Brazil Gets a Dose of Free-Market Remedies
Dilma Rousseff—conservative? For those who know the story of Brazil’s president, that label seems impossible. Rousseff is a former guerrilla and political activist whose sympathies are clearly on the left. Yet she’s so determined to get Brazil’s economy growing again that she’s abandoned her Workers’ Party line to open the country’s crumbling infrastructure to private management. She’s also adopted an industry-backed agenda to cut costs for business.
The move is part of a broader shift in policy from fueling a decade-long consumer-led boom to boosting competitiveness and private investment, particularly for local manufacturers who have lost market share to cheaper imports. Thanks to lower overseas demand for commodities, falling investment, and rising household debt, Brazil, which rivaled India and China in 2010 with economic growth of 7.5 percent, will grow less than the U.S. and Japan this year, according to a Bloomberg survey of economists.
In the last month, Rousseff has announced payroll-tax cuts, reduced the rates industry pays for power, offered private companies licenses to build and operate roads and railways, and unveiled plans to do the same for major airports and ports. The licenses are especially radical in Brazil, where the political left does not like to give up any control of public assets to the private sector. But if Rousseff can sell her ideas, she can tap billions of dollars in investment capital to modernize and revive infrastructure without increasing taxes.
During the 1995-2002 administration of President Fernando Henrique Cardoso, Rousseff’s party criticized the privatization of transport and telecommunications services. Yet in February, Rousseff granted private companies licenses to build and operate airport terminals in São Paulo and Brasilia, ending a state monopoly. “She’s crossed an ideological line others in her government would not have done,” says Enestor dos Santos, senior economist at Banco Bilbao Vizcaya Argentaria. “She’s a pragmatist.” Brazil will benefit from the know-how private companies have in managing airports, ports, and other infrastructure.
“At last they are waking up to adopt structural measures, and not the quick-fix solutions of recent years,” says Gilberto Cantu, head of the ground cargo transport association in Parana state. “Having privately operated roads means paying tolls, but it’s the only way out.”
Brazil urgently needs to repair its infrastructure, as well as build new roads and ports. Potholed, jammed single-lane roads help make cargo transport 40 percent more expensive than in the U.S., says Cantu. Energy prices at 330 reais ($163) per megawatt/hour are the fourth highest in the world, according to CNI, Brazil’s all-industry trade group. In July, rains, strikes, and inadequate cargo-loading facilities created queues of over 100 anchored ships at the southern port of Paranagua, a main export route for one of the world’s top agriculture exporters. Some ships waited at anchor for more than a month. Brazil ranks 126th out of 183 countries in the latest World Bank index on the ease of doing business, behind Uganda and Swaziland.
Industry leaders say removing such bottlenecks is essential to reignite economic growth, which will slow to a consensus forecast of 1.57 percent this year from 2.7 percent in 2011. Rousseff has made competitiveness her new battle cry. “It’s more than a new word, it’s a new concept, a new attitude,” she said in a Sept. 6 Independence Day speech. Faced with falling revenue as the economy slows, the government hopes that awarding licenses to private companies to build and operate 10,000 kilometers of railways and 7,500 km of roads will attract 80 billion reais ($39.5 billion) in capital investment over five years.
Cardoso’s party now accuses Rousseff of abandoning her anti-privatization platform from the 2010 campaign. Rousseff says that her plan will differ from the Cardoso privatizations. “Our system of concessions will strengthen the state’s regulatory powers to ensure quality, end monopolies, and ensure the lowest possible shipping rates,” she said in her Sept. 6 speech.
While Rousseff is improving operating conditions for some businesses, she continues to wield a heavy government hand in managing the economy, says Paulo Vieira da Cunha, a partner at investment firm Tandem Global Partners. The government has increased import tariffs to protect troubled industries and pressured banks to lower interest rates and utilities to drop electricity rates in exchange for renewing their concessions, according to Vieira da Cunha. “It’s a positive agenda. It’s an advance, but it’s not liberalization. It creates regulatory uncertainty,” he says. “What they seek is a more efficient model of state-led development.”
Still, for those standing to benefit, Rousseff is on the right track. The Curitiba-based Hübner Group, which makes engine parts and truck trailers, expects to cut costs by 1.5 percent as a result of the cuts in power rates and payroll taxes. “With those savings I can buy new machines,” says Nelson Hubner, the company’s president. “These measures will save hundreds of small companies from bankruptcy.”