Brazil and the USA could have been more alike, but excessive regulation changed everything

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The United States and Brazil share many things in common. They are both vast, diverse nations with rich cultural traditions. The US is the most important country in North America; Brazil is the big player in South America. They are similar in size (if we forget about Alaska, as many Americans do) and in range of geographic environments. America enslaved millions of Africans, and Brazil did too. Native inhabitants were displaced north and south of the equator. Both Brazil and America produce everything from agricultural products to sophisticated airplanes.

But when it comes to economic wellbeing, the fortunes of the two nations sharply diverge. If you take all of the economic production in the country in a year and divide it by the population (GDP per capita), the US is about eight times better off. The Brazilian economy produces about $11,000 per person, while the US produces more than $85,000.

And despite starting from a lower level, Brazil is not growing faster than the US. Both economies are expected to grow about three percent this year. At this rate, in twenty years, the average American will produce more than $153,000 per year, compared with less than $20,000 for the typical Brazilian.

What could explain this difference?

The answer is not inherent in the people. Brazilians are as intelligent, diligent, hardworking, and capable as their American counterparts. Americans do not have a monopoly on ambition or good ideas. Brazilians want a better life for themselves and their families, just as Americans do. 

There are undoubtedly many reasons and change will be difficult. But identifying the causes of low growth and developing solutions should be the top priority of thinkers across the political spectrum in Brazil.

There has been some work by economists on the role law plays. Highly cited work looks at macro-level differences, such as whether a country was settled by the English (and hence uses the common law) or other Europeans (and hence uses the civil law). It finds common law countries outperform civil law ones. Recent work calls the method and conclusions from this work into doubt.

At a more micro level, the legal environment likely has a big effect. Some of this may be traced back to the colonial past.

Brazil has more lawyers per capita than any country in the world. Americans are famously litigious, but Brazil has almost twice as many lawyers relative to population. Lawyers do important work but mostly fight about how to divide the pie rather than figuring out ways to make it bigger. Lawyers can be thought of as a tax on growth.

When Shakespeare wrote, “The first thing we do, let's kill all the lawyers,” the line was spoken by an enemy of freedom. Putting hyperbole aside, when it comes to economic growth, the Bard may have been onto something. The problem, however, is not the supply of lawyers. Who can blame young people for pursuing jobs that pay well. The problem is the demand for them. The source of this demand is too many rules.

Regulation is also a tax on growth. Every country must figure out the right balance between regulation and growth, with the choice depending in part on the preferences of the people. In the extreme, unregulated activities can result in disease and death, but so too can poverty. Wealthier people are healthier, live in cleaner environments, and commit less violence. In the 1970s in my hometown of Pittsburgh, violence was rampant and the three rivers that ran through the city were filled with chemicals. Today, crime is down and people swim in the same rivers. All thanks to economic growth.

Regulatory defaults and mindset are other key factors. There is an old joke that demonstrates the point. In the US, everything is permitted, except that which is forbidden; in Germany, everything is forbidden, except that which is permitted; and in the Soviet Union, everything is forbidden, including that which is permitted.

Lawyers do important work but mostly fight about how to divide the pie rather than figuring out ways to make it bigger. Lawyers can be thought of as a tax on growth

Focusing on the US versus Germany, the attitude towards innovation and doing new things is stark. US companies are making huge advances in artificial intelligence, decentralized finance, and biotechnology, while Europeans are hampered by fear-based regulation. No leading Internet companies have come out of Europe. Not surprisingly, German per capita income is half that in the US, and its economy is expected to shrink this year. Germans are famous for their manufacturing prowess and skill but are hampered by an overly cautious approach to change. Brazilian innovation is similarly hampered by a regulatory approach focused on minimizing risks rather than optimizing them.

Some of this mindset may be attributable to history. America was founded by refugees from an overly centralized governmental authority (albeit with respect to religion) and threw off its king long before the industrial revolution, while Brazil came of age under a monarchy that ended at the end of the 19^th century. If business and industry need kingly permission, the cost of innovation is high. Initially, businesses in the US needed government permission to start, but this ended as early as 1812, when a New York law permitted anyone to form a corporation for any reason without permission. A great flourishing ensued.

This mindset can be changed, but it takes a government with a will to do so. Cutting red tape and freeing people to do what they want without permission is a good first step. Those with a vested interest in the status quo, mostly government officials and lawyers will stand in the way.

Government officials have good intentions and the regulations they administer are designed to make sure people aren’t cheated, that businesses are safe, and that the public interest is served. But there is nothing so inimical to wellbeing as good intentions. About a decade ago, the American TV host, John Stossel, did an experiment to demonstrate the role played by bureaucracy in thwarting growth. He tried to start a simple business selling t-shirts in three countries—the US, Hong Kong (then a free place), and India. He was up and running the same day in Hong Kong; in the US it took about a week; after a year, he was still waiting for approval in India. The US can afford to err a bit on the side of caution but economies like India and Brazil cannot. And government officials cannot be trusted to decide the optimal tradeoff between regulation and growth. After all, their paycheck depends on the former.

Money does not buy happiness, but poverty essentially ensures it will not be realized. Government officials may claim the society can be made richer through government but there are no examples like this anywhere. If government would get out of the way, reduce the bureaucracy and rules that prevent innovation, and establish a society based on simple principles—secure property rights, public safety, and equal treatment under the rule of law—the inherent capabilities of Brazilians will flourish as never before.