L. E. Melin and Franklin Serrano
Since reaching its
zenith in 2010, the Brazilian economy has suffered a remarkable reversal
of fortune. Despite official protestations to the contrary, however,
Brazil's afflictions turned out to be of its own making, as it so often
proves to be the case. The origins of the contraction of Brazilian GDP in 2015-2016 by nearly 7.5% can be traced back to the economic
policies implemented during President
Dilma Rousseff's first administration.
[1]
Between 2011 and 2014, Brazilian economic growth was halved, averaging
only 2.1% annually, in comparison to 4.4% average in the 2004-2010
period.
But the slowdown of economic activity was only the first consequence of a series of policy changes promoted by the
Workers’ Party
(Partido dos Trabalhadores, PT)
government under President Rousseff with the deliberate purpose of
reducing the direct role of the state in the economy, although
important social inclusion policies concerned with decreasing inequality
remained in place during that period.
The chief objective of this policy change was to signal that the
successful strategy pursued until 2010, in which the state played a
central role directly promoting economic growth, would no longer be
pursued. This strategy was implemented chiefly via the
public sector (including state-owned companies and public banks), by
stimulating aggregate demand and generating supply-side structural
change through public investment.
This development policy enabled robust growth to be consistently
achieved and allowed significant reductions in inequality to be
promoted.
However, the resulting changes both in the Brazilian social matrix and
in labour-market relations generated growing political resistance
from the country's financial and business communities. Even at the
height of prosperity, large private media groups and
economists associated with, or sponsored by, large private banks, were
particularly vocal in expressing their discontent.
In an attempt to placate this mounting wave of criticism, President
Rousseff and her party (with the public acquiescence of former President
Lula da Silva) decided by the end of 2010 to endorse the view that the
government was intervening “too much” in the economy.
Instead of acting as a primer for aggregate demand expansion, the
government's economic role was shifted to one of slowing down the
growth of domestic demand and providing incentives for private
investment, in the shape of substantial and unconditional tax cuts to
businesses, together with a (quickly reversed) reduction of interest
rates, and a large exchange-rate devaluation. Unlike more traditional
trickle-down theory, the rationale underlying this policy was that it
would stimulate private business to lead economic growth, instead of
following in the wake of public investment and social transfers, as had
happened in the previous decade.
This policy shift initiated in 2011 proved ineffective and, as
public-sector investment fell sharply, no corresponding increase in
private investment and net exports materialized. The downward effects
were compounded when unusually dry weather and mismanagement of the
energy policy guidelines imposed on Eletrobras, the large state-owned
electricity company, pushed the country close to a serious power
shortage in 2014, despite the fact that demand was weak because domestic
economic activity had been decelerating steadily for four years.
Instead of reverting to the successful policy trajectory of 2006-10
and seeking to improve long-term planning through better technological
and infrastructure policies, the second Rousseff administration
(inaugurated in January 2015) decided to double down on its
market-led strategy. From the first day of its new term in office, the
government fully committed itself to implementing the policies
championed by the defeated conservative opposition during the recent
2014 election campaign.
In fact, President Rousseff's government went significantly further
than that. Working in close concert with Brazil's redoubtable financial
industry (the new Minister of Finance came into office straight from the
Executive Board of the country's largest private bank), the
PT-led government had put in place a more radical version of the
austerity recipe favoured by many developed countries and multilateral
institutions.
This neoliberal U-turn was translated into an unprecedented
combination of public spending cuts, consecutive interest-rate hikes, an
array of credit-inhibiting measures, and large increases in utility
prices. By deploying simultaneously every
available policy tool that can decelerate economic activity, while
allowing a substantial exchange-rate devaluation to occur, Brazilian
authorities created a perfect storm of austerity that plunged the
country in what was to become the biggest recession in its history, with
a net loss of 1.6 million formal jobs in 2015 alone.
