As the Brazilian Economy cools Rousseff looks to Tax Cuts and Privatization to Restore Economic Momentum

Posted by PITHOCRATES - July 29th, 2012

Week in Review

The president of Brazil is Dilma Rousseff.  She belongs to the Workers’ Party.  A party that enjoys strong support from the labor unions.  Because it leans towards socialism.  At least in state-ownership of some state assets.  In particular those that employ a lot of people.  But the great Brazilian economic growth is sputtering.  Like an engine no longer firing on all cylinders.  Because of her party affiliation one would expect Rousseff to adopt Keynesian policies.  To stimulate their economy with some government spending.  But no.  She’s talking about doing something completely different (see UPDATE 1-Rousseff ‘very worried’ about Brazil economy by Alonso Soto and Brian Winter posted 7/23/2012 on Reuters).

President Dilma Rousseff is pessimistic about Brazil’s chances for a meaningful economic recovery this year and is pushing ahead with new measures aimed at lowering taxes and increasing investment, hoping they might give the economy a lift by 2013, government officials told Reuters.

The measures include a consolidation of some overlapping federal taxes; a new round of concessions that would allow the private sector to manage more of the country’s congested airports and seaports; and a more aggressive effort to reduce electricity costs for manufacturers and others, the officials said on condition of anonymity because they were discussing private policy discussions…

Rousseff, a trained economist, has reacted with several targeted tax cuts and more than half a dozen packages aimed at stimulating consumption and investment. However, many business leaders and foreign investors have complained that her policies have been too ad hoc and narrow in scope, citing forecasts that now see growth as low as 1.5 percent this year…

Some business leaders have called for Rousseff to take even more dramatic measures, such as an omnibus reform package that could substantially reduce or simplify Brazil’s tax load. Rousseff has opted instead to pursue more targeted reforms to help struggling sectors on a case-by-case basis, believing that Congress would block a more ambitious, organized effort.

So Rousseff would have been a more aggressive tax cutter if it weren’t for Congress.  So one can hardly blame her for her ad hoc ways.  You have to do the best you can with the cards you’re dealt.  Especially when your party tends to favor state ownership of industry and higher taxation to pay for the labor in those state-owned industries.

Lowering taxes and electricity costs?  Privatization?  Other than that part about consumption one would think that Rousseff’s economic training was of the Austrian school variety rather than the Keynesian brand.  Whatever her economic roots with policies like these Brazil should rebound well from this momentary interruption in their economic growth.

The move most likely to stir investors, for both practical and symbolic reasons, is the new round of port concessions. Airports and seaports are routinely cited as some of the country’s most crippling bottlenecks, slowing everything from commodities exports to business travel, as public investment failed to keep up with the boom in the economy over the past decade…

The officials declined to say which additional airports Rousseff was considering, but one of the targets could be Rio de Janeiro’s international airport, which needs renovations ahead of the 2014 World Cup and 2016 Olympics. Rio’s governor, Sergio Cabral, described the airport in an interview with Reuters last year as being like “a third-rate bus station…”

The Brazilian economy had been roaring thanks to the private sector.  What wasn’t keeping up with the private sector was the public sector.  While people were doing remarkable things in the private sector the best the government could do was make Rio de Janeiro’s international airport “a third-rate bus station.”  Which just goes to show you that for the best economic activity you have to release the human capital of the people.  When you let these people think.  When you let them create.  When you let them create the things they thought about you get the kind of explosive economic activity that put Brazil in the BRICS emerging economies.  While running ‘third-rate bus stations’ just doesn’t quite do it.

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