Cynics
have long described Brazil's development path as "the flight of the
chicken:" brief spurts of growth, sometimes spectacular, followed by more
or less brutal declines. After a tad more than a decade of expansion, the
country is now going through one of those periodic crashes. And this one is
ugly, perhaps because this time the chicken was flying really high, seemingly dreaming
that, with all this talk of BRICS and emerging power, it was a chicken no more.
Analysts
are predicting between two and four years of recession while inflation has
reached its highest level in more than 10 years. Tax revenues are down (minus US$37bn
projected for 2015), June's "primary" deficit—excluding interest
payments—is larger than the worst predictions of analysts while the overall
deficit of the public sector borders 7 percent of the GDP. The Real is down 40
percent since June 2014 and the index of São Paulo's stock exchange—the largest
in Latin America—has dropped 20 percent in dollar terms since January 1.
Exports were down in 2014, especially for manufactured goods (minus 14 percent)
and the country saw its first trade deficit in years. The current account shortfall,
at US$93bn, reached 4.3 percent of GDP last year, the largest since 2001 and interest-rates
stand at a world's "best" 14 percent. The country has lost more than
300,000 jobs in the first three months of 2015, to the point where the absolute
size of the formal labour market has shrunk for the first time in years.
Help
won't be coming from the government, which is instead ushering in brutal budget
cuts that affect all programs, including health and education, while public
investment, already insufficient, has dropped 37 percent in the first five
months of 2015 (ECLAC). Understandably, given high interest rates and the
general uncertainty, the private sector is wary of jumping in and foreign
direct investment flows for the year are now lower than the current account
deficit. No wonder Brazil's credit rating could soon fall back to junk status.
To make things
worse, President Dilma Rousseff's popularity, at between 7 and 10 percent, is among
the lowest ever recorded by a chief executive since the end of the military regime.
Congress is as dysfunctional as ever, with the Presidents of both the Senate
and the Chamber of deputies under investigation for corruption. And yet, to get
the support that she needs to govern, Rousseff's team is about to
"give" the Congress' most influential members control over the hiring
of hundreds of employees in various state dependencies.
Petrobras,
the country's largest company—still de facto under government control—and Brazil's
world-class engineering firms are at the centre of a corruption scandal
involving the governing Workers Party (PT) and its allies, and reaching back to
the golden age of Luiz Inácio Lula da Silva's two presidential mandates. The sums
involved boggle the mind: Odebrecht, the country's dominant engineering firm
and one of the world's largest, is accused of having transferred R$1bn (US$350m)
to secret bank accounts in foreign countries, many of them held by government
and party officials. The Workers' Party former treasurer, João Vaccari Neto, is
accused of having received R$500m (US$150m) for the party. Renato Duque, an upper-middle
level Petrobras official named by the PT and responsible for getting the party
a share of over-billed contracts, had 20 million Euros in Switzerland and Monaco
bank accounts. In a country where barely half the population lives on more than
two minimum salaries (R$1600 per month or less than US$500 at the current
exchange rate), this level of corruption, for a government controlled by one of
the most admired "progressive" parties in recent history, is quickly
destroying the long held assumption that the PT was different from its largely
discredited competitors.
Any light
at the end of the tunnel?
Well,
maybe yes, but mostly no. The flip side of the corruption scandal is that
Brazil's justice system is strong and doing its job, which is cause for
optimism. The problem is, judges and police officers can't run finance
ministries, design infrastructure programs, reform education or implement
social policy. A sizable part of the massive resources generated over the last
decade of growth were captured by the state and invested in infrastructure,
education and security.
After the
World Cup's orgy of white elephants (a whole slew of high-tech stadiums with few
ripple effects and no hope of profitability), brutally over-budget energy
projects and through the ever-expanding corruption scandals, it is becoming
clear that such spending was highly inefficient and that the machinery designed
to implement state programs remains creaky and, above all, leaky. Now that
resources are drying up and the need for efficiency increases, the lack of a
serious re-engineering of the state represents a massive obstacle for any
attempt to relaunch the country on a sustainable growth path.
Given its
immense resources and capabilities, Brazil is not inescapably doomed to
"chicken-dom." In recent years, however, the country has been flying
high on strong prices for the primary goods that remain its bread and butter,
while leaving hard choices—on pensions, education, trade liberalization,
taxation, public sector reform—for another day. That day is still not on the
horizon. With a political class keener on pilfering public funds than on
tackling the county's structural challenges, Brazil should be stuck on the farmyard—or pretty close to it—for a while still.
I am currently a visiting
researcher at the Núcleo de Estudios de Política Comparada e Relações Internacionais
– NEPI, Federal University of Pernambuco, Brazil.
[Originally
published on http://opencanada.org/features/brazil-the-crash-of-the-chicken/
]