Blaming International Conditions
Given that five years of continually deteriorating, and ultimately
collapsing, macroeconomic figures – including eight consecutive quarters
of falling investment – cannot easily be swept under the carpet when it
comes to an economy
the size of Brazil's, the official line of the PT-led government was one
of explaining away the negative results of deliberate economic policy
choices by blaming adverse international conditions.
However, changes in external economic conditions, such as trends and
composition of the balance of trade, or the availability of external
finance have had very little direct impact on the overall performance of
the Brazilian economy over the past five years.
Brazil's exports grew only feebly between 2011 and 2014 (1.6% on
average), primarily as a result of much weaker world trade, combined
with a
sharp fall in commodity prices. However, this underwhelming performance
had a virtually negligible direct effect on aggregate
demand, once the small relative weight of exports in Brazilian GDP (of
around 11%), as well as the very high import coefficient of many key
Brazilian exports, are taken in account.
More relevantly, Brazil has not faced even the remote threat of a
balance-of-payments crisis at any point of its trajectory from
economic deceleration to stagnation to collapse. Foreign debt has
remained at historically low levels (under 16% of GDP) from 2010 to
2014, being even lower than that by July 2015, while international
reserves stood at historical peak levels throughout the period and,
at $370-billion (U.S.), currently amount to nothing less than 20% of
GDP.
Despite this solid balance-of-payments position, the threat of
Brazil's sovereign credit rating being downgraded by private
international
agencies (which finally came to pass on March 2015) was repeatedly
invoked as one of the main arguments used by financial market
economists and Brazilian government officials alike to justify even
deeper spending cuts and ever wider austerity measures being implemented
domestically. Thus a contrived conflation between domestic public debt
denominated in
local currency and the country's foreign liabilities in hard currency
(both private and public) was introduced at the heart of the
Brazilian economic debate and presented as a crucial linchpin for
preventive, and subsequently, corrective contractionary policies.
This rhetorical artifice was taken even further when Standard &
Poor's textually reaffirmed Brazil's strong foreign-exchange position in
the
body of the very same document that
announced that the country's foreign currency ratings were being stripped of investment-grade status, in
early September 2015.
[2]
The rating agency justified placing Brazil below investment grade
because of its “fiscal performance” and of the “rise of net general
government debt.” The report goes on to mention Brazil's “low external
financing needs” and “its high level of international reserves.”
From a macroeconomic standpoint this raises more questions than it
answers since it is by definition impossible for any government to be
compelled to default on internal debt denominated in its own currency.
In any country where the Central Bank can buy and sell any
quantity of short-term government bonds in the secondary market to set
the basic interest rate of the economy, any bonds not purchased
by the private sector can be (and usually are) bought by the central
bank itself at the set interest rate. For some reason, this simple
fact of public finance was ignored by both Brazilian advocates of
ever-growing austerity and the analysts of U.S. credit-rating agencies.
To be fair, when taken to court in the U.S. (and Europe) over their
role in the financial crisis of 1997, credit rating agencies stated
through their lawyers that their ratings are merely “expressions of
opinion,” protected as free speech,
and should not be construed as anything other than that.
[3]
President Rousseff, however, took these mere “opinions” very
seriously and the downgrading by S&P was ostensibly used to justify
yet another
round of spending cuts. The result was that even though exports are not a
significant direct source of aggregate demand in Brazil, and in
spite of the fact that for years the country has had comfortable levels
of foreign-exchange reserves and relatively low levels of
foreign debt – in other words, that there was no threat of
balance-of-payments problems on the horizon – the international crisis
was blamed for the economic downward spiral
brought about by the government's increasingly restrictive and orthodox
policies.
Justifying Austerity
Until recently, Brazilian authorities made use of orthodox rhetoric
to justify the austerity measures that effectively derailed the
Brazilian economy. That came either under the guise of the standard ‘the
international crisis made me do it’ discourse just described, or by
resorting to the notion that fiscal (and, in
Brazil's case, also monetary and credit) pains are the only way to
ensure growth gains.
