Brazil: The Challenges Ahead - Antony Mueller (AIER)

Brazil: The Challenges Ahead

By Antony Mueller

American Institute for Economic Research, Friday, October 26, 2018

https://www.aier.org/article/brazil-challenges-ahead?fbclid=IwAR0x68yrArN3qLVUpR5dgnOmxCAj3dbTpIhUmT6afMmgVeIwlJRXJZRlvlM#.W9R1HnvpkRY.facebook

Whoever wins the Brazilian presidential election on Sunday, October 28, will face tremendous challenges. The economy is in depression, the unemployment rate is in the double digits, and the fiscal situation is bleak. A sharp polarization has characterized the election campaign. The disapproval of each of the two leading candidates is higher than the support they get from the electorate. In the years to come, the political uncertainties and economic doldrums might not go away.

Public corruption scandals have led to political chaos. Former President Luiz Inácio "Lula" da Silva of the socialist Workers' Party is in prison because of corruption. His successor, Dilma Rousseff, continued Lula's populist agenda but was impeached and removed from office. 

Michel Temer, who followed her in the presidency, has never gained popular support. He has been unable to consolidate the country’s public finances or revive the economy. A heavy burden will fall on the next president when he takes over the helm on January 1, 2019. 

Much Potential, Little Accomplishment

Brazil is the largest country in South America with a size like that of the United States without Alaska. The country has a population of 207 million, and in terms of gross domestic product, its economy ranks number eight. The author Stefan Zweig called Brazil a land of the future, while cynics added that it always will be. Throughout its history, Brazil has experienced a series of spurts of growth, all of which ended in prolonged stagnation. This has also recently happened. After a period of high growth rates and much exuberance in the decade from 2002 to 2012, the economy fell into an ongoing deep recession.

Brazil suffers from many political barriers that stifle its economic progress. The country’s bureaucracy is the main force of obstruction along with its judicial system. Brazil’s political leadership enjoys the dubious privilege that, because of Brazil’s immense natural wealth and its favorable overall geographic conditions, they do not get much punished even when they make severe blunders. Many incompetent and corrupt politicians enjoy frequent reelections.

Brazil’s economic progress suffers from the country’s flirtation with the welfare state that came with the new constitution of 1988 after the country had shed the military dictatorship of 1964 to 1985. Brazil’s democracy has fallen victim to a process of competition in social handouts. The political game requires an endless process of coalition making, with each of the individual political parties expecting a special treatment for their clientele as the price of supporting the government.

Brazil’s integration into the world economy comes through the country’s wealth of natural resources. During commodity booms, Brazil’s currency is overvalued, and when the boom is over, its industry often lies in tatters. As for everything other than natural resources, Brazil’s international competitiveness is weak. Domestic industry speaks loudly in demanding protectionism.

Brazil’s governments follow a tradition of focusing on the short term and neglecting structural reforms. All knowledgeable observers agree about the fundamental challenges. Yet a kind of paralysis keeps the Brazilian government from addressing the fundamental deficiencies of the country in infrastructure, innovation, and education. 

Obstacles to Development

There are many problems that inhibit the Brazilian economy from achieving steady economic growth. These problems go beyond short-term macroeconomic management. Brazil is a country notorious for its intricate web of irrational regulations, its complicated tax structure, its overly powerful judicial system, its vast bureaucratic inefficiencies, and corruption at all levels. These are nightmares for those doing business in Brazil. There has been a profound negligence of basic education, and widespread professional incompetence spreads throughout the whole society. The result is a low level of productivity, even by Latin American standards (see figure).

A lack of capital formation results from a low savings rate. Low productivity and innovation characterize Brazilian businesses. Private companies spend little on research and development. There is a huge governmental apparatus in place, which should promote scientific progress but works as a bureaucratic web and hampers more than it promotes innovation. Instead of doing away with these burdens, the Brazilian government prefers monetary stimuli, implements ad hoc interventionist measures, and leads a confusing public discourse about utopian plans and fantastic measures.

The deplorable macroeconomic condition of Brazil — with insufficient savings and a weak industrial base — comes with a rotten political system and Brazil’s heavy bureaucracy. Brazil’s public administration is a gigantic apparatus that holds down the country’s economy with a myriad of useless and senseless regulations and their foolish execution. Brazilian bureaucracy represents a major blockade to economic modernization. Brazil has one large macroeconomic bottleneck — lack of savings — and it has a large structural hole where the country’s energy evaporates in the form of over-regulation of its economy. 

