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Brazil's Populist President Taps Free Market Economist

Dilma Rousseff, Brazil’s first woman president, advanced into her second four-year term last week with a full-scale cabinet shakeup designed to overcome a serious economic slump and restore investor confidence in her populist government, shaken by a huge corruption scandal in Petrobras, the state oil company emblematic of Brazilian economic nationalism. The economic slump brought Brazil’s $2.3 trillion economy to a virtual standstill last year, with inflation of more than 6.5 percent contributing to unsustainable levels of public debt. Bowing to the evidence that economic policy was mistaken during her first term, Rousseff dismissed Finance Minister Guido Mantega, a pseudo-Keynesian advocate of deficit public spending for “development,” and replaced him with an orthodox investment manager, Joaquim Levy, who said he would restore fiscal responsibility and rebuild confidence in Brazil as a friendly market for foreign and Brazilian private investors. Levy said increased investment and greater labor productivity were the keys to restoring economic growth in Brazil. Levy did his graduate economic studies the at the University of Chicago, the bastion of free market economics, and worked at the International Monetary Fund and the Inter-American Development Bank before returning to Brazil, where he worked at the Ministry of Finance during the Workers Party (PT) government of President Luiz Inácio Lula da Silva, Rousseff’s predecessor and mentor. After a successful passage as treasury secretary of the state of Rio de Janeiro, Levy joined Bradesco, Brazil’s largest private bank, as a top executive involved in market development. There is no doubt in foreign financial circles, or in Brazil’s private sector, that Levy and his team are qualified and capable of arresting Brazil’s economic slide—if he gets full support from Rousseff. The true test will come when the balancing of Brazil’s unruly finances begins to effect interest groups, from labor unions close to the PT government structure to business sectors accustomed to government tax breaks and other “political” favors.

In the context of recovering the confidence of investors in Brazil during Rousseff’s second term, the investigation of the enormous corruption scandal at Petrobras, the strategic public corporation on which Brazil depends for oil and gas, is of supreme importance. The scandal grew out of an independent investigation by the federal police and later the Public Ministry, run by Brazil’s chief federal prosecutor, that has obtained a huge dossier of evidence from witnesses who agreed to testify in exchange for judicial leniency. This has led to the arrest of several past and present Petrobras directors, a ring of money brokers who ran an illegal system of international transfers involving hot money, and many executives of leading Brazilian contractors who formed a pool to divide up contracts with Petrobras, overcharging for services that then became kickbacks paid to political parties that were aligned with the governing PT of President da Silva and more recently President Rousseff. Until the investigators prepare a public report for prosecutors, there will be no official figures on how much Petrobras money was stolen, but Brazilian publications estimate at least $10 billion was embezzled. In her inaugural address, Rousseff said she would give full support to the judicial process and declared she would call on Brazilian society to form a National Alliance Against Corruption. This proposal was received with ironic comments by skeptical opposition leaders who recalled that the Supreme Court convicted the top echelon of the PT leadership in 2009 for another massive political corruption scheme, but spared da Silva, who was then still president. Evidently, there has been no change in the PT’s political methods.

The Petrobras imbroglio has a complicating international dimension. As a major international oil company, with production of oil and gas of 2.3 million barrels a day, Petrobras shares are quoted on the New York Stock Exchange as American Depositary Rights. Since the corruption scandal erupted last year, Petrobras shares have lost nearly 50 percent in market value. Some holders of Petrobras shares are suing Petrobras in US courts for fraudulent administration. The last thing Petrobras needs is litigation with angry American shareholders because Petrobras needs to borrow billions of dollars to develop its huge offshore oil and gas potential and reach the goal of becoming a global petroleum power. Rousseff’s second term is bound to be a great disappointment if Brazil does not reverse its economic down turn, and Petrobras, which accounts for 10 percent of Brazilian fixed capital investment, has a key role to play in this recovery.

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