Brazil’s Highs and Lows
It’s 2009 and Brazil’s beloved President Luiz Inacio Lula da Silva proclaims the nation’s biggest oil discovery its “passport to the future.” Rio de Janeiro is awarded the 2016 Olympics on top of the 2014 World Cup, and Brazilians see both as belated recognition of their rising international standing. The global financial crisis is a hiccup for effervescent Brazil as a commodity boom surges. Fast forward to today and the economy has just suffered its worst recession on record. Unemployment is near a record high. An investigation into corruption that started at the state-run oil colossus Petrobras, dubbed Carwash, has expanded and ensnared members of the business and political elite. Prosecutors even won a conviction of Lula, one of the most popular presidents in Brazilian history, on graft and money-laundering charges in mid-July. His protege and successor, Dilma Rousseff, has been removed from office after being impeached for bypassing Congress to finance government spending. And the current president, Michel Temer, the former vice president, has survived a massive corruption scandal himself, at least for the time being. What went wrong? Can Brazil get its magic back?
Temer’s allies in August defeated a motion in Brazil’s lower house of Congress that would have put him on trial for obstruction of justice and corruption. Temer, who has denied wrongdoing, in June was acquitted of separate charges of illegal campaign financing. The vote in Congress paves the way for him to turn his attention to economic reforms. He’s already attained overhaul of labor laws and a constitutional amendment to limit public spending and to help put public finances in order, and he’s set his sights on pension reform, a plan welcomed by investors. However, Brazil’s top prosecutor has indicated he may bring new charges against the president. The International Monetary Fund estimated in July that Latin America’s largest economy will grow just 0.3 percent in 2017.
Brazil has suffered boom-and-bust cycles and political instability since independence from Portugal in 1822. Half its 2015 exports were raw products, so its prosperity is sensitive to the vagaries of the commodities markets. On paper, Brazil looks like a powerhouse. It’s the fifth-largest country in the world, by land mass and population. Its offshore oil reserves include the Western Hemisphere’s biggest discovery since 1976. It has the second-largest iron ore reserves, is the second-largest producer of soybeans and third-largest of corn. On the other hand, its wealth distribution remains among the most unequal. Good times did provide cash to beef up the Bolsa Familia social-welfare program that became an international model for the eradication of poverty. The new middle class went shopping, boosting growth. Now, with commodity prices at lower levels and industry sputtering, that model appears to have run its course. In early 2017, the economy recorded its first quarter-on-quarter growth in two years, led mainly by agriculture. But investment, which the government hopes will become the economy's new engine, fell for three straight quarters and, as a percentage of gross domestic product, remains about one-third that of China.
Can Temer put Brazil back on a solid footing? His plan began with changing the constitution to limit public expenses for up to 20 years. Now he wants to repair the overburdened social-security system and continue to create a more business-friendly environment. But the distraction of the corruption allegations has significantly diminished Temer’s odds of accomplishing pension reform, and legislators will be increasingly hesitant to pass unpopular measures as Brazil draws closer to 2018 elections. Temer can implement some micro-economic reforms by presidential decree but will require congressional approval for major budget measures. Unlike Rousseff, Temer is a seasoned politician with experience striking deals to secure passage of bills. But his coalition is at risk as allies have distanced themselves from him. Both Congress and the Temer administration have approval ratings below 10 percent. And there’s no reason to think investigators have unearthed the full scope of high-level corruption in Brazil. Temer’s former tourism minister was arrested in June 2017 in connection with alleged corruption on a World Cup stadium project. Carwash has not only produced scores of defendants, it has exposed a system of institutionalized corruption connecting Brazil’s largest companies and political parties.
The Reference Shelf
- Bloomberg interviews Brazil's President Michel Temer.
- A 2015 report published by the Center for Economic and Policy Research concludes that Brazil’s slump resulted more from policy choices than external conditions.
- A 2016 Congressional Research Service report provides background on Brazil’s politics
- Bloomberg Businessweek recounts how Brazil’s richest man, Eike Batista, lost his $34.5 billion fortune.
- The Brazilian Institute of Economics, a think tank, finds Brazil’s tax breaks too costly.
- A Businessweek web comic on the Petrobras corruption scandal.
First published March 27, 2014
To contact the editor responsible for this QuickTake:
Paula Dwyer at firstname.lastname@example.org