Just over a decade ago, in a paper entitled The World Needs Better Economic BRICs, Goldman Sachs Asset Management Chairman Terence James Jim ONeill introduced the acronym BRIC, which identified four rapidly developing economiesBrazil, Russia, India and Chinaas up-and-coming global leaders.
In the decade since, the four economies have grown at a much faster pace than the rest of the world, lifting millions of people out of poverty: some 40 million in Brazil alone.
Indeed, a more recent Goldman Sachs report, published in 2010, predicted that the BRIC countries could account for 41% of the worlds market share by 2030. But thats far from certain.
Brazils economy, for example, is plagued with problems, despite a 4.4% compounded annual growth rate over the past five years. Unless Brazil cuts the Gordian knot, the BRIC group could become the RIC group.
Brazils place as one of the BRICs was originally made possible by the bold privatization and economic liberalization policies of President Fernando Henrique Cardoso. His successor, Lula da Silva, continued the reforms.
Dilma Rousseff, da Silvas hand-picked successor, is trying as wellattempting to curb excessive government spending and reforming one of the few Latin American pension systems that is still government-controlled.
But President Rousseff has her work cut out for her, since the global economic downturn has helped trigger a wave of protectionist hysteria in her country. The growing protectionist choruswhich includes powerful voices in Rousseffs own governmentis now threatening the reform agenda.
The protectionists argue that cheap products originating in China and Mexico, coupled with the loose monetary policies of the United States and Europea subject Rousseff brought up with President Obama during her recent White House meetingis making it impossible for Brazilian companies to compete successfully.
To counteract these outside forces, the protectionists want Brazil to revise the 2002 bilateral trade agreement with Mexico, under which cars trade back and forth pretty freely.
They also want to raise the South American Common Markets external tariffsdespite the fact that Brazil already places an average 10% tariff on importsand want the Brazilian central bank to keep cutting rates, which they believe will make exports cheaper and imports more expensive.
Brazils problem, however, is not appreciating currency, too many cheap imports, or unfair practices by competitors.
The real problem is that Brazils government has been overtaxing, overspending, over-regulating, and placing too many other obstacles in the way of businesses, entrepreneurs and investors.
Brazils economy seriously underperformed last year, growing at an estimated 2.7%, while the Russian, Indian and Chinese economies were growing at 4.3%, 7.8% and 9.2%, respectively. Meanwhile, Brazils currency, the real, has appreciated by 30% over the past two years, and manufacturing has dropped significantly as a percentage of gross domestic product (GDP) compared to a decade ago.
The reasons for the downturn are not surprising. Since the 1990s, Brazils government has doubled its spending as a percentage of GDP. Huge government expendituresfor offshore oil exploration, subsidies for national champion companies and other purposeshave produced huge deficits and onerous interest rates.
Trade has become more complicated and costly, with tariffs increasing on a list of 100 products until 2014. Taxes are a labyrinth and a burden, with more than 80 different levies. Laws protecting workers under a code originally imported from Mussolinis fascist Italy add to business costs, not to mention the 10 billion reals ($548 million U.S.) it costs the judicial system to deal with related lawsuits.
The picture isnt pretty.
One would like to believe, judging by her record thus far, that President Rousseff doesnt plan to give in to the siren song of protectionism. This much is true: If she isnt as protectionist as those around her, shes fast losing the political will and agenda to drown out opposing voices.
The worldnot just Brazilneeds Rousseff to prove that she can go even further than she already has, addressing the countrys deeply rooted economic problems, such as the social security pension system. If she doesnt move forward with reform, Brazil will march backward, producing ripple effects that will be felt far beyond Brazils borders.
Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His Independent Institute books include Global Crossings: Immigration, Civilization, and America, Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.
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