By Mary Stokes.
A familiar refrain among analysts and commentators is the need for structural reform in Brazil. The ‘Custo Brasil’, or high cost of doing business in the country, is widely credited with holding back the economy from a path of higher growth. The labyrinthine tax system and deficient infrastructure stand out as areas particularly ripe for reform.
According to the World Bank’s Doing Business report for 2012, Brazilian companies spend more time on taxes than anywhere else in the world. They spend 2,600 hours per year (or 108 days per year), compared with the Latin American average of 382 days and the OECD average of just 186 days. To ensure compliance, companies are forced to employ an army of bookkeepers and accountants. Infrastructure is also a weak point. The cost to move a container in Brazil is reportedly around three times the price in Hong Kong. In terms of overall infrastructure quality, Brazil lags behind the other BRICs (Russia, India and China), according to the World Economic Forum’s Global Competitiveness Index.
There is wide agreement that structural reforms are desperately needed to invigorate growth and the business climate. So why is the government not delivering? The short answer is politics.
The president, Dilma Rousseff, enjoys very high approval ratings. According to a Datafolha poll in April, 64% of respondents rated her administration’s performance as ‘excellent’ or ‘good’. Meanwhile, her party – the Workers’ Party (PT) – holds the largest share of seats in the Chamber of Deputies and the second-largest in the Senate (Charts 1 and 2). Nevertheless, her ability to push through structural reforms is severely limited by her conflict-ridden governing coalition.
Rousseff inherited an extremely heterogeneous legislature. The Chamber of Deputies, has 513 deputies from 21 different political parties. Meanwhile, the Senate has 81 members from 15 parties. Many of these parties are part of the governing coalition, but they lack any sense of unity. As a result, the government is in a permanent state of unease.
The coalition partners are constantly battling for goodies, like political appointments and pet spending projects, and the Rousseff administration has found it difficult to placate them and maintain discipline. For example, the PR – Republic Party – briefly moved into the opposition in March when they were told that they would not be able to appoint the new transport minister from their own ranks.
Despite having a sizeable majority on paper, the administration has suffered embarrassing defeats on a number of key votes. In March, the Senate vetoed Rousseff’s preferred candidate to head the national land transport agency (ANTT), which is responsible for a range of important infrastructure projects.
Unfortunately, the prospects for major reform over the next two years are dim. The administration has maintained a tight grip on government spending to provide more room for monetary easing. As a result, it will continue to find it difficult to find goodies to cajole its coalition partners into lending their support on even minor votes.