Brazil's boom creates a backlash

  • Article by: THE ECONOMIST
  • Updated: May 21, 2012 - 4:59 PM

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

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A soybean harvest in the state of Mato Grosso, Brazil. Selling soybeans, iron and copper ore and other commodities to Asia has transformed Latin American economies.

Photo: Andre Penner, Associated Press

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Not long ago, the BRICs (Brazil, Russia, India and China) were lionized 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 months. 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's Brazil's turn. Much is being made of Brazilian threats of huge fines and prison sentences against executives of Chevron 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.

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 percent 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 are rising and foreign investment is pouring in -- $67 billion in 2011, a record. Most economists reckon that Brazil can continue to grow at around 3.5 percent without triggering higher inflation.

Many countries would love to have Brazil's highly productive farms and its big new oil fields, 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 nation's weaknesses. A 3.5 percent growth rate may seem lavish by Western standards, but it is below both what Brazil needs 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 stabilization, opening and reform of the economy in the 1990s, and a huge lift in exports, thanks to China's appetite for commodities. Henceforth Brazil's labor force will not grow as fast, even as the pension bill rises.

The 'Brazil cost'

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." The tax burden has risen from 22 percent of GDP in 1988 to 36 percent, and the tax system is absurdly complex. Most of the money goes on overgenerous 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 percent 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.

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 favored industries, has invited private investors to modernize 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 percent.

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 Rousseff in large numbers, will suffer most.

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