The beginning of a new presidential mandate is generally a time of great hope. If a president is re-elected—even if only by a thin margin like Brazil’s Dilma Rousseff was in late 2014—the new term supposedly reinforces the work carried out in the previous mandate. If policy adjustments are necessary, the re-invigorated president’s new show of popular support will help in dealing with Congress, business and civil society.
But as we move into the last quarter of 2015, Brazil’s outlook is gloomy, and any re-election rebound has long faded. The economy is in a steep recession. Dilma is at odds with leaders in Congress and her governing coalition is severely fractured. The motto chosen for her second term was “Brazil, a country of education,” but in only nine months into it she’s already had three different ministers of education (a country of ministers of education?). The president’s political party, Partido dos Trabalhadores (Workers’ Party—PT) is at the center of the largest corruption scandal in Brazilian history, leaving the country paralyzed.
For a country once seen poised to enter a new political, diplomatic and economic era, suddenly the future seems uncertain and unstable. What happened?
When Luiz Inácio Lula da Silva, Rousseff’s predecessor and the founder of PT, campaigned for president in 2002, he attempted to show his willingness to stick to economic orthodoxy established by his predecessor Fernando Henrique Cardoso (president from 1995 to 2002). Cardoso’s “Real Plan”— developed when he was finance minister in the previous administration – stabilized the economy and ended chronically high inflation rates.
In a “Letter to the Brazilian People,” Lula promised to adhere to fiscal responsibility and inflation targeting. He also vowed to face social inequality head-on. Contracts would be honored and the country’s debts paid down, giving rise to a new industrial policy based on commitment to “local content.” Surprisingly, he also promised to push for the reform of Brazil’s outdated labor laws. And he pledged to make the country’s tax and social security systems simpler and less burdensome.
Policies implemented during Lula’s eight years in the presidency (2003 to 2010) and in Rousseff’s first term, seemed to do fine. Well, at least as long as Brazil benefited from the global commodity boom. A few chosen entrepreneurs were given privileged credit lines offered by official banks to foster “national champions.” Foreign direct investment (FDI) flowed into the country to set up local production plants and take advantage of rules protecting the domestic market by favoring local production over imports. Fiscal incentives to automobile and home appliance manufacturers helped cushion the blow from the 2008 Great Recession to Brazil’s manufacturing sector.
But those tax and labor reforms that Lula mentioned in his letter were somehow forgotten along the way.
Today, the economic model that produced fast growth only a few years ago has reached a point of exhaustion. Privileging consumption over investment, sectoral policies over structural reforms, and the domestic market over global trade has reached a dead end. Brazil’s so-called national development model is incapable of lifting the country out of the “middle income” trap.
The way out of the current stalemate in Brazil needs to include the drafting of a new “Letter to the Brazilian People,” and this one needs to address the tax and labor reforms that Lula talked about originally.
Brazil has yet to find its place in the “reglobalization” now in the making. This new process of globalization is being shaped by plurilateral trade and investment deals such as the Trans-Pacific (TPP) and Transatlantic Partnership (TTIP), as well China’s new growth model, supposedly less dependent on the import of mineral and agricultural commodities that spurred the Latin American boom.
In 2015, Brazil’s economy is heading towards a painful recession with a 3 percent contraction. This comes on top of disappointing numbers throughout Rousseff’s first term, with the economy averaging less than 2 percent yearly growth in 2011-2014. Unemployment is on the rise and inflation is dangerously edging close to 9.5 percent: far north of the government’s 4.5 percent target.
As the effects of monetary tapering in the U.S. settle in globally, the Brazilian real will continue to depreciate. Interest rates are soaring, further weakening Rousseff’s claim of being the first president in Brazil’s history to bring Selic (the benchmark interest rate) down to a single digit—as was artificially the case at one point in her first term.
In search of good news to deliver, the government hopes to continue pushing its infrastructure package to the private sector in the form of new concessions to build and operate nearly 7,000 km of roads, as well as four large airports and a number of ports and railways. After a long process of ideological soul-searching—the ruling PT never wanted “management concessions” to be politically equated to unholy “privatization.” The president and her closest aides decided concessions were a good way to both continue to attract FDI and show a “market-friendly” face.
But bureaucracy, government micromanagement (such as trying to define profit margins in advance of infrastructure concession auctions) and the prospect of further government meddling have taken the allure out of long-term investment opportunities. So, the great uncertainty about Brazil for the next couple of years is: will continued under-performance result in inertia or finally stimulate change?
Low Probabilities
When millions took to the streets in June 2013—the largest demonstrations in Brazil’s history—they were protesting more than just fare hikes in public transportation. Yes, they were denouncing the poor quality of public services offered by a state that collects 36 percent of national income that, at best, only invests 3 percent of it. But they were also, in essence, protesting Brazil’s current model of state capitalism and its self-serving appetite.
For some, the way forward should feature more state involvement and less capitalism. This may seem like a viable option, especially if Brazil’s most productive sectors, such as its world-class agribusiness, continue to generate the surplus resources to cover for state-led inefficiencies.
