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Brazil's Economic Growth Shouldn't Be Overlooked

By Ian Bremmer

When it comes to emerging-market success stories, Brazil is usually the most overlooked of the so-called BRIC countries, a group that includes Russia, India and China. Trends underlying Brazil's political development and the country's ability to profit from a favorable international investment climate suggest that's a mistake.

The story behind Brazil's growth has become a familiar one. When Luis Inacio Lula da Silva became the country's first elected "leftist" president in October 2002, many observers expressed deep skepticism that he would honor campaign pledges to pursue disciplined economic policy. Some fretted that the former union negotiator would prove a Brazilian Hugo Chavez, lavishing cash on social projects to boost his popularity at the expense of economic liberalization.

That hasn't happened. Lula has demonstrated again and again that he understands the value of compromise and of maintaining the trust of foreign investors in Brazil's success. He has proven that he's a pragmatist, not a Chavez-style ideologue.

During his tenure, the state has made its debt repayments on schedule. The economy has generated millions of new jobs. The lowest inflation rates in decades and an expansion of consumer credit have bolstered the purchasing power of Brazilians rich and poor. That's a large part of why he won easy re-election in October 2006.

Thanks in part to surging commodity prices, Brazil has built a healthy fiscal surplus. A strong current account surplus has drawn some U.S.$160 billion into the central bank's reserves. Yields on the country's sovereign debt remain within about 2.2 percentage points of U.S. treasuries, as investors become more confident that liquidity jitters elsewhere will not drive Brazil toward turmoil.

The country's GDP could reach 5 percent growth this year and should remain above 4 percent in 2008. A lot of this expansion comes from favorable conditions beyond the country's borders. High global liquidity, China's surging demand for Brazilian exports, and rising commodity prices have boosted the country's fortunes. But Lula still gets much of the credit for strong growth and the 60-plus percent approval ratings that go with it, helping him maintain a strong support base in Brazil's congress despite a seemingly endless series of scandals involving some of his closest associates.

Generally speaking, investors like what they see. Foreign direct investment for the first eight months of this year reached $26.5 billion - compared with just $18.8 billion for all of 2006. A recent report from the United Nations Conference on Trade and Development revealed that a survey of 192 multinational companies ranks Brazil the fifth most attractive country in the world for investment over the next three years.

Brazil's economic horizon is not without clouds. The country's growth rates remain by far the lowest of the four BRICs, driven by a tax burden of nearly 35 percent of GDP and often painfully slow progress on key reforms. Though foreign investment continues to flow, some observers are still skeptical of the near-term prospects for much-needed structural reforms.

But most underestimate the likelihood of approving reforms that don't make headlines but are important for attracting private investment. Brazil's government looks set, for example, to approve legislation that facilitates increased private investment in the natural gas sector to address looming threats of power shortages across the country. There's legislation in the pipeline to reduce obstacles to investment flowing from ambiguities in the country's environmental regulations. Anti-trust legislation is also heading toward congressional approval.

But the best news may come on tax reform, long one of the biggest stumbling blocks for would-be investors in Brazil. A greatly simplified tax plan - a unified federal value added tax and a new state-level VAT - is bound for congress, likely in the next few weeks. In addition, high growth and the revenues it generates for the government will help Lula redistribute funds toward the regions that figure among the potential losers from these reforms.

Continuing economic growth in China is a big part of the Brazil story. But there's another potential international development that can boost the country's longer-term prospects still further. With growing bipartisan support in Washington for the development of biofuels, it's increasingly likely that the U.S. Congress will do away with the 53 cent-per-gallon import tariff on Brazilian sugar cane ethanol over the next several years. U.S. corn production will simply not be able to meet growing demand for a viable hydrocarbon alternative.

Obviously, there are plenty of good reasons to invest in Russia, India or China. All three have solid growth trajectories. All three are increasingly open for business in many sectors.

But Brazil enjoys important long-term advantages over all of them. China's political future will remain uncertain so long as hundreds of millions of citizens have few accepted avenues for the redress of a growing list of political, economic and environmental grievances. India's politics are increasingly dominated by smaller parties with local interests to protect - often at the expense of the country's liberalization and economic growth. Russia continues to be plagued with some of the investment-unfriendly attributes of a classic petro-state.

Brazil, on the other hand, has institutionalized some important political gains. The transformation of the country's political left, a domestic political consensus in favor of disciplined and market-friendly macroeconomic policy, and its stable democratic governance have created a solid foundation for steady and predictable growth over the next several years.

Ian Bremmer is president of Eurasia Group, a political-risk consultancy and the author of "The J Curve: A New Way to Understand Why Nations Rise and Fall,". He can be reached via e-mail at

(c) Tribune Media Services, Inc.

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