Real Clear World
January 29, 2013
by Jaime Daremblum
A few years ago, Dilma Rousseff appeared to be one of the luckiest politicians on Earth. In October 2010, she easily won election as Brazilian president, defeating former São Paulo governor José Serra by 12 percentage points in their second-round runoff. She achieved this lopsided victory despite a noticeable lack of charisma, and despite being a onetime Marxist revolutionary. Her trump card was an endorsement from the outgoing president, Lula da Silva, for whom Rousseff had worked as a cabinet officer. Lula was so popular that his support was more than enough to push her over the top.
Rousseff took office on New Year's Day 2011, and she inherited a resource-rich economy that had grown by 7.5 percent in 2010. She also inherited a world-famous anti-poverty program (Bolsa Família) that has helped millions of Brazilians ascend to the middle class. During the first months of her presidency, it seemed as if Brazil would continue thriving. In August 2011, after the U.S. credit downgrade and the European debt crisis rattled global financial markets, Rousseff bragged about her country's relative stability: "This is the second time that a crisis affects the world, and it is the second time that Brazil doesn't shake."
Unfortunately for Lula's protege, Brazil did shake in 2012: Its exports declined by 5.3 percent; its annual inflation rate stayed close to 6 percent; and its economy barely grew at all, expanding by less than 1 percent. The causes of the downturn ranged from an overvalued currency to an economic slowdown in China, Brazil's largest trading partner. Last month, Brazil's current-account deficit hit a record high, with the country's trade surplus nearly 41 percent lower than it was in December 2011.
To be sure, the World Bank projects that the Brazilian economy will grow by 3.4 percent this year, and Finance Minister Guido Mantega has estimated that it could grow by as much as 4 percent. But the years of super-fast "catch-up growth" are clearly over. "Anyone expecting a return to the boom times," writes Brazil expert Kenneth Rapoza, is "in for a rude awakening."
In other words, Rousseff's luck is running out. Boosting real growth will require Brazil to adopt major supply-side reforms. The country can no longer simply depend on a rapidly expanding labor force and surging commodity exports. Instead, it must embrace policies that increase economic freedom and bolster its overall competitiveness. In short, Rousseff must cut the notorious "Brazil cost" that makes South America's biggest country such an expensive and difficult place to do business.
For all the good that Lula did in promoting low inflation and economic stability, he made very little progress on structural reform. During his presidency, which lasted from 2003 to 2011, Brazil's score in the Heritage Foundation's Index of Economic Freedom declined by 11 percent. For that matter, the World Bank now ranks Brazil 156th out of 180 countries or territories for the ease of paying business taxes, and 130th for the ease of doing business overall. It also ranks Brazil 143rd for the ease of resolving insolvency, which highlights the need for serious bankruptcy reform. In both the Index of Economic Freedom and the Ease of Doing Business Index, Brazil places far behind Chile, Colombia, Mexico and Peru.
Thus far, Rousseff's record has been decidedly mixed. On the positive side, she has taken a firm stand against political corruption, demanding the resignations of seven government ministers who were caught up in scandals. In addition, there have now been more than two dozen convictions in the so-called mensalão case, a congressional bribery scandal that dates back to the Lula presidency. (These convictions included a lengthy prison term for Lula's former chief of staff, José Dirceu.) Many Brazilian reformers are hopeful that the mensalão trials could mark a turning point in their battle against a longstanding culture of impunity.
Rousseff should be congratulated for her anti-corruption vigilance, as well as her efforts to privatize certain infrastructure projects and thereby improve the quality of Brazil's airports, railways, roads, and seaports. The Brazilian president has also slashed payroll and electricity taxes to ease the tax burden on companies and consumers alike.
On the negative side, Rousseff has attempted to drive down Brazilian electricity rates even further by strong-arming utility firms. In early December, Reuters reported that her intervention had "wiped more than $15 billion off the book value of Brazilian power companies," with the Norwegian investment fund Stavanger (part-owner of the Brazilian utility Eletrobras) losing roughly $200 million. Brazil has endured several massive blackouts since Rousseff announced the rate cuts on Sept. 6.
Meanwhile, her government's treatment of the multinational energy giant Chevron following a relatively small November 2011 oil spill has been outrageous. Indeed, the editors of Latinvex, an online business journal, note that "foreign oil companies are having trouble recruiting executives to Brazil" because of the "scandalous" punishments imposed on Chevron, which have included enormous fines and the threat of 31-year jail terms for various executives.
Finally, Rousseff has not been bold enough on privatization. "After selling 51 percent stakes in three airports last February," observes The Economist, her government "got cold feet and spent the rest of the year sounding out foreign operators to see if any would consider bidding for minority shares in the next round of auctions. Only when it found no takers did it decide to continue to sell off controlling stakes."
With a general election scheduled for October 2014, Rousseff is still very popular, probably because the national unemployment rate remains quite low. But there are no politically easy fixes to Brazil's deep-rooted economic challenges. The only way to get faster real growth over the long term is to enact controversial but necessary supply-side reforms. As Brazilian-American economist José Scheinkman recently told the Financial Times, "We have to do the tough stuff."
Ambassador Jaime Daremblum is a Hudson Institute Senior Fellow and directs the Center for Latin American Studies.
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