Jair Bolsonaro had some good news for Brazil’s young families ahead of Christmas. Taking to social media a few weeks ago, the country’s president announced that tariffs on imported toys would be slashed from 35 per cent to 20 per cent.
The move was part of his administration’s sweeping plans to revitalise the Brazilian economy through an ambitious programme of trade liberalisation, cuts to bureaucracy and structural reforms. It appeared to be a win for the rightwing populist leader, who took power in 2018, and Paulo Guedes, his free market finance minister.
But within days of the decision — made only after a year-long consultation with Brazilian manufacturers — the finance ministry faced a wave of industry lobbying and quickly backtracked. The reduction in tariffs would not start this month as planned but be implemented gradually over the course of next year, the ministry announced.
The laboriousness of a process that has been mired in vested interests exemplifies the difficulties facing Mr Guedes as he tries to pry open one of the most protectionist economies in the world. Brazil ranks alongside much poorer African nations on measures of protectionism, according to the trade freedom index of the Heritage Foundation, a US think-tank.
“The ministry was beaten from one side to the other. In the end, everyone was unsatisfied,” said a finance ministry official.
When he took the finance portfolio at the beginning of last year, Mr Guedes was hailed as a star who would restore Brazil’s economic fortunes.
The former fund manager notched up a notable early success, with the passage of a landmark reform of Brazil’s bloated pensions system, which is expected to save the government almost $200bn over the next 10 years.
But two years into his tenure, his glow has faded as his planned structural reforms, including a simplification of the tax system and administrative reform of the state, have foundered in Congress.
Successes on privatisation and cutting bureaucracy have also been rare. In August the two officials responsible for both portfolios quit, citing deep vested interests and a lack of political will.
The coronavirus pandemic has also thwarted Mr Guedes. Fiscal rectitude lay at the heart of his plans, but since April the government has handed out billions of dollars in crisis relief to Brazil’s poorest, tearing a hole in the nation’s increasingly shaky public finances and dominating the economic agenda.
“The Paulo Guedes that existed two years ago now faces reality. Reforms in Brazil are a slow, bit by bit process,” said one lobbyist in Brasília involved in the decision on toys. “Reforms are like heaven. Everyone wants to go, but just not right now.”
Camila Abedelmalack, chief economist at Veedha Investments, highlighted the government’s lack of progress on even the most routine tasks, such as setting next year’s budget.
“We are crawling. We thought the main challenges would be tax reform and privatisation,” she said. “But at the moment we are struggling to get clarity on even the management of the budget for the coming year.”
Some foreign businesses have begun to express frustration at the glacial pace of change. Following the delay on toy tariffs, the US toymaker Hasbro said: “The sudden and unjustified change of positioning contradicted the announced economic policy, representing contradictory behaviour that violates good faith.”
Critics of the lack of action have turned their fire on Mr Guedes, who is increasingly viewed as an obstacle to progress rather than a driver of change.
Known for a pugnacious personal style, he has an acrimonious relationship with Congress — which must vote on almost all the government’s reform proposals — trading frequent barbs with the speaker and bickering with deputies over his plans.
“The next two years are going to be tense given the difficult relations the government has with Congress,” said Sergio Vale, an analyst at MB Associates.
“The [finance] ministry is out of focus, not as organised as it used to be in the past and more playing a supporting role. The minister has been making promises for two years but has nothing to show for it.”
But Adolfo Sachsida, secretary for political economy at the ministry, described the past year as a “huge success”.
“In the middle of a pandemic, we approved legislation for private investment in sanitation and for bankruptcy protection and we improved legislation for gas [market investment]. We also have a vote on central bank autonomy upcoming in the Senate,” he said.
Defending the slow progress on tax reform, he said it was a “very hard agenda” with which Brazil had been grappling for decades. “You have major challenges: you have to have the support of local governments and state governments, the industrial sector and financial sector and citizens. It is a lot of people at the same table,” Mr Sachsida said.
On trade tariffs and privatisations there were a chorus of voices “representing legitimate interests and they have the right to do so”.
“People will disagree over the speed of tariff reduction. People will disagree over the number of privatisations. [But] everyone agrees that we have to open our economy,” he added.
Opponents of reform have different agendas but have converged “around fear of change”, said the lobbyist in Brasília. “Our tax system has for so long accommodated advantages for certain groups, which do not want to change. On trade, it is the same thing: so many sectors have been protected for forever that they depend on it,” the lobbyist said.
“Brazil is a corporatist and clientelist country,” said Lucas de Aragão, a partner at consultancy Arko Advice. “There are battles that the government has identified as just not worth fighting,”
Additional reporting by Carolina Pulice
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