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Since March of 2014, when the first signs of a major money laundering and corruption scheme at Petrobras became evident, the Brazilian judicial system has been working overtime and the country’s overcrowded jails are bursting at the seams. Dozens of high executives, company owners and prominent politicians are serving sentences for their participation in a bribery operation, in which large contractors and service providers overcharged Petrobras for several years and deposited the difference in offshore accounts of the governing party (PT), to oil the party machinery and personally enrich their leaders. But until recently, most Brazilians felt that the real “big fish” were getting away with impunity. That changed dramatically on April 4, when judge Sergio Moro issued an arrest warrant to former President Luiz Ignacio Lula Da Silva.

After two days of defiance, surrounded by angry supporters at the headquarters of the Union of Metallurgical Workers in Sao Paulo that he helped found and led for many years, president Lula finally turned himself in to the Federal Police to start serving a 12-year sentence for corruption under the “Lava Jato” (Car Wash) scandal. In an ironic twist of events reminiscent of Al Capone, after failing to find conclusive evidence that the former president was the mastermind behind Lava Jato, investigators managed to build a case around a beach apartment that Mr. Lula is accused of receiving from OAS, a large infrastructure company, in return for government contracts.

It is a sad, if just end for a leader that has dominated the Brazilian political scene for the past 15 years and who interpreted the dreams and aspirations of the Brazilian people like no other in modern history. With little formal education, he understood that it is no coincidence that mature democracies are all market economies. Command economies involve a centralization of power that is inimical to pluralism and competition. Brazil is an extreme version of a democratic market economy. With 22 parties represented in congress, a free press and a highly independent judiciary, it is a poster child, though at times a fairly chaotic one, of how entrepreneurial initiative flourishes best in a democratic society. However, Brazil is also a perfect example of the inherent contradiction between democracy and market capitalism: free market economies generate economic inequalities and political influence which are undemocratic. The undue influence of the rich poses a threat to democracy, and the more unequal a country’s opportunities and outcomes, the greater the risk that political power will be monopolized by the economically powerful.
When Luiz Ignacio Lula Da Silva became president of Brazil in 2003, he and his Workers Party (PT) thought they had an answer to this contradiction. Taking advantage of high commodity prices for Brazilian exporters and a benign world economic environment, they set out to eliminate extreme poverty and create a large middle class. Through the “Bolsa Familia” cash transfer program, 12 million Brazilian families were guaranteed a minimum income and basic schooling for their children. In parallel, the new president cut a deal with businessmen in which orthodox macroeconomic policy was preserved and free market rules respected, in return for higher wages and social benefits for the workers. Over the following eight years, it is estimated that 20 million people in Brazil became middle class under the definition of the World Bank. At last, it seemed like the expression “Brazilian Miracle” had some real meaning and the “country of the future” was realizing its full potential.

There were only two problems with this artful formula. On the political front, Lula’s PT had no majority in Congress and had to form a coalition in a highly fragmented political system. Since the return of democracy and the constitution of 1989, Brazil (and much of the rest of Latin America) has had an awkward mix of presidentialism and proportional representation in which the elected president frequently does not have a majority in Congress. While is this also common in the United States, the PR system ensures that multiple and sometimes very small parties are represented in Congress, which makes the assembling of Government coalitions extremely difficult. To get around this inconvenience, Lula and the PT conceived a scheme of monthly payments to certain members of Congress in return for support for their legislative agenda. The “Mensalao”, as it came to known, was an expedient but illegal way of securing political support, and led to the indictment of several ministers (including that of Jose Dirceu, the Interior Minister and ideologue of the PT), but not of Lula himself.

The second problem was that the economic boom was based on high commodity prices, which are highly cyclical. When the downturn arrived in 2011, Lula, still immensely popular, had been replaced by his anointed successor Dilma Rousseff. Instead of imposing fiscal discipline and consolidating reforms, Dilma doubled down and pushed forward with massive Government spending and subsidies for all sorts of businesses and pet projects. Not surprisingly, inflation increased, the Brazilian Real suffered a major devaluation and the country, which had survived the financial crisis of 2008/2009 almost unscathed, went into a deep recession. To make matters worse, in her zeal to keep the wheels of the economy moving through public spending Dilma was found by Congress to have violated the Balanced Budget Law, which led to her impeachment and removal from power in 2016. She was replaced by her Vice President Michel Temer from the PMDB, the main coalition partner.

Under Temer and his competent economic team, Brazil has enjoyed a period of economic stability with some significant results that are beginning to attract the attention of international investors. Inflation is down to about 3%, interest rates are at historic lows, the Real has stabilized, and economic growth has resumed after three years of contraction: GDP growth was 2% in 2017 and is forecast at close to 3% for 2018. While major reforms such as the change in pensions and social security are still making their way through Congress, the approval of limits to public spending and a major labor reform approved last year are building blocks for long term economic prosperity.

To most Brazilians, however, it still doesn’t look like a real recovery. Investors are back, but mostly to take advantage of cheap asset sales from financially strained companies, including Petrobras, rather than invest in new machinery and equipment. The main reason is the political uncertainty surrounding the presidential election scheduled for October. At the time of his arrest, Mr. Lula was leading the polls by a considerable margin, and his closest contender was Jair Bolsonaro, a congressman who has become the standard-bearer of an emerging right-wing populist movement. With Mr.Lula still leading in the polls from prison, but effectively out of contention for legal reasons, the political landscape has been thrown into total disarray and the election is clearly up for grabs. The PSBD, the main opposition party, should be the obvious beneficiary, but in Geraldo Alckim, the current Governor of the state of Sao Paulo and himself a former presidential candidate, they have an uncharismatic and potentially tainted leader, viewed by many as part of the establishment they want to get rid of.

President Temer, who at 6% approval rating is one of the most unpopular presidents in history, thinks he has a chance, and has hinted that he intends to run as the candidate of the PMDB. At least two others have thrown their hat on the ring. Henrique Meirelles, the current finance minister, who is credited with laying the foundations of the current incipient economic recovery, but who suffers from a noticeable lack of charisma not uncommon in finance ministers; and Marina Silva, a former environment minister and presidential candidate who is considered honest but without the competence, political clout and party machinery to be a serious contender. A “dark horse” such as a TV presenter or well known public figure outside politics cannot be ruled out.

As always with Brazil, it’s too early to tell if the country has learned from its past mistakes and is about to enter a secular period of stability and prosperity which, most Brazilians believe, God has reserved for them. But it is clear that the painful experience of the last four years, with a unique combination of political, economic and moral crisis, has left an indelible mark on this generation of Brazilians and people are exhausted and ready to move on. Much will depend on the outcome of the presidential election and the ability of the new government to assemble a coalition prepared to pass the pending structural reforms and finish the job of cleaning politics. With Brazil, everything is possible, including a new Brazilian miracle.

Jaime Ardila
May, 2018

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