As a result, the real is overvalued by 35 percent as compared to the U.S. dollar, according to the Economist's Big Mac index. Brazil could already be suffering from the so-called Dutch disease as its overvalued currency makes the country's exports more expensive abroad and imports relatively cheaper for Brazilian consumers. This may be leading to nascent deindustrialization: domestic consumer goods manufacturing fell by almost 2 percent in 2011 even as retail sales boomed because of growing demand.
The Brazilian government blames the overvalued real on what Finance Minister Guido Mantega calls a "currency war" -- an influx of speculative capital searching for returns in Brazil. Officials have applied piecemeal measures to curb the flow, such as tweaking a tax on overseas loans in March -- extending the application of a 6 percent tax to maturities of up to three years instead of the previous two years.
In response to cries from local industry, officials have gradually applied a series of protectionist measures that have ruffled feathers from Japan to Mexico. "Brazil continues to improvise in its industrial and trade policies," complained economic columnist Míriam Letão in the Rio de Janeiro daily newspaper O Globo. "Attempting to find a way out of the slight drop into the red in the trade balance, and for the lean numbers for industrial output in 2011, all the government could do was to repeat a kneejerk reaction: protectionism and favors for lobbies and special interests."
As in Luis Buñuel's film The Exterminating Angel, where dinner guests inexplicably fail to leave as the night wears on despite the lack of physical barriers, the solutions to Brazil's problems seem obvious but remain unimplemented. Most economists blame the country's problems on what they call the "Brazil Cost," a hodgepodge of problems that make it more expensive to do business in Brazil than most anywhere else. Brazil rings in at 126th (of 183) on the World Bank's index on the ease of doing business, coming in right behind Bangladesh, Uganda, Swaziland, and Bosnia and Herzegovina.
Their prescription for change generally calls for the following: simplifying the tax structure, reforming public administration and social security to improve efficiency and reduce outlays, overhauling labor regulations to make it cheaper to employ workers, and investing in infrastructure. In addition, fiscal reform would give policymakers an extra anti-inflation tool, perhaps allowing them to more quickly lower interest rates, stimulating the economy while helping stem the tide of speculative capital.
The agenda for lowering the Brazil Cost is admittedly ambitious, but the country has made little if any progress on any front. Infrastructure would seem vital in preparation for 2014 World Cup and 2016 Olympics, but investments have lagged enough to have engendered a diplomatic snafu. An official from the international soccer federation FIFA recently suggested that organizers needed "a kick up the backside" because they were behind on preparations. The otherwise euphoric Brazilians were not amused.
Perhaps Brazil is living in its own little vacuum. This certainly could be said of its economic policies. Though he was wildly popular, Rousseff's predecessor Luiz Inácio Lula da Silva's greatest contribution to economic policy was to follow the physician's adage to "first do no harm." As O Globo put it in a wrap-up special as he left office, "President Lula ends his eight year mandate with popularity never before obtained by a president of this country despite a contradictory legacy. We did not have advances or improvements in education, health, public security, basic sanitation, infrastructure and reforms." According to Rutgers sociologist Ted Goertzel, author of biographies of both Lula and his predecessor Fernando Henrique Cardoso, "Lula chose to go into retirement with popularity ratings in the 80s rather than use his popularity to pressure for controversial reforms."
Lula's greatest achievement was probably his Reaganesque ability to make Brazilians feel good about themselves and their country and, one-upping Reagan, convincing foreigners as well: hence the World Cup and the Olympics. But that confidence has led to the kind of self-congratulatory smugness that rubbed the greybeard correspondent wrong in Davos, blinding leaders to the need to tackle the Brazil Cost. While campaigning for office in September 2010, Rousseff chided a Reuters reporter when he suggested in an interview that it might not be possible to maintain 7 percent growth without reforms. "Is Brazil growing (that quickly) now?" she asked him sharply. Since it was, the journalist had to agree. "Well, then, it's possible."
Clearly, at 2.7 percent, it's not happening now. And if Rousseff wants to regain the growth of the Lula years, she'll have to grapple with the chosen political allies of her own Workers Party (PT) -- a pork-barrel party called the PMDB with no identifiable political ideology. The PMDB technically gives the president a majority in Congress, but its members tend to drag their feet on legislation unless and until their personal backs are scratched.
That anybody cares what happens to the Brazilian economy shows how far the country has come since it tackled hyperinflation nearly two decades ago. But economic history shows that everything runs in cycles. The question is: Will Brazil's next downturn be deep and prolonged, like the "lost decade" that followed the "miracle" of the 1970s, or short and relatively painless, as in 2009 when it bounced back quickly from the global shock in 2008? Without reforms, the former option looks more likely.
Like Americans, Brazilians possess a New World optimism, remaining upbeat even through periods of mediocre growth. However, muddling through is not enough for a savior or even a new pillar of the global economy. Ash Wednesday could come sooner than expected.