A worker checks the wall of a tunnel constructed as part of the urban development project around the old industrial and port areas in Rio de Janeiro. A series of factors have kept Brazil’s economy from performing as Brazilians think it should. (YASUYOSHI CHIBA/AFP/Getty Images)

Valter Barros, co-owner of a small electronic-components factory in this city’s suburbs, was unimpressed with the Brazilian government’s battle last week to pass a controversial fiscal measure economists dubbed “creative accounting.”

He was not alone. As lawmakers arrived in Brasilia this week for a vote on a measure that would effectively permit the government to ignore all of a legally mandated $45 billion budget surplus for this year, protesters jeered and held up 100 real notes.

This was not the first time the administration of newly reelected President Dilma Rousseff had moved the goal posts to meet its targets.

The government’s budgetary woes are a consequence of Brazil’s underperforming economy. Critics trace the economy’s troubles back to the government’s policies. Brazil, they say, needs to overcome the barriers that hold it back: crippling tax burdens, tortuous bureaucracy, expensive labor legislation, rising inflation, poor education and a lack of infrastructure, all of which result in low productivity.

“The Dilma government tried to overcome this challenge, but it did not succeed,” said Felipe Salto, an economist at a Sao Paulo consultancy called Tendencias. “Because it altered policies that were working and substituted policies that did not work.”

A woman carrying a baby and a résumé attends a job fair promoted by the mayor’s office to boost employment in Rio de Janeiro. (Dado Galdieri/Bloomberg News)

It took almost three days to get the new budget target through the National Congress, and then only with promises to free up specific budget items for individual senators and deputies. That’s what brought out the protesters waving cash.

Public galleries were closed in the tumult. An opposition deputy, Mendonça Filho, called the budget procedure “blackmail by decree.”

“Creative accounting has substituted for fiscal responsibility,” said Salto.

In the dining room that doubles as a boardroom for his electronic-components company, called Teckab, Barros, 54, said he was sick of what he saw as mismanagement of Brazil’s economy. He had voted for Aécio Neves, the center-right candidate who was narrowly defeated in October’s presidential runoff. “Economic policy got completely lost,” Barros said. “They really let it out of their hands and lost control of spending. They should have more control.”

Like other entrepreneurs, he wants to see Brazil’s economy put back on track. “Everyone believes that Brazil has potential,” he said. “It needs to go back to growing.”

Under Rousseff and her outgoing finance minister, Guido Mantega, Brazil kept unemployment down but not spending, and inflation is above target at 6.6 percent. Two ratings agencies have already downgraded Brazil’s investment status this year.

Instead of leading the continent it dominates, Brazil is growing less than other Latin American economies — 2.5 percent last year and just 1 percent in 2012. “Brazil should really be growing between 3 to 4 percent,” said Robert Wood, a Brazil analyst at the Economist Intelligence Unit in New York.

Under increasing pressure, Rousseff in November announced a new economic team led by banker Joaquim Levy, a move cheered by financial markets. “This is an excellent team,” said Salto, but he added that it will need to spend the next year “putting out fires.” There are doubts whether Levy will have the space to introduce the bigger reforms Brazil needs to grow.

Otherwise, Brazil could remain stuck in what some economists call the “middle income trap,” where growth in developing countries stalls because of factors that can include lack of infrastructure and low productivity.

Brazil has enjoyed 20 years of economic stability since a 1994 currency plan ended hyperinflation. Under Rousseff’s predecessor, Luiz Inácio Lula da Silva, dollars flowed into the country, which rode a commodities boom led by China’s growth. A family income support program helped put money in circulation. Brazilians spent heavily as the economy grew 7.5 percent in 2010.

But as the managing director of the International Monetary Fund noted last week in an interview with Brazil’s business daily Valor, the commodities boom is decelerating and China’s growth has slowed. “We are in a big transition phase,” IMF chief Christine Lagarde said.

Critics say the government should have done more to improve infrastructure during the good years.

Valter Barros seconds that idea. His company spends heavily to fly finished merchandise to companies in the free-trade zone in the city of Manaus, deep in the Amazon jungle, because there is no train and a truck takes 30 days to make the trip.

Brazil has made huge gains in productivity in agriculture, an important sector. But it loses heavily transporting products such as soybeans by truck on bad roads or in aging rail cars, while a lack of storage means it has to sell quickly rather than wait for the best price, said Manoel Reis, an infrastructure and logistics specialist at the Getulio Vargas Foundation in Sao Paulo. Work has begun on six highway concessions announced in an ambitious 2012 infrastructure plan — but on none of the new railways envisaged in the plan.

According to the 2012 Program for International Student Assessment, two-thirds of Brazilian 15-year-olds were “low achievers” in math, and Barros said low educational standards are a problem when hiring staff.

“You have to have a revolution. You have to rethink school education,” said João Batista Oliveira, a teacher and former executive secretary at Brazil’s Ministry of Education and Culture. “You have to reorganize the system.”

Labor legislation means workers are expensive — Barros said pension and tax payments mean an employee earning $1,000 a month costs him $2,500.

“It impacts on the growth of industries because they are going to compete with the prices of China, and you can’t be competitive,” he said.

Salto said the complexity of Brazil’s myriad taxes means companies spend time and money just working out how to pay them. Sector-specific tax breaks introduced by Rousseff’s government to encourage growth in the auto industry, for example, complicate the picture. “The measures that Dilma took made the business environment worse,” he said.

To add to Rousseff’s worries is Operation Car Wash, an investigation into overpayments on contracts by the state-controlled oil company, Petrobras. As key figures in the case turned state’s evidence, leaks from their testimonies linked the multimillion-
dollar graft scheme to payments to political parties, including Rousseff’s Workers’ Party.

Politicians are expected to be named. General Prosecutor Rodrigo Janot said over the weekend that 11 high-ranking executives from six of Brazil’s biggest construction and engineering companies linked to the scandal and currently under arrest will be charged this week.

“It could go pretty high up,” said Wood, the New York analyst.

Such corruption, Barros said, is part of Brazilian culture, but he added that the scale of this scandal has disappointed him. Yet, in quintessentially Brazilian fashion, he remained optimistic.

“I just want to give a vote of confidence,” he said. “Brazil deserves it.”