After its financial crisis of 2002 and stagnation of last year, Brazil has begun to look like a viable country again. President Luiz Inacio Lula da Silva, who completes his second year at the helm this week, has stabilised the world's ninth largest economy and advanced several reforms that should improve productivity. But to really capitalise on his country's potential, Mr Lula da Silva now needs to attack the bureaucracy that stifles small business.

Mr Lula da Silva cannot take credit for all the improvement. The revival of the world economy and surging demand from China has helped boost the price of minerals and other commodities that Brazil exports. Relatively low international interest rates have helped ease external financial pressures.

But at the same time, Brazil has been helping itself. The economic team has been steadfast in pursuing a tight fiscal policy. Inflation remains subdued. Public indebtedness has been reduced and the proportion of debt linked to the exchange rate is now about 10 per cent of the total. Mr Lula da Silva has been an assiduous promoter of his country's exports to new markets. And he has pressed ahead with structural reforms.

During 2003 he piloted through a far-reaching reform of the country's public sector pension system that should ease the country's fiscal burden in the longer term. He has followed up in 2004 with new laws to reduce the length of legal proceedings. New rules guaranteeing private investment in public infrastructure projects may help attract capital into much needed plans to improve the dismal quality of its roads, railways, ports and bridges.

All of this has been achieved in the face of fierce opposition and dissent within the ranks of the governing nine-party coalition. Indeed, earlier this month Mr Lula da Silva lost the formal backing of the centrist Brazilian Democratic Movement Party (PMDB), although most of its congressmen will continue to vote with the government.

After a rocky period earlier this year, Brazil is now growing at about 5.2 per cent in 2004, its fastest expansion for at least a decade. But to sustain this level of growth, the government must do more to tap the country's entrepreneurial potential, in particular by making it easier for poor and socially marginal Brazilians to become integrated into the formal economy. Punitive taxation, restrictive labour laws and an unresponsive bureaucracy make it attractive for informal businesses to stay outside the formal economy.

The government has taken some steps to reduce the bureaucratic burden on small businesses but they have been too timid. Reform of the labour market to make it easier and cheaper to hire and fire workers is particularly vital if the country is to be able to reduce stubbornly high rates of unemployment. Mr Lula da Silva and his Workers' party have embraced the cause of stability. They now need to champion the cause of enterprise.