Today's Headlines: Turbulence In Brazil

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Today's Headlines: Turbulence In Brazil
May 17, 2016

Brazil's Year of Trauma

Brazilians have to be wondering what else can go wrong. The economy has taken a nosedive, with inflation hovering in the 9-10% range, unemployment above 10%, and a GDP that has been shrinking at an accelerating pace since the second quarter of 2014. The summer Olympic Games in Rio are threatened by infrastructure problems and a bay so polluted that participants in outdoor water events are openly concerned about their safety.

Enter the devastating Zika virus, which is causing more concern by day as its effects and transmission methods are becoming clearer. Questions have been raised about whether the Olympics should be postponed or moved because of public health concerns. According to an article in the Harvard Public Health Review, the huge influx of international tourists could cause a worldwide outbreak with a relatively low number of infected tourists.

As the final indignity, Brazilian President Dilma Rousseff was suspended last week as the first step in an impeachment process — characterized as a "coup" by Rousseff and her supporters in the Workers' Party. What's next for Brazil, floods? A plague of locusts?

In accordance with Brazil's impeachment laws, Vice-President Michel Temer of the centrist PMDP party is required to assume power while Rousseff's fate is decided by the Senate. Brazilian politics has never been particularly clean. However, Rousseff's impeachment may signal a turning point in Brazilian politics that could also have ramifications throughout the world.

A Conservative Turn

Rousseff is accused of fiscal wrongdoing that made Brazil's economy appear to be in better shape than it really was, an accounting practice known as "pedaladas" (pedaling). You probably have the same humorous thought as we do: applied to America, this principle could put the majority of politicians out of office. However, there is a bit more to the Brazilian situation than simply misrepresenting economic conditions.

Rousseff's government allegedly used state-operated banks to plug budget shortfalls and make payments on regular expense streams (benefits, etc.). Essentially, under Brazilian law, these pedaladas are considered to be illegal loans to the government from the banks. Previous governments have also engaged in the practice, but amounts were usually around a billion Brazilian Reals (R$1 billion) or less and the "loans" were resolved without lasting damage. Under Rousseff, the pedaladas reached a staggering R$58.7 billion in late 2015 (around $17 billion in US dollars). The government repaid all but R$11.3 billion, but that is still a significant shortfall.

Governmental accounting trickery is a sensitive topic in Brazil. Great strides were made in bringing runaway inflation under control during the 1990s thanks to stricter budget controls. Transparency in the issuance of debt was key. The leftist governments of the Workers' Party that have ruled Brazil for the last 13 years benefitted from that relative stability until the global economy turned south, depressing prices for Brazilian commodity exports and fueling higher unemployment. These twin demons helped spawn a funding crisis for Brazil's social welfare programs that is worsening by the month.

It wasn't so long ago that Brazil's leftist leadership was riding high. Luiz Inácio Lula da Silva ("Lula"), Rousseff's mentor and Presidential predecessor, retired from office in 2010 with an astronomical public approval rating of 90%. The Brazilian government as a whole was viewed favorably by 68% of the public at that time; while it now sits at an anemic — and still declining— 15%. Understandably, Brazilians have grown disillusioned as the Worker's Party engaged in the same type of corruption associated with previous, discredited regimes. The Lava Jato ("Car Wash") scandal, where billions of dollars were skimmed from the state-owned oil company Petrobras, is perhaps the greatest example.

Temer may have difficulty reestablishing public confidence, as three members of his newly announced right-leaning cabinet are implicated in the Petrobras scandal. Temer named an all-white, all-male cabinet, further alienating progressives.

Brazil is not the only leftist South America government in turmoil. Venezuela is suffering from some of the world's highest inflation rates and, by some reports, could be nearing collapse. The heavily oil-dependent economy has been devastated by the recent downturn in oil prices, and the death of Hugo Chavez in 2013 left a void of charismatic leadership. A conservative turn is unlikely, but Venezuelan politics is notoriously unpredictable.

The moral of the story: leftist governments work wonderfully when there is enough money to fund their social programs, but they can fall apart when hubris, corruption, or just plain bad economic management establishes a disconnect between income sources and collective expenses.

Left or Right?

Why should we care about South American politics? Because economics is global — and based on the last GDP data from the World Bank, Brazil represents the seventh-largest economy. Brazil is a rich source of raw material commodities while Venezuela holds the world's largest reserves of crude oil. What happens there has a significant effect on the world economy. The trend in South America is toward conservatism — and while that may be exactly what is needed in the long term for stability, the result may be short-term economic pain.

Meanwhile, America is embroiled in one of the most unusual and potentially definitive presidential elections in history. We may be electing as our next President a billionaire who has never held office and appears to vacillate between exploiting international relationships and blowing them up. Nobody is quite sure what "Making America Great Again" really means in a world economy or how Trump plans to achieve this goal.

Simultaneously, Democrats are tilting markedly leftward. While Bernie Sanders may not win the nomination, he has certainly energized the leftist wing of the Democratic party and is likely to influence the party platform toward further government and social program expansion — not quite the "democratic socialism" Sanders espouses, and certainly not like the leftist governments of Brazil or Venezuela — but nevertheless a significant turn to the left.

Another upheaval may be coming in Great Britain with the upcoming "Brexit" vote on June 23. Should Britain choose to leave the European Union, Europe heads into uncharted economic territory with most economists predicting significant declines as trade issues slowly sort themselves out. The more liberal parties (Labour, Liberal Democrats, etc.) tend to favor staying in the EU as it represents a more uniform (and arguably progressive) governmental approach. Right-wing parties such as the Conservative Party and the UK Independence Party prefer to leave the EU and go it alone.

In essence, the first, fifth, and seventh-largest economies in the world (US, Britain and Brazil respectively) will be setting directions on the world economic stage within the year, with Brazil leaning conservative and the other two almost evenly split according to most polls. The divide is as sharp as it has ever been. Throw in a slowdown in the second largest economy (China), stagnation in the third (Japan), and growing populist unrest in the fourth and sixth (Germany and France), and we are in for a roller-coaster ride in 2016 world economics.

The Takeaway

2016 has already been an eventful and tumultuous year, and before it ends, we may witness a massive change in geopolitics that has profound and enduring consequences for the global economy. As fiscal conservatism and social progressivism battle epically for the reins of power, it is impossible to predict the results.

It's too early to say that a conservative tide will sweep over democracies worldwide, and America has a decent chance of swimming against the tide and continuing a progressive path. Regardless of the outcomes, 2016 may turn out to be one of the most pivotal years in geopolitics — and in turn, world economics — in decades.

Photo by Igo Estrela/Getty Images

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Daniel | 05.17.16 @ 20:39
The economy there has been terrible for quite some time, can only hope something can turn it around for the people to have a better way to live
Carla | 05.17.16 @ 20:40
I hope they are able to make enough off the Olympics to get some relief. It is a really sad situation.
Erin | 05.17.16 @ 20:44
I'm not sure hosting the Olympics is going to go so well with the Zika virus scare. I've heard before that hosting the Olympics doesn't really help the local economy in good situations. I can only imagine what having to contend with the virus is going to do to them. Hopefully they get things turned around soon.
Steffanie | 05.17.16 @ 20:45
I haven't been keeping up with everything in Brazil. Seems maybe the Olympics will help things out.
Beverly | 05.17.16 @ 20:47
Alot of South America economy is hurting, most of them(if not all) socialist countries. You can't continue to pay 99% of the people with monies from the 1%....eventually the 1% leave or stop all together. Something has to change.
Nancy | 05.17.16 @ 20:49
There are so many variables in hosting the Olympics. I hope that they get the financial relief that they need.
Christina | 05.17.16 @ 20:54
This is a very bad situation.I hope something good will help turn it around.
$commenter.renderDisplayableName() | 11.27.20 @ 08:26