As it turns out, the previously unstated purpose of the set of
policies currently being implemented in Brazil is to weaken the
bargaining
power of workers by reducing real wages and by increasing unemployment.
The institutional ensemble that protects the interests
of labour in Brazil is comparatively weak and lacking both in organic
and in party-political clout. Thus, swelling the ranks of unemployed
workers has the added benefit of effectively reducing the political
resistance to the introduction of the neoliberal measures necessary
to reverse the advantages gained by labour over the past decade,
perceived as being excessive.
In June 2015, Finance Minister Joaquim Levy told an audience of
business executives, in the presence of both local and international
press,
that it was time to “rethink the country” and that he intended to
“abandon rhetoric and face some realities.” His declared aim was clearly
spelled out: “We
are going to have to reverse this reduction in the supply of labour.”
According to Minister Levy, there were people who previously “did
not want to join the labour market, who now will have to look for jobs,”
thus causing labour supply to be increased.
[4]
Mr. Levy's political diagnosis was an accurate, if somewhat blunt,
one. The bargaining power of the Brazilian workforce was, perhaps
inadvertently, much increased by a tight labour market between 2006 and
2014, as well as by successful social policies introduced by the
PT-led government over that period. Unemployment had fallen markedly and
average real wages in the formal sector increased continuously,
at a steady average of 3% annually, beginning in 2006. Even more
relevantly, having reached a deep trough in 2004, the wage share of GDP
had been recovering since then.
After continued political pressure from private business (despite
record-high profit levels reached in the preceding decade) and, even
more vocally, from large media groups and opposition parties, in 2015
the PT-led government decided to act in earnest to reverse this state of
things by means of increasingly strong measures.
The fast growth of unemployment by means of radical austerity
policies, as well as sharp shifts in income distribution away from
wages, have created a political climate in which it is possible
substantially to decrease the size and importance of the Brazilian
state in the overall economy. This, in turn, has paved the way for a
roll-back of distributive gains, labour rights and social benefits put
in place since 2003, some of which are even now being either dismantled
or significantly reduced.
Many PT militants, as well as social movements and trade unions, were
clearly taken aback by this open endorsement of a neoliberal agenda
they had together long opposed, and one that hurts their own
working-class base the hardest. This reaction, if understandable, is
somewhat predicated on wishful thinking. Closer empirical analysis of
its 30-year history reveals that, once they are in power (whether at
local, state or federal level), the PT has an
established tradition of avoiding direct confrontation with the
country's conservative property-owning classes. While they sincerely
appear to want to promote social change, the Workers’ Party's top people
have long been steered by a consensus-seeking credo, according
to which there is no situation where a compromise that avoids upsetting
Brazil's moneyed elite, while simultaneously improving the lot of the
country's huge underclass, cannot be reached.
This unlikely squaring of the political circle had seemed possible
prior to 2011, at the federal level, in the wake of a foreign-exchange
bonanza, coupled with the extraordinary surge both in domestic
consumption and in profit levels that followed the initial opening of
the social inclusion floodgates. But as sporadic conflicts in the
political arena over income distribution became more widespread, and
ideological criticism gave way to undisguised class antagonism, the
previous self-congratulatory mood among the then ruling party's top
brass changed into one of diffidence and alarm.
Faced with a hostile new Congress after winning the 2014 presidential
elections, and weighed down by its heavy dependence on funding from
big private firms and banks, the PT leaders' pliable ways and
placatory beliefs translated into a seldom seen episode of top-down
political capitulation.
Fighting Corruption
Throughout those troubles, public debate in Brazil gave virtually no
emphasis to any of the key economic and political factors mentioned so
far. Since 2014 the country daily devotes its full attention not to
policy, but to police matters.
Since at least the days of the late
President Vargas, in the early 1950s,
public corruption has been the go-to political tactic of the Brazilian conservative establishment whenever a situation seen as
unduly imbalanced in favour of labour needed to be tackled in short
order.
