Brazil Struggles to Reconcile Rapid Economic Growth

Photo by flikr user Semilla Luz

In the past few weeks, protests have rocked Brazil’s major cities as more than one million citizens turned out to oppose a 20 cent bus fare hike announced by the government in early June. The protests were initially launched by the Free Fare Movement, an organization that advocates dramatically reduced transportation fares, financing of public transportation through tax increases, or doing away with fares altogether. The protests swiftly took on a life of their own as university students and leftist activists were joined by increasing numbers of citizens who opposed not only the rising cost of public transportation, but a growing number of grievances against the government. Brazilian citizens’ primary concerns include the inadequate provision of public services such as education and health, alongside widespread corruption and abuse of power in office.

The Brazilian government, led by President Dilma Rousseff, has reached out several times in an effort to respond to protestors’ demands and put an end to the demonstrations, which have often turned violent. On June 20, officials in São Paulo and Rio de Janeiro revoked the bus fare increase. Most recently, on June 24, President Rousseff proposed a wide range of actions to reform Brazil’s political system. To achieve these sweeping reforms, she called for a national referendum on amending Brazil’s constitution. She also pledged that her government would focus on five priority areas: fiscal responsibility and controlling inflation, political reform, health care, public transport, and education. Rousseff also announced that her government would allocate $23 billion for new spending on urban public transport. Regardless of the president’s proposed changes, protesters have returned to the streets.

At first blush, the recent atmosphere of social tension and political unrest appears to stand at odds with the increasingly mainstream image of Brazil as a growing economic powerhouse and established democracy well on its way to joining the ranks of the world’s major players. However, regional experts argue that Brazil’s impressive economic growth is in fact the main trigger for the protests. More specifically, Brazil’s rapidly expanding middle class (from 1999 to 2009, Brazil’s middle class grew by 31 million people) is putting increased demands on social services such as transportation and education. As Isobel Coleman, a senior fellow at the Council of Foreign Relations argues, “as their economic prospects have improved, their expectations for better public services have grown.”

In recent years, the government’s efforts to improve public services have not kept pace with their citizens’ growing needs and expectations. Brazilian students ranked 53 out of 65 nations in educational assessment by the Organization for Economic Cooperation and Development alliance. Corruption remains institutionalized in the political system. Rather than channeling resources into addressing these problems and improving public services, Brazilians see their government spending large amounts on preparations for the World Cup and Olympics.  According to Filipe Campante, a Brazilian professor of public policy at Harvard University’s Kennedy School of Government, “there is a deep sense of discontent with political institutions, which are seen as inefficient, corrupt, and unresponsive.”

Unfortunately, these protests come at a time when Brazil’s economic growth rates are lagging, potentially complicating Rousseff’s efforts to respond to protestors’ demands and implement her proposed reforms. The country’s economic growth has proved to be disappointing in past months. Figures from May 29 suggest Brazil’s economy grew by just 0.6 percent, falling well short of analysts’ expectations. The country is running a trade deficit for the first time in years, as government debt grows and its primary fiscal surplus diminishes. Brazil’s problems appear to have origins within the country itself, with high inflation (nearing 6.5 percent) despite slow economic growth suggesting harmful domestic rigidities.

Weak foreign demand for Brazilian exports is also complicating matters. In 2011, incoming president Dilma Rousseff raised public spending and the minimum wage, while forcing government-controlled banks to lend more in an effort to stimulate growth. Rather than raising interest rates to counter the resulting inflation, Rousseff’s administration cut sales taxes and imposed price ceilings on staple items like food and gas. The measures proved popular with the general public, but they are beginning to hurt the economy. Wage increases are barely keeping pace with inflation, and consumer confidence is tumbling as prices continue to rise.

Now, the Brazilian government has been forced to adapt its strategy. The Central Bank recently raised the base interest rate from 7.5 percent to 8 percent to rein in inflation. The government discontinued a tax on foreign purchases of bonds on June 4 in an effort to boost foreign currency inflows and strengthen the real. A weakening currency has been making imports more expensive and further fueling inflation.

Analysts are still awaiting substantive evidence that Rousseff’s government plans to follow through on a promise to encourage investment, rather than shortsighted efforts to boost consumption. Investment is currently just 18.4 percent of GDP. Despite official rhetoric encouraging business investment, the actions of Brazil’s government have impeded investment on several fronts. Clumsy interference with the transportation, electricity and banking industries have created the image of an anti-business administration with a heavy-handed approach. Many of the top-down economic tactics that contributed to Brazil’s rapid rise are now proving to be impediments to continued growth as the country’s economy matures.

By successfully lifting millions out of poverty and into the middle class, Brazil’s government increased accountability for its policy decisions while restricting its economic maneuverability. As the Rousseff administration seeks to ease growing political tensions and address economic woes among an increasingly informed and politically active populace, it must walk a fine line between imposing far-sighted economic planning by the government, and fulfilling its end of the social contract with a democratically-empowered populace of 200 million.


kenAbout the author: Ken Anderson is a writer and editor specializing in international relations, international development, economics, and technology. A graduate of Georgetown University’s Master of Science in Foreign Service program, Ken enjoys traveling, hiking, cycling, and sci-fi stories. Read more of his work on Privatizing Diplomacy.



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