A rhythm the world listens to

A rhythm the world listens to

In just the last year, Brazil's economic indicators have been glowing. 5.2% growth, inflation below 5%, low interest rates and an investment-grade rating round the corner. But will its chaotic infrastructure hold it back?

Despite the latest in a series of corruption scandals — this time over officials running up huge personal bills on government credit cards — president Lula da Silva remains Brazil's most popular leader in living memory. And why wouldn't he? From the boombust days of triple-digit hyperinflation in the late 1980s and early 1990s, Latin America's biggest economy is enjoying a new period of stability and growth. It was six years ago that Goldman Sachs economist Jim O'Neill formulated the concept of Brics — the giant emerging economies of Brazil, Russia, India and China — which he believed would grow so rapidly they would overtake most of the developed world's economies by 2050. Until last year Brazil, the world's 10^th biggest economy hadn't looked much like fulfilling that promise. But in 2007 its stock market was among the best performing in the world and the country climbed rapidly up the global league table for foreign direct investment, attracting $34.6bn — almost double its 2006 total. Growth, which had averaged just 2.5% a year over the two decades before Lula swept to power in 2003, reached 5.2% last year. Inflation has been kept under control and within government targets of 4.5% and

interest rates have been falling steadily. The country remains on track to gain an investment-grade credit rating later this year, despite jitters from the global financial crisis. This would allow the government to borrow at lower rates and would also widen the country's appeal to overseas investors. Investment-grade status will be "very positive," says Jose Carlos Grubisich, who heads petrochemicals group Braskem. "Not only will we have lower funding costs but

also access to a larger base of investors." The government appears confident the economy is in good shape to withstand the worst of a world slowdown, although growth is expected to fall to around 4.5% this year. There have been worrying signs — in January Brazil ran up a current account deficit of $4.23bn, giving the country its first 12-month deficit in five years, at $1.17bn. Economists expect its trade surplus to narrow from $40bn in 2007 to

around $33bn as imports rise rapidly to feed domestic demand. Growth in its exports to China, up from 2% two years ago to 10% now, will help

cushion Brazil should America move into recession but it is domestic demand that remains buoyant. The spending has been fuelled by a slashing of interest rates from the 45% peak they reached in 1999 to 11.25%. Credit, a new concept to most Brazilians, is becoming more widely available and the pent-up demand for consumer goods is kicking in.

 

Need for reform

Despite the new mood of confidence in the country, Brazil has lagged behind the other Bric countries, hampered by the urgent need for radical reform of its

bloated public sector and its complex tax system, which stifles enterprise and imposes a crippling burden on business. A recent survey by PWC and the World Bank calculated that it takes a typical Brazilian company an astonishing 2,600 hours a year to comply with tax legislation. That compares with an average of 322 hours for the 178 countries in the survey and less than an hour in the Maldives. Lula has been widely applauded for his Bolsa Familia financial aid programme which helps 40 million of the poorest Brazilians and is conditional on school attendance and vaccinations for children. It costs some 9bn reais ($5.3bn) a year, but the gap between rich and poor in Brazil remains vast. Many millions live in favela or shanty towns, with a housing deficit estimated at 10m homes. Hike up into the favelas, the notoriously lawless hillside slums, and you find hairdressers, stationers and electrical goods shops reporting booming sales. There are still, of course, the more traditional booms courtesy of drug-dealers in combat fatigues who sit on pavements making little piles of gunpowder. "A bomb for the police," explained one young bomb-maker in Rocinha, a Rio favela, after a shoot-out that killed an 11-year-old girl.

 

Gang warfare and police brutality remain embedded here, as does extreme inequality. Some shantytowns, with their legions of street children and shacks of wood and plastic, could pass for the more impoverished parts of sub-Saharan Africa. Except that overhead there are helicopters ferrying the super-rich to shopping appointments with Gucci and Jimmy Choo. Economic and social indicators do suggest the gap is closing, albeit slowly. "What has been achieved looks more solid than in some other countries," concludes Michael Reid in a recent book, Forgotten Continent: the Battle for Latin America's soul. Reid's upbeat assessment comes with a warning about the need for bolder premarket reforms of byzantine taxes, red tape and outdated labour laws. Some critics go further and argue that Brazil is glitzy but hollow, just like a carnival float, because it is coasting on benign global conditions and a domestic credit boom while shirking the hard graft of building a competitive economy.

 

"Everybody is making a lot of money," says Alan Goldlust, the head of Comexport, a big trading company. "I'm making more money than I've ever made. But nothing is being done to improve our schools or labour laws or bureaucracy. We're filling our stomachs but not our heads." In the same vein some western diplomats credit Lula with raising Brazil's prestige but not its influence, partly because he lets Venezuela's Hugo Chavez shout as regional spokesman. A permanent seat on the UN Security Council is still a dream. The president's vow to end the corrupt ways of the old elite has also faded in a

slew of financial scandals tainting senior members of his ruling Workers' Party. Dilma Rousseff, the president's chief of staff, disagrees. Lula was enthusiastically voted back into power last year, she points out, and the government is sticking with its commitment to low inflation and financial

stability. "We have shown we are not afraid of taking tough decisions." It used to be said that Brazil was a country with a great future condemned to its

eternal contemplation. That future has not arrived, not quite yet, but it is closer now than it has been in generations.

 

For Roger Agnelli, president of mining giant Vale, Lula's government has been a pleasant surprise. But the country's inadequate

infrastructure urgently needs attention, along with the fiscal system. "We have to think about railways, harbors and energy." The boom in commodities and overall global growth has largely been behind Brazil's increased prosperity, says Flávio Maluf, president of the wood and metal products group Eucatex. But reform is urgently needed: "Perhaps we will have two or three years of prosperity, but Brazil has to go through a dramatic structural change in order to keep growing." That view is echoed throughout Brazil. Most accept that total reform would be a political impossibility, but changes to pensions and the tax system are "imperative" if the country is to continue to attract overseas investment, says Sergio Thompson- Flores of Infinity Bio Energy. "Brazil today is like a marathon runner carrying an anchor round his neck … the anchor is our taxation system, which is a burden worsened by our labour laws and

benefits." It is a wonder Brazil manages to run the race at all, he says. Marcos de Moraes, a former dotcom entrepreneur who now heads the fast expanding

Sagatiba drinks business, has a more sanguine view on the lack of reform: "The economy and the government can go the same way or not," he says. "Fortunately the economy is depending less and less on the government as it's becoming stronger. "We are survivors here, never forget that. We endured a period of hyperinflation, a military government … we've survived many difficult situations here in Brazil."