For others, it is time to cut loose from the current model and truly reinvent Brazil. Dilma Rousseff struggled (against both her party’s economic mantra and her own views on how the economy should be run) to assemble a new macroeconomic team after the bitter political battle that led to her re-election. Tensions have continued to build within her party between those who believe in staying the same economic course and those who seek policy change.
Rousseff’s appointees at the ministries of finance and planning, in office since January 2015, signal that the argument for change is gaining the upper hand. They have opted for large doses of orthodoxy and increased transparency in macroeconomic management, and are trying to eliminate Rousseff’s original “new economic matrix ” (the set of policies that drove Brazil away from macroeconomic orthodoxy) and her government’s creative accounting. These features left their mark on Brazil’s lackluster growth of the past four years.
But if Brazil is to overcome its current difficulties it will have to change more than just economic policy. Reinvention will have to operate at the very core of the country’s political economy. In this, southeast Asian countries’ experiences offer a powerful lesson. Countries such as Taiwan, South Korea and Vietnam have been able to achieve their economic success through creating a macroeconomic and political environment conducive to business competition, long-term planning and establishing themselves in global value chains.
Unfortunately, the trend for Rousseff’s second mandate has been exactly the opposite: inertia and drift. Devoid of any strategic plan to face the rise of a new cycle in globalization, all we can expect is a continuation of the state capitalism model that has reigned over the past 13 years.
If left to themselves, Rousseff and the PT would try to revive Brazil’s domestic market-led growth by giving targeted fiscal benefits to chosen industrial sectors and instigating selective cuts in labor taxes here and there. Official banks and state-controlled companies would continue to be used for fostering local content, in the hope of generating local jobs and tax revenues—at a very heavy cost to Brazilian consumers and taxpayers.
But, in the same way that markets are driving Rousseff’s macroeconomic policies away from the experimental, state-driven adventures of the recent past, failure and scandal may help bring the country closer to a more market-oriented, pro-business environment.
Rousseff cannot count on promoting growth through Brazil’s domestic market and local consumption. Likewise, under greater public and media scrutiny and with the weight of the country’s recent credit downgrade, BNDES (Banco Nacional de Desenvolvimento Econômico e Social), Brazil’s development bank, must clean up its own accounts and break free of direct political influence. The government must put an end to the flow of subsided loans from the national treasury to BNDES to allow for the financing of privileged “national champions.” That policy of picking winners and lavishing them with resources has consumed more public resources over the years than Bolsa Família (the poverty alleviation cash transfer program that has raised the living standards of millions).
Petrobras, given the corruption scandal in which it is engulfed, is now too weak and demoralized to be used as an instrument of industrial policy. With both its resources and its credibility reduced, it will no longer be a major shaper of supply across the oil and gas sector and beyond.
But less wiggle room for the BNDES’s discretionary credit policies and the travails of Petrobras may actually be blessings in disguise. They both invite better governance and compliance.
It will be hard for Rousseff or any other political leader in Brazil to restore confidence to the levels of 2010, when Brazil’s economy grew by 7.5 percent, merely by improving macroeconomic policy. For Brazil’s star to shine again, it must do more than summon a team of well-versed financial managers.
In a country with widely acknowledged potential as a creative economy, Brazil directs only about 1 percent of its GDP to research, development and innovation. Despite its vibrantly entrepreneurial society, the confluence of heavy bureaucracy, over-regulation and poor infrastructure puts Brazil at an embarrassing rank of 120th among 189 nations according to the World Bank’s Ease of Doing Business report.
This also bears on economic foreign policy. Brazil should engage in the negotiation of dynamic free trade agreements—without the protectionist straitjackets imposed by Mercosur (Brazil, Argentina, Paraguay, Uruguay and Venezuela)—with the United States, the European Union and the Pacific Alliance countries of Mexico, Colombia, Peru and Chile. This is complementary to the essential role Brazil should play in fostering its relations with the BRICS countries (a loose alliance of the emerging markets of Brazil, Russia, India, China, and South Africa) and working toward the institution-building process of new global governance tools such as BRICs’ new development bank and other BRICS-related initiatives.
During the past 13 years of the PT in power, the government has had a number of opportunities to change its course to pursue a more long-term, sustainable economic policy. But it has often failed to take advantage of global conditions and its own reserve of domestic political capital.
Right now, the adoption of sound macroeconomics, a more modern, interdependent global economic policy and at least the promise of reform have to be pursued within the reshifting alignment of global economic forces. Unfortunately the current government—bearing the weight of its state-centric and Mercosur-focused policies—is poorly placed to do that now.
Ongoing investigations into corruption, calls for Rousseff’s impeachment, and the inability of Rousseff’s administration to devise a constructive agenda with Congress make the country a “prisoner of the short run,” unable to see past the crisis of the day. This current political state of affairs offers little hope domestically for the much-needed structural re-boot that would unlock Brazil’s huge wealth-building potential.
Marcos Troyjo is co-founder and director of BRICLab at Columbia University, where he is also an adjunct professor of international affairs. He is an op-ed columnist for Folha de S. Paulo, and is a regular commentator for global media outlets such as CNN en Español and Financial Times. Professor Troyjo is also the president and founder of the Center for Business Diplomacy, a global advisory firm. His new book, The Coming of Reglobalization, will appear in March 2016.
