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The last decade has seen Brazil’s rise as one of the economic powerhouses of the developing world and one of the leaders of moderate economic policies in Latin America. Bolstered by high commodity prices, Brazil has managed to lift thirty to forty million out of poverty and acquire more international recognition, as evident by its association with other BRICS nations (Russia, India, China, and South Africa). Brazil’s increased recognition is evident by its winning the hosting rights to this year’s World Cup and the 2016 Summer Olympics. However, like other BRICS nations, Brazil is beginning to see its economy slow down as a result of falling commodity prices, poor government management, and American monetary policy. Although the nation has significant oil wealth and is still better off economically than the late twentieth century, it is still in need of dire economic and political reforms. With a presidential election approach this October it is unlikely that reforms will come in the short-term, but the next presidential administration will be tasked with preserving the nation’s economic gains and preventing social tensions from exploding.
This topic brief will break down Brazil’s economic and security struggles while providing ways that Brazil can try to fix some of these problems. It is hoped that the analysis contained in this brief can assist extempers when talking about Brazil since they are likely to get questions on the country in the near future pertaining to its ability to host international events and its upcoming presidential election.
Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic.
Brazil’s Economy
Brazil is still a relatively young democracy, having emerged from a military dictatorship in 1985. The young Brazilian government struggles in the late 1980s and 1990s, though, due to its inability to handle the country’s budget. The military government, while presiding over high levels of economic growth in the early 1970s, presided over an economic crisis by the mid-1980s and an addiction to high levels of government spending created hyperinflation. Brazil limped along until President Itamar Franco appointed Fernando Henrique Cardoso as Minister of Finance May 1993. Cardoso, an intellectual, spearheaded a series of economic reforms called the Plano Real (or “Real Plan”). These reforms sought to control high inflation levels by introducing a new currency called the real, reducing government spending, and tightening monetary policies (e.g. high interest rates). Aside from stabilizing inflation levels, the Plano Real was intended to increase foreign investment, since it was assumed that foreigners would be more willing to deposit their money in the country if they knew the central government was series about correcting the nation’s economic problems. Cardoso was elected president on the Social Democracy Party (PSDB) ticket (a centre-left party) in October 1994 over Luiz Ignacio Lula da Silva and he won re-election in 1998 against Lula. While president, Cardoso worked to privatize more elements of the Brazilian economy, especially its mineral and telecommunications industries. However, public debt rose as a share of GDP and the collapse of the Argentinean economy, which almost took Brazil with it, in 2001 reduced his popularity. In 2003, Lula da Silva of the left-wing Workers’ Party (PT) was elected to the presidency, which alarmed international investors who thought he would overturn many of Cardoso’s private sector-friendly reforms. However, Lula preserved much of the structure of the new Brazilian economy while attempting to redistribute the nation’s wealth to its working class. The state pushed to end hunger, provide financial assistance to the poor, and improve spending on education. Capitalizing on rising soy, oil, and mineral prices during his term, Lula managed to turn Brazil from a debtor nation into a net creditor nation in January 2008. Whereas other Latin American nations such as Venezuela and Bolivia during the early 2000s were nationalizing foreign assets in the name of “Bolivarian socialism,” Brazil adopted a more moderate, social democratic approach that looked very tame by comparison. Lula’s chief of staff, Dilma Rousseff, was elected in 2010 and became the country’s first woman president.
