“Brazil is the country of the future, and always will be”, so goes the adage that has haunted Brazilian citizens for decades. Despite boasting one tenth of the world’s fresh water, untapped forests and significant deposits of precious minerals, the Brazilian economy has struggled to fully employ the natural resources it has been blessed with, leaving many wondering whether it will ever achieve the position of economic superpower that has long been prophesised.
Hopes for a Brazilian economic miracle took off after the Real Plan of 1994 successfully curbed hyperinflation caused by decades of high external public debt as the government had increased taxes to service its debt, resulting in higher prices set by producers. The plan established a new currency (the Real) and tightened monetary policy, resulting in a substantial drop in the annual inflation rate from around 2,075% in 1994 to 15.76% 2 years later. At the turn of millennium, it seemed, by all estimates, as though the future of the Brazilian economy would be highly prosperous; the country was experiencing some of the fastest economic growth in the world, putting it in the BRICS group of countries. In the following decade, the Brazilian economy would come to reap the rewards of the commodities boom of the 2000s – utilising its cheap labour and large reserves of raw materials to quench the insatiable demand of China and India for metals and fuels; exports soared, inequality dropped, and employment increased. The economy was expanding annually by 4% as Brazil paid off its entire debt to the IMF and subsequently gained the confidence of investors as foreign investment agencies elevated the classification of Brazilian foreign debt from speculative to investment grade. Not even a global financial crisis seemed to stop the inevitability of a booming Brazilian economy, with the country only suffering a single year of negative GDP growth in 2009 before bouncing back by over 7% the following year. Months after it was announced Brazil would host both the Olympics and the World Cup, the Economist featured a 14-page special report on the country, headlined “Brazil Takes Off,”. 4 years later another special report on Brazil was published by The Economist, only this time with the title “Has Brazil Blown It?”
The Brazilian economy ground to a halt in 2014 and eventually entered into a recession, contracting severely in both 2015 and 2016 as unemployment soared from 6.7% in 2014 to 11.6% in 2016. The culprit? A mixture of bad luck and poor policy. Brazil’s reliance on its exports was its downfall, commodity prices declined by more than 38% between 2014-15 and, as exports shrank, so too did tax receipts. The government, under Dilma Rouseff, believed ‘expansionary austerity’ was the remedy, reducing public sector investment by 30% and slashing federal spending on social benefits. The result was a deterioration of the economy as consumers reduced spending and federal tax revenues plummeted even further, worsening living conditions for the majority of Brazilians. Since 2016, the situation has not improved: GDP growth has been meagre, unemployment has remained high and government debt continues to rise. The decline in both the price and quantity of exports, as well as the instability of foreign markets in 2008, negatively affected Brazil. Yet, whilst policy severely impacted the country’s chances of a swift recovery, the real culprit behind Brazil’s failure to return to strong economic growth is a complex system rooted in Brazilian politics – corruption.
In 2015 Operation Carwash, arguably the largest corruption investigation in history, was made public, resulting in the conviction of 159 individuals, including ex-presidents Dilma Rouseff and Luiz (Lula) da Silva (2003-2010), as well as several other high ranking government ministers. Whilst corruption had been present in Brazil for decades, its exposure in 2015 threw Brazilian politics into disarray, hindering efforts at economic recovery as a lack of trust amongst Brazilian politicians and, in particular, the PT party (of which Rousseff was a member) divided the country’s congress. This hindered Rousseff’s successor, Michel Temer, in his efforts to pass crucial bills and implement structural reforms needed for economic recovery. As if political chaos was not enough, the involvement of large corporations in the corruption scandal further contributed to economic ruin. When it was revealed that Petrobras, a state-owned oil company and Brazil’s largest employer, was heavily involved in the corruption uncovered during the Car Wash investigations, the company’s value and stock prices plummeted. The company is estimated to have suffered a $27.1 billion dollar loss, which cost the Brazilian economy approximately 1.1% of its GDP and caused thousands of job losses. This phenomenon was not exclusive to Petrobras; the losses of construction companies, for example, involved in the corruption scandal are estimated to reduce GDP by another R$10 billion and contribute further to unemployment. The effects of the failure of companies like Petrobras (the largest oil company in Latin America) and Odebrecht (the largest construction company in Latin America) as a result of corruption are expected to have long lasting effects on Brazil’s economic growth and are likely to discourage future foreign investment.
Whilst Brazil had the means to become an economic superpower in the 21st century, it was the victim of fluctuations of trade, bad policy and, most importantly, the exposure of rampant corruption. The Brazilian outlook for the future is unclear; Operation Car Wash has done much to discourage future corruption by demonstrating that government officials can and will be held accountable for their crimes, yet, as with all global economies, the Brazilian economy will be severely challenged by the effects of COVID-19 and its new variants – Brazil’s populist incumbent, Jair Bolsonaro has left the country vulnerable to a health disaster, downplaying the seriousness of the pandemic and repeatedly flouting the country’s public health recommendations. Next year, the country will give its verdict on its so called ‘Trump of the Tropics’ president and, in doing so, will likely determine the future path to economic recovery and potential prosperity.