Brazil’s Trilemma

Brazil is facing a challenging economic, political, and social landscape. The economy is expected to contract by 3 percent this year and the real, Brazil’s currency since 1994, has depreciated sharply against the dollar. Standard & Poor’s, the U.S. credit-rating agency, has downgraded Brazil’s investment-grade credit rating to “junk” status. Unemployment has also increased, with 100,000 formal jobs disappearing each month. Current president Dilma Rousseff is facing impeachment proceedings, a corruption scandal, and her approval rating has sunk to single digits. Ahead of the 2016 summer Olympics in Rio de Janiero, water pollutionremains a significant challenge, and social tensions are heightened over accusations that the government has funneled spending away from social programs and into building Olympic infrastructure. This grim economic situation combined with unraveling political and social situations sets a difficult course for Brazil in the coming year.

Although a shift away from the dominant policy paradigm of state capitalism, in which industry is privatized but still heavily influenced and guided by the state, seems unlikely due to long-standing precedent and nationalism, Brazil’s economic performance is probably going to get worse before it gets better. Fiscal discipline is needed to lower the deficit, reduce inflation, and restore confidence in the real, but this will likely result in further deterioration of the social and political situation because these unpopular economic measures will be undertaken with little outside support. Brazil’s penchant for state capitalism is evident in cases like Petrobras, an oil company; Banco do Brazil, a bank; and key electric providers, such as Electrobras. These formerly state-owned companies have been privatized and the majority of share holdings have been sold off, yet the state has retained enough minority shareholdings in ways to reinforce the state’s influence over the industry. Ironically, shares of these companies were originally sold off in order to balance the budget. However, the persistence of state influence in these companies has made investors wary. Although complete privatization of the industries may help restore confidence for investors and boost the economy, Brazil’s nationalist sentiments are unlikely to allow this to happen. Petrobras represents a major source of revenue and is a symbol of state pride. Brazil is unlikely to let this industry slip entirely from its grasp, no matter the economic situation.

Under the administration of leftist President Luiz Inácio Lula da Silva (affectionately called “Lula” by his constituents) from 2003 to 2011, Brazil thrived. When Lula first came to office, the economy was in peril amid fears that Brazil would default on its debt. Thus, Lula cut government spending and raised interest rates in order to stabilize the economy and achieve a fiscal surplus. It worked. He then implemented a three-pronged economy policy: fiscal surplus, inflation targeting, and a floating exchange rate. In addition to these macroeconomic stabilizers, Lula focused on improving the microeconomic situation of Brazilians. This emphasis on social welfare ushered in the Bolsa Famila conditional cash transfer program, which provided money to female heads of households for sending their children to school and making sure they receive vaccinations. Consequently, 36 million Brazilians were lifted out of extreme poverty and the middle class expanded rapidly during Lula’s two terms in office. Additionally, real wage increases, expansion of credit, and increased employment all contributed to the rise in living standards witnessed by Brazilians. Those living in the historically poorer eastern side of the country, women, and ethnic minorities especially benefitted from these social programs. The economic success of this era stuck with Lula’s Partido dos Trabalhadores (PT, Portuguese for Worker’s Party) and helped ensure the election of the party’s successor, President Dilma Rousseff.

However, Dilma has been unable to translate Lula’s policies into a healthy economy. We see an attempt to achieve a fiscal surplus, with a target of 1.2 percent for this year, according to the Economist. Although Brazil has since recovered from a period of hyperinflation, inflation still remains at 10 percent, higher than the regional average with the exceptions of Venezuela and Argentina. Finally, a floating exchange rate means that the market is left to set an efficient rate, but for Brazil’s faltering economy this results in a depreciating real. Brazil has officially entered recession, and the economic outlook is poor. Congress is struggling to make necessary budget cuts while also facing limited borrowing options due to the credit rating downgrade. Furthermore, microeconomic growth and social spending have stagnated.

Brazil’s weak economy is complicated by problems in the political and social spheres. The country faces a multitude of hazards including jarring inequality, social unrest, and corruption.

Protests erupted in 2013 over increased bus fares, and quickly devolved into violent clashes and strikes over general discontent with the government. Reforms promised by Dilma in an attempt to appease protesters never materialized, and the social unrest continues. More recently, Brazilians have taken to the street to call for President Rousseff’s impeachment and protest Olympic spending and the economic crisis. Government funding and resources have increasingly gone towards building World Cup and Olympic infrastructure instead of towards affordable housing, roads, and other necessary provisions for the Brazilian people. Furthermore, although social programs like Bolsa Familia helped reduce extreme poverty, inequality remains a prominent characteristic of the Brazilian economy. The Gini coefficient (a measurement of inequality with a score of 0 representing perfect equality and 100 representing perfect inequality) of Brazil stands at 52.9,according to the World Bank, while most South American countries average a coefficient between 40 and 50. The disparity in income equality in Brazil is clearly observed in the favela slums that surround urban centers, where violence and crime are rampant and the rule of law is incredibly weak.

Politically, Brazil is headed for crisis, with President Rousseff at the center of it all. She is currently facing impeachment proceedings for violating Brazil’s budget laws, although we are unlikely to see a definitive outcome of these proceedings until spring of 2016. Arguably worse, she is also at the center of a corruption scandal enveloping the PT party, in which politicians are accused of accepting $4 billion in bribes in exchange for unfairly improved contracts with Petrobas. Corruption is not new in Brazilian politics. In fact, the Mensalão vote-buying scandal during the Lula administration resulted in the resignation of several top advisors. However, due to the economic success of Lula’s term, it barely made a dent in his popularity and he went on to be re-elected in 2006. Dilma, on the contrary, has not been blessed with the mask of a healthy economy, and this corruption scandal is further eroding her legitimacy as president.

Brazil faces a trilema of economic, political, and social crisis. The current economic policy is unsustainable, as it is failing to produce the successful results it once did under the Lula administration. Digging the economy out of recession, reducing inflation, increasing employment, and restoring faith for international investors must become priorities. Furthermore, attention must also be paid to the microeconomic situation in Brazil. The government can no longer push aside the social problems plaguing Brazil, as inequality, violence, and crime create vulnerability, which economic instability only exacerbates. Political crisis also mutually reinforces economic and social problems, as investors become unwilling to invest in a politically unstable country and social unrest is fomented. Significant –and likely painful– institutional reforms are needed to fix the economy, keep politicians accountable, and improve the social situation in Brazil.

Gretchen Cloutier is a student in the School of Public Affairs class of 2017. He can be contacted at

All views expressed are solely those of the author, and do not necessarily reflect the views of the World Mind or of Clocks and Clouds.

About Gretchen Cloutier

Gretchen is a senior with a double major in International Relations and Economics and a minor in Spanish Language and Area Studies. She is a Staff Writer for The Americas column, and spent a semester abroad in Costa Rica. Outside of the World Mind, you can find her playing ultimate frisbee or sipping coffee at the Dav on American University's campus.