Activist and adversarial Supreme Court shares responsibility for Brazil still being a largely unfree country economically – Heritage

RIO DE JANEIRO, BRAZIL – The Americas region covers more than one-quarter of the globe’s landmass and is one of the world’s most economically diverse regions. With a population of just over 1 billion, it has the second-highest population-weighted gross domestic product (GDP) per capita (US$31,992 at purchasing power parity).

According to the 2021 Economic Freedom Index of the Heritage Foundation, Latin American countries, with widespread corruption and weak protection of property rights exacerbate such systemic shortcomings as regulatory inefficiency and monetary instability that is caused by various government-driven market distortions.

Business freedom, labor freedom, investment freedom, and financial freedom are generally consistent with world standards. Aggravated by much higher deficit spending during the pandemic, however, fiscal health is deteriorating.

Unfortunately, many countries that historically have been economically free such as Chile, Peru, and Colombia are at risk of sliding into another period of populist–leftist political resurgence. Not coincidentally, Communist China has become a dominant foreign power in Latin America.

Brazil’s economic freedom score is 53.3, making it the 133rd freest economy in the 2021 Index. Brazil ranks 26th out of 32 countries in the Americas region, and its overall score is below the regional and global average.

Brazil’s economic growth slowed in 2019, turned negative in 2020, and rebounded in 2021. Its level of economic freedom has changed little over the past five years.

Led by modest score increases in labor freedom and government integrity, Brazil has recorded a mere 0.4-point overall gain in economic freedom since 2017 and remains in the lower ranks of the “mostly unfree” countries. Monetary freedom is relatively good, but its fiscal health is among the world’s worst.

BRAZIL CAN’T GET RID OF THE LEFTIST PAST

Brazil is the world’s fifth-largest country, has a population of more than 200 million, and is dominated geographically by the Amazon River and the world’s largest rainforest.

After a long period of political chaos triggered by massive public corruption scandals and economic crises, voters elected conservative Jair Bolsonaro president in a defiant election in 2018, ushering in a shift from years of leftist governments and corresponding mental indoctrination.

Bolsonaro entered office with a generally free-market agenda and pursued reforms that included overhauling the state pension system and privatizing state assets. However, he was undermined in large part by an activist and adversarial Supreme Court.

In addition, his fractious relationships with many parties in Congress impeded his reform agenda, hindering the enactment of austerity measures and reforms in the tax system, which consumes about 33% of GDP and is one of the most burdensome among emerging economies.

An ongoing failure to rein in spending and reduce unsustainable debt levels has helped Brazil to register one of the world’s lowest Index indicator scores for fiscal health—second only to the United States and Venezuela (among others). In addition, the rule of law in Brazil remains too weak for a potentially world-class country.

RULE OF LAW

Property rights for both Brazilians and foreigners are generally enforced, but the mortgage registration system is uneven. Protection of intellectual property rights is inadequate.

The judiciary, while largely independent, is overburdened, inefficient, and often subject to negative external influences.

In the case of the Supreme Court (STF) and the Supreme Electoral Court (TSE), however, the abundance of power got out of control. Growing political activism in favor of the left has made effective conservative and business-friendly government virtually impossible.

Corruption and graft remain endemic, especially among elected officials and in the tax administration, public procurement, and natural resource sectors.

GOVERNMENT SIZE

The top individual income tax rate is 27.5%, and the top corporate tax rate is 34%. Other taxes include value-added and excise taxes. The overall tax burden equals 33.1% of total domestic income.

Government spending has amounted to 39.2% of total output (GDP) over the past three years, and budget deficits have averaged 8.8% of GDP. Public debt is equivalent to 98.9% of GDP.

REGULATORY EFFICIENCY

The Economic Freedom Law, adopted in 2019, is meant to simplify regulations and establish standards for the protection of free enterprise and free choice in economic decisions.

The Bolsonaro regime’s agenda to reform onerous labor laws were undone by COVID-19. The government continues massive subsidies for the production of sugar and other agricultural products in addition to subsidies for the hundreds of state-owned enterprises that are not yet privatized.

OPEN MARKETS

Brazil has nine preferential trade agreements in force. The trade-weighted average tariff rate is 10.0 percent, and 697 nontariff measures are in effect.

Foreign investors are granted national treatment, but their activity is restricted in some sectors, including communications and mining.

The banking sector remains stable and relatively competitive with credit to the private sector increasing. The insurance sector has become the largest in the region.

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