A Temperamental Consensus

By Fernando Horta

Originally published September 2015

In 2001 when Brazilian democracy proved strong enough to bring ex-metalworker and union head Luiz Inácio Lula da Silva to the Presidency the country became an international sensation receiving compliments from some of the most important leaders around the world as well as the United Nations. Equally important the economy was stable and grew at an average of 3,52% in the 2003–2013 period . This data has no value per se but for the fact during the same period 22 million people were taken from extreme poverty. This was unprecedented in a democratic society. Today Brazil has come out from UN’s Hunger Map for the first time in the country’s history. President Lula left office with 80% approval and a strong economy, placed at 6th largest in the world (briefly overtaking the United Kingdom following the 2008 global financial crisis). Low inflation rates, low levels of unemployment and declining economic inequality rates despite the historical high economic inequality being a structural issue for the country. To compound the country’s success, Brazil hit the UN Millennium Development Goals, and surpassed the environmental goals becoming a model for ecological discussions and pragmatic solutions. Of course, Brazil was far from perfect but all the data was showing a promising political course with few clouds on the horizon.

The last two years, unfortunately, are looking like a political and economic nightmare. The inflation is rising, as is unemployment (although still below average rates of the previous PSDB government). GDP growth is stagnating, exacerbating public debt while at the same moment industrial activity seems to be retracting. President Dilma Rousseff clinched reelection in 2014, however now there are loud voices asking for her impeachment and even advocating her self-retirement. Corruption scandals are popping up from everywhere, notably within the State Oil & Gas giant Petrobras, and the President’s approval rating is at historic lows.

An IBOPE Poll in October 2015 showed former president Lula ahead in 2018 voting intentions, and leading a tight pack (All candidates around 50%) in terms of rejection — these figures depict a crisis of representation unless a new consensus is found.

What went wrong?

For the opposition PSDB and allies the answer is a simple one: President Lula’s and Rousseff’s Workers’ Party (PT) is responsible for all this ill-management both in the economic field and the political one. The corruption scandals showed the devilish side of the Brazilian most important leftwing party and the “PT’s way of government” cannot be accepted anymore. These discourses are blown up by the local media, which consistently targets the government with bad news and even worst economic evaluations, boosting any demonstrations against President Rousseff.

Even if we accept, in part, this argument — which we should not — this is a vivid demonstration of how a reductive evaluation of the economic and political situation can be made dominant through Brazil’s monopolistic media, which is accused of acting as an opposition party. Moreover, a highly concentrated media seems to be as bad as Brazil’s grotesque concentrations of capital and inequality. The answer for this downturn of Brazil’s economic and political course can be divided in three parts: (1) the international scenario, (2) Lula’s and Rousseff’s governments and (3) the structural problems of Brazil.

In spite of the endless discussion of the causes the international crisis and its influence on Brazil’s internal problems done by journalists, political figures, experts and people in general, a recent G20 meeting indicates that the world is “not yet out of the woods” economically speaking. The US is still facing high (for them) rates of unemployment and the GDP is recovering slower than expected. The UK recovery was the slowest in decades. The Euro-zone does not need any more commentary regarding Greece’s (…and Ireland’s, Italy’s, Spain’s, Portugal’s, etc.) recent problems. China is showing lowest growing rates in a decade, with a “banking bubble” a potential future storm. All this situation can be rationalized differently using different economic schools. Of course, we do not need to submerge in analysis to understand the Euro-zone is Brazil’s primary trade partner, China the second and US the third. With all these partners reducing their imports and trying to maximize their exports the trade balance shifted abruptly against Brazil. The international prices of commodities (high during the Lula era) are currently on a descending curve, and the oil price is in free fall.

It is obvious that the forces that sustained a virtuous circle during Lula’s Presidency are over and Rousseff needed to adjust accordingly. The problem is how to adjust? Rousseff has chosen the “austerity” recipe and now is struggling with a difficult situation. Brazilian public debt is about 65% of its GDP and is taking a little bit more than 51% of the annual budget. How can government go for a cut in the expenditure (social programs, security programs, infra-structure investments and etc.) to save money and allow itself to elevate the basic interest tax rate? Each point increased in the interest rate costs approximately R$ 17 billion to government. One cannot expect to save money by cutting the social expenditures and, at the same time, increase the basic interest rate. The problem is in the “austerity package” increasing the interest rate is a necessary measure (almost a divine law) to contain inflation. Suddenly the equation seems not to be working at all. Brazil’s interest rate (SELIC) is 14,25%, the highest among major economies.

