June 27, 2013

Don't Give Up on Rio Yet

By Benjamin Shepherd for Investing Daily

When we witness massive street protests in emerging market nations, it typically conjures preconceptions of democratic uprisings and revolts against corruption. While that’s emotionally satisfying to citizens of liberal democracies, it’s just not always the case.

Millions of Brazilians have taken to the streets of the country’s major cities over the past few weeks, but the fact is, Brazil broke its chain of dictatorships in 1985 and has evolved into a functional, pluralistic democracy with guaranteed civil liberties.

To be sure, the government has often resorted to heavy handed populism to keep its citizenry happy, but President Dilma Rousseff has done more to combat corruption and improve the average Brazilian’s lot in life than most past presidents.

Although corruption remains a problem in Brazil, Rousseff has struck an extremely hard line on the issue and has forced several of her ministers to resign simply on the basis of allegations. She has also helped push through sweeping tax reforms and infrastructure improvements to help combat the country’s economic stagnation of late. What’s more, she has implemented labor market reforms to reduce the cost of hiring employees and to liberalize the job market.

Unfortunately for Brazil’s social stability right now, most of Rousseff’s reforms have been designed to exert a long-term, cumulative impact on the country’s economy, so few Brazilians have seen any immediate and tangible results from her efforts.

Instead, what most Brazilians have seen is massive and seemingly profligate spending on preparations for the 2014 World Cup and the 2016 Olympic Games, even as the government is cautious about spending in other more vital areas. Brazil has a long history of battling inflation, currently running at about 6.5 percent, so the government has been careful not to stoke it while at the same time strategically investing to help the country’s economy grow.

Walking that tight rope has resulted in popular discontent; transit fare increases in many of the country’s larger cities were the final straw. Movimento Passe Livre (the Free Pass Movement) organized most of the mass protests against the hikes but other political organizations in Brazil, on both the right and left, have gradually been co-opting them for their own purposes. That’s the main reason why the demonstrations have continued, even as most of the increases have been delayed and 11 cities have even lowered mass transit fares.

However, Rousseff has done a superb job of managing the situation and has maintained surprisingly high approval ratings, despite the protests and economic uncertainty. That’s partly because she has generally supported the demonstrations as a show of democratic strength, a rather shrewd move, and has helped ensure that the disparate groups involved don’t coalesce around a common agenda.

And while government troops have been used to control the protests in five major cities, including the capital, so far law enforcement efforts have been relatively successful with only a few outbreaks of street violence.

Given Rousseff’s deft management of the situation, polling data shows that if the elections scheduled for October 2014 were held now, Rousseff and her party would likely maintain control of the government.

However, to ensure that result next year, the president and her government need to address the heart of the protestors’ complaints, which aren’t really about high transit fares, wasteful government spending or corruption.

To put it bluntly: Brazil is rife with grinding poverty. It’s true that he country has been steadily moving up the socioeconomic ladder, according the United Nations Development Program and its Human Development Index, largely thanks to improvements in health care and education. But a very wide chasm still exists in the country between the haves and have nots.

The poorest segment of Brazilians makes up a third of the country’s population, while the extremely poor make up about 15 percent, virtually unchanged from a decade ago. Shantytowns are still all too common as well. Despite its building boom, the country suffers from a housing deficit of nearly 7 million units.

The reality of a rapidly growing economy is that some members of society ultimately get left behind, at least in the short term. It’s particularly telling that many Brazilians spend more than a quarter of their incomes simply on transit fares. Couple that with a high tax burden—tax revenues total about 36 percent of the country’s gross domestic product—and you have a perfect recipe for social unrest.

There’s no denying that Brazil has problems, but most of them are the result of growing pains. These recent developments bear watching but, for now, there’s little reason to exit the country. Both the government and the public are working to get a handle on the situation.

The Brazilians are a resourceful and entrepreneurial people; we’re optimistic that they’ll succeed in getting their society back on track.

Courtesy Benjamin Shepherd for Investing Daily - profitable advise for smart people (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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