Crowds formed in Three Powers Plaza to await inauguration of new capital in Brasilia in 1960.
Photo:
ASSOCIATED PRESS
Brazil’s Giant Problem
John Lyons and David Luhnow
The Wall Street Journal, April 23, 2016
Corruption is just a
symptom of Brazil’s deeper issue: a vast state apparatus that has tried
to be the country’s engine of economic growth.
But the sparkling new capital was a monument to Brazil’s past. For
all its modernist appeal, it was one more expression of the country’s
long and troubled attachment to the concept of a giant paternalistic
state, responsible for managing the affairs of the entire society, from
its biggest companies to its poorest citizens.
Founded by
Portuguese monarchs who moved their court to Rio de Janeiro in 1808,
Brazil has experienced almost every conceivable sort of rule over the
past two centuries. Its leaders have run the gamut from emperors and
dictators to democrats and former Marxists. Regardless of their
politics, however, almost all of them have shared a commitment to the
Leviathan state as the engine of progress.
“The problem is, from
time immemorial, Brazil’s political leaders only see one way forward,
the growth of the state,” said Fernando Henrique Cardoso, a former
leftist intellectual who sought to reduce the size of Brazil’s
government while president from 1995 to 2002. “But you need another
springboard for progress, that doesn’t exclude the state but that
accepts markets. This just doesn’t sink in in Brazil.”
Today, the Leviathan is sick. Brasília is embroiled in a sprawling embezzlement scandal at the state oil company,
Petróleo Brasileiro SA
. Investigators say that politicians, oil executives and businessmen
conspired for a decade to siphon billions of dollars from the firm,
channeling money to Swiss accounts and the slush funds of major
political parties.
In Brazil’s Congress, where six in 10 members
now face some kind of criminal investigation, lawmakers in the lower
house have voted to impeach President
Dilma Rousseff,
a leftist economist whom many blame for fostering corruption and
ruining Brazil’s economy. One vote against her came from Congressman
Tiririca, a professional clown who won office campaigning that “it can’t
get any worse.”
But it might. Brazil is deep in its worst recession since the 1930s,
and it may not yet have hit bottom. The country’s debt tripled to $1
trillion in nine years, and some of its states are already going bust.
Government insolvency is a possibility. If Ms. Rousseff is impeached,
her vice president, Michel Temer, will need to rely on lawmakers
implicated in the Petrobras scandal to make unpopular decisions like
spending cuts to prevent Brazil’s crisis from turning into a full-blown
calamity.
While many observers of Brazil’s predicament have
focused on the country’s corruption, that may miss the point. Brazil’s
deeper problem lies in the failures of its Leviathan state, which has
perennially reached for the utopian visions embodied in Brasília but
instead has produced recurring cycles of boom and dramatic bust.
A
sensation of déjà vu hangs over Brasília right now. The current
downturn follows one of Brazil’s greatest booms. Just a few years ago,
the country appeared to be climbing into the global club of developed
nations. The economy surged 7.6% in 2010, capping a decade in which
millions of the poor climbed into the middle class. Diplomats opened new
embassies and lobbied for a seat on the U.N. Security Council. Brazil
was selected to host the 2014 World Cup and this year’s Olympic Games.
But
the country has been here before. With 10% annual growth in the 1970s,
some declared a “Brazilian Miracle,” only to see the 1980s become the
“Lost Decade”: Inflation surged to four digits, and workers rushed out
on payday to spend their wages, knowing that their money would be
worthless by morning.
But it might. Brazil is deep in its worst recession since the 1930s,
and it may not yet have hit bottom. The country’s debt tripled to $1
trillion in nine years, and some of its states are already going bust.
Government insolvency is a possibility. If Ms. Rousseff is impeached,
her vice president, Michel Temer, will need to rely on lawmakers
implicated in the Petrobras scandal to make unpopular decisions like
spending cuts to prevent Brazil’s crisis from turning into a full-blown
calamity.
While many observers of Brazil’s predicament have
focused on the country’s corruption, that may miss the point. Brazil’s
deeper problem lies in the failures of its Leviathan state, which has
perennially reached for the utopian visions embodied in Brasília but
instead has produced recurring cycles of boom and dramatic bust.
A
sensation of déjà vu hangs over Brasília right now. The current
downturn follows one of Brazil’s greatest booms. Just a few years ago,
the country appeared to be climbing into the global club of developed
nations. The economy surged 7.6% in 2010, capping a decade in which
millions of the poor climbed into the middle class. Diplomats opened new
embassies and lobbied for a seat on the U.N. Security Council. Brazil
was selected to host the 2014 World Cup and this year’s Olympic Games.
But
the country has been here before. With 10% annual growth in the 1970s,
some declared a “Brazilian Miracle,” only to see the 1980s become the
“Lost Decade”: Inflation surged to four digits, and workers rushed out
on payday to spend their wages, knowing that their money would be
worthless by morning.
