(Bloomberg Opinion) -- With Brazil's presidential election less than six months away, the state of the economy is the country's biggest priority. Weighed down by crippling inflation and high borrowing costs, growth is likely to be less than 1% this year, threatening the future not just of Brazil's 215 million people but the region as a whole.
Unfortunately, neither incumbent Jair Bolsonaro nor his main rival, former president Luiz Inacio Lula da Silva, have shown signs they intend to prioritize the reforms the country needs to return to sustainable growth. Brazil's voters deserve better.
After Bolsonaro was elected in 2018, he appointed the University of Chicago-trained Paulo Guedes as economy minister. In his first year, Guedes was successful in pushing through much-needed changes to the pension system, including setting a minimum retirement age and trimming benefits. But further progress has stalled, due to congressional squabbling and Bolsonaro's indifference. Many of the country's chronic problems — from the high level of informal employment to an unequal education system — were laid bare by a pandemic that punished the poorest. A post-Covid rebound fueled by generous government stimulus payments has faded.
Seizing on Bolsonaro's failures, Lula, the front-runner, has predictably highlighted his administration's record of poverty reduction, hoping voters will focus less on the subsequent corruption investigations that tarnished his legacy. Yet even when buoyed by a commodity boom, Lula chose not to expend his political capital on messy problems like fixing the bloated civil service. There's little reason to believe he'll govern differently if he reclaims the presidency in October.
The populist tendencies of the two main candidates has deprived the country of what it needs most: a vision for reducing the size of government and undoing the thicket of red tape that continues to stifle businesses.
What should that look like? Start with a leaner civil service. More than 90% of federal expenditures are mandatory, and Brazil's wage bill is six times greater than public investment — reflecting too much spent on bureaucracy and not enough on other priorities. The pandemic has reminded Brazilians of the importance of institutions like the national health system, but the public sector needs to shrink and provide better value for money. The government should tie the wages of civil servants to performance; make it easier to demote or fire tenured workers; and cut excessive benefits for those at the top of the ladder.
Promoting investment and job creation also requires a simpler tax system. According to the Organization for Economic Cooperation and Development, an average medium-sized company in Brazil spends some 1,500 hours each year sorting out tax-related procedures, compared with 317 hours in Latin American countries more broadly or 159 hours in OECD countries. Merging several levies into a simplified value-added tax is a start, allowing the government to reduce or eliminate inefficient sector-specific and regional exemptions.
Finally, the next government should lower trade and other barriers that have made Brazil one of the world's least open economies. Doing so will require taking on domestic manufacturers, but will yield substantial benefits over the long run. Trade liberalization would integrate the country in the world economy more effectively. Along with less regulation and better governance, freer trade would boost per capita growth by nearly 1 percentage point per year over 15 years and lower the prices of ordinary goods for consumers.
An alternative choice with a credible economic record could conceivably seize the middle ground. Yet the “third way” has so far failed to unite behind a single presidential standard-bearer. Unless a viable alternative emerges soon, Brazilians will be left with a choice between two populists from opposite ends of the spectrum, neither of them likely to make the economic changes necessary to unlock Brazil's potential. That would be a shame.
More From Other Writers at Bloomberg Opinion:
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Can Brazil Find an Answer for Fake News?: Clara Ferreira Marques
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Expats Flee Bolsonaro's Backward-Looking Brazil: David Wainer
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Latin America's Finance Ministers Aren't So Powerful Anymore: Shannon K. O'Neil
The Editors are members of the Bloomberg Opinion editorial board.
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