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Demonstrators march during a protest against a rise on public bus fares and the costs of the Brazil 2014 FIFA World Cup, Rio de Janeiro, Brazil, February 13, 2014. (CHRISTOPHE SIMON/AFP/Getty Images)

Which Path Will Brazil Choose?

Jaime Daremblum

When Latin America’s most-populous nation was awarded the 2014 World Cup back in 2007, it was enjoying strong economic growth and being celebrated as a potential superpower. Brazil grew by 6.1 percent that year and by 5.2 percent the following year, and it suffered only a mild recession after the global financial crisis. In April 2009, Newsweek discussed its progress below the eye-catching headline “How Brazil Became a Superpower.” Later that year, Rio de Janeiro was awarded the 2016 Summer Olympics, prompting then-President Lula da Silva to declare, “I’ve never felt more pride in Brazil. Now, we are going to show the world we can be a great country.” The Brazilian economy went on to expand by 7.5 percent in 2010, its highest annual growth rate since the 1980s.

Today, with the World Cup just a few months away, the euphoria of the Lula years seems a distant memory, as Brazil is mired in turmoil and stagnation.

For starters, Standard & Poor’s just slashed its credit rating, bringing it down to “BBB minus,” which, Reuters notes, is “the agency’s lowest investment-grade rating.” Economic growth slowed to a dismal one percent in 2012 before increasing to a mediocre 2.3 percent in 2013. Most experts are projecting that it will slow again in 2014. One reason is that rising inflation has spurred the central bank to raise interest rates. Explaining its downgrade of Brazilian debt, S&P pointed to “the combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the October presidential elections and some weakening in Brazil’s external accounts.”

Meanwhile, World Cup stadium construction has been plagued by delays, deadly accidents and wasteful spending. In December, the death of a laborer in Manaus (in northwestern Brazil) led to a strike, with union members protesting the dangerous working conditions. “Among all 12 of Brazil’s World Cup stadiums,” the Los Angeles Times reported in January, “construction or repair costs have exceeded initial estimates, and work was either completed late or is still underway on all but two.”

Widespread anger over the costs of staging the quadrennial soccer tournament has fueled social unrest, which exploded into massive protests last June. The immediate trigger was a hike in bus fares, but the rallies quickly became a vehicle for broader anti-government demonstrations, with Brazilians marching through the streets to express their frustration with inflation, crime, corruption and shoddy public services.

In a way, the protests signaled just how much Brazilian society has changed, because they appeared to be driven largely by members of the country’s growing middle class. Indeed, according to a survey cited by CNN back in July, “79 percent of the protesters earn more than twice the minimum wage, and 76 percent are employed.” Like middle class protesters in other developing countries, the Brazilian protesters were affirming that they have rising expectations of their government. What was considered acceptable in the past is no longer tolerated today. For example, even though inflation is less of a problem now than in previous years, Brazilians expect their government to keep it lower.

They also expect public officials to make greater progress on reducing violent crime and curbing police brutality. A 2013 report by Brazilian sociologist Julio Jacobo Waiselfisz offered some shocking figures: Between 1980 and 2011, the country’s overall murder rate increased by 132 percent, rising from 11.7 per 100,000 to 27.1 per 100,000, and the murder rate among Brazilian youths more than tripled, going from 17.2 per 100,000 to 53.4 per 100,000. The overall murder rate has fallen a bit since peaking in 2003, but it has gone up since 2007 and is still much higher than it was in the mid-1990s. While Brazil’s two biggest cities, São Paulo and Rio, have seen a long-term decline in homicide levels, other cities have seen a huge jump. In 2011, for example, the city of Maceió — the capital of Alagoas state, which sits along the Atlantic coast in northeastern Brazil — had a murder rate (111.1 per 100,000) more than nine times higher than that of São Paulo (11.9 per 100,000). In addition to being a social crisis, the persistence of such high crime levels is obviously a substantial drag on Brazil’s economy.