So based on that history, an extempers may wonder what the problem is for the Brazilian economy. The answer is a combination of economic protectionism that undermines the country’s standard of living, a lack of infrastructure investment, a burdensome tax system, vulnerability to external forces, and political inefficiencies. First, despite the privatizations enacted under Cardoso, Brazil still leans toward having publicly owned industries and this makes them vulnerable to political influence. The best example of this is Petrobras, the state-owned energy company, which has been a major part of Brazil’s rise as a global economic power. Petrobras has led the way in deep sea oil exploration and earlier this century Brazil was the site of the some of the biggest new oil finds in the world. However, Petrobras is now stagnating due to a corruption scandal and politically motivated decisions. The New York Times on April 15th reports that Brazilian investigators are looking into claims that Petrobras employees received $139 million in bribes from SBM Offshore, a Dutch oil rig supplier. Investigators are also investigating Paulo Roberto Costa, who led Petrobras’s refining operations until 2012 and was allegedly involved in a money-laundering scheme through the company. Brazilian officials are also examining the purchase of a Houston, Texas oil refinery that saw Petrobras pay a Astra, a Belgian oil trading company $1.19 billion for the property, which was likely well in excess of its market value (Astra had purchased the Houston refinery in 2005 for $42.5 billion). Furthermore, as The New York Times goes on to explain, President Rousseff has prevented Petrobras from raising fuel prices on Brazilian customers so as not to provoke social protests during the World Cup and damage her chances at winning re-election this year. As a result, foreign bondholders are growing wary of giving the company new funds as the company is hemorrhaging money and lost $8 billion last year. The Brazilian government has also withdrawn 80% of the company’s sovereign wealth fund to balance its budget, which has drained money for new infrastructure projects that the company needs. Whereas once Petrobras was indicative of what Brazilians were doing right, it has now become a model for what the country is doing wrong.
The Economist on April 19th recently chided Brazil for other forms of protectionism as well, which serve to undermine the construction of a strong middle-class and reduce levels of economic growth. For example, Brazil maintains high tariffs on some sectors of its economy like mobile technology and this ends up hurting consumers. The country has an 80% tariff on foreign produced smartphones and this makes these products too expensive for most Brazilians to buy (tariffs tend to make products more expensive by playing heavy taxes on them). Also, the country’s tariff policy reduces the growth of foreign enterprises in Brazil, which insulates national industries from competitive pressure that could make them more productive and efficient. After all, why would a business ever seek to improve itself if it had a guaranteed pool of customers and never had to face competition? Perversely, although the Brazilian government champions protectionism as a way to keep Brazilians in charge of their economy it may be responsible for the country’s inequality. By sheltering national industries in steel, petrochemicals, and pharmaceuticals and making it cost prohibitive to compete, new jobs cannot be opened to more Brazilians via companies that might be willing to invest in these areas. Forbes on February 24th reports that 93% of Brazilians think that income inequality is a problem in their country and anger at this inequality is what produced social protests earlier this year. Although Brazil has taken some successful steps to reduce income inequality, like the Bolsa Familia program (which the Washington Post gives an overview of on January 31st) that gives poor families money as long their children stay in school, it still has a lot of work to do to increase the hopes and aspirations of the poor. Income gaps are bound to happen as nations grow quickly, since the investors and producers of wealth will capitalize first on new markets, but Brazil must continue to try to alleviate poverty. MercoPress, the press arm of the South American trading alliance Mercosur, writes on April 17th that the country’s GDP grew 2.3% in 2013 but that growth is expected to fall to 1.65% this year. The nation needs 3-4% GDP growth to continue providing productive economic avenues for its citizenry and creating more competition in sheltered industry might do the trick.
The Economist article cited earlier also points out that Brazil has an infrastructure problem that demands attention as well. Brazil invests just 2.2% of its GDP in infrastructure versus the rest of the developing world that spends 5.1%. An example of why this is bad is found in a Reuters article from March 12th which explains that Brazil has tried to encourage foreign automakers to sell their products since the mid-1990s but failed to build new roads. The result is that traffic jams now exist in many of Brazil’s major cities, which produce a headache for supply chains and normal citizens. Brazil is not alone in this regard among the BRICS nations as both South Africa and India suffer the same infrastructure problem. Without more road networks, bridges, and similar infrastructure systems, Brazil is bottling up potential economic growth. This is a field that demands effective government action in the future.