“It really begs the question: Is all this cyclical, is our economy
and politics like a chicken trying to take flight, rising a few feet and
then settling back down again?” said Marcos Troyjo, a former Brazilian
diplomat who now teaches at Columbia University. “We seem to have
returned to a spot in the past where inflation is a real threat, where
debt is rising exponentially, where the president must act or the
scenario deteriorates further.”
Brazil inspires optimism because
it has a lot going for it. The South American nation has qualities that
Americans would find familiar. It is a continent-sized nation with
fertile land, abundant natural resources and a deeply ingrained sense of
national destiny. Its population of 200 million is mixed, including
descendants from a dark past of slavery (Brazil imported more slaves
than the U.S.) and waves of European and Japanese immigration. But
Brazil remained underdeveloped as the U.S. became a superpower.
“Brazil
has yet to find a way to combine an enormous economic potential with
the political leadership needed to sustain the needed enabling reforms,”
said Mohamed El-Erian, chief economic adviser at Allianz. “As such, the
economy ends up behaving like a thoroughbred horse that can run really
fast on smooth ground but stumbles and falls when it gets bumpy.”
One
explanation for Brazil’s stop-and-start development path is reliance on
commodities. The country is even named for one: Brazilwood, used to
make red dye in the 16th century. Brazil’s history can be told through
commodities cycles, from sugar in the mid-1500s to coffee and rubber in
the 1800s. In the early 2000s, iron, oil and soy positioned Brazil to
soar as Chinese demand for the goods surged.
While commodities
exports represent a small part of Brazil’s largely closed economy, they
are a direct driver of growth. No other country in Latin America has a
tighter correlation between commodity prices and growth, according to a
survey by Morgan Stanley.
Brazil’s leaders spent much of the 20th
century attempting to diversify away from natural resources, but their
approach almost always relied on state banks and state companies—and it
failed time and again. Juscelino Kubitschek, who built Brasília,
promised “50 years of progress in five.” He created a state company to
build the capital, called Novacap, and put a rival political party in
charge to ensure stability. The cost of the city is still a matter of
debate in Brazil, but the central bank printed so much paper money that
inflation surged.
As a leftist militant in the 1960s, Ms.
Rousseff was tortured by the military dictatorship, which itself tried
to drive growth by creating state factories and Pharaonic projects such
as giant dams. As an energy minister and later president of a
left-leaning democracy, Ms. Rousseff helped to implement the same sort
of industrial strategies.
Why does Brazil’s Leviathan state
endure? One reason is a strong current of nationalism running through
Brazilian life. Another is that it has delivered just enough on its
grand promises to win the loyalty of key segments of the population.
Brazil
has modernized significantly since World War II, when half the
population was illiterate and much of it hungry. The government also
created national health and educational systems that, though of poor
quality, reach even into the country’s remote Amazon jungles.
Research
by the government-backed Embrapa agricultural institute helped Brazil
to expand soy and cattle ranching to the harsh soils of its West, and
the country became a farming power. State initiative turned Brazil into a
leader in ethanol, and the oil firm Petrobras was known as a pioneer in
deep-water drilling before the corruption scandal overwhelmed it.
When Luiz Inácio Lula da Silva was elected in 2002, he set the
Leviathan in motion to lift the poor. A massive expansion of a welfare
program called Bolsa Familia fed families while encouraging children to
attend school. Birth-weights in the poor northeast rose. Other programs
expanded the electricity grid to regions without light and provided
water where there was little. State-subsidized mortgages turned swaths
of the working class into homeowners.
“There are vast parts of
our country that are poor and without security or education. The state
needs to reach these people. Brazil’s history has shown that the free
market simply won’t do it,” said Luiz Torelly, a bureaucrat at the
state-run Institute for National and Artistic Patrimony in Brasília who
defends the size of Brazil’s state.
At the same time, there are
few voices in Brazilian public life to challenge the ideas of people
like Mr. Torelly. There is no major political party advocating limited
government. Politicians who do are likely to be derided by nationalists
as sellouts to the free-market U.S.
Unlike other nations in the
New World, Brazil never had a revolution that set it in opposition to an
intrusive state. The Portuguese monarchy brought an entire ship filled
with royal files and documents when it relocated to Rio. Successive
governments have added new layers of regulation to a state that began as
a royal court. In 1979, military rulers tried to pare back the
bureaucracy by creating a cabinet post, the Minister of
De-bureaucratization.
The result today is a bureaucracy that
spends 41% of the country’s gross domestic product—about double the rate
of the U.S. The return for all that tax money is questionable: poorly
built roads, ports and bridges, and second-rate education and health
services. As one travelers’ cliché goes, Brazil taxes like Scandinavia
but has Africa-level infrastructure. In 2013, huge and sometimes violent
protests erupted across the country, with protesters upset that the
country was spending billions on World Cup stadiums while patients died
waiting on the floors of hospital hallways.
Brazil’s government
employs millions of workers, most of whom are nearly impossible to fire
because of protections written into the constitution. The sheer extent
of the bureaucracy and red tape stifles job creation. Brazil ranks 174th
in the world for ease of starting a business, behind Uganda and
Djibouti, according to the World Bank.
