By Markus Jaeger (*) - What could China possibly learn from Brazil, economically? After all, real GDP growth in Brazil averaged 2.75% annually over the past three decades, compared to 10% in China. Moreover, Brazil’s consumption-oriented growth model is about to exhaust itself, while China’s investment-focussed strategy continues to generate high, if somewhat diminished economic growth.
Factor in the social, environmental and political consequences and it becomes clear that China’s growth model needs to change as well. Therefore: Brazil would be well-advised to become more “Chinese” in terms of savings and investment behaviour, while China would benefit from becoming more “Brazilian” in terms of consuming more (saving less).
Brazil’s economic growth has disappointed in the past couple of years. After increasing more than 7% in 2010, real GDP growth decelerated to 2.7% and 0.9% in 2011 and 2012, respectively. Even if real GDP growth recovers to slightly more than 3% this year, it will be below the 4% growth level Brazil got accustomed to over the past decade. While economic growth has disappointed, household consumption has remained resilient due to rising incomes, tight labour markets and the greater availability of household credit. Investment growth, by contrast, has been very weak, especially in the manufacturing sector. This is largely due to rising labour costs, a strong currency and a lack of productivity-enhancing structural reform. Brazil may be showing symptoms of Dutch disease.
The structural differences between Brazil and China have thus remained very striking. In Brazil, the household sector has limited incentives to generate precautionary savings. An extensive social security and pension regime incentivises households to consume rather than save. In China, the household sector faces the opposite problem: the social welfare regime is not very extensive. In Brazil, the corporate sector is facing very high borrowing costs (in part due to low domestic savings), which limits profitability. In China, the corporate sector has access to very cheap funding due to high savings and financial repression. In Brazil, the exchange rate is overvalued, limiting the incentives to invest in export-oriented industries, while in China the exchange rate - at least until recently - had been undervalued, favouring investment in the export-oriented manufacturing sector. The list goes on.
Policy-makers in both countries have acknowledged the need to adjust their economic strategies; and the political incentives to adapt their respective models do exist, too. Both governments have taken a number of measures in the past few years, but respective consumption/ savings patterns have changed only little in the past few years. Chinese savings have declined a little, but investment is actually higher today than it was before 2008-09. (While the combination of higher investment and somewhat lower savings/ higher consumption has helped narrow the politically-contentious external surplus, it has made the economy even more dependent on investment.) Admittedly, neither Brazil nor China has taken overly aggressive measures to achieve their respective objectives. But savings, consumption and investment patterns perhaps only change slowly. Perhaps fundamental factors such as demographic trends and cultural or historically-inherited attitudes (e.g. hyper-inflation) are also at work. This does not mean that government policies will not have any effects – only that they need to be pursued more forcefully if Brazil and China are to shift their economic growth models towards greater investment and greater consumption,
(*) Dr Markus Jaeger is a Director at Deutsche Bank Research in New York, US, where he is responsible for economic, financial, and political risk research, with a special focus on the larger emerging markets. His current research interests include the global economic, political, and financial implications of the rise of the ‘BRIC’ countries. Previously, he oversaw Deutsche Bank’s EEMEA (Eastern Europe, Middle East, and Africa) and Latin American sovereign and country risk research in London and New York. He holds a Ph.D. from the London School of Economics.