Brazil’s tax code is another reason for Brazil’s lackluster growth in recent years. The Chicago Tribune on April 17th reports that the World Bank cites the Brazilian tax code as the world’s most complex and The Economist from September 28th of last year finds that taxes take up 36% of Brazil’s GDP growth. This means that more than one-third of the money in the economy is being taken out and sent to the government. Sometimes this is not a problem if the government is spending that money on areas that can improve economic growth (e.g. infrastructure). When the government does not do this, though, it serves as a drain on consumer and business spending and serves as a deterrent to those Brazilians or foreigners that wish to set up new economic enterprises in the country. Part of the reason why taxes are complex and high is due to the country’s generous social security system, which allows Brazilians to retire at the age of fifty-four with 70% of their final pay check. The Economist previously cited notes that this is an outrageous system that causes Brazil to spend as much on pensions as Southern European nations that have more older people receiving benefits. Extempers should also take note that the Brazilian retirement age is nearly ten years short of how long an American has to live and work for Social Security and Medicare benefits. The UK Telegraph points out on March 25th that the Brazilian tax code is one of the reasons for the country’s poor showing on global economic indexes as the World Bank ranks it 116th in the world for ease of doing business (lower than Ethiopia), 123rd for starting a business, and 159th for paying taxes.
Brazil’s economic growth is also tied to external factors that it cannot always control. Lower prices for its mineral, soya, and oil products have contributed to less revenue for the economy as a whole. Some of these problems become more acute when bad government planning has contributed to less production in these sectors so that even if global prices rebound, the country may not be able to take advantage of the situation. The New York Times article previously cited mentions how oil and natural gas production fell 2.2% in 2013, which is an indicator of bad management, poor equipment in the industry, and/or a lack of investment. Brazil has also enjoyed a great deal of foreign investment because returns in the Western world have not been ideal since the 2008 economic collapse. In Western European nations and the United States, central banks have lowered interest rates and this has sent investors looking for better returns to the developing world, especially to the BRIC nations. However, the Federal Reserve is gradually beginning the process of ending its “quantitative easing” policies that have sent money into financial markets to keep U.S. interest rates down. When these rates rise as a result, the financial capital that has been sent to emerging markets may dry up and this could make it harder for the Brazilian government and its industries to acquire funds. It could also trigger a collapse of Brazil’s exchange rate because if foreign money leaves then the Brazilian real will depreciate against the dollar, which could increase the prices of foreign products imported into the country and fuel inflation. MercoPress on April 10th explains that inflation is becoming a bigger problem in Brazil and is averaging 6% this year due to irregular rainfalls driving up food prices and the cost of ethanol. A foreign capital flight could make this situation worse and exacerbate social tensions.
Finally, Brazil’s politician system demands attention because it makes achieving consensus on needed reforms difficult. Brazilian politics is known for loose, ad hoc coalitions that make it difficult for the president of the country to govern. Currently, the Brazilian Chamber of Deputies, the name for the lower house of the Brazilian legislature, has twenty-one parties (the Brazilian Senate has fifteen groups), which illustrates the political factionalism that plays out in Brazilian politics. The current National Congress has two major coalitions: Lulista, composed of ten left-wing parties, and an opposition centre-right coalition composed of six parties. Additionally, The Economist article from September explains that the Brazilian government has thirty-nine ministries in the presidential cabinet, which is well in excess of what it needs (for comparison, the U.S. government has fifteen). It used to be common for Brazilian politicians to be elected on one ticket and then switch parties, but the Brazilian Supreme Court found this unconstitutional several years ago on the grounds that Brazilian election law makes a seat won by a party their property and not the property of a candidate. Political coalitions also feud with each other on the local and state level, which further complicates decision-making. For example, The Christian Science Monitor writes on April 18th that in this fall’s elections, Rousseff’s Workers’ Party (PT) is being challenged on the local and state level by its coalition partner, the Brazilian Democratic Movement Party (PMDB). The PMDB is banking on defeating PT candidates at these levels to improve its leverage over Rousseff in the next government (it is expected that she will win re-election). Therefore, the factional nature of the Brazilian legislature makes it very difficult for a president to push through their agenda and significant reforms.
Brazil’s Hosting of International Events & Security
As stated in the introduction to this brief, Brazil is hosting this year’s World Cup (which kicks off on June 12th) and the 2016 Summer Olympics. Hosting these events is a signifier of a nation’s status on the global stage and this is why Vladimir Putin heavily campaigned for Russia to win the 2014 Winter Olympics at Sochi. It is also a vote of confidence by the international community that the host nation can build the necessary infrastructure to host the event. Brazil won rights to the World Cup in 2007 and won the rights to the Summer Olympics in 2009. For the Summer Olympics, which will be held in Rio de Janeiro, Brazil beat out more developed nations that wanted to host the Games. These included Spain (who wished to host the Games in Madrid), Japan (who picked Tokyo as the host site), and the United States (which had Chicago put in a bid and had their bid backed by President Barack Obama).
