Brazil: Still the Country of the Future

By MARY ANASTASIA O'GRADY

RIO DE JANEIRO -- On a recent winter evening here, as a full moon crept slowly up over Copacabana and sun worshippers headed home, I went for a stroll along the water's edge.

Balmy breezes, the rhythmic pounding of the waves and the cool, sandy surf underfoot quieted my mind. I gazed at the green peaks around the bay and contemplated the Portuguese explorers who came upon this paradise. Within the hour, dusk gave way to darkness, stars blanketed the sky and Cariocas began to populate the sidewalk that runs next to the beach, walking dogs, biking, jogging and patronizing the open air restaurants.

With its breathtaking scenery and the sunny disposition of its people, this place ought to be the pearl of the Southern Cone. But it's not. Look past the natural beauty and the small surviving pockets of its glamorous past and even the better parts of town seem to be in decline.

The city looks dingy, "for sale" signs dot prime real estate on beachfront Avenida Atlântica, locals gripe about the multiplying corruption scandals in Brasília, crime dominates the news and young, educated people talk about leaving their hometown in search of opportunity. Linking it all together is an uncharacteristically discouraged private sector.

It was not only in Rio that I observed dark clouds of pessimism hanging over Brazilian heads. After two weeks in the country, I could not ignore the fact that the wider entrepreneurial community, in this nation known for its incurable optimism, is decidedly down in the dumps.

It must be noted that this nation of immigrants does not have the habitual negativity of some cultures; Brazilians are not whiners. But what seems to be tempering the hopes of even positive thinkers these days is the growing, sobering realization that the burden of socialism is exceedingly hard to throw off, even when patently obvious that it is the chief culprit producing persistent underdevelopment, poverty and misery.

Prof. Jitendra Singh of the Wharton Business School, who spoke at Wharton's annual global alumni forum held here on Aug. 11, described this problem generically as "the socialist trap." Once in, it's very hard to get out. And with Brazil's 1988 constitution -- over 200 pages long when downloaded from the Web -- charging the government with the obligation to ensure every possible human need including "education, health, work, leisure, security, social security, protection of motherhood and childhood and assistance to the destitute," Brazil is well-ensconced in the trap.

Not that Brazilians get any of those things from government, by the way. But a state with such powers has become a monster that drains the life out of the nation.

The immediate cause of the drooping spirits of entrepreneurs seems to be the way in which the presidential election, set for Oct. 1, is shaping up. While the market-friendly Geraldo Alckmin appeared poised to make a serious challenge to Brazilian President Luiz Inácio "Lula" da Silva of the Worker's Party a month ago, the latest polls show Lula pulling ahead again. "It looks like we're going to be stuck with this guy for another four years," one Brazilian entrepreneur I met in Bahia told me, "and that's not good."

Lula certainly hasn't been the worst president in Brazilian history. Despite his admiration for Fidel Castro, he has remained within the bounds of the rule of law and has not consolidated power or destroyed institutions in the authoritarian style of Argentina's President Nestor Kirchner. Also, he has been pragmatic and accepted the disciplines assigned by capital markets. His government has sought fiscal restraint, low inflation and a stable real.

That the country has not dissolved into a hyperinflationary basket case over the past four years has made the Lula presidency look almost brilliant to Brazilians and the international community. But that's only because expectations were so low.

Meanwhile, at the level of microeconomic policy, where a pro-market attitude that respects private property is so desperately needed, another four years of Lula is a grim thought.

Take, for example, the way in which this government is dealing with intellectual-property rights in the pharmaceutical industry.

Lobbied by special interests and nongovernmental organizations, Lula has made treatment of HIV-infected Brazilians with state-of-the-arts drugs a high priority. Yet if Brazil were to pay the market rate for such medicines, the bill would put more than a dent in its underfunded socialist budget and badly impact the macroeconomic picture.

The public purse is already strained on the spending side by unsustainable entitlements such as ridiculously generous public-sector pensions, and on the revenue side by the massive informal economy which, having burrowed underground to avoid high taxes and onerous regulation, provides little government income. But rather than downsize dysfunctional government to solve this problem, Lula is working to meet his fiscal targets by threatening drug companies with compulsory licensing if prices are not adjusted downward to meet his budget constraints.

So far drug companies have complied with this arm-twisting. But one pharmaceutical company executive told me that it is like a "Damocles sword over our heads." That's not a good message for a developing country to send investors. Moreover, should the government one day move to compulsory licensing, the costs to Brazilian development could be higher than the benefits. Brazil will still have to comply with the World Trade Organization's intellectual-property rights agreement by paying royalties. Failure to do so would harm the country's WTO status and trade relations with the U.S.

Such a myopic attitude toward markets, prices and investment illustrates what Brazilian entrepreneurs have come to recognize more broadly: that socialist Lula together with the Brazilian constitution enshrining the nanny state, spells four more years of mediocrity at best. For young, talented minds eager to create, innovate and profit, such a forecast makes even an enchanting city like this one a good place to be from.