Commentary: Here's what really went wrong with Brazil's economy

When President Luiz Inacio Lula da Silva left office in January 2011, Brazil was widely regarded as Latin America’s gold standard for economic development and social progress. But today, with his handpicked successor, Dilma Rousseff, facing an impeachment trial, the country is widely viewed as an economic failure.

Suspended Brazilian President Dilma Rousseff attends a news conference with foreign media in Brasilia, Brazil, May 13, 2016. REUTERS/Ueslei Marcelino

But the problem is not with the objectives, or design, of Lula’s policies. It has been with their management and implementation.

Lula was lauded for policies and programs that accelerated national growth, kept inflation and debt in check, reduced poverty and inequality and greatly expanded the middle class. Few other Latin American nations had ever achieved Brazil’s heady combination of robust growth and social advance. Democracy appeared to be thriving, too.

Brasilia’s efforts were imitated by regional governments to its left and the right. Brazil’s economic success was praised as the “Lula model,” or the “Brazilian consensus.” Growth was faster than at any time in the country’s past 50 years, and inflation remained under control. Unprecedented numbers of Brazilians climbed out of poverty. When he left office, Lula’s approval rating was 82 percent.

Powerful trends in the global economy bolstered Brazil’s success. Most important was the skyrocketing demand for commodities, which Brazil exports in large quantities. China was its biggest market, with a gross national product that was exploding at 10 percent or more a year. The U.S. Federal Reserve’s clamp on interest rates encouraged the flow of capital to high-performing developing countries like Brazil. In addition, just as oil prices were spiking, Brazil discovered major offshore reserves.

And, to boot, Brazil’s highly competitive democracy, more than most developing nations, seemed consistently to allow for accommodation and compromise among rival parties and ideologies.

Those days of wine and roses are gone. Brazil is suffering through its worst national trauma in recent memory. Its economy is in its third consecutive year of negative growth; the cumulative loss in output may reach 10 percent, with no end is in sight.

The Lula era’s social gains are beginning to slip away, as well. Unemployment and poverty are growing, if slowly. New entrants to the middle class are increasingly vulnerable, and many public services are deteriorating. Massive corruption scandals have enmeshed top political and business leaders, and have undermined the state oil company, the country’s largest corporation.

Rousseff has borne the political brunt of this precipitous economic decline. She has been replaced by her vice president, Michel Temer, during the impeachment process. Though formally charged with manipulating national accounts, her downfall was largely precipitated by Brazil’s economic reversals, which were compounded by ballooning corruption investigations and her own leadership failures.

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What went wrong with Brazil’s economy? The Lula model may bear some blame. But not because it is inherently flawed. Rather, it is a model that, while relatively easy to implement when economic conditions are favorable, demands a level of political discipline hard to sustain when conditions sour.

Like most governments, the Lula administration could not resist the temptation to spend freely in the boom years and not save for harder times. Not long after Rousseff took office, commodity prices dropped worldwide, and growth rates dipped sharply. Government revenues fell, though budgetary obligations and expenditures remained largely unchanged.

Deficits swelled, inflation increasingly threatened, unemployment edged up and the public began to lose confidence in the Rousseff government. What were needed were decisive spending cuts to compensate for declining tax receipts.

Lavish subsidy programs for corporations needed to be reined in. Bloated government payrolls needed to be shrank, and the rapid growth of social programs tamped down. Exceptionally generous pension programs needed to be reformed. Instead, the government sought to restart faster growth with a poorly devised stimulus plan. It tried to avoid price hikes by directly bankrolling energy companies.

Now, after two and a half years of recession, a new Brazilian government, installed a week ago, is struggling to put together a program of fiscal adjustment with growth that will point the way to recovery. All without cutting income transfers to the very poor.

Yet there are reasons for optimism. Brazil’s new finance minister, Henrique Meirelles, knows the territory well and commands the confidence of the business and banking communities in the country and elsewhere. He served successfully for eight years as president of Brazil’s central bank during the Lula government and, prior to that, as head of BankBoston. His success, however, will likely hang on whether the erratic Congress and an angry electorate are ready to accept his agenda.

Though many Brazilians display little enthusiasm for the interim president, they want him to turn the economy around. Yet, it is never easy to raise taxes and downsize benefits, particularly for a public that already feels squeezed and abandoned.

With municipal elections four months off, political candidates and party leaders are understandably concerned about the flow of federal monies to their cities and towns. Temer’s leverage is limited by his status as an interim president, who may be replaced in five or six months -- or earlier, if corruption charges are brought against him.

Whatever the design of the new government’s economic program, however, it will almost surely resemble the old Lula model. Few governments in Latin America dare take the political risk of pursuing economic growth in the absence of social development and inclusion.

Variations of the Lula model are guiding Argentina’s new business-oriented president, as well as other leaders across the region. To them, the Lula model crashed in Brazil largely because of failed implementation. Lula never prepared for the inevitable leaner years, and Rousseff abandoned fiscal restraint.

It would also have helped if either of them had invested more in reforming various outmoded policies and institutions, including counterproductive labor laws, unwieldy tax codes, complex business regulations, poor education and many other roadblocks to innovation and higher productivity.

The news, then, is both good and bad. There remains a collection of economic policies that can bring sustained economic growth and social progress to Latin America and other developing regions. The problem is that they are not easy to apply consistently, as Brazilians and their leaders are now painfully learning.

About the Author

Peter Hakim is president emeritus and senior fellow of the Inter-American Dialogue, a Washington-based policy organization on Western Hemisphere affairs.

The views expressed in this article are not those of Reuters News.