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ROBERTS: Brazil’s economic woes show limits of state meddling

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ANALYSIS/OPINION:

Brazilians are angry. President Dilma Rousseff's government is spending billions on beautiful new stadiums — and it's all about image.

And when billions of viewers tune in to the 2014 soccer World Cup and 2016 Summer Olympics in Rio, Ms. Rousseff wants them to see what appears to be a First World country. But that's not what Brazil's middle class sees when they look out their windows.

What greets the average Brazilian's eyes is an urban landscape of inadequate and, at times, crumbling infrastructure. Aging and crowded, their roads, airports, bridges and ports often have a decidedly Third World cast. And what makes the sight so irksome is the knowledge that this degradation of facilities continues — despite the fact that they pay high taxes every day in many ways.

Ordinary Brazilians are also upset by the widespread corruption of self-serving elites. Brazil's corporatist private-sector — often shielded from global competition by protectionist policies and political cronyism — has honed tax avoidance to a fine art.

Last month, though, Brazil's bourgeoisie went all Howard Beale: Like the fictional newscaster in the movie "Network," millions of middle-class Brazilians realized they are "mad as hell," and they started sounding off about it.

The first demonstrations erupted over a seemingly minor hike in bus fares. But the protests — occasionally turning violent — have continued even as Pope Francis made his first official visit to Brazil to celebrate World Youth Day.

The protests are taking hold. Ms. Rousseff's popularity has plummeted. Earlier this year, more than half of the population supported her. A recent poll found that her job-approval ratings had dropped to around 30 percent.

It is not hard to see why. A pizza can cost more than $30 in Rio and inflation is picking up, now topping 6 percent.

Meanwhile, high tariffs and excise taxes have jacked up prices for many imported products that the middle class wants (e.g. smartphones, iPads) and that small businesses need (e.g. software). These policies — implemented by Ms. Rousseff's left-of-center government — mimic the failed "import-substitution" policies of the socialist 1970s. As a result, a Volkswagen made in Sao Paulo sells for thousands of dollars less in Mexico than it does in Brazil. Brazilians often find it cheaper for to fly to Miami to do their shopping.

Meanwhile, voracious government spending — by state and local officials as well as the federal bureaucracy — eats up more than a third of Brazil's gross domestic product. To fund those expenditures, the government imposes an avalanche of taxes — close to 90 separate levies by one recent count. Many come in the form of consumption taxes, which fall disproportionately on the middle class.

Not surprisingly, the economy has started tanking. Global demand for Brazil's agricultural and mineral exports is weakening. The International Monetary Fund projects a growth rate of just 2.5 percent this year, far below the average of 5 percent for developing and emerging economies and slightly under the 3 percent rate projected for the Latin American and Caribbean region.

The economic growth Brazil needs will come again — but only when the country returns to the policies of economic freedom begun in the 1990s under President Henrique Cardoso. Workers will become more productive when their employers are no longer shielded from foreign competition. And more Brazilians will find jobs when the current rigid labor codes that discourage hiring are reformed. (Depending on the industry, the cost of hiring in Brazil now ranges from 70 percent to 180 percent higher than the average wage.)

Ms. Rousseff's state-centric policies have left too many Brazilians out of work and trapped in a cycle of government dependency. But they stand to gain the most if the middle-class demonstrations lead Brasilia to restore the growth-oriented reforms of two decades ago. The nation's poor will discover that their incomes can rise and their lives can be enriched when they are permitted to work and invest as they see fit.

A 25-year veteran of the State Department, James M. Roberts is a research fellow in the Heritage Foundation's Center for International Trade and Economics.

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