Brazil's Challenges #1: Aging and Retirement

To all you readers out there - that is to say, my future self:

This entry is the first in a short series of summaries of economic challenges that Brazil will face in the coming years. Though Brazil expects to become a developed nation on the strength of agricultural and oil exports sometime in the coming decades, there will be onstacles and difficult decisions along the way. First up: the population pyramid and retirement benefits.

First, when reading about the Brazilian economy, you may often find references to Brazil's relatively young population listed as an important asset underpinning growth potential. This claim should come with a very important "however": the population may be young, but it is aging, and fast. In the 1960s, Brazil was home to severe demographic turnaround, when a large portion of the Brazilian population decided, all at once, that two was a pretty good number of children to have. It's been speculated that the mass decision was brought about by representations of family on TV, among other theories (those interested can take a look at this National Geographic article). Whatever the case, the implications for the coming decades are pretty stark. According to IBGE census data and projections, from 2008 to 2050, it's estimate that the number of children up to 14 years old in Brazil will fall by half, and the number of elderly 65 and over will almost quadruple. Here go the numbers, which I took from an article called A agenda fiscal by the economist Antonio Delfim Netto, so I wouldn't have to crunch them myself:



Sometime in the 2030s, then, the population of 0-14 year olds will be smaller than the geriatric population in Brazil. Actually, that specific measure compares favorably with the United States, where the change should occur prior to 2030, according to census statistics. But here's a measure in which Brazil does not compare favorably - from 2008 to 2050, the population age 65 and over will go from less than 7% of the total in Brazil to 23%. In the case of the United states, the same population is projected to go from 13% in the United states in 2010 to 20% in 2030, but it will remain more or less in place through 2050, reaching that year with a smaller population 65+ than Brazil. The aging of the population thus appears to be sharper and deeper in Brazil, meaning that the "sweet spot" the country is currently in, with a small non-working age population, is going to be relatively short. And the country will almost certainly be (even) less prepared for its coming transition.

Now, social security in the United States is a thorny subject. Most serious people would say that it's unsustainable in its current form. But it also isn't impossible to find real economists that would say that the problem isn't that drastic - that if we were able to solve some other problems like health care costs, the US could support most of social security without going broke. I don't pretend to know either way. What I am pretty sure of, however, is that there isn't much debate among economists in Brazil.

I first noticed that something seemed iffy about Brazil's retirement policies a couple years ago, when my then-girlfriend complained that, if retirement policy hadn't been changed, she would have been able to retire on full salary after 25 years of work as a public school teacher, at age 45. Yes, 45. It is truly a country that doesn't think ahead that is willing to give a public employee one year of full pay to do nothing for every year she worked (I'm assuming a life expectancy of around 70 years in this case). I think it's a reasonable guess that a 45-year-old teacher is more or less at the peak of her career - she dominates her classroom material, knows how to discipline students and can give class with her eyes closed. She's efficient and productive. So let's pay her to go home and watch TV all day (or alteratively, sit in her doorway and watch people walk by all day).

Even worse is the fact that this case isn't particularly extreme. Even with recent retirement reforms, the number of years Brazilians must work has increased to 35 years for men and 30 years for women. But this is still without a minimum age (unless you haven't contributed to social security - that is, worked irregularly or not at all), which means that the average age of requests is currently 54 years for men and 52 years for women.

One way this impacts the country is cultural. The Brazilian population, in my personal experience, seems to have become fairly spoiled, with 50-year-olds already starting to curse the government (or their employers) for their tight-fistedness, while woeing their lot for still having to labor at such a ripe old age. Their German counterparts will be active in the labor market for another 17 years.
Furthermore, though other factors can be considered causes for this (for example, Brazil's history of inflation), very few people seem to save for retirement in Brazil. This is also possibly an effect of the region I live in, but my impression is that dependence on the government for retirement income is almost absolute.

More darkly, Brazil spends a preposterous sum on paying out current retirees. The current figure is about 12%, according to Brazil's Institute for Applied Economics Research (IPEA). This measure put Brazil in 14th place out of 131, countries studied, in line with the world's most developed countries. But Brazil isn't a developed country, and won't be for some time; and the aging of the population has only just begun.