However, the rose has come off of hosting these events in light of declining economic growth, rising popular protests in the country, and poor decisions made by the Brazilian government to build the necessary venues. The Wall Street Journal on March 31st points out that the Brazilian government has invested at least $11.5 billion in remodeling airports, remodeling stadiums, and building new venues for this summer’s World Cup, but there are rising complains among Brazil’s poor and working class that the government would have been better served putting this money into social programs and education. International experts are also wondering whether Brazil can pull off a successful World Cup due to its poor infrastructure that might create traffic jams on the way to matches. The Los Angeles Times on April 22nd also points out that Brazil has not finished all of the facilities needed to host the matches as the stadium that is supposed to host the opening match between Brazil and Croatia has not been finished. FIFA, international soccer’s governing body, has expressed concern with Brazil’s decision to build twelve stadiums to host the event instead of just using eight. The decision to use twelve different stadiums means that some venues are being built in local areas that do not have local soccer teams. The deaths of nine workers while building the facilities for the World Cup has also drawn attention to the lack of safety regulations in the country.
Another reason some are worried about Brazil holding the World Cup and Summer Olympics is the country’s security situation. Rio de Janeiro’s slums, called favelas, are home to drug gangs and violence and the Brazilian government has launched a campaign to clean up the slums before the World Cup. These efforts, dubbed “pacification” by Brazilian authorities, kicked off in 2008. The Christian Science Monitor on April 2nd notes that the goal is to install a permanent police presence in these areas, which the Brazilian state has historically neglected, and rid them of criminals and drug gangs. Currently, 174 communities have been “pacified”, but the strategy has attracted some criticism from human rights groups and slum residents, who are largely middle-class and not poor. First, military police forces sent into the slums, according to The Los Angeles Times on April 23rd, have been accused of extrajudicial killings and a former commander of police forces in the pacification effort is currently awaiting trial for torturing and murdering a slum resident. Second, as CNN reports on April 23rd, efforts to push out drug gangs may have actually produced more, instead of less, violence and clashes with police in the slums are on the rise around Rio. Clashes are escalating to the point that Rio has called on the Brazilian Army to help with the pacification effort. Third, drug traffickers have largely escaped capture and although homicides are going down in the slums, disappearances around Rio, according to The Christian Science Monitor article previously cited are going up. And finally, the poor have largely been excluded in pacification efforts as promises to improving the slums access to city sanitation and water systems have been neglected, as have promises to build new schools and hospitals. Just like fighting an insurgency, a military or police presence gets nowhere if it does not win over the hearts and minds of local residents and it appears that the Brazilian government is doing a poor job of that at present.
Hosting a successful World Cup is necessary for Brazil for two reasons. First, it would provide a propaganda tool for the Brazilian government internationally and would further promote Rousseff’s re-election. And second, Brazil needs to show it can host the World Cup to improve global confidence in its ability to host the Summer Olympics. Extempers can recall questions they received this year about the capacity of Russia to host its Winter Olympics and that will pale in comparison to the questions they may receive in two years time about whether Brazil can host the Summer Olympics.
As a side note, extempers should be wary of giving speeches on Brazil and the World Cup that oversell its economic impact. The Wall Street Journal article previously cited from March 31st argues that the World Cup will barely make a dent in the Brazilian economy. Yes, 600,000 tourists are expected to arrive for the event and they will bring a great deal of foreign exchange with them via U.S. dollars and euros. And yes, the World Cup does last a month. However, the lack of infrastructure will probably delay the delivery of some goods and services throughout the tournament, which will reduce some of the buying and selling activities that happen around Rio and other cities hosting tournament matches. Also, Brazilians will miss work to attend matches (Brazil is one of the tournament favorites after all) and the overall reduction of business activity nationwide, especially lost productivity, may make the entire event “a wash” in economic terms. This is not to say that there will not be some economic benefit for the average Brazilian, but the World Cup is not going to pull the Brazilian economy out of the doldrums by itself.
