To unleash the entrepreneurial energy in the economy, the Spanish government cut back government’s role by reforming the social-security system, shutting down unprofitable state enterprises and making the labour market flexible — just the type of reforms Brazil needs to enact now. The economic boom that followed took Spain to a developed market status by the mid-’90s. Per capita income in Spain currently stands at a remarkably high $27,000. Brazil’s population is four times greater than Spain; if Brazil can achieve a similar growth profile, the impact will be enormous.

The current risk is that Brazilian policymakers are content with just achieving stability. It’s important to realise that very favourable global economic conditions have facilitated, in no small measure, the current growth. The boom in commodity prices has particularly helped Brazil, as commodities comprise 50 per cent of the country’s exports. More importantly, it will be hard for Brazil to achieve globally competitive interest rates as long as the government occupies such a large share of the economic sphere. At 35 per cent, Brazil has one of the highest ratios of government spending to GDP in the developing world. To fund that spending, it naturally has a prohibitive tax structure. As a result, Brazil’s productivity growth over the past two decades has averaged an abysmal 1 per cent.

This is not how Brazil used to be. In the 1950s and ‘60s, it was the China of the world, with the economy galloping at double-digit growth and professors heralding it as the paragon of economic virtue. But the first oil shock in 1973 made Brazil lose its way. What happened since should serve as an important lesson to the emerging economic stars of today. Brazil succumbed to the populist appeal of creating a welfare state with policies directed more toward redistributing the pie, such as an overly generous social-security system and extensive retirement benefits for government employees. Government spending exploded and private investment got crowded out. Today, Brazil has one of the lowest investment-to-GDP ratios in the developing world — just 16 per cent. Infrastructure bottlenecks are rife and the cost of doing business is among the highest anywhere. Brazil’s economic experience shows how countries can lose their will to grow once they reach a certain per capita income level, and why so many nations aren’t able to break out of their middle-class existence.

... contd.