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Visiting Fellow Roger F. Noriega

Upon the outbreak of the global financial crisis, Brazil's president Luiz Inacio Lula Da Silva famously asserted that the economic downturn was George Bush's problem, not Brazil's. Unfortunately, such brave talk was soon overwhelmed by the staggering depth and breadth of the global financial shock. The Brazilian stock index (BOVESPA) plummeted by 45% since June; the real slumped 29% in three months; and economic output has expanded by its slowest pace since 2006.

With more than a decade of economic growth and poverty reduction at stake, Brazil announced a stimulus package to counter these dire developments--$3.6 billion in tax cuts and $10 billion of credit for indebted Brazilian firms. Even with government intervention, Lula concedes that widespread job losses and reduced export revenue may compound the nation's problems.

As the Brazilian president ponders his legacy, he should understand that a stimulus by itself will do no better than to preserve the status quo: an improved but fragile economy whose steady and sustained growth is threatened by lingering social and political obstacles. If Lula and his team think strategically, they will respond to the widespread uncertainty about the economy with a series of bold and overdue reforms.

Lula can begin by reforming Brazil's antiquated and byzantine tax system, which requires an average of 2,600 hours to pay corporate taxes and eats up almost 70 percent of profit. Brazilian entrepreneurs often joke that their real work begins around April--they spend the first quarter of each year completing tax returns. In today's economic climate, that is a particularly bad joke.

A simplified tax structure would be a blessing for small- and medium-sized enterprises, which generate most of the jobs and wealth in growing economies. It also would help attract foreign direct investment (FDI), which has stagnated during the last decade. Indeed, since 2000, FDI inflows have fallen from 5% to less than 2% of GDP. (In addition, much more reliable protections for intellectual property will do much to attract foreign capital.)

As multi-billion dollar stimulus packages are being unveiled around the world, counseling fiscal prudence may be out of fashion. Indeed, Brazil's investment in internal infrastructure has never been more urgent. Nevertheless, Brazil's excessive and misguided government spending has been a chronic drag on the country's competitiveness. Bringing spending under control, even with presidential elections approaching, will be a welcome policy.

Spending on education is another worthy investment in a society striving for greater equality. But accessibility of the classroom is meaningless without a commitment to quality. In fact, more than 20 percent of Brazilian students repeat a grade in secondary school, higher than any other Latin American country (and three times higher than students in Niger, Ghana, and Zambia.) Education is a sound investment only if it produces results.

In developing nations, income inequality always is a serious problem. But this gap is especially grave in Brazil, where the poorest 10 percent of inhabitants claim a smaller share of their country's income now than they did twenty years ago. Economic opportunity will not be shared more efficiently so long as political institutions and the rule of law are weak. Enjoying historic popularity, Lula should invest some of the considerable political capital he has earned to crack down on corruption and cronyism and to modernize Brazil's political institutions so they better serve all citizens.

Lula also could exert global leadership by working to end the gridlock at the World Trade Organization negotiations, doing his part to promote a rules-based trading system and ending agricultural subsidies. An open trade policy will help alleviate some of the pain of falling oil prices, incentivize exports, and support poor farmers in the country's hefty agricultural sector.

Like Lula himself, 20 million of his fellow countrymen have pulled themselves out of poverty in the last six years. Lula's anti-poverty program, Bolsa Familia, has benefited more than 11 million poor Brazilians. Yet government spending alone does not offer a permanent solution to poverty. The only way for Lula to consolidate his legacy in the wake of this deep financial crisis is to push long-term structural reforms and investments in human capital.

Roger F. Noriega is a visiting fellow at AEI. His law and advocacy firm, Tew Cardenas, LLP, represents U.S. and foreign governments and companies. Apoorva Shah is a research assistant at AEI.