RIO DE JANEIRO, BRAZIL – Some 20 years ago, when Brazil was singled out by the British economist Jim O’Neill as one of the emerging countries that would reshape the global economy – along with Russia, India, and China – the country’s context was different, and the tools used to drive its growth would prove unsustainable not many years later, with the deterioration of Brazil’s fiscal situation.
The novel coronavirus pandemic further deteriorated this fiscal scenario, pushing the economy into the deep end, like so many others around the world, and extending by over ten years the central government’s forecast for the year to end in blue ink again.
Nevertheless, Brazil has not reached the end of the line, according to the economist in charge of creating the term ‘BRIC’, in 2001, when he headed Goldman Sachs’ analysis area, where he worked for 18 years before becoming the UK’s Treasury Secretary, until 2016:
“I don’t rule out the possibility that the third decade of BRICS will be much better for Brazil than the second,” he says. But, of course, it is still too early to say, according to him, since the answer lies in solving problems that not only Brazil but its peers in Latin America have been facing for decades, with an emphasis on the growth of social inequality and fiscal risk.
“It is something that, in ten years, Latin American countries will get right. Despite the political issues you have, it seems to me that some economic policymakers are trying to challenge long-standing issues, particularly that of excessive public spending,” O’Neil says.
Another indispensable point for the country to see more productive years ahead is governance, care for the environment, and the strengthening of institutions.
“Countries that are not prepared for independent and robust institutions and that do not have the best technology available for the population face greater difficulties,” he says.
For O’Neil, the BRICS countries, which began to meet a few years after the term was born, failed to resolve these types of problems in common among them, which resulted in a second decade of BRICS worse than the first.
O’Neil refers to the Brazilian government’s lack of seriousness in tackling the coronavirus, which, he says, contributes to an increased climate of uncertainty and fear among citizens. He also talks about how Latin countries have been orphans of positive models after Chile, once a promise in the region, became less robust and politically unstable than expected.
The way out now is to look over to Asian models, like South Korea, he says. Read the full interview with André Esteves of BTG Pactual, published in Exame magazine:
Reopening economies has been a major issue for governments. What is the best model to follow at the moment?
When I was an economist at Goldman Sachs, we created Growth Environment World (GEW), an index that measures sustainable growth in about 180 countries. Most of the countries that topped the list are the ones doing best in the current crisis: South Korea, Hong Kong, Singapore, Germany, Denmark, Australia, New Zealand, among others.
These countries have a better and wider social market economy, let us call it that, and this allows them to experience shocks with greater ease. And that doesn’t surprise me.
Sweden is an exception, as it usually ranks in the top ten of 100 nations, but it deliberately decided to adopt the strategy of not ordering the closure of economic activities during the outbreak. Instead, it preferred only to close its borders, which led the country to have far more deaths than expected by neighboring countries. Even so, the Swedish economy has not weakened more than others.
Sweden has recently ranked second among Europeans on the list of new cases per million inhabitants, behind Luxembourg, which has only around 600 000 inhabitants compared with over ten million Swedes. How has the country made its economy feel the impact of closing its borders so much less?
Of course, Sweden has suffered. It wasn’t as impacted economically because it didn’t stop its activities on purpose as its neighbors did to contain the spread of the disease. So, to a certain extent, Swedish life remained normal.
But, on the other hand, the closing of borders weakened their international trade relations and travel. And also because, even with the consumption options available, people become more careful at a time like this.
The dilemma in Sweden is that it is not an isolated country, it is part of the same world. From an economic perspective, the question is: why did the country think that this strategy in Phase 1 would lead to a stronger economy?
The answer may be that they already expect – like many others – more waves of virus contamination with no vaccine. This will be Sweden’s real test because the other populations are more immunized to the virus, they probably won’t need to go through another lockdown.
Many Brazilian cities are reopening their economies and what we see so far is a cautious consumer, mainly because of the uncertainties related to the pandemic and the high unemployment rate. What would be the best way to revive the domestic economy in Brazil?
I really don’t know how to answer this question in detail, as I haven’t followed the reopening in Brazilian states so closely. But it seems to me that the strategy is more like that of the United States. Both countries have chosen to deny that the health crisis will not follow what their political leaders want.
I don’t think that Brazil, at least at the Presidential level, has handled this crisis seriously. And the consequent escalation of infection rates, both in Brazil and in the United States, is quite impressive and contrasts with what has happened in countries in Europe and Asia.
This contributes to an increased climate of uncertainty and, obviously, creates fear among the citizens of both countries.
As an economist with experience in the public sector, what is your opinion about the role of political leaders amid the crisis, since it is a time when unsustainable issues arise, such as great inequalities between the poor and the rich?