Serious reforms will be necessary, since even under a situation of moderate reform, by 2050 social security would end up eating 22% of GDP (and in a situation without any reform, the figure is estimated at something like 35-40% of GDP). Certainly, reform will happen sooner or later. But at the moment, later is looking like the most likely option as current strikes and strike threats seem to indicate that it will be a serious challenge for Dilma to limit government spending in any fashion. The government has won big with expansions in welfare in the last decade as well, making more spending a winning proposition. With major sporting events coming up and investments in infrastructure necessary, one can only imagine that social security reform is not high on the agenda.

But there is also another reason to worry about Brazil's extravagant spending on pensions - it's not fair. Public sector employees are blessed with easy retirement at high wages, while the poor, which overwhelmingly work informal jobs, can only hope for minimum wage when they reach retirement age. This means that enormous amounts of government money (to a large extent levied regressively on hidden production taxes, so households pay through higher prices) are being funneled to Brazil's most comfortable citizens.

Over the next years, Brazil will need to tackle the challenge head-on, or it will only get uglier.

Most Exciting Market?

Two articles in Bloomberg give somewhat opposing views of Brazil today. One quotes Tempelton fund manager Mark Mobius describing Brazil as "one of the world's most exciting markets", and the article cites recent activity such as interest rate cuts in response to the European crisis, as well as the relatively weak Brazilian real, which has boosted industrial production, to justify the excitement. Interestingly, these are temporary effects - the real could well strengthen again after the global crisis matures, and interest rates still need to take inflation targets into account - yet Mr. Mobius seems to favor Brazil for it's long-term potential.

On the other hand, Bloomberg also released the results of its first-ever ranking of the "most promising" emerging markets, which ranks countries by projections 2012-16 GDP growth, inflation and government debt, while also taking into account exchange rate volatility, the price/earnings ratio of its stock market, and the ease of doing business. Brazil's place on the list? Number 16, which incidentally is one spot too low for it to appear in the available database, which lists only the top 15 countries. Brazil lags behind not only India and China and a number of other Asian countries, but also a good portion of Latin America, including Peru, Chile, Colombia and Mexico.

It's not difficult to imagine what tripped Brazil up, despite its absence from the list. Inflation is under control but still significant, and while growth was strong in 2010, the European crisis provoked a considerable slowdown in growth last year, and estimates for 2012 growth are similarly mediocre at 3.3%. The exchange rate is also a constant worry since the advent of the crisis in 2008, with a strengthening real constantly threatening the country's exports. And of course, the country regularly gets massacred in rankings of ease of doing business.

I have no idea about the price to earnings ratio of the Bovespa, but a quick look around Google seems to indicate that it hovers around 13, which would make it about average for the top 15 emerging markets group. And the goodish news? Government date is currently low! Though that could change soon, as President Dilma tries to balance worker demands and strike threats with the budget cuts smaller than what economists are calling for.

The verdict? I'd say Brazil at number 16 sounds about right. It may have good long-term potential, but a lot of countries are in even better positions right now.

Police Strike in Bahia

The state of Bahia, where I live, is currently in the midst of a police strike. The event has huge coverage in the news and reports of fantastic violence have come out of the Salvador area, where spikes in murder rates and other crimes were reported in the early days of the strike, more than doubling according to the AP. According to the same article and television news, soldiers brought in by the state government have surrounded a building occuppied by what they describe as rogue police officers, who the governor claims have promoted vandalism and violence during the strike.

Certainly, it's believable that the police are behind at least some of the surge in violence in Bahia. As they strike against low pay, offices are simultaneously desperate to convince the population of how necessary they are. And some of the crimes reported in Salvador are certainly suspicious. For example, Globo's news program last night reported the hijacking of a school bus - the criminal stopped the bus, ordered the driver and all the children off, drove it away and burnt the bus to a crispy black shell. Notably, he didn't steal anything. Why committ such an absurd crime? That a police officer's friend was hired to scare some children and increase the demand for security seems a lot more plausible than the theory that reduced security has allowed school-bus arsonists to run rampant.

Here in small Senhor do Bonfim, there is also a general feeling of unease without police protection, though it is nothing like in Salvador. There have been some reports of minor vandalism, but the same suspicions remain about police involvement. In any case, how effective are the police really in preventing crime here? How many would-be robbers are really deterred by a minor police presence when they aren't on strike? I'm not sure, but my personal experience is that the situation is extremely different from the United States. No one stands ready to call the equivalent of 911 and expects a speedy police response in a dangerous situation. Police might investigate crimes after the fact, and they might murder drug dealers on occassion, but do the intervene in petty crime? Not that I've ever seen personally around here.

