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Why Brazilians Are Protesting

To make matters worse, Brazilians have watched their government spend enormous sums of taxpayer money building stadiums for the 2014 World Cup. This has exacerbated popular discontent over lousy public services and shoddy infrastructure, and it has also contributed to growing anger over corruption. The Brazilian Football Confederation is famously corrupt, and President Dilma Rousseff, who took office in January 2011, has already seen more than half a dozen government ministers resign due to scandals. Meanwhile, the so-called mensalão scandal -- a congressional bribery scandal that dates back to the presidency of Lula da Silva, Rousseff’s predecessor -- has produced no fewer than 25 convictions.

Brazilian officials have promised that the World Cup will bring their country significant economic benefits. We should be highly skeptical of such promises. As economist Dennis Coates has written, “There is a wide array of evidence that sports mega-events, including the World Cup, have little net impact on the number of tourists arriving and staying at the host destination. Without substantial tourists over and above the normal tourist traffic, unless the World Cup fans spend substantially more than the usual travelers, there can be little new impact on the local economy of the mega-event.”

But regardless of what economic benefits Brazil receives from the World Cup in 2014, its economy needs a boost right now. After reaping the fruits of a rapidly expanding labor force and booming commodity exports for several years, the Brazilian economy can no longer rely on swift “catch-up growth.” The days of 7.5 percent annual growth rates -- or even 4 percent annual growth rates -- are gone, most likely forever. “Brazil will continue growing at pretty anemic rates,” World Bank economist Pablo Fajnzylber said last September. “It will likely not go back to that 4 percent.” Brazilian growth slowed dramatically in 2012, thanks to an overvalued currency and a major economic slowdown in China (which is Brazil’s biggest trading partner). Indeed, Latin America’s largest economy grew by only 0.9 percent last year, and it grew by only 0.6 percent in the first quarter of 2013. Annual inflation is running at 6.5 percent, and frustration with rising prices has prompted many Brazilians to join the ongoing demonstrations.

In short: Brazil needs a new economic model. Unfortunately, many of its policymakers are tempted to borrow from the China model of state-led capitalism. “It used to be that all of Latin America looked to Europe as its ideal model, and that one day Brazil, Argentina, and Colombia would become a Portugal, Italy, Greece, or Spain, if it was lucky,” a Brazilian diplomat told the Financial Times last year. “But now, given the eurozone crisis, that is no longer the case. And, increasingly, China is becoming a more attractive or plausible model.”

Yet the China model is no longer working for China, and it would not work for Brazil. After all, the Brazilian government is already much too involved in the economy, which is why the South American giant ranks 100th in the Heritage Foundation’s Index of Economic Freedom (Mexico is 50th) and 130th in the World Bank’s Ease of Doing Business Index (Mexico is 48th). Brazil’s tax code is far too complicated, its level of taxation is far too high, and its burdensome labor regulations are a major drag on economic activity. Over the long term, reviving and maintaining strong economic growth will require government officials to reduce the “Brazil cost,” i.e., make the country more welcoming to business investment and entrepreneurship. It will also require them to improve Brazil’s weak education system and its hopelessly inadequate infrastructure.

The transition to a more sustainable, free-market economic model won’t be easy. As Brazilian-American economist José Scheinkman said last year, “We have to do the tough stuff.” Many Brazilians won’t be happy with the necessary reforms -- which means we should expect more protests in the future.