end there was broad consensus that the event was one of the best World Cups ever held. Of course, the quality of the matches was the main factor behind such a perception. But the fact that the tournament proceeded smoothly, despite many logistical concerns and fears about street protests, suggests that the Brazil "brand" was strengthened by hosting the World Cup. In the end, such events are like big parties. It is difficult to derive net economic benefits from them, but if successful they may have positive welfare implications in the near term. Needless to say, wasted resources in building "white elephants" (e.g., large stadiums in remote cities) qualify such considerations.

In the case of the Olympic Games, there is an opportunity to explore investments in infrastructure (e.g. transportation) that may have a positive legacy for Rio de Janeiro. The more these investments are well synchronized with a broader urbanization strategy (as was the case, for example, in Barcelona) the better the chances of a net positive economic outcome. It is, however, a major political and managerial challenge. That is why we are dedicating a whole session of the upcoming conference to analyzing the economic implications of mega-sport events.

What's next for Brazil?

Carlos Braga: The upcoming presidential election is too close to call. The first round will take place on October 5th and we will have a chance to discuss initial results at the conference. The growth constraints faced by Brazil are dominated by supply-side problems that require significant structural reforms and they will take time to be addressed. But one can quickly reset expectations if the right signals are given. This could be an opportunity to unleash a new cycle of growth. In short, independently of who wins the election, it is time to revisit the development model and to better explore the many strengths of the Brazilian economy.

The upcoming event "Brazil: What Next?" at IMD will focus on the opportunities and challenges of doing business in the country. It will feature panel discussions on prospects for Brazil's economy; investing in Brazil; the international expansion of its leading companies; the impact of major sports events; and how the country compares to the other BRICS markets.

Carlos A. Primo Braga is Professor of International Political Economy at IMD, and Director of The Evian Group@IMD. He teaches in the Orchestrating Winning Performance program. 



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