This point is a good one to understand where Lula’s government made mistakes. Despite all good done by former President’s administration, he avoided politically difficult structural reform. Brazil still leads towards taxing consumption over property/income (what is referred to as a “regressive” taxation system where the lower income group expend more relative income in taxes than the wealthy). Brazil has low income taxes for the 10% richest on an international comparison. This provides a perverse situation: the poorest people pay for almost 80% of the public revenue and the 1% richest pays only 8%. This is without even discussing tax evasion, since this is a habitual practice in Brazil. All the achievements of Lula did not conclude in well planned reforms to increase economic equality. Lula’s good numbers were achieved by distributing the new and increasing national income in a more equal way. Once this “new income” (exports, international investments, etc.) ceased to flow into the Brazilian economy, structural inequalities have started to drag again. Now it seems to be a heavier burden since the lowest classes are consuming (and borrowing) more than they were ten years ago.

Even if corruption was not attacked directly by the former President — Lula is an astute political operator and knew this would damage any chance of implementing his poverty reduction agenda — it may be correct to say that Presidency created some of the most important institutions and laws to combat corruption CGU (Controladoria Geral da União), SFC (Secretária Federal de Controle Interno) etc. Unfortunately the realities of Brazilian politics meant he did little actively to encourage investigations. These problems are, right now, being faced by Rousseff, paradoxically, with disastrous effects on the current President approval rating. The so called “Lula Social Pact” Lulismo in Portuguese, which designates a certain consensus were all social strata wins part of the rising national income can not longer produce the same results since now “enlarging the cake”[1] is at a standstill. Now that Brazil needs to redistribute what already exists more equally political consensus disappears.

Analyzing the current Brazilian government it is clear that some political choices were made by Rousseff in order to avoid negative economic impacts prior to the 2014 ballot. By keeping all the social expenditures regardless the shrinking budget, Rousseff opted to incur in a delicate economic situation rather than damaging her political image. It was a risky option since now she needs to do all the reforms Lula left undone and, at the same time, deal with an “economic adjustment” trying to regain GDP growth to supporting Brazil’s now stable working class’ newly available consumption habits. Inequality continues to be the most important structural problem in Brazil. For all the positive transformation during Lula’s two mandates Brazil is still one of the most unequal countries in the world. We need to take for granted that Brazilian elites will not accept to pay for what they call “economic populism” which is being enforced during Rousseff’s current political weakness. Using Brazil’s wealth — and some of its debt capacity — to diminish economic inequality and poverty is not seen by the dominant classes as a valid goal. This contrasts with the previous period when the amount of wealth to share amongst the classes was from new sources, the “everyone wins” situation provided some level of social consensus. According to Brazilian elites and their media allies in the present situation, where it is needed to redistribute the existing wealth and accept lower levels of growth, the state will become “bloated” again, all social politics become classified as “populists” and all the past achievements are reinterpreted as an “uneconomically unsustainable welfare state”. However this is rightly regarded as a bad joke, calling a public policy agenda that took 22 million people from extreme poverty is not an “unsustainable welfare state”, it is social justice.

Brazil’s social programs are considered good value considering how little they cost. Bolsa Família, the landmark program of Lula’s first mandate which consolidated and massively expanded on a number of previous schemes costing around 2.5% of the Federal Budget and for every Real spend generates nearly two in the wider economy, One can easily be confused by any argument that labels a policy that removes Brazil from the UN Hunger Map “unsustainable economic populism”, but that is the political argument against Rousseff right now. In a way, this type of political use of poverty, naturalizing the historical process (“the poor will always be with us”), is not a new discourse. Since independence South American elites were taught that the State was theirs to fulfill their concerns, and the society, after all, is not an example of justice. Some people are rich, some people are poor and this is supposedly because they are hardworking, have faith in God and individual talent. From this reactionary point of view, trying to change Brazil’s economic and social structure is a crime, a “populist crime”.

1. This is a historical-political Brazilian joke coming from dictatorial period (1964–1985) when Delfim Neto, former economic minister, explained why inequality was soaring even with GDP growing. He answered the question “We need first to enlarge the cake and only then divide it.”