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Economia brasileira: um editorial realista da Economist

The Brazil backlash

Its strengths are real, but the government should worry more about its weaknesses

The Economist, May 19th 2012

NOT long ago, the BRICs were lionised as fast-growing superpowers-in-waiting. These days Russia is portrayed as a corrupt petrostate. India is ensnared in red tape, unable to muster the political will to break free. The mighty Chinese economy has slowed in recent weeks (see article). Even South Africa, which considers itself to be the “S” in BRICs, seems sluggish and hidebound next to the gazelles to its north.

Now it is Brazil’s turn. Much is being made of Brazilian threats of huge fines and prison sentences against executives of Chevron, an American oil company, after a small leak of oil off the coast. Critics have taken to complaining about Brazil’s expensive welfare state and dependence on commodity exports. Its torpid economy ground to a halt in the middle of last year. Admittedly officials say that they deliberately cooled the economy, to drive down an overvalued currency and astronomic interest rates. Yet their expectation of growth of 4.5% this year and a bit more next looks implausible.

Does Brazil deserve the backlash? Some of the criticism is misplaced or inaccurate. Unemployment is low, wages rising and foreign direct investment pouring in ($67 billion in 2011, a record). Most economists reckon that Brazil can continue to grow at around 3.5% without triggering higher inflation. Many countries would love to have Brazil’s highly productive farms and its big new oilfields, two of the sources of its commodity dependence. Compared with Russia, China and even India, Brazil more clearly enjoys the rule of law. Its welfare state represents a defensible political choice for a country of yawning inequalities. Above all, Brazil’s strength is a democracy that has yielded broad political continuity and economic stability.

Even so, its government must start to confront the country’s weaknesses. That 3.5% growth rate may seem lavish by Western standards, but it is below both what Brazil needs to be to continue recent social gains—and what it could be. Some of the sources of the faster growth of recent years may now be exhausting themselves. These included a bonus from the stabilisation, opening and reform of the economy in the 1990s, and a huge lift in the country’s terms of trade, thanks to China’s appetite for commodities. Henceforth Brazil’s labour force will not grow as fast, even as the pension bill rises. Domestic credit cannot go on increasing at today’s rate, as households are starting to struggle with debt (see article).

At the same time, Brazil has turned itself into a very expensive place to do business. The government blames the currency for this; it has gone to great lengths to drive its value down. But the government itself is responsible for much of the “Brazil cost”. Not only has the tax burden risen from 22% of GDP in 1988 to 36% today, but the tax system is absurdly complex. Most of the money goes on over-generous pensions and wastefully big government, rather than transfers to the poor.

The minimum wage is now three times that of Indonesia or Vietnam (no wonder manufacturers are struggling). Businesses face pointless regulation. Lack of investment means freight costs are high. And the state has started messing around with business: a rule that 65% of equipment for the deepwater oil industry must be produced at home guarantees that developing the new fields will be slower and costlier than it need be.

Time for another burst of reform

Dilma Rousseff, the president since January 2011, says she is starting to tackle some of these problems. She wants to eliminate the fiscal deficit, has started to cut taxes for favoured industries, has invited private investors to modernise four airports and is assailing a banking oligopoly that has helped to keep interest rates up. But the picture is uneven: her effort to drive down costs is too timid; she was responsible for the silly new protectionist oil regime; and the impression is that she is prepared to settle for growth of under 4%.

That would hurt Brazil. Investors will start looking for higher-growth markets in Latin America—Peru, say, or Colombia and soon perhaps Mexico. The poor, who supported Ms Rousseff in large numbers, will suffer most. She should treat the backlash as a warning. Brazil cannot run on autopilot.

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