Does a Rising Power need a flexible economy? The Case of Brazil…

One of the historic strengths of the U.S. economy has been its flexibility.  Dust bowl migrants relocated to Michigan for auto jobs in the thirties.  Hiring and firing has been less fraught with regulation in the U.S. than in other countries.  Labor mobility has helped buoy U.S. productivity growth in years past.  Rapid adjustment could likewise help the U.S. economy rebound from recession and crisis more quickly, than, say, Japan did during its lost decade.


On February 19, I posted a blog about Embraer, Brazil’s world-class airplane exporter, discussing its decision to lay off 20% of its workforce.  Since that time, a Brazilian labor court temporarily suspended the layoffs due to an appeal by the metalworkers’ union.  President Lula subsequently asked Embraer’s president for an explanation.  The president of the metalworkers’ union requested that the president of BNDES, Brazil’s massive, state-owned development bank which owns 6% of Embraer, lobby the airplane manufacturer to reverse the layoffs.  A country must strike a balance between worker protection and the free market, true, but Brazil’s balance has been a drag on growth.


For all of the improvements in Brazil’s economic performance and policies of late, GDP growth has lagged many other emerging market powerhouses, including its BRIC peers.  Small business, often the engine of job creation and growth in an economy, faces formidable obstacles in Brazil.


After military rule, Brazilian political elites promulgated one of the most populist constitutions in the world, which micro-manages the economy and stymies economic reform.  One result is that Brazil remains a difficult place to do business.  The World Bank produces a report annually called Doing Business, which ranks 181 countries by how conducive the regulatory environment is to doing business.  Brazil ranked 125th in 2009.  By contrast, China ranked 83rd, Mexico 56th, and the U.S. 3rd.  Brazil was even bested by Russia (120th) and bureaucratic India (122nd).  


Brazil’s electoral and legislative rules make it challenging to pass reforms that would make it easier to do business (e.g. labor and tax reforms).  Often, 60% majorities in both houses of Congress, required to amend the constitution, must be cobbled together among Brazil’s numerous parties just to make changes to fiscal policy.  Brazil suffers from an excess of what political scientists call “veto players,” or the number of actors that must agree in order to reach a decision.  Political parties, the executive branch, the courts, local governments, etc.  The compelling analysis of Barry Ames, Professor of Comparative Politics at the University of Pittsburgh, of Brazil’s cumbersome politics and mediocre policy outcomes in The Deadlock of Democracy in Brazil is a must-read for any Brazil hand…



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