When their country was chosen to host the 2014 World Cup and 2016 Olympics, Brazilians saw overdue recognition of their rising international standing. Even the global financial crisis had barely nicked Brazil’s effervescent economy, thanks to cheaper credit, newly discovered oil and a commodities boom. Fast forward to 2018,and the economy continues to struggle after emerging from the worst recession on record, with unemployment stuck in double digits. Lula — Luiz Inacio Lula da Silva, one of the most popular leaders in Brazilian history — is in jail. His conviction on graft and money-laundering charges was part of a corruption investigation,dubbed Carwash, that started at the state-controlled oil colossus Petrobras and expanded to ensnare members of the business and political elite. Lula’s protege and successor was impeached and removed from office for bypassing Congress to finance government spending. Into this maelstrom, toss an unpredictable presidential election, complete with an assassination attempt on the frontrunner. With Brazil fragmented and its economy sputtering, some are concerned about potential authoritarian setbacks for its three-decade-old democracy. What went wrong? Can Brazil get its magic back?
A federal judge in April ordered the leftist Lula to begin a 12-year prison sentence, and electoral authorities prohibited his attempt to again seek the presidency. Still, he overshadows the campaign, having thrown his support behind a chosen successor who looks likely, in first-round voting on Oct. 7, to reach a second-round runoff on Oct. 28. The front-runner, Jair Bolsonaro, is a far-right former Army captain who denies that the era of military rule, from 1964 to 1985, was a dictatorship. He survived a stabbing during a campaign rally in early September. Centrist candidates lag in the polls, a sign of Brazil’s polarization, and business confidence has plateaued. Voters huddled on one side of the political spectrum warn Brazil could be flirting with its authoritarian past, while those on the opposite end insist vanquishing Lula’s Workers’ Party is imperative. Whoever wins will need to pull Brazil out of a fiscal hole, dug deep by years of government overspending, and accelerate economic growth to put people back to work. Michel Temer, the unelected incumbent who’s extremely unpopular, overhauled labor laws and won a constitutional amendment to limit public spending. He then tried and failed to achieve pension reform amid political opposition. The International Monetary Fund estimates that Latin America’s largest economy will grow by 1.8 percent in 2018, a far cry from the 6.1 percent pace at the height of the commodities boom.
Brazil has suffered boom-and-bust cycles and political instability since independence from Portugal in 1822. Almost half its 2017 exports were raw products, so its prosperity is sensitive to the vagaries of the commodities markets. On paper, Brazil looks like a powerhouse. It’s the fifth-largest country in the world, by land mass and population. Its offshore oil reserves include the Western Hemisphere’s biggest discovery since 1976. It has the second-largest iron ore reserves. It’s the second-largest producer of soybeans and third-largest of corn. On the other hand, its wealth distribution remains among the most unequal. Good times provided cash to beef up the Bolsa Familia social-welfare program begun by Lula, which became an international model for eradicating poverty. The new middle class went shopping, boosting economic growth. But with lower commodity prices and industry sputtering, the model petered out. In 2017, the economy returned to growth after a crushing two-year recession, yet activity has remained sluggish. Business investment, which the government had hoped would become the economy’s new engine, sank by 1.8 percent in the second quarter of 2018, the most since the recession, with election uncertainty weighing on decision-making. As a percentage of gross domestic product, investment remains about one-third that of China.
A constitutional amendment limiting public spending for up to 20 years means the social-security system is consuming an increasingly dominant portion of the budget, leaving almost no room for discretionary spending. Pension reform will be one of the chief tasks of the next administration. Until he leaves office, Temer can continue trying to create a more business-friendly environment with small-scale economic reforms using presidential decrees, but he needs congressional approval for major budget measures. Companies, meanwhile, are holding back their spending as they await the result of the election. Their restored confidence will be needed if Latin America’s largest economy is to return to faster growth.
To contact the author of this QuickTake: David Biller in Rio De Janeiro at firstname.lastname@example.org
To contact the editor responsible for this QuickTake: Walter Brandimarte at email@example.com, Laurence Arnold
First published April 22, 2015
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