A moment of truth for Dilma

Brazil

A moment of truth for Dilma

The president needs to do more to tackle the “Brazil cost”

WRITING about the Brazil of a century ago, Warren Dean, an economic historian, noted that the country’s foreign trade “appears to have been limited to commodities in which overwhelming comparative advantage offset high costs of production and commercialisation and high internal taxes.” Both government and private sector paid “little attention to…competitiveness,” he added.

Those words ring uncannily true of the Brazil of recent years. For much of the past decade the country enjoyed faster growth because of China’s demand for its iron ore, soya beans and oil, and because higher wages and newly available credit boosted the purchasing power of tens of millions of Brazilians. But now the economy has stalled. Having slashed interest rates, intervened to weaken an overvalued currency and offered tax breaks and cheap loans to favoured sectors, officials insist that GDP will grow by 4.5% next year. In 2008, when the world economy tanked, the government engineered a quick recovery by stimulating demand. But now its lever-pulling seems to be having less effect. That is partly because of global economic gloom, and partly because Brazil’s consumers, like those elsewhere, are paying back debts. But it also reflects the harsh truth that Brazil has become a wildly expensive place in which to invest or manufacture. It is cheaper to import steel made in South Korea from Brazilian iron ore than to buy it locally, complains Carlos Ghosn, the boss of Renault-Nissan.

There are many reasons for this. Wages have risen without regard for stagnant productivity. Poor infrastructure adds to firms’ costs. But the remorseless expansion of the state is also to blame. Taxes take around 36% of GDP, a European-sized chunk. But Brazilians get nothing like European public services in return. Almost half of them lack sewerage connections. Although public investment has risen, it remains paltry. A disproportionate share of tax revenues is gobbled up by insiders. Under Luiz Inácio Lula da Silva, the former trade-union leader who was president between 2003 and 2010, the public-sector wage bill more than doubled in nominal terms, whereas inflation was less than 50%. Lula also pushed up both the minimum wage and pensions much faster than inflation.
An end to tax and spend, and more investment please
It has been clear for some time that, if Brazil is to continue to grow at a decent clip, the policy emphasis needs to shift from twiddling the dials of demand to tackling the high cost of supply. Dilma Rousseff, Lula’s successor, seems to understand the need for change. But hitherto her efforts to cut costs have focused mainly on forcing down the currency and interest rates. This has not yet prompted the spike in inflation that some feared, but it remains a gamble. The government auctioned contracts to upgrade four airports, but on terms so harsh that improvements may be slow.
Now there are signs that Ms Rousseff is prepared to be a bit bolder. On August 15th she invited private operators to invest in roads and railways (see article). If the government is to attract the $66 billion in investment it wants, it will have to offer a reasonable return. The plan is for widespread private investment in ports and airports to follow. There is talk of reducing taxes on electricity, which double its cost, and applying to all industries a cut in payroll taxes that was given last year to a select few. To do this without swelling the budget deficit, Ms Rousseff must also halt the increase in public spending.
That is easier said than done. Much of the federal budget goes to lower tiers of government or on pensions. Ms Rousseff should abolish absurd retirement rules that mean most workers can draw their pension in their early 50s. But that will take time. In the short term, reining in payroll costs—one of the few budget items over which the federal government has plenty of discretion—is vital. So she must continue to resist the exorbitant wage demands of striking civil servants.
The decisions that Ms Rousseff is taking this month will be a critical indicator of where her presidency is headed. Her Workers’ Party derives much of its support from public-sector unions. But her own popularity goes far wider, thanks to her firm action in firing ministers alleged to have tolerated the misuse of public funds. Restoring growth and the competitiveness of Brazilian business by beating back the greedy Leviathan in Brasília is the best way for her to win a second term—and to ensure that Brazil’s economy does not continue to reproduce the faults of a century ago.