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 is in its worst recession on record. Unemployment is at a record high. An investigation into corruption at the state-run oil colossus Petrobras, dubbed Carwash, has ensnared members of the business and political elite. Prosecutors have described Lula, who denies any wrongdoing, as the “commander-in-chief” of the scheme and charged him with corruption. His protege and successor, Dilma Rousseff, has been removed from office after being impeached for bypassing Congress to finance government spending. And the administration of her replacement, Michel Temer, 76, the former vice president, continues to be plagued by corruption allegations. What went wrong? Can Brazil get its magic back?
Brazil's currency and stocks have rallied since Temer took office in May 2016, and business and consumer confidence rose from record lows under Rousseff. But sentiment in recent months took another downturn, and a rebound in the economy remains elusive. The International Monetary Fund estimated in January that Latin America's largest economy would grow just 0.2 percent in 2017. In testimony that a Brazilian court released in mid-April, a former construction company executive said he paid a $40 million bribe to Temer's party in exchange for a Petrobras construction contract. Temer denies the charge, but he already had been touched by an influence-trafficking scandal that forced his top congressional liaison to step down. Allegations of interference with the Carwash investigation also had led several cabinet members to resign in the early weeks of Temer’s government. The president won passage of a constitutional amendment to limit public spending and help put public finances in order, and now has set his sights on pension reform. Investors have welcomed his plans.
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 poverty eradication. The new middle class went shopping, boosting growth. Now, with commodity prices dropping and industry sputtering, that model appears to have run its course. Investment that could become the economy's new engine has remained well below half that of China as a percentage of gross domestic product.
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 restore the sustainability of the overburdened social security system and introduce a more business-friendly environment, for instance by deregulating the labor market and streamlining authorization for environmental permits. He 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. He has an ample majority in Congress and good relations with legislators. But there has been growing opposition within his own coalition to austerity measures, specifically the pension overhaul. Both Congress and the Temer administration have approval ratings below 15 percent. And there’s no reason to think investigators have unearthed the full scope of high-level corruption in Brazil. Carwash has not only produced scores of defendants, it has exposed a system of institutionalized corruption connecting Brazil’s largest companies with its 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
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