Is Brazil's Boom Over?

Seven steps to boost Brazil’s economy and reduce inflation.

BY JOACHIM BAMRUD

Is Brazil’s boom over? Is it again becoming a country with future potential rather than current success?

The massive protests the past few weeks – which at one point gathered more than one million people in 100 cities throughout Brazil – show a clear discontent with the way the country is going. While the original protests were against a raise in bus fares in Sao Paulo, they have now become a gathering point for a wide range of grievances, including rising costs, inefficient public services despite high taxes, corruption and the cost of the 2014 World Cup in soccer.

“The multiple, spreading demonstrations may indicate that Brazil is again entering a cul-de-sac, that its aspirations are too grandiose and its progress too slow and erratic to be sustained,” Peter Hakim, president emeritus of the Inter-American Dialogue, told its daily Latin America Advisor today.

The protests come as Brazil’s economy has slowed down and inflation is growing. Last year, GDP only grew by 0.9 percent (its worst result since the 2009 crisis and a far cry from the impressive 7.5 percent rate of 2010). Both the government and economists had expected a recovery this year, but first quarter growth disappointed, showing a mere 0.6 percent increase from the same period last year.

That compares with 5.4 percent last year. The International Monetary Fund is more pessimistic, predicting a 6.1 percent increase this year. This month alone, it breached the 6.5 percent upper limit of the government target range, Bloomberg reports.

So, what’s the solution?

President Dilma Rousseff needs to immediately take seven key steps to improve Brazil’s economy and reduce discontent.

#1. Fire Guido Mantega
Fire Guido Mantega and do it now. For all intents and purposes, he has become the poster boy for Brazil’s failed economic policies which have led to growing inflation and reduced growth. Mantega has been a disaster as finance minister, a post he has held for the past seven years. He suffers from a lack of respect by key local and foreign investors and frequently manages to impact markets negatively each time he opens his mouth. Rumors are that Mantega is on his way out. In one scenario he would be replaced by former central bank president Henrique Meirelles or current central bank president Alexandre Tombini. Another scenario even calls for Tombini to become finance minister with Meirelles back at the central bank. In any case, there is no doubt that a return by the widely-respected Meirelles – coupled with Mantega’s exit – would go a long way in returning investor confidence.  After growing speculation that he was on his way out, Rousseff’s spokesman Thomas Traumann yesterday told Reuters that Mantega would remain. We sincerely hope Rousseff changes her mind. Brazil’s economy can’t take any more of Mantega’s failed policies and antics.

#2. Change Economic Policies
Current economic policies – centered around government interventionism – have clearly failed. They have led to lower private investment and higher inflation. From the infamous 2011 ousting of Roger Agnelli as CEO of mining giant Vale to the unpredictable tax and tariff policies (one minute raising them, another lifting them) on select sectors, the government’s economic policies have only hurt, not helped the economy.  Rousseff should have instead followed the policies of Peruvian president Ollanta Humala, who appointed a well-respected finance minister (Luis Castilla) while keeping the widely-regarded central bank president Julio Velarde and then letting them set economic and monetary policy. That policy has been generally pro-market and has avoided the kind of expansionary fiscal policies favored by Brasilia. For the past five years, Peru has had Latin America’s best macro economic environment, according to a Latinvex analysis of data from the International Monetary Fund. It has had the region’s second-lowest inflation despite having the second-highest GDP growth rate. Instead of micromanaging the economy – like Mantega and Rousseff have preferred – the government needs to get out of the way.

#3. Reduce, Simplify Taxes
Brazil has Latin America’s worst tax environment and a world record in the time necessary to comply with tax forms – a whopping 2,600 hours, or 108 days, according to a Latinvex analysis. Brazil also has Latin America’s second-highest corporate tax rate (34 percent versus the regional average of 28 percent).  In addition to the high corporate tax rate, companies need to pay labor taxes, which can add as much as 100 percent on top of employee salaries. Although the Brazilian government has implemented various tax breaks recently, they are not enough to alleviate the tax burden in the South American country, experts say. “Those are mostly temporary tax breaks,” says Rogerio Menezes, the CFO of the Brazil unit of a major multinational firm and a leading expert on Brazil taxes. “We need a more structural reform.” He also points out that Brazil has three types of taxes -- federal, state and municipal. “The tax breaks are basically happening in the federal tax dimension, not in the other dimensions, with very few exceptions,” Menezes says. “It is important that tax breaks also occur in the two other dimensions, mostly in the state tax dimension, the heaviest side for tax payers from a company perspective.”

#4. Reduce Red Tape
The protesters the past few weeks are likely to include many frustrated entrepreneurs who have had to face major hurdles in addition to the tax system. Those hurdles include the time and number of procedures to start a business. It takes 119 days to do so in Brazil. That’s the fifth-highest time in the world, according to The World Bank’s Doing business report. And it takes 13 procedures to start a business in Brazil, the tenth-highest number in the world.  When taking into other factors for doing business, Brazil ranks as the fifth-worst country in Latin America, behind all Mercosur countries except Venezuela, according to The World Bank.

#5. Improve Infrastructure
Brazil has Latin America’s second-worst transport infrastructure, according to a Latinvex ranking. Only Haiti is worse. Brazil has the third-worst air transport quality in Latin America. Worldwide, it ranks among the 11 worst countries, according to an executive opinion survey by the World Economic Forum. Brazil’s port quality ranks as the fourth-worst in Latin America, while its road quality is the seventh-worst, according to the same WEF survey.  Only 5.5 percent of Brazil’s roads are paved – the lowest percent in all of Latin America, according to a Latinvex analysis of data from the CIA and governments in Latin America. The airport concessions last year are a good start, but they are only that. A start. Rousseff needs to implement a Korea-style infrastructure overhaul that will help reduce bottlenecks for cargo.

#6. Reduce Protectionism
Brazil’s system of high import tariffs aimed at boosting local manufacturing is outdated and increasingly only hurting the country. Not only are consumers having to pay more, but so too are businesses that depend on imports. Brazil is a big enough market to attract many manufacturers, but it should also encourage imports of many products that can’t be made cost-effectively in the country. When it comes to exporting and import goods Brazil ranks among the costliest countries in Latin America, according to World Bank data. Exporting a container typically costs $2,215, while importing a container costs $2,275. Both rank as third-highest costs in the region. Meanwhile, in terms of documents needed to export and import, Brazil ranks among the bottom half (with 7 and 8, respectively), while it ranks midway in time to import a container (17 days) and above average in time to export (13 days).

#7. Improve Education
Economic growth is being hampered by a widespread skills shortage. Rousseff deserves praise for focusing more on Brazil’s education sector, but much of the focus has been on the tertiary level, while primary and secondary continue to get short shrift, points out Luanne Zurlo, founder and co-chair of the board of Worldfund, a non-profit organization whose mission is to raise the quality and relevance of education in Latin America in order to transform lives and break the cycle of poverty.   In 2011, Rousseff announced a new program that would grant one-year scholarships for 100,000 Brazilians to study in the United States and Europe. “Well, in order to study in Europe you have to have great primary and secondary [education] and know English,” Zurlo says.  “Effectively all resources are benefiting the elite classes.” In any case, Brazil needs to urgently revamp its public education system so it can avoid the kind of skills shortages that are hurting it today.

Brazil’s boom may not be completely over. The country will still be a major attraction for foreign investment, if not for any other reason than its huge market (Latin America’s largest economy). But by taking these seven steps, Rousseff can help jumpstart the economy and attract even more foreign – as well as local – investments, while creating a much more sustainable business environment.

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