The front-runner from the Workers Party Dilma Rousseff, the chosen successor of the hugely popular outgoing President Luiz Inacio Lula da Silva, looked like a certain winner. But she has seen her lead dwindle from 20 percentage points two weeks ago after the first round of voting to 4-6 percent, various polls in recent days indicate.

This is a surprise. Brazil is booming, its economy slated to score 7.5 percent growth this year, with the promise of an offshore oil bonanza by the end of this decade. Its currency, the real, is rising so high against the U.S. dollar that government is putting controls on hot money that has flooded in to ride the growth. Voters usually reward such economic success.

The immediate cause of Rousseff's declining support is yet another corruption scandal, involving a family member of her closest aide who has been accused to taking money to help win government contracts. A further problem for Rousseff is a growing controversy over abortion rights and the influential Roman Catholic Church isn't entirely at ease with her evangelical Protestant faith.

But concern is growing about how Rousseff would govern, whether she could control the powerful labor union barons and her own party and whether she could follow Lula's careful balance between social programs and financial orthodoxy. The underlying fear is that after a decade of impressive growth Brazil could sink back into its old, depressing pattern of deficits, inflation and currency crises.

Beneath today's encouraging financial figures are ominous signs. Inflation is creeping up again and interest rates have had to be raised 2 percentage points this year to more than 10 percent. Growth is slowing, in part because China is slowing and in the Lula years Brazil has become strikingly dependent on the Chinese market, which has replaced the United States as Brazil's biggest customer.

Currently, 65 percent of Brazil's exports are of iron ore and soya beans. Its mining giant Vale, which alone accounts for 51 percent of Brazil's trade surplus, makes 56 percent of all its sales in China. And Brazil's manufacturing exports have shrunk. The drop in the U.S. market is a double blow because the shortfall is mainly in manufactured goods, which generate more added value and more jobs. Three-quarters of Brazil's exports to the United States are industrial products, which account for only 24 percent of its sales to China.

The growth in trade with China is "a step backward," argues Jose Augusto de Castro, vice president of the Brazilian Foreign Trade Association. When dealing in commodities, "the importer decides and controls the quantity and prices, making an unstable market," in contrast to the situation with manufactured goods, he says.

Despite its recent growth, Brazil remains a developing country, where half the population lacks decent sanitation and water. For one of the world's Top 10 economies, Brazil ranks a humiliating 80th out of 179 countries in Transparency International's Corruption Perceptions Index. And yet the government spends as if Brazil were a fully developed European welfare state.

More than 40 percent of gross domestic product goes to the federal and state governments. Public sector pensions take 10 percent of GDP and social spending takes more than 16 percent of GDP. Education spending is weighted toward free public universities with poor reputations and the average Brazilian entering the labor market has less than eight years of schooling.

And the public finances are threatening to run out of control. Official government spending is budgeted to increase by 10.7 percent in 2010. Housing lending for the first half of this year is up 51 percent from the same period in 2009. The government has announced an $886 billion infrastructure investment plan -- the Program to Accelerate Growth -- for the next seven years.

Brazilian state banking lending has increased from 1 percent of GDP in 2002 to more than 7 percent. Spending on the country's 119 state-owned companies is expected to increase by 32 percent this year. Lending by the Brazil Development Bank is expected to double from its 2008 total to reach $87 billion this year. Factor in these costs and the real budget deficit looks like hitting double figures.

Brazil isn't an easy place to do business. An employer can expect to pay 70 percent on top of employees' wages in social charges and employers very seldom win in Brazil's labor courts. Business loans are problematic. Most loans are for one year or 18 months and interest can be more than 20 percent.

The U.S.-based Heritage Foundation's Index of Economic Freedom rates Brazil a lowly 113th out of 180 countries and 21st out of 29 countries in the South and Central America/Caribbean region. Barriers to entrepreneurial activity and job creation include a heavy overall tax burden, inefficient regulation, the relatively high cost of credit, and a rigid labor market. The judicial system remains vulnerable to political influence and corruption.

Starting a business takes more than three times the world average of 35 days, and obtaining a business license takes much longer than the global average of 218 days. Import bans and restrictions, market access barriers in services, high tariffs, border taxes and fees, restrictive regulatory and licensing rules, subsidies, complex customs procedures, and problematic protection of intellectual property rights add to the cost of trade.

After discussions last week with several Brazilian business leaders, this reporter was left with the impression that Brazil's real miracle was that its economy was doing so well under such constraints. Their fear was that a Rousseff presidency would veer to the left and increase the burdens on business while ducking the need for structural reforms. If that argument takes hold in the next two weeks, an election surprise shouldn't be ruled out.

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