The Opportunities and Challenges for President Dilma Rousseff
Political will is necessary to face a new generation of policy issues.
Gradually and firmly over the past 15 years, Brazil has consolidated a stable democracy, broken free from macroeconomic instability, and taken remarkable steps toward alleviating poverty and reducing a historically high level of income inequality. The country that welcomed Dilma Rousseff as its new president on January 1 is also the country that will host the 2014 World Cup and the 2016 Summer Olympics.
Ms. Rousseff has a chance to push Brazil further along the road to development. To get there, she must maintain the achievements of the past and persevere in making the changes that Brazil needs. The opportunities are big—so are the challenges.
Brazil’s political, economic and social advances have paved the way for the development of a large consumer market. This puts the country in a position to benefit from today’s global marketplace. Consumer spending in advanced economies is flattening out. At the same time, with their large potential consumer markets, emerging markets are becoming “consumers of last resort,” attracting an increasing share of global resources.
Brazil is one of them.
A new, larger middle class is now emerging. From 2003 to 2009, about 35.7 million people joined Brazil’s middle-class income bracket. By 2014, Brazilian economists and business leaders estimate that another 30 million will have made that move. This development will have far-reaching implications for businesses, but also for society as a whole.
Investment is very likely to rise in the years ahead. New projects now follow the expected consumer patterns of this new middle class. Investment is spurred by macroeconomic stability and other developments that have increased confidence and enabled a slow but steady decline in real interest rates. This has lowered the cost of capital and stimulated credit and capital markets.
Investments will also increase for more specific reasons. First, the new deepwater oil fields will require vast financial resources and new technology, allowing Brazil’s oil production to double by 2020. Second, pent-up demand for housing will be a catalyst for investment, since a significant number of Brazilians still live in sub-standard homes. Third, the World Cup and Olympics will require investments on a considerable scale.
Preparing for these large sports events will benefit diverse sectors of the economy, through spending on ports and airports, urban transportation, sports facilities, hotels, telecommunications, energy, and security. Tourism is likely to benefit during the games, and also afterward.
Nevertheless, with public and private domestic savings at their current low levels, Brazil will need to continue tapping external savings to finance growth. That means a larger current-account deficit and an exchange rate appreciated by capital inflows.
Brazil will have to make the most of its available resources. It will be essential to create an environment that is conducive to private sector saving and investment. Ensuring stable macroeconomic conditions is critical. Remaining market-friendly in a well-regulated environment is also crucial for healthy and abundant financing.
A well-established institutional design for regulatory agencies, which instills the necessary confidence that the private sector can undertake major, long-term projects, is indispensable.
A great deal can be achieved through small but focused changes, instead of ambitious but often unrealistic regulatory agendas. The advance in credit regulation in Brazil is one such example. Developing a deeper market for private, fixed-income securities is important, but there needs to be a liquid secondary market, so that families have more confidence in extending the maturities on their investments. Just as we have such a market for equities, we can have one for fixed-income securities...