This article is from the source 'washpo' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.washingtonpost.com/world/the_americas/brazils-economy-in-a-funk-marked-by-low-productivity-and-creative-accounting/2014/12/08/08c55534-796c-11e4-9721-80b3d95a28a9_story.html?wprss=rss_world

The article has changed 4 times. There is an RSS feed of changes available.

Version 0 Version 1
Brazil’s economy in a funk marked by low productivity and ‘creative accounting’ Brazil’s economy in a funk marked by low productivity and ‘creative accounting’
(35 minutes later)
SÃO PAULO — Valter Barros, co-owner of a small electronics components factory in the São Paulo suburbs, was unimpressed with the Brazilian government’s battle last week to pass a controversial fiscal measure economists dubbed “creative accounting.”SÃO PAULO — Valter Barros, co-owner of a small electronics components factory in the São Paulo suburbs, was unimpressed with the Brazilian government’s battle last week to pass a controversial fiscal measure economists dubbed “creative accounting.”
He was not alone. As lawmakers arrived in Brasília this week for a vote on a measure that would effectively permit the government to ignore all of a legally mandated $45 billion budget surplus for this year, protesters jeered and held up 100 Real notes.He was not alone. As lawmakers arrived in Brasília this week for a vote on a measure that would effectively permit the government to ignore all of a legally mandated $45 billion budget surplus for this year, protesters jeered and held up 100 Real notes.
This was not the first time President Dilma Rousseff’s administration had moved the goalposts to meet its targets. This was not the first time the administration of newly reelected President Dilma Rousseff had moved the goalposts to meet its targets.
The government’s budgetary woes are a consequence of Brazil’s under-performing economy. Critics trace the economy’s troubles back to the government’s policies. Brazil, they say, needs to overcome the barriers that hold it back: crippling tax burdens, torturous bureaucracy, expensive labor legislation, rising inflation, poor education and a lack of infrastructure, all of which result in low productivity. The government’s budgetary woes are a consequence of Brazil’s underperforming economy. Critics trace the economy’s troubles back to the government’s policies. Brazil, they say, needs to overcome the barriers that hold it back: crippling tax burdens, torturous bureaucracy, expensive labor legislation, rising inflation, poor education and a lack of infrastructure, all of which result in low productivity.
“The Dilma government tried to overcome this challenge but it did not succeed. Because it altered policies that were working and substituted policies that did not work,” said Felipe Salto, chief economist at a São Paulo consulting outfit called Tendencias. “The Dilma government tried to overcome this challenge but it did not succeed. Because it altered policies that were working and substituted policies that did not work,” said Felipe Salto, economist at a São Paulo consulting outfit called Tendencias.
It took almost three days to get the new budget target through the Brazilian congress, and then only with promises to free up specific budget items sought by individual senators and deputies. That’s what brought out the protesters waving cash. It took almost three days to get the new budget target through the Brazilian congress, and then only with promises to free up specific budget items for individual senators and deputies. That’s what brought out the protesters waving cash.
Public galleries were closed in the tumult. An opposition deputy, Mendonça Filho, called it “blackmail by decree.”Public galleries were closed in the tumult. An opposition deputy, Mendonça Filho, called it “blackmail by decree.”
“Creative accounting has substituted for fiscal responsibility,” said Salto.“Creative accounting has substituted for fiscal responsibility,” said Salto.
In the dining room that doubles as a boardroom for his company, called Teckab, Barros, 54, said he was sick of what he saw as mismanagement of Brazil’s economy. He had voted for Aécio Neves, the center-right candidate who was narrowly defeated in October’s election. “Economic policy got completely lost,” Barros said. “They really let it out of their hands and lost control of spending. They should have more control.”In the dining room that doubles as a boardroom for his company, called Teckab, Barros, 54, said he was sick of what he saw as mismanagement of Brazil’s economy. He had voted for Aécio Neves, the center-right candidate who was narrowly defeated in October’s election. “Economic policy got completely lost,” Barros said. “They really let it out of their hands and lost control of spending. They should have more control.”
