How Brazil blew it

REUTERS/Ueslei Marcelino
Brazil's Finance Minister Joaquim Levy seen coming out of the Finance Ministry in Brasilia, Brazil on Thursday.

This is how you go about shooting yourself in the foot.

We should be witnessing a moment of triumph for Brazil. The South American giant has been able to pull millions of its people out of poverty in the past decade, and last summer it successfully staged soccer’s World Cup. Next August, it’s the Olympic Summer Games in Rio de Janeiro.

The country has seemed on the verge of putting to rest a reputation for never being able to reach anywhere near its vast potential (‘The country of the future, and it always will be, according to the cliché).  Instead, it’s crashing. Hard.

The prosperity was largely built on a commodities boom (including soy beans, corn, beef, iron, copper and other ores) that has evaporated. As if there was any doubt, the widespread fears this summer about the health of China’s economy make clear that Beijing is buying much less. China has been Brazil’s biggest customer, accounting for almost a fifth of its exports, so Brazil is one of the biggest victims of the slowdown. Look at the trend line on this chart.

That’s the risk you take when you rely on commodities. Unfortunately, when the good times rolled, Brazil didn’t develop much of a Plan B.

In addition, the country is dealing with a scandal on a truly massive scale surrounding the state-owned oil company Petrobras – an indication that it never built institutions to crack down on the corruption that plagues it. More than 100 people have been indicted, and Petrobras acknowledged earlier this year that it lost $2 billion because of bribery.

So, rather than riding high into the last year of its Olympic preparations, Brazil last week officially entered what is likely to be a steep recession. All the major economic indicators — unemployment, inflation, the value of the currency, debt levels — are heading in the wrong direction, and the government doesn’t appear to know what to do about it. The president’s approval rating is in the single digits, all of 8 percent. The opposition is screaming “Impeachment!”

Brazilian officials actually saw the economic trend looming several year ago, and as this BBC analysis explains, left-leaning President Dilma Rousseff first tried stimulus, including freezing energy prices and providing tax breaks to companies that hired workers.

That helped, but not enough and not for long enough. Unemployment and inflation crept up, anyway, and the level of public debt threatened to become unmanageable. So Rousseff switched to austerity. Unemployment benefits, business incentives and spending on infrastructure all ended up on the table. But that doesn’t seem to be working any better. Since the first of the year, unemployment has increased two percentage points and the currency has lost a quarter of its value against the dollar.

If anything, the corruption exposed at Petrobras, of which the government owns 51 percent, has Brazilians even angrier.

Vast offshore reserves were supposed to be another pillar of Brazil’s newfound prosperity. Instead, government policies toward the oil company and a huge network of kickbacks and bribery illustrate much of what’s still wrong in Brazil. 

Here is a clear simple explanation of how the kickback scheme worked, courtesy of David Segal of the New York Times: “A small number of top Petrobras officials colluded with a cartel of companies to overcharge the oil company for construction and service work. The cartel would decide which of its member companies would win a contract to, for instance, service an oil rig or build part of a refinery. This fake competition was overseen by Petrobras confederates, who were rewarded with bribes. They kept some of the money but shared much of it with political figures.”

Segal’s piece does a good job of explaining how “Operation Carwash,” a scandal that barely registers in the U.S., has completely convulsed Brazil. 

Millions of dollars were allegedly funneled directly to politicians and political parties. Charges were filed last week against the speaker of the lower house of Brazil’s congress, and a former president.

Many Brazilians can’t believe that Rousseff, who served for a time as chairwoman of the Petrobras board, didn’t know. She insists she didn’t. But less than a year after winning reelection, she’s in very serious trouble. 

What happens now? How long will it take for Brazil to climb out of its hole? In the meantime, are next year’s Olympics in trouble? 

Among those implicated in the Petrobras scandal are companies responsible for constructing many of the Olympic venues.  

But there always are worries about whether the host country will be ready. The recent history of the games in other questionable venues (remember the concerns about Athens?), as well as Brazil’s success at hosting the World Cup tournament, suggest it’s not unreasonable to expect things to go passably well.

And here’s a sliver of hope: an argument that the existence of an independent judiciary willing to go after powerful people, and a middle class demanding better governance mean Brazilian democracy is actually maturing

Perhaps. But not nearly as fast, or as much, as Brazilians had thought.

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Comments (2)

  1. Submitted by Neal Rovick on 09/04/2015 - 09:07 am.

    Commodity booms are best for those that own the means of exploiting the commodity–which most often does not include the people at the bottom of the economic ladder.

    The real issue facing Brazil and the world is that the percent of people required to do/make/produce is far fewer than ever before, and modernization of an economy only makes it worse for those who had little to begin with.

  2. Submitted by Steve Titterud on 09/04/2015 - 01:16 pm.

    Brazil’s real priorities are shown by the fact…

    …there is virtually no treatment of sewage in its cities, e.g. Rio de Janeiro.

    To speak about “prosperity” in a country where a fundamental public service like water treatment barely exists, causes cognitive dissonance. What kind of “prosperity” is this, and for whom ?

    http://www.nytimes.com/2015/07/31/sports/olympics/filthy-rio-de-janeiro-water-a-threat-at-2016-olympics.html?_r=0

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