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May 19th 2012 | from the print edition

In this section

The endangered public company

The Greek run

Spring can come again

Rethink the reset

»The Brazil backlash

Counter revolution

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Business

Emerging markets

Brazil

The B in BRICS

The Brazil backlash

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

weaknesses

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

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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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