Brazil Trucker Strike Shows a State Running on Empty

(Bloomberg Opinion) -- After a week of anger and protests, Brazilian truck drivers agreed late Sunday to ease their strike. That’s the good news. For more than a week, the truckers had all but staggered this country of 208 million people, jamming the highways with semis and strangling commerce from the grain silos to cargo ports.

What’s less heartening are the terms of the shaky truce, including cheaper fuel and a tax break for cargo transport workers, which emboldened a powerful pressure group at the expense of Brazilian taxpayers, may well encourage other aggrieved groups to do the same, and did nothing to address the fiscal disarray and ailing infrastructure sapping the region’s biggest economy.

Ostensibly, the strike was over the price of diesel fuel, which has kept pace with the price of crude oil and the ascendant U.S. dollar. Such is the mandate of the new management at Petrobras, the disgraced Brazilian oil major that has just begun to claw back credibility and asset value by shedding dud holdings and pledging to follow the global market instead of the whims of spendthrift petro-populists.

Yet most Brazilians have rarely been market enthusiasts, and one of the consequences of dirigisme in Brasilia is a longing for the all-too-visible hand, which sought to mollify lobbies by managing prices, from the light bill to the filling station, and deliver both growth and low inflation. What Brazil got instead over the last decade were fiscal bloat, the worst recession in memory, and an austere economic course correction that set the stage for popular discontent and now road rage. 

Emboldened by the wavering command of President Michel Temer -- the least loved president since the return of democracy – the nation’s 1 million-strong truckers hit the pavement. In a matter of hours, the rebel fleet managed to stagger Latin America’s biggest economy, apparently with a wink and a nod from big transportation companies.

The truckers, and surely their undeclared sponsors, want cheaper diesel and elimination of a fuel tax and other levies that they say are unfair and onerous. With gas stations running dry, airlines grounded and supermarket shelves depleted, the Temer government relented, restoring the generous fuel subsidy and temporarily reducing prices at the pump.

Far worse than the official diffidence, however, was the failure by successive national leaders to foresee an economic comeuppance decades in the making. Leave aside for a moment the strikers’ poor aim: they targeted just a small part of the problem. Economists note that what makes gassing up so burdensome is not the federal fuel tax, elimination of which would shave the fuel bill by just a few cents per liter, but Brazil’s overall tax burden -- one of the highest and most regressive in the developing world.

Total fuel taxes in Brazil amount to close to half the price of every liter. Other countries (Norway, Netherlands, the UK) pay more, according to the OECD. (Mexico and the U.S. are outliers, with taxes amounting to less than a quarter of the total price.) However Brazilians also are hostage to a fiscal war between state governments, each of which sets its own tax on the circulation and sales of merchandise, known as the ICMS. That  adds up to 34 percent (13 percent for diesel) to the fuel bill. And since local governments control the ICMS, revising that weighty levy will be far more vexing.

The improvised deal to slash the fuel tax and prices will cost Brazilian public coffers around $2.6 billion, part of which the government will pay for by cutting public spending and the rest by kiting the bill to taxpayers. More than piecemeal tax breaks, Brazil needs tax reform, which takes political focus and conviction, both of which are also running on empty.

More troublingly, the crisis exposes Brazil’s woeful dependence on asphalt and tailpipes. More than 60 percent of cargo trundles by road across a country as big as the continental United States. By contrast, only a quarter of the nation’s freight is carried by rails. And despite a 7,400-kilometer coastline and a countryside filigreed with navigable rivers, a paltry 14 percent of Brazilian cargo is ferried by waterways, far below the share in the U.S. (25 percent) and Canada (35 percent).

Yet because repeated fiscal crises and spotty maintenance have left the country’s roadways in chronic disrepair, overland shipping is often a pricey crapshoot, where perishable cargo and trucker’s health are constantly at risk. The National Transportation Confederation found last year that of 105,000 of roadways, 62 percent were in poor or terrible shape, compared with 58 percent in 2016.No wonder anywhere from 5 percent to 30 percent of grains and cereals harvest goes to waste due to shabby infrastructure, including decrepit roads. That’s one reason Brazil scores so badly on world measures of logistics and competitiveness.

The World Economic Forum ranked Brazil 107th out of 144 countries in the level of infrastructure development. It trailed all three developing nation peers China, India and South Africa on the World Bank’s 2016 Logistics Performance Index, and placed last out of 160 nations on a six-item checklist for customs and international shipping.

In a recent ranking of overall infrastructure, Brazil, with the world’s eighth largest economy, finished 73rd out of 137 nations, according to the international consultancy Oliver Wyman.

Most of these woes have been lost in the row over the cargo strike, which truckers have vowed to continue despite official concessions. With politicians gauging the potential fallout on the coming presidential elections, Brazilians typically responded to the “fuel blackout” with memes and improvisation, such as pizza delivery on horseback. Unfortunately, tax reform and better infrastructure are unlikely to come via takeout.

©2018 Bloomberg L.P.

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