“Brazil’s young democracy is being subjected to a coup,” said Dilma Rousseff after the Senate on May 12 voted 55 to 22 to remove her as president and move forward with impeachment.
Is this really a coup, as Rousseff and her supporters believe? Coups usually entail the violent overthrow of a government or a trampling of constitutional rules and procedures. In Brazil, there has been no involvement by the military other than to keep the peace.
And the major players in this real-life Brazilian telenovela—Congress, the judiciary, the federal police, and the Federal Accounting Office (TCU)—are all playing by the constitutional rules. This is testimony to strong institutions in Brazil and a victory for checks and balances.
Far from being a coup, the current tumult, I believe, offers a chance for Brazil, with the right leadership, to return to the policies initiated in the mid-1990s that put the country on a virtuous trajectory of rising growth and falling inequality. The middle class expanded dramatically and the political system became more transparent.
Such policies first and foremost conform to monetary and fiscal orthodoxy but also promote social inclusion through programs such as the one that pays mothers to keep their children in school.
I call this economic model “fiscally sound social inclusion,” and it’s a topic my coauthors and I explore in our forthcoming book, Brazil in Transition: Beliefs, Leadership and Institutional Change. Such policies helped make Brazil one of the world’s largest and fastest-growing economies.
Can Brazil’s new leader, Vice President Michel Temer, use this window of opportunity to restore economic growth and also reduce inequality under the mantle of fiscally sound social inclusion?
How we got here
Prior to the reelection of President Rousseff in October 2014, two decades of economic and political development were beginning to founder on the shoals of a decline in commodity prices and a corruption scandal involving Petrobras, the state-owned oil company.
With the country’s economy in decline and the election drawing nearer, the president submitted rather rosy-looking public accounts to the TCU—basically a federal budget watchdog similar to the U.S. General Accounting Office but with the power to approve or reject them. Rousseff’s accounts suggested the government’s finances, although deteriorating, were not far off track.
But in a historic ruling following her narrow election victory, the TCU unanimously rejected the accounts, asserting that Rousseff understated the public deficit in the year prior to the election.
It is plausible, as her critics have argued, that Rousseff would not have won reelection had the voters known the true fiscal state of Brazil.
Although the impeachment trial technically entails prosecution for violating the fiscal responsibility law, in the eyes of the public, more is at stake, including the mismanagement of the economy and the corruption scandal at Petrobras, where Rousseff was board chair prior to her election.
Markets remain optimistic
Where does Brazil go from here?
Again, playing by the rules, former Vice President Temer, who belongs to a different party than Rousseff, is now the interim president while the impeachment prosecution proceeds. If Rousseff is impeached or resigns (never, she claims), Temer’s position will become permanent, and he will serve out her term, which expires in 2018.
Impeachments (and certainly coups) generally send economies into a tailspin. Yet, this hasn’t happened in Brazil. As the impeachment gained steam this year, the Brazilian real (the national currency) actually appreciated, as did the stock market.
Since the beginning of the year, the real is up by 10 percent and the stock market by 23 percent. And even when the real was tanking in late 2015, foreign direct investment surged, a sign of confidence by outside investors in the underlying fundamentals of the economy despite the political turmoil.
It may also signal confidence that Temer will institute market-friendly reforms. It’s important to note that in Brazil presidents have much stronger agenda-setting powers than in the U.S.
Temer is not popular in Brazil, but he is known as a “dealmaker,” one who is capable of managing a coalition in a multiparty Congress.
This all sounds promising, but before looking forward it is important to understand the past.
From military rule to fiscally sound social inclusion
From 1964 until 1985, Brazil was ruled by a military regime.
The military imposed order in its early years and embarked on an ambitious top-down development plan that turned Brazil into a “miracle economy” in the 1970s. However, growth began to sputter by the end of the decade, and inflation soared.
As growth weakened and the opposition became more vocal, the military’s oppressive reaction failed to suppress a growing populism, forcing it to pave the way for a return to democracy.
This helped usher in a new belief: social inclusion, which meant everything for everyone. The constitution of 1988 is one of the most detailed in the world, especially in terms of human rights. The decision-making process codified these beliefs around social inclusion as every interest group got to hang its ornament on the “Christmas tree” constitution.
