The China Temptation

What a difference a year makes.

In August 2011, as the European debt crisis raised fears of another international financial panic, Brazilian officials were bragging about their country’s impressive economic strength and record-low unemployment rate. “This is the second time that a crisis affects the world,” said President Dilma Rousseff, “and it is the second time that Brazil doesn’t shake.” The perception of Brazil as a booming economy that was insulated from the global turmoil had prompted an influx of foreign businessmen hoping to get rich (or richer). “If the rest of the world is cratering,” a Rio-based American banker told the New York Times, “this is a good place to be.”

In August 2012, amid a slowdown in China and other developing countries, Brazil is teetering on the brink of recession, largely because of an overvalued currency and sluggish exports. Its economy barely grew at all (0.2 percent) in the first quarter of this year, and its persistent weaknesses have suddenly been magnified. Even the Brazilian services sector, which had been buoying the economy, is now slumping: Its activity index (as measured by the financial giant HSBC) hit a three-year low in July. As for Brazilian industrial production (approximately one-third of the national economy), it has “failed to respond to government stimulus measures and a series of aggressive interest rate cuts,” notes the Wall Street Journal. Writing in the Miami Herald last week, Latin America expert Susan Kaufman Purcell declared that “Brazil’s economic future does not look nearly as bright as its recent past.” Indeed, while unemployment remains relatively low (for now), Brazil is no longer seen as an unstoppable economic powerhouse.

In other words, the country has arrived at a crossroads. The good news is that Brazil has an opportunity to strengthen its economic fundamentals by adopting certain long-overdue structural reforms. The bad news is that many Brazilian policymakers would rather embrace the type of state-led capitalism practiced in China.

“It used to be that all of Latin America looked to Europe as its ideal model,” a Brazilian diplomat recently told the Financial Times. “But now, given the eurozone crisis, that is no longer the case. And, increasingly, China is becoming a more attractive or plausible model.”

Of course, the Brazilian government already plays a large role in the economy, and Brazil ranks much lower than Chile, Peru, Colombia, and Mexico in the Heritage Foundation’s Index of Economic Freedom. The current Brazilian economic model is somewhere between the free-market Chilean model and the state-led Chinese model, but closer to the latter, albeit with a fully democratic political system and the rule of law, both of which are conspicuously absent in China.

The question is: Will Brazil become more like Chile or more like China? The answer will have profound implications for a country of nearly 200 million people that fashions itself a rising superpower.

To understand the best course for Brazil, simply consult the World Economic Forum’s 2011–12 Global Competitiveness Report, which lists the seven “most problematic factors for doing business” in Brazil as follows: (1) “tax rates,” (2) “tax regulations,” (3) “inadequate supply of infrastructure,” (4) “restrictive labor regulations,” (5) “inefficient government bureaucracy,” (6) “inadequately educated workforce,” and (7) “corruption.” The report affirms that such factors “hinder [Brazil’s] capacity to fulfill its tremendous competitive potential.” In the Global Competitiveness Index, Brazil ranks behind Chile, Puerto Rico, Barbados, and Panama.