OECD Brazil Survey

The OECD has a new survey out on Brazil. Bloomberg have a rough summary here:

"Brazil's economy will slide further behind its peers unless the government limits spending, especially on pensions, the Organization for Economic Cooperation and Development said today in a report."

Of course the interesting question that this raises is who exactly Brazil's peers are?

If we look at the key demographic indicators the counry which most resembles Brazil in its present profile is Turkey. Both have fertility levels which are rapidly approaching replacement level - and of course may well soon follow the global pattern of below replacement fertility - since both currently have a 2.4 TFR (and dropping fast). In terms of life expectancy Brazil is around 71 and Turkey 72, and of course these ages are rising comparatively rapidly as economic conditions improve. As far as median age goes both countries are now entering the age range during which the phenomenon known as the 'demographic dividend' can be expected to operate (Brazil 27.81, Turkey 27.7, for the importance of median ages in macroeconomic analysis see this post here). So the similarity at this level between these two countries is in fact striking and remarkable. Turkey in recent years has enjoyed far stronger rates of economic growth when compared to Brazil, but it is not clear to what extent the 'anchor' of the EU accession process (and the consequent surge in domestic investment) has been responsible for this, and equally how this process might be affected by any distancing between Turkey and the EU which could result from 'enlargement fatigue' or a worst case scenario in Iraq might impact on this.

In cultural terms the countries which most resemble Brazil would of course be the other two Latin American 'tigers' Chile and Argentina. And again, these countries, possibly for different reasons, have enjoyed rather higher growth rates than Brazil. So in this sense the OECD may well be right to describe Brazil as something of a laggard. The key question is just how long this position will continue.

In these terms the OECD report is revealing. At a superficial level the OECDs key point would seem sound enough:

``Brazil's growth performance needs to improve to close a widening income gap relative'' to other countries in the group, the OECD said in the report. ``Despite reforms implemented since 1998, the deficit of the social-security regime for private- sector workers continues to rise.''

Clearly this is the case, though I doubt the validity of making a direct comparison with the OECD 30 at this point. Brazil is a relatively poor developing country, it is starting on the round to becoming a developed economy, but this road is likely to be a long and hard one. As has already been noted the population is still comparatively young - Brazil is just entering the demographic dividend range - and the still fairly large young cohorts undoubtedly place special pressures on the labour market, and exert a somewhat negative influence on employment rates and income growth. This position will to some extent correct itself automatically as the shape of the pyramid changes, however the OECD is undoubtedly right in stressing the need for a balanced policy environment so as to leverage this process to the maximum.


Brazil is the biggest debtor among emerging market nations with about 1.06 trillion reais ($494.2 billion) in public federal debt in October. The country's 2.5 percent annual growth rate since 1995 lags the global average by more than a third.

Obviously it is clear that Brazil needs to get a better hold on its public finances and that increased taxes are not the best solution, but I do feel that both the above statistics are a little misleading since in the first place Barzil is a large country and hence proportionally the debt is not as big as this makes it seem, and secondly Brazil has only really started to take off in the last couple of years, so the average growth rate since 1995 is not a particularly informative number.

In fact the OECD says the following:

Fiscal performance remains strong. The consolidated primary budget surplus target – which has been raised repeatedly since 1999 to ensure the sustainability of the public debt dynamics – continues to be met and sometimes exceeded by wide margins. The net public debt has fallen in relation to GDP since the 2003 peak and has now stabilised, albeit at the comparatively high level of around 50% of GDP by emerging market standards. The government has been able to sustain fiscal adjustment, despite the limited room for manoeuvre caused by a ratcheting up of current spending over the years and Brazil’s notorious budget rigidities. Nevertheless, fiscal adjustment has been achieved at the expense of cutting back on public investment and by increasing the tax burden. The revenue-to-GDP ratio rose by about 5 percentage points during 2000-05 to nearly 37.5% in 2005 – a level that is one of the highest among countries with comparable income levels. A durable reduction in public indebtedness on the back of a retrenchment of current expenditure, rather than tax hikes, would serve to facilitate a swifter fall in real interest rates and to permit the channelling of domestic saving to finance growth enhancing investment. It would also lay the groundwork for removing distortions in the tax system, including by broadening tax bases.

So progress is being made on the deficit front, and the real issue is about the structure of public spending with more emphasis needed on infrastructural investment rather than on current spending. The politics of this are, however, complex.

Also on the monetary policy front the OECD is fairly positive:

The perception that the authorities are committed to a monetary policy framework combining inflation targeting and a flexible exchange-rate regime appears to be suitably well entrenched. The central bank enjoys de facto, but not yet de jure, operational autonomy. The policy regime has been working well, delivering continuous disinflation since 2003 and anchoring expectations. Notwithstanding these achievements, which should not be underestimated, the conduct of monetary policy is complicated by cumbersome regulations on the allocation of credit to selected sectors, especially agriculture and housing, including through mandated saving arrangements. Compulsory reserve requirements on commercial banks are also burdensome for a variety of deposit categories, although most countries that have adopted inflation targeting as the framework for monetary policymaking have now reduced or eliminated such requirements. These restrictions act as an implicit tax on the financial sector, against the backdrop of an already relatively high tax burden on financial transactions, including that of the bank debit tax (CPMF).

