Can Brazil overcome economic malaise and scandal?

BY ROGER F. NORIEGA AND FELIPE TRIGOS - IASW

Key Points

Brazil’s economic malaise and corruption scandals present significant challenges to President Dilma Rousseff’s ability to govern, just four months into her second four-year term.

Latin America’s largest economy is rediscovering that stimulating growth and creating jobs requires controlling government spending, increasing trade, and attracting investment by adopting a host of free-market reforms.

The United States and Brazil should jump-start efforts to improve their commercial and diplomatic relations to bolster economic development in a region crucial to both countries.

While US policymakers, commentators, and the media have been distracted recently by the “historic” normalization of US-Cuban relations, the rest of Latin America is beset by extraordinary challenges—not the least of which is the economic malaise and governance crisis in Brazil, South America’s most populous country and the world’s sixth-largest economy.

Sworn in for a second four-year term just over three months ago, Brazilian President Dilma Rousseff is confronting the worst economic conditions in decades and a spiraling public corruption scandal involving the state-owned oil company Petrobras. Even before her narrow victory last October, most Brazilians questioned whether her policies could jump-start economic growth and address the nation’s social and economic challenges.[1] Today, her popularity has plummeted: according to Brazilian polling institute Datafolha, 62 percent of those interviewed rated Rousseff’s government as “bad” or “terrible,” while only 13 percent considered the government “great” or “good.”[2]

In the last two months, a series of protests in Brazil’s main cities have drawn millions of people to the streets demanding Rousseff’s impeachment. Although the dissatisfaction appears to be rooted in middle-class anxiety about a flagging economy, the protests have intensified because of allegations that contractors working for Petrobras paid $800 million in kickbacks to politicians—the vast majority of whom are from the president’s left-wing Workers’ Party (PT). (Unless investigators are able to prove Rousseff’s direct knowledge of the kickback schemes, however, few experts expect the matter to escalate to her impeachment.) Government supporters also have taken to the streets to defend labor rights and demand an increase in teachers’ salaries.

Combined with the potential of Brazil’s vast natural resources, a regimen of overdue reforms should eventually get the economy growing again. Rousseff appointed a new economic team at the beginning of the year that has proposed new measures to restore economic confidence and growth. And in the wake of demonstrations in March, her attorney general announced stiffer penalties for political corruption.[3] However, scandal-ridden politics, a fractious National Congress, and the president’s plummeting approval ratings may make it difficult for her new team to get traction in a second term.

Mixed Legacy of the Workers’ Party

When longtime labor leader Luiz Inácio da Silva (popularly known as “Lula”) assumed the presidency of Brazil in 2003, his predecessor, Fernando Henrique Cardoso, had established the underpinnings of a strong and prosperous economy. Keeping most of Cardoso’s macroeconomic policies, Lula enjoyed the benefits of an economy that was flourishing, with record commodities exports to China and high oil prices. Moreover, the 2007 discovery of vast oil deposits in Brazil’s territorial waters appeared to ensure the country’s economic security for decades.

While credited for reducing poverty by 30 percent, Lula’s administration neither secured the prosperity of the new middle class nor laid the foundation for a Brazilian economy capable of competing in the 21st century.[4] A year ago, in a research paper for the American Enterprise Institute, we explained that Lula failed to push through essential reforms for “improving government efficiency and accountability, simplifying the labyrinthine federal and state tax systems, and removing arbitrary obstacles to doing business.”[5]

Despite leaving behind important unfinished business, Lula’s personal popularity allowed him to name his successor, Dilma Rousseff, who had served as minister of energy and presidential chief of staff. After she was elected to the presidency in 2008, Rousseff maintained most of Lula’s populist policies and continued to ignore a reform agenda.

But unfortunately for Rousseff, the end of the China commodity boom and the failure of leaders to retool the Brazilian economy have taken their toll. During Rousseff’s first term as president, the economy of Brazil went from expanding an average of 4 percent per year between 2002 and 2008 to averaging just 1.3 percent growth in the last four years.[6] This year, the trend is expected to deteriorate even further with a contraction of 0.5 percent.[7]

In hindsight, Rousseff’s undoing may have been relying on social programs that produced record deficits and rising expectations while failing to create sustainable jobs. For example, an estimated 50 million people in Brazil have benefited from government social welfare program Bolsa Família, which provides conditional cash transfers to very poor families to reward school attendance and vaccinations. However, 12 years after Lula expanded the program, only 12 percent of the beneficiaries have been able to improve their economic situation to rise into the middle class.[8] And the demand of that burgeoning middle class for greater opportunity, first manifested in spontaneous demonstrations in 2013, is at the heart of the crisis Rousseff is facing today.

With commodity prices beginning to fall in 2013, economic growth slowing, and government spending climbing, Rousseff doubled down on costly government solutions to ensure her reelection. In particular, she expanded social programs to shore up support in underdeveloped regions and with demographic groups that rely on government subsidies. Indeed, Rousseff managed to win reelection in October 2014 in large measure because of the dependence of poor voters on the social safety net. As Investor’s Business Daily reported, “Every state that [voted] for Rousseff had at least 25% of the population dependent on Brazil’s Bolsa Família . . . [whereas] states with less than 25% of the population on Bolsa Família overwhelmingly went for [opposing candidate Aécio] Neves and his policies of growth.”[9]

Notes

1. See Roger F. Noriega, “As the Brazilian Economy Slips into Recession, Voters May Opt for Free-Market Solutions,” American Enterprise Institute, September 5, 2014, www.aei.org/publication/as-the-brazilian-economy-slips-into-recession-voters-may-opt-for-free-market-solutions/, in which the author summarizes a series of polls conducted by the Brazilian Institute of Public Opinion and Statistics.

2. Brian Winter, “Brazil’s Rousseff’s Popularity Tumbles in New Poll,” Reuters, March 18, 2015, http://ca.reuters.com/article/topNews/idCAKBN0ME12J20150318.

3. “Brazil’s Attorney General Announces Anti-Corruption Measures,” Associated Press, March 20, 2015, www.nytimes.com/aponline/2015/03/20/world/americas/ap-lt-brazil-corruption.html.

4. Camila Nobrega, “Bolsa-Família: Template for Poverty Reduction or Recipe for Dependency?” Guardian, November 5, 2013, www.theguardian.com/global-development-professionals-network/2013/nov/05/bolsa-familia-brazil-cash-transfer-system.

5. Roger F. Noriega and Felipe Trigos, “Brazil and Mexico: Hope or Hype?” American Enterprise Institute, April 3, 2014, www.aei.org/publication/brazil-and-mexico-hope-or-hype/.

6. “The Crash of a Titan,” Economist, February 28, 2015, www.economist.com/news/finance-and-economics/21645248-brazils-fiscal-and-monetary-levers-are-jammed-result-it-risks-getting-stuck.

7. “Brazil’s Coming Recession,” Economist, February 27, 2015, www.economist.com/news/finance-and-economics/21645248-brazils-fiscal-and-monetary-levers-are-jammed-result-it-risks-getting-stuck.

8. Nobrega, “Bolsa-Família.”

9. “Brazil’s Election Shows How the Left Thrives on Welfare Dependency,” Investor’s Business Daily, October 9, 2015, http://news.investors.com/ibd-editorials/100914-721083-brazilian-election-shows-how-the-left-thrives-on-dependency.htm.