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Cablegate: Brazil: Wages Remain Stagnant Even While

This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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

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