Can Dilma Rousseff Fix Brazil?

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. 

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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.

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Jaime Daremblum, who served as Costa Rica’s ambassador to the United States from 1998 to 2004, is director of the Center for Latin American Studies at the Hudson Institute.

(AP Photo)

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