Entrenched interests constrain Brazil’s economic upside

Brazil’s macro readings look healthier than in recent years — GDP growth near 3%, inflation around 4.3% and unemployment at a recent low — but these surface improvements obscure deeper structural frictions that curb the country’s growth potential. Concentrated economic power in protected incumbents, complex regulatory regimes and politically driven bargains raise costs, blunt competition and discourage the large‑scale productive investment needed to close productivity gaps. These constraints are evident in lagging investment ratios, infrastructure bottlenecks and only modest productivity gains even as consumption and employment recover. International experience suggests a template for improvement: loosening sectoral constraints on energy and infrastructure, streamlining approvals and tightening fiscal frameworks can materially lower operational risks and lift investor sentiment — but such gains are conditional on implementation. Energy reform, greater scope for private participation and clearer rules for public‑private collaboration would reduce logistics and power risk for firms; regulatory simplification would shorten project timetables for capital‑intensive sectors; and clearer fiscal rules could restore confidence among rating agencies and foreign creditors. Each of these steps, however, entails political and social trade‑offs: unions, entrenched supplier networks and municipal capacity constraints can slow or blunt reforms, and measures to reduce deficits may raise short‑term distributional tensions. The political calendar matters. With an October general election approaching, the administration is banking on the current momentum to help its electoral case, which reduces the appetite for politically costly reforms even as it raises the risk that policy will prioritize short‑term stability over structural change. Financial markets and foreign investors will be closely watching whether policy signals move toward deeper liberalization and credible execution — which would support higher inward investment — or toward renewed protectionism and selective reforms, which would likely depress medium‑term prospects. Fiscal headroom is limited by legacy commitments, narrowing the set of countercyclical tools and increasing the importance of reforms that improve supply‑side performance. In short, Brazil has a window in which modest macro stability can be converted into higher‑quality growth, but turning that window into sustained improvement requires confronting concentrated interests and delivering complex reforms — a politically fraught undertaking with execution risk at its core.