Economic Scene: Populist Policies Let Brazil’s Tomorrow Slip Away

Eduardo Porter
Eduardo Porter

Not too long ago, Brazilians might have been counted as the most optimistic people in the world. From 2008 to 2013, as the United States and Europe grappled with the aftermath of a crisis wrought by blind trust in unfettered finance, Brazil’s income per person grew 12 percent after inflation. Wages soared. The poverty rate plummeted. Even income inequality narrowed.

Brazil remained only a high-middle-income country, in the technospeak of the International Monetary Fund. But for the first time in forever, the eternal “country of tomorrow,” as Brazilians often ruefully described their nation, saw itself instead as a rampant member of the emerging cohort of BRICS (Brazil, Russia, India, China and South Africa) — maybe even closer than China to making the jump into the ranks of the world’s richest nations.

And then it didn’t happen.

Between 2015 and 2017, the Brazilian economy is expected to shrink 8 percent, in the I.M.F.’s estimation. That is deeper than the contraction of the early 1980s, which began what in Brazil and much of Latin America is still known as the “lost decade.”

Unemployment hit 11 percent in the first quarter. Brazilians are so angry that they are about to impeach their president. The development of Brazil into an advanced economy — once tantalizingly within sight — again seems more like an elusive mirage.

What gives?

Mistaken hopes inspired by high commodity prices are common in Latin America. With China insatiably buying Brazilian iron and soybeans, it was hard for policy makers not to feel invincible as rock-bottom interest rates in the United States pushed a wave of money into Brazilian bonds.

“Lula thought he was an economic genius,” said José A. Scheinkman, a noted Brazilian economist now at Columbia University, about Brazil’s previous president, Luiz Inácio Lula da Silva, who stepped down in January 2011.

The commodity boom, however, did not a new economic paradigm make. The hubristic belief that it had led to critical policy mistakes.

“The boom delayed other policies that were costly to implement: judicial reforms, tax reforms, education reforms, labor market reforms, opening up to foreign trade,” said Alejandro Werner, who heads the Western Hemisphere department at the I.M.F.

When Dilma Rousseff succeeded Mr. da Silva as president, she doubled down on the populist alternative. Markets are overrated, she concluded. The kind of politically painful but economically beneficial reforms the I.M.F. likes are pointless. Better to develop the economy by the hand of the state.

Brazil’s economy has long been notably closed to the world. Its average applied tariff of 10 percent, according to the World Trade Organization, is the highest among the BRICS. But that did not stop the Brazilian government from further increasing subsidies and protection for favored sectors, like the auto industry. The three federal development banks did so much subsidized lending that by last year they accounted for well over half of all lending in Brazil.

There is nothing inherently wrong with government action to spur the economy. Yet the Brazilian government did not know when to stop. Often, interventions smacked more of political opportunism than ideological resolve. Increases in the minimum wage — a critical benchmark used to index wages, pensions and a host of prices — were extremely popular. So were caps on regulated prices for gasoline and electricity, which kept the inflation rate from rising way past its official target.

“It was a classical mistake of political economy,” said Rubens Ricúpero, a Brazilian economist and diplomat who was minister of finance in the mid-1990s. “They wanted to stay in power.”

Monica de Bolle, a Brazilian economist at the Peterson Institute for International Economics, dates the populist shift to 2006, when President da Silva was hit with a vote-buying scandal known as “mensalão.”

“After that he became much more populist,” she said. “He needed support not to be ousted from office.”

The case for populism only intensified as Mr. da Silva fought to ensure the election of his anointed heir, Ms. Rousseff, and as she battled to ensure her own re-election in 2014, after the commodity boom had lost much of its steam. Ultimately, the strategy opened the way for her impeachment when it was discovered that the state-owned banks were in effect surreptitiously funding the government, hiding a growing budget deficit.

Even without the scandals and mistakes, Brazil would be facing rocky times. China’s cooling appetite for Brazil’s commodities and the gradual tightening of monetary policy in the United States were bound to slow the economy. But what turned the downturn into a crisis was bad policy making. When the foreign outlook dimmed, Brazil’s economy was strangled by fast-rising public debt fed by billions in loans gone bad to former national champions.

Revelations of rampant corruption were hardly surprising, given the cozy relationship between corporate Brazil and a government dispensing contracts, subsidies, preferred loans and other protections.

What is the rest of the world to learn from Brazil’s troubles?

“Lula walked back slowly to the old closed economic model,” said Armínio Fraga, who headed the central bank in the 1990s, during Brazil’s fairly brief flirtation with opening up its economy. “It worked while commodities and financial conditions were doing well but became unsustainable when that was over.”

Brazil was not alone. Until the 1980s, governments all over Latin America flirted with similar policies of state control. More recently, Venezuela and Argentina spent much of the last 10 years increasing the government’s hold on the economy.

One important lesson is that the choices faced by governments in Latin America and developing nations around the world do not necessarily pit free markets against policies to combat poverty and foster social inclusion. Brazil’s anti-poverty strategy started in the 1990s, well before its turn toward state control. And most of Brazil’s enormous subsidies over the last few years went to large corporations, not the poor.

“Businessmen all supported the interventions with the exchange rate and interest rates, the subsidized credit and the interventions in prices of electricity and gasoline,” said Marcos Lisboa, who heads Insper, an educational and research institute in São Paulo. “They didn’t support opening the country to trade.”

Nor do Brazil’s misfortunes amount to a wholesale indictment of the Latin American left. Mr. Ricúpero, the former finance minister, notes that Bolivia and Ecuador, run by left-leaning governments, exhibited more cautious economic management and avoided Brazil’s fate.

“Not every government with a social inclination will necessarily do the same as Brazil,” he said.

Brazil’s downfall offers a more complicated lesson: Development is hard. And if Brazil’s rise and fall offer lessons about government’s inherent limitations, the Great American Meltdown of 2008 similarly offers a cautionary tale about allowing markets to run wild.

Avoiding turning inward is the biggest challenge. As Latin America has proved time and again, it is a recipe for low productivity growth. Relying on commodities has failed time and again, too. But even the successful export-led models — Taiwan and South Korea most prominently — no longer seem so useful in a world where much manufacturing will soon be done by robots.

But there are other common-sense recommendations to come out of such experiences: Invest in human capital, manage commodity bonanzas with caution, recognize that openness to foreign competition is necessary to develop.

As President Obama might put it, don’t do stupid stuff. Easy, feel-good recipes — especially those found wanting in the past — will probably fail if you try them again. That goes for the United States, too. America’s very own populist, Donald Trump — offering walls and tariff barriers to his aggrieved supporters — could learn something from the Brazilian experience. He probably won’t.

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