Laura Carvalha writes about the coup

(Photo: Adriano Machado/Reuters)

On The Conversation.

Facing unemployment, austerity and scandal, Brazil struggles to keep it together

January 27, 2017 2.33am EST

By Laura Carvalho, professor of Economics, University of São Paulo

As if 134 deaths in a two-week rash of prison riots were not dramatic enough for Brazil, on January 19 a plane crash killed Teori Zavascki, the Supreme Court justice overseeing a high-profile nation-wide corruption case known as Operation Carwash, which has incriminated the upper echelons of national politics.

Brazil, as the saying goes, is not for amateurs. That’s long been true of South America’s most populous nation and biggest economy, which has seen many ups and downs since toppling its military dictatorship in 1985 – including prior impeachments and debt crisis.

But, as Brazilians are now coming to realise, things can always get worse. Today the country of 200 million has one of the world’s highest homicide rate and is contending with a storm of competing and colluding crises: economic, political, and social.

The great recession

Brazil is facing a severe economic crisis. After the slowdown in China and sharp drop in commodity prices, various Latin American nations have seen the end of the past decade’s short – but bright – period of higher economic growth and inequality reduction.

But Brazil’s decline has been particularly steep. Gross domestic product (GDP) shrunk by 3.8% in 2015 and over 3% in 2016, while unemployment rose from 8.8 million to 12 million in one year.

Elements of the crisis pre-date president Dilma Rousseff’s truncated second term (2015-2016). But the sharp fiscal consolidation program she began implementing in 2015 helped turn an economic slowdown into the deepest recession in a century. Rousseff became a believer in expansionary fiscal austerity, reducing public investment by more than 30% in 2015 and slashing federal spending.

This tactic caused both the fiscal system and the broader national economy to deteriorate. As GDP contracted, so did federal tax revenues, dropping 5.6% in 2015.

Millions lost their jobs, returning the unemployment rate nearly to its pre-boom levels. And Rousseff’s popularity fell, reaching a record low of 9% in June 2015.

Which leads us to the next issue: president Rousseff’s controversial impeachment, and the turmoil surrounding it.

Political chaos

The Operation Carwash probe, which was launched in 2015, did not directly implicate Rousseff. But it uncovered corruption among members of her Workers’ Party, along with lawmakers from most of the country’s numerous political parties. These swirling scandals inflated a generalised distrust in Brazil’s political system.

The door was then open for her ouster, which took eight months to be realised. When the senate finally voted 61-20 in August 2016 to impeach Rousseff for breaking budgetary rules, many believed economic stability would return.

Instead, Brazil’s economy contracted by another 3.2% in 2016, according to the latest estimates, frustrating hopes for a quick recovery. Many states are now in a calamitous financial situation.

The vast majority of the country’s economic elites supported Rousseff’s ouster. But many millions marched in support of her, and they are deeply unsatisfied with the leadership of new president Michel Temer.

This polarising scenario has plunged Brazilian institutions into deep chaos.

President Temer’s close ally and former minister of planning, Romero Jucá, was caught on tape conspiring to obstruct Operation Carwash. This revelation all but confirmed that the impeachment process was an attempt by corrupt lawmakers to stop investigations into their illegal activities.

No wonder the plane crash that killed Justice Zavascki – just a few days before a crucial next step in the Supreme Court case – is raising so much suspicion.

Six ministers from Temer administration have resigned amid corruption charges, and investigations have implicated other major figures in the president’s Brazilian Democratic Party Movement (PMDB).

Former congressional president Eduardo Cunha, who led the push to impeach Rousseff based on tenuous allegations of a minor crime, was arrested for taking US$5 million in bribes from a company that won contracts with the state-run Petrobras oil company. The senate president also nearly stepped down.

Meanwhile, polls from October 2016 show that just 14% of Brazilians approve of Temer’s government.

Unpopular reforms

Despite its unpopularity, congress has mustered the required three-fifths majority to approve a series of fiscal reforms.

In December it passed what is arguably the harshest austerity measure in the world: freezing the federal budget at its 2016 level for the next two decades. The cap means that funding for education, health care, pensions, infrastructure and other government programmes will remain relatively constant (except for inflation), in real terms, until 2036.

In failing to account for any growth in Brazil’s population or economy, the spending cap may destroy, in slow motion, the country’s incipient welfare state. Brazil’s public health-care system, already precarious, will be too underfunded to adequately serve its ageing population – a disaster particularly for the poor.

An alternative way to cut the fiscal deficit would be taxing the incomes of the very rich, 65% of which is exempt under Brazil’s unfair system. But this is not even up for discussion.

So, next up, the government has announced a draconian reform of the pension system and deregulation of labour laws.

Future prospects

Today, Temer’s fragile government is essentially surviving based on the dramatic setbacks to the Supreme Court’s corruption probe and its tough fiscal reforms, which are popular among economic elites.

Not surprisingly, both are also serving to deepen widespread distrust of the government. It is unclear whether Temer will make it to December 31 2018, when Rousseff’s term would normally have ended.

It’s likely that only the next Brazilian presidential election can end the current turbulence and restore trust in the nation’s institutions.

But if the results of recent mayoral elections are any indication, things don’t look good for the left. In Rio de Janeiro, fed-up voters chose a conservative evangelical pastor, while São Paulo put in power a conservative wealthy businessman.

And things could yet get worse. According to recent presidential polling, public support for Congressman Jair Bolsonaro, who openly longs for the “good old days” of Brazil’s military dictatorship, is climbing.