Brazil walks a tightrope to the World Cup

To the great annoyance of longtime Brazil analysts, presentations on Brazil inevitably tend to start with the cutting remark generally ascribed (probably incorrectly) to French President General Charles de Gaulle: “Brazil is the country of the future and always will be”. With the World Cup kicking off shortly, and the Olympics to be held in Rio in summer 2016, Brazil’s historic moment appears at last to have arrived. Perhaps it has. Brazil is already showing a natural showman’s ability to ratchet up the suspense. Leaving venue construction to the last possible moment is only one element in this high-wire act. Brazil is also teetering on the edge of an economic precipice. S&P recently downgraded the country’s sovereign bonds to BBB minus, one step above junk. A Brazilian property bubble – a 414 percent increase in property prices over the past 10 years – exceeds even the pre-crisis house-price run-ups in the US (+92%), Ireland (+287%), and Spain (+193%). (See chart below.) Brazil got itself into this position by pursuing rapid economic growth without taking the hard decisions necessary to make this growth sustainable. The Brazilian political system tends to protect vested interests, including labour unions, big businesses, government employees, and agricultural landlords. As a result, Brazilian policy tends to be twisted in favour of these interests, and reforms are badly needed (and always ongoing) in areas including public pensions, labour law, and taxation. The result is a business environment that is relatively hostile to small businesses – Brazil ranks not even among the top 100 countries in the World Bank’s Ease of Doing Business Index – but favourable to...