Like other entrepreneurs, he wants to see Brazil’s economy get back on track. “Everyone believes that Brazil has potential,” he said. “It needs to go back to growing.”Like other entrepreneurs, he wants to see Brazil’s economy get back on track. “Everyone believes that Brazil has potential,” he said. “It needs to go back to growing.”
Under Rousseff and her outgoing Finance Minister Guido Mantega, Brazil kept unemployment down but inflation burst through government targets and is at 6.5 percent. Two ratings agencies have already downgraded Brazil’s investment status this year. Under Rousseff and her outgoing finance minister, Guido Mantega, Brazil kept unemployment down but not spending, and inflation is above target at 6.6 percent. Two ratings agencies have already downgraded Brazil’s investment status this year.
Instead of leading the continent it dominates, Brazil is growing less than other Latin American economies – 2.5 percent last year and just 1 percent in 2012. “Brazil should really be growing between 3 to 4 percent,” said Robert Wood, a Brazil analyst at the Economist Intelligence Unit in New York. Instead of leading the continent it dominates, Brazil is growing less than other Latin American economies — 2.5 percent last year and just 1 percent in 2012. “Brazil should really be growing between 3 to 4 percent,” said Robert Wood, a Brazil analyst at the Economist Intelligence Unit in New York.
Under increasing pressure, in November Rousseff announced a new economic team led by banker Joaquim Levy, a move cheered by financial markets. “This is an excellent team,” said Salto, but he said it will need to spend the next year “putting out fires.” There are doubts whether Levy will have the space to introduce the bigger reforms the country needs to grow. Under increasing pressure, in November Rousseff announced a new economic team led by banker Joaquim Levy, a move cheered by financial markets. “This is an excellent team,” said Salto, but he said it will need to spend the next year “putting out fires.” There are doubts whether Levy will have the space to introduce the bigger reforms Brazil needs to grow.
Otherwise, Brazil could stay stuck in what some economists call the “Middle Income Trap,” where growth in developing countries stalls because of factors that can include lack of infrastructure and low productivity.Otherwise, Brazil could stay stuck in what some economists call the “Middle Income Trap,” where growth in developing countries stalls because of factors that can include lack of infrastructure and low productivity.
Brazil has enjoyed 20 years of economic stability since a 1994 currency plan ended hyperinflation. Dollars flowed into the country, which rode a commodities boom led by China’s growth. A family income support program helped put money in circulation. Brazilians spent heavily as the economy grew 7.5 percent in 2010. Brazil has enjoyed 20 years of economic stability since a 1994 currency plan ended hyperinflation. Under Rousseff’s predecessor, Luiz Inácio Lula da Silva, dollars flowed into the country, which rode a commodities boom led by China’s growth. A family income support program helped put money in circulation. Brazilians spent heavily as the economy grew 7.5 percent in 2010.
But as Christine Lagarde, managing director of the International Monetary Fund, noted last week in an interview with Brazil’s business daily Valor, the commodities boom is decelerating and China’s growth has slowed. “We are in a big transition phrase,” Lagarde said. But as Christine Lagarde, managing director of the International Monetary Fund, noted last week in an interview with Brazil’s business daily Valor, the commodities boom is decelerating and China’s growth has slowed. “We are in a big transition phase,” Lagarde said.
Critics say the government should have done more to improve infrastructure during the good years.Critics say the government should have done more to improve infrastructure during the good years.
Valter Barros seconds that idea. His company spends heavily to fly finished merchandise to companies in the free trade zone in the city of Manaus, deep in the Amazon jungle, because there is no train and a truck takes 30 days to do the trip.Valter Barros seconds that idea. His company spends heavily to fly finished merchandise to companies in the free trade zone in the city of Manaus, deep in the Amazon jungle, because there is no train and a truck takes 30 days to do the trip.
