The Brazilian stock market has fallen by nearly 30% since the end of January, leading a correction in emerging market equities. In part, this has been caused by a rising dollar, a manifestation of a vibrant U.S. economy and Federal Reserve rate hikes. The strong dollar has the collateral effect of reducing investor appetite for the more vulnerable emerging markets, such as Brazil, Argentina, and Turkey, which depend on foreign inflows to finance large current account and fiscal deficits. In addition, investors are being spooked by political uncertainty. In Mexico, Andres Manuel Lopes Obrador, a radical populist with authoritarian tendencies is likely to win the upcoming presidential election, promising “regime change,” and in Brazil, a somewhat similar character, Jair Bolsonaro, is leading the polls and promising the same.
Though it is way to early to predict the results of Brazil’s October presidential election, there is no question that the electorate’s very sour mood is increasing receptiveness for Bolsonaro’s populist, strong-man, “law-and-order” message. After four years of recession, made much worse by a draconian monetary policy, a corruption scandal which has permeated the entire political establishment and a dramatic decline in public order, voters are eager for radical change and warming to Bolsonaro. A retired army officer who has been in the Chamber of Deputies since 1991, Bolsonaro expresses nostalgia for the military regime and his conservative Christian views have resonated with the increasingly influential evangelical community. He has the distinction of being one of the few politicians in Brasilia not tainted by the “Car Wash” corruption investigations being carried out by the judiciary.
Bolsonaro’s views on economic issues are unclear. His voting record as a deputy in Congress has been supportive of policies pursued by the leftist Workers Party, and throughout his legislative career he has tended to side with Brazil’s mainstream in support of state capitalism and trade protectionism. However, at the same time, Paulo Guedes, his chief financial advisor and probable Minister of finance, is a dyed-in-the-wool supporter of free markets, privatization, deregulation and the shrinking and decentralization of the state. With a PHD in economics from the University of Chicago, Guedes has been for decades a proponent for radical free-market reforms in Brazil to unleash the country’s productive potential.
Guedes views have been shared by very few politicians in Brazil, a country that for decades has had a strong consensus in favor of a dominant role for the central government in Brazil’s economy. However, the tide may be changing in Brazil because the recent corruption scandals have made clear the degree to which the state apparatus has been taken over by rent-seeking politicians and their business cronies. That may explain why Bolsonaro has latched on to Guedes. A politician wanting real change in Brazil today may have as the best option a promise to unleash Brazil’s repressed entrepreneurial spirit by state reform. In a recent interview, Guedes commented: “Jair has evolved much more quickly than Brazil’s economists or past presidents have evolved.”
Free-market reforms, deregulation and privatizations could provide an enormous boost to Brazil’s stagnant economy. As Guedes says “Brazil is paradise for the rentier class and hell for the entrepreneur.”
Brazil’s ranking in the World Bank’s Annual Ease of Doing Business Survey is emblematic of the regulatory burdens imposed by the state. Brazil’s ranks 125th in the latest survey, the worst ranking of a major emerging market and even terrible by the poor standards of Latin America (Argentina 117, Colombia 59, Peru 58, Chile 55, Mexico 49). A few examples from the World Bank survey will suffice to show the regulatory oppression faced by Brazilian businesses.
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