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Brazil’s next president faces a big, tricky plate

hImmersed in With houses on one side and the Anchieta highway leading to the coast on the other, the Mercedes-Benz plant in San Bernardo, a suburb of São Paulo, is the company’s largest truck assembly plant outside Germany. It was established in 1956 and is undergoing modernization. As a result, it plans to cut its 7,400-strong workforce by nearly half, largely by outsourcing some of its operations. For Mercedes, this is part of a global strategy. It was a blow to Sao Bernardo, the heartland of Brazil’s auto industry.

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In 2019, Ford closed its factory adjacent to Mercedes, cutting 2,700 jobs. Toyota is gone too. A decade ago, the San Bernardo-based metalworkers union had 108,000 members. Now that number is 70,000, said its president, Moisés Selerges. “This administration has no policy against industry,” he laments Brazil’s president, Jair Bolsonaro. “Its policy is to cut down trees for soybeans.”

The plight of the unions illustrates one aspect of the dramatic shift in Brazil’s economy. Manufacturing now accounts for only 10% of the country gross domestic product, down from 15% in 2004 and 26% in 1993. By comparison, agribusiness revenue, broadly defined, now accounts for 28 percent of the economy, according to calculations by the University of São Paulo. That’s a success story. Brazil has become the world’s third-largest agricultural exporter after the United States and the European Union, with exports worth $125 billion last year. According to Marcos Jank of the Insper Business School, productivity in Brazil’s agribusiness is growing at 3% a year, compared with 0.5% in services and zero in manufacturing.

This structural shift has political, cultural and foreign policy implications. But that’s happening against a backdrop of overall decline, a diminished international profile and bitter political conflicts (take the example of a fractious presidential campaign). Far-right populist Mr Bolsonaro and left-wing Workers’ Party Luiz Inácio Lula da Silva face a runoff on October 30 .PT).

When deindustrialization began in the 1990s, it coincided with the opening and modernization of the economy. Some of the shuttered factories, protected by tariffs and import bans, are inefficient. The real plan in 1993 involved new monetary and fiscal reforms that ended four years of high inflation, the result of cumulative distortions under “state developmentalism,” the ugly jargon for state-driven industrialization policies. It revived the economy. Poverty rates began to fall and income disparities narrowed.

Fernando Henrique Cardoso, president from 1995 to 2003, was fond of saying that Brazil had found a “sense of direction” again. This progress continued under Lula, who was in power from 2003 to 2011. By 2011, the country had become the sixth largest economy in the world. He promotes Brazil on the world stage, host of the 2014 World Cup and the 2016 Olympics in Rio de Janeiro.

Some commentators say the turning point came in Lula’s second term, when he abandoned reforming the economy and public administration in favor of expanding the state and surfing a commodity boom that included major new offshore oil discoveries. Others point to the 2014 elections, when Lula’s chosen successor, the more dogmatic leftist Dilma Rousseff, served a second term but a year later The economy declined. Over the past decade, Brazil’s economy has grown at an average annual rate of just 0.3 percent, less than half the rate of population growth (see Figure 1). In an economy currently only the 12th largest in the world, poverty is rising and income distribution has become more uneven (see Figure 2). The rest of the economy offers no alternatives for the good-paying jobs lost in industry.

Brazil seems to have lost its way. Mr Bolsonaro is both a result and a further cause of all these changes. A core source of his support is agribusiness. In the first round of the election, he swept the Midwest and the states of São Paulo and Parana, the heartland of commercial agriculture. His culture war on the left is symptomatic of a country divided within. Celtanejo, or Brazilian country music beloved by conservatives, is booming. Political scientist Miguel Lago points out that farmers in São Paulo state have bought radio stations, and samba artists are now rarely on the air.

Mr Bolsonaro and his economy minister, Paulo Guedes, say they want to boost the economy by shrinking the country. But apart from privatizing some of the electricity generation and allowing private investment in water and wastewater, they have done relatively little. Their re-election manifesto included more privatization, a crackdown on bureaucracy and a pledge to invest in the digitization of public administration.

