Will Bolsonaro’s Free-Market Revolution Succeed?

Forbes – The first seven months of Brazilian President Bolsonaro have been driven by the idea that only free-market reforms and innovation can bring Brazil back on track after more of a decade of corrupted socialist governments led by Brazilian Workers’ Party.

The recent signing of the Principle of Agreement between EU and Mercosur is an important step forward for free trade and free-market reforms in Latin America. In fact, on July 16 Brazilian President Bolsonaro expressed his intention to reshape the South-North economic relationship with the United States with a new free-trade agreement between Mercosur and the U.S. The formal process could start anytime now as Brazil assumed the presidency of the trade bloc earlier this month.

President Bolsonaro was elected late 2018 thanks to a free-market platform with the following goals: pension reform, simplification and reform of the tax code, and deregulatory reforms to unleash Brazil’s economic potential. One of the first step taken by Bolsonaro in reforming the country has been the recent approval of the Provisional Measure on Economic Freedom, a classical liberal framework to rejuvenate the local economy.

The Provisional Measures were approved by the special commission in the Brazilian Congress which fosters free enterprise and limits the government’s ability to interfere with small businesses. Some of the proposals are very deliberate and straightforward, such as the freedom to innovate – not requiring a license while a company is still testing, developing, or implementing a product that is not of risk.

According to Geanluca Lorenzon, Director of De-Bureaucratization from the Minister of Economy, ‘this is the single most expressive liberalization for the average Brazilian in modern history.’ Other proposals are more esoteric, such as the freedom to endeavor – which protects entrepreneurs from being pre-judged as villains before a demonstration of their guilt. Now these measures, to become permanent, need to pass by a simple majority vote in the House and the Senate before August 28.

This renewed focus on the liberalization of Brazil’s economy comes after years of failure by previous left-wing governments led first by President Luiz Inacio Lula da Silva (2003-2010) and right after from President Dilma Rousseff (2011-2016). However, the “mother of all reforms” will be the pension reform. Currently, Brazil’s public spending on social security is equal to 13 % of GDP growth. Recently, Fitch Ratings projected a weak 2% growth for the Brazilian economy this year. The math here is not favorable: projected growth is not enough to cover the state’s public employee retirement liabilities.

The pension problem is just one microcosm of Brazil’s larger issue: the economy’s lack of free-market institutions and the overbearing presence of government. This has been documented well by various international groups. For example, Heritage’s Economic Freedom Index ranks Brazil No.150 out of 180. In the Fraser Economic Freedom Index, Brazil is No.144 out of 162. Brazil’s Economy Minister Paulo Guedes noted that the ‘pension reform is only the beginning’ to filling the fiscal ‘black hole‘ the country is facing.

‘The pension reform’ Mauricio De Freitas Bento, one of the founders of NOVO the young libertarian political party, says, ‘is essential to bring back confidence from domestic and foreign investors. It is an extremely necessary though not sufficient step to bring back robust economic growth in the country. We look forward to a tax reform that can take Brazil to a new level in terms of investment and growth.’

An emerging economy that wants to break through on the global scale simply cannot score this poorly in the areas of economic freedom. According to the World Economic Forum’s Global Competitiveness Report Brazil ranks No.72 out of 140 countries. For investors, the knowledge that a country is committed to the market, and not to arbitrary government interventions, is a key determinant of whether or not to invest.

If successful in these reforms, Bolsonaro will not only greatly benefit Brazil, but change the current geoeconomic landscape in Latin America.

While it undertakes these reforms, Brazil has also shown its appetite for a monumental free trade deal between the Pacific Alliance (Colombia, Peru, Chile, Mexico) and Mercosur (Brazil, Argentina, Paraguay, Uruguay). This would benefit the domestic economies of all members by reducing harmful barriers to trade. At the same time, a Brazil that implements free-market reforms could become a more attractive place for investment in the regions considering the financial crisis that is affecting neighboring countries such as Argentina.

One industry poised for large growth under the new reforms is the Brazilian telecommunications industry. The Brazilian telecom market is expected to expand 20.4% between 2016 and 2022, according to consulting firm Frost & Sullivan. The firm notes that growth could be higher if not for challenging characteristics in the Brazilian market – including high taxes, economic uncertainty, and regulations arbitrarily targeting the market. Anatel (the Brazilian telecom regulatory agency) is holding up, thanks to the SeAC Law, a merger between AT&T and Time Warner as well as preventing FOX from offering online content.

However, the process is moving in the right direction, Federal Court Judge Flávia de Macedo Nolasco suspended Anatel’s injunction saying, ‘in the face of innovative technologies… at this early stage of the process, we must preserve the novelty and free choice of consumers and not act in the opposite direction.’ Last but not least Senator Vanderlan Cardoso proposed a bill to remove from the SeAc law Articles 5 and 6 that prohibit cross-ownership of content producers and telecom services. A prolonged judicial battle over the merger could deter investors from the Brazilian marketplace, slowing the industry’s growth. At this point, a Bolsonaro Executive action to speed up the process would unleash the power of the internet and liberalize the telecom sector.

Bolsonaro’s free-market reforms are taking Brazil in the right direction. Not only do they have the potential to revitalize the Brazilian economy but can alter the entire Latin American geopolitical landscape and bring the region back on track. It is now crucial Bolsonaro works to win support for this plan from the Brazilian Congress.

By Lorenzo Montanari – 27 July 2019