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Brazil’s Image Takes a Beating

In a way, those convictions reflect progress in the Brazilian judicial system. Still, the recent stream of corruption cases has exposed a widespread problem. Just last Saturday, Brazilian president Dilma Rousseff, Lula’s successor, fired all government officials connected to a new bribery scandal. To date, Rousseff has lost seven cabinet ministers to corruption allegations.

Brazil’s corruption plague has caused all sorts of economic damage. In particular, it has stifled infrastructure development, including the construction and renovation of stadiums for the 2014 World Cup. How urgently does Brazil need better infrastructure? Go ask the people of Recife and other northeastern cities, who in late October endured their worst electricity blackout in over a decade. Brazilian energy minister Márcio Zimmermann said there had been “a total collapse of the northeastern grid.” It was the fifth large-scale blackout in Brazil since President Rousseff’s September 6 declaration that electricity rates would be reduced.

“The government has to create regulation that encourages investment, maintenance, and modernization of the transmission and distribution systems in Brazil,” Adriano Pires, director of the Brazilian Infrastructure Center, a Rio-based consultancy, told Bloomberg News. “You’re having a lot of investment in generation, but the investment in transmission isn’t happening in the same proportion.”

In addition to its infrastructure deficiencies, Brazil also has a ridiculously complicated and onerous tax code. The latest reminder of that came on October 9, when the Latin Business Chronicle released its 2012 Latin Tax Index, which ranks Brazil dead last. “The intricacies of the Brazilian tax system also require from taxpayers a whopping 2,600 hours per year (or 108 days) to pay taxes,” the Chronicle reports, citing World Bank data. “That’s the highest number in Latin America (five times higher than the regional average) and the worst among 183 countries worldwide.” Brazil also ranks dead last in the Chronicle’s Latin Globalization Index, which means it is “the least globalized country in Latin America.” Economist Walter Molano of BCP Securities explains that “two of the main reasons” for Brazil’s low globalization score are its “poor infrastructure and complex tax system.”

While Brazil “will most likely improve” in the 2013 Latin Tax Index, given President Rousseff’s recent tax cuts, it still needs fundamental tax reform and a broader shift away from protectionism. In the World Bank’s new Ease of Doing Business Index, Brazil ranks a dismal 156th (out of 185 countries or territories) for the ease of paying business taxes, and it ranks 130th overall. The South American giant ranks far behind Mexico, as it also does in the Heritage Foundation’s Index of Economic Freedom. Even though Mexican economic growth slowed in the third quarter, Mexico is still expected to grow more than twice as fast as Brazil this year.

For that matter, Nomura economist Tony Volpon believes that Brazil’s potential growth rate (i.e., its ceiling for noninflationary growth) has declined from 4 percent to around 3 percent. If the country wants to boost growth, keep inflation under control, and maintain its status as the biggest economy in Latin America, it must build on President Rousseff’s tax cuts and privatization measures with bolder, more sweeping reforms. Otherwise, Brazil could enter a prolonged period of economic stagnation that would make its crime problems even harder to solve.

(You can read this article in Spanish here.)