Image Logo for Latin American Institute

Brazil hobbled by political and economic crises

Although Brazilian President Dilma Rousseff is likely to be impeached, it is unlikely that her impeachment will resolve either the Petrobras corruption scandal that has devastated the country's political class or the country's economic crisis.

Brazil hobbled by political and economic crises

March 13, 2016. Protest against corruption at the Esplanade of Ministries, Brasília. (Photo: Wilson Dias/Agência Brasil Fotografias.) CC BY 2.0.

By Peggy McInerny, Director of Communications

“[Rousseff] is being impeached for a minor infraction, but there's an aspect of the situation here that's like prosecuting Al Capone for tax evasion. What she is accused of is not a big deal — lots of people have done it and other people didn't get impeached for it.” Barbara Geddes

UCLA International Institute, May 12, 2016 — President Dilma Rousseff may soon be impeached by the Brazilian Congress for violating the country’s law on fiscal responsibility, yet over half the members of that Congress are currently under investigation as part of a massive corruption scandal linked to the state oil and gas firm Petrobras. At the same time, the country’s economic growth has slowed precipitously due to a ballooning deficit, falling oil prices and structural inefficiencies.

Conservative parties are poised to dominate the post-Rousseff government, but there is no end in sight to either the economic or corruption crises presently gripping the country. These were the major observations of a panel discussion hosted by the UCLA Center for Brazilian Studies on Wednesday, May 4, at the Luskin School of Public Affairs.

Cosponsored by UCLA’s Department of History, Luskin School of Public Affairs, Department of Urban Planning, Luskin Global Public Affairs, Institute for Research on Labor and Employment and Department of Political Science, the event was moderated by Fabrício M. Fialho, UCLA Ph.D. candidate in political science. The featured panel speakers were Roberto Véras de Oliveira, associate professor, Federal University of Paraíba, and visiting scholar, UCLA Institute for Research on Labor and Employment; William Summerhill, UCLA professor of history; Barbara Geddes, UCLA professor of political science; and Manoel Gehrke, UCLA Ph.D. student in political science.

Fabrício M. Fialho opened the panel by noting that while Brazil’s economic grew steadily between 2003 and 2014, its GDP is predicted to drop by 3–4 percent in 2016. Overall, he observed, “the country is facing its most serious political crisis since democratization in the mid-1980s.”

The lower house of Congress voted on April 17 to impeach President Dilma Rousseff for violating the law on fiscal responsibility. Should the Senate accept the case [which it did on May 12, 2016], she will step down for a period of 180 days while the impeachment process proceeds. 

Fiscal deficit drives economic crisis

The heart of the charges of fiscal irresponsibility against President Rousseff concern what are known in Portuguese as “pedaladas” (literally, turns of the bicycle pedal), explained economic historian William Summerhill. The government has been obtaining short-term, off-the-books loans from government owned-banks (BNDES, Banco do Brasil, Caixa) and the FGTS (Fundo de Garantia por Tempo Serviço, or Employee Indemnity Guarantee Fund). As revenue arrived in the treasury, the government immediately repaid the loans. Over time, however, it could not keep up with the repayments.

Summerhill noted that the baseline “structural” value of these loans was roughly 1 billion Brazilian reals per year from 2001 to 2008. However, the volume of loans exploded thereafter, reaching some 58 billion dollars by 2015. This off-balance-sheet government spending, he said, led to inflation (10 percent in 2014) and has undermined the efficacy of the Central Bank. The soft loans were used primarily to fund costly subsidies to big businesses, not to sustain anti-poverty programs like Bolsa Familia.

The government’s sleight-of-hand borrowing has helped it sustain what Summerhill called “a complicated array of subsidies” across economic sectors that create market distortions and reduce the efficiency of the Brazilian economy. Together with local content requirements, those distortions represent structural impediments to effective state investment. As a result, he said, investment in capital goods in Brazil more or less zeroes out, despite huge public spending that represents 40 percent of GDP.

Summerhill argued that Brazil’s fiscal crisis was the main driver of its current economic woes – not the slowdown in China. Today, he concluded, the market has no confidence in the country’s fiscal policy and real investment has collapsed.

  From left: Roberto Véras de Oliveira, Manoel Gehrke, William Summerhill and Barbara Geddes.

A political system based on pork on patronage

“[Rousseff] is being impeached for a minor infraction, but there’s an aspect of the situation here that's like prosecuting Al Capone for tax evasion,” remarked political scientist Barbara Geddes. “What she is accused of is not a big deal — lots of people have done it and other people didn't get impeached for it.

“On the other hand,” continued the speaker, “while she's been in charge, amazing levels of stealing from the state has taken place… The extent of corruption — the very large number of deputies and other political figures that are involved — means that it won’t be just the president who falls, but a large part of the Brazilian political class that is not long for this world.”

Because of Brazil’s fragmented multiparty democracy, Geddes explained that the president never rules with a majority and needs the support of multiple legislative parties to accomplish anything. Local pork projects and patronage are essential to making the political system work. This is true even in congressional elections, where open-list proportional representation means candidates from the same party compete with each other as well as with candidates from other parties, using pork and patronage to obtain support.

