Rough road ahead: Brazil wants faster growth, but it must deal with potholes, real and symbolic, to get there.

Growth has become something of an obsession in Brazil. After controlling inflation--an endemic problem for Brazil's economic past--and after stabilizing the economy, the new goal is sustainable growth and getting gross domestic product (GDP) to increase to 5% a year, double the average performance of the last two decades and on par with other emerging-market economies, which have known better how to take advantage of a highly liquid global economy. President Luiz Inacio Lula da Silva, reelected with more than 58 million votes cast, the most in Brazilian history, has decided to turn this national goal into the centerpiece of his second term, which began in January. Lula knows his political legacy depends on his making a mark, and nothing would better achieve that than clearly doing what Brazil hasn't done in decades: grow with vigor.

"Growing at an accelerated pace means pulling out the stops and putting the country on track to grow more in line with its abilities and strengths," Lula said at the end of January, when he presented his Accelerated Growth Program (PAC), designed to "unlock" the economy and post growth of at least 4.5% in 2007 and 5% in the years through 2010. The program's major goal is to drum up US$240 billion in new investments--$136.70 billion from public sources and $103.30 billion in private money--by 2010. The majority of the resources are destined for projects in infrastructure, such as highways, railroads, ports, airports, hydroelectric power plants, housing and basic sanitation.

In Brazil there is a sense that the solid macroeconomic performance of late--moderate inflation, interest rates relative to the ratio of debt to GDP on the decline, a healthy trade balance at $45 billion in 2006, reserves at $100 billion, among others--don't seem to be leading the country toward any place but solid, sustained growth. "The success of the monetary policy in terms of controlling inflation and the diminishing risk rate in Brazil to record lows shows foreign-investor confidence in the Brazilian economy," says Emilson Alonso, president and CEO of HSBC Bank Brasil, the domestic subsidiary of the U.K. global financial giant.

Alonso says the PAC is a well-timed initiative that links action to projects to foster economic growth. "Brazil needs more jobs and more income in order to grow and the attention paid to infrastructure needs is absolutely correct," he says. In a five-year strategy plan that ends in 2008, HSBC chose Brazil, Mexico, India and China as priority expansion countries. "HSBC believes that these countries will be responsible for half of the growth in global demand over the next 25 years," Alonso says.

Spanish telecommunications giant Telefonica, too, has shown confidence in Brazil's outlook. In January, Grupo Telefonica's executive chairman and CEO, Cesar Alierta, met with Lula in Brasilia to announce $7 billion in investments to be made in the country over the next four years.

Nevertheless, opinions are divided on the ability of the Lula plan to fuel growth. Many charge that the program doesn't attack two fundamental points for revitalizing the economy: cutting public spending, and reforms in regards to taxes and the country's social security system, Previdencia, which in 2006 represented a $20 billion deficit in the national treasury.

Opposition leader Jose Serra, currently governor of Sao Paulo state, says that the growth plan is "vague, weak, contradictory and won't lead to growth." Serra, like the majority of state governors, is miffed for not having been invited to contribute to the plan's formation. "It's just an order for investments from the federal government, many of them already in progress," Serra says. In fact, a good part of the planned infrastructure projects in Lula's program were already part of public spending plans, such as those being done under the auspices of state oil giant Petrobras and state electric-utility holding company Eletrobras.

Everardo Maciel, a former head of the Brazilian federal tax authority, consider the PAC to be just "a budget for projects with some timid incentives." Lula's program isn't enough for sustainable growth, he says, which would come from cutting public spending that feeds Brazil's tax burden, the highest in the world at 38% of GDP. Maciel says that after discounting the primary surplus, Brazil's public spending comes to 35% of GDP, well above the spending of other emerging-market countries. The solution, Maciel says, is to restructure government spending. "Balanced budgets are more important than growth, but the government in my view has no intention to do so because the political costs are enormous."

