If Brazil's new government liberalizes its economy as vowed, it may also seek new and more dynamic trading partners like Chile and the Pacific Alliance.
SANTIAGO DE CHILE — Brazilians went to the polls on Oct. 28 to elect the president who will run their country for the next four years.
The campaign was overshadowed by several incidents that say a lot about the country's social and political environment in recent years. The sharp polarization of political forces, added to the crushing impact of corruption revelations related to the Workers Party (PT), eventually led to the triumph of Jair Bolsonaro, a former army captain and congressman for Rio de Janeiro for over two decades. He won thanks to a far-right discourse, promising strong-handed policies against crime and corruption, but also to create jobs and more economic growth to bring Brazil out of its recession.
Goodbye to protectionism?
Bolsonaro has put the University of Chicago graduate Pablo Guedes in charge of devising his government's economic plan. There are scant details on it for now but we know the country faces a delicate fiscal situation that must be addressed with spending cuts and increased revenues. This would be possible thanks to the privatization of non-essential government companies, which would exclude oil giant Petrobras and various energy-sector firms.
There is also strong budget pressure from the country's costly pensions system, which threatens to increase the fiscal deficit that is already close to 8% of GDP per year. This makes Brazil's access to international credits more costly, so the new government will likely put a pension reform among its priorities, increasing personal contributions and raising the retirement age with appropriate incentives.
Brazil also has considerable room for growth when it comes to trade. International trade represents for example only 23% of its GDP, in contrast with 44% and 57% for Peru and Chile respectively. Bolsonaro has more than once shown an interest in taking the country closer to the Pacific Alliance, a Latin American liberal trading block that is in clear contrast with the protectionist approach that has dominated Mercosur. Brazil would have to leave behind the protectionist approach if it wishes to develop an open trading policy.
Bolsonaro's economic success would be a boost to the region — Photo: Fabio Rodrigues Pozzebom
The announcement that Bolsonaro's first visit abroad will be to Chile, not Argentina, Brazil's traditional trading partner in the region, shows the new administration's liberal economic inclinations and greater regard for the national interest in seeking pacts and deals. That will mean unshackling itself from the commitments Mercosur membership implies. Brazil will also seek to strengthen its position as a recipient of foreign investments, which requires boosting market confidence in the country. That should help boost internal demand, create jobs and make inroads into a current unemployment rate of 12%.
Relations with Chile
Here in Chile, we are not indifferent to the Brazilian election results, or to how the Bolsonaro administration will put its ideas in practice. Chilean businessmen have been keen on South America's biggest market in recent decades, investing almost $31.7 billion there between 1990 and 2016. This is 27.7% of all Chilean investments abroad in that period and makes Brazil our top investment destination. Bilateral trade furthermore exceeded $9 billion in the year 2017, which is 15% more than our total trade with our Pacific Alliance partners. The figures show the importance of the two countries' economic and trading relations. They also show how important it is for Chile that Bolsonaro's promised reforms succeed.
Here in Chile, we are not indifferent to the Brazilian election results.
The government of President Michel Temer has in recent months moved to consolidate ties by updating the Chile-Mercosur Economic Complementarity Agreement (ACE 35), which currently governs our bilateral trade. While leaving aside some key issues on better market access (like rules of origin or intellectual property norms), the new deal allows both sides to move toward a common set of norms on issues of current concern in international trade. These include internationalization of small and mid-sized businesses, environmental protection and incentives for digital trade, measures which help improve the bilateral trading regime. There is no doubt that the updated agreement will also bring Brazil closer to the Pacific Alliance.
The gigantic size of Brazil's economy, its regional importance, the extent of our economic and trading ties, the evolution of the Bolsonaro government and confirmation of the democratic credentials he promised during the campaign are all issues that matter to Chile. His economic success, which we all want and hope for, would be a strong boost to the region, its citizens, investors and all of us who consider Brazil an essential partner in forging a prosperous, consolidated Latin America.