Bad Roads, Red Tape, and Other Reasons Brazil's Economic Shine Is Fading

Brazil's GDP growth was nearly flat last year. Here's what happened to this former economic success story.

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Brazilian President Dilma Rousseff (3rd from the left) claps during the inauguration of a factory which will make metal hull structures for four conventional diesel-electric attack submarines, and eventually a fifth submarine powered by a nuclear reactor developed entirely by Brazil, in Itaguai near Rio de Janeiro on March 1, 2013. (Reuters)

In recent years, Brazil has been lauded as an emerging economy success story. Leading the BRICS countries with an average real GDP growth rate of over 4 percent from 2004 to 2010 and whopping 7.5 percent GDP growth in 2010 despite the global downturn, Brazil has attracted investment and attention as the poster child for high-growth emerging economies. Add in unemployment below 5 percent, rising wages, and an expanding middle class and Brazil looked like it was poised for long-term economic growth and prosperity.

But according to the recently released government numbers, GDP in 2012 was down to .9 percent, the lowest among the BRICS, and inflation of 6 percent neared the top of the Central Bank's targets for the third year in a row. Brazil's nascent consumer class had been supporting growth here for the last several years, aided by record low interest rates and the expansion of consumer credit. The federal government's "my house, my life" program to help lower-income Brazilians buy or build their first home had also fueled growth, even as it raised concerns about a credit bubble.

This internal consumer-driven growth cannot hold the economy up forever, though, and it is starting to show signs of weakness. Despite rising wages and record low unemployment, the consumer default rate hit 30-month highs in the fall. With low unemployment and the consumer economy reaching its limits, further growth will have to come from improved productivity or expanded investment, and this can't happen without addressing some of the long- term structural issues known collectively here as the "Brazil Cost" -- that is, the combined effect of high import tariffs, poor infrastructure, and bureaucratic hurdles to doing business in Brazil.

Despite Brazil's impressive gains in education, skilled and qualified labor is hard to come by, pushing wages up and keeping productivity down. These challenges put Brazil 128th on a list of 185 countries in the World Bank's "doing business rankings" and make national products 34 percent more expensive than imported ones, according to a study recently released by the Federação das Indústrias do Estado de São Paulo.

These structural problems have come as a surprise to investors who are interested in doing business here. Rafael Lourenço of the Brazil U.S. Business Council says "There is a lot of opportunity and money to be made in Brazil, but there is also a lot of red tape, both for hiring skilled workers and for investing in the country."

Presented by

David Lavin

David Lavin is the founder of XRE Global, a consultancy that supports businesses, international organizations, and social enterprises working in Brazil.

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