By Jaime Daremblum
When
Latin America's most-populous nation was awarded the 2014 World Cup
back in 2007, it was enjoying strong economic growth and being
celebrated as a potential superpower. Brazil grew by 6.1 percent that
year and by 5.2 percent the following year, and it suffered only a mild
recession after the global financial crisis. In April 2009, Newsweek
discussed its progress below the eye-catching headline "How Brazil
Became a Superpower." Later that year, Rio de Janeiro was awarded the
2016 Summer Olympics, prompting then-President Lula da Silva to declare,
"I've never felt more pride in Brazil. Now, we are going to show the
world we can be a great country." The Brazilian economy went on to
expand by 7.5 percent in 2010, its highest annual growth rate since the
1980s.
Today, with the World
Cup just a few months away, the euphoria of the Lula years seems a
distant memory, as Brazil is mired in turmoil and stagnation.
For
starters, Standard & Poor's just slashed its credit rating,
bringing it down to "BBB minus," which, Reuters notes, is "the agency's
lowest investment-grade rating." Economic growth slowed to a dismal one
percent in 2012 before increasing to a mediocre 2.3 percent in 2013.
Most experts are projecting that it will slow again in 2014. One reason
is that rising inflation has spurred the central bank to raise interest
rates. Explaining its downgrade of Brazilian debt, S&P pointed to
"the combination of fiscal slippage, the prospect that fiscal execution
will remain weak amid subdued growth in the coming years, a constrained
ability to adjust policy ahead of the October presidential elections and
some weakening in Brazil's external accounts."
Meanwhile,
World Cup stadium construction has been plagued by delays, deadly
accidents and wasteful spending. In December, the death of a laborer in
Manaus (in northwestern Brazil) led to a strike, with union members
protesting the dangerous working conditions. "Among all 12 of Brazil's
World Cup stadiums," the Los Angeles Times reported in January,
"construction or repair costs have exceeded initial estimates, and work
was either completed late or is still underway on all but two."
Widespread
anger over the costs of staging the quadrennial soccer tournament has
fueled social unrest, which exploded into massive protests last June.
The immediate trigger was a hike in bus fares, but the rallies quickly
became a vehicle for broader anti-government demonstrations, with
Brazilians marching through the streets to express their frustration
with inflation, crime, corruption and shoddy public services.
In
a way, the protests signaled just how much Brazilian society has
changed, because they appeared to be driven largely by members of the
country's growing middle class. Indeed, according to a survey cited by
CNN back in July, "79 percent of the protesters earn more than twice the
minimum wage, and 76 percent are employed." Like middle class
protesters in other developing countries, the Brazilian protesters were
affirming that they have rising expectations of their government. What
was considered acceptable in the past is no longer tolerated today. For
example, even though inflation is less of a problem now than in previous
years, Brazilians expect their government to keep it lower.
They
also expect public officials to make greater progress on reducing
violent crime and curbing police brutality. A 2013 report by Brazilian
sociologist Julio Jacobo Waiselfisz offered some shocking figures:
Between 1980 and 2011, the country's overall murder rate increased by
132 percent, rising from 11.7 per 100,000 to 27.1 per 100,000, and the
murder rate among Brazilian youths more than tripled, going from 17.2
per 100,000 to 53.4 per 100,000. The overall murder rate has fallen a
bit since peaking in 2003, but it has gone up since 2007 and is still
much higher than it was in the mid-1990s. While Brazil's two biggest
cities, São Paulo and Rio, have seen a long-term decline in homicide
levels, other cities have seen a huge jump. In 2011, for example, the
city of Maceió -- the capital of Alagoas state, which sits along the
Atlantic coast in northeastern Brazil -- had a murder rate (111.1 per
100,000) more than nine times higher than that of São Paulo (11.9 per
100,000). In addition to being a social crisis, the persistence of such
high crime levels is obviously a substantial drag on Brazil's economy.
