Brazilian President Dilma Roussseff
© Corbis

Brazil’s 36th president leans forward and casts an intent look around the table, ensuring no one misses her simple yet bold idea of what she wants for the country.

After nearly 10 years of rule by the Workers’ party (PT), Latin America’s largest economy has slashed poverty rates and gone a long way to reducing inequality – a trend that runs contrary to widening gaps elsewhere.

“This, I think, is a very important gain for Brazil – that is, to transform Brazil into a middle-class population,” Dilma Rousseff says in her office in the Palácio do Planalto in Brasília, the modernist marble wonder designed by Oscar Niemeyer, the Brazilian architect. “We want this; we want a middle-class Brazil.”

Remarkable progress has been made towards improving the lot of millions in what remains one of the world’s most unequal societies. Its economic miracle has helped lift 30m-40m people out of poverty, created markets for domestic and multinational companies and drawn in global investors.

Yet after almost a decade of largely favourable global conditions, the economy has suddenly slowed to a crawl. If the country is to cement its new-found prosperity and remain one of the engines of global growth alongside Russia, India and China, the other Bric nations, Ms Rousseff must find a new development model. In a world afflicted by economic crisis, the question is whether she can push through the changes needed to kick-start a second decade of growth. This includes tackling the thorny issues of Brazil’s lack of competitiveness and high labour costs.

“We have to do the tough stuff,” says José Scheinkman, a Brazilian economics professor at Princeton University.

But if Ms Rousseff is feeling the pressure, there is no sign of it when she enters the modest conference room adjoining her office in the presidential palace looking confident but apparently taking no chances: on her wrist is a traditional charm to ward off the “evil eye”.

She has a reputation as a hard taskmaster known to make ministers cry in meetings if they have not done their homework. But when a Spanish speaker in the room attempts to speak Portuguese with a heavy accent, she gently teases him by imitating his cadences. “We speak Spanish here, too,” she says, good humouredly.

When Ms Rousseff came to power in January last year as the anointed successor of Luiz Inácio Lula da Silva, the former president, there was scepticism about whether this technocrat who had never held elected office would be able to control her PT-led coalition of more than 10 parties. What critics did not count on, however, was the determination of the first woman to be elected president in Brazil. In 1967, she joined a leftwing militant group rebelling against the country’s rightwing dictatorship, taking the nom de guerre of Estela. In the early 1970s, she endured capture, torture and nearly three years of prison.

When Mr Lula da Silva won power in 2003, he chose Ms Rousseff, a trained economist, as his energy minister and then his chief of staff. As president, she has made up for her lack of electoral experience by being different. When her ministers last year became embroiled in corruption scandals, she did something unusual in Brasília: she did not defend them but instead simply let them go – seven of them in all. Voters applauded. Meanwhile, the unemployment rate continued to fall, hitting a record low this year of below 6 per cent and driving her popularity to a record high of more than 70 per cent.

“People said she lacked political experience,” said Fernanda Montenegro, the Brazilian film star and Oscar nominee said to be Ms Rousseff’s favourite actor, at an event last year in her honour in New York. “I believe, however, that we gained with Dilma because she …does not fit the traditional way of doing politics in Brazil.”

But while last year tested her political skills, this year she is under pressure to revive the economy. After reaching 7.5 per cent on the back of high commodity prices and a credit and consumer boom in 2010, growth last year slipped to 2.7 per cent. This year it could be as low as 1.5 per cent.

Asked to name the principal challenges, Ms Rousseff points to a familiar suspect. Easy monetary policy in the US, when not accompanied by fiscal policies to absorb excess funds, leads to competitive currency devaluations and inflation. “Monetary ex­pansionist policies that lead to currency depreciation are policies that create asymmetries in trade relations – serious asymmetries,” she says.

With the US and other countries looking to export themselves out of the downturn, Brazil has refused to become a market for dumped goods. The government has tried to protect its industries through measures such as increased taxes on cars comprised of more than 40 per cent of imported components. This, and a recent move to raise tariffs on hundreds of goods from iron pipes to bus tyres, has led to complaints by trading partners, including the US. However, Ms Rousseff, in a speech at the UN General Assembly last month, shot back that “legitimate defence measures” cannot be branded protectionism.

