Lessons from Brazil

Brasilia did too little to curb structural weakness

It is notable that Brazilian stocks and the currency rose as prospects of President Dilma Rousseff's removal from office grew stronger since mid-March. That outcome seemed even more likely on Tuesday after a key partner prepared to break away from the ruling coalition, and a powerful lawyers' association submitted a legal request for a second impeachment against her, this time for granting international football's governing body tax-exempt status for the 2014 World Cup. Coming on top of a corruption scandal involving kickbacks paid to the ruling coalition by contractors working for state-owned petroleum major Petrobras, some consider Ms Rousseff's departure a foregone conclusion. The irony of Ms Rousseff's deep unpopularity, expressed in the growing number of rowdy street rallies demanding her removal, is that she has followed the populist policies of her mentor, the iconic Luis Inacio Lula Da Silva, whom she succeeded in 2011. These policies included those that were aimed at countering the global slowdown with stimulus spending. Now, she faces impeachment for allegedly manipulating government accounts that allowed her to boost government spending and, it is claimed, helped her re-election in 2014. None of this really helped the Brazilian economy, however; if anything, the crisis exposed yet again the deep structural dependency assailing Latin America's largest economy that Ms Rousseff, an economist by training, did too little to correct.

Minerals, agriculture and primary products have long accounted for half of Brazil's exports. The bulk of these go to one market, China - even as the latter threatened the competitiveness of Brazilian manufactured goods. The long commodities boom masked these inherent problems, and the country's abundant production of oil, iron ore, soyabean and corn financed Mr Silva's pork-barrel policies. The signature Bolsa Familia welfare programme, which has become a global model for poverty reduction, was predicated on cash from a long-term commodities boom.

But, when the commodity prices began collapsing in mid-2014, Ms Rousseff's belated effort to raise revenues through higher taxes proved ineffective, even as household debt - the other consequence of the stimulus - curtailed consumer spending. Thus, in 2015, the Brazilian economy shrank 3.8 per cent in 2015, the worst performance in a quarter century. Inflation is now in double digits, the country's credit rating has been downgraded to junk status and unemployment has surged above nine per cent. In January, despite a record budget deficit of 10 per cent, Ms Rousseff announced a spending package for agriculture, infrastructure, industry and construction. But this last-ditch populism was doomed simply because there is no money to spend: government debt is now 67 per cent of GDP. Unsurprisingly, her approval ratings plunged even further; her efforts, ultimately unsuccessful, to induct Mr Silva into her cabinet to shield him from legal action in the Petrobras case worsened matters. Ms Rousseff's predicament carries a cautionary tale. The most solid of the BRIC countries just a few years ago, Brazil has become an object lesson for emerging economies on how dangerous it is to avoid tough structural reform when the going is good.