[5]
And that is precisely the perception that took shape over the course
of President Rousseff's administration, and was solidified by the defeat
of right-wing candidates Aecio Neves and Marina Silva in the 2014
elections.
Even though from her first days in office President Rousseff's
policies of reducing the government's role in the economy and promoting
unconditional tax cuts to business ostensibly aimed to please both the
Brazilian private sector and foreign investors, recurring
economic and political mismanagement resulted in that, by the end of her
government's first term in 2014, those policies in practice
served no one. Business saw growth and profit levels go down and
investment fall, while the labour market remained tight. Workers also
had little to celebrate as household disposable income stagnated then
fell, and jobs became increasingly thinner on the ground.
From the perspective of Brazil's traditional economic and political
elite, it had become plain by then that change would have to be much
deeper
and to come much faster. For those familiar with Brazilian political
mores over the last century it should not come as a surprise, then,
that long-prevailing but shady contracting practices involving the
country's state-controlled oil and gas company, Petrobras, became an
overnight ‘outrage’ and began to be treated as nothing short of a
national emergency.
[6]
What is perhaps less widely known outside Brazil is that, this time
around, the anti-corruption discourse was not placed at centre-stage
by the conservative opposition alone, but was in fact ushered in and
given priority status by President Rousseff herself. Since taking
office in 2011 she repeatedly stressed her personal commitment to
prosecuting “wrongdoers” and fighting corruption
“regardless of whom it might hurt,” quickly dubbed by both domestic and
international press as a “clean-up” (faxina) operation.
By the end of 2013, however, the anti-corruption broom, as it were,
had changed hands. It was no longer merely a case of producing media
sound bites, replacing the odd cabinet minister, or conspicuously
introducing new (and increasingly cumbersome) regulatory compliance
requirements, as the PT-led government had been
doing so far. The probes into Petrobras' dealings that began a few
months earlier were being conducted by groups clearly hostile to the
ruling party and its leaders, and when the first indications of the
involvement of politicians surfaced, President Rousseff's government
and former President Lula da Silva became the obvious political targets,
despite the fact that both situation and opposition politicians were
equally implicated.
The reverberations of the ensuing media campaign were greatly
amplified by the eagerness for the limelight of politically ambitious
magistrates and prosecutors, whose every action received instant praise
from the country's media oligopoly, long openly sympathetic to
the opposition camp. This represents a new historical development,
signalling a departure from an established tradition of Brazilian
judicial officials keeping out of politics that, in its own right, could
add a different dimension to future political use of the
anti-corruption discourse in the country.
The steep fall in popularity resulting from the Petrobras ‘scandals’,
together with poor management of party alliances, both in Congress
and within the Cabinet, pushed the Rousseff administration into a
singularly fragile political position. This, in turn, has made it
easier to shift economic policy toward austerity even further, as it
built on an already dominant trend among PT party leaders since the
October 2014 elections, to do whatever could be done to meet “market”
(i.e., big private business groups, large private banks, and the media
oligopoly) demands.
The job losses and business slump brought about by these austerity
policies then took their own toll in further eroding the government's
popular support, thus closing the cycle.
Poor Political Judgement
Former President Lula and the PT led a partially successful
opposition to both macroeconomic austerity and neoliberal reforms during
the 1990s,
which helped Brazil escape some of the worst impacts of neoliberalism in
Latin America. Twenty years later, however, the wheel had come full
circle.
The adoption of austerity policies and the ensuing effects of growing
unemployment and tumbling real wages were reflected in the reduction
of 16.7% in the total wage bill of the Brazilian economy, in real terms,
over the last 22 months.
[7] These results hit the PT government's natural working-class
constituency very hard, effectively estranging it from its political base.
The adoption of an anti-corruption agenda, and the flurry of inaction
that followed its appropriation by right-wing judicial officers, gave
their opponents added legitimacy to wield the traditional Brazilian tool
used for pruning overgrown political forces from outside the
traditional establishment.
