IE Focus | By Antonio Montes, Director of International Development, IE University

This year Brazil is facing a much greater challenge than having to organize the World Cup. It also has to lay the foundations that will enable it to really become the world’s fifth greatest economic power.

It would appear that all the analysts, both Brazilian and foreigners, agree that 2014 will be a crucial year for Brazil, and not just because it will be hosting the world cup.

The country is in a particularly delicate situation, due to several factors. First we have the revaluation of the American dollar, which has worsened Brazil’s already deficient trade balance, and which has also made it more difficult to control inflation. Second, there is the fact that Europe is beginning to emerge from the crisis as a result of significant sacrifices which comprise more than just downsizing, and include reforms that have made Europe-based industry much more competitive, highlighting much that is lacking in Brazil’s industrial sector. Thirdly, the country is facing problems that are intrinsic to its economy and Brazilian policies of recent years.

Brazil has changed drastically over the course of the last decade, to become the world’s 7th power thanks to the high rate of growth of its GDP. Brazil currently has a newly created middle class that makes up around 55% of the population, some 10 million people who consume and demand goods that they hitherto could not afford. All this has had an equally significant impact on inflation, although it still stands at the reasonable rate of approximately 5%. However, neither industry nor infrastructures have grown to the kind of levels needed to meet the growing demands of new consumers.

This is one of the greatest challenges that Brazil’s new government will have to face after the upcoming elections in October. Although she has not yet confirmed that she will be up for re-election, President Dilma Roussef, seems to be the favorite, and there is even speculation that from the first round she would have enough support to govern without having to go on to a second round.

The president has had her ups and downs, particularly during the popular protests last June, partly caused by the feeling that public money was being wasted on useless infrastructures for the world cup when there were many other things lacking that should have been attended to. Nevertheless, she made an excellent comeback, and now enjoys the support of 56% of the electorate, having responded to popular demand with specific measures, such as the hiring of 6,700 foreign doctors to improve the healthcare system, concessions to address some of Brazil’s urban transport problems, and, particularly, a recognition that things were not working well. Also, although it may seem incredible, the result achieved by Brazil’s national football team in the world championship will also play a decisive role in the electoral result.

When all is said and done, it is clear the policies adopted to date, which yielded results in the early years of her mandate, is not what is needed to meet the country’s future needs. A far more firm and decisive commitment is needed to support the private sector in such a way that it will make it possible to carry our infrastructure projects, which are so badly needed for the country’s development, and to which the treasury allocated 18% of GDP, which is not sufficient by any means (India, another member of the BRIC club, allocated 36% of its GDP to infrastructure). Brazil needs new highways, airports, ports, high-speed train networks, etc. It is way behind, and unless it able to attract major investment in the form of private capital, it will be impossible to carry out work that is not only needed, but was also promised.

Moreover, the new government will have to promote the necessary means to develop Brazilian industry and make it more competitive. Not only are labor costs very high in Brazil in comparison with other countries, but it will also have to make a major effort in terms of training if it is to have enough skilled labor, which is something else that is greatly lacking in the country.

Finally, Brazil needs to regain credibility in fiscal terms. The market sees this government has followed an expansionist policy, without limits or goals, often scaring entrepreneurs, and making them look to other, less demanding markets. Predictions of a drop in the quality of its debt currently abound in Brazil.

This year will have to be a year of cutbacks, internationalization, solution of structural problems, in order to attract and retain capital, slow down inflation, and help lower tax rates while consolidating a modern and dynamic economy with constant growth. It is the only way to reposition Brail definitively as one of the world’s great countries , and meet its aim of becoming the world’s 5th largest economy.

Via@IEBusiness, EL PAÍS

About the author