Monday 21 March 2016 3:59 am

Petrobras corruption is a sideshow: Protectionism and profligacy are destroying Brazil’s economy

"Brazil,” Charles de Gaulle quipped in the late 1950s, “is the country of the future – and always will be”. Many a true word is said in jest.

For the past month, the country has been gripped by protests, spurred on by outrage at virulent corruption inside the state-owned oil firm Petrobras.

The corruption scandal has been wide-ranging, with prosecutors seeking the arrest of former President Luiz Inácio “Lula” da Silva and a number of parliamentarians on charges of accepting bribes in exchange for the granting of lucrative construction contracts.

The response to the charges from the country’s technocratic President Dilma Rousseff, Lula’s former chief of staff and hand-picked successor, has been more reminiscent of Hugo Chavez-era Venezeula than of the model of democratic accountability Brazil has sought to be since the end of military rule in 1985. In a move to grant Lula effective immunity from prosecution, last week Rousseff appointed him to the post of Chefe da Casa Civil – effectively the country’s Prime Minister.

With Rousseff’s move having thrown fuel on the fire of existing tensions, few expect street protests to dissipate soon.

But corruption, while important, is a sideshow. The disastrous economic record of the ruling Workers’ Party (PT) is now being brought into sharp focus.

While Brazil had been viewed as a regional exemplar of tight fiscal policies in the late 90s, its public debt is set to reach 93 per cent of GDP this year – a move that has prompted S&P to strip the country of its investment-grade rating.

The global drop in commodities prices has undoubtedly contributed to the current malaise. External factors, though, are no excuse for the PT’s profligacy and failure to tackle a domestic business climate that discourages inward investment, frustrates startups, and stifles entrepreneurship.

There is no clear answer – other than a risky acceleration in deficit spending – as to how the PT will turn this situation around. Plans to bring about a 0.7 per cent budget surplus this year have been unceremoniously shelved.

Over the past decade, GDP per capita has rocketed from under $5,000 a year to over $11,000. Associated tax revenues more than doubled in the same period. Rather than use the proceeds of growth to fund infrastructure, however, they have been squandered on a dramatic expansion of the welfare state.

While one would ordinarily expect an emerging market to spend roughly 25 per cent of its national income on investment, Brazil’s average spend over the past decade has been less than a fifth. Rio de Janeiro may have an attractive Olympic village and refurbished Maracanã stadium, yet Brazil lacks a single inch of high-speed railway track, its roads are falling apart, and the state-owned airport system was last upgraded in the 1970s.

Brazil remains one of the highest tax economies in the world, with a corporation tax rate of 34 per cent – markedly higher than the 25 per cent rate in regional competitor Colombia.

Protectionism remains the order of the day. Crippling restrictions and tariffs are applied to 60 per cent of imports in order to prevent local firms from being undercut – a regime that has been in place since the mid-70s. As a result, consumer prices are among the highest in the world, with electronics and textiles costing roughly double what they do in the United States.

The public sector and labour market also remain unreformed. The country’s constitution limits Brazilians to a 44-hour working week and, rather opaquely, index links the value of pensions to average consumer prices. Hamstrung by the myriad far-left parties forming the governing coalition in Congress and the threats of powerful union barons, constitutional reform is currently impossible. Instead, the PT has spent the last 13 years tripling the size of the civil service while simultaneously hiking state salaries across the board.

Against a background of corruption, a stubborn refusal to address even the most pressing of reforms, and no prospect of fresh elections until late 2018, Brazil’s prospects look increasingly bleak. De Gaulle, it pains me to say, may well have been right.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.