Others praise Lula's initiative. "The government's program has the merit of establishing strategic planning for four years, which boosts confidence. Furthermore, it prioritizes infrastructure, and little was done in this field over the last 20 years," says Romeu Chap Chap, president of Secovi-Sao Paulo, a real estate industry trade group. "Brazil needs reforms, but the country still grows without them. But without infrastructure it will not happen."

Indeed, many share the view that a lack of infrastructure in Brazil is the main obstacle to growth. "Over the last four years, the government had forgotten about infrastructure. Now it's going to take another four years to get the house in order," says Adriano Pires, director of the Brazilian Infrastructure Center. That, he says, is why the PAC should be praised--for prioritizing infrastructure spending. "The negative aspect is that the government uses state-owned companies as a guarantee of the program's success," Pires says. "Petrobras, for example, increased and redirected the company's gas investments to cater to the PAC. We know that oil is where the company's profits come from. So, why shouldn't the government provide incentives for private capital in gas?"

Economic analysts say they worry that, under pressure to turn the plan into reality, Lula will give in to market demands that could compromise economic stability, like lowering interest rates too quickly, in turn sparking inflation anew. Lula faced up to that critique and has said that he will not go down the path of economic populism, sacrificing stability in the process.

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As evidence, Lula confirmed months earlier he would keep Henrique Meirelles as president of the Central Bank. Meirelles has been a lightning-rod for criticism from within the government owing to his orthodox views on interest rates. The country still has the highest cost-of-money rates in the world, a condition seen by many in Brazilian industry as the main roadblock to growth.

Lula and his team want to attract enough private capital to raise the investment rate in the country to 25% of GDP from 20%, a figure deemed necessary by many to achieve annual economic growth of 5%. The government invests today less than 2%. Almost all investments are made privately. A study entitled An Agenda for Sustainable Economic Growth, issued in 2006 by the Institute for Research and Applied Economics, a unit of the Brazilian Finance Ministry, reported that the current investment rate of 20% hinders expansion needed for GDP to grow more than 3.5% a year and that problems with electricity supply would create risks if the economy grows by more than 4% annually.

Antonio Ermirio de Moraes, at the inauguration in January of a new plant for aluminum maker Companhia Brasileira de Alumino (CBA), the largest in the country, said that he doesn't think blackouts are imminent, but he did criticize the government for not moving forward with hydroelectric projects that, according to him, are "stuck." Moraes used as an example the Usina Hidreletrica Tijuco Alto power plant, a project his company tried to build on the border of Sao Paulo and Parana states more than a decade ago but still has yet to be greenlighted. The CBA invested $2.40 billion expanding aluminum output over the last five years and is 60% self-reliant on energy. (Aluminum smelters use huge amounts of electricity.) Moraes says he's hopeful: "If there's no energy, there's no aluminum," he says. "If there's no investment in infrastructure, the country doesn't grow."

The economic bellwether pulp-and-paper business is paralyzed, too, by the lack of investment. The industry has barely budged since 2002, posting sluggish growth of barely 2%, according to Roberto Nicolau Jeha, president of Industria de Papel e Papelao Sao Roberto, which produces 18,000 tons of paper and cardboard a year. "There are practically no investments in the sector. We are accustomed to mediocrity," says Jeha, who sees only one way for Lula's plan to work: "Lower interest rates, a higher exchange rate and diversification of the tax base to incentivize private investment."

"Mexicanization." Brazil cannot move ahead without reforms, say industrialists. "We were the eighth largest economy in the world. China and India were way behind, way out of sight and today, we see these other countries miles ahead of us," says Carlos Rodolfo Schneider, vice president of Ciser, one of Latin America's largest producers of bolts and screws. The PAC's failure is in being short-sighted, he says. "We are getting by with very small growth rates, mainly due to a lack of structural reforms," he says. "Ireland, for example, rebounded from a serious fiscal and economic adjustment, growing 8% over the last few years."