The country’s leadership has never abandoned the corporatist development model of the 1930s. The result is that Brazil has a large but inefficient industrial sector ranging from vehicles and small airplanes to agricultural machinery and chemicals. Yet these industries are sleeping giants limited in flexibility and innovation because of a tight web of governmental regulations and direct interventions.

Paths to Prosperity

It is not enough for Brazil to consolidate its macroeconomic policy. To advance its economy, the country needs to take serious steps toward better governance. As of now, however, not only have the governments of the past been doing little to improve governance, but there also has been a lack of understanding about the urgency and importance of fundamental reforms. 

With more privatization and deregulation, huge investment opportunities would emerge on the horizon. The development of Brazil's gigantic agricultural potential has only just begun. Beyond that, there is the need for privatization and deregulation in infrastructure. Everything from ports and airports to the road system offers tremendous opportunities. With the help of foreign direct investment, Brazil’s metal-mechanical sector could be brought to a world-class level, as is also the case with the country’s food-processing, pharmaceuticals, and chemicals industries. All it would take for this to happen is to take some courageous steps toward de-bureaucratization; Brazil could emerge as the economic miracle of the 21st century.

State of the Economy

Brazil’s economic freedom score is 51.4 according to the index of the Heritage Foundation. With this score, Brazil ranks as the 153rd freest country in the 2018 index and falls into the category of “mostly unfree.” It ranks 27th among the 32 countries of its region, and its overall score is below the world average (see table).

The judiciary, although independent in a formal sense, is overburdened with lawsuits. Inconsistent and imprecise legislation makes judicial processes uncertain, protracted, and subject to special-interest influences. Corruption has become an integral part of political life. Only with the recent judicial actions and convictions of prominent politicians, the former President Lula da Silva among them, has a signal been sent to elected officials that bribery will no longer be tolerated.

Despite a high tax burden, the fiscal situation of the country has deteriorated. The budget deficit reached over 10 percent in 2015 and stands at 7.8 percent in 2018. From around 50 percent in 2010 and 2013, the ratio of public debt to gross domestic product climbed to 70 percent in 2016 and stands now at 74 percent. 

The personal income tax rate is 27.5 percent while the standard corporate rate is 15 percent, but specific transaction taxes lift the effective rate to 34 percent. The overall tax burden equals 32.0 percent of total domestic income. The effective tax burden is much harsher than the numbers suggest because of the complex and contradictory tax code. Many companies use the lack of simplicity to enter legal disputes, which then may last for decades. 

While salaries are low by international standards, the economy is burdened with a heavy load of non-salary labor costs, business-unfriendly labor laws, and a judiciary biased against private enterprise and in the hands of the trade unions. 

The low labor productivity is only in part the result of the low quality of the labor force. The bureaucracy, the poor infrastructure, rigid labor laws, many non-tariff trade barriers, the complex tax code, and a plethora of diffuse regulatory requirements stifle economic efficiency. 

Conclusion 

In order to put the Brazilian economy back on track, economic policy must move forward with key reforms. The Brazilian government should recognize that the country must improve its infrastructure and its system of education. It is high time to deregulate the labor market and to cut red tape. The country must end the horrendous privileges and absurd salaries in the public sector and in the judiciary. Brazil must adapt its pension system to the conditions of the future, as Brazil faces an aging population. 

To improve its position in the world economy, it is not enough for Brazil to consolidate its macroeconomic policy. Brazil needs to take serious steps toward better governance. The governments of the past have done little to improve the workings of the political system. There has been a lack of understanding about the urgency and the importance of fundamental reforms. Future governments must end this negligence. 

The next government has much to accomplish. Yet it is not impossible. Most of the reforms do not require new laws, new institutions, and much higher spending. On the contrary: what must be done is to cut many of the superfluous items of public expenditure, eliminate the many harmful regulations, and scale down the bureaucracy. Improving the infrastructure does not require new massive spending, but a better administration, effective cost control, and ending corruption. 

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Brazil in 2014: A change in the official policies? - Paulo Sotero (CNN)

Brazil in 2014: Will Rousseff change course?

By Paulo Sotero, Special to CNN

January 3, 2014

Editor’s note: Paulo Sotero is director of the Wilson Center Brazil Institute. The views expressed are his own. This is the latest in the '14 in 2014' series, looking at what the year ahead holds for key countries.

Three consecutive years of disappointing economic performance, with an average GDP growth of barely 2 percent and deteriorating fiscal and external accounts, should be enough to convince President Dilma Rousseff to move Brazil away from the inward policies and micromanaging style she introduced after succeeding her popular mentor, Luiz Inácio Lula da Silva, in January 2011. The same mindset has affected Brazil’s international affairs, with similar results.

A leader with little appetite or patience for diplomacy and focused by necessity on domestic challenges, Rousseff implemented a modest foreign policy agenda when compared to her predecessor and became the first Brazilian president to fire a foreign minister, over a preventable incident. There are both negative and positive incentives for Rousseff to change course as she faces reelection in October 2014.

The consensus among market and political risk analysts is that the Brazilian economy, the world’s seventh largest, will get worse before it gets better. An expected lowering of Brazil’s sovereign debt risk rating to just above the investment grade arduously obtained in 2008 will make capital more expensive for Brazilian companies. This is likely to happen at a time when the Central Bank will be dealing with the adverse consequences of the end of the U.S. Federal Reserve policy of monetary easing, which Rousseff once compared to a “monetary tsunami.” Her finance minister, Guido Mantega, criticized it as a weapon in a “currency war” that made the Brazilian real overvalued and uncompetitive. The problem now is the reverse, as the real loses value against the dollar and adds pressures to an economy tormented by an inflation of 5.8 percent that is kept below the 6.5 percent upper limit of the Central Bank target thanks mostly to government containment of prices under its control, such as gasoline and diesel. Signs are that, in a deteriorating environment, Rousseff could have problems raising enough campaign contributions for herself and her multiparty coalition from a clearly unhappy business community.

Facing stiffer competition and shrinking markets for Brazil’s manufactured products, the president of the National Confederation of Industry, Robson Andrade, who is close to Rousseff, said in November that Brazil should change course in its trade policy, distance itself from Mercosul, the problematic trade arrangement of the Southern Cone, and seek a better deal with the United States and other advanced economies. Minister of Development, Industry and Foreign Trade Fernando Pimentel, the cabinet member closest to the president, said recently in New York that Brazil, having built domestic consensus on democracy, economic stability and social inclusion over the past three decades, now faces the challenge of competitiveness, which requires a more open economy and a steady stream of foreign investment in infrastructure and industrial capacity. That is the message Rousseff is likely to take to Davos in her first appearance as president at the World Economic Forum in January 2014

The president knows that rising and uncompetitive prices in a slowing economy could frustrate her reelection plan. With interest rates back to double digits, from 7.25 percent at the end of 2012, a fiscal adjustment is in order, but unlikely to be embraced in a campaign year. Waiting, however, will only make the problem bigger. On the positive side, after many false starts, the government program to attract domestic and foreign investments to expand the country’s infrastructure took off at year’s end with successful auctions of some major projects, including the Rio international airport, the Libra pre-salt oil field and a few roads, with more to come. Approaching $400 billion, currency reserves, on the other hand, lessen the risk of a crisis.

Polls suggest that most Brazilians are dismissive of the clouds economists see forming in the horizon. The reason is that, despite the souring of the macroeconomic picture, what people see is their income going up, unemployment at a record low and credit available for consumer goods and housing. No wonder Brazilians seem well disposed to reelect the president. That is what almost half of likely voters told pollsters in October and November. Rousseff’s popularity may have been helped by a decision she announced in September to cancel a state visit to the White House after revelations of the Snowden files that American intelligence had allegedly snooped on her, on Brazil’s oil company Petrobras and on email accounts of millions of Brazilians. Making clear she is not a leader to be fooled around with, Rousseff announced a decision to buy 35 Grippen jet fighters from Sweden for the Brazilian Air Force, a deal worth $4.5 billion, over Boeing’s F-18’s that she had come to favor until the Snowden disclosures.

But Rousseff also used the Snowden revelations to show she can act with restraint. In December, she rejected calls to grant Snowden asylum. Around the same time, a resolution to protect privacy on the internet that was initiated by Brazil and supported by Germany and other European allies of the United States was unanimously adopted by the U.N. General Assembly just as a panel of experts convened by President Obama proposed limits to NSA spying activities. In May, Rousseff will lead a global conference on internet governance in Brasilia.

On the home front, Rousseff will greet the New Year in good shape, despite the growing doubts over the economy. Politically, she has recovered from the steep loss of popularity experienced after last June’s massive street protests. The good news comes, however, with one important caveat. Disconcertingly, two thirds of the voters – a larger proportion than of those who say they would vote to reelect her – have said repeatedly in polls that they want change. What that means exactly is left for Dilma, as she is known, and her challengers to figure out.

The popular revolt that shook the country and paralyzed hundreds of Brazilian cities for days earlier this year took the government and the opposition by complete surprise. It was mobilized by social media, with no participation of political parties or unions. Provoked by excessive use of police force against students asking for free fares on the poor public transportation system of São Paulo, the country’s largest metropolis, the protests turned quickly into a very loud cry for more and better services that affect the quality of life of millions of members of a new middle class, whose emergence in the past decade has transformed Brazil’s social landscape and created new demands.

The revolt had important consequences. Members of Congress, denounced at the rallies as self-serving politicians oblivious to what matters to the people, hurried to regain some popular trust. Under pressure from the streets, they rejected a proposal to limit federal prosecutors’ investigative powers against corrupt politicians and officials. They also banned secret voting by congressmen in decisions involving ethics cases.

Mindful of the people’s bad mood, the eleven members of Brazil’s Supreme Court also went into action. On November 15, the country’s Republic Day, they unexpectedly ordered more than a dozen politicians, businessmen and associates to start immediately serving the prison terms to which they had been sentenced in 2012, in the largest trial of political corruption in Brazil’s history. It was an unprecedented and welcome move in a country with a long tradition of impunity of criminals in high places.

Among those sent to jail were former senior members of the Lula administration and of his Workers’ Party. Seen as a hardworking and honest leader, Rousseff did not interfere and was left unscathed by the episode.

So, the streets have quieted down, but maybe not for long. Former Senator Marina Silva, a founding member of the Workers’ Party and a minister of the environment under Lula, has predicted that the protests will return in 2014. Marina, as she is known, received an impressive 20 million votes when she ran for president against Rousseff in 2010. She has shifted her support to Eduardo Campos, the popular governor of the state of Pernambuco, and could emerge as his running mate. Polls suggest that, in that scenario, she could complicate both Rousseff’s campaign and that of the president’s current top rival, senator Aécio Neves, a center-right former governor of the state of Minas Gerais.

If Marina’s prediction about protests is correct, the most likely timing for it to happen is from mid-June to mid-July, when Brazil will welcome the FIFA World Cup, just ahead of the presidential race. What happens in and around the soccer fields in the twelve state capitals hosting the games may be less relevant for the elections than what happens until then in terms of inflation, jobs, investment and growth.

With that in mind, and considering the difficult challenges Brazil is bound to face in 2015, some joke that Rousseff’s problem is not to lose next year’s presidential election, but rather to win.

Stratfor: Brasil (ou Brazil) na berlinda...

Eu tinha sido solicitado a falar com a analista do Stratfor, Reva Bhalla, mas por razões de calendário de viagem e de férias, não foi possível. Fico satisfeito de encontrar em minha caixa este material, que vem seguido de um video, que infelizmente, na minha incompetência técnica, não sei colocar aqui.
Ainda não li, e não vi o video. depois comento.
Paulo Roberto de Almeida

Agenda: Brazil at a Crossroads
Stratfor, January 21, 2011

Latin America analyst Reva Bhalla discusses the challenges new Brazilian President Dilma Rousseff will face on crime, defense, the economy and foreign affairs in 2011.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

Colin: Brazil’s President Dilma Rousseff is no newcomer to politics, after all she was her predecessor’s chief of staff. 2011 is shaping up as having a very full agenda. Apart from recovery from deadly floods, where the death toll is approaching 800, there is much to be done. A full half of one percent increase in interest rates reminded us the economy is overheating.

Welcome to Agenda where I’m joined by webcam to STRATFOR’s Latin America analyst Reva Bhalla. Reva, let’s start by discussing the new president’s agenda.

Reva: Well Colin, Dilma Rousseff has a lot of items on her plate. Everything from major defense deals that she has to make decisions on, security issues with the country’s favela issue to important decisions Brazil has to take as it is emerging as a major regional power. One thing to keep in mind is that Dilma may not have the charisma as Lula, but she has a reputation for being very non-ideological, very technocratic. She employs this sort of no-nonsense attitude with her staff and she expects her staff to come to her with a plan B in pretty much every proposal. So she’s very much in the process of re-evaluating a lot of major decisions right now, including the jet fighter deal, which is taking a lot of attention these days. Colin: Who’s in the frame to win the jet fighter contract?

