US embassy cable - 04BRASILIA2751

UNCLAS SECTION 01 OF 03 BRASILIA 002751 
 
SIPDIS 
 
NSC FOR MIKE DEMPSEY 
STATE PLEASE PASS TO USTR FOR SCRONIN 
DEPT OF TREASURY FOR SSEGAL 
USDOC FOR 4332/ITA/MAC/WH/OLAC/SHIELDS 
USDOC ALSO FOR 3134/ITA/USCS/OIO/WH/RD/CREATORE 
USDA FOR FAS/ITP AND FAS/FAA/WH 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, BR, Macroeconomics & Financial 
SUBJECT: BRAZIL: WAGES REMAIN STAGNANT EVEN WHILE 
ECONOMY EXPANDS 
 
REF:  Brasilia 2447 
 
1. (SBU) Summary and Introduction.  In recent 
months, the macroeconomic picture for Brazil has 
been especially bright.  Growth has been strong, 
inflation has remained in check, exports have 
increased sharply, and the trade balance and the 
current account (both positive) have come in 
higher than expected.  This good news, however, 
masks a disturbing trend.  Per capita income 
growth for 2004 is likely to be anemic (around 
0.4 percent), and unemployment, while declining 
slightly, remains at historically high levels. 
This small increase in per capita income growth 
comes in the wake of a whopping 7.4 percent 
decrease in real wages per worker in 2003. 
Indeed, comparing 2003 figures to those in 1996, 
real wages per worker were nearly 20 percent less 
(852 Brazilian reais versus 692) and unemployment 
was more than 100 percent higher.  It appears 
that the lower middle class has borne the brunt 
of this wage and employment squeeze.  There is 
hope that improvements in these indicators during 
2004 might signal the end of this long slide, 
particularly if current economic growth is 
sustained into the medium term.  End Summary and 
Introduction. 
 
2. (U) With GDP growth predicted to come in at 
4.5 to 4.7 percent this year (as opposed to -0.2 
percent in 2003), the GOB economic team is 
receiving plaudits from both industry and the 
market for its ability to restart economic 
growth.  The country's economic expansion has 
brought advances on all fronts:  2004 exports are 
predicted to reach a record high (USD 90 billion, 
up from 73 billion the previous year), and the 
trade balance, originally forecast at USD 23 
billion for 2004, should fall somewhere between 
the USD 30 and 32 billion level.  Meanwhile, the 
current account is expected to be positive (USD 
9.5 billion) and consumer prices remain under 
control (forecast to rise 7.16 percent for 2004). 
This positive economic news has enthused market 
risk watchers.  Moody's, Standard & Poor's and 
Fitch's have all raised their rating of Brazilian 
debt, with GOB bond issues now 3 to 4 categories 
below investment grade. 
 
3. (U) Notwithstanding the GOB's achievements 
this year on the growth, trade, and inflation 
fronts, these advances come against the 
background of mid-term reductions in both real 
wages per worker and employment.  According to 
data from the Brazilian Institute for Geography 
and Statistics for calendar year 2003, compared 
to 1996 (the tail end of the Plano Real boom) 
real wages per worker declined from R$ 852 per 
month to $R 692 per month - nearly 20 percent. 
Meanwhile, unemployment, again according to IBGE 
figures, rose from 5.4 percent to 12.3 percent 
during this period (although methodological 
changes for measuring job losses put in place in 
2002 distort this comparison).  The drop in real 
wages was particularly sharp during the first 
year of the Lula government, 2002 to 2003, when 
this figure dropped a whopping 7.4 percent. 
(During this same time-frame, unemployment rose 
from 11.7 percent to 12.3 percent.)  Even with 
the economy currently in full recovery mode, post 
estimates that for 2004 real income per worker 
will likely only rise in the 0.3 to 0.4 percent 
range - hardly sufficient to make much of a dent 
in the decline over the past 8 years. 
 
4. (SBU) In a recent conversation with EconCouns, 
ECLAC economist Carlos Mussi offered an 
explanation for the drop in wages/employment 
between 1996 and 2003.  In 1996, he opined, 
though the economy's macro numbers were good, in 
reality the over-valued exchange rate meant that 
growth was unsustainable.  With the real trading 
more or less on par with the dollar Brazilian 
consumers had artificially enhanced purchasing 
power.  This fed increases in imports, which 
combined with the difficulty exporters had in 
selling their products overseas, created current 
account problems.  The GOB's response - sky-high 
interest rates - led to stagnant growth and 
higher unemployment.  The excess of number of job 
seekers allowed employers to hold the line on 
salaries, and, in some industries (such as retail 
banking) even cut pay.  Workers were hit with yet 
another body blow when consumer prices increased 
(7.7 percent in 2001, 12.5 percent in 2002, and 
9.3 percent in 2003), further eroding their 
incomes.  The good news, Mussi declared, was that 
even though workers were less well off today than 
they were in 1996, with all indicators in balance 
now at least the economy has a chance to 
experience sustainable long-term growth.  While 
the real wage and unemployment numbers were 
better in 1996, the disequilibrium in the economy 
then doomed the country to a start-stop pattern 
in terms of expansion. 
 
5. (SBU) Mussi felt that the middle-class has 
borne the brunt of the wage and employment 
squeeze, and IBGE data appear to confirm this. 
Unemployment rates remain high in the major 
metropolitan centers where the middle class is 
concentrated (for September 2004, 8.8% in Rio and 
11.7% in Sao Paulo).  While as a whole real wages 
per worker sank 7.4 percent between 2002 and 
2003, for the top half of the population wages 
declined 8 percent - as opposed to a mere 4.2 
percent for the bottom half.  Indeed, between 
2002 and 2003 workers at the bottom of the scale 
earning between one and two monthly minimum 
salaries (at that time, 240 to 480 reais) 
experienced no real wage losses at all.  Comment. 
While Mussi did not explicitly address this 
point, the rise in unemployment between 1996 and 
2003 also highlights the difficulties of small 
and medium-sized enterprises in generating job 
growth.  With middle and working-class incomes 
being squeezed, entrepreneurs with small and 
medium-sized enterprises who normally might have 
devoted their disposable funds to investment 
found that they had precious little to put back 
into the businesses.  The result:  stagnant 
growth in employment generation. 
 
6. (SBU) Comment Continued.  Nevertheless, there 
are a couple of encouraging notes in this tableau 
of statistics.  The first is that the still- 
evolving social safety net for the poor helped 
keep them from losing any ground during this 
period of sliding incomes among the middle 
classes.  The second observation, although not 
yet sustained into the longer term, is that the 
slide in real incomes looks to have halted in 
2004.  There is hope, given the more sustainable 
policy mix in 2004 vs. 1996 (i.e., floating 
exchange rate coupled with responsible fiscal and 
monetary management and healthy external 
accounts) that the Brazilian middle class will 
continue to see real income gains. Current GDP 
growth is more sustainable -- albeit at more 
moderate rates than in 2004.  Realizing that 
goal, however, will require continued GOB focus 
on the microeconomic and structural reform agenda 
necessary to increase both investment and 
productivity. 
 
Danilovich