The American Spectator

At Large

There is a host of statistics that hail the amazing vitality of Brazil's economy. Perhaps the most impressive, however, is the fact that Brazil has leaped over Canada as the number two in hemispheric national GDP. In fact, this vast and dynamic state now is estimated to be producing nearly 60% of the entire South American economy.

Brazil has achieved its dominating status by running counter to the contemporary industrialized world trend; by privatizing major industries such as telecommunications, mining, petroleum, transportation, etc. This all has been accomplished under both its earlier center-conservative president, Fernando Henrique Cardoso, and then surprisingly continued under the left-wing unionist, and current president, Luiz Inacio Lula da Silva. It's a lesson President Barack Obama and his single-minded, simplistic-thinking, big government economic advisers would do well to learn.

During the recent year of stress on the world economy, Brazil substantially reduced reserve requirements of its private banks (the amount of their deposits they have to place in the central bank). The government then made temporary reductions in sales taxes on big ticket vehicle and household items. The result of this startling free enterprise (dare we say Reaganeconomia) action has been characterized by the Financial Times as having "returned sales to pre-crisis levels."

While the Obama sophomore socialists are playing with a second stimulus package, Brazil's government has chosen to extend its tax cuts for several more months during the third quarter of the year as well as totally exempting certain key capital goods. And this has occurred under the pragmatic leadership of a man representing the political left wing of his country.

The popular government of Lula da Silva has just announced plans to attack a vexing problem that none of its predecessors were able to do. It has taken steps to reduce the cost of labor for all private industry while not cutting employee salaries. Back in the 1930s Benito Mussolini's Italian government introduced the concept of having private employers pay a portion equal to a percentage of workers' gross salaries into national welfare funds. Brazil became enamored of this device.

Brazil has faithfully followed this antiquated example to the tune of 25.5% on top of all salaries. The result has been to depress workers' salaries while at the same time adding to Brazil's high labor costs. Competition on world markets has suffered and exports seriously impacted. The expectation is that with the new reduction in employer taxation Brazil will now be able to compete vigorously in world markets of food and industrial commodities as well as petroleum products and financial services. It has been speculated that the additional revenue gained through increased corporate profits will more than replace the loss of the surcharge calculate on workers' salaries.

One of the more exciting prospects for Brazilian industry exists in the potential sale of its "flex" automobiles. Brazil manufactures 90% of all cars sold domestically. Not only is the price of the vehicle attractive, but the driver can choose to use either ethanol or gasoline -- or a combination -- upon arriving at the pump. That Brazil, itself, produces all of its required ethanol and petroleum keeps the price well within the automobile owner's pocket book range.

Unfortunately this rose garden also has its share of thorns. To begin with, the highly popular flex car has limited export attraction as few countries can match Brazil's alternative fuel production capacity. Sales of the flex vehicle are highly dependent on continued government subsidies through tax breaks. Adding to the problem of automobile transport growth is the truly decrepit state of Brazil's roads -- to say nothing of the Wild West driving habits of its citizens.

Graft and a well-organized bribery culture tend to add substantially to the cost of doing business in the otherwise energetic economy. One thing that vexes all businessmen, both Brazilian and foreign, is the continuing danger of violent crime, and, most particularly, kidnapping for profit. As a result, the insurance business thrives on K&R (Kidnapping and Ransom) policies -- a lamentable but lucrative business.

Nonetheless, Brazil has done exceptionally well in these parlous times; and done so using to the fullest all possible methods to encourage free enterprise. At the same time Brazil has been imaginative and yet exceedingly self-controlled in its federal financial subsidies. The administration in Washington can learn a great deal from the success of this dynamic South American giant -- if it will remember that the United States economy was built by private enterprise and not by government!

topics:
Global Financial Crisis, Economic Freedom, South America