Brazil needs to take advantage of the fragmentation of the global economy – 04/19/2023 – Solange Srour

In addition to the ambitious economic agenda of building a new credible fiscal framework capable of bringing about a sustainable drop in interest rates, Brazil is currently facing a very important geopolitical challenge: to position itself in a world where the liberal paradigm —based on multilateralism and international cooperation between countries as a way to generate higher growth rates— lost ground to the geopolitical paradigm, in which national security became a priority.

The consequences of this “new world”, in which the worsening of the bellicose relationship between the United States and China prevail, the redesign of global supply chains and the rise of nationalist industrial policies, are negative: higher inflation and lower global growth.

However, at an individual level, some countries can benefit from the search for friendly nations, with greater cultural correspondence, that can be part of the companies’ production chain (the so-called “friendshoring”) or that also allow them to be close to their main markets. consumers, avoiding logistical problems (the so-called “nearshoring”).

In this fragmented world, emerging economies that manage to reduce their domestic vulnerabilities —such as legal uncertainty, a complex tax system, precarious infrastructure— will be able not only to attract a huge flow of foreign direct investment but also to stimulate private domestic investment, counterbalancing the smaller impetus of global GDP.

Mexico has been one of the biggest beneficiaries of the reorganization of production chains, in the search for alternatives to Chinese production. Despite relevant reforms falling short of what was needed, proximity to the US market is a differential and the economy is benefiting from US government stimulus packages aimed at bringing microchip factories and green technology products to North America , such as electric cars.

India is another emerging country to be favored due to its demographic advantage, already surpassing China in population. The country has, incidentally, been able to escape the sanctions imposed by the Americans, despite its continued economic and military relationship with Russia.

Brazil, until now, is seen as a geopolitically neutral country, with a large consumer market and the advantage of being a relevant producer of agricultural and metal commodities. It is one of the favorite candidates to receive investments in sectors such as renewable energy and agriculture, as well as consumption and infrastructure.

This process could be accelerated if Brazil reduced its vulnerabilities more quickly. The new fiscal framework, in fact, brought some spending restraint when compared to the situation prior to the spending ceiling, but failed to depend on a substantial increase in the tax burden in order to stabilize the debt in the coming years.

A State reform that established good rules and strengthened institutions, for example, would make room for a responsible expansion of public investments. Such an agenda is not being set; on the contrary, the country is backtracking on some important achievements. The proposed changes in the sanitation framework may jeopardize the entire agenda of concessions and public-private partnership programs.

One of the countries harmed by fragmentation is China itself, already struggling to sustain growth rates as in the past. Policies to stimulate infrastructure and civil construction no longer have the same impact and increase the risk of bubbles. Economic growth depends on increasing the workforce and productivity. Chinese demographics have peaked and will have a very negative trajectory for decades to come.

Furthermore, with US sanctions, it will be increasingly difficult to achieve marginal productivity gains via cutting-edge technological advancement.

For the US, the most direct consequence is that the dollar —dominant reserve and transaction currency— will gradually lose that status. In recent decades, China has increased its bilateral trade in goods by more than 130 times, and it is natural to expect that such commercial transactions will be carried out without using the dollar as a reference.

We are witnessing a fragmentation of the global economy into competing blocs, each trying to pull as much of the rest of the world closer to their respective strategic interests and shared values.

With adequate public policies and a neutral geopolitical position, Brazil would have a secular opportunity to increase its potential GDP. Missing this opportunity would be a huge waste.

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