Latin America

What Brazil's Populist Bust Could Teach Trump

Latin America's biggest economy provides an object lesson in the dangers of sweetheart deals and naked protectionism.

A cautionary tale.

Photographer: Mario Tama/Getty Images

In the other half of the Americas, Donald Trump's bombast, aggression, and populist aggrandizement have fed comparisons to Venezuelan strongman Hugo Chavez, the archetypal caudillo. But in fact, to incarnate the late Venezuelan Comandante, Trump would have to capture or trample too many robust U.S. institutions -- the courts, Congress, the media, to name a few. That seems unlikely.

Instead, in policy terms at least, the more appropriate and in many ways no less disastrous comparison may be to former Brazilian President Dilma Rousseff.

True, besides trademark hairdos, there's little surface resemblance between the volcanic showman mogul and the onetime Brazilian guerrilla turned Workers Party wonk who governed Latin America's largest country.

But consider the shared traits and policy preferences and quirks, which roiled Brazil and might portend trouble for any divided democracy. Second-guessing the markets? Check. Willfulness? Sim, senhor. A disdain for conventional politics? Check again. An appetite for alternative facts and immunity to fiscal reality? Double check. Taken together, these traits offer a prescription for a debacle foretold.

Rousseff's predilection for alternative facts was well known. Back in 2005, when she served as President Luiz Inacio Lula da Silva's chief of staff, she scotched the finance minister's prudential advice to curb spending and generate a budget surplus as "rudimentary." Six years later she was running the country and shredding the economics rulebook. She poured money into pet government projects, showered tax breaks and soft loans on corporate darlings, and ring-fenced the economy with buy-Brazilian rules. Sound familiar? Her finance minister, Guido Mantega, even gave this policy adventure a fancy rubric, the "new economic matrix," on a bet to make South America's underachiever great again.

That didn't work out so well. Putting Latin America's biggest economy in a nationalist bell jar encouraged corruption and shackled competitiveness. The damage was most evident at Petrobras, once the proudest Latin American multinational, which saw its reputation and market value collapse. Lavishing corporate champions with tax breaks and subsidized loans swelled corporate bottom lines but didn't draw much investment, let alone a flock of building cranes. Fiscal stimulus goosed growth but sabotaged the budget as government spending outpaced the economy, stoking inflation without creating many jobs.

Sure, Brazil's economy briefly surfed the commodities swell, but little of the increase in gross domestic product owed to structural advances. Gains in total factor productivity -- the broadest measure of competitiveness -- accounted for only a tenth of growth during the Workers Party governments from 2002 to 2014, according to Otaviano Canuto, who oversees Brazil and eight other developing countries for the World Bank.

When Rousseff finally responded to the emergency, in late 2013, she made things worse. Marshaling public banks to conceal the damage, she broke the fiscal responsibility law and paved the way for her own impeachment last August. Brazil's economy shrank 6 percent in the last two years, the worst recession in a century. Some 12.3 million Brazilians are jobless, nearly double the number of three years ago. Only now, with the economy in the tank, has inflation begun to ease. President Michel Temer, who took over after Rousseff's impeachment, has pivoted toward fiscal sobriety, but his agenda of structural reforms -- a bruising 20-year spending cap, overhauling social security and labor laws -- assures more pain before any recovery.

Trump is not Rousseff, but he might take a cue from the "populist sugar rush," as the World Bank's Otaviano Canuto puts it. "Tweeting about companies, bringing CEOs into government, micromanaging the economy -- all this is very Dilma-like," said Monica de Bolle of the Peterson Institute for International Economics. "You get a bump at first, and then you disorganize the economy."

Brazilians also know something about the perils of grooming corporate champions. "If the U.S. moves to unhealthy relationships, with government getting into bed with business, that tends to be very bad," Arminio Fraga, a former Brazilian Central Bank president, told me. "That's a source of inequality and unfair advantages that people have trouble tolerating, as we know too well in Brazil."

Brazil was not alone in its protectionist frenzy. Closing borders and buying Latin American was gospel among governments on the left and right across the region though most of last century and made a comeback in the 2000s. Its major ideologue was Argentine economist Raul Prebisch, another economic nativist who wanted to nurture homegrown industry and build walls against predatory traders (albeit rich-world predators). "I don't know if Raul Prebisch is smiling or rolling in his grave," said Marcos Troyjo, a Brazilian scholar at Columbia University, in a recent seminar on Trump's policies.

Trump ultimately may be too pragmatic an executive, and his own political base too firewalled against fiat, to indulge the sort of nationalist folly that sunk Rousseff and her country's fortunes and dogged Latin America for decades. But Brazil's woes are a cautionary tale about mortgaging wealth and stability to the populist temptation, and that's a problem no border wall can fix. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mac Margolis at mmargolis14@bloomberg.net

    To contact the editor responsible for this story:
    James Gibney at jgibney5@bloomberg.net

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