Brazil has made huge gains in productivity in agriculture, an important sector. But it loses heavily transporting products like soybeans by trucks on bad roads or aging rail cars, while a lack of storage means it has to sell quickly rather than wait for the best price, said Manoel Reis, an infrastructure and logistics specialist at the Getulio Vargas Foundation in São Paulo. Work has begun on six highway concessions announced in an ambitious 2012 infrastructure plan — but on none of the new railways it envisaged.Brazil has made huge gains in productivity in agriculture, an important sector. But it loses heavily transporting products like soybeans by trucks on bad roads or aging rail cars, while a lack of storage means it has to sell quickly rather than wait for the best price, said Manoel Reis, an infrastructure and logistics specialist at the Getulio Vargas Foundation in São Paulo. Work has begun on six highway concessions announced in an ambitious 2012 infrastructure plan — but on none of the new railways it envisaged.
According to the 2012 Program for International Student Assessment, two thirds of Brazilian 15-year-olds were “low achievers” in math, and Barros said low educational standards are a problem when hiring staff.According to the 2012 Program for International Student Assessment, two thirds of Brazilian 15-year-olds were “low achievers” in math, and Barros said low educational standards are a problem when hiring staff.
“You have to have a revolution. You have to rethink school education,” João Batista Oliveira, a teacher, former executive secretary at Brazil’s Ministry of Education and Culture, said. “You have to reorganize the system.” “You have to have a revolution. You have to rethink school education,” João Batista Oliveira, a teacher and former executive secretary at Brazil’s Ministry of Education and Culture, said. “You have to reorganize the system.”
Labor legislation means workers are expensive – Barros said pension and tax payments mean an employee earning $1,000 a month costs him $2,500. Labor legislation means workers are expensive — Barros said pension and tax payments mean an employee earning $1,000 a month costs him $2,500.
“It impacts on the growth of industries because they are going to compete with the prices of China, and you can’t be competitive,” he said.“It impacts on the growth of industries because they are going to compete with the prices of China, and you can’t be competitive,” he said.
Salto said the complexity of Brazil’s myriad taxes meant companies spend time and money just working out how to pay them. Sector-specific tax breaks introduced by Rousseff’s government to encourage growth in the auto industry, for example, complicate the picture. “The measures that Dilma took made the business environment worse,” he said.Salto said the complexity of Brazil’s myriad taxes meant companies spend time and money just working out how to pay them. Sector-specific tax breaks introduced by Rousseff’s government to encourage growth in the auto industry, for example, complicate the picture. “The measures that Dilma took made the business environment worse,” he said.
To add to Rousseff’s worries is Operation Car Wash, an investigation into overpayments on contracts by the state-controlled oil company, Petrobras. As key figures in the case turned state’s evidence, leaks from their testimonies linked the multi-million dollar graft scheme to payments to political parties, including Rousseff’s Workers Party.To add to Rousseff’s worries is Operation Car Wash, an investigation into overpayments on contracts by the state-controlled oil company, Petrobras. As key figures in the case turned state’s evidence, leaks from their testimonies linked the multi-million dollar graft scheme to payments to political parties, including Rousseff’s Workers Party.
Politicians are expected to be named. Brazil’s Attorney General Rodrigo Janot said over the weekend that 11 high ranking executives from six of Brazil’s biggest construction and engineering companies linked to the scandal and currently under arrest will be charged this week. Politicians are expected to be named. Brazil’s Attorney General Rodrigo Janot said over the weekend that 11 high-ranking executives from six of Brazil’s biggest construction and engineering companies linked to the scandal and currently under arrest will be charged this week.
“It could go pretty high up,” said Wood, the New York analyst.“It could go pretty high up,” said Wood, the New York analyst.
Corruption like this, said Barros, was part of Brazilian culture, but the scale of this scandal had disappointed him. Yet in quintessentially Brazilian fashion, he remained optimistic. “I just want to give a vote of confidence,” he said. “Brazil deserves it.”Corruption like this, said Barros, was part of Brazilian culture, but the scale of this scandal had disappointed him. Yet in quintessentially Brazilian fashion, he remained optimistic. “I just want to give a vote of confidence,” he said. “Brazil deserves it.”