Questioning corruption as the main root of Brazilian economic crisis.

Since 2015, Brazil is dealing with the biggest economic recession in its history in terms of GDP reduction and, especially, complexity. Concurrent to this economic turmoil is the “Operation Carwash”, Brazil’s biggest-ever corruption-dismantling effort, highlighting innumerable scandals of bribes paid by large private players to politicians — so, connecting both events seems natural and, obviously, make sense.

Encouraged by angry taxpayers and, in some cases, a poisoned media, the last decade’s government is currently being named by many as the main — or even unique — responsible for the economic trouble, not due to how economy was conducted, but asserting that the party in power sort of invented corruption and has thus destroyed our promising business environment due to that. Of course, it is unnecessary to expose that part of the blame is really on Lula’s allied base and that his administration displayed an absurd corruption pattern. However, when truly reflecting about politics in Brazil, corruption always existed; therefore, what else contributed to this drastic earthquake in the Brazilian economy? Why has South America’s BRIC become so sensible to these issues? Does corruption really deserve to be branded the sole villain in this story?

The complexity of the Brazilian economic crisis presume the existence of an infinity of influencers and it is unfeasible to detect them all, but some pieces of this domino effect are relevant of mention.

Brazil is famous for its favorable geographical constitution, with a lot of natural resources and an exceptional amount of fertile land. These characteristics favors the development of an industry based in commodities (products with no or few differentiations in quality), as the examples of soy, metals, fuels and others. Temporally to the beginning of Lula’s first mandate, the global economy was starting a huge super cycle of commodities showcased by petroleum and iron exportation to China so, basically, products that Brazil has in abundance were very valued in the global market for its demand, which improved significantly the profits of companies like Vale and Petrobras. Such scenario promoted growth in the Brazilian economy at an incredible pace, with highlights to positive GDP rates of 5.8% and 7.5% in 2007 and 2010, respectively. This economical movement, as the name itself says, occurs as a cycle; so, closely to 2014, the quotation of commodity prices started to show significant decreases, culminating in the opposite effect. Then, with Dilma Rousseff leading the country, external factors began to become unfavorable.

It is not insane to assert that this external context was crucial for Lula’s administration outstanding economic performance and for the significant reduction in the number of Brazilians under the extreme-poverty line leaded by social programs during his government. Such results were definitely driven by these circumstances, in the same way that the reversion was vital to eliminate the governability during Dilma’s term. Another punctual event was the explosion in consumption provided by this development, which contributed even more to a temporarily healthy economy.

This brief description of how the last global super cycle of commodities impact positively the economy introduce an important question, that reminds us of a famous parabola between a cicada and an ant, a situation that can be summarized by a rhetorical question, “What happens if you don’t prepare yourself during the abundance, for the shortage”?

During this golden decade, the promising environment favored a lazy industry, based in public subventions in many sectors, and low unemployment rate (an incredible 4.8% rate in 2014), while great profit margins have omitted many logistics deficiencies and made cost reductions and investments in technology seem unnecessary. This context resulted in a very similar industry structure between the end and the beginning of the cycle. The expensive operational processes of most of Brazilian companies were hidden by the great prices and by the public subventions so, in short, if the government is covering part of my costs and I can sell my product with greater margins, why should I care about efficiency?

The approached context was result of an economic policy with a large governmental intervention, who virtually selected which sectors should perform well, acting as a crutch for many of them. In the end of the day, this centralized approach was not sustainable during a bad season and thus, when the crisis came, the country was not able to keep feeding all industries. As a consequence of such behavior, many of them were not capable to survive on their own.

Necessary investments in public programs raised expenses but vital investments in infrastructure were left undone, hence Brazil did not follow the technological path of developed countries, keeping its core business focused mainly in raw materials, maintaining the nation extremely sensitive to external fluctuations in commodity prices and paralyzed most Brazilians in low intellectual activities. Naturally, not all industries followed this way, the Brazilian agribusiness being still a case of success, even in crisis.

The natural consequence of these behaviors was the unsustainability of permanent growth standards so, after the retraction in commodities prices, the excess in public subventions was eliminated and became an ungrateful mission for Brazilian industries: to be competitive against low production costs from developed countries, physically based in Asia and Africa. This scenario culminated in reduction in manufacturing activities, which resulted in a reduction of consumption, unleashing a domino effect between layoffs in industry and subsequent layoffs in services providers.

The head objective of this article is not to absolve corruption from any responsibility in Brazil’s current economic crisis, but reflect about some technical issues that contributed in a relevant way to it and, more deeply, to incite learning from this experience. Obviously, Brazil must progress in business confidence, fight corruption and invest a lot in compliance actions, but considering the complexity of this crisis, more than that will still be necessary.