Dilma Is Likely to Be Reelected, So Why Are Brazilians Celebrating?
The wind appears to be at Dilma Rousseff's back again, as Brazil's performance at the World Cup has virtually assured that she will be re-elected -- politics working as politics do. Having now been officially named the Worker's Party's candidate for president, a poll recently issued by the Brazilian Institute of Public Opinion and Statistics shows Dilma leading 39 percent to 21 percent over her closest challenger, Aecio Neves. The outcome seems pre-ordained. Should Brazilians be rejoicing?
Brazil should be an economic powerhouse, given its large population, strategic location and wealth of natural resources. Foreign investors have been enthusiastic about Brazil since it was designated a BRIC, but it really should never have received the designation. When it was first designated a BRIC in 2001, the country was $200 billion in debt and spent 38 percent of its GDP servicing that debt. The following year Brazil took out of $40 billion loan from the IMF. The truth is, the country's average GDP growth rate since 2000 has been just over 2 percent, and Brazil consistently had the lowest GDP performance of any of the BRICS between 1998 and 2008 (surpassed only recently by Russia).
As an investment destination, Brazil scores poorly in the World Bank's Doing Business rankings, with an overall score of 116 out of 189, and ranked in the lowest third in 6 of the 10 categories. According to HSBC, only this year is Brazil expected to return to its pre-Crisis level of foreign direct investment, having never attracted more than 3 percent of global FDI. Its inward investment as a percent of GDP is just two-thirds of what it was in 2008. In other words, Brazil has failed to live up to the hype either in terms of economic performance, ability to attract FDI or ability to invest in itself.
There are a number of reasons for this, ranging from a failure to control government spending, to poor economic management, to labor productivity. According to the Conference Board, Brazil's labor productivity is half of Mexico's and less than a third of South Korea's.
Like many of its counterparts in Latin America, Brazil has also fallen into the trap of export dependency on China. Approximately 80 percent of Brazil's basic goods exports went to China between 2000 and 2010, while less than 20 percent of its manufactured and semi-manufactured goods were purchased by China. That's fine when times are good, but as China's growth rate continues to decline, Brazil is finding it difficult to find buyers to take up the slack.
Another source of concern is Brazil's increasingly dilapidated infrastructure, which impacts everything from production logistics to basic transportation needs. A number of large infrastructure projects were approved during the 'boom' years under Lula da Silva, and remain unfunded and unfinished. The country's balance of payments deficit continues to rise while inflation continues to push up against the Central Bank's 6.5 percent ceiling.
So, given that Dilma has presided over the continuing decline in Brazil's basic economic and business indicators, business as usual is not what Brazil needs in the future. In order to come close to its potential, Brazilians should reject her failed economic policies and embrace change. Aecio Neves has proven himself to be a competent change manager, having successfully reduced state government expenditure and secured investment during his tenure as governor of Minas Gerais. The "Management Shock" he introduced is sorely needed in Brasilia. May Brazilians have the wisdom to reject the devil that they know and embrace the change agent they need.
____________Daniel Wagner is CEO of Country Risk Solutions and author of the book "Managing Country Risk".
Follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt
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