Mighty Brazil: an overinflated image?

Brazil has performed well, writes guest blogger Greg Michener, but its leaders' swagger reflects an immodesty unmerited for a country as susceptible to the winds of change as Brazil.

A couple of weeks ago, Brazilian Finance Minister Guido Mantega puffed out his chest and idly suggested that the BRIC countries might bail out Europe. A few weeks later, President Dilma Rousseff stood before the United Nations Assembly and tossed daggers at economic mismanagement in the US and Europe while at once highlighting Brazil’s sure-footedness:

Part of the world has not yet found the balance between appropriate fiscal adjustments and proper and precise fiscal stimuli to demand and growth […] It is noteworthy that it is the president of an emerging country, a country experiencing practically full employment, who speaks here today in such stark terms of this tragedy that assails the developed countries in particular.

While the swagger of Brazil’s top policy-makers may be based on the country’s good performance and the crush of the US and European debt crises, it reflects an immodesty that is simply unmerited for a country as susceptible to the winds of change and as economically and politically backwards as Brazil.

Is Brazil really that much better off? Inflation and currency volatility

Brazil’s vitals are not even as strong as policy-makers might like outsiders to think. Inflation is on the uptick, according to the Estado de São Paulo Newspaper, heading in the direction of 7 percent and putting further pressure on the poor, whose wages are adjusted with greater infrequency than other segments of society. Higher inflation may also signal the need to again raise Brazil’s interest rates, once again putting pressure on the poor as well as inviting speculative capital.

This raises the question of the wildly vacillating Brazilian Real. According to the Valor Económico newspaper, Brazil’s currency decreased 11 percent between September 23 and 26 – an alarming drop when compared to the average 5 percent drop experienced by a basket of 14 other currencies during the same period. The volatility is spooking Brazil’s exporters, importers, and investors (addendum: see this NY Times article). It’s also making price-setters edgy. The hope is that an unstable currency – reflecting an economy built on the highly elastic prices of primary commodities – will not unleash the sort of expectation-driven inflationary cycles from which Brazilians suffered throughout the late 1980s and early 1990s.

Tax and public policy mismanagement

While Ms. Rousseff and Mr. Mantega tout Brazil’s fiscal management, they seem to be speaking solely in terms of spending control, as opposed to taxation – the other side of the ‘fiscal management’ coin. Tax burdens are getting out of control in Brazil, especially given the offensive quality of public administration that public money buys. The Globo Newspaper reports that tax collection has hit an all-time high, having increased from 33.14 percent of GDP in 2009 to 33.59 percent in 2010. By comparison, the overall tax burden in the US is 24 percent and in Canada it is 32 percent.

Security

Yet public services are regionally uneven and frequently of poor quality – especially for a country doing as well as Brazil supposedly is. Take the most basic responsibility of government – security. According to a report this week in the Globo Newspaper, Brazil solves only 5-10 percent of its approximately 50,000 homicides each year, which compares abysmally to the UK’s 90 percent or even the 65 percent achieved by US authorities. The Globo’s analysis is that Brazil’s rock-bottom performance has to do with a lack of expertise. Given that the average police officer in the State of Rio de Janeiro starts his career with a monthly salary of 1200 reais (~$800), it’s no wonder that experts are lacking.

Health

Health policy is yet another example, and a subject of heated debate right now in the National Congress. According to what the Minister of Science, Technology and innovation, PT faithful Aloizio Mercadante, told the Globo newspaper, Brazil spends 47 percent less per capita on public health than much-poorer Argentina, and 2.5 times less than is spent by the private sector. In Rio de Janeiro, people regularly die in emergency rooms, and public health services are so bad that my wife, a construction manager here in Rio, sends her workers back to their home state of São Paulo to receive urgent medical care. Ironically, the federal government is now fighting against a constitutional amendment (29) that would set a 10 percent floor for government health expenses. The government originally suggested raising a new tax to fund greater health spending, but recanted under well-justified criticism. Now it simply says it cannot afford such a commitment.

Over-stretched?

Perhaps money earmarked for 2012 municipal pre-election spending binge is one of the reasons why officials are so tight-fisted. Perhaps it is lavish spending on the 2014 World Cup or the 2016 Olympics that has the public purse in a bind. Or maybe it’s just poor fiscal management, the sort of mismanagement signaled by corruption scandals and the fall of four Ministers in nine months of a new presidency. But wait, isn’t fiscal mismanagement the developed world’s problem?

Over-taxed

Fiscal mismanagement is not only about keeping the public accounts in order, it’s also about taxation, and how taxation is levied. This government has been praised for its fiscal discipline. Yet its approach to taxation is woefully out of step with the just treatment of citizens. Taxes accost Brazilians from every angle. Less than a week and a half ago, the government sent an executive decree to Congress levying a 30 percent increase on a ‘Tax on Industrialized Goods’ for imported cars (Mercosur excepted). The new measure provides no guarantees that domestic car producers will not raise their own prices in response to the heightened prices of foreign competitors. Effectively, the tax places a burden on consumers – who will pay more for cars – and weakens the international competitiveness of Brazil’s auto industry, which the new tax effectively inoculates against real competition. The original idea behind the measure was to protect domestic auto-makers from imports, driven into Brazil by the strong real. The newly strengthening US dollar and the fall of the real now appears to have alleviated the original bind domestic car makers were having – but the tax remains.

Another tax that experienced an increase in 2011 is one that would cause a revolt in any other country – a 6.38 percent tax on all credit card purchases made outside the country. In order to force Brazilians to buy overtaxed goods at home, the government attempts to curb spending abroad by placing taxes on foreign credit card spending. What it may effectively achieve is capital flight: driving richer Brazilians to open up accounts in the US or offshore.

Brazil’s Limited Options

Despite Brazil’s many problems, it is still thankfully in much better economic shape than the US or Europe right now. But whereas the US has fiscal options, in Brazil they’re relatively limited. Taxes cannot be raised much more and government cuts in spending look unlikely, what with elections on the horizon, expensive preparations for the 2014 and 2016 games, and the desperate straits of Brazil’s public services. In short, Brazil has little margin for error, which leaves it in a tight spot if the world recession should jump Brazil’s high tariff barriers or narrow the funnel that travels from Brazil’s forests, fields, and mines to China’s kitchens and workshops.

If there’s one place Brazil could be saving money, it’s on administration. By opening up government to greater transparency, citizens might be able to help government reveal inefficiencies, incompetence, and corruption. Eliminating this fat would help Brazil save an inestimably large amount of public money.

Until the Brazilian government acts to clean up its own waste and mal-administration, it should keep its eulogizing about the mismanagement of other countries to itself.

--- Greg Michener, based in Rio de Janeiro, writes the blog, Observing Brazil. He is currently writing a book on Freedom of Information in Latin America for Cambridge University Press.