Photo Jonathan Blair

Friday, August 7, 2015

Brazil: The Crash of the Chicken

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.