Brazil is favored to win this year's World Cup, which starts today. Yet the cost of hosting the games, along with some expensive promises made by a president seeking re-election, may turn any athletic triumph into a Pyrrhic victory. Brazil's economy is sputtering. Seventy-two percent of Brazilians don't like how things are going in their country -- which comes as little surprise after more than a million of them took to the streets last year to protest price hikes, poor services and the billions the government was throwing at arenas and airports.
Many of Brazil's foreign investors are sanguine, however. As the July/August issue of Bloomberg Markets magazine reports, "Companies as diverse as Forever 21 Inc., known for cheap and cheerful fashions for young women, and luxury automaker Bayerische Motoren Werke AG have put down stakes in the past year." Brazil ranks seventh in the world for attracting foreign direct investment, according to the McKinsey Global Institute, and only five cities in the world are home to more large foreign subsidiaries than Sao Paulo.
Such companies help satisfy the consumer urges of the tens of millions of Brazilians who have been lifted from poverty over the past decade. They're a magnet for other businesses. And most important, they can be a catalyst for improving Brazil's labor productivity, which rose by only 1.2 percent from 1990 to 2012, an increase well below that in China (8.4 percent) and India (4.4 percent). With rising debt levels, plateauing demand for the riches that God gave it and a workforce that's all but tapped out, Brazil must improve productivity if it wants to grow faster. And that will take policies to promote economic competition.
The obstacles are entrenched enough to have earned their own name -- the "Brazil cost," shorthand for everything from the country's underdeveloped infrastructure to its overdeveloped bureaucracy. Near the top of what makes the world's seventh largest economy a perennial tail-dragger on competitiveness is a Byzantine tax system: According to the World Bank, compliance with 27 different tax codes can take businesses 2,600 hours a year -- the most in the world. Multinationals must also contend with high tariffs and laws that require them to use local components and partners. Such barriers help explain why a Brazilian pays 144 percent more than an American pays for a Toyota Corolla (even one built in Brazil), 329 percent more for a Sony PlayStation 4, and 89 percent more for Nike sneakers. Brazil's new middle class needs stronger purchasing power.
Reality check: it's an election year. President Dilma Rousseff has already boosted social spending and doubled down on fuel subsidies, and she's not about to make any new enemies (tax reform may come after the election, whisper her advisers). With the Olympics looming after the World Cup, she's also got plenty of high-profile infrastructure projects to complete. So enjoy the games. Buy some coveted sticker sets of your favorite World Cup players. And don't look for any hard choices or far-seeing economic reforms in Brazil before October.
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