As Growth Ebbs, Brazil Powers Up Its Bulldozers

Ipojuca, Brazil – More than 40,000 laborers swarm the port complex here in northeast Brazil, building a refinery for the state oil company. Five thousand others toil at a shipyard, another government-led project. Real estate prices are soaring and unemployment is falling in this region along the Atlantic coast, once known for its festering poverty.

In a show of the extraordinary sway that Brazil's government wields in nearly every important area of the economy, President Dilma Rousseff is accelerating an array of stimulus projects throughout the country aimed at blunting a slowdown that has reduced Brazil's economic growth to a snail's pace.

Ms. Rousseff's assertiveness in enhancing the government's role in molding economic policy is not wholly unlike China's state-led investment, an increasingly popular model in the developing world. Brazil's stimulus spending has helped preserve jobs, keeping unemployment at a historic low of 5.8 percent, down from 13 percent a decade ago. Months into a sharp slowdown, Ms. Rousseff's approval ratings stand at more than 60 percent.

But in an echo of the debate about heavy government borrowing in the United States and Europe after the global downturn, Ms. Rouseff's moves are starting to meet resistance in Brazil. Some experts fear that Brazil is becoming too dependent on government intervention to smooth the ups and downs of an economy that remains tied to commodity cycles; others fear that the creation of state-supported champions in the business world give the government even greater power to dictate policy shifts, potentially eroding Brazil's exposure to market forces.

Economists here still have unhappy memories of the aftermath of the "Brazilian miracle" of the late 1960s and early '70s, when a state-directed boom fostered fast growth for a time, but ended in rapid inflation, low productivity and a radical restructuring of the economy.

"The government is pressing ahead with projects of pharaonic proportions, when areas like basic sanitation need urgent attention," said Sergio Lazzarini, an economist at Insper, a São Paulo business school, who has written widely on Brazil's state capitalism. The investment push is already showing signs of strain. So many infrastructure projects have been approved at once, including stadiums for the World Cup soccer tournament in 2014 and hydroelectric plants in the Amazon, that the government is having a hard time spending all the money allocated. For instance, just a fifth of the $7 billion budgeted for highway projects in 2012 has been spent.

In Ipojuca, contractors on state projects are luring workers from other government investment priorities, like the construction of a network of concrete canals in the Sertão, the semiarid hinterland in northeast Brazil. Delays and cost overruns, partly because of labor shortages, have plagued big stretches of that project, which is part of a $4 billion effort to divert the flow of the São Francisco River to villages in need of irrigation.

Ms. Rousseff vigorously defends her response to the slowdown (Brazil eked out 0.2 percent growth in the first quarter). In a speech this month, she drew a stark comparison to the austerity policies in Europe, where more than half of the young people in some countries are without jobs. "We don't have a vision which justifies an adjustment leaving 54 percent of a country's young people without work," she said. "We never thought that way; our policy is clearly in defense of employment."

Ms. Rousseff's position reflects Brazil's fiscal running room, since improvements in tax collection and the earlier surge in the economy helped bolster state finances. But her thinking is also rooted in Brazil's strong tradition of government leadership of the economy.

The officials at the helm of Brazil's state-controlled companies argue that the nation still needs such sprawling projects to consolidate the gains in reducing inequality. "It's a catalyst of job creation," Maria das Graças Foster, the chief executive of the national oil company, Petrobras, said in an interview, referring to policies requiring Petrobras to buy Brazilian-made ships even though state-supported shipyards are mired in delays.

Brazil has a web of state-controlled energy companies, including Petrobras, and banks like Banco do Brasil, Latin America's largest lender by assets.

More subtly, but with perhaps even greater lasting impact, the authorities also wield economic influence through the National Bank for Social and Economic Development, an institution in Rio de Janeiro that has mushroomed, lending four times as much as the World Bank does around the globe.

Like the World Bank, the national development bank finances big infrastructure projects aimed at alleviating poverty and boosting development. Founded in 1952, the bank remained under state control throughout Brazil's privatization wave in the 1990s, even financing many of the government auctions of state companies.

Under President Luiz Inácio Lula da Silva's government, from 2003 to 2010, the bank aggressively expanded, acquiring minority stakes in a number of private companies. Some are huge, like JBS, the world's largest meatpacker. Others are start-ups, like Bug Agentes Biológicos, which mass-produces wasps to combat the larvae threatening soybean crops.

Altogether, the development bank, along with the pension funds of big state companies, now hold stakes in nearly 200 Brazilian companies, up from 95 a decade ago. In some cases, these holdings allow the government to oust powerful corporate leaders. They showed that capacity in 2011, forcing Roger Agnelli, chief executive of the mining giant Vale, to resign after he upset officials by firing 1,300 employees and slashing investments in Brazil.

Ms. Rousseff's government is showing its teeth to Brazil's financial elite again this year. She has seized on the economic slowdown as an opportunity to persuade Brazil's private banks to lower interest rates, which until recently were among the highest in the world, by pushing Banco do Brasil and Caixa Econômica Federal, another large state bank, to cut their own rates.

Initially, the response from Brazil's powerful banking establishment was tepid. "You can take a horse to the riverbank, but you can't force it to drink water," Rubens Sardenberg, chief economist of the powerful Febraban association of banks in São Paulo, said in May.

The reaction from Ms. Rousseff's office was blunt. "The horse can die of thirst," said an official in her government, reflecting the president's irritation. The banking group promptly withdrew the economist's comments, and private banks started following the giant state banks in lowering rates.

Perhaps aware of such reactions, Brazil's business establishment rarely voices explicit criticism of state intervention in the economy. But while Brazil remains far more receptive to private investment than neighboring Argentina, concern is nevertheless building as growth stalls.

While bowing to her wishes, some business interests are starting to chafe under Ms. Rousseff's interventionist policies. "We urgently need to shift our course," the influential business magazine Exame said in an editorial this month, complaining about what it called Ms. Rousseff's "strong hand."

Concerns have emerged over growing consumer debt, with nine million Brazilians taking out loans in 2011 for the first time. At the same time, the valuations of some of Brazil's largest companies have declined, and the currency, the real, has tumbled against the dollar.

Ipojuca is in Pernambuco State, where both the advantages and drawbacks are on display of the heavy reliance on the government for investment decisions. On the positive side is Brazil's resilience at a time of global economic turbulence.

"Of course, we're concerned about contagion reaching our shores, but there is no sense of crisis at the moment," said Frederico da Costa Amancio, chief executive of the Port of Suape, home to the Petrobras refinery that is under construction alongside factories that produce everything from wind-power turbines to potato chips.

But in villages like Agrovila Seis in the interior, state investment has been a mixed blessing. After a windfall in 2007, when the earth-moving machines arrived and foremen started hiring workers to dig canals intended to divert the São Francisco River, the optimism dissipated after contractors began suspending work last year, raising fears of white elephants on the Sertão.

Ms. Rousseff personally visited the work sites in February. Later, she vowed to increase the number of workers on the project by the end of the year to 6,500 from 4,500. Still, Agrovila Seis is limping along for now, reflecting the disarray of one of Brazil's largest infrastructure projects. Empty housing for workers gives part of the village the feel of a ghost town.

"I try not to feel despondent about my debts," said Eliane da Silva, a restaurant owner in the village who took out loans to buy equipment; her clientele, made up largely of work crews, has plunged. "I try to imagine where all the money went for this project."

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