Brazil’s Dichotomous Treatment of Corruption – PT 1

Brazil is a country saturated with corruption. From the small, family-owned mom and pop neighborhood grocery store to the hallowed halls of the Senate and Congress, the country suffers from a cancer that consumes the bone marrow of its political elements, economic structures, and social relationships. The one-time rising star of Latin America and its fall from grace has been both dramatic and shocking. Political chaos, administrative mismanagement, and digressive legislation now overwhelm this once hopeful democratic republic.

Deep-seated corruption that went unchecked for decades has destroyed Brazil’s opportunity to be a successful, functioning democracy. Today, forces are converging to reshape Brazilian society for the next few decades and not in a good way. Changes in global emerging market economies, the historic and unprecedented Petrobras corruption scandal, the impeachment of a democratic elected President Dilma Rouseff and the arrest of past president Luiz Inácio Lula da Silva are just some of those disruptive forces. Also, the investigations and imprisonment of many members of Brazil’s elite political class and high-level corporate executives from some of the country’s flagship corporations is having a devastating effect on the country and its economy. At the same time, Brazil faces what seems to be a bevy of insurmountable local issues such as the Zika virus outbreak, significant hospital and medical facility shortages, a very poor education system, exploding violent crime, social unrest and environmental pollution. Currently, the country faces a controversy that seems to be causing a systemic meltdown of the government, the Petrobras (Lava Jato) scandal.

Brazil’s previous significance as one of the world’s leading, emerging economic powers comes from a combination of both external relations and internal strengths. In the case for external relations, for example, the increase of global populations throughout the world increased the demand for Brazil’s agricultural and mineral products. Besides this, the continuing growth of a global middle-class (according to projections the global middle-class will increase 1.8 billion people by 2020) is creating more demand for commodities and products from Brazil. Also, the public outcry for reducing carbon emissions puts Brazil in a key position with its evolutionary development of biofuels. On the internal side, Brazil emerged as a major exporter of commodities. Moreover, it holds a significant percentage in global markets. Research shows that Brazil’s share in global commodities are soy (40%), chicken (30%), coffee (30%), beef (20%), orange juice (80%), and tobacco (20%) which has made the country a major global commodities producer. The problem for Brazil is it faces two daunting challenges. First, it must invest the wealth from its natural resources in education, infrastructure and technology to sustain long-term, continued, growth. Second, there is an overwhelming need to develop a more consistent economic course to integration and diversification into global markets and not depend so much on commodity exports.

This is not the first time Brazil benefitted from exceptional economic growth. The country grew at the rate of 6% per year from 1947 to 1962. During the period, 1968-1973 (dubbed the “miracle years”), the country grew at about 12% per year – one of the highest rates in the world. Then, the debt crisis of 1982 hit and the so-called “lost decade” resulted in macroeconomic instability and hyperinflation. Still, the country contains the largest and most bio-diverse rainforests and the largest renewable reserves of freshwater. Due to its vast territory, it has the ability for large-scale livestock farming and commercial agriculture. Also, its mineral wealth is considerable especially with iron ore. Finally, offshore oil and gas discoveries placed it in position to be one of the world’s largest producers of hydrocarbon fuels.

But growth and ascension came at a considerable cost and introduced certain debilitating economic conditions. Since the days of Gertulio Vargas, state-led developmental policies dominated in Brazil’s economy in an attempt to make the country a self-sufficient, independent, global economic power. In 1985, Brazil’s public sector accounted for almost 50% of the net assets of its 8,000 largest companies, 25% of its sales, and 20% of the country’s employment. The government, as manager and economic planner, assisted in the emergence of prominent successes in aircraft manufacturing, biofuels, and petrochemicals. In addition, it assisted in encouraging entrepreneurial groups to develop products and technologies that were more challenging. In addition, this economic development assisted with the introduction of protective tariffs, subsidies, targeted credit, and government assistance for Brazilian companies doing business with foreign investors.

Starting in the 1980s, state-led developmental policies to promote autonomy became counterproductive. Instead of providing a strong foundation for the country’s economic growth, these policies “paradoxically” contributed to certain eviscerating economic situations. For instance, massive financing of certain public sectors led to chronic inflation and a direct impact on the middle-class and poor. It appears that costs associated with failed economic experiments by the government passed on to the public. Also, the government’s import-substitution industrialization policy led to extensive foreign borrowing which created payment pressures. Yet starting in the late 1980s, the government began to dismantle the import substitution framework by reducing certain tariffs and the removal of nontariff barriers. Later, the Cardosa administration began a major privatization campaign by selling off about U$110 billion worth of assets including the telecom giant Telebrás.

When we consider the political governing body of the country, we discover that for more than two decades following the end of the military dictatorship, a group of rich, right wing, autocrats controlled the government and its decision-making processes. This political class enjoyed complete and unquestionable power and influence. Moreover, instead of meeting challenges to sustain Brazil’s growth into the future, they pillaged the public coffers through corruption, threw the country into huge debt and failed to meet the objectives of investing in social and educational improvement for Brazilians. In fact, the hyperinflation of the 1980s and 90s destabilized the country’s currency. In 1986, for example, Brazilians used the “Cruzeiro,” (First Cruzeiro). But a governmental economic plan changed the currency to “Cruzados” or second Cruzeiro in the same year. A few years later, the currency changed again, this time to the “Cruzados Novo.” By the 1990s, the Cruzado Novo retired and the country returned to the Cruzeiro. Yet by 1993, the Cruzeiro turned into the “Cruzeiro Real.” As a result, the country’s currency was not stable until 1994 when it became the Brazilian “Real.” More important, for the first time in eight years, Brazilian citizens had an opportunity to become accustomed to a stable currency.

In 2002, after several failed attempts, Luiz Inácio Lula da Silva, a left wing, socialist candidate became president of Brazil. Not only did he prove that a left-wing administration was capable of navigating a sound macroeconomic course for the country but he also opened the country’s economy to unprecedented global trade and investment. Lula’s philosophy worked something like this: if you want to sell products in Brazil to Brazilian people, then you have to build factories in Brazil and employ Brazilian citizens. As a result, Brazil became more integrated into the global economy than it had in over forty years. Under Lula, trade accounted for 25-30% of Brazil’s national economy. This was a significant increase over the 15-20% of preceding decades. Also, through a sustained commitment to sound macroeconomic policies, Brazilian corporations achieved global success in various sectors. He implemented policies on alternative and new energy sources, agricultural self-sufficiency, and Brazil began to ascend the ranks as a resource-rich, global economic power (to be continued…)

Brainard, L., Martinez-Diaz, Leonardo, (2009). Brazil as a Economic Superpower: Understanding Brazil’s Changing Role in the Global Economy. Washington DC, Brookings Institute; Diaz-Alejandro., Cooper, R.N. and Dornbusch, Rudiger. (1983). Some Aspects of the 1982-83 Brazilian Payment Crisis. Brookings Papers on Economic Activity, Vol. 1983(2), 515-552; Almeida, J.T., (2008). Brazil: economics, politics and sociology. New York, Nova Science Publishers; Schineller, Lisa, (2012). Brazil’s economic success is based on more than the demand for natural resources. America’s Quarterly;; Rapoza, K. (2016) Latest Brazil Study on Impeachment Unlikely to Save Dilma.