Amid the country’s prolonged stagnation, a clear divide has emerged in Latin America between the four members of the Pacific Alliance trade group — Mexico, Colombia, Peru and Chile — and the three biggest members of Mercosur — Brazil, Argentina and Venezuela. The Pacific Alliance members have liberalized their economies and signed free-trade deals with nations around the world, while the Mercosur members have remained stubbornly protectionist and statist, with much lower levels of economic freedom. “If Mercosur represents 21st Century socialism, the Pacific Alliance represents 21st Century capitalism,” Peterson Institute economist Barbara Kotschwar recently told the Financial Times. “It takes a pragmatic approach toward development, incorporating elements of social inclusion as well as liberal economic policies.”

To be sure, Brazil is in far better shape than Cristina Kirchner’s Argentina or Nicolás Maduro’s Venezuela. But it won’t return to strong, sustainable economic growth without major supply-side reforms, and it has thus far resisted such reforms. “Last year,” writes Wall Street Journal Latin America editor David Luhnow, “one Brazilian summed up the Atlantic bloc harshly: ‘Brazil is becoming Argentina, Argentina is becoming Venezuela and Venezuela is becoming Zimbabwe.’”

A comprehensive Brazilian reform agenda should start with fiscal policy. The nation imposes European levels of taxation and disburses European-level pensions, but it does not offer anything close to European-quality public services. Taxes amount to 36 percent of GDP, which is higher than the OECD average, and the system is ridiculously complex. Brazil has consistently ranked dead last in the Latin Business Chronicle’s Latin Tax Index, and the World Bank ranks it 159th out of 189 countries and territories for the ease of paying business taxes.

As for public pensions, the Economist notes that “[t]he average Brazilian can look forward to a pension of 70 percent of final pay at 54. Despite being a young country, Brazil spends as big a share of national income on pensions as southern Europe, where the proportion of old people is three times as big.” Not surprisingly, pension spending crowds out spending on urgent national priorities, such as infrastructure. Countries around the world spend an average of 3.8 percent of GDP on infrastructure, but Brazil spends only 1.5 percent, despite its glaring need for better roads, railways, airports and seaports.

“The Brazilian ‘infrastructure gap’ plays a big role in slowing growth that would be much greater, given Brazil’s resources, but for shortfalls, especially in transportation infrastructure and logistics,” noted a 2013 PricewaterhouseCoopers (PwC) report. To give you some perspective: The PwC report cited an estimate by Brazilian analyst Paulo Resende that “the logistics costs of poor infrastructure amount to an average economic drag on the Brazilian economy of 12 percent of GDP, compared to 8 percent for the United States, and 6 percent for Europe.”

President Dilma Rousseff, who succeeded Lula in 2011, has begun to tackle the infrastructure problem through a series of auctions aimed at luring private investment. The auctions have mostly been a success, for which Rousseff deserves credit. She also deserves credit for taking a stand against government corruption. (Unfortunately, corruption remains deeply embedded in Brazilian politics and society. According to a Financial Times report published in December, the U.S. hedge fund Platinum Partners considers Brazilian fraud such a potential “boom industry” that it will “invest in the recovery of Brazilian fraud claims” worth more than $5 billion.)

Yet Rousseff’s heavy-handed, interventionist economic management has largely been a disappointment. “The government’s economic policies have only hurt, not helped the economy,” wrote Joachim Bamrud, editor of the online business journal Latinvex, during the 2013 street protests. While the Brazilian president is currently favored to win reelection later this year — partly because unemployment, for now, remains relatively low — that could easily change if 2013-style protests erupted during the World Cup.

Over the long term, there are two paths Brazil can choose. The Pacific Alliance countries have demonstrated the benefits of free trade and liberalization, while Argentina and Venezuela have demonstrated the folly of autocratic populism. Brazil is currently somewhere in the middle, committed to democracy but unwilling to embrace the reforms necessary to open its economy and boost its long-term growth potential. The challenge for President Rousseff — or her successor — is to build a political coalition in favor of those reforms. Easier said than done.

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