The political and economic crisis that is shaking Brazil goes far deeper than the booms and busts that have characterized the country’s recent history. With the economy paralyzed and public debt soaring, Brazil’s sovereign debt rating has been reduced to junk. Public approval of Brazilian President Dilma Rousseff, now in her second term, has sunk below ten percent. And Rousseff’s leftist government, led by the Workers’ Party (PT), is hanging by a thread in the Brazilian Congress due to a deep split with its coalition partners over the austerity measures Brazil that needs to control its fiscal crisis.
These problems are too large to be fixed by tweaks to economic policy or by modest political maneuvering. The crisis arose out of Brazil's populist economic model; to resolve it, that model needs to change. Under Brazil’s economic system, first enshrined by Rousseff's predecessor, Luiz Inácio Lula da Silva, the state distributes wealth to rich and poor Brazilians alike—in the form of subsidies and social services—to secure public favor in elections. After years of extravagant public spending and easy credit, that model is no longer sustainable. The public is also increasingly suspicious of it, given recent revelations of high-level corruption in the country’s public sector.
Rousseff, then, must contend with a public that is struggling to make ends meet, demands the continuation of social spending, and resists the tax increases that the government must pursue to put its fiscal house in order. And she must deal with the disintegration of her electoral base in the Workers’ Party.
That might sound impossible, but there are things Rousseff can do to address the problems. In particular, she must build a ruling coalition that incorporates conservative forces in the national congress and responds to the interests of the country's private sector, which seeks greater fiscal responsibility from the federal government. Without such a coalition, her government will lack the legislative clout it needs to tackle the crisis at its roots.
FITS AND STARTS
When Brazilians took to the streets to protest economic stagnation and corruption scandals in the Workers’ Party in the fall of 2014, Rousseff responded with a high-level salvage operation, appointing a new finance minister, Joaquim Levy, a former bank executive with orthodox credentials, to put the country's economy back on track. But as soon as Levy called for austerity and efficiency in the country's indebted public sector, representatives of the Workers’ Party in the Brazilian Congress pushed back, refusing to pass austerity measures and denouncing the government’s abandonment of the social subsidies promoted by Rousseff during her 2014 reelection campaign.
The task force is turning up new cases of high-level corruption with astonishing frequency.
The centrist Democratic Movement Party (PMDB), the Workers’ Party’s major partner in Brazil’s governing coalition, has broken from the Workers' Party over these fiscal reforms. The PMDB promised to provide Levy with limited support, but only if he pushed for spending cuts that Rousseff’s party has historically resisted. By fits and starts, then, Levy has made some progress in reducing deficits, but he is still far from stabilizing Brazil's fiscal situation. As a result, private investors have held back on new ventures. That has only deepened the crisis.
The prospects for Brazil's recovery are further complicated by two major sources of political uncertainty. The first is the unprecedented anticorruption activism of the federal judiciary, which, over the past year, has uncovered the looting of billions of dollars from public enterprises, such as the state-owned oil company Petrobras, in that case allegedly to bankroll the electoral campaigns of Workers' Party candidates. The Petrobras scandal has reached the highest levels of Brazilian politics: the directors of some of Brazil’s largest oil contractors have testified under plea bargains, and figures including João Vaccari Neto, the Workers' Party treasurer during Rousseff's reelection campaign, have been implicated in the kickback scheme, which some estimate to involve more than $3 billion.
The Brazilian judiciary, once quite passive, has taken on an important role as a watchdog over the country's unruly democracy.
The judiciary's investigations have been led by Sergio Moro, a young federal judge who heads a task force of federal police and public prosecutors from the politically independent Public Ministry. The task force is turning up new cases of high-level corruption with astonishing frequency. One of the latest inquiries, in late July, led to the arrest of Othon Luiz Pinheiro da Silva, a prominent retired admiral in the Brazilian navy.
The judiciary's anti-corruption drive enjoys wide public support, and the prosecutions it produces will have powerful political effects. Rousseff’s political fortunes, in particular, have been seriously damaged by the judiciary’s efforts, and that has further complicated her efforts at reform. But the real significance of the corruption investigations is much broader: the Brazilian judiciary, once quite passive, has taken on an important role as a watchdog over the country's unruly democracy.
THE LULA FACTOR
An even greater source of uncertainty is Lula, the iconic co-founder of the Workers' Party, who was Brazil's most popular politician when he handed over the presidency to Rousseff in 2010. At the time, constitutional term limits barred him from pursuing reelection; his grooming of Rousseff as his successor during her time as his chief of staff from 2005 to 2010 was widely viewed as a bid to maintain his influence in Brasilia ahead of a likely campaign for the presidency in 2018. But with Brazil’s economy in shambles and corruption a major public concern, the Workers' Party's aspirations to stay in power—and Lula's chances of returning to power—are diminished. Indeed, the extent of the corruption in state-owned enterprises is so broad that many in Brazil believe that Lula must have been complicit in a system of corruption that Brazilian prosecutors have described as a “criminal conspiracy” designed to perpetuate PT rule. Lula has persistently denied knowing of high-level corruption and describes claims related to his involvement as an “elite” campaign against his prospects in 2018. To garner public support, meanwhile, he has distanced himself from the austerity measures considered by Rousseff to be essential to Brazil's economic recovery. Instead, he has sought to improve his standing among Brazil's poor, among whom he enjoyed enormous popularity as president. When international risk evaluators downgraded Brazil’s credit rating, for example, Lula scoffed. He argued that the downgrade was “not important” because Brazil would be restored to economic well-being “by the power of the poor.” On a tour of Venezuela and Bolivia last month, Lula praised their populist regimes, and during a visit to Argentina recently he joined political rallies supporting the Peronist presidential candidate Daniel Scioli. The message was clear: Lula hopes to maintain the populist model that brought the Workers' Party to power.
Although Lula says he will attempt to return to the presidency, his chances as a candidate in 2018 depend on the outcome of Rousseff’s attempts to address both Brazil’s economic crisis and the public’s disgust at the country’s corruption scandals. If Rousseff is unable to develop a multiparty coalition that will support an austerity program in Congress, she may be forced to step aside and turn over the presidency to Brazilian Vice President Michel Temer, now the president of the PMDB. In the meantime, a broad political consensus may be the only way to create the stability that Brazil needs to pull itself out of crisis.