With roughly 30 parties in the national legislature, a large number of parties in the president’s collation and important differences in interests among states and localities, “managing this system of exchange for legislative support is extremely complicated,” said Geddes. She pointed out that former President Fernando Henrique Cordoso computerized the entire exchange system and used it very effectively. However, the speaker said that the Partido dos Trabalhadores (Workers’ Party, or PT) led by former President Luiz Inácio Lula da Sliva and now by President Rousseff, “was unusually inexperienced” at managing the system of political exchange. Prior to Lula’s election in 2002, the PT had no experience as part of a ruling coalition and tried to limit the use of pork within the party.

After encountering difficulties in securing Congressional votes during his first two years in power and failing to make extensive use of the system of exchange, Geddes said Lula and the PT appeared to have concluded that “straightforward bribery [was] a substitute for using state resources to buy legislative support.” The resulting Mensalão scandal of 2006 revealed that a significant number of Congressmen were bribed every month to vote with the president. Lula’s chief of staff and PT party leaders were eventually found guilty of bribery by the Brazilian Supreme Court. 

“The great irony and the thing that‘s so upsetting about the current situation in Brazil,” said Geddes, “is that we have Brazil’s most ideological and disciplined party [the PT] — the party that was considered honest and that was going to bring about a real change in distributive issues in Brazil… and it apparently ends up relying on corruption to hold the president’s legislative coalition together.” Yet Geddes held out a note of hope, arguing that the crisis might lead Brazilians to reassess what they want from their government and produce a “real change in the political path.”

Petrobras corruption investigation implicates most of Brazil’s political class

The Operação Lavo Jato (“Operation Car Wash”) investigation into the Petrobras scandal was begun by the Brazilian federal police and judiciary in March 2014. Today, it is investigating 3 governors, 12 senators and 2 government ministers for corruption, said UCLA Ph.D. student Manoel Gehrke.

The investigation uncovered a bid-rigging cartel created by the biggest Brazilian construction companies for service contracts with Petrobras, he explained. Under a straightforward arrangement, for the past 10 years legislators were bribed to appoint Petrobras directors, who received kickbacks on over-priced contracts and prevented Petrobras from investigating those contracts.

While most of the huge margins on the contracts went to cartel members, Gehrke said that a certain amount of the profits went to money launderers, who redistributed these funds to politicians and three political parties: the PT, the PMDB (Partido do Movimento Democrático Brasileiro/ Brazilian Democratic Movement Party) and the PP (Partido Progressista/ Progressive Party). According to the speaker, the cartel’s profit from the scheme averaged 2–3 percent of the annual revenue of Petrobras.

In a domino effect based on plea bargains, the investigation began with the money launderers, who named Petrobras directors, who in turn named legislators. Most of the CEOs of the companies involved are now in jail, although Gehrke noted that some were already out of jail because they had named politicians complicit in the scheme.

In the speaker’s opinion, three pieces of legislation have been key to the success of Operação Lavo Jato: the Clean Slate Law (2010), the Criminal Organizations Law (2013) and the Clean Company Act (2013). The first law made politicians convicted of corruption ineligible for office for eight years, the second created plea bargains for the first time in Brazilian judicial practice and the third established administrative punishments for companies involved in corruption.

The Lavo Jato and other investigations have led to serious allegations against high-level actors across the political spectrum, including President Rousseff; former President Lula; the main opposition candidate, Aéico Neves of the PSDB; the president of the Chamber of Deputies, Eduardo Cunha of the PMDB (accused of receiving $40 million in bribes); the president of the Senate, Renan Calheiros of the PMDB; and vice president Michel Temer of the PMDB.

Brazilians are tired of the political chaos and the economic crisis, said Gehrke, who speculated that some kind of political deal may be in the offing. He noted, however, that it remained unclear whether legal or electoral sanctions would be levied against politicians implicated in the scandal.

Several processes converging in Brazil

For Brazilian sociologist Roberto Véras de Oliveira, several simultaneous social processes have been converging over the past four years in Brazil: a systematic campaign against the PT (especially the current government) for corruption; the huge growth of new evangelical churches and their political representatives; and rising fascist attitudes among middle-class people. He claimed that big media has been one of the chief sponsors of the drive to impeach Rousseff and that Justice Department actors involved in the Lavo Jato campaign have been integrated into the rising conservative wave, either by omission or through conscious partisanship.

In his view, the wave of mass social protests in Brazil that began in June 2013 began to fall into two categories following Rousseff’s re-election in 2014 by a small margin: protests in favor of impeachment organized by right-wing political groups, primarily by means of social networks, and protests in favor of democracy and human rights (and against a possible “coup”) organized by unions and social movements.

The populist PMDB, the party of Vice President Michel Temer — due to become interim president in the event of Rousseff’s impeachment by the Senate — and the conservatives are now in the ascendant, said Véras de Oliveira. He claimed that the politicians supporting the impeachment were close to the security forces, evangelical churches and the agricultural sector. This BBB (Bullets, Bible and Beef) coalition, he said, will likely be the most influential group in any new government formed after Roussef’s impeachment.

Audience members at the well-attended panel discussion.

All photos of event by Peggy McInerny/ UCLA.



Please upgrade to a browser that supports HTML5 video or install Flash