Three things to watch in Brazil

By Samuel George

What now?

What now?

This piece was originally published on the Global Economic Dynamics website

On the morning of March 2, I met with former Brazilian President Lula da Silva at the Instituto Lula in Sao Paulo in the context of the Latin America at the Crossroads video series. He seemed tired and apprehensive. He asked if I would visit the beach, and I said only if you promise not to tell my boss.

Two days later, in scenes that played out on live TV, federal police raided his house and detained him for hours of questioning regarding percolating corruption charges stemming from his period as president. A federal indictment followed days later, and the opposition to the Partido dos Trabalhadores (PT) government – both elected officials and regular Joãos in the street—smelled blood. Lula is inexorably linked to his protégée and successor, President Dilma Rousseff, who herself faces impeachment charges regarding fudged fiscal figures.

The situation continues to unravel as if out of a telenovela; not an altogether uncommon characteristic of Brazilian politics. With competing street protests as a backdrop, President Dilma offered Lula the opportunity to join her administration as a Chief of Staff, a position that entails broad legal protection from prosecution. However, just as Lula formally accepted the position, a federal judge in Brasilia issued an injunction that would prevent the realization of the appointment.

Forecasting what could happen next is a fool’s errand. However, a couple of underlying trends are important to monitor. While these issues may not indicate tomorrow’s headline, they can help us understand the trajectory of the perennial country of the future.

I hope you like jamming

Regardless of what happens in the next weeks, the Brazilian political system has hit a log-jam. As a result, any policy implementation is unlikely, and critical reforms will remain sidelined.

Identifying corruption is one thing; eradicating it is quite another. Both the brazen nature and the scope of the Petrobras scandal underscore the deep-seated roots of graft, fraud and bribery in Brazil’s public sector—a pedigree not particular to any one party.

In a sentence, the scandal involves billions of dollars of public sector contracts awarded by Petrobras, the state oil company, with a few percentage points tacked on top for kickbacks. But such institutionalized malfeasance does not occur in a vacuum. Since transitioning to democracy in the in late-1980s, political parties have been unable to consolidate power. Instead, Brazilians vote for individuals as opposed to platforms, and party affiliation is tenuous. For years, the best way to maintain a coalition (or support on a given issue) was through favor-granting, or, in more vulgar moments, cash.

Even many opposition partisans admit that the first one-and-a-half terms of Lula’s presidency were rather successful. From 2003 through 2010, Brazil averaged over four percent annual growth, while conditional cash transfer programs helped lift around 40 million people from poverty. Only later did it come to light that the congressional coalition that supported Lula’s program was funded by monthly bribes – hence that previous scandal’s nickname, mensalão – or “the big monthly”.

The scheme was effective, but hardly original. Many in the upper-echelon of Brazilian politics on both sides can and are being implicated in corruption scandals. Dilma faces impeachment, but the House Speaker bringing the charges, Eduardo Cunha, himself faces charges of receiving upwards in US$ 40 million in bribes.

No cow is sacred. Lula—the man behind Brazil’s “rise”—faces federal charges. His predecessor, Fernando Henrique Cardoso, a darling of Washington technocrats, has his own dirty laundry aired in every newsstand along Avenida Paulista.

As a result of the finger-pointing, the already tenuous coalitions have fragmented, undermining anyone’s ability to implement economic reform. This is unfortunate because the country badly needs it. Brazil’s fiscal deficit has surpassed ten percent. Inflation, a pest that has plagued the country long before anyone heard of Zika, is back above ten percent. Joaquim Levy, the market-trusted finance minister appointed by Dilma in February 2015, has left the government having been unable to reign in the country’s spending.

Dilma may remain in power, but she will lack a mandate. Even if she could push through reform, the incentive to do so is unclear. She needs her core constituency now more than ever; slashing the budget in the midst of a recession carries significant risk. If Dilma can save her presidency, the current government will likely muddle on until general elections in 2018. The alternative is not much better. A great success of the PT governments has been to give a voice to millions of poorer Brazilians that previously had none in the political realm. An impeachment would undermine that voice, and create deep fissures in increasingly divisive political discourse.

A Dilma-led government will struggle to implement reform. A government instituted via impeachment will have dubious legitimacy and would struggle as well. Either option is unlikely to break the impasses in Brazilian politics. Thus far, financial markets have reacted positively to increased pressure on President Rousseff. These markets may be disappointed to find that even a replacement government will be hardpressed to address the economic conundrum.

  1. Who is in the streets?

In the coming weeks, Brazil followers will be treated to an impressive array of protest photos – iconic avenues throughout the country packed with protesters, both for and against the government. But these are not the first protests of the Dilma administration. In 2013, a modest hike in bus faressparked lingering frustration with the country’s economic management. Millions took to the streets in the run-up to the 2014 World Cup as the country erected world class football stadiums in the shadows of third-world favelas.

But in the end, nothing changed.

Could this time be different? The consequences could depend on who and not how many are in the streets. The anti-government protesters tend to be middle class and upper middle class. They are better educated. In a country of tremendous diversity, they are often of lighter skin. Meanwhile the pro-government protesters also come from a reliable base: The PT government remains strong with unions for example (leading to the ever-present rumor that they are paid to participate). If these trends hold true, the government could well survive the current uproar—after all, it has done so before.

To date, the extremely rich and the extremely poor (and there are both in Brazil) have not taken part in the movements. Increased involvement by either could put significant pressure on Brazil’s congressmen and senators to pursue the impeachment option. If the poor were to join the protests, President Dilma would likely lose her job.

  1. Dilma, Lula and the PT – Stuck in the Middle with You

Finally, dynamics between President Rousseff and ex-President Lula da Silva will hint at the future not only of both politicians, but also of the Partido dos Trabalhadores. Both figures have a lot at stake. Dilma – who has indicated that she will not resign – must walk a careful tightrope to avoid having her potential impeachment upheld by the senate and congressional plenary. For Lula, the outcomes are even more dramatic – if he can galvanize his waning support, he could still make a run at the presidency in 2018. Alternatively, if charges against him proceed and he is stripped of immunities, he could well end up in prison. What becomes of the PT hinges on the fate of their two flagbearers.

In early March, insiders felt Dilma was on the verge of leaving the PT. With the fog of corruption scandals engulfing the party, political analysts felt the prospect of her survival would improve if she cut ties with the embattled group. Speculation increased when she did not attend March meetings of National Directorship of the PT.

This calculous changed, however, when a high-ranking PT Senator who was close to Dilma was arrested in relation to the Petrobras scandal. As part of the plea bargain, Senator Delcídio Amaral implicated the President in his testimony. This deposition made it much more difficult for Dilma to present herself as above the fray, and independent of the corruption circuits that apparently plagued the PT. No longer able to cut ties, her best chance for survival shifted to doubling down on her affiliation with Lula, and throwing the ex-President a life jacket by way of a cabinet seat.

At the moment, it appears likely that a senate subcommittee will recommend Dilma’s impeachment in late-April. Lula may be the only person capable of building enough support in the senate and congress to prevent that recommendation from being upheld. In this case, de-facto power would shift into Lula’s hands, implying that Dilma could be out either way: either by impeachment, or by internal and informal displacement.

Meanwhile, cue the ominous piano riff…this soap opera is about to get interesting.

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