A stagnant economy, a bloated state and mass protests mean Dilma Rousseff must change course - Sep 28, 2013
FOUR years ago this newspaper put on its cover a picture of
the statue of Christ the Redeemer ascending like a rocket from Rio de Janeiro’s
Corcovado mountain, under the rubric “Brazil takes off”. The economy, having
stabilised under Fernando Henrique Cardoso in the mid-1990s, accelerated under
Luiz Inácio Lula da Silva in the early 2000s. It barely stumbled after the Lehman
collapse in 2008 and in 2010 grew by 7.5%, its strongest performance in a
quarter-century. To add to the magic, Brazil was awarded both next year’s
football World Cup and the summer 2016 Olympics. On the strength of all that,
Lula persuaded voters in the same year to choose as president his technocratic
protégée, Dilma Rousseff.
Since then the country has come back down to earth with a
bump. In 2012 the economy grew by 0.9%. Hundreds of thousands took to the
streets in June in the biggest protests for a generation, complaining of high
living costs, poor public services and the greed and corruption of politicians.
Many have now lost faith in the idea that their country was headed for orbit
and diagnosed just another voo de galinha (chicken flight), as they dubbed
previous short-lived economic spurts.
In this section
The new face of terror
Has Brazil blown it?
Sending the wrong smoke-signal
Curb your enthusiasm
Remember what you once were
There are excuses for the deceleration. All emerging
economies have slowed. Some of the impulses behind Brazil’s previous boom—the
pay-off from ending runaway inflation and opening up to trade, commodity price
rises, big increases in credit and consumption—have played themselves out. And
many of Lula’s policies, notably the Bolsa Família that helped lift 25m people
out of poverty, were admirable.
The world’s most burdensome tax code
But Brazil has done far too little to reform its government
in the boom years. It is not alone in this: India had a similar chance, and
missed it. But Brazil’s public sector imposes a particularly heavy burden on
its private sector, as our special report explains. Companies face the world’s
most burdensome tax code, payroll taxes add 58% to salaries and the government
has got its spending priorities upside down.
Compare pensions and infrastructure. The former are absurdly
generous. The average Brazilian can look forward to a pension of 70% of final
pay at 54. Despite being a young country, Brazil spends as big a share of
national income on pensions as southern Europe, where the proportion of old
people is three times as big. By contrast, despite the country’s continental
dimensions and lousy transport links, its spending on infrastructure is as
skimpy as a string bikini. It spends just 1.5% of GDP on infrastructure,
compared with a global average of 3.8%, even though its stock of infrastructure
is valued at just 16% of GDP, compared with 71% in other big economies. Rotten
infrastructure loads unnecessary costs on businesses. In Mato Grosso a soyabean
farmer spends 25% of the value of his product getting it to a port; the
proportion in Iowa is 9%.
These problems have accumulated over generations. But Ms
Rousseff has been unwilling or unable to tackle them, and has created new
problems by interfering far more than the pragmatic Lula. She has scared
investors away from infrastructure projects and undermined Brazil’s hard-won
reputation for macroeconomic rectitude by publicly chivvying the Central Bank
chief into slashing interest rates. As a result, rates are now having to rise
more than they otherwise might to curb persistent inflation. Rather than admit
to missing its fiscal targets, the government has resorted to creative
accounting. Gross public debt has climbed to 60-70% of GDP, depending on the
definition—and the markets do not trust Ms Rousseff.
Fortunately, Brazil has great strengths. Thanks to its
efficient and entrepreneurial farmers, it is the world’s third-biggest food
exporter. Even if the government has made the process slower and costlier than
it needed to be, Brazil will be a big oil exporter by 2020. It has several
manufacturing jewels, and is developing a world-class research base in
biotechnology, genetic sciences and deep-sea oil and gas technology. The
consumer brands that have grown along with the country’s expanding middle class
are ready to go abroad. Despite the recent protests, it does not have the
social or ethnic divisions that blight other emerging economies, such as India
An own goal for Dilma Fernández?
But if Brazil is to recover its vim, it needs to rediscover
an appetite for reform. With taxes already taking 36% of GDP—the biggest
proportion in the emerging world alongside Cristina Fernández’s chaotic
Argentina—the government cannot look to taxpayers for the extra money it must
spend on health care, schools and transport to satisfy the protesters. Instead,
it needs to reshape public spending, especially pensions.
Second, it must make Brazilian business more competitive and
encourage it to invest. The way to do that is not, as the government believes,
to protect firms, but to expose them to more foreign competition while moving
far more swiftly to eliminate the self-inflicted obstacles they face at home.
Brazil’s import tariffs remain high and its customs procedures are a catalogue
of bloody-minded obstructionism. More dynamic Latin American economies have
forged networks of bilateral trade deals. Brazil has hidden behind Mercosur, a
regional block that has dwindled into a leftist talking-shop, and the moribund
Doha round of world-trade talks. It needs to open up.
Third, Brazil urgently needs political reform. The
proliferation of parties, whose only interest is pork and patronage, builds in
huge waste at every level of government. One result is a cabinet with 39
ministries. On paper, the solution is easy: a threshold for seats in Congress
and other changes to make legislators more accountable to voters. But getting
those who benefit from the current system to agree to change it requires more
political skill than Ms Rousseff has shown.
In a year’s time Ms Rousseff faces an election in which she
will seek a second four-year term. On her record so far, Brazil’s voters have
little reason to give her one. But she has time to make a start on the reforms
needed, by trimming red tape, merging ministries and curbing public spending.
Brazil is not doomed to flop: if Ms Rousseff puts her hand on the throttle
there is still a chance that it could take off again.