speri.comment: the political economy blog

Brazil over troubled waters

Corruption, economic decline and distrust mark the end of 2014 in Brazil

Giselle Datz, Associate Professor of Government & International Affairs, Virginia Tech, USA

Giselle DatzMore than 2 million people, dressed in white, welcomed the New Year by the ocean on Copacabana beach in Rio.  They were hardly asleep when festivities for the (re)-inauguration of Brazilian president, Dilma Rousseff, were set under way in Brasilia.  For many Brazilians, the familiar New Year celebrations this time around were less important than saying goodbye to 2014, a year marked by large-scale displays of ineptitude in different – but important – aspects of the social and political consciousness of the nation.

The historical 7-1 loss of the Brazilian soccer team to Germany in the semi-final of the World Cup at home was a shameful disappointment.  But more significant, and depleting of national esteem, has been the descent of Brazil from a promising ‘BRIC’ country that had just discovered enormous amounts of potential oil wealth beneath the waters off its southeast coast to a downgraded economy of anaemic growth and mounting corruption scandals.  Indeed, in 2014, the country recorded almost no annual growth (0.2%), well below the region’s average (1.1%), according to the UN Economic Commission for Latin America.

This descent coincided with Rousseff’s first term in office.  Although, from 2007 to 2010, Brazil grew more than its neighbors (no doubt, riding the commodity boom wave), since her first inauguration in 2011 its growth rate has tumbled far ahead of them.  Despite relative initial resilience to the 2008 crisis, the Brazilian economy was severely hit by exogenous adversities: foreign capital volatility, uncertainty in developed economies, a fall in the prices of commodities, and interaction with relatively weaker trade partners (especially China, now Brazil’s main trade partner, responsible for 20% of its exports).

To be sure, Brazil’s reversal of fortune was also crucially determined by domestic policy choices.  While fiscal expansion was welcome as a crisis containment measure, the maintenance of this policy perpetuated economic distortions.  A ‘growth’ model that focused on boosting internal demand failed at revamping investment and production. Lack of investment has, in fact, been Brazil’s lingering economic problem.  At only 17% of GDP, it is lower than the Latin American average of 20%, and less than half the average for Asian countries (40%).

Relatively high interest rates (in no small measure due to ascendant inflation) have also contributed to anaemic growth, along with restrictions in credit availability and the absence of much-needed tax reforms.  Gross domestic debt has risen as a result of giant transfers to the national development bank.  Combined with the fiscal gimmicks adopted by the government to mask its deepening fiscal problems, these prompted a rating downgrade by S&P in March 2014.

Of all the difficulties the country is currently facing, one of the most disturbing has been a huge new corruption scandal involving high-level officials in the president’s Worker’s Party (the PT), some politicians from allied parties, construction companies, and directors of the national oil company, Petrobrás.

First unveiled in March 2014 as part of an investigation into a money-laundering scheme, the Brazilian federal police is still uncovering all the details of a mega bribery operation which the local media calls ‘the biggest corruption scandal in Brazil’s history’.  The operation entailed construction companies paying Petrobrás’s directors in exchange for overestimated contracts with the oil company.  The money ultimately benefited the PT and its allies.  Rousseff, who presided over Petrobrás’s board of directors from 2003 to 2010, first as Minister of Energy and then as chief of staff under Lula, has denied any involvement and protected the president of Petrobrás from calls to step down.

Relentless investigations and the jailing of directors of Petrobrás and some construction companies show that the authorities have been pursuing the case with determination. Meanwhile, Petrobrás’s stocks – already hit by Rousseff’s energy price freeze – have  fallen precipitously, evoking fears of a downgrade in light of its high debts, lower global oil prices, difficulty in accessing new credit and the possibility of a US Securities and Exchange Commission investigation.  Corruption in state enterprises is, of course, by no means a PT invention.  But the practice spread via a machinery of governance heavily invested in the perpetuation of the party’s hold on power.

It was in this context of growing distrust that the PT faced elections last October.  Yet the party fared well and achieved the goal of reelecting Rousseff, albeit by a small margin of votes.  She won 51.64% of the votes, with her challenger from the PSDB party getting 48.36%.

Although some credit Brazil’s famous (and now much-copied) conditional cash transfers program, known as Bolsa Família, for Rousseff’s victory, the story is more nuanced. Rousseff did indeed count on 72% of the votes in the country’s poorest Northeast region (a large recipient of cash transfers), but she also amassed majorities in five other regions, the only exception being the South.  Damaging for the opposition was its own weak performance, as challenger Aécio Neves, a former governor of the large state of Minas Gerais, failed to win in his native state.

Perhaps it is true that Neves did not fight on a level playing field, given the disproportionate television time (and resources) enjoyed by the incumbent.  Yet Brazil’s consolidated democracy showed again that the PT’s grip on power is well rooted, not only in the vast public resources that, according to the police, it has appropriated, but also in the preferences of a divided electorate that cannot be understood via simple classifications that slice the country between its richer and poorer regions.

Rousseff’s second term in office is bound to introduce changes.  Given the level of economic distress and lack of international confidence Brazil faces, her new economic team is poised to undertake reforms that will, at least to some extent, reverse the fiscal laxity and interventionism of her first term.  In this way, Rousseff’s agenda will resemble more that undertaken by Lula and proposed by Neves than what was actually set out in her own campaign rhetoric.

Beyond Brazil’s own troubled waters, Rousseff’s team also will have to navigate the consequences of the reversal of monetary easing in the United States.  More capital outflows will follow.  Resuming an upward trend in foreign direct investment will require more public-private partnerships, encouraged by the Rousseff government since its early years but undermined by inefficient regulations and lingering uncertainty.

A hopeful wish for 2015 is that the past year has helped discern fact from fiction.  After all, just as in soccer, the game is rarely won without good coaching that emphasises feasible and responsible choices, no matter the natural endowments with which a team is gifted.

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Categories: Development, Economics, Politics and policy, SPERI Comment, The BRICs | Tags: | Leave a comment

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