Brazil’s Unique Take On Stimulus

(By Fisher Investments)  Brazilian President Dilma Roussef announced Wednesday $66 billion of new stimulus measures aimed at spurring the economy in what thus far has been a tepid year for growth—particularly compared to 2010's rather torrid 7.5% pace. Assuming the standard, media definition of "stimulus," one would likely pretty safely assume Brazil plans some combination of increased government spending—possibly in the form of incentives for private businesses, though more likely through direct government investment in projects like infrastructure—and possibly some tax cuts.

And if enacted thusly, such a program would ostensibly stand in pretty stark contrast to measures being enacted across the pond—in countries like Italy and Greece, among others—who are currently deploying "austerity" measures.

Now, "austerity" means slightly different things to different countries, depending on the primary challenges said countries face. But among the possibilities are plans to privatize large swathes of government-owned businesses and increase labor force flexibility by doing things like increasing the minimum retirement age. And it's precisely such austerity measures the media's widely panned for choking off already too-low growth—ostensibly because decreasing government spending at such a time is precisely the wrong course of action.

What's interesting, though, is such actions are entirely the stated intentions of Brazil's recently announced stimulus measures. You read that right: Brazil's stimulus doesn't include vastly increased government spending at all. Quite the opposite, in fact: It includes the sale of rights to operate railroads and roads to private companies, as well as raising the minimum retirement ages for men and women to 65 and 60, respectively. The program's $66 billion figure is the anticipated amount of private-sector investment the program likely attracts over the next couple years. And that's just to start—there's speculation more reforms are to come, including possibly selling rights to private companies to upgrade and modernize Brazil's ports, which are so outdated they're actually hurting overall productive capacity.

Also interesting is this is a relative about-face from Brazil's prior, much more traditional approaches to stimulus—for example, at the end of June, Roussef announced a $4 billion package including primarily government purchases. And prior stimulus packages included measures aimed at increasing domestic consumption—all of which seemingly had little impact in terms of goosing overall economic growth. So it seems Brazil's recognized it ought to try a different tack.

But the media's treatment of Brazil's plans is odd at best, in light of its near-complete opposite reception of the various PIIGS nations' "austerity" measures, which seem strikingly similar to Brazil's "stimulus." And which highlights well an odd dichotomy we at MarketMinder have commented on a couple times recently: Namely, folks (especially in, but certainly not limited to, the media) seem to get quite confused about the typical source of economic activity. And as a result of that confusion, they similarly confuse "austerity" and "stimulus," presuming the former automatically an economic scourge and the latter a surefire recipe for jumpstarting economic activity.

Stepping back, though, and recognizing the private sector is far and away the larger economic engine makes such concerns far less relevant—because they really only weigh heavily in arguments predicated on a belief the government originates the majority of economic activity. Were that the case, then yes, too-draconian government spending cuts would be cause for concern.

But the reality is the vast majority of economic activity originates in the private sector—including, in fact, the government's very ability to exist and operate. And making plans like Brazil's—and Italy's and Greece's, among others—in our view, more likely to ultimately succeed at increasing private-sector activity than the "stimulus" measures as typically defined by the media.