Politics Paralyzed as Brazil Slides into Recession

Brazil’s economy is going down yet national politics is more dysfunctional than it has been in years.

Brazil economy is sliding into recession while unemployment, officially at 6.4 percent, has reached a four-year high. Yet the country’s politics are increasingly dysfunctional and seemingly incapable of stemming the tide of bad news.

Brazil’s Planning Ministry revealed this week that gross domestic product had shrunk almost a quarter from last year in dollar terms.

Much of the contraction is due to a 21 percent depreciation of the real against the American dollar. But expressed in local currency terms, Latin America’s biggest economy is still forecast to shrink 1.2 percent this year — its worst performance in a quarter of a century.

Many analysts also believe the jobless figure is higher than government statistics show, in part because up to half the jobs in Brazil are informal. Burdensome labor laws and high welfare contributions, which can add a staggering 58 percent to the average salary, discourage companies from hiring. The country shed almost 100,000 formal job posts last month alone.

To restore investor confidence, the government is unwinding stimulus programs to rein in a 6.7 percent deficit — the biggest in the country’s history.

Discretionary spending is set to be frozen while taxes on banks and brokerages are to be raised. This may help Brazil achieve a 1 percent surplus this year — which would be the first time in over a decade it managed to balance its finances — but the austerity effort could also come at the expense of consumer confidence at home.

Ordinary Brazilians are already facing higher taxes as the government is raising levies on electricity to discourage use. Water shortages have left a country that depends on hydroelectricity dams for more than 75 percent of its power at risk of outages.

Other prices are rising too and inflation is up to 8 percent, having steeply risen from 6 percent late last year when President Dilma Rousseff was narrowly reelected.

The downturn owes much to her Workers’ Party reluctance to liberalize the economy in the boom years when it used the proceeds from rising commodities exports to Asia to finance social spending instead, including on the popular Bolsa Família program.

Since Rousseff’s predecessor and the architect of Brazil’s commodities-fueled success, Luiz Inácio Lula da Silva, came to power in 2003, incomes have risen faster than economic output and private debt has risen dramatically.

Rousseff tried to slow things down in her first term by limiting pension payouts to civil servants and capping government contributions for new hires. But Brazil’s pension program is still among the world’s most generous. The average Brazilian can retire at 54 with 70 percent of his or her pay. Pensions take up 13 percent of gross domestic product.

By contrast, the country spends just 1.5 percent of its yearly economic output on infrastructure, compared with a global average of 3.8 percent, even though its weak network of ports, railways and roads is a huge bottleneck to more sustainable growth.

Rousseff has meanwhile done little to remove structural impediments to economic expansion which include a complex tax regime and excessive regulation. The World Bank considers Brazil to be the worst place in the world to file one’s taxes. Import tariffs remain high while customs procedures sometimes amount to outright obstructionism of foreign trade.

The worsening economic outlook, coupled with corruption scandals at the state oil company, Petrobras, have turned the public against Rousseff whose approval rating plummeted to 13 percent last month.

The president is also losing support from her most important coalition partner in Congress, the Brazilian Democratic Movement Party (PMDB), which is resisting her austerity measures.

Last week, the Senate blocked a bill that would trim workers’ benefits. It is expected to pass this week but only after the government withdrew its proposal to limit access to an annual bonus enjoyed by Brazilian workers.

The PMDB is also thinking about fielding a presidential candidate in the 2018 election for the first time in twenty years, a move that could splinter the left-wing vote to the Workers’ Party’s detriment. In the first round of last year’s presidential election, the far-left Socialist Party already took 21 percent of the votes against 42 percent for Rousseff and 34 percent for the right-wing Brazilian Social Democracy Party.

Although it lacks a coherent ideology and exists rather to serve the interests of regional bosses and constituencies, the PMDB is the perennial kingmaker in Brazilian politics. It backed the Social Democrats between 1995 and 2002 and has since supported the Workers’ Party. In exchange for this support, it has won control of both houses of Congress and the vice presidency; power it is now using to stop any serious attempt to try to turn the economy around.