Brazil’s Giant Problem: The State (WSJ)

A lengthy Wall Street Journal article notes that while many observers focus on Brazil’s problem with corruption, a deeper problem lies in the failures of its Leviathan state. Some interesting Brazil facts or tidbits noted in the article included:

• In Brazil’s Congress, six in 10 members now face some kind of criminal investigation
• Brazil is deep in its worst recession since the 1930s, and it may not yet have hit bottom.
• While commodities exports represent a small part of Brazil’s largely closed economy, they are a direct driver of growth. No other country in Latin America has a tighter correlation between commodity prices and growth.
• Debt has tripled to $1 trillion in nine years and government insolvency is a possibility as some states are already going bust.
• There is no major political party advocating limited government and politicians who do are likely to be derided by nationalists as sellouts to the free-market U.S.
• Brazil ranks 174th in the world for ease of starting a business, behind Uganda and Djibouti (according to the World Bank).
• The bureaucracy spends 41% of the country’s gross domestic product – about double the rate of the U.S. But as as one travelers’ cliché goes, Brazil taxes like Scandinavia but has Africa-level infrastructure.
• As much as 85% of Brazil’s federal budget goes to spending that is guaranteed by law, from increases in retirement plans to spending on housing.
• Brazil has 35 registered political parties, some 27 of which are represented in the lower house. Many of these parties have no ideology and exist to capture federal funds budgeted to political parties in the constitution.
• Some 20,000 high-ranking posts in Brazil’s bureaucracy are political appointments.

Mohamed El-Erian, chief economic adviser at Allianz, was also quoted as saying:

“Brazil has yet to find a way to combine an enormous economic potential with the political leadership needed to sustain the needed enabling reforms. As such, the economy ends up behaving like a thoroughbred horse that can run really fast on smooth ground but stumbles and falls when it gets bumpy.”

Brazil’s one potential bright spot? The country at least has a judiciary with the strength and independence to go after the elites because thanks to the 1988 Constitution along with lobbying of judges and prosecutors who wanted job security, judges and prosecutors have lifetime jobs and have their budgets shielded from politicians.

To read the whole article, Brazil’s Giant Problem, go to the website of the Wall Street Journal. In addition, visit our Brazil ETF list page.

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