Brazil's Coming Election: Can the Nation Embrace a Free Economy?
On Sunday, October 7, 2018, Brazil holds its presidential election and will vote for the national deputies, the state governors, and the senators. Brazil has a diverse party system with tens of political parties. When no candidate reaches more than 50 percent in the first run, the two candidates with the highest score will compete against each other in the second vote few weeks later.
The election of 2018 is not only one of the most critical in Brazil’s recent history, it is also the most polarized. This comes partly from the curiosity that the former president Inácio Lula da Silva takes an active part in the election campaign although he is in jail because of corruption charges. Lula, as he is popularly called, was sentenced to over nine years of prison but continuous to exert a strong influence on his followers and the media. He led the Workers’ Party (PT) to great victories in 2002 and 2006 and during his second term he was the post popular politician in Brazil. Fernando Haddad who is the candidate of the Workers’ Party visits Lula frequently and communicates with him to obtain directions how to lead the election campaign. On the campaign trail, Haddad even tries to imitate the distinct voice and mode of expression of the former president.
So far, two prime candidates for the presidency have emerged: Fernando Haddad of the Workers’ Party (PT) and Jair Bolsonaro of the Social Liberal Party (PSL). Beyond their fierce clash in promoting extremist right- and left-wing political positions, the two candidates have an ardent populism in common. As current polls indicate, the voter must (Brazil has compulsory voting) make a decision between the populist right (Bolsonaro) and the populist left (Haddad) in the final vote that is scheduled for October 28.
After he suffered a knife attack in early September and had to spend weeks in the hospital, Bolsonaro’s star rose. At the same time, Haddad also moved ahead, leaving the rest of the field of the candidates behind him. Hostility is rising, and the confrontations have become more aggressive. Whoever wins the presidency will face tough opposition, not only in the Congress and the Senate but also from large parts of the population. The mutual rejection in the population of each candidate are consistently higher than their acceptance. Aversion and hatred have become stronger feelings among the voters than sympathy and support.
Brazil is in need of urgent reforms which have been neglected since the Labor Party took power under the leadership of Inácio Lula da Silva in 2003. Lula was reelected in 2006 and then launched Dilma Rousseff as his successor in 2010 and 2014. Dilma Rousseff, however, never gained the same degree of popular support that Lula had enjoyed. She was forced out of office in 2016 after an impeachment against her.
Under the presidencies of the Workers’ Party, the government turned populist state capitalism into the leading economic model. The beginning of the thirteen years of the rule of Workers’ Party coincided with a commodity boom and a deepening economic symbiosis with China. Brazil’s exports boomed. At home, President Lula pursued an economic policy that fostered mass consumption and public spending. Under his rule, the government launched a far-reaching program of redistribution that provided public money to millions of families. This policy of almsgiving found praised by many, including foreign observers and international institutions . At the height of the populist wave towards the end of his second term in 2010, Lula da Silva was able to boast of high growth rates, full employment, and moderate inflation.
Yet during the phase of good economic performance, the government did very little to promote the productive capacity of the country. The planned infrastructure projects ran aground or fell victim to corruption. The Brazilian boom was based on the export of commodities and on domestic consumption. As demand from abroad declined, the government sought to stimulate domestic demand through credit expansion. Although this policy secured the election for the Workers' Party and Rousseff’s presidency, this policy prepared the current slump.
Since 2011, the economy has been sinking. Instead of catching up to the advanced economies, Brazil is falling back again. The mean economic growth rate of the past five years is negative (Figure 1) and the unemployment rate has reached more than 12 percent since 2017. In terms of economic freedom of the Heritage Index of Economic Freedom, Brazil stands at number 153 between Uzbekistan and Afghanistan.
Brazil. Gross domestic product. Annual rates of growth, 2013-2018
Source: IBGE. tradingeconomics.com
The Workers Party precluded sustained economic progress by prioritizing redistributive policies. This project had to fail because it plundered the middle class, which is still weak and relatively small in Brazil. Instead of fostering new enterprise and liberating the entrepreneurial spirit, a stifling bureaucracy and high taxes have hampered economic development.
Paying the Price for Failed Policies
In the 20th century, Brazil was the country of Latin America that made the most progress in industrialization. The economy benefited from the immense wealth of raw materials and agricultural resources and the way seemed open to catch-up to the rich countries. Yet after the great advancements of industrialization from the 1940s to the 1960s, the country fell into the trap of foreign loans in the 1970s and became a victim to the international debt crisis in the 1980s.
In response to the military rule that dominated the country from 1964 to 1985, the democratic forces created a Constitution that is packed with social utopia. The resulting political system is a hodgepodge of welfarism, presidentialism, and democratism. The Constitution of 1988 created a new privileged class in the form of the judiciary which enjoys privileges beyond belief and gives provincial judges almost unlimited authority to make decisions that concern the whole country.
After the ‘lost decade’ of the 1980s, the country slowly regained new ground and in the second half of the 1990s with an effective currency reform, privatizations, and expenditure control the economy begin to grow again.
That was the time when Brazil should have said goodbye to its interventionist economic model. Yet instead, the government put the country on the path to its current misery through Keynesian development policy. Expansionary fiscal and monetary policies have not brought relief but exacerbated the problems. Excessive public spending and monetary expansion have led to imbalances between production and demand. Without enough technological progress to offset the lack of savings, the economy lacks vitality and has remained stuck in stagnation.
The Workers’ Party did not accomplish any of the overdue reforms. When the crisis hit, the traditional weaknesses of the Brazilian economy reappeared in full force. The list of miseries ranges from the education system to pensions, from bureaucracy to labor legislation, from extreme economic and social inequality to the immense privileges of the civil service, and especially the privileges enjoyed by the judiciary in Brazil. Numerous unnecessary regulations burden the economy. Unclear and contradictory laws provoke incalculable bureaucratic and fiscal encroachments of the authorities on business. The labor market is extremely rigid. Workers are hard to dismiss. Public servants enjoy exorbitant salaries and generous benefits.
The high tax burden weights heavily on companies, consumers, and the working population. The public service is expensive and inefficient. The retirement regulations for civil servants are paradisiacal. The strong influence of the state on the economy and the numerous state and semi-state enterprises has opened the door to exorbitant levels of corruption.
The fact that Brazil has survived these burdens and still maintains a relatively good standard of living is due to its immense wealth of natural and agricultural resources. Yet this abundance is a blessing and a curse at the same time. The easy exploitation of the natural resources entices the country’s elite to pay little attention to productivity, efficiency, and thriftiness. The capital formation in Brazil is weak, savings are low, and the rate of innovation is poor. Without fundamental reforms towards a market economy, the future looks bleak.
A few years ago, at the height of the impeachment process against President Dilma Rousseff, it seemed for a while that the old ideology of state interventionism had abated, and that free market philosophy was on the rise. The country was hungry for new ideas. The representatives of the established elite had lost their legitimacy. The investigations that brought an immense corruption scandal to light had aroused the will of the population to establish a clean democracy. Yet the closer the next election came, the more the old forces regained strength up to the point that now Lula can direct an election campaign from jail.
The chances of a reversal after the election are small. Poor economic policies tend to produce even worse economic policies, and false ideology provokes more false ideas. Brazil is stuck in the swamp of interventionism which is typical of the populist state capitalism. At universities and schools, socialist and communist ideas dominate. Brazil needs a profound change in its economic structure, replacing its state capitalism of a top-down development strategy with a model of an entrepreneurial economy. The strange thing about Brazil is that with some persistence most of the country’s ailments are to cure but that hardly anyone in the political arena has the will to begin with the treatment and is determined enough to carry it out.