“This country does not just assemble stuff,” Ms Rousseff says. “We want a country that produces, that creates knowledge and applies it here; we want a skilled workforce.”

But she acknowledges that many of Brazil’s problems are also homemade. High labour costs, low productivity, poor infrastructure and high taxation – with government spending at 36 per cent of gross domestic product, or the equivalent of many advanced European countries but without the same efficiency levels – have created a situation under which inflation emerges whenever the economy starts to grow.

Tony Volpon, an economist with Nomura in New York, argues that Brazil’s potential growth rate – the speed at which it can expand without generating high inflation – has fallen from 4 per cent in the past decade to closer to 3 per cent. This is because growth in the past decade was partly the result of people joining the formal workforce in greater numbers. Today, with relatively low unemployment, that low-hanging fruit is gone.

“The question is: are we going to be more ambitious and address other things?” asks Mr Volpon, “or not, and be a 3 per cent growth economy with high inflation.”

While the president does not promise a “big bang” package of reforms, as seen recently in India, which deregulated the retail and airline sectors, Ms Rousseff says Brazil is cutting the cost of labour by reducing payroll taxes. So far 40 industrial sectors have benefited. Other tax measures are to come. “This is important because we don’t want to penalise those who employ people,” she says.

The government is also stepping up the sale of infrastructure concessions, having already sold airports in São Paulo, nearby Campinas and Brasília, the country’s biggest. It is also preparing to offload R$133bn of road and rail concessions. Ports are next. These big-ticket projects are seen as crucial ahead of Brazil’s hosting of the football World Cup in 2014 and the Olympics two years later. “We want partners from the private sector of any origin,” she says.

The government’s other grand programme is to reduce Brazil’s traditionally high interest rates. The central bank has cut rates by 500 basis points in 12 months to a record low of 7.5 per cent. But Ms Rousseff and her ministers have also weighed in, browbeating banks to lower lending rates. While banks are criticised for charging usurious rates in Brazil – those on credit cards can exceed 100 per cent – the government’s verbal intervention has raised fears of interference in the market. Ms Rousseff is unapologetic.

Brazil was the last free lunch in the world for the banks, she says, referring to the high interest rates they charge customers. “We are returning to a place with normal levels of profitability. That means some of us will need to start looking for adequate profits in productive activities that are good for the country.”

She is equally adamant about another area in which the government is accused of interference with the private sector – its decision to cut the profits electricity operators are allowed to make. Pulling out a notepad, she draws a chart representing the life of the average hydroelectric plant, where the facility continues to produce power long after the original investment has been paid off – yet companies want to continue to charge the same high prices. So the government has given operators a choice – cut prices now and renew the contract or wait for the contract to expire and risk losing it. The result was a 16 per cent cut in energy prices for consumers and a 28 per cent reduction in charges for industrial customers. “This is very important because we need to reduce costs,” Ms Rousseff says of the initiative.

While her predecessor enjoyed the international limelight, Ms Rousseff is an indifferent diplomat. She ruffled US and European feathers at the UN General Assembly last month by claiming that Islamophobia is on the rise in developed countries. But generally she describes a Brazil that is everyone’s friend, with special relationships with Lusophone African countries and its close ties with Europe through immigration. “The world for us is a multipolar one,” she says.

Closer to home, she did not wish to comment on the landmark supreme court corruption case dating from the first term of Mr Lula da Silva. In the so-called Mensalão, or “big monthly allowance”, the case involves many of the former president’s party lieutenants are accused of using public funds to pay opposition politicians to support the government’s legislative agenda in congress. Some have already been convicted.

But Ms Rousseff clearly seems preoccupied with governance. She tells a story about a mayor who was supposed to be building two schools with federal government funds but was in fact building just one and pocketing the rest. He was required to post photos on the internet of the schools being constructed. He was eventually caught out when the same dog appeared in photos of what were meant to be the two different schools.

“You have to be ready for everything in life – but a dog denouncing a mayor?” says the president, laughing. She suddenly becomes serious. “We are computerising the entire structure of the government because that will permit us to control what it does.” Such processes are “banal” but necessary, she says.

A president who gives attention to detail, however banal, is perhaps what Brazil needs as it seeks to consolidate the past decade’s achievements and continue its emergence as a middle-class country. But with reform just beginning, much will still depend on how willing she is to get the “tough stuff” done.

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