[8]
Thus, through a remarkable display of poor political judgement (and
even poorer political principles), President Rousseff and the PT
leadership effectively cut the ground from under their own government's
feet. After seeing their candidates lose four general
elections in a row, from 2002 to 2014, the traditional right-wing
political establishment, and their sponsors in finance, industry and
agribusiness, finally had the means for ridding themselves of a
persistent nuisance.
“
As a result of being associated with
recession, unemployment and corruption by voters, the PT-led government
faced the lowest popular approval ratings in Brazilian politics since
the early 1990s
”
As a result of being associated with recession, unemployment and
corruption by voters, the PT-led government faced the
lowest popular approval ratings in Brazilian politics since the early
1990s, and saw its congressional support melt away very swiftly. The
political
opportunity was immediately seized upon. Impeachment proceedings were
instituted against President Rousseff, and after a few months of
hearings the Senate voted on 12 May 2016 to remove her definitively from
office. According to many experts, the criminal charges brought against
the President failed to meet the minimal legal and evidentiary burden
of proof
under Brazilian law. Outside observers often consider these to be moot
points, however, in view of other conditions laid down by the Brazilian
Constitution.
The impeachment process was presided over by the Chief Justice of
Brazil's Supreme Court, and, crucially, the President could not have
been removed had she secured the support of at least one-third of the
members of either of the houses of Congress, which, it is
argued, constitutes an
absolute minimum requirement for democratic governability. However
egregious the legal technicalities may have been, the political
verdict of this quintessentially political process, once set in motion,
was never in any doubt.
Post Impeachment
Since taking office, the new administration, headed by former
Vice-President Michel Temer, quickly proceeded to set up a
parliamentary alliance with the main right-wing opposition parties to
the outgoing PT-led government. A thorough ministerial cabinet
reshuffle was carried out, and not a single name from the previous
administration was kept in office, down to the Governor of the Central
Bank and the heads of public banks and state enterprises.
By then, in addition to the sharp contraction of 2015, Brazilian GDP
had fallen by 5.4% in the first quarter of 2016, compared with Q1 2015,
with 400,000 more formal jobs being lost, bringing the grand total to 2
million since January 2015. To make matters worse, prospects for
recovery seemed farther than ever as recession reached every economic
sector and region in the country.
In spite of the deep recession, the new government fully reaffirmed
their commitment to the neoliberal economic agenda set by the
outgoing PT administration, to the point of explicitly adopting
austerity measures their predecessors left in draft form. The
implementation of a long-term “fiscal reform” to replace the continuous
sequence of ad-hoc spending cuts was the most notorious case in point.
This now includes the imposition of a
20-year public expenditure ceiling that will sharply reduce funds
allocated to health, education and social transfers. The proposal for
a comprehensive “pensions and benefits reform,” currently being
submitted to Congress was another legacy from the previous government.
Also in line with the Workers’ Party policy agenda is the
current proposal to rewrite Brazil's Labour Code (the CLT), altering the
ceiling for weekly working hours, and allowing privately
contracted working conditions to supersede requirements established by
law.
[9]
The Right: Divided and Jockeying for Position
Once the PT-led government was gone, the single thread binding
together the wide array of conservative forces that collaborated to oust
it
was cut. After the initial scramble to fill the most strategic offices,
it became apparent that the main parties comprising the new
government's parliamentary base have keenly divergent interests on at
least two different, if related, fronts.
First, a large and mounting number of influential politicians within
those parties have been directly linked to accusations of corruption in
one
or other of the scores (literally) of investigations instigated to
topple Dilma Rousseff's government and to put the main leaders of PT
– specially former President Lula da Silva – out of politics, or in
jail. Which of the political bosses will face prosecution and
which will remain in play is a key element for the second major issue
driving apart the conservative forces that back Mr. Temer's
administration, namely, the jockeying for position ahead of the 2018
general elections for president, state governors, Congress etc.