Lula in some ways represents old industrial Brazil. He first came to prominence as a strike leader for the San Bernardo trade union during the military junta in the late 1970s. But he has also become a divisive figure, worshiped by poorer Brazilians as a symbol of social justice while others resent the massive corruption that has flourished under the government. PTthe rule of. He himself was convicted of corruption and served 19 months in prison before the Supreme Court reversed his sentence in 2019.

There are indications that Lula knows that “national developmentalism” cannot return. Ms Rousseff’s attempts to revive it by raising tariffs and coddling private-sector “national champions” will only accelerate deindustrialization. Lula opposed privatization. But he won’t reverse them. Gabriel Galípolo, an economist who advises him, said he was “not talking about increasing the size of the country, but improving the quality”. Mr Galípolo said Lula’s government would promote private investment in infrastructure.

Brazil is “big enough to have everything”, including manufacturing, argues Arminio Fraga, who ran the central bank under Mr Cardoso. But reforms will be needed to return to a faster growth trajectory with structural changes in the economy. Three things stand out: education and training, state and budget reforms, and better environmental policies.

During its first 160 years or so as an independent nation, Brazil neglected education. In 1980, the average worker had fewer than four years of education. By 2018, that period had more than doubled to 9.3 years, according to the Institute for Statistics. But quality is still an issue.inside pizza The 2018 Brazilian Standardized International Exam ranked 66th out of 77 countries. Fifteen-year-olds in Brazil are lagging behind in reading, science and especially math. Improvements seem to have stalled in 2009.

Mr Bolsonaro’s handing over of the education ministry to someone with ties to the evangelical Protestant church is another central part of his support base. They were more interested in embedding conservative values ​​in the curriculum than improving quality, and cut budgets. The president also defies science as he denies the seriousness of covid-19 and climate change. Likewise, vocational training has been neglected. There is a shortage of places and courses are often geared toward industrial economics.

A more diversified economy requires a more flexible government. “The Brazilian government is extremely incompetent,” said André Lara Resende, an economist who worked in Mr. Cardoso’s government. Since then, administrative reform has been an unresolved task. The same goes for tax reform. Mr Selerges, the union’s president, complained that manufacturing was taxed more heavily than services.

The state’s problems are partly fiscal. Public spending close to 40% gross domestic product. This is a similar ratio to many rich countries, but Brazilians are much poorer served and the state in general does little to help the poor. Mr Fraga noted that almost 80% of spending was on wages and pensions, compared with less than 60% in most countries. Public investment accounts for only 2% gross domestic product. In 2016, interim president Michel Temer introduced strict spending caps. Both Lula and Mr Bolsonaro want to abolish it (indeed, the president has already done so). Investors will be looking to the new government to come up with new fiscal rules to replace them. Mr Bolsonaro has ceded control of large amounts of discretionary spending to Congress. Taking back government control of the budget will involve an uphill political battle.

granary blues

Under Mr Bolsonaro, Brazil has drawn international condemnation for gleefully destroying the Amazon rainforest. That was until last year, when his environment secretary, Ricardo Salles, dismantled the agency tasked with enforcing anti-deforestation laws. Lula said he would restore his environmental policy, under which deforestation has been slowed.

Even Mr Bolsonaro and his new ministers now seem to accept the need for tighter controls. The same goes for many agribusinesses. Due to China’s growing demand for soybeans, the EU accounts for only 16 percent of Brazil’s agricultural exports, compared to 41 percent in 2000 (see Figure 3). “The main driver of better environmental policy is not trade. It’s reputation and the attraction of investment,” Mr Jank said.

Brazil still has a big advantage. The world needs its abundance of food and energy. Its government borrows mostly from local investors, rather than foreign currency. For example, its finances are not as bad as Argentina’s. “Over the past 25 years, under every administration, we have taken at least one step in the right direction,” said Carlos Simonsen Leal, president of Fundação Getulio Vargas University. But there are also wrong steps. If Bolsonaro wins and continues to pursue confrontational politics, Brazil will continue to drift with the tide. Lula’s rare chance for personal redemption. The question is whether he will use it to implement the reforms Brazil needs to be a successful economy in the 21st century.

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