Brazil’s Bad Choices

“A second marriage is the triumph of hope over experience.” Samuel Johnson

Brazilian voters have the sorry task of choosing between two deeply flawed political figures in a runoff presidential election on October 30. The frustration is increased in that the two candidates already have proven their incompetence for the job, so the choice can only be grounded in hope over experience.

The alternative is between Luiz Inacio Lula da Silva, the caudillo who has run the Workers Party (PT) for decades, including a 14-year stretch (2002-2016) marked by rampant corruption, and Jair Bolsonaro, a right-wing evangelical populist with a truculent manner, an unsavory environmental record, and a deep nostalgia for the “order and progress” of military dictatorship (1964-1985). Most voters are motivated by fear and rancor and resigned to choosing the least-worse option; either “a corrupt thief” (Lula) or “a genocidal fascist” (Bolsonaro), as the candidates defined each other in a recent public debate.

The political, media and business elites in Brazil mainly have sided with Lula, if with a pronounced lack of enthusiasm. The rationale is that Lula is “more democratic,” though this overlooks his fervent admiration of Cuba’s Castros and other Latin American dictators and his antagonism towards Brazil’s vibrant free press.   Bolsonaro is lambasted for adulating Trump and siding with right-wing strong-men around the world. Bolsonaro also is accused of plotting to bring back a military dictatorship to Brazil, though there is no evidence that the military would countenance this unless social order declined precipitously, and the middle classes took to the streets clamoring for an intervention.

Lula’s key campaign promise is that he will bring back the consumption boom experienced during his presidency (2002-2010) which resulted from a surge in commodity prices and a massive positive terms-of-trade shock. This was a period of prosperity when purchasing power expanded greatly for low-skill workers and investment bankers alike. As Lula tirelessly repeats: “They know that never in the history of this country they made so much money as when I was president. Bankers made money, businessmen made money, farmers made money.”

However, Lula grossly mismanaged the commodity boom, and it was followed by a severe case of “Dutch Disease’ (the natural resource curse) from which Brazil still has not recovered.

“Dutch Disease,” named after the economic instability caused by the discovery of gas fields in the Netherlands in the 1960s, is well documented, and responsible natural resource producers (e.g., Norway, UAE) have learned to avoid it by taking preventive measures e.g., offshore sovereign funds.  The discovery of the huge pre-salt offshore deposits by Petrobras in 2005 and the China-induced commodity super-cycle (2002-2012) caused a massive terms-of-trade shock for Brazil.  Unfortunately, Lula fell right into the trap, and Brazil followed the classic course of Dutch Disease as outlined by academics.

1. Currency overvaluation, resulting in the decline of the trade sector and deindustrialization, followed by devaluation.
2. A credit-fueled consumption boom, followed by lower growth and reduced living standards.
3. Monetary expansion and asset bubbles followed by crashes.
4. Increase in corruption and rent seeking, undermining confidence in judicial and political institutions.

Corruption scandals marred the 14 years of PT rule. Moreover, Lula undid important administrative and economic reforms that had been achieved under his predecessor, Fernando Henrique Cardoso.

 Since the end of the PT’s rule in 2016, Brazil’s economy has been in a depressionary state. But slowly the foundations of growth have been restored by competent monetary and fiscal policies and a series of important reforms. These include pension, labor and bankruptcy law reforms, and laws setting a ceiling on fiscal spending, guaranteeing Central Bank Independence and for the regulation of water and sewage utilities. Since 2016, Brazil has also seen its most important wave of privatizations since the 1990s. This includes the spectacular privatization of Eletrobras, the national electricity utility, which for decades had been a bountiful source of graft for politicians. Next on the list of privatizations is Petrobras, which was at the core of the corruption scandals of the PT years. These reforms aim to make the economy more competitive and productive. Lula opposes them all and aims to overturn them.

The choice is a tortuous one for the Brazilian voter. If character is the determining factor, many will stay home or nullify their votes. If voters understand the benefits that may accrue from the current course of economic reforms, the choice may be easier.