Issues in Brief

Will Brazil Finally Address its Infrastructure Deficiencies?

Economic Consultant
October 16, 2012

Brazil’s economy in general, and manufacturing in particular, have seen their competitiveness erode over the past several years, clearly limiting long-term growth prospects; however, the country’s poor growth performance is arguably more of a structural issue than just a cyclical one. Specifically, a persistent and rather structural multi-decade strong currency, together with Brazil’s historically high tax burden, low-skilled labor force, and poor infrastructure quality, makes the country uncompetitive and increasingly reliant on domestic market growth.

The authorities’ rising protectionist stance is undoubtedly a byproduct of the economy’s lack of competitiveness. According to the Global Competitiveness Report (GCR) published by the World Economic Forum, Brazil is the most closed economy in the world, ranking last on the measure of imports as a percent of GDP out of the 144 countries examined. At the same time, protectionism has been combined with a policy mix aimed at boosting cyclical demand in targeted sectors rather than focusing on general, broad-based productivity improvements.

The poor quality of infrastructure stands out in an economy the size of Brazil’s, now the sixth largest in the world. As shown in Figure 1, according to the GCR, Brazil’s overall infrastructure quality ranks 107 out of 144 countries, a huge gap with its GDP ranking. The country lags behind in most infrastructure facets, ranking 100 in the quality of its railroad infrastructure, 123 in the quality of its roads, 134 in air transport infrastructure, and 135 in the state of its ports, each out of 144 countries surveyed. 

The news for MAPI members is that the authorities may have finally realized that Brazil is in need of a major infrastructure boost. On August 15, 2012, Brazilian president Dilma Rousseff announced a $66 billion plan for auctions to bring private firms into building and running infrastructure, with half of that amount to be spent over the next five years. The investments include building and improving highways and operating toll roads totaling some 4,700 miles. Plans also call for the laying of 6,200 miles of train tracks, which would eventually improve the country’s ailing railroad system. Auctions for road and rail infrastructure are supposed to start in early 2013; the government promises that ports, airports, and waterways will be addressed soon. President Rousseff argues that the country will finally have an infrastructure that is compatible with its size and ambitions.

Though the Rousseff administration has finally admitted that supply-side problems are holding the economy back, more details on the concessions program are needed. After all, the authorities’ efforts to improve infrastructure via concessions have been disappointing so far. A somewhat recent airport concession program has failed to attract bidders with sufficient expertise, as the internal rates of return appeared to have been too low. The government argues that these rates of return should be consistent with the current relatively low interest rates in the country; however, higher rates of return are needed to account for the risks associated with doing business in Brazil.

Despite major public infrastructure announcements in recent years, federal spending on infrastructure is barely above 1 percent of GDP (excluding housing), one of the lowest in the region, and inadequate considering the country’s development needs. Brazil is at a crossroads when it comes to preparing the stage for the next 5 to 10 years of economic growth and development. It cannot run the risk of having a company that lacks major credentials winning an auction and then failing to deliver. These auctions will surely follow the premises of the Buy Brazilian Act, which is also a barrier for foreign companies with the needed expertise to participate and win.

Brazil’s lagging infrastructure is not the only variable explaining the well-known Custo Brasil, or Brazil’s cost of doing business. Expensive energy, as well as a lack of qualified labor that creates significant labor cost pressures, is also hindering growth. The government understands that benefits of a successful infrastructure program are not fully realized for a number of years, and remains concerned about the short-term implications of the infrastructure announcement. An auction program that excites the private sector could trigger a new wave of optimism that further strengthens the currency, hurting the already agonizing competitiveness of the manufacturing sector. A serious downturn in the short-term would make it impossible to carry on with the infrastructure projects.

The short-term side effects of a successful infrastructure program could be addressed with the use of proper economic policy. It would be devastating for Brazil’s growth prospects if the implementation of the announced auctions were not both efficient and timely. While the news hinting at a change in policy direction is welcome, more details of the concessions program will allow a more in-depth analysis regarding Brazil’s long-term outlook. MAPI will continue monitoring these developments, particularly for the role that U.S. manufacturing companies might play in the process.

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