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.
