Sleeping giant Brazil wakes, but could stumble

Tue May 13, 2008 5:10am EDT
By Raymond Colitt
BRASILIA (Reuters) - From Wall Street to the World Trade Organization, Brazil is finally punching its weight with a booming economy and stronger global leadership but it remains burdened by a bloated state and daunting social problems.
President Luiz Inacio Lula da Silva, basking in the investment grade status Brazil received last month, said it was a "magical moment" for Latin America's largest country.
The economy was previously plagued by boom and bust cycles and rampant inflation, and Brazil was for long dubbed the eternal country of the future, always promising much but never delivering.
But now it is growing at rates of around 5 percent, helping secure its place as one of the four so-called BRIC major emerging economies along with Russia, India and China.
The stock market -- home to world-class companies such as aircraft maker Embraer and oil firm Petrobras -- has gained eight-fold in just over 5 years, helped by economic stability and surging prices for Brazil's huge farm exports.
While many analysts credit former president Fernando Henrique Cardoso with laying the groundwork, former leftist union leader Lula surprised skeptical investors by maintaining market-friendly policies after he took office in 2003.
Abroad, Lula has forged a common front of developing nations to pressure rich nations for freer farm trade, making Brazil a key player in global trade talks.
He has also pushed Brazil's role as regional moderator at a time of growing political divisions between left and right in Latin America.
An estimated 20 million Brazilians have emerged from poverty on the back of cheap credit, welfare checks, and tax breaks, helping to forge a new middle class that in turn is fueling strong consumer demand.
"In my street, there are more new cars and satellite dishes -- we even have two supermarkets now," said Jose Antonio Pereira, a taxi driver from Sao Sebastiao, a low-income satellite city outside the capital Brasilia.
PITFALLS
Investment grade is a seal of approval for investors in Brazil's lucrative financial markets but not for those who have to negotiate the more perilous day-to-day realities.
A high tax burden, red tape, a slow and often corrupt judiciary, and an unwieldy labor market undermine Brazil's international competitiveness.
Brazil came 72nd in a survey on perceived corruption by international watchdog Transparency International, behind Senegal and on a par with India and China.
Lula has lost several key aides, including his finance and energy ministers, to corruption scandals.
"Without reforms to tackle these problems, Brazil cannot maintain its current growth rate," said Flavio Castelo Branco, chief economist at the National Industry Confederation.
At roughly 37 percent of gross domestic product, Brazil's total tax burden is the highest of any major emerging market, acting as a ball and chain on the fledgling giant.
Despite Lula's weekly inaugurations of public works projects, washed out roads and overcrowded ports still cause delays and raise costs for business.
"Everything we gain by investment grade we lose to poor infrastructure," Julio Sergio Gomes de Almeida, former economic policy secretary under Lula, told Reuters.
A maze of taxes and barriers to set up businesses also drag down Brazil's international competitiveness.
"Industry is doing well despite, not because of, government," said Almeida.
With higher income, the poor in many big cities are less likely to go hungry than a few years ago. But many still risk dying of a stray bullet from a shootout between drug gangs and often poorly paid and under-trained police. Few have access to justice, clean water or sewage treatment.
"Investment grade? I don't see much investment here," said Father Jaime Crowe, an Irish priest in Jardim Angela, a rough and poor neighborhood on the outskirts of Sao Paulo.
"The people here are buying more gadgets but that's not sustainable without education, health and security," he said.
Brazil's recent economic strength has been due in part to a global boom in commodities prices with exports from beef to soybeans soaring. Its prospects have been helped by huge oil and gas discoveries.
Although it sells a larger diversity of products to more countries than years ago, a reversal in commodities markets would hit its trade balance and slow growth in the vital agriculture sector.
Social and environment problems, from slave and child labor to violent crime and the large-scale deforestation of the Amazon, also weigh on the country's development, and experts say the government has not pushed through the economic reforms needed to guarantee long-term strength.
"Now is the time to ensure tomorrow's growth but I don't see any signs of economic reforms," Almeida said. "Brazil is already becoming complacent."