China’s recurring 10 percent annual average growth rate has won it predominantly accolades (and not a little envy); making it the global economic powerhouse it is today. But as Brazil nears these numbers – growing 7.5 percent in 2010 -- it is the naysayers and doubters that have come to the fore. Even the government has labored to reassure investors and the public that it is working hard to “slow down” growth: Finance Minister Guido Mantega assured last week that “[Brazil] will grow moderately” due to proactive measures to raise interests rates and cut public spending.
Why the stark contrast?
One reason is the source of economic growth. China’s has been primarily investment led. From 2000-2008 China invested an average of 41 percent of GDP, a ratio more than double that of Brazil (and other countries such as the United States). In 2009, in the depths of the worldwide global downturn, investment soared to almost 50 percent of GDP, much dedicated to infrastructure. Thousands of factories, millions of miles of road, new ports, high speed railway lines, and airports have sprung up over the past decade. The country is now populated by entirely new cities and manufacturing centers that then drive growth.
Brazil, by comparison, invests less than 19 percent of GDP a year. Infrastructure is notoriously bad – which some economists estimate will curtail future growth by nearly 1 percent a year. Instead, consumption fuels Brazil’s recent rise. In 2009 a whopping 84 percent of GDP was consumption - compared to just 48 percent in China. Brazil now ranks at the top of the list of the world’s best shoppers led by booming credit, the expansion of foreign and domestic retailers, and the now 100 million strong middle class. The current over reliance on consumption leads economists and policymakers alike to worry about overheating.
Furthermore, China’s transformative growth has been mostly self-funded. It leads the world in internal domestic savings, which has risen steadily since the turn of the 21st century and in 2007 topped 54 percent of GDP, dwarfing the 23 percent average rate of OECD countries. Brazil’s internal savings rate, meanwhile, is only 15 percent, making it more reliant on foreign investment (both long term FDI and more worryingly shorter term portfolio or “hot money” flows) to fund needed investment. Even with these inflows, the savings available don’t approximate those China wields, limiting the potential pace of growth.
But another real and important reason for the discrepancy is that Brazil is already a much more developed economy. Brazil’s per capita income is more than double China’s - $8,230 vs. $3,650 in 2009. Its mortality rates, education rates and urban development rates all top China’s. The basic health improvements, spread of education, and urbanization behind much of China’s growth occurred in Brazil from 1967-1979, when it too grew at rates of almost 9 percent a year.
This current growth differential between China and Brazil isn’t a permanent status quo. China’s per capita income has now already risen, and much of the “easy” productivity gains are behind it. Some China observers point to the growing speculative real estate bubble, the rapid aging of its population, and a less than open government as further obstacles to sustainable high growth. Brazil, in turn, has many advantages - a sizable and diversified economy, low government debt and healthy banks. But going forward, for Brazil to grow quickly (and sustainably) it must increase its productivity (and not rely on just high commodity prices and consumption). This will depend on more investment, better education, and other structural reforms. If these changes happen, then the skeptics should fade, and a true second “Brazilian miracle” will be possible.