Is Brazil Repeating America's Mistakes?

For years, investors have relied on emerging markets as the last bastion of strong economic growth in the world. But as emerging-market nations have seen substantial slowdowns from their past growth rates, their governments and central banks are looking for ways to stimulate their respective economies.

One challenge all of these countries face is exactly how to put together stimulus packages. Some recent moves from the Brazilian government look eerily similar to initiatives that the U.S. put into place during the recession, and given the minimal impact they had, it's hard to feel particularly optimistic about their prospects for Latin America's most dynamic economy.

A repeat performance?
Yesterday, Brazil's finance minister said the country would extend a suite of tax breaks designed to encourage consumers to spend money. The breaks focus on consumer durables with fairly high prices, including furniture, home appliances, and, most notably, automobiles.

If that sounds familiar, it's because it closely resembles a couple of programs that the U.S. used in recent years to boost economic activity. The fabled "cash for clunkers" program involved trading in used cars for scrap to buy new ones, earning rebates from the federal government. The program was extremely popular and was funded with about $3 billion. But in the end, the primary impact seemed to be a brief acceleration of sales into the month the program was in effect, along with a lasting upsurge in used-car prices resulting from taking old cars off the road.

Similarly, the home appliance and furniture initiative looks a lot like the smaller U.S. "cash for appliances" program, under which the federal government turned over hundreds of millions of dollars to states to run their own programs. Most states targeted the purchase of energy-efficient appliances with the federal money, again leading to benefits for appliance makers General Electric (NYSE: GE  ) and Whirlpool (NYSE: WHR  ) , as well as appliance retailer Sears Holdings (Nasdaq: SHLD  ) and its peers. Yet the boost was largely short-lived and again, arguably, merely accelerated existing demand rather than creating new demand.

Of course, Brazil's experience with its stimulus program might not be the same as America's. In Brazil's case, the break reduces taxes on furniture from 5% to 0%, stoves from 4% to 0%, refrigerators from 15% to 5%, and washing machines from 20% to 10%. Brazilian officials specifically pointed to the measures having helped increase sales by 22% from January to May, and they expect further gains in the second half with the extension.

Go east, young man
Moreover, Brazil isn't the only country to borrow a page from America's past stimulus playbook. The Russian government implemented a cash-for-clunkers-type program in 2010 and 2011 as an attempt to bolster its domestic auto industry. With various worldwide automakers such as Volkswagen, General Motors (NYSE: GM  ) , and Ford (NYSE: F  ) having factories in Russia, the program benefited foreign companies as well. But after spending about 30 billion rubles in 2010 and 2011, the country decided to end the program.

Yet the common theme among countries that have implemented these programs is that the measures haven't always turned out the way officials intended them to. In the case of Brazil's car incentive, automakers haven't boosted their production levels in the way Brazilian policymakers had hoped. Rather, they're getting rid of inventories, making the tax break look more like an industry bailout than a true stimulus package.

Keep watching
Inevitably, emerging markets going through growing pains will make their own mistakes. It's unfortunate if they choose to make the same mistakes that U.S. policymakers have already made. But for emerging economies to move to the next level and truly become world economic powers, experience is the best teacher.

Ford may have benefited from cash for clunkers, but it has managed to succeed without a full measure of government assistance. Find out the future prospects for the automaker in our premium report on Ford.

Fool contributor Dan Caplinger tries to learn from everyone's mistakes, including his own. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is no mistake.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2001607, ~/Articles/ArticleHandler.aspx, 10/25/2014 6:36:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement