November 29, 2012
by Jaime Daremblum
In recent weeks Brazil has been making international headlines for all the wrong reasons. Stories about the fast-growing Brazilian middle class and the country's preparations for hosting World Cup 2014 are being overshadowed by stories about deadly gang violence, government corruption, electricity blackouts, a hellish tax system, and a hostile business climate.
The violence in São Paulo, Brazil's largest city, has turned into a virtual war pitting law-enforcement authorities against the most powerful Brazilian street gang, in a showdown similar to the bloodbath that occurred in 2006. So far this year, close to 100 police officers have been killed in São Paulo, compared with 56 in 2011. The city experienced 144 murders in September and 176 in October. By comparison, there were 82 murders in October 2011.
All told, São Paulo had 33 percent more homicides in the first ten months of 2012 than in the first ten months of 2011. On November 12, Guardian correspondent Jonathan Watts reported that there had been no fewer than 140 murders over the previous fortnight, leading to "early school closures, a change of municipal bus routes, and street demonstrations." More recently, on November 21, the police chief for the state of São Paulo (which includes the São Paulo metropolitan area) resigned from office.
To be sure, São Paulo city is a much safer place today than it was in the late 1990s: Its total murder rate fell by 71 percent between 1999 and 2011. Brazil's second-largest city, Rio de Janeiro, has also enjoyed a dramatic decline in violence, and its Pacifying Police Unit (UPP) program, launched in 2008, has produced stunning results: The Brazilian Forum for Public Security estimates that Rio slums with a UPP presence have seen their combined murder rate plummet by 80 percent.
Yet both cities (especially Rio) remain highly dangerous by international standards. As the Financial Times reported last December, Pedro Henrique de Cristo, founder of the United City initiative, has calculated that roughly one-sixth of all Rio residents
live under the drug warlords outside the control of the government. Their average income is about one-third of that of regular neighborhoods, murder rates are nearly twice as high, and teenage pregnancies are five times higher.
Other parts of Brazil are even more dangerous. According to a study by the Sangari Institute, its national homicide rate increased by 124 percent between 1980 and 2010, rising from 11.7 per 100,000 to 26.2 per 100,000. (The World Health Organization designates 10 per 100,000 as the threshold for an "epidemic" level of violence.) The total number of murders in 2010 was close to 50,000. As the study grimly observed, Brazil "has managed to exterminate more of its own citizens than the number of people who have died in recent armed conflicts around the world."
The ongoing violence in São Paulo has spread to areas that were once relatively safe, such as the coastal state of Santa Catarina and its capital city, Florianópolis, which is known for its beautiful beaches and energetic nightlife. Earlier this month, reports MercoPress, "at least 17 buses were torched and six police stations were attacked with heavy gunfire" in Florianópolis. Meanwhile, the coastal state of Alagoas, in northeastern Brazil, now has the country's highest murder rate, at 74.5 per 100,000.
As if Brazil needed any more attention on its crime problem, a famous Brazilian soccer star, Bruno Fernandes, is being tried for the murder of his former girlfriend. Not surprisingly, the case has become a media spectacle, with some calling it Brazil's equivalent of the O.J. Simpson trial.
The Fernandes trial — which has been postponed until March — began shortly after the conclusion of a spectacular corruption trial involving former Brazilian presidential aide José Dirceu, who served as President Lula da Silva's chief of staff from 2003 to 2005. (Lula left office in January 2011, after two terms.) On November 12, Dirceu was sentenced to nearly eleven years in prison for his role in a congressional bribery scandal that has now led to 25 convictions.
In a way, those convictions reflect progress in the Brazilian judicial system. Still, the recent stream of corruption cases has exposed a widespread problem. Just last Saturday, Brazilian president Dilma Rousseff, Lula's successor, fired all government officials connected to a new bribery scandal. To date, Rousseff has lost seven cabinet ministers to corruption allegations.
Brazil's corruption plague has caused all sorts of economic damage. In particular, it has stifled infrastructure development, including the construction and renovation of stadiums for the 2014 World Cup. How urgently does Brazil need better infrastructure? Go ask the people of Recife and other northeastern cities, who in late October endured their worst electricity blackout in over a decade. Brazilian energy minister Márcio Zimmermann said there had been "a total collapse of the northeastern grid." It was the fifth large-scale blackout in Brazil since President Rousseff's September 6 declaration that electricity rates would be reduced.
"The government has to create regulation that encourages investment, maintenance, and modernization of the transmission and distribution systems in Brazil," Adriano Pires, director of the Brazilian Infrastructure Center, a Rio-based consultancy, told Bloomberg News. "You're having a lot of investment in generation, but the investment in transmission isn't happening in the same proportion."
In addition to its infrastructure deficiencies, Brazil also has a ridiculously complicated and onerous tax code. The latest reminder of that came on October 9, when the Latin Business Chronicle released its 2012 Latin Tax Index, which ranks Brazil dead last. "The intricacies of the Brazilian tax system also require from taxpayers a whopping 2,600 hours per year (or 108 days) to pay taxes," the Chronicle reports, citing World Bank data. "That's the highest number in Latin America (five times higher than the regional average) and the worst among 183 countries worldwide." Brazil also ranks dead last in the Chronicle's Latin Globalization Index, which means it is "the least globalized country in Latin America." Economist Walter Molano of BCP Securities explains that "two of the main reasons" for Brazil's low globalization score are its "poor infrastructure and complex tax system."
While Brazil "will most likely improve" in the 2013 Latin Tax Index, given President Rousseff's recent tax cuts, it still needs fundamental tax reform and a broader shift away from protectionism. In the World Bank's new Ease of Doing Business Index, Brazil ranks a dismal 156th (out of 185 countries or territories) for the ease of paying business taxes, and it ranks 130th overall. The South American giant ranks far behind Mexico, as it also does in the Heritage Foundation's Index of Economic Freedom. Even though Mexican economic growth slowed in the third quarter, Mexico is still expected to grow more than twice as fast as Brazil this year.
For that matter, Nomura economist Tony Volpon believes that Brazil's potential growth rate (i.e., its ceiling for noninflationary growth) has declined from 4 percent to around 3 percent. If the country wants to boost growth, keep inflation under control, and maintain its status as the biggest economy in Latin America, it must build on President Rousseff's tax cuts and privatization measures with bolder, more sweeping reforms. Otherwise, Brazil could enter a prolonged period of economic stagnation that would make its crime problems even harder to solve.
(You can read this article in Spanish here.)
Ambassador Jaime Daremblum is a Hudson Institute Senior Fellow and directs the Center for Latin American Studies.
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