By the end of 2016 Brazil's economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December.
One thing I've noticed is that commenters attempt to find excuses for the failure of the model that Paul Krugman assured us was just fine, as recently as 2012:
Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive "BRIC" while Argentina is always disparaged? Actually, we know why -- but it doesn't speak well for the state of economics reporting.
Perhaps the most bizarre excuse is that it's China's fault. Here's one of Tyler's commenters:
Hey, Tyler, you are one of the people touting negative stories about what is going on in China, and I am largely sympathetic to your claims on that front. So why are you picking on the Brazilians so hard, arguably the worst victims of the Chinese deceleration and outright decline in sector directly importing from Brazil?
That's right, the collapse of a major continental economy on the other side of the world from China, which isn't even particularly heavily exposed to international trade, was (we are told) caused by Chinese growth slowing from 7.3% to 6.9%, or perhaps to 5% if you believe the China conspiracy theorists. I'm picking on one commenter, but I often read this claim being made.
Now in fairness, Chinese growth in the heavy industry sector has slowed much more sharply than the overall economy, and that has depressed the price of iron and coal. But consider this data:
There are many problems with the "blame China" argument, but I'll just mention three:
1. Brazil is not particularly exposed to international trade. Australia exports more than Brazil, even though Brazil has nine times the population of Australia, and three times the GDP.
2. Australia exports lots of coal and iron, which are especially hard hit by the slowdown of heavy industry in China. Brazil exports lots of soybeans, oil and iron, only one of which is directly impacted by the drop in Chinese heavy industry. The Chinese continue to rapidly increase their rate of car ownership and their consumption of meat. Yes, those prices have also declined, but for reasons having little to do with China. Furthermore, Brazilian exports are only down 11.8% year over year, and the article suggests that's mostly due to lower prices. So I see little evidence that the real volume of Brazilian exports has plunged sharply. And yet real GDP is expected to be down by 8%, and even more in per capita terms. All this in a continental-sized economy that (like the US) mostly serves the domestic sector.
3. Maybe you don't like the comparison to Australia, which is much more advanced than Brazil. Then how about the rest of Latin America:
Moreover, many Latin American economies will continue to face growth divergence in 2016. Again, the Atlantic-facing economies of Argentina, Brazil and Venezuela--the largest members of the Mercosur bloc--will either experience meagre economic growth or remain in recession. On the other side of the continent, Chile, Colombia, Mexico and Peru--which make up the Pacific Alliance--will experience stronger expansions. Nevertheless, growth in the Pacific Alliance economies is expected to remain below potential due to the headwinds caused by still-low global commodities prices, the potential impact a Fed rate tightening could have on financial conditions, as well as domestic political challenges.
Yes, lower commodity prices have definitely slowed growth, especially in economies like Chile and Peru, which are heavily dependent on the export of minerals like copper. But this article says that the consensus forecast calls for growth in the 2% to 3% range in the relatively neoliberal Pacific economies. In contrast, Argentina is expected to have 0.4% growth, whereas Brazil and Venezuela will see outright declines. I don't want to overstate the policy differences, none of the countries are either neoliberal or socialist models, but there is no question that the Atlantic economies have tilted more in the socialist direction.
Many Keynesian commenters used to complain when I pointed out that Australia avoided recession in 2008-9 by keeping NGDP close to the long-term trend line, through sound monetary policy. They said Australia was simply lucky, due to its commodity exports to China. Well now Australia is getting walloped by much lower commodity prices for its coal and iron exports, and yet the consensus forecast for Australia calls for the same 2% to 3% RGDP growth that is expected in the more free market part of Latin America. What happened to the claim that commodities were so all important to these countries that they could overwhelm the business cycle? Is it still true for Brazil, but not the much more exposed Aussie economy? I don't get it.
For years, left-leaning economists like Paul Krugman have been telling us that demand-side factors were key, and supply-side economic reforms were overrated. The leader of the British Labour Party praised the socialist government of Venezuela, which makes even Brazil look somewhat sane by comparison. I think we are finally seeing that the left is paying a price for forgetting the lessons of the 1970s. Markets work and statist policies don't. How did this happen? How did they forget?
I think they overreached. After 2000 the GOP took some increasingly silly positions on a wide range of issues. They became widely viewed as the "stupid party." Then you had the global economic crisis, which was wrongly (but perhaps understandably) blamed on laissez-faire policies of deregulation. Progressives started thinking, "maybe the right is wrong about almost everything, including the need for neoliberal policies." Intellectuals moved sharply to the left, especially younger ones with no memory of the failures of socialism. Polls show many younger Americans, especially Democrats, have a positive opinion of socialism. You see serious economists contemplating policies that in the 1990s would have been regarded as loony, like rent controls, or a $15 nationwide minimum wage. And you had serious economists overlooking the horrible consequences of statist big government policies in Brazil, Greece, Argentina, Venezuela, etc.
In 2009 I thought this was another 1933 moment, where the left would greatly benefit from a "crisis of capitalism". Now I'm not so sure. It looks to me like a failure of both left and right in the US, and the only countries that will do OK are those where the right has kept its head, such as the other English speaking countries, the Nordic countries, and East Asia. I see two key differences from 1933:
1. In 1933, most governments were small by modern standards, so there was room to grow. Now Brazil's public sector spends 40% of GDP, which is very high for a developing country. And despite all that spending, they are not building modern infrastructure like China, where government spending is far lower, but better targeted to growth.
2. In the mid-20th century, growth was more like a military operation---mobilizing resources to produce things like steel and washing machines. Even the Soviets could do it. But when the global economy shifted toward high tech and services, the need for a flexible market economy became much greater. After the 1970s, growth slowed almost everywhere, but especially in the more rigid, statist economies.
So today the failures of socialism are immediately exposed as soon as their economies are no longer propped up by commodity exports. Brazil is the poster child for this phenomenon, but it's happening many other places as well.
PS. Mea culpa. I did expect Venezuela and Argentina to do poorly once the commodity boom ended, but did not realize how bad things were in Brazil. The scale of the disaster has caught me off guard. Ditto for Greece. I knew the euro might be a problem for them, but never imagined it would get this bad. So perhaps I'm putting too much weight on socialism. But I am quite confident that Brazil's depression cannot be explained simply by pointing to lower Chinese demand for commodities---the numbers simply don't add up.