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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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Página 2 de 2The B in BRICS: The Brazil backlash | The Economist
10/09/2012http://www.economist.com/node/21555583