Brazil president Luiz Inácio Lula da Silva is determined to raise the country’s rate of economic growth during his second term but the political obstacles to achieving that could be too great.

Brazil’s economic growth averaged 2.6% since Mr Lula da Silva came to power in January 2003 but in his inauguration speech for his second term, which started on January 1 this year, he committed himself to raising that level to above 5%. On January 22, he set out a $240bn investment programme to do so.


However, Brazil-watchers say that the country is unlikely to achieve such high levels without radical structural reform, requiring the backing of a highly fractious Congress. Peter Collecott, British ambassador to Brazil, tells fDi: “There is a strong debate in Brazil about whether growth of 5% is realistic, at least during the next couple of years. Only one of the years during Lula’s first term saw economic growth above 4%: 2004, when it hit 4.9%.

“Leading economic research in Brazil shows that it could take until 2010 or 2011 to achieve those high levels, because there has to be an improvement in the energy sector and reforms of the social security system and the labour markets.”

Dr Collecott says that most Brazilian commentators agree that major economic reform in the country is extremely difficult because no president has ever had majority support in Congress. During Mr Lula da Silva’s first term, about 40% of congressmen switched their political affiliation.

Peter Hakim, president of the InterAmerican Dialogue, a Latin American think tank based in Washington, DC, says: “I had some hope that during his second term, he would push for a new platform to raise economic growth and attract more foreign investors. However, this evaporated when I saw that one of the first things congressmen did after Mr Lula da Silva was re-elected was to try to double their salaries. Politicians in Brazil are not public servants; they are in it for the money. The political system is so difficult and is so skewed in favour of high government spending and high pensions that he would alienate too many people in his own party if he attempted radical reform.”

Renato Baumann, director of the Brazil office of think tank Economic Commission for Latin America and the Caribbean, agrees. “For Brazil to achieve higher rates of growth, it’s necessary to reduce taxes, improve the fiscal side, reduce all the paperwork and bureaucracy, and deal with the energy supply problems,” he says.

Infrastructure work

In announcing his investment plan, called Acceleration Programme for the Country’s Growth, Mr Lula da Silva said he wanted to involve the private sector in plans to upgrade roads and railways, and develop the country’s energy provision.

Of the $240bn funding, 13% will come from central government, the rest from state-controlled companies and the private sector, which is being offered tax breaks to participate. The programme could offer major opportunities for foreign companies to invest in Brazil.

However, critics of the plan say it does not offer the necessary major overhaul of tax structures or detailed proposals to reform a heavily indebted pensions system.

The programme must be approved by Congress and backed by powerful state governors.

Lula’s success

The president’s first term was a success by most measures, hence his landslide victory in the run-off election on October 29. Brazil did not suffer any major external shocks during Mr Lula da Silva’s first four years, a fact that is unprecedented in recent Brazilian history. He also managed to tame inflation, reduce the budget deficits and pay off much of the country’s external debt.

“Despite initial concerns that Lula would be overly left-wing, his economic approach has turned out to be quite conservative and this has been well-received by foreign investors and the international financial community,” says Mr Baumann. “Current inflation is around 3%, which is below the target of 4.25%. External debt in relation to export revenues was 300% before Lula came to power but now stands at 200%. Brazil now has much higher foreign reserves, at $86bn.”

Whether Brazil is able to attract more FDI during Mr Lula da Silva’s second term largely depends on whether it can implement structural reform. Between January and November last year, the country received $16.3bn of FDI inflows against $15.2bn for the whole of 2005.

Lisa Schineller, a director at Standard and Poor’s and a Brazil analyst, says: “Brazil now has better credit ratings than ever before. In February last year, we upgraded it to BB on foreign currency and BB+ on local currency. It is now only one or two notches away from investment grade, which the country has never achieved. At the end of last year, we also granted it a ‘positive outlook’.

“If Brazil were to achieve investment grade, it would be a breakthrough for it in terms of attracting FDI. However, only 25% of countries with Brazil’s current credit ratings make it to investment grade within five years.”

Ms Schineller says that there are a number of key areas on which the president must focus, including reducing the budget deficit of 6% of gross domestic product. One of the main obstacles to foreign investment has been infrastructure bottlenecks, including a lack of new highways and ports, she says. For example, the administration has repeatedly put off a decision about one of the most important highway concessions in the country, BR163, which would go through the Amazon rainforest.

Highlighting the country’s rickety infrastructure, in December last year, 44% of flights were delayed or cancelled because of a work-to-rule protest by air workers. This followed Brazil’s worst ever plane crash, when 154 people were killed in October.

Ms Schineller says more foreign companies would invest in Brazil if the infrastructure was better. And infrastructure projects would create huge opportunities for foreign investors. Two of the biggest issues facing investors in Brazil are interest rates and the level of taxation. The central bank rate is 13.25%, commercial business rates are about 40% and personal rates are up to 100%. The tax burden is about 38% to 39% of GDP.

Hampering business

“I think most businessmen would agree that Brazil is not an easy place in which to do business, because of the high rates of interest, the tax burden and the level of bureaucracy,” says Dr Collecott. “Interest rates have been so high because they are the only effective monetary policy instrument that the authorities have, and they have been trying very hard to keep a lid on inflation.”

Ms Schineller says: “If Brazil is to achieve investment grade, it must reduce government spending. However, during the past two years, the fiscal side has got worse, mainly because of major social programmes by the government in the run-up to the presidential elections.”

Most Brazil-watchers agree that Mr Lula da Silva made a number of significant achievements during his first term. Business confidence seems much higher, even to the extent that Brazilian companies feel bold enough to make major acquisitions on the global stage. However, many say that Mr Lula da Silva’s second term will be business as usual. The president says he is committed to higher economic growth and seems to be putting more stress on education as a means of reducing the country’s vast social inequalities.

Yet, few foresee him embarking on the sort of major structural economic reforms that are needed to propel Brazil on to a higher growth path, because of the constant horse trading and political coalition building that is necessary to run the country.