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Brazil's Conundrum: Corruption and Economic Realities

Brazil, the jumbo democracy of Latin America, has been driven into an economic, political, and moral rut so deep that it is going to take profound changes in governance to recover the bright promise this key economy enjoyed until recent setbacks.

Brazil’s crisis is a perverse conjunction of economic stagnation, growing inflation, rampant corruption, unsustainable public indebtedness, and public sector incompetence. This is a homemade crisis brought about by misguided economic policies during the first four-year term of President Dilma Rousseff. During this period, Rousseff followed the advice of her populist advisers from the leftist Workers Party (PT), whose economic choices were guided mainly by the political objective of mustering electoral majorities by dispensing overgenerous, inadequately financed social programs, and by brazen political corruption.

This electoral strategy worked. Rousseff was democratically reelected in 2014, and with three years to go until the next vote, she’s no lame duck. But she could be a dead duck if her new team of financially orthodox advisers fails to turn Brazil around and correct mistaken policies. Rousseff has suffered a 21 percent drop in popularity since her reelection, a decline attributed largely to a gigantic corruption scandal that has all but paralyzed Petrobras, the state-run oil company. Petrobras is Brazil’s largest investor, financing a mega-network of contractors, suppliers, and energy consumers that account for more than 13 percent of Brazil’s $2.3 trillion national product. Therefore the whole Brazilian economy, one of the world’s 10 largest, is in trouble if Petrobras doesn’t recover. So are thousands of US investors in Petrobras, which is quoted on the New York Stock Exchange. The share value has dropped 60 percent since the scandal became public last year.

Rousseff’s choice to lead Brazil’s recovery team, Minister of Finance Joaquim Levy, inspires confidence in financial circles. He is a skilled economic technician, with a Ph.D. from the University of Chicago and staff experience at the International Monetary Fund. Levy is also a resourceful political operator who was a successful secretary of finance of the state of Rio de Janeiro before becoming a top executive at Bradesco, Brazil’s largest private bank. Levy has launched a stabilization plan that aims to achieve a 1.5 percent surplus in the national public fiscal balance during the coming year, after a fiscal deficit of 6.2 percent in the big-spending election year of 2014.

This dose of austerity is politically unpalatable and a revolt has begun in Rousseff’s Workers Party, where labor unions have a strong voice. As a sign of the social problems Levy will face, discontented truckers staged a national strike, paralyzing deliveries of fuels and feeds with a consequent jump in consumer prices. The strike ended only after government negotiators promised that the price of diesel fuel, produced by Petrobras refineries, would not be increased for six months. This will aggravate the financial crisis in Petrobras, which needs billions of dollars to finance its production program. Moody’s, a major risk assessor, downgraded Petrobras shares last week from investment to speculative levels. That makes borrowing more expensive for Petrobras, which already carries debts of $115 billion.

Buffeted by these conflicting market and social forces, there are many who question whether Rousseff will maintain her support for Levy’s austerity program or buckle under the political pressure from discontented voices in her multiparty coalition.

But the Brazilian crisis goes far beyond the economic nuts and bolts of a conventional stabilization program. With all his economic expertise, Levy can’t solve the underlying political causes of the crisis. Corruption is the reason behind the collapse of Petrobras, the economic engine of Brazil. An investigation by prosecutors of the independent Public Ministry has produced evidence that former directors and managers of the state oil company, in collusion with executives of Brazil’s largest construction contractors, mounted a scheme of payoffs, stripping Petrobras of billions of dollars that wound up in the pockets of Brazilian political parties and politicians. Rodrigo Janot, Brazil’s chief public prosecutor, has said he will submit the names of the politicians who allegedly received the political bribes to the Supreme Court, which will decide whether they should be indicted and tried. If convicted, the politicians, whether governors, senators, or deputies, would be banned from exercising public office.

The Petrobras corruption scandal is therefore destined to be the centerpiece for Brazil’s political life until the next presidential election, in 2018. The opposition, led by the modernizing Social Democracy Party (PSDB), which governed Brazil from 1995 to 2003, has seized on the Petrobras issue and created a congressional investigating committee focusing on Petrobras corruption. The opposition hopes that the exposure of corruption will weaken public support for the PT candidate who will run to replace Rousseff in 2018. That candidate is expected to be former President Luiz Inácio Lula da Silva, the popular working-class hero of the PT.

Da Silva, the self-styled “father of the poor,” has already taken up the gauntlet thrown down by the opposition. On the same day that Moody’s downgraded Petrobras, he led a rowdy crowd of red-shirted Petrobras workers, organized by the PT, in a street demonstration denouncing the opposition for magnifying the scandal with the intention of “privatizing” the state-owned oil company. Not a word was uttered by da Silva about the disastrous effects of the billions lost in corruption that has forced Petrobras to cut back by 50 percent its investments in Brazil’s potent offshore oil fields and left hundreds of contractors and suppliers on the verge of bankruptcy.

How this political conflict between populists and economic realists will play out is uncertain. Corruption is bound to be a central issue, but how the voters will react is in doubt. Well-informed participants in public affairs admit candidly that the outcome of the current crisis is a national conundrum. But whatever the outcome, it will define the nature of democracy and the strength of public institutions in this country of 200 million people who are badly in need of good governance. Can Brazil’s muddled system, with 38 registered parties competing for public money and 2 million federal, state, and municipal jobs, deliver a modernized, competent, and honest government? Only a creative political reform can achieve this civic dream.

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