So changes are needed:

Consideration should be given to gradually removing the extant directed credit and reducing compulsory reserve requirements so as to improve the efficiency of the financial sector and adequately reward long-term saving, an aspect of the problem that is often overlooked. The favourable domestic macroeconomic environment, with falling inflation and improving growth prospects, appears propitious for further liberalisation in this area. At the same time, the consolidation of macroeconomic stability not only creates a need to move forward but also provides an opportunity to go beyond the current policy achievements as a means of eliminating the remaining distortions inherited from the pre-stabilisation period. The payoff from reform in this area can be considerable in terms of reducing Brazil’s stubbornly high real rates of interest, which weigh heavily on growth.

Essentially the real rate of interest needs to come down.

Incidentally this post is also cross posted from my Brazil blog project: Brazil Economy Watch.

Ferenc Puskás and Life Expectancy

The following post comes from my Hungary Economy Watch Blog. It takes the example of the relative longevity of Ferenc Puskás (the Hungarian Football legend) as an example of how complex an issue life expectancy is likely to prove in the context of Hungary's ongoing economic crisis.

One of the factors is undoubtedly medical expenses, and some indication of just what is involved here can be found in this post, Now for Puskás.

This week we learn of the sad death of Ferenc Puskás at the age of 79. Puskás was undoubtedly a great footballer (you can find an interesting page about him on wikipedia) and he will be missed by family and football fans alike. Puskás reached the comparatively advanced age of 79, and we hope he enjoyed his later life. We may also like to note that Puskás lived considerably longer than the majority of Hungarian men, since the average male life expectancy is currently some 68.45 years. And it is here that the economic part of our story begins.

Life expectancy in Hungary continues to be comparatively young by European standards, so it is to be hoped that in the coming years this situation will improve considerably, but how exactly will this improvement affect the economic outlook for Hungary, that is also the question?

Now one thing is clear, any increase in life expectancy in Hungary will come by people who are now over 60 living longer. As this happens it will be wonderful news for everyone, but in economic terms this will have an important on cost, since it will involve a considerable expenditure in medical care and medicine, and it is just the question of who is going to pay for this which is the subject of considerable dispute between the Hungarian government and the pharmaceutical companies:

“We see if the modification would get approved it could lower the payment obligation of both Egis and Richter arising from tax on drug subsidies to HUF 1.5bn (when compared to the earlier version of 14%-16% tax resulting in HUF 2.0bn) and to HUF 2.4bn (when compared to the earlier version of 14%-16% tax resulting in HUF 3.3bn) for 2007 respectively," KBC's Barbara Jánosi said on Friday.

She added this step would be only a little positive development for these two companies when compared to substantial increase seen in their payment obligation from co-financing the gap of the drug subsidy budget.

According to the Parliament's latest decision, next year's drug subsidy budget target will be HUF 287 billion when compared to HUF 364 bn reported earlier by the Finance Ministry.

“We see the lowered target could lift substantially the budget gap for next year resulting in higher payment obligation for drug makers (if no changes will be in the distribution principles of the gap between industry participants)," Jánosi added.

Now it is clear that with this current comparatively low life expectancy some considerable improvement is to be hoped for and expected. If we take a look at a comparable society, the old east Germany, we can see that such an improvement can occur relatively quickly, if the right care and clinical environment is available.

Last year I had a post about this situation on a Fistful of Euros, based on a paper by the German-based researcher Marc Luy. Essentially the point is that after years of life expectancy divergence, the two societies - East and West - converged again comparatively rapidly in the 1990s based largely on what Luy calls the availability of nursing care:


“The demographic changes and developments in Eastern and Western Germany are generally seen to offer a unique possibility to understand the interaction between societal, social respective economic conditions and population processes. Almost identical demographic composition and behaviour until 1945 were followed by 45 years of life under different political and socio-economic structures resulting in completely different demographic conditions…. With Reunification in 1990 the population in Eastern Germany returned to the Western societal and economic system what caused sudden changes in all its demographic developments. These special preconditions lead some scholars to describe the Eastern German population as a kind of 'natural experiment' generated a large number of researches about changes in Eastern German demography.”

“In the field of mortality research especially the rapid convergence of survival conditions since 1990 following roughly two decades of continuous divergence are subject of central interest. The fact that both, the former increase and the recent decrease of the life expectancy gap between West and East Germany were mainly caused by age groups between 60 and 80 led to the central message that "it's never too late" for increasing length of life.”

So on the face of it a convergence of Hungarian life expectancy towards levels which are regarded as rather normal in the West European parts of the EU is to be expected, but we need to think about how this can be paid for.

