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Brazil Needs to Restore Economic Growth
World Economy

Brazil Needs to Restore Economic Growth

The world’s fifth-largest country and Latin America’s largest economy, Brazil, is an important American trading partner.
The Brazilian economy averaged better than 4 percent annual growth from 2006 to 2010, largely thanks to surging prices for exported commodities. Yet that growth rate was substantially less than many other major emerging countries, and growth has weakened considerably since 2011, the Heritage Foundation reported Sunday.
Brazilians are justifiably concerned that their country has become stuck again in the decades-old cycle of high inflation and commodity dependence from which it emerged only in the 1990s. Strengthening the foundations of economic freedom is the critical step required to restore rapid growth.
The Brazilian government continues to dominate many areas of the country’s economy, undercutting development of a more vibrant private sector. The efficiency and overall quality of government services are inadequate, and the government seems to be more skilled at collecting taxes than at implementing needed reforms.
Total government expenditures, including public-sector wages and transfer payments, consume more than 40 percent of gross domestic product (GDP).
The overall pace of Brazil’s regulatory reform has slowed, and the tax burden is much heavier than in the emerging economies of Colombia, Peru, and Mexico. Corruption is problematic, private property rights are insecure, and the judicial system remains vulnerable to political influence.
Brazil is also too dependent on commodity exports and risks being afflicted by the “Dutch disease,” where revenues from natural resources make the currency stronger, imports cheaper, and manufactured products more expensive. Sustainable growth will require internal reforms to boost productivity and economic freedom.
The commodity-induced era of Brazilian prosperity has been driven primarily by China. If China continues to rise for another decade or more, Brazil may become locked in a dependent relationship, which it will have to break later.
  Fight Against Corruption
A recent report indicates that “40 percent of the projects — in infrastructure, housing, transportation, and security — currently being carried out by the Brazilian government to prepare for the millions of tourists that will visit the country” for the 2014 World Cup and 2016 Rio Olympics are not complete.
President Dilma Rousseff has won praise recently in Brazil for taking a hard line against corruption. But her initial response to Brazil’s current economic challenges has been to resort to the sort of Keynesian stimulus government spending programs that not only have been tried — and have failed — in the United States and elsewhere, but will also create a plethora of new opportunities for cronyist corruption.
Instead, her government should make the painful structural reforms to create conditions for growth, especially in non-commodity sectors. These reforms should be led by further privatization, especially in infrastructure, and by reducing burdensome taxes, inefficient regulation, barriers to entrepreneurial activity, barriers to long-term financing, and rigidities in the labor market.

 

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