Whatever the real role of the police in Brazilian society, the current situation is certainly bad for Brazil's development. The United States has warned tourists against visiting Brazil, and the Bahian tourism association claims that the strike has reduced the tourism take by 10%, and bars and restaurants have been hit hard as citizens become loathe to leave their homes. They say that uncoming Carnaval won't be affected, but the situation still remains ugly. Here's hoping that Carnaval will be canceled so we can see what happens in such an extreme situation!

New Yorker on Brazil

My favorite magazine has written about my favorite subject! But though it's 14 pages long, the content perhaps isn't that interesting. This is in part because much of the content is basic information that one can find anywhere - explanations of what Bolsa Família is, the basic background of Lula and Dilma... all things one would know if they follow Brazil at all (and not necessarily closely).

But what is interesting is how the different politicians interviewed (the main ones are President Dilma, ex-President Lula, and ex-ex-President Fernando Enrique Cardoso). Both Dilma and Cardoso came off as thoughtful, dignified politicians. Lula, on the other hand, comes off as a man desperate to preserve his legacy. After impressing the journalist by personally serving coffee (rather than having a maid do it), he proceeds to move his chair in close and repeatedly jab his index finger into his interlocutor's leg while stressing how stupid people that are not Lula are.

The two most interesting topics he chose to approach were the legacy of the administration prior to his (that is, Fernando Henrique Cardoso's presidency) and his international diplomacy, including Brazil's nuclear deal with Iran, co-brokered with Turkey. Here's what he says about Cardoso:

"If we had continued the Cardoso policies, Brazil would be bankrupt. [...] Brazil worked out only because we changed his policies. The only thing we kept was fiscal responsibility. One thing - that's all. What happened after conquering inflation? We were very active in international policies. Brazil for many years had no policy for investment. No ability to generate jobs. No policies to redistribute wealth."

This is shameful credit-taking and up-is-down rhetoric. Lula knows that in reality he is vulnerable to the charge that he benefitted enormously from the progress his predecessor made, but instead of acknowledging it he doubles down on his critics. But Lula substantially maintained the policies he inherited from Cardoso. His famous Bolsa Familia was made by renaming a previous policy called Bolsa Escola. Though Lula increased the investment, it's still a patent lie that Brazil had "no policies to redistribute wealth". As for Brazil's "ability to generate jobs", what exactly did Lula do to generate jobs? Why should anyone believe that job creation in recent years in Brazil has been due to Lula, and not, say, to China's phenomenal growth, which has buoyed Brazil's export economy? You won't find an answer in the interview, or anywhere else that I know of. Credit where credit is not due.

As for the Iran deal:

"I traveled to Iran, against the wishes and advice of many friends and presidents, and what happened? They signed hte statement on nuclear proliferation, just as the Security Council wanted them to. But to my surprise they decided to keep sanctions, as a punishment for Iran. Why? Because they weren't the ones to get the deal through? That was the first time I had the feeling that jealousy in politics is a very delicate matter."

This is a preposterous version of events. Iran did not sign a meaningful statement on nuclear proliferation. I'm not going to try to explain what really happened in this diplomatic snafu (you can find a good write up here on Slate), but we can sum up pretty easily - Brazil either got taken for a ride by the Iranians or knowingly tried to push off a seriously deficient agreement with Iran as a breakthrough. In the lead up, there was a lot of press about how this showed that newly powerful players could make a huge diplomatic difference and help emerge from the same old stalemate, so it must have felt pretty bad for Brazilians when everyone started pointing out that the agreement was, at the very best, worthless. And instead of trying to learn a lesson from this, a year and a half later Lula is musing that he is not being lauded for this disaster because other heads of state are too petty to recognize his greatness. This is pathetic.

To be clear, I'm not anti-Lula, but I think it's worth being very skeptical of his view of his own presidency. He has maintained a high approval rating as much by very effectively figuring out how to take credit for everything good and blame others for everything else as much as by any genius for policy.

