AN INTERVIEW WITH PAULO SOTERO

June 2007
Energy Tribune

Paulo Sotero Marques is the director of the Brazil Institute of the Woodrow Wilson Center. Prior to that, he spent 17 years as the Washington correspondent for Estado de S.Paulo, a leading Brazilian newspaper. Since 2003 he has been an adjunct lecturer at Georgetown University. He has a B.A. in history from the Catholic University of Pernambuco, Brazil, and an M.A. in journalism and public affairs from American University in Washington, D.C. He corresponded with ET’s Robert Bryce in May via e-mail.

ET: There’s been a great deal of talk in the U.S. lately about the promise of Brazil. And yet, from a purely economic standpoint, the country seems stuck. That is, its growth appears slow compared to countries in Latin America like Chile, or the explosive growth in another member of the BRIC, China. What do you see as the key obstacles to the growth of the Brazilian economy?

PS: Excessive and inefficient public [spending] is a big part of the problem that has prevented Brazil from reaching the higher rates of growth seen by the other members of the BRIC, and even of its neighboring countries in recent years .Add to that the negative effects on growth of a policy of high interest rates that was introduced as part of the strategy to combat near-hyperinflation. Interest rates are now on a downward trend. But they were kept high longer than they should [have been] because of the inability of the political system to address structural deficits particularly in the social security area that are the center of the Brazilian fiscal problem. According to recent estimates, the size of the government in Brazil has nearly doubled in the past two decades, despite the privatization of public companies in the 90s and the more recent gains obtained in reducing the public debt which is today mostly domestic debt as a proportion of the country’s GDP.

ET: A recent McKinsey report blames some of the slow growth on Brazil’s large “gray market or “informal economy. The report says that taxes have grown over the last decade and regulations mean that an average business needs 150 days to get all the permits needed to operate. Is regulation part of the problem?

PS: The McKinsey report is correct in its assessment of the impact of the so-called informality in the Brazilian economy. In order to support an ever-growing public sector, successive governments have increased almost all forms of taxes and fees and introduced new ones.President Luiz InÃƒÂ¡cio Lula da Silva himself described the problem, saying recently that “to invest in Brazil is to be punished. He was referring to the disincentives created not only by high rates of taxes, but also to the enormous complexity of the tax system, which requires companies to hire a large number of lawyers and accountants to follow and comply with constantly changing tax laws and regulations (at the federal, state, and local levels) or, alternatively, to figure out ways to avoid paying. Brazilian labor laws are very protective of those who manage to get a regular job. But employment-related taxes can be as high as 102 percent of salary and even more expensive if the employee is let go. The consequence of the labor law is that companies avoid hiring workers through the system, preferring schemes that favor “self-employment and transfer part of the tax burden to the worker. Various studies have suggested that about 50 percent of all new jobs created in Brazil are in the “informal sector.”

ET: The same McKinsey report talks about Brazil’s ongoing need for improvements in its infrastructure, in everything from roads to water and energy. What should Brazil be doing with regard to infrastructure?

PS: Increasing investments in infrastructure is at the center of the strategy recently launched by the Lula government to accelerate economic growth to at least 5 percent a year. The program is a variation of a similar one introduced by the previous government under less favorable economic conditions, with one important difference: the current administration’s program tends to rely more on investments from the already bloated and mostly inefficient public sector. Initial reports suggest the program’s execution is not going well, especially in the area of energy generation, which is obviously crucial for higher rates of economic growth. Brazilian companies can be very productive.They all face, however, what is known as the “Brazil cost to do business, which is paid when they have to ship products through bad highways in most of the country (the state of SÃƒÂ£o Paulo is the exception in this case), an insufficient rail system, and outdated ports. That is one of the ways Brazilian companies and the country as a whole lose in the global competitiveness game.

ET: The two companies that appear to be the most successful in Brazil are Embraer and Petrobras. Why have they been so successful?

PS: Embraer was a well-run state company before it was privatized in the 90s and literally took off to become a world leader in its field. Petrobras remains a public sector enterprise and is today probably one of the most efficient state companies anywhere. What makes them successful?…they have embraced competition, which requires competent and timely use of technology and new management methods.
ET: In particular, what do you see as the keys to Petrobras’s remarkable success?

PS: Petrobras has always been a center of excellence. Although various governments attempted to politicize its management, with varying degrees of success, the company has been run by a core cadre of professionals, mostly engineers who developed their careers in-house and are protected from political pressures by their own competence but also by the very nature of the business. It is not by accident that Petrobras has become the world leader in deepwater oil exploration and is today the seventh-largest oil company in the world.

ET: In March, George W. Bush visited Brazil. He was greeted warmly by President Lula. It seems that Lula is doing something of a balancing act: he wants to be friendly to both Bush and Hugo ChÃƒÂ¡vez. Over the long term, where do Brazil’s interests lie?

PS: The recent acts of presidential diplomacy between Lula and George W. Bush (two visits by Bush to Brazil in a 16-month period, a visit by Lula to Camp David three weeks after greeting the American president in SÃƒÂ£o Paulo in March, and regular phone conversations) seem to indicate that both governments have recognized that their national interests are more convergent than they are divergent, and are better served by proximity rather than by distance. Lula is certainly aware that Brazilians in general and the business community in particular favor good relations with the U.S., regardless of their feelings towards the person in charge at the White House, which are not at all positive at the present time. Brazil’s good relations with the U.S. should not, however, be a detriment to the country’s relations with Venezuela, which is, and will continue to be, a next-door neighbor, regardless of the way and by whom it is governed. Brazilian companies exported $6.5 billion to Venezuela last year and have been contracted to execute major infrastructure projects by the ChÃƒÂ¡vez government. As long as they are allowed to function and are paid on time, the relationship will remain important, even if Brazilians tend to dislike the style and disapprove of the substance of some [of] ChÃƒÂ¡vez’s international initiatives.

ET: Why is Hugo ChÃƒÂ¡vez so popular in Latin America? And more specifically, how popular is he in Brazil?

PS: I do not agree that ChÃƒÂ¡vez is popular in Latin America. Candidates that sympathize with him have won presidential elections in BolÃƒÂvia, Ecuador, and Nicaragua. But [such candidates] have lost in more substantial countries such as Mexico and Peru. Alvaro Uribe is no friend of ChÃƒÂ¡vez and was re-elected in Colombia. Lula in Brazil, Michelle Bachellet in Chile, and TabarÃƒÂ© Vasquez [from Uruguay] are not exactly “Chavistas. Lula once described ChÃƒÂ¡vez as a “military officer and an authoritarian at heart and has recently adopted a more sober attitude vis-Ãƒ -vis the Venezuelan leader, after he attacked Brazil’s ethanol initiative with the U.S. We will probably see less “abrazos between Lula and ChÃƒÂ¡vez in the future. Lula is aware that ChÃƒÂ¡vez is a source of political instability in the Andean region. And instability is the last thing Brazil wants in South America. He also knows that, contrary to the perception created in the U.S., ChÃƒÂ¡vez is not popular in Brazil or in the region. A poll recently mentioned by the Economist magazine suggested that ChÃƒÂ¡vez, Bush, and Fidel Castro are the three least popular [leaders] in the region.