Is sustainable growth possible?

It has been generations since Brazil has experienced an extended period of low inflation and economic growth under democratic leadership. Over the past decade, Brazil has advanced on the path to economic stability.

But Brazil still faces myriad challenges if its economy is to grow sufficiently to make headway in eliminating the profound socio-economic inequalities that have plagued the country for centuries.

Given the demand for Brazilian commodities and high levels of international capital eager to find a home, Brazil has an historic opportunity to begin to make lasting improvements in the economy and perhaps more importantly, in the quality of life of all its citizens.

Stabilization finally achieved…

In 1994, the Real Plan successfully ended Brazil's decade long and difficult relationship with inflation. While the Real Plan marks the beginning of the longest period of economic stabilization in Brazilian history, it also required Brazil to adopt a new approach to government spending -- turning on the currency printing press was no longer an option.

The cost of stabilization has meant huge increases in taxation and forced the Finance Ministry into a constant state of fiscal austerity. Despite a marked increase in taxation, public investment in infrastructure and government services has declined steadily over the past decade. And in too many cases, the private sector has failed to fill the investment gap.

…but fault lines remain

As a result, a climate of insecurity remains in Brazil. In 2006, the breakdown of the air traffic system illustrated the consequences of poor planning and limited investment. Similar breakdowns are expected in logistics, as exports continue to rise and in the energy sector, where demand is outstripping investments in new capacity. The government has sought to address these issues but still fails to recognize that only the private sector has the cash and the capability to efficiently move ahead with important infrastructure investments.

Strong companies and sectors

While Brazil has experienced low growth in recent years, there are sectors of the economy that have consistently shown double-digit growth. The stabilization of the 1990s allowed the government to embark on broad-reaching privatizations. Among the companies that went to the auction block are mining giant Companhia do Vale do Rio Doce (CVRD), steel company Companhia Siderugica Nacional (CSN), as well as key assets in telecommunications, banking and energy.

Brazil's agricultural sector continues to shine. Its production costs are a fraction of those of its peers in the heavily subsidized US and European markets, which allows agribusiness to prosper despite high logistics costs. While Brazil stands out for its soybean, coffee, sugar, beef, and orange industries, the biofuels sector offers the most promise for Brazil at home and on the global market. Brazil is not only the most efficient producer of ethanol; it is also a leader in biofuels technology and will continue to be a model in renewable fuels in years to come.

These sectors, along with mining and steel, will continue to be beacons of strength in Brazil's economy, helping to increase growth despite the many challenges businesses face in Brazil, which range from a labor-favored constitution to a byzantine tax system that collects at first world levels but provides third world services.

Government inefficiency

Despite strong companies and sectors, Brazil still has a long way to go if it is going to grow at rates high enough to create jobs for new entrants into the work force as well as the mass of existing unemployed workers. The main obstacle to expansion continues to be inefficient government, which arguably impedes rather than promotes development.

As Brazilian democracy continues to consolidate, the need to make unpopular decision with long-term positive effects will continue to grow. Furthermore, flirtations with populism will be a continuous threat to long-terms solutions to the country's woes.

Attacking impunity

Finally, there is a growing perception in Brazil that crime and corruption go unpunished at all levels of society. From foreign investors to voters to business people, there is a widespread belief that the legal system does not work. Given that the judiciary operates like a state-within-a-state, this issue will be among the hardest to resolve.

Our themes
Public sector
Infrastructure
Biofuels
Economic growth
External trade
Crime and impunity