Getting Brazil on a winning streak

Reuters

A general view shows demonstrators waiting before a protest in Rio de Janeiro, one of many such protests in Brazil's major cities, June 20, 2013.

Article Highlights

  • The discovery of staggering oil wealth in Brazil’s territorial waters 2007 was the icing on the cake.

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  • Lula’s successor, Dilma Rousseff, has doubled-down on statist econ policies that have created a drag on foreign investment.

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  • Too much of the country’s new middle class still depends on government transfer payments.

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Compete with the rest of the world, and win.

That’s what Brazil’s national fútbol team did in winning the prestigious Confederations Cup last month, capped off with a 3-0 thumping of defending world champion Spain. And that’s precisely what the Brazilian nation must do to address the root causes of urban unrest that marred the tournament revelry. Perhaps the mass demonstrations will prod Brazil’s leaders to remedy the current malaise with a series of reforms that are essential to create new opportunity and unlock their country’s extraordinary potential.

Most observers were surprised that a million demonstrators took to the streets of Brazil’s principal cities just as the country’s leaders hoped to showcase their hospitality on the eve of the 2014 World Cup and 2016 Summer Olympics. Indeed, for the better part of a decade, the news from Brazil has been exceedingly positive. A succession of democratically elected leaders (including two from the left) have applied sound macroeconomic policies to tame rampant inflation (nearly 3,000 percent in 1990) and made Brazil a stable, top-10 economy.

Innovative social programs have helped millions pull themselves out of poverty. The discovery of staggering oil wealth in Brazil’s territorial waters 2007 was the icing on the cake.

Some explanations for this unrest have centered on a recent hike in bus fares and outrage over about $30 billion in spending on facilities related to the upcoming sporting events. However, there may be a deeper anxiety among the new middle class that the powerful state that tackled poverty by redistributing wealth may be too inefficient, unresponsive and corrupt to meet their rising expectations.

Brazil’s cheerleaders had good reasons to hope for the best. The labor leader elected president in 2002, Luis Inácio “Lula” da Silva, seemed like an antidote to the authoritarian populism inspired by the late Venezuelan caudillo (strongman) Hugo Chávez. Lula’s combination of orthodox macroeconomic reforms and social spending was seen as a reasonable strategy for overcoming structural poverty. I joined the chorus of praise for Brazil, but my commentary advocated an agenda of reforms to open its economy to foreign competition and capital and to modernize its 19th century political institutions.

Today, economic growth in Brazil is slumping, inflation is rising, and political corruption continues to feed cynicism about democratic institutions.

• Lula’s hand-picked successor, Dilma Rousseff, has doubled-down on statist economic policies that have created a drag on foreign investment.

• Taxes are high (about 34 percent of gross domestic product, compared to about 25 percent in the United States); and the federal and state tax codes are a barrier to homegrown commerce, let alone foreign investors.

• A bloated government bureaucracy excels at social spending but is infamously inefficient in delivering services.

• Too much of the country’s new middle class still depends on government transfer payments, because statist economic policies and an antiquated and rigid labor code have stifled the creation of private sector jobs.

Although Brazilians are entrepreneurial and adaptive to innovation, excessive and redundant regulations squander these advantages. Moreover, Brazil’s vast internal market is a tremendous advantage, but it is not sufficient to generate the robust growth needed by an economy with huge pockets of under-development.

As for the country’s petroleum wealth, the state-run oil company Petrobras has been unable to mobilize the vast amounts of capital needed to tap the potential of deep-water reserves, and new domestic-content laws have hindered foreign technology and investment. Petrobras itself has become less productive and profitable, as revenues are diverted from exploration and production to pay for growing government spending.

Even on global economic policy, rather than seek free trade regimes, Brazil’s foreign policy establishment lined up with protectionist, third-world actors like India and sought to wall off competition by shoring up the Mercosur “customs union” among its South American neighbors.

I doubt that a single Brazilian took to the streets to agitate for free trade or foreign competition. However, Brazil cannot create sufficient jobs and income unless it incentivizes entrepreneurs, rewards productivity and cultivates foreign investment, technology, and trade. The very good news is that a more educated, productive populace is ready to go to work, and Brazil’s vast oil and mineral wealth remains largely untapped. The right policies can still unlock Brazil’s great potential.

It may be asking too much to expect Brazil’s current political leadership to turn away from statist formulas. However, they may opt for a common sense mix of efficient social spending and economic freedom. A generation of Brazilian politicians can take credit for helping millions of people pull themselves out of poverty. That legacy is all about solving yesterday’s problems. Leadership is about the future.

Roger Noriega was assistant secretary of State for Western Hemisphere Affairs and ambassador to the Organization of American States in the administration of President George W. Bush (2001-2005) and is a visiting fellow at the American Enterprise Institute. His firm, Vision Americas LLC, represents U.S. and foreign clients, and he is a member of the board of directors of mining companies and advisor to an equity fund with interests in Brazil.

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