Rousseff Must Speed Up Reforms Before Election

Brazil’s technocratic president should remove structural impediments to growth if she wants to maintain her popularity.

Brazil's president Dilma Rousseff observes an Independence Day parade in Brasília, September 7
Brazil’s president Dilma Rousseff observes an Independence Day parade in Brasília, September 7 (Blog do Planalto/Roberto Stuckert Filho)

Brazil’s president Dilma Rousseff must advance economic and political reforms if she is to maintain her popularity going into next year’s election.

Rousseff, a pragmatic leftist who took over from the immensely popular President Lula da Silva in early 2011, hasn’t announced her intention to run yet. Polls nevertheless show she is favored to win but a recent economic slowdown and protests this summer over rising living costs could imperil her reelection — especially if her Green and Socialist Party rivals join forces. The former are popular among young and environmentally conscious Brazilians as well as evangelical Christians. The latter are seen as more business friendly. An alliance between them could split the left-wing vote and favor the liberal social democrats who won 44 percent of the votes in the last presidential election

The technocratic Rousseff has started to change what had become a culture of corruption in Brazilian politics, firing seven cabinet members for ethics breaches and pushing Congress to enact a comprehensive anti-graft law, personally vetoing loopholes and demanding higher fines. She also backed a Freedom of Information Act which is sweeping compared with America’s.

She also reined in Brazil’s pension fund by limiting payouts to civil servants and capping government contributions for new hires. But it is still among the most generous retirement schemes in the world, eating up some 13 percent of economic output and allowing the average Brazilian to retire at 54 with 70 percent of his pay.

By contrast, the country spends just 1.5 percent of GDP on infrastructure, compared with a global average of 3.8 percent, while its weak network of ports, railways and roads is quite possibly its greatest bottleneck.

Rousseff tried to persuade private companies to participate in infrastructure investments but they were deterred by the unattractive terms she offered. Her government has since been prone to interventionism, ordering state banks to slash lending rates and raising taxes on foreign borrowing in an attempt to drive down the exchange rate of the real.

Interest rates and unemployment are low but so is growth while inflation is rising. Rousseff has done little to remove structural impediments to economic expansion which include a burdensome tax regime and excessive regulation. The World Bank considers Brazil to be the worst place in the world to file one’s taxes. Payroll taxes add a staggering 58 percent to the average salary. Import tariffs remain high while customs procedures sometimes amount to outright obstructionism of foreign trade.

Brazil’s economy is highly dependent on beef, corn and sugar exports — and it is expected to start exporting oil soon. But it has a growing manufacturing industry and consumer brands that are ready to compete worldwide. Rousseff should make it easier for them to do business.

Lula was so popular because he spent lavishly on welfare while exposing Brazil to international competition and trade — which helped finance his war on poverty. Rousseff has continued those social spending policies but the pace of market reform has stalled. If she is to regain the confidence of the business community and meet the expectations of Brazil’s burgeoning middle class, she must press on.

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