The World Cup and Brazilian Economy.

An estimated 3.5 million people will have their eyes glued to the 2014 Football World Cup, hosted in Brazil. Investors have probably also got their eye on the ball in Brazil too, but it’s not just the football that’s grabbing their attention, it also the Brazilian economy and its future prospects.

Indeed, the Brazilian economy over the past decade in many ways has been similar to an exotic game of Latin American football, with a lot of excitable twists, turns and successive goals-comparatively enviable GDP results. But like a football team which leads comfortably against its opponent, following a number of goals, perhaps the Brazilian economy is starting to fall into complacency and stutter and maybe it has got its eye off the ball.

Most observers would agree that the Brazilian economy seemed to be well stewarded over the past decade. For example, hyperinflation had been successfully restrained with a new currency in 1994; the Real. Moreover, successive governments had stuck with sound economic policies and anti poverty programs. The results of which bared some fruits; the economy grew rapidly with GDP on the advance for a number of years, then reaching a peek growth of 7.5 percent in 2010. Notably, these economic advances had been partly spurred on by the global commodity boom, which has resulted in robust exports of Brazilian iron ore and agricultural produces. Moreover, the recent discovery of deep sea oil fields in 2007 had ensured that the economy was running on high octane.

There have also been some social advances too. Inequality went on the decline and a better safety net implemented by successive governments resulted in poverty being cut by two thirds. The income of Brazil’s poorest has almost doubled over the past decade, while on the other side of the income scale the richest 10 percent have seen their income increase by just 20 percent. The result of all this means that Brazil now has approximately 200 million people, which is half of its population in the middle class socio economic group. That’s a lot of people with disposable income and aspirations, which has meant ballooning sales for white goods, cars, flat screen TV etc.

But while the living standards for many Brazilians, underpinned by a buoyant economy and government policy, has vastly improved, Brazil still remains today one of the world’s most unequal societies.

Additionally, there are other challenges that lie ahead for Brazil. For example, as the population becomes better educated they also become more demanding of their politicians. The younger better education generation is less tolerant of corrupt politicians and they want their taxes more efficiently spent on public services.

Despite the economic momentum of the previous decade Brazil’s infrastructure has to some extent been left lagging behind. Approximately, 100,000 new registered vehicles roll across the roads each year, but the roads continue to remain in a sorry state with large pot holes and in need of tarring. Public transport is also in a rundown state with cramped decrepit buses. Despite air traffic almost doubling over the previous decade, there has been no new airports.

But perhaps spending more taxpayers money on public projects may not be the solution. Public spending in Brazil already amounts to 38 percent of GDP, which is far higher than other middle income countries, in 2012, according to a recent survey in the economist.

So the solution may lie in the more efficient allocation of public resources. For, example despite Brazil being a young demographic country it spends approximately 11.3 percent of its GDP on pensions and 5.6 percent of GDP on education, which happens to be greater than the Organization for Economic Co-operation and Development (OECD) average. But Brazilian schools, remain in a dire state with an unbalanced amount of money being spent on university students and not enough going into primary secondary education. Teachers also retire early and get generous pensions.

Furthermore, those few public infrastructure projects that are concurrent are well behind schedule and well over budgeted. Indeed, tackling corruption would also pay dividends, Brazil scored 43 (100 representing very clean and 0 representing highly corrupt) on the 2012 Corruption Perception Index, scoring more poorly than Cuba. Corruption has also been cited as the catalyst for the recent 2013 riots.

Brazil’s competitive needs tackling too. Unit labour costs have doubled in the past decade, driven by big hikes in the minimum wage, the strengthening currency has also seen them treble in dollar terms. For example, 100 USD in 2002 and 322 USD in 2012 and the consequence of this is that it has made Brazil an expensive place to manufacture. Businesses have also moaned about the excessive red tape and bureaucratic customs procedures. Three quarters of Brazil’s growth has been created by adding more workers, but only one quarter has come from productive gains. In view of the fact that there is not much room for the workforce to grow the need for changes are more pressing. This could mean trimming tax benefits, pension reforms, cutting red tape and updating labor laws.

Also enticing private investment in infrastructure projects could be on the government’s radar. Brazil’s credit rating was BBB minus (stable) according to the credit rating agency Standard and Poor. Business investment fell 2.1% in the first three months of 2014, the biggest decline in two years. So keeping a rein on public spending maybe beneficial, particularly if the government wants the option of financing infrastructure projects with a greater proportion of private money.

High inflation is rearing its ugly head again, inflation remains at 6 percent; above the Central bank’s target, which has been maintaining a tight monetary policy by keeping interest rates at 11 percent. The high interest rates are not only making it difficult for Brazilians to get access to cheap finance, it also appreciating the real, making Brazilian exports less competitive. GDP expanded by just 0.20 percent in the first quarter of 2014.

Nevertheless, with the abundance of natural resources that could underwrite foreign investments, Brazil still looks attractive for investors. With a young and better educated population, which usually leads to productivity growth, and a vibrant middle class, with easier access to credit Brazil’s trajectory of growth should continue.