Brazil: Infrastructure new president’s challenge

Brazilian housewives rallied to ask the government for retirement pensions for their housework in Brasília in 2006, when the Social Security deficit was R$44.927 billion (US$26.24 billion). (Evaristo Sá/AFP/Getty Images)

Brazilian housewives rallied to ask the government for retirement pensions for their housework in Brasília in 2006, when the Social Security deficit was R$44.927 billion (US$26.24 billion). (Evaristo Sá/AFP/Getty Images)

By Cristine Pires for Infosurhoy.com—27/10/2010

PORTO ALEGRE, Brazil – Luiz Inácio Lula da Silva’s successor will take office on Jan. 1 with a mission as huge as the size of the nation that occupies 70% of South America: to resolve public infrastructure snags, which have forestalled investments in the country.

Energy, transportation, basic sanitation, and telecommunications are the sectors presenting the biggest impediments to the economy’s growth.

“The need to expand airports is one of those matters that must be addressed urgently,” says José Alexandre Hage, who teaches political science at Campinas State University (Unicamp) and international relations at Trevisan Business School.

Hage offers the example of Guarulhos International Airport, in São Paulo, which is overbooked with flights.

The high cost of productive investments in the country also worries analysts, who point to what they see as a shortage of long-term credit lines, largely due to high interest rates.

The investments of the National Bank for Economic and Social Development (BNDES), which in 2010 should exceed the R$137 billion (US$80 billion) in freed-up credits last year, are not adequately supplying the demand for productive credit.

“BNDES is selective when it comes to granting credit,” Hage says. “Those who cannot access it end up needing another source of financing – and at high interest rates.”

The government has kept interest rates high as a strategy to slow consumer spending and keep inflation down. Yet Hage said there are other ways of steadying prices, such as adopting a public policy of better income distribution.

“That’s where the Growth Acceleration Program (PAC) comes in,” he says.

Hage points out the PAC – one of the main pro-development bulwarks of the current government – should be “truly sped up” to stimulate income circulation.

Taxes and social security policies also will require increased attention from the nation’s next leader, analysts say.

says economist Marcelo Portugal, a professor at the Federal University of the State of Rio Grande do Sul (UFRGS). “The same thing is needed regarding social security or we’ll risk running out of money to pay retirees.”

If the next president maintains the same low-inflation economic policy that Brazil adopted in 1999 under then-President Fernando Henrique Cardoso and keeps the country open to foreign competitors, growth “will come naturally,” Portugal says.

“That way it’ll be possible to attract capital, since Brazil will have a consumer market with a purchasing power matching the size of its economy,” Hage says.

Political scientist Silvana Krause said Lula’s administration created a “different perception of the government” that will help his successor overcome the challenges.

“The government took the role of intermediary and creator of incentives, without remaining a spectator with respect to society,” she says.

The Brazil Cost

  • ::The so-called Brazil Cost, which is how government policies, laws or regulations result in economic inefficiency and distortions, increases the price of Brazilian products by 40% when compared to international competitors
  • ::High tax rates, interest charged on credit towards production, and labor wages increase the cost of producing goods
  • ::The taxes added to payroll functions are responsible for 80% higher production costs in Brazil
  • ::Logistics costs represent 7.5% of the net income for Brazil’s largest companies

Source: Brazilian Builders Machinery Association (Abimaq) and Federation of the Industries of the State of São Paulo (Fiesp)

Social Security Deficit

  • ::From January to September 2010, contributions made to Social Security were R$147.3 billion (US$85.8 billion) while expenditures reached R$187.4 billion (US$109.2 billion)
  • ::The estimated Social Security deficit by the end of 2010 will be R$44.5 billion (US$25.9 billion)
  • ::Brazil pays benefits to more than 27 million retirees and pensioners

Source: Social Security Ministry

Industry demands

  • ::Brazil earmarks 2% of its gross national product (GNP) for infrastructure, which is equivalent to a third of Chile’s and half of India’s percentages
  • ::Industrialists defend doubling Brazil’s per capita income every 15 years, rather than its current pace of 21 years, increasing from US$10,465 to US$20,000 by 2025
  • ::Industry leaders want defined limits for public expenditures and support a reform of Social Security
  • ::To allow for investment growth, CNI supports reducing the surcharges in electrical energy prices and adopting changes in the public transportation sector

Source: National Confederation of Industry (CNI)

Infosurhoy.com series “Which country is this?” will examine the damage caused by corrupt public management in Brazil on Oct. 28.

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