Another thing that stood out, or rather, utterly baffled me in the article:

While I was in Brasilia, I spoke with an economist named Ricardo Paes de Barros, a Ph.D. from the University of Chicago. He is the undersecretary of a new government agency that is charged with long-term planning, called the Secretariat for Strategic Affairs. He was organizing a workshop, at which the President was scheduled to give the opening remarks, on the politics of the new Brazilian middle class. "This new middle class, they talk a lot about meritocracy," he said, disapprovingly. "They forget that a lot of their success was based on solidarity. Suddenly, now I'm not so concerned about inequality. They start talking about merit. Wow, it's a big problem. People are very concerned. Very, very concerned. It will have very important political implication."

In fact, this is so deeply perplexing to me that I'm going to give it some days to sink in and talk about it more another day.

"Brazilians are rock stars in Miami right now"

The Financial Times reports that the South Florida real estate market, obliterated in 2008, is seeing a rebound due to the influx of rich Brazilians. Brazilians do love Miami. But will it last? My favorite part (because I like disaster) is the last paragraph where the university professor notes that a change in the exchange rate could send the market tumbling again as Brazilian cash in.

The Chevron Oil Spill

Reuters published an interesting article yesterday about a recent 2,400 barrel Brazilian oil spill (by contained) caused by the US company Chevron. For those of us that tend to be skeptical that it will be so easy for Brazil to obtain "developed-country status" within the next two decades, it supplies some interesting information. While the proximate cause was errors in Chevron's calculations of pressure and rock strength, the article argues that the ultimate cause is the vast difficulty involved in tapping subsalt oil supplies.

Though the Brazilian government has tightened restrictions following the 2010 BP disaster in the Gulf of Mexico, the fact that Brazil is counting so heavily on subsalt oil makes it likely that risky exploration will continue. Brazil has been making good progress since the end of hyper-inflation in the mid 1990s, but the country's political culture makes it difficult to take on some of its most glaring problems, such as education and health. Recent oil discoveries represented a way to take them on without making large sacrifices elsewhere, and the allure of billions to spend on social issues without cutting out other spending on voters is more than any government can resist. So don't expect Brazil to willingly slow down it's own oil development, given the huge payoff leaders can expect.

At the same time, even when moving forward as fast as possible, Brazil can expect to encounter further difficulties. As quoted in the article:

"This spill shows that there is much that we still don't know," said Segen Estefan, a professor of undersea engineering at the Federal University of Rio de Janeiro.

"We have to recognize that we really don't fully understand the risks and need to do much more to not only make drilling safer but find ways to clean up spills. As you go deeper everything gets more difficult."

With things getting further behind schedule and many becoming impatient with the delay in payoff after the 2009 announcements of oil, it seems likely that the pressure to deliver results soon will risk bigger disasters.

Roubini on Brazil

The first time I sat down last year to try to learn something about now-President Dilma, one thing in particular leapt out at me. It was a brief passage that I found in Bloomberg (this was over a year ago, so I don't have the link) to the effect of this:

Reporter: Can Brazil keep growing at this fast pace without major structural reform?
Dilma, looking irritated at someone questioning Brazil's economy: Is Brazil growing now?
Reporter: Yes...
Dilma: Then it can grow.

Obviously, what struck me about it was the incredible stupidity of the presidential candidate (who is an economist), akin to someone in airplane that's out of fuel claiming she can fly for eternity. Dilma has growing on me since that offensively idiotic statement, especially with the ministerial bloodbath that is continually happening. But the issue of structure reform hasn't gone away, and as far as I can tell, probably won't in my lifetime.

Nouriel Roubini made headlines in Brazil today with skepticism about Brazil's future, noting that the few good years that Brazil has been having until now are far from a guarantee of future success. The main weaknesses that he pointed to in Brazil's economy:

-Dependence on commodities - as soon as commodity prices fall globally, Brazil will be in trouble.
-Lack of investment - despite various investment programs (PAC 1 and 2, investments for the World Cup and Olympics), Brazil is simply not capable of investing what it needs to guarantee future growth. This includes mainly education and infrastructure, which have the power to seriously limit progress if they stay the way they are.

On the plus side, all is well as far as energy, and at least the country's financial system isn't capable of destroying the economy for it's own gain.

In the end, pretty typical stuff that you'll read over and over again researching the Brazilian economy. Views on Brazil seem to have cooled a bit over the last year.