Brazil flag

As one of the so-called “BRIC” countries, Brazil is often looked to as one of the countries of the future. Well, if that’s the case the future might not be so bright. Brazil’s economy is now dangerously close to slipping into contraction, with the economy expanding by only 0.6% through the third quarter. This is only half the rate that many analysts expected and is a far cry from the 7.5% growth rate the country demonstrated in 2010. Overall, the economy is projected to grow only 1% through 2012, a troubling number for a country that has been relying on strong growth to alleviate poverty and rising living costs.

Brazil’s economy had been a bright spot until 2011. In 2010 the country posted a growth rate of 7.5%, its highest growth rate in decades. In 2009, Brazil, along with numerous other countries, posted a slight contraction (0.2%), but in 2007 and 2008 the country posted growth rates about 5%. Brazil is home to 194 million people, and with a 2.5 trillion dollar GDP (nominal) represents the 6th largest economy in the world. The country is the largest in South America and while many of its regional rival, such as Argentina, have been struggling economically, Brazil has been steadily moving forward.

Importantly, the country’s recent growth has been fueled by service and high-tech industries, allowing the country to gradually shift away from its resource and agricultural roots. Internet access has been rapidly growing and information technology companies now make up 4.5% of the nation’s GDP. Yet these companies have struggled to take their innovations into the global market, where they are overshadowed by Western and Asian competitors.

Unfortunately the “Brazilian costs” or high costs of doing business in Brazil are infamous. While most developing countries see their GDP jump when put into terms of Purchasing Power Parity, Brazil’s economy actually shrinks from USD 2.5 trillion to USD 2.3 trillion. The country is known for its high tax burdens, poor infrastructure, high costs of living, and a cumbersome government bureaucracy. Even without a looming global downturn, the aforementioned factors could impede the growth of any economy.

On the up side, Brazil has relied more heavily on a consumption based economy model, favoring import-substitution, over exports. This may help the Latin American nation avoid the brunt of a global economic downturn, should one occur in the near future. On the other hand, Brazil has been trying to increase exports, especially of its manufacturing goods and technology services.

Developing nations are generally under pressure to post strong growth rates or face backlash from civil society. For example, surging enrollments in colleges leads to more college graduates looking for decent paying white-collar jobs. When these jobs don’t exist, there is suddenly a large population of well-educated people growing restless and in search of opportunity. The Arab Spring in Egypt was initially driven by students and the educated classes in Spain, Greece, and elsewhere are now leading the anti-austerity protests that are threatening to destabilize the E.U. Other groups, such as the poor and disadvantaged can also quickly join in on protests and backlashes, ratcheting up pressure on the government.

Now Brazil’s government will have to face tough challenges in the months ahead. With the global economy likely to continue to slow, Brazil may have to correct its high costs of living and doing business in order to encourage investment. The country has plenty of untapped potential, but a complicated bureaucracy and high taxes discourage investments which now make up less then 20% of the GDP. If Brazil is to maintain strong growth it will need to install reforms to liberalize its markets and reduce costs of doing business.