Brazil – a Country of Buts

It’s tough to visit Brazil without noticing the buts. Every objective statement seems to require a subsequent hedge. Yes, the country enjoyed heady growth through the first decade of the 20^th century, but since 2011 its economy has averaged just 1.6 percent annual expansion.

Yes, conditional cash transfer programs have pulled millions from poverty but Brazil remains one of the globe’s most unequal countries in terms of income distribution.

Yes, President Dilma Rousseff has taken an aggressive stance against corruption, but a brewing scandal threatens to undermine her administration.

You get the idea, but let me explain.

On June 30, 2015, Brazilian President Dilma Rousseff visited US President Barack Obama in Washington, DC, her first trip to the US capital since cancelling a 2013 meeting in the wake of the spy-gate scandal.

The trip marked an opportune moment for the leaders to reflect on the future of Brazilian – US relations; a partnership that has underwhelmed for some time now.

But Brazil faces a trying moment, independent of its relations with the US. Back home, the country struggles with a sputtering economic environment that requires fiscal and monetary tightening.

Dilma is expected to push for fiscal adjustments through 2015, but her efforts will be complicated as her support in Congress wanes, and as ominous clouds from the Petrobras scandal loom over her presidency.

On the ground, observers note a tension in the atmosphere. Inflation is up, interest rates and debt are up, job security is down, and it is in this environment that technocrats are asking President Rousseff to push fiscal austerity.

Is Brazil on the Rocks?

These are all factors the Bertelsmann Foundation’s INCRA (an international non-profit credit rating agency built by Bertelsmann Foundation) committee considered when reviewing Brazil.

As a spoiler alert, the committee (in which I took part) is generally optimistic about Brazil’s forward looking indicators, and that while overall, INCRA has downgraded Brazil to BBB+, Brazil’s forward outlook remains relatively stable.

For example rule of law is considered strong in Brazil, a country with a democratic, constitutional government, an independent judiciary, and strong separation of power.

What’s Wrong with Brazil’s Economy? Check out our video: Five Steps to Kickstart Brazil

The Thing about Brazil is that it is a Country of Buts.

In terms of social cohesion, Brazil is still reaping the benefits of pulling tens of millions of families from poverty, via conditional cash transfer programs such as Bolsa Familia.

But it is still profoundly unequal with a very high gini coefficient, and extreme social and regional disparities.

Brazil has improved its framework of anti-corruption laws, but implementation and enforcement remains lacking.

Let’s look a little closer at some of the fundamental fault lines:

Fixing Education in Brazil – It’s more than Money

If Brazil wants to be a 21st-century leader, it must build a 21st-century workforce.

The country has made impressive progress in education. But notwithstanding major improvements implemented by Presidents Fernando Enrique Cardoso, Luiz Inácio Lula da Silva and Rousseff, the quality of Brazilian education remains poor by international standards.

Primary and secondary institutions have struggled to prepare students either to enter the workforce or to move on to higher education. Two-thirds of Brazilian teens can do little more than basic mathematics, and 50 percent have marginal reading comprehension skills.

Given that these young people will ultimately inherit Brazil, this is a major cause for concern. Unfortunately, addressing the education gap will require more than simply throwing money at the problem.

Brasília already invests a reasonable amount in education. As of 2013, the country spent 5.6 percent of GDP on education—more than the OECD average. This figure is set to jump to a globally-unprecedented 10 percent by 2020.

Funding never hurts. But Brazil’s key to building a qualified workforce lies rather in improved efficiency—an area where the INCRA committee found the country lacking.

Transparency and Accountability

The issue of corruption in Brazil recalls the proverbial debate about the glass of water: Is it half full? Or half empty?

It is no secret that corruption has long had a pernicious hold on Brazilian politics, and it is one reason the party system has been so weak. For the right price, many politicians have been willing to jump ship to a different party.

President Rousseff has stated that addressing corruption is a priority, and to be fair she showed little hesitation in ousting ministers involved in corruption scandals.

These moves reveal that corruption exists in the upper echelon of Brazilin governance. But they also demonstrate that the country is trying to do something about it. All told, corruption and bribery are still obstacles to doing business in Brazil.

The 2014 revelation of a wide-spread kickbacks scandal involving Petrobras contracting and subcontracting demonstrates how ingrained corruption remains in Brazil’s biggest and most important companies.

Just how big the fall-out from the scandal will be remains to be seen. President Rousseff, who was formerly Energy Minister and sat on the Board of Directors at Petrobras, has close ties to the company and if evidence emerges that she was complicit in the corruption, it could still cost her the presidency.

Infrastructure – Building Brazil

From unpaved streets in the northeast to the overburdened ports of Santos, Brazil’s infrastructure deficit is ubiquitous and costly. Brazilian fields produce grain twice as fast as those elsewhere, but getting that grain to port can cost almost half its value. Meanwhile, vast mineral deposits remain buried deep within the earth (and vast numbers of people remain buried deep in São Paulo’s traffic) for want of better infrastructure.

Not only does this deficit hamper growth in established sectors, it prevents the country from fully exploiting new ones. Many analysts believed the discovery of potentially tremendous deep-sea oil fields off the Brazilian coast in 2007 would be a transformative moment for the Brazilian economy.

But having the oil is one thing. Extracting it has proven quite another. Given the infrastructure deficit, Brazil has been unable to fully meet these challenges.

The Biggest But of All

Significant fault lines clearly exist in Brazil’s development, but Latin America’s BRIC retains its perennial potential. The dynamism and opportunity in the country remain unmatched in much of the developing world.

Moreover, Brazil has shown an ability to make it through tough times. Perhaps because it has had the practice, the country is rather adapt at crisis management. Brazil has shown an ability to overcome political turmoil, democratic transition, debt default, hyperinflation and the impeachment of its first democratically elected president.

That said, the INCRA committee did determine that Brazil has an “alarming tendency towards crisis.”

While Brazil’s crisis management capacity can be commended, it must work towards avoiding future crises to begin with.

The country could also use an attacking mid-fielder. But that’s another story.

Want More? See our study Five Steps to Kickstart Brazil: