Brazil’s Challenges and Dilma’s Choices

Jonas Pereira / Agência Senado / CC BY 2.0

This post is also available in: Portuguese (Brazil)

President Dilma Rousseff, a political neophyte when she was took office in 2011, had a rough first term. During her four-year watch, a booming economy stagnated, furious protests erupted across the country, and the nation’s worst corruption scandal ever was exposed. Brazil’s influence, regionally and globally, diminished, and US-Brazil relations became increasingly fractious. Still, with Lula’s help, Dilma narrowly won re-election this past October. After her inauguration on January 1, the crucial question will be whether she can engineer a turnaround in Brazil’s fortunes. It mainly depends on her success in reviving the economy.

When Dilma was first elected, the economy was operating close to its peak, with 7.5 percent growth in 2010. Last year, the economy dropped into recession, inflation rose steadily, fiscal accounts were badly out of balance, and Brazil suffered its worst trade deficit in 15 years. The fault is not all Dilma’s. The global financial crisis, which first decimated the US and Europe, began to take its toll on Brazil and other developing countries. The slowing of China’s hyper-growth, which had propped up demand and prices of Brazil’s soybeans, iron, and other commodity exports, was particularly damaging. So was the shrinking of international capital flows to emerging markets.

But Dilma’s government also made mistakes. It sought to recharge the economy with a poorly designed stimulus package, increased already bloated taxes and public spending, and ended up fueling inflation. State subsidies to keep energy and other prices low made things worse. New import barriers designed to spark domestic production left the country among the world’s most closed and protectionist. Little was done to improve debilitated infrastructure or deficient educational and health systems.

Brazil’s economic troubles were a prime factor triggering political unrest and driving down the president’s approval ratings last year. A million plus Brazilians took to the streets to vent their frustrations with government waste and corruption, and dismal public services. Though, in part, the protests reflected Brazil’s success in building an emerging middle class with rapidly expanding demands.

Other setbacks roiled Brazil as well. Secret US surveillance, extending to the president’s office and Petrobras, created a sharp, still unresolved, breach between the US and Brazilian governments. For more than a year, relations have been cool and distant. Independently, the oil company became entangled in a widening corruption scandal, a scheme of the president’s own Workers Party (PT) to siphon funds from inflated contracts.

Dilma was re-elected by a small three percent margin. Her victory, in an aggressive, mud-slinging campaign, demonstrated the voting strength of Brazil’s lowest income groups. They remained loyal to Dilma and Lula for the social programs and job creation that have lifted so many out of deep poverty.

In her campaign, Dilma emphasized the need to repair the economy—to get growth up and inflation down. Those who voted against her were skeptical and concerned about how she would go about it. Would Dilma continue the state-led development strategy of her first term, which depended heavily on government mandates and public funds to shape the country’s economic course? Or would she shift toward a more orthodox, mainstream approach that would rely more on market forces.

Her first decisions—the designation of a new cabinet—suggests the market approach is more likely to prevail. Although doubts remain, the new appointments have lifted the confidence of Brazil’s business community and reassured foreign investors.
They especially welcomed the choice of Joaquim Levy for the key post of finance minister. A high official in the Lula government, he has held senior posts at the IMF and Inter-American Bank and recently was a top officer at Brazil’s second largest private bank. Dilma has also made pro-business appointments to most other Cabinet posts relevant to the economy. Now the question is whether she will give the new ministers the authority and independence they need to redirect economic policy—and, as important, succeed in generating the political support needed to make some drastic, politically contentious changes.

Although the political costs will be high at the outset, getting the economy back on track will give the Dilma government enormous advantages in dealing with other challenges, domestic and foreign. A more vibrant economy will help to restore Brazil’s leverage and capacity for leadership in Latin America. It will also raise the country’s stature and influence globally, and certainly increase it attractiveness as a trade partner and locus for investment.

One issue that needs more attention from Brasilia is what can be done to mend fences with the US. The revival of the two economies would surely improve the prospects. Both countries, after all, consistently assign highest priority to the commercial side of their relationship. President Obama’s recent reversal of US Cuba policy, which Brazil warmly applauded, should also help. It should open the way for the two countries to engage more constructively on many regional problems. That would be especially timely with the next Summit of the Americas scheduled in April and a new leader taking charge of the Organization of American States in June.

Vice President Biden’s attendance at Dilma’s inauguration on New Year’s Day is the most recent signal of Washington’s interest in rebuilding the soured US-Brazil relationship. Dilma now has to decide how she proposes to reciprocate.

But it is the economic policy choices Dilma makes that will most determine the success of her second term and most shape the future of Brazil.