Tuesday, 3 September 2013

BRAZIL: D. Rousseff & Economic's drift

The economy of Brazil, once held up as a model of what a BRIC emerging market can do, has begun to set off alarm bells in the populist government of President Dilma Rousseff as the ruling party tries to halt its current decline.

In Brazil, political economy means putting the economy at the service of political goals, mainly through measures that improve the electoral prospects of those already in power. With annual growth at a measly 2 percent, foreign balance of payments $50 billion in the red, and the exchange rate for Brazil’s currency, the real, down more than 30 percent since the start of the year, Rousseff’s Workers Party is already worried about the October 2014 election.

This decline comes after Rousseff and her finance minister, Guido Mantega, both proponents of state intervention in economic affairs, have thrown billions of dollars in public investments, credit stimuli, and consumer subsidies into a failed attempt to produce vigorous growth.

This is not yet a full-blown crisis. Employment remains high, mainly through low-paying service jobs. The informal economy, which pays no taxes, is thriving. Consumer spending remains high, stimulated by easy credit, but family debt has reached a limit for many borrowers.

The most ominous sign of economic malaise is inflation, which is increasing prices of goods and services at a rising pace, now over 6.8 percent a year by the official index and 10 percent by private calculations. Tax collections are declining and the budget deficits of state governments are increasing beyond legal limits. Without renewed economic growth, the fiscal situation is unsustainable.

The political time frame for the Rousseff administration to get its act together is determined by the presidential and congressional elections in October 2014, campaigning for which is already under way. Rousseff, Brazil’s first female president, has decided to run for reelection with the backing of her political mentor, former president Luiz Inácio Lula da Silva, and a coalition of parties led by the Workers Party.

Once seen as a shoo-in, Rousseff suffered a setback after mass demonstrations rocked the country in June. Rousseff´s popularity collapsed from 56 percent in May to 31 percent in July. The latest figures show a recovery to 38 percent approval after a number of hasty moves to reduce urban transportation fares and the withdrawal, by the government majority in Congress, of legislation designed to reduce investigation of corruption. But the public remains in a mood of protest and the main issues now are economic.

The government is in full reelect mode. When the exchange rate of the Brazilian real for the US dollar exploded last week to 2.40, the central bank announced that it would auction $300 million a day for future delivery as a way of controlling the devaluation. Where the dollars are going to come from is not clear, but the move will probably reduce Brazil’s international reserves. The government sees this scheme as a way to avoid reducing deficit spending for subsidized energy prices and social programs that are hallmarks of Rousseff’s government. But it also shows the contradictions and political motivations of Rousseff’s economic policies.

Such decisions have hurt investor confidence and damaged major public enterprises, like Petrobras, the state oil company that has lost billions of dollars for necessary investments because of price controls on gasoline and diesel fuels that are 25 percent below international prices.

Under the current administration, Petrobras has been unable to increase oil production, build necessary refineries, or lead the development of huge offshore fields. After five years of delays, a large auction of promising properties is scheduled for next month, but the investors who bid will not produce any oil or gas for years. Meanwhile, shale gas production in the US and Canada will drive down international prices—along with Brazil’s hopes of being a major oil exporter.

With the government fixed on the elections in 2014, other areas are also coming in for emergency programs. A mission formed by government transportation experts went to China this week to try to obtain investments for construction of railroads, waterways, and ports to overcome logistical bottlenecks for export of Brazil’s huge production of soybeans, corn, cotton, and beef from the deep interior of Brazil.

China is Brazil’s largest customer of agricultural products and would benefit from lower transportation costs, as would Brazilian farmers. But the Rousseff administration has not succeeded in organizing a national logistical program to provide adequate transport.

In another political move, last week Brazil began receiving the first contingents of 4,000 medical doctors from Cuba under a program labeled “More Physicians.” The Cubans will be assigned mainly to communities in backward rural areas and urban slums, places poorly served by Brazil’s public health service.

The deal has political overtones because the Cuban government receives a major part of the payments for the physicians, who are paid far less than Brazilian doctors would accept to work in locations where medical centers are notoriously underequipped. For the Rousseff administration, the services of the contracted Cuban doctors can be presented as a response to the public protests that swept Brazil in June, which focused on inadequate public services, mainly in health care.

This initiative is an example of how social and political objectives combine under the Workers Party project to maintain political dominance in Brazil beyond 2014. The visible leader of the Brazil-Cuba project is Alexandre Padilha, the current minister of health, and President da Silva has chosen him to be the party’s candidate for governor of São Paulo next year—a race second in importance only to the presidential contest itself.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist
World Affairs Analyst

Photo-Credit: AFP- Brazil's President Dilma Rousseff