Unfortunately, this didn’t work so well for the economy. From 1986 through 1993, governments spent generously on wasteful pork barrel projects, financed by printing money, leading to hyperinflation in the thousands of percent. Social inclusion was great in principle but bad in practice.
Several stabilization plans aimed at reining in inflation dramatically failed, and Brazil’s first democratically elected president since military rule, Fernando Collor, resigned during an impeachment trial in 1992.
This marked a turning point for Brazil and its economy after Fernando Henrique Cardoso, a self-exiled socialist during the military regime, was appointed finance minister by Collor’s replacement.
Cardoso and his team swiftly tamed inflation and instilled confidence, especially among businesses. This helped him win reelection, following which he passed the cornerstone of fiscally sound social inclusion: the fiscal responsibility law, aimed at ensuring that state governments could no longer spend more than their budgets allowed.
At the same time, Cardoso never abandoned the concept of social inclusion. Rather he merged it with his orthodox fiscal and monetary policies, such as keeping inflation in check, reforming pensions and controlling the budget. This led to modest economic growth and a growing middle class.
Yet his party lost the 2002 election to the charismatic Lula da Silva, who campaigned on a platform of largesse for the lower class and workers in general. Fortunately, high commodity prices helped da Silva run successive fiscal surpluses during his two terms, even as he expanded programs for the poor started by Cardoso. In other words, he continued and solidified a policy of fiscally sound social inclusion.
It was on da Silva’s crest of popularity and economic growth that Rousseff took the helm in 2010. But she abandoned many of his “fiscally sound” policies by increasing government expenditures and subsidies as well as expanding the role of state-run companies like Petrobras and the Brazilian Development Bank. And as commodity prices plunged, the economy fell with them, eventually exposing the holes in the government’s finances.
The traits of a leader
So the question now is will (and can) Temer restore those socially inclusive yet fiscally sound policies that put Brazil on course to becoming a truly developed country?
So far, foreign and domestic investors have reacted favorably. But Temer faces a difficult task in resurrecting trust amongst the population and investors. Meanwhile he also faces his own allegations of corruption.
To me, whether he can successfully navigate the ongoing bumps in the road and stay the course of reform or not depends on whether he has the necessary attributes of a leader to rise to the occasion.
In “Brazil in Transition,” my coauthors and I pose three questions to help us assess whether a leader such as Temer has what it takes: does he know what policies are needed to recover from the shock? Can he coordinate a coalition that includes economic and political actors as well as citizens to embrace those policies? And is he trusted and does he possess moral authority?
To this, I add two more: can he adapt to unforeseen bumps to stay the course? Does Temer (including his policy team) possess imagination to see solutions that were not on the table?
Temer has recognized the heart of Brazil’s dilemma: policies need to be fiscally sound. This means accepting some austerity, as Argentina recently did. On this score he wins points for naming Henrique Meirelles, a well-respected former head of the central bank and a Wall Street veteran, as finance minister.
Can Temer coordinate among Congress and other powerful players in Brazil, such as industry and unions, and convince them to play ball? Being known as “the dealmaker” means he should be able to “coordinate and adapt” as opportunities arise. Temer was also trained as a constitutional lawyer, which means he knows well both the law and rules of the game in Congress.
However, he lacks the moral authority of both Cardoso, who was a vocal critic of the military regime, and da Silva, who with a fourth-grade education rose to the presidency as a strident union leader. But leaders can build moral authority; they need not come to the job with it in hand. (Not everyone can be a Nelson Mandela.)
Finally, does Temer have the “imagination” to come up with extraordinary ideas capable of breaking through the gridlock and bringing about reform? In his first hours in office, he demonstrated imagination by cutting his cabinet by a third, to 22 from 31, and, controversially, he picked only white men. This move could backfire, but it at least shows he’s willing to take risks and is not afraid of some controversy.
So does this suggest he has the “right stuff” to seize the window of opportunity of a new government and return Brazil to its virtuous trajectory?
His early moves may please markets, but to satisfy Brazil’s diverse citizenry, he will need to demonstrate that he is not abandoning social inclusion. On this as well as his own fate in the ongoing corruption scandals: the jury is still out.
This article was originally published on The Conversation. Read the original article.