The New Cold War
America, China, and the Echoes of History
For Brazil’s political elite, the August 31 impeachment of President Dilma Rousseff for corruption was a barely disguised attempt to draw a line between them and the crises that have kept their country in a straitjacket for much of the past two years. With Rousseff’s successor, Michel Temer, now formally in place as president, the new administration can finally take the bold steps needed to revive the Brazilian economy. Corruption investigations will continue, but they will no longer be a soap opera distracting from the day-to-day business of governing the country. More important, according to this view, is that just as former President Fernando Collor de Mello’s impeachment 24 years ago may have set the stage for the reforms that led to Brazil’s impressive growth over the past two decades—Collor’s ouster was followed by a macroeconomic stabilization program, the Real Plan, that ended decades of hyperinflation—Rousseff’s impeachment could set in motion a new cycle in the country’s economic and political life.
The reality is somewhat more complex. In the cacophony of arguments over the legality of the impeachment process, there has been little focus on deeper questions that will have a greater bearing on Brazil’s long-term prospects. The current crises have exposed the fact that Brazil desperately needs a change in leadership; the real question is whether its new class of politicians has the vision, and the ability, to provide it.
The immediate answer is “no.” To a large degree, the new administration represents the worst of Brazilian political life. Temer himself faces allegations stemming from the Lava Jato (Car Wash) scandal, the same wide-ranging corruption probe surrounding the state-owned oil company Petrobras that has crippled Brazil’s politics and economy over the past two years. In his first 35 days as interim president, three of his original cabinet members had to step down amid claims of attempted cover-ups or shutdowns of the corruption investigation. Temer’s Brazilian Democratic Movement Party (PMDB), moreover, is known less for its ideology than for its willingness to hang on to the coattails of whoever is in power, reaping the (often illegal) political and economic dividends that go with it. In reality, little has changed by swapping a Workers’ Party (PT) president, Rousseff, for one from the PMDB—the parties’ roles in the Petrobras scandal were virtually indistinguishable, and the PMDB was the bulwark of the PT’s ruling coalition, with the same thirst for illicit funds to shore up its position. More broadly, nearly 60 percent of the new ruling coalition is the same as the old one under the PT. Temer is therefore just as dependent on disgraced rent seekers as his predecessor.
This situation sheds a clear light on the perverse (and pervasive) incentives built into the country’s electoral system. Brazil’s open-list proportional representation system has created one of the most fragmented legislatures in the world: there are currently 26 political parties represented in Congress, and presidents are forced to rely on large, heterogeneous coalitions with little ideological affinity. Lack of party loyalty among members of Congress further confounds policymaking, fostering a culture of pork barreling and patronage in which legislative approval is often contingent on buying political support with public funds and lucrative appointments in state-owned firms. Lawmakers’ self-interest thus tends to keep real political reform off the table.
Temer’s administration has tried to portray itself as a kind of caretaker government, focused on bringing the country out of its slump—GDP has shrunk for six consecutive quarters—before the next election in 2018, at which point a new government can focus on bigger-picture reform (Temer has ruled out running for reelection). In that respect, Temer has certainly taken steps in the right direction. He has appointed new technocratic management teams at state-owned companies such as Petrobras and the development bank BNDES. He has also shifted toward using foreign policy as a tool to promote trade: Foreign Minister José Serra, for example, is currently working to make the Mercosur customs union a “real trade bloc” that would allow member states more flexibility to reach bilateral accords. Other policies, such as a cap on public spending and a wave of privatizations in infrastructure, aim to rebalance public finances and stimulate private business.
Yet many of these moves have been relatively easy ones designed to win over the markets and put a positive face on the administration. Temer also benefits, perhaps perversely, from the tough economic times, in the sense that most Brazilians accept that the government has little choice but to try something different. But progress on the more fundamental obstacles to a sustainable economic footing—Brazil’s pension and tax systems, to name but two—remains difficult and still faces significant opposition in Congress and from interest groups such as labor unions. In the longer term, moreover, the incentive for reform would be substantially reduced if a commodity-price rebound caused cash to flow more freely through the government coffers once again.
Progress, therefore, is likely to be superficial at best. Brazil, which is still the world’s ninth-largest economy, will continue to be a country where foreign companies feel the need to operate because of its sheer size, not because it is an easy place to do business. It will take far more than positive spin and minor, superficial reforms to overcome the famous custo Brasil, or “Brazil cost,” the name for the economic impact of the country’s deeply inefficient bureaucracy, onerous tax system, pervasive corruption, and poor infrastructure. Likewise, Brazilian manufacturing cannot hide behind the shield of the state forever. Foreign competition is too often regarded with deep suspicion by local industrialists, rather than embraced for its potential to encourage dynamism. Brazil has enough world-class companies—Embraer, Vale, and, yes, Petrobras—to demonstrate that success can be achieved without protectionism.
The Temer administration should not hold up a return to economic growth in 2017 or 2018 as evidence of success. Two years from now, when a new administration takes over, the momentum for deeper reform may have already been lost, or other short-term priorities may have already taken over. If something positive is to come from the chaos of the past years, it needs to be set in motion now, before Brazil’s opportunity to properly rebuild itself is lost. Yet there is no sign that Temer, or any of his allies, has the courage to think big.
In fact, it may be that just as the recent corruption investigations drew their strength from popular anger, the successful change will need to be driven by pressure from underneath—from Brazil’s civil society and from institutions that are fed up with the status quo. Without that pressure, a political class that has often failed its constituents will continue to do just that. (In fact, it is incentivized to do so.) Brazil could lose its best chance to make sure its present doesn’t repeat its future, because this time, it won’t take 24 years for the next crisis to come.