During the “Lost Decade”
of hyperinflation in the 1980s, the Leviathan went haywire. State banks
that had made bad loans to state enterprises posted enormous losses,
forcing Brazil to print money to support them, which in turn created
hyperinflation. The currency changed value and even names so often that
old bills started circulating with rubber stamps on them showing their
new denominations.
Perhaps the most insidious legacy of
Brazilian’s Leviathan state is the country’s endemic corruption.
Bureaucrats with broad controls become tempted to seek bribes to issue
permits, licenses and contracts. Businessmen become tempted to pay them.
Brazil’s Leviathan grew so great that it gave rise to a popular
theory that corruption could be a good thing because it “greased the
wheels” of otherwise paralyzed bureaucracies. The idea was outlined in a
1964 paper by the American economist Nathaniel Leff, who worked
extensively in Brazil.
That view was challenged in the 1990s by
economists such as Paulo Mauro, who saw that corruption directly
inhibits development: Officials make investments based not on the
country’s best interests but on the size of the bribes they get. Matters
get worse during commodity booms, when corruption expands in a tide of
easy money. “Corruption becomes a system, and the bigger the system, the
harder it is to break it,” Mr. Mauro said.
Exhibit A is the
Petrobras scandal. After Brazil discovered massive oil fields off Rio de
Janeiro, planners sought to make Petrobras a driver of development.
They required the company, for example, to source oil platforms locally,
with hopes of creating a ship-building industry. Investigators now say
that oil executives, businessmen and politicians conspired to skim
contracts from Petrobras, channeling money back to Ms. Rousseff’s
Workers’ Party and its allies, including the party of Mr. Temer, the
vice president who will take over if she is impeached. Ms. Rousseff and
Mr. Temer are not charged and deny involvement in the scheme.
The
Petrobras scandal is also a case study in opportunities squandered by
Brazil’s Leviathan state. Huge investments in refineries and other
projects at the center of the scandal were largely wasted—just as Mr.
Mauro had predicted. In 2006, Petrobras bought an aging refinery in
Texas for $1.2 billion, 30 times what it sold for just the year before.
Petrobras’s new $18.5 billion Abreu e Lima refinery is eight times over
budget and still incomplete. Both deals are under investigation, and
neither may ever be profitable, analysts say.
The Petrobras
scandal also allegedly shows how politicians used corruption to retain
control. Brazil has 35 registered political parties, some 27 of which
are represented in the lower house. The variety is almost comical. Aside
from the Workers’ Party, there is the Democratic Labor Party, the
Brazilian Labor Party, the Christian Labor Party, the Labor Party of
Brazil, the National Labor Party and the Brazilian Labor Renewal
Party—and those are just the parties that mention labor or workers.
Many
of these parties have no ideology: They exist to capture federal funds
budgeted to political parties in the constitution. Their allegiance is
for sale, political scientists say. Mostly that means swapping
congressional votes for control of cabinet ministries and political
appointments. Some 20,000 high-ranking posts in Brazil’s bureaucracy are
political appointments, including posts at Petrobras, where
investigators say that officials embezzled money for their parties and
themselves.
The Workers’ Party came to power vowing to wipe out
corruption but was pulled into it, some longtime members say. In 2005,
the party and its founder, Mr. da Silva, were rocked by the “Mensalão”
vote-buying scandal. Mr. da Silva’s chief of staff resigned and was
later jailed. But the economy was booming, and Mr. da Silva was
re-elected.
The 84 arrests in the Petrobras scandal—among them a
senator and high-profile chief executives of big construction firms—show
that Brazil’s big state has at least built a judiciary with strength
and independence to go after elites. Part of the credit goes to the 1988
Constitution, which ensured lifetime jobs for judges and prosecutors
and shielded their budgets from politicians.
In recent years,
prosecutors also won the ability to use plea bargains to offer
cooperating witnesses reduced sentences. And suspects could no longer
avoid jail by endlessly appealing a guilty verdict in the country’s slow
courts, as they had in the past.
“The culture of compliance is
sinking in fast. Companies are all persuaded they need to change their
ways,” said Rubens Ricupero, a former Brazilian finance minister.
What’s
unclear yet is whether the Petrobras investigations represent a
watershed for Brazil or an isolated crusade driven by a few willing to
exert their power. “A big reason for the independence of the judiciary
was not some high-minded separation of powers, but a happy byproduct of
the lobbying of judges and prosecutors who wanted job security,” says
Ivar Hartmann, a law professor at the Getulio Vargas Foundation law
school in Rio.
Trimming back Brazil’s Leviathan state won't be
easy. As much as 85% of Brazil’s federal budget goes to spending that is
guaranteed by law, from increases in retirement plans to spending on
housing. Changes will require constitutional amendments.
“The
trouble is, the only way to fix the politics is through the
politicians,” says Mr. Ricupero. “Are they really going to vote against
their own self interest?”
Write to John Lyons at
john.lyons@wsj.com and David Luhnow at
david.luhnow@wsj.com