Now many attribute Germany's current public finance problems to the incorporation of East Germany, and this view is *both* right and wrong.

It is wrong in the sense that it doesn't take account of the fact that ageing is an *all Germany* phenomenon, but it is right that the rapid increase in life expectancy that took place in East Germany in the 1990s simply piled on, and piled on the costs, and this must be a big part of the current financial crisis that the German health system is experiencing.

So all I am saying at this point is that the sum total of these effects will make the managing of the Hungarian deficit issue a bigger rather than a smaller headache, and the sooner the body politic in Hungary wakes up to this the better.

The Japan Government Reduces Its Economic Forecast

In many ways this is significant. The Japanese government has just reduced its economic forecast for the first time since December 2004. So it seems that now all the signs are there that the longest economic expansion since the great recession began is now begining to come to an end. Foremost among the weak points is, of cousre, domestic consumption. Rather than repeating myself for the umpteemth time here, I would simply direct you to yesterday's post by Claus Vistesen, where the issues involved are made extremely clear.


Japan's government lowered its evaluation of the economy for the first time in almost two years, after sluggish wage growth prompted a slump in consumer spending.

``The economy is recovering, despite some weakness in consumption,'' the Cabinet Office said in its report for November in Tokyo today. ``Private consumption is almost flat,'' it added, cutting the assessment for the first time since December 2004.

The last time the government lowered its assessment was in December 2004, as stalling global demand prompted a glut in corporate inventories and a slump in production. The world's second-largest economy almost slipped into a recession when slower export growth caused it to contract in the fourth quarter.

Household spending, which has declined every month this year, plunged 6 percent in September, the biggest drop since 2001. Wages were unchanged in the same month, after rising only about 8,000 yen ($68) since January.


Although it lowered the assessment, the government maintained its view that the economy is ``recovering,'' unofficially putting the current expansion in its 58th month, the longest since 1945.

``As far as the monthly economic report is concerned, the economy of Izanagi has been surpassed,'' Ota said, referring to the so-called Izanagi boom that ended in 1970.

During the Izanagi boom, a 57-month period named after a Japanese god, gross domestic product almost doubled, helping Japan emerge as a major economic power. The expansion, sandwiched between the 1964 Tokyo Olympics and the 1970 Osaka world expo, was so named because the economic miracle was compared in significance with Izanagi's creation of the Japanese islands.

Japan's economy has grown at an average 2.5 percent in the current recovery, about a fifth of the average 11.5 percent seen during the Izanagi period, according to Dai-Ichi Life Research Institute, a Japanese think tank.


The biggest difference between Izanagi and the current recovery is that deflation plagued most of the latter, meaning growth relied on exporters as consumers, discouraged by job and wage cuts, spent less. Unemployment surged to a record 5.5 percent during the current recovery, more than four times the average rate between 1965 and 1970, government data show.

``Deflation crippled non-manufacturers, who employ about 80 percent of the workforce, which has made it hard for most citizens to feel the recovery,'' said Hideo Kumano, a senior economist at Dai-Ichi Life Research Institute and a former central bank official. ``The recovery may be the longest since the war, but it certainly isn't the largest.''

Japan Trade Surplus Narrows

This is hard to interpret, but it does seem that we have here more evidence of an investment slowdown in China (as well of course of a decrease of the rate of growth in US consumption), and Japan is one of the first to feel all of this. Now we have to watch for Germany. Note that many commentators are asking for domestic consumption to take the strain, and that doesn't sound at all realistic to me.

Japan's trade surplus narrowed more than expected as U.S. demand cooled, signaling the impetus that exports gave to economic growth last quarter is fading.

The trade surplus fell 24.8 percent to 614.7 billion yen ($5.2 billion) in October from a year earlier, the Ministry of Finance said today in Tokyo. The median forecast of 33 economists surveyed by Bloomberg News was for a surplus of 770 billion yen.

Demand for Japanese exports is cooling after the country's largest export market grew at the slowest pace in more than three years. Waning overseas demand leaves the world's second-largest economy more reliant on its consumers, who reined in spending last quarter, to sustain the longest expansion since 1945. Exports rose 11.6 percent, the slowest growth in six months.

Growth in exports to the U.S. slowed to 13.5 percent in October, after climbing 20.5 percent a month earlier, as demand for automobiles cooled. Shipments to the European Union grew 8.7 percent, slower than the 14.2 percent growth in September. Exports to China expanded 18.4 percent after climbing 19.7 percent the previous month.

Exports measured by volume, which don't take into account price fluctuations, grew 2.2 percent, the slowest since August 2005.

Demand for transportation equipment and electronics, which together make up almost half of Japan's exports, waned last month. Exports of transportation equipment, which include cars, trucks and automobile parts, rose 17 percent from 21 percent in September, the report said. Electronics shipments grew 7.3 percent, down from 11.8 percent.