Brazil’s Slowdown: What it Means for Chile

Brazil’s economic growth has slowed dramatically in the past 12 months or so, from 7.5% in 2010 to 2.7% last year. Economists expect it to reach just 2.5% this year. That has major implications for Chile. Brazil is Chile’s fourth largest trading partner, accounting for 41% of Chilean exports to Latin America. Trade between the two countries hit a record US$11 billion in 2011.

Michael Reid is the Americas Editor of The Economist and a veteran observer of Latin America. In April, his analysis of the social protests in Chile, published in The Economist, caused a stir in Santiago and ruffled feathers within the Piñera government.

In his last book, ‘Forgotten Continent’ (published in 2008), Reid examined ‘the battle for Latin America’s soul’ – a battle, in his view, between populist autocrats and reformist democrats. In his next, he turns his attention to Brazil, where he previously worked as bureau chief for The Economist. Here, he talks to bUSiness CHILE about Brazil’s economic slowdown and what it means for Chile and the region.

What’s gone wrong with the Brazilian economy?

It has stalled since the middle of last year after a period of overheating, and it’s stalled for longer than the government expected. That points to some structural weaknesses. The accelerated growth of the previous 15 years was the result of several forces – the reforms implemented by former President Fernando Cardoso, the opening up of the economy, privatization, a boost from the rise in commodities prices, an improvement in terms of trade, the benefits of wealth redistribution and growth of GDP. All of these forces are now exhausting themselves.

There is a growing consensus among independent economists in Brazil that the trend rate at which the country can grow without risking inflation has now fallen to around 3.5%. That points to the need for another round of structural reform.

That said, the country is not heading for disaster – it has many strengths. I would highlight agriculture, which is very productive and very efficient, and oil and energy where the opportunities are strong and real. Brazil will carry on growing, but the question is whether it will grow as fast as it could.

What’s the likely impact of the slowdown on Chile?

In the last few years, you’ve really started to feel the strength of the Brazilian economic motor in places like Chile and Peru. There’s been increasing trade and foreign direct investment in both directions. You will undoubtedly start to feel that motor less now.

You were in Brazil recently researching your book. Has the atmosphere changed as a result of the slowdown?

I think it’s the view of the country from outside that’s changed. The outside world was slow to wake up to Brazil’s potential and once it did, expectations were exaggerated. There’s now a risk that they’ll be exaggerated in the other direction. The atmosphere inside the country hasn’t really changed, largely because consumer demand has continued to grow, much of it satisfied by imports. I think the atmosphere might deteriorate over the next year or so because inflation is likely to rise. If you combine that with low economic growth, there’s a risk that sentiment inside the country will turn negative.

What do you think of President Dilma Rousseff and her government?

In many ways she’s been an impressive president. She’s tried to reduce the patronage of politics in Brasilia. Every time she’s faced credible denunciations of abuse of public money by ministers she’s acted, and that’s good. Many of her priorities are sound, like eliminating extreme poverty, improving education and encouraging private investment in infrastructure.

My question about Dilma is whether she will be radical enough. I think the new oil regime, designed to oversee the exploitation of the new offshore reserves, is a mistake. It’s too nationalistic and it places too big a burden on state-controlled Petrobras. It means costs will be higher than they should be. Brazil’s tax burden remains too high and it’s a very expensive place to do business. It’s not clear to me that Dilma will be bold enough in tackling those issues.

Brazil’s wine producers recently called for protectionist measures to curb imports of Chilean wine. Is protectionism on the rise in Brazil?

Yes, there’s been a noticeable increase in protectionist measures in recent years. It’s due largely to a fear of China and the huge increase in imports of Chinese manufactured goods. Brazil has a significant manufacturing industry and the big fear is deindustrialization. The government’s short-term response has been to increase trade tariffs.

Brazil has vast new oil fields and years of experience in biofuels. Could it play a role in solving Chile’s energy problems?

It’s certainly likely to become a more important exporter of sugarcane-derived ethanol in the coming years, and it will soon have a significant exportable oil surplus. That’s good for oil consumers everywhere, including in Chile. For Chile, the tragedy is that Argentina is not a reliable energy partner. The discovery of large shale gas deposits in southern Argentina ought to be a solution to some of Chile’s energy problems but I doubt it will be.

The ports of northern Chile are on the same latitude as the industrial heartland of southern Brazil. Could they serve as a Pacific exit for Brazilian exports to Asia?

The main development here has been the completion of a paved highway linking Mato Grosso to the port of Ilo in Peru, so the soya crop can reach the Pacific via that route. The problem for Chile is Bolivia. Any road linking Brazil to Chile’s northern ports would pass through Bolivia and, apart from the geographical obstacles involved, which are considerable, there are political obstacles to overcome.

Chile has just formed the Pacific Alliance with Colombia, Mexico and Peru. Is that a sign Chile is distancing itself from Brazil and Mercosur?

I think Chile distanced itself from Mercosur when former President Ricardo Lagos decided to negotiate a free trade agreement with the United States [signed in 2003]. And he was right to do so. Sadly, after a promising start, Mercosur has stagnated. Argentina has become increasingly protectionist and Brazil, mistakenly in my view, has opted to accompany Argentina rather than question it. Mercosur increasingly looks like a defensive high-cost arrangement, and the Pacific countries have drawn their own conclusions from that.

The formation of the Pacific Alliance is extremely interesting. If nothing else, it sends a statement to the world that in Latin America there is an alternative project to Brazil. Not a hostile project, but an alternative one. That ought to act as a healthy challenge to Brazil, and one hopes it will.

Tell me more about your next book…

It’s an interpretation of Brazil, looking at why it is the way it is and whether its rise on the world stage is sustainable. It will be published by Yale University Press and should be out before the [FIFA] World Cup comes to Brazil in 2014.