On the role of political leaders, I return to the sustainability index: there are 15 variables in this index, including government quality, the strength of institutions, education level, inclusion in technology use. These items make a great difference and their relevance is evident in crises like this one. Countries that are unprepared for independent and robust institutions and that lack the best technology available for the population experience greater challenges.
In this context, I consider South Korea one of the most interesting that I know, if not the best. Because it is the only one with over 50 million inhabitants which has seen its wealth grow from levels similar to those of an African country to that of members of the G7. And they did all that very well. Nowadays, practically every South Korean has access to modern technology.
I am quite sure that this is not the case in Brazil, where political leadership does not allow institutions to be strong as they need to be. And this has also been the case in the US, surprisingly.
How do you see the BRICS countries today, almost 20 years after creating the term? And what should we expect for the future?
It’s nearly 19 years since I created that name. And the second decade for those countries wasn’t as good as the first.
But somehow I’m more concerned about Chile. I remember in a conversation with Armínio Fraga, in which I said how South Korea is a fantastic model for emerging countries, he said, amusingly but accurately, that Chile would be a better model than South Korea.
However, a few years have passed and Chile has proved less robust – in terms of government stability – than expected. This is worrying. It suggests that many Latin American countries, including Brazil, have not yet found a model to follow in the region.
The root of Chile’s problem, in my opinion, is that only part of the population gained from Chilean growth. And social inequality has become a major problem.
Inequality is a problem seen in Latin American countries for 40 years, if not longer. There are blatant cases like Argentina and, of course, Brazil.
So it seems that Latin American countries, particularly Brazil, because it’s the largest, need to look carefully at such instances as South Korea to see how they’ve managed to do so well.
To some degree, they must also look at China, even if they are communist. Why have so many Asian nations, like Hong Kong and Singapore, done better? The latter two are only smaller than South Korea, which is so interesting because it has 50 million inhabitants. Why can’t Latin countries follow their example? I think that would make an interesting PHD dissertation. Because it’s disappointing.
It’s something that in ten years, Latin American countries will get right. Despite the political problems you have, it seems to me that some economic policy makers are trying to challenge long-standing problems, particularly excess public spending.
I don’t rule out the prospect that the BRICS’ third decade will be much better for Brazil than the second. But it is still too early to say.
Regarding China, do you think the country comes out stronger from this event because it was a good case of initial outbreak control, or will its relationship with the world be more marked by the fact that the Chinese government initially omitted data on the outbreak?
I will give contradictory answers. On the one hand, there has been a blow to China’s relationship with the rest of the world because of how the country handled the information at first, but it is important to say that, on the other hand, the country has been supporting other countries – every day – in the fight against the disease, and has done so for the whole world to see.
This can give the country a chance for reconciliation with the rest of the world. But it can also continue to upset other countries, which blame China for causing this crisis, such as the United States.
And, oddly enough, we can draw parallels there with the 2008 financial crisis. The event was caused by a problem in the US housing market and they rebounded faster than everyone else.
The only difference, which is actually a big difference, is that it is now China, which adds to the concern of many countries – including the UK – with communist nations.
Will China and India continue to lead growth among the economies and draw attention for that in the long term?
I hope so. India should start to threaten the United States, just as China does today, within 30 years. In particular, China’s growth, but also India has enabled the global economy to grow faster over the past two decades than it did before. In the 1980s/90s, we grew by about three to 3,3 percent, and over the last two decades, by 3.5 to 3.6 percent. And this was thanks to China and India.
If these two countries are unable to grow in line with this potential from now on, the world will suffer. Moreover, they are two world cultures with over a billion people each.
Unless they persistently pursue their policies, it is very difficult for them to fail in this growth plan. And, of course, these two countries have followed these policies. India more than China.
I would be surprised if they don’t grow more robustly than the rest of the world.
If we look particularly at China and its latest indicators, “purchasing managers” index (PMI), which were published a few weeks ago, and the service sector PMI set a record unseen ten years ago.
There are many populist reasons to worry about China. But I would be careful about being too focused on this surge of populism because that could be wrong.
What went wrong with India? The country started off well in the fight against Covid-19, but now cases are exploding. Do you think the country will start to compete with the US and Brazil in the death toll?
Governance in India, from the perspective of how they lead society in some respects, makes it very difficult to deal with the consequences of the pandemic, very difficult. Particularly in Mumbai.
Imagine Rio’s largest favela and think of communities ten times larger and with more people living in them. Many of them in extreme poverty. It becomes more difficult for India to deal with such a problem in this scenario.
It is difficult to tell how much damage this crisis can cause India. But I think it is unlikely to threaten the long-term growth of the country, which has already experienced several crises and seems to have managed to prevent them from lasting forever. India will recover from this, as will Brazil and other cultures.
And that process can encourage India, as well as other countries, to think more carefully about healthcare policies, education, and aspects of social life. If that happens, the country will recover in the long term. And I would not dismiss that possibility.
Source: Exame