Reva: Well, toward the end of the Lula administration, it seemed pretty clear that Brazil would go ahead and opt for the French Rafale jet, for mainly political and strategic reasons. Now Dilma has basically re-opened the bidding process. U.S. firm Boeing is trying to sweeten the deal, but Brazil is very concerned about being tied to certain congressional constraints in agreeing to the U.S. deal, something that Brazil is very irked by especially when it comes to technology transfers. Now the Swedish Gripen offers more to Brazil in terms of price and performance, but we think this decision is still going to boil down to mainly a political and strategic decision in that Brazil is more likely to lean more toward the French jet.

Colin: Brazilian interest rates are very high, up half of one percent this week and more to come. That’s forcing the currency up, which might have two harmful effects: attracting hot money and damaging exports. ? Reva: Brazil maintains very strict fiscal policy and for good reason considering that the country was mired in an economic crisis just less than two decades ago. Now, in trying to keep inflation under control, Brazil has kept extremely high interest rates — right now it’s at about 11.25 percent. Now, with a government that is likely very unwilling to cut down on public spending, there are serious side effects to this kind of policy. One of those side effects is the boost to the country’s already appreciating currency. Now the stronger the Brazilian real gets, the less competitive Brazilian exports are on the open market. The Brazilian government really doesn’t have any good options in trying to deal with this currency crisis, but it’s transforming slowly and slowly into more of a political issue, especially as business and trade unions especially in the financial hub of Sao Paulo are applying more pressure on the state to do something to protect Brazilian industry. Again, Brazil doesn’t have very good options in dealing with this, but it is definitely an issue that is going to be pre-occupying the state in the coming year.

Colin: Let’s turn to resources. Can Brazil really realize its dream and become a major oil exporter? ?Reva: Well, its going to be difficult, but Brazil is definitely dedicated to this project. By the “project,” we are referring to the pre-salt fields — Brazil’s offshore deepwater fields that could potentially make Brazil a major oil exporter in the years to come. Now, this is going to require a lot of investment. We have already seen Brazil’s Petrobras employ some rather unorthodox means of capitalizing this endeavor. But the Brazilian government has made clear it’s going to be dedicating its resources in hopes of realizing this geopolitical dream.

Colin: What about domestic political problems like crime and drugs?

Reva: Now, Brazil faces a major challenge ahead to both pacify and integrate major favelas in the city of Rio de Janeiro. They’ve been employing a strategy called the UPP strategy that basically involves first overt military force that drives the drug-traffickers out and then a long-term police occupation. Now, this is an impressive model that’s worked on a small scale but replicating it on a larger scale is going to be extremely difficult. What’s happened so far is that a lot of the drug-traffickers in Complexo Alemao, which was the last favela targeted, are simply being displaced. Now that has side effects, especially when more drug-trafficking activity is just going from favela to favela or coming more from the favelas into city centers. Also, these drug-trafficking groups, particularly Comando Vermelho, the main group in Rio, they’re extremely well armed. And, if the state keeps pushing them in this pacification campaign, they do have the means of perhaps selectively carrying out attacks and trying to pressure the state to backing off of this offensive.

Colin: The other so-called BRIC countries are Russia, India and China. To what extent is Brazil joining them on the global scene?

Reva: Well, Brazil is most definitely emerging on the global scene; it’s no longer this insular power that it has been for decades now. And so of course we see a lot of countries reacting to that. You know, Brazil is interacting with the French on major defense deals, with the Chinese in this deepening economic relationship, also with the Indians where Brazil and India face a lot of competition with each other in certain industries. And so Brazil is learning more and more how to assert itself on the global scene and we can expect Brazil to fumble in a lot of respects. You know, Brazil is also trying to involve itself in issues that are very distant from the South American continent. For example, in very thorny Middle East issues. But, while this attracts a lot of attention, Brazil is slowly gradually attempting to assume this leadership role but it may not necessarily want to make very hard decisions or deal with the negative repercussions that may be attached to such a role.

Colin: Reva, it’s good to have you with us on Agenda, I’m sure we’ll talk again soon.

Reva: Certainly Brazil is a high priority for STRATFOR and we will be watching all these issues closely.