Amid
the country's prolonged stagnation, a clear divide has emerged in Latin
America between the four members of the Pacific Alliance trade group --
Mexico, Colombia, Peru and Chile -- and the three biggest members of
Mercosur -- Brazil, Argentina and Venezuela. The Pacific Alliance
members have liberalized their economies and signed free-trade deals
with nations around the world, while the Mercosur members have remained
stubbornly protectionist and statist, with much lower levels of economic
freedom. "If Mercosur represents 21st Century socialism, the Pacific
Alliance represents 21st Century capitalism," Peterson Institute
economist Barbara Kotschwar recently told the Financial Times. "It takes
a pragmatic approach toward development, incorporating elements of
social inclusion as well as liberal economic policies."
To
be sure, Brazil is in far better shape than Cristina Kirchner's
Argentina or Nicolás Maduro's Venezuela. But it won't return to strong,
sustainable economic growth without major supply-side reforms, and it
has thus far resisted such reforms. "Last year," writes Wall Street
Journal Latin America editor David Luhnow, "one Brazilian summed up the
Atlantic bloc harshly: ‘Brazil is becoming Argentina, Argentina is
becoming Venezuela and Venezuela is becoming Zimbabwe.'"
A
comprehensive Brazilian reform agenda should start with fiscal policy.
The nation imposes European levels of taxation and disburses
European-level pensions, but it does not offer anything close to
European-quality public services. Taxes amount to 36 percent of GDP,
which is higher than the OECD average, and the system is ridiculously
complex. Brazil has consistently ranked dead last in the Latin Business
Chronicle's Latin Tax Index, and the World Bank ranks it 159th out of
189 countries and territories for the ease of paying business taxes.
As
for public pensions, the Economist notes that "[t]he average Brazilian
can look forward to a pension of 70 percent 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." Not surprisingly, pension spending crowds out
spending on urgent national priorities, such as infrastructure.
Countries around the world spend an average of 3.8 percent of GDP on
infrastructure, but Brazil spends only 1.5 percent, despite its glaring
need for better roads, railways, airports and seaports.
"The
Brazilian ‘infrastructure gap' plays a big role in slowing growth that
would be much greater, given Brazil's resources, but for shortfalls,
especially in transportation infrastructure and logistics," noted a 2013
PricewaterhouseCoopers (PwC) report. To give you some perspective: The
PwC report cited an estimate by Brazilian analyst Paulo Resende that
"the logistics costs of poor infrastructure amount to an average
economic drag on the Brazilian economy of 12 percent of GDP, compared to
8 percent for the United States, and 6 percent for Europe."
President
Dilma Rousseff, who succeeded Lula in 2011, has begun to tackle the
infrastructure problem through a series of auctions aimed at luring
private investment. The auctions have mostly been a success, for which
Rousseff deserves credit. She also deserves credit for taking a stand
against government corruption. (Unfortunately, corruption remains deeply
embedded in Brazilian politics and society. According to a Financial
Times report published in December, the U.S. hedge fund Platinum
Partners considers Brazilian fraud such a potential "boom industry" that
it will "invest in the recovery of Brazilian fraud claims" worth more
than $5 billion.)
Yet
Rousseff's heavy-handed, interventionist economic management has largely
been a disappointment. "The government's economic policies have only
hurt, not helped the economy," wrote Joachim Bamrud, editor of the
online business journal Latinvex, during the 2013 street protests. While
the Brazilian president is currently favored to win reelection later
this year -- partly because unemployment, for now, remains relatively
low -- that could easily change if 2013-style protests erupted during
the World Cup.
Over the long
term, there are two paths Brazil can choose. The Pacific Alliance
countries have demonstrated the benefits of free trade and
liberalization, while Argentina and Venezuela have demonstrated the
folly of autocratic populism. Brazil is currently somewhere in the
middle, committed to democracy but unwilling to embrace the reforms
necessary to open its economy and boost its long-term growth potential.
The challenge for President Rousseff -- or her successor -- is to build a
political coalition in favor of those reforms. Easier said than done.
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