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Monday, November 06, 2006
Commentary

Ten Reforms for Lula

Ten key reforms that can boost economic growth in Brazil.
STRONG POTENTIAL Lula with US president George W. Bush at the White House. (White House photo by Paul Morse)
KEY TRADE PARTNER Lula with Chinese president Hu Jingtao. (Photo Ricardo Stuckert)
TALKS, BUT NO CIGAR:  Lula and Brazilian foreign minister celso Amorim (left) with EU Council president Wolfgang Schüssel (center). (Photo: Österreichische Präsidentschaft).

BY CHRONICLE EDITORS

He won a second term. Now Brazilian president Luiz Inacio Lula da Silva must use that mandate to boost economic growth and competitiveness.

"Custo Brasil (The Brazil Cost) continues to be a major problem and will only diminish slightly in the next four years," says Riordan Roett, director of the Latin America studies program at Johns Hopkins University.

To reduce that cost and reach his own goal of 5 percent GDP growth the next few years, Lula should implement the following reforms:

1. Reform trade policy. Forget Mercosur, which is increasingly looking like a political discussion forum rather than the economic alliance it originally planned to be. Instead, Brazil should concentrate on Asia, Europe and the United States. The South American giant needs to negotiate more free trade agreements, as Lula’s rival Geraldo Alckmin called for. Short term, Asia is the main option for Brazil and Mercosur, Roett says. However, as great as the demand from China is, Brazil also needs to boost trade with the United States and Europe. It should finalize its longrunning negotiations with the European Union (but independent of Mercosur, which will only slow it down) and reach some kind of free trade agreement with the United States, a key and fast-growing market for Brazilian exports. Brazil also needs to make imports easier, especially in the technology sector.

2. Reduce state spending, which is a drag on the economy. The state has a tax burden of nearly 40 percent of GDP. Lula can do this by various means, including privatization.

3. Privatize. Despite his reent campaign attacks against the privatization process in the 1990s, Lula should acknowledge that privatization has been a big benefit overall to Brazil and is a valuable tool for further growth. Mining giant CVRD and aircraft manufacturer Embraer have both become world-class companies in large part because of privatization. And while it could use more competition, the telecom sector also became more efficient thanks to privatization. Ideal candidates are the three state banks, including Banco do Brasil, the largest in Latin America. It typically lags Banco Bradesco, Brazil’s largest private bank, in net income and efficiency.

4. Reduce taxes. The tax burden is too high and complicated.

5. Central Bank independence. Lula deserves praise for granting de facto autonomy to the central bank and for appointing Henrique Meirelles to head it. Now Lula needs to take the next step and grant the bank formal autonomy. This would boost investor confidence and help offset concerns about changes in Lula’s economic team.

6. Reduce the public debt burden and budget deficit. See Privatize.

7. Reduce corruption. Brazil is not the worst offender in Latin America, but clearly has a major problem with corruption. Lula needs to go on the offensive against corruption to regain credibility. In addition to privatizing state companies (a key source for corruption), he needs to implement strict ethics codes in all public entities and ensure that they are actually respected.

8. Liberalize labor regulations. Make it easier to hire and fire, a proven boost to employment anywhere in the world.

9. Reduce interest rates. Reduced government expenditure will help reduce the need for the sky high interest rates, which are among the highest in the world. According to The Economist, only Turkey has higher interest rates among leading emerging markets. And if we compare with its Latin American neighbors, Brazil’s short term rate of 13.7 percent is nearly twice that of Mexico and three times higher than the rate in Peru.

10. Social security reform. Reform social security further and start implementing past reforms. 

These reforms will go a long way in providing the necessary incentives for local and foreign investors to boost spending in Brazil as well as providing an environment that will stimulate more trade and economic activity.

The ball is now in your court, President Lula.

© Copyright Latin Business Chronicle.

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