Thus, three conclusions can be drawn from the present state of
political affairs in Brazil. First, infighting among right-wing forces
in the
party-political scene reflects ingrained conflicts of interest and is
likely to intensify in the run-up to the next elections. Second,
left-of-centre forces have been scattered and discredited in the wake of
the debacle of President Rousseff's government and should offer
very little electoral competition, which tends to make rivalries within
the conservative camp even sharper. Third, the final
composition and correlation of political forces in Brazil will depend
strongly on how the new element in the equation – the judicial
officialdom that has been allowed extraordinary powers to interrupt the
long cycle of PT election victories ؘ– is to be ultimately co-opted or
neutralized.
Ultimately, then, reneging on their political commitments to labour
and surrendering on all key public policy issues did not shelter
President Rousseff and the PT party leadership from the onslaught of the
Brazilian power elite to regain direct control of the state, and
to rid themselves of those they always perceived as interlopers standing
in the way of the exercise of their traditional authority.
That they neither foresaw this antagonism, nor responded timely and
proportionately to it, is evidence that, over their 13-year-long
tenure in government, the Workers’ Party leaders failed, to a man (and
woman), to understand the class struggle element that defined the very
essence of their ascension to power. •
L. E. Melin teaches Political History and Economic
Development at the Catholic University of Rio (PUC-Rio). He is a member
of the Advisory Board of the Official Monetary and Financial
Institutions Forum (OMFIF), London.
Franklin Serrano teaches Political Economy and
Macroeconomics at the Federal University of Rio (UFRJ). He is a Senior
Research Associate of the Centre for Economic Policy Research (CEPR),
Washington, DC.
Original:
ACA
Endnotes:
1.
See F. Serrano and R. Summa,
Aggregate Demand and the Slowdown of Brazilian Economic Growth from 2011-2014, Centre for Economic and Policy Research (CEPR), Washington DC, August 2015.
2.
This particular instance of rating-agency theoretical innovation was spotted by M. Vernengo in “
From BBB-razil to BB+razil or the meaning of investment grade.”
3.
See
Jefferson County School Dist. v. Moody's Investor's Servs., 988 F. Supp. 1341, 1348 (D. Colo. 1997),
aff’d, 175 F.3d 848 (10th Cir. 1999).
4.
See “
Crise é momento importante para "repensar o país", afirma Levy.”
5.
Besides removing Vargas in 1954, the moral crusade against corruption
was a key tool again in toppling President Goulart (who championed a
“trade-unionist republic”) in '64, and in preventing the election of
Lula da Silva and his left-wing coalition in '89, before reappearing
unsuccessfully to try to impeach then-President Lula in 2005, and again,
more forcefully, in the last few years.
6.
President Cardoso (who championed privatization and the Washington
Consensus agenda in Brazil from 1995-2002) admits in his recently
published memoirs that he had knowledge of the Petrobras “scandal” since
October 1996, thought of intervening in the company, but ultimately
chose not to do so.
7.
The unemployment rate shot up quickly, reaching 11.8% by official figures in October 2016.
8.
Under Dilma Rousseff, Brazil also acquired a new-found zeal for
international cooperation on corruption and counterterrorism matters, to
the point that a
UN Special Report
issued a warning that the text of the new Brazilian Terrorism Act is
“too broadly drafted and may unduly restrict fundamental freedoms.”
9.
The priority assigned to this political agenda was underscored by the
fact that the first bill sent to Congress in President Rousseff's second
term (on the eve of her inauguration) simultaneously curtailed access
to unemployment insurance, pay compensation for laid-off workers,
benefits for employees on sick leave and widows' pensions. Yet another
item of continuity was the
upholding of President Rousseff's veto that prevented Bolsa Familia
(Family Stipend) education-linked direct transfers to poorer families
from rising in line with inflation, effectively reducing their overall
value in real terms.