Fixing Brazil
One of the significant challenges that Brazil will face in ensuing decades is trying to build a self-sustaining and robust middle-class. Extempers should expect to see questions about this at nationals and/or future tournaments because it is an emerging question in Brazilian policy circles. Building a middle-class is important in order to promote more domestic consumption of market goods and also serves as an area of wealth creation, since the middle-class can invest and open small businesses. To get to this stage, Brazil would be wise to lower some of the burdens on opening a business through reform of the tax code and stripping away some elements of “red tape” that businesses have to navigate to open. Reducing protectionism would also help, although it would be wise to reduce tariffs instead of just eliminating them. Brazil’s industries might be inefficient, but that does not mean that the government should throw them to the wolves against their better funded Western competitors. Instead, a gradual tariff reduction would allow Brazilian industries to learn, give them space to compete, and gradually provide more choices to Brazilian consumers. More spending on infrastructure and education would also help by assisting travel and laying the foundation for an educated class to lead Brazil in future decades.
Political reform is something that the new presidential administration should examine as well. Brazil’s elections are scheduled for October and currently, Rousseff leads her two challengers, Senator Aecio Neves and former state governor Eduardo Campos, by a sizable margin and observers expect her to win re-election. Rousseff should press for reforms that would set a limit for what share of the vote a party needed to be elected to the National Congress. Representation in the National Congress is determined by proportional representation, so setting a limit on what percentage of the vote a party needed to be represented would eliminate smaller parties that contribute to legislative gridlock. It would eliminate sizable political coalitions and turn Brazil into a country that had four or five major political parties. These parties might still enter into coalition with each other, but dealing with fewer parties might make reforms easier to accomplish and eliminate patronage demands that contribute to corruption scandals. Reuters on April 22nd argues that political reform might be the linchpin for other reforms since it is somewhat unfeasible that Rousseff could push for significant reform with the current composition of the National Congress.
Additionally, the Brazilian government must continue its fight on income inequality. This does not mean that inequality should be completely eliminated, because that is virtually impossible in a market system that rewards hard work and ingenuity, but more can be done and should be done for Brazil’s poor. For the “pacification” program to succeed, the Brazilian government must provide these communities with adequate schools, hospitals, and municipal services. These deeds will go a lot further than sending in police forces with guns to blast drug lords out of the slums. The government must heed the demands of a rising middle class that will demand higher wages and better governance and a failure of heeding these demands, according to Der Spiegel on February 7th, is risking the transformation of Brazil from a BRICS nation into one of the “fragile five” (which is a name that some economic journalists are now adopting for the BRICS).
Finally, adopting these reforms will require a degree of political willpower and it is still uncertain whether Brazil’s officials have what it takes to do that. The Reuters article previously cited from April 22nd notes that Rousseff doubts whether significant economic reforms are necessary and blames Brazil’s recent slump on the European debt crisis and a slowing Chinese economy. While it is true that Europe’s debt crisis did shake credit markets and China’s slowdown has negatively impacted its purchases from emerging markets like Brazil, the true problems that Brazil faces are not short-term, but long-term structural challenges. Only if Brazilian leaders realize the complexity of the challenge can they get their economy back on track and extempers should carefully watch the economic rhetoric during the upcoming Brazilian presidential election to get an idea of where things are headed.
As I have said in some of the other briefs for Extemp Central this year, I may have laid out a lot of things wrong about Brazil in this brief, but that does not mean that the country is headed toward civil war or is experiencing complete economic devastation. Brazil still has large deposits of oil and natural gas, is a pioneer in deep sea oil drilling, has a very young and growing population, and has succeeded in pulling nearly forty million people out of poverty since the twenty-first century began. It has been one of the fastest growing economies in the world during the twenty-first century as well. Still, the government of Brazil needs to find ways to improve consumer spending and income levels, provide ways to get more jobs into the hands of the younger generation, and make it easier to start and run a business. Without enacting significant reforms, Brazil risks a return back to the 1970s where it experienced a brief period of robust economic growth only to be followed by hyperinflation, an erosion of consumer and international confidence, and a wrecked public finance system.