June 6 (Bloomberg) -- The present is fast catching up with the country of the future. Brazilians woke last week to news of unexpectedly anemic economic growth, slumping industrial production and a plunging stock market.
The administration of President Dilma Rousseff has been trying to ride out the global economic slowdown by devaluing its currency and raising import barriers. For all of Rousseff’s complaints about an external “monetary tsunami” and predatory trade, the real threats to Brazil’s remarkable economic achievements over the past two decades can be found at home.
We recognize the challenges posed to Brazil by the debt crisis in Europe, loose monetary policies in the U.S. and slowing demand in China, which is Brazil’s biggest trading partner. We think the Brazilian real, which has fallen in value by 14 percent in the past three months, should drop some more. We also think that further cuts in Brazil’s benchmark interest rate -- now at a record low -- are warranted and that Brazil’s limited use of capital controls has so far been pragmatic and appropriate.
We can’t say the same, however, about requirements that a certain proportion of deepwater oil drilling rigs, autos and telecommunications equipment be locally made, and about tariffs on shoes, chemicals, textiles and that most pernicious of imports, Barbie dolls.
None of these measures will make Brazilian manufacturing, which has seen its share of gross domestic product slip from 17.2 percent in 2000 to 14.6 percent in 2011, more competitive. They will not reduce the “Custo Brasil” -- the Brazil cost -- or the added burden of high taxes and interest rates, bureaucracy, poor infrastructure, stiff wages, and a shortage of skilled labor that companies face there. As one Brazilian executive asserted to Bloomberg News, if you airlifted a factory from Germany to Brazil, your costs would jump by 48 percent.
If Rousseff wants Brazil to be more a maker of things than a fount of commodities, she should start by slashing through a tax system worthy of the Amazonian jungle: Dense, tangled and choking, it is equal to 36 percent of gross domestic product and, according to one survey, eats up more time for businesses than any other system. Rousseff has announced piecemeal tax cuts for selected industries, but so far has made little headway on larger reforms, particularly unifying and lowering the various state and municipal rates.
The tax system funds generous social benefits that have helped, over the past few decades, to reduce inequality and lift large numbers of Brazilians from poverty. Brazil spends 9 percent of its GDP on pensions, for example, which is well above the average for advanced economies -- and that cost will rise steeply as its elderly population triples in the next four decades. Setting a minimum retirement age would reduce costs and spur savings, currently among the lowest in Latin America.
The politics of these reforms -- and others, such as rewriting inflexible labor laws and spurring investment -- are daunting. Rousseff presides over a coalition of 10 parties, and in the curious world of Brazilian politics, these national allies will slug it out in municipal elections in October. She also has to worry about the competing ambitions and machinations of various regional power brokers. Moreover, corruption casts a debilitating shadow across Brazilian politics, engulfing and distracting legislators: This August, for example, a long-brewing vote-buying scandal involving the president’s party seems likely to go to trial.
Rousseff’s early willingness to cut public spending and reduce the interest on public savings accounts suggests a level of toughness that offers hope for progress. More than 50 years ago, her predecessor Juscelino Kubitschek said Brazil was “doomed to greatness.” Brazilians are fond of that kind of statement. Whether Rousseff takes on the thorniest of reforms will determine which half of Kubitschek’s pronouncement comes true.
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