The BRIC countries are in trouble. For a season the dynamos of international growth while the West was mired in the worst financial crisis and recession since the Depression, they are now the leading source of anxiety in the headquarters of the IMF and the World Bank. China, above all, because of its weight in the global economy: slowing output and a himalaya of debt. Russia: under siege, oil prices falling and sanctions biting. India: holding up best, but unsettling statistical revisions. South Africa: in free fall. Political tensions are rising in each: Xi and Putin battening down unrest with force, Modi thrashed at the polls, Zuma disgraced within his own party. Nowhere, however, have economic and political crises fused so explosively as in Brazil, whose streets have in the past year seen more protesters than the rest of the world combined.
Picked by Lula to succeed him, Dilma Rousseff, the former guerrilla who had become his chief of staff, won the presidency in 2010 with a majority nearly as sweeping as his own. Four years later, she was re-elected, this time with a much smaller margin of victory, a 3 per cent lead over her opponent, Aécio Neves, the governor of Minas Gerais, in a result marked by greater regional polarisation than ever before, the industrialised south and south-east swinging heavily against her, and the north-east delivering an even larger landslide for her – 72 per cent – than in 2010. But overall it was a clear-cut win, comparable in size to that of Mitterrand over Giscard, and a good deal larger, not to mention cleaner, than that of Kennedy over Nixon. In January 2015 Dilma – from this point we’ll drop the surname, as Brazilians do – began her second presidency.
Within three months, huge demonstrations packed the streets of the country’s major cities, at least two million strong, demanding her ouster. In Congress, Neves’s Brazilian Social Democracy Party (PSDB) and its allies, emboldened by polls showing Dilma’s popularity had fallen to single figures, moved to impeach her. On May Day, she was unable even to give the traditional televised address to the nation: when her speech on International Women’s Day in March had been broadcast people banged saucepans and blew car horns, a form of protest that became known as panelaço. Overnight, the Workers’ Party (PT), which had long enjoyed by far the highest level of approval in Brazil, became the most unpopular party in the country. In private, Lula lamented: ‘We won the election. The following day we lost it.’ Many militants wondered if the party would survive at all.
How had it come to this? In the last year of Lula’s rule, when the global economy was still gripped by the aftermath of the financial crash of 2008, the Brazilian economy grew 7.5 per cent. On taking office, Dilma tightened policy against risks of overheating, to the satisfaction of the financial press, in what looked like the kind of reinsurance policy Lula had himself taken out at the start of his first term. But as growth fell sharply, and world financial skies darkened once more, the government changed course, with a package of measures intended to prime investment for sustained development. Interest rates were lowered, payroll taxes cut, electricity costs reduced, loans to the private sector from private banks increased, the currency devalued and limited control of capital movements imposed. On the heels of this stimulus, halfway through her presidency, Dilma enjoyed an approval rating of 75 per cent.
But, far from picking up, the economy slowed from an already mediocre 2.75 per cent in 2011 to a mere 1 per cent in 2012, and with inflation above 6 per cent, in April 2013 the Central Bank abruptly raised interest rates, undercutting the ‘new economic matrix’ of Guido Mantega, the finance minister. Two months later, the country was swept by a wave of mass protests, triggered by higher bus fares in São Paulo and Rio but quickly escalating into generalised expressions of discontent with the quality of public services and, fanned by the media, of hostility to an incompetent state. Overnight, the government’s approval ratings halved. In response, it beat a retreat, starting cautionary reductions in public spending and allowing interest rates to rise again. Growth fell further – it would be nil in 2014 – but employment and wages remained stable. At the end of her first term Dilma waged a defiant campaign for re-election, assuring voters that she would continue to give priority to improving the living standards of working people, and attacking her PSDB opponent for planning to reverse the social gains of PT rule by slashing social benefits and hitting the poor. In the face of a continuous ideological barrage against her in the press, it was enough to give her victory.
Before her second term had even formally begun, Dilma reversed course. A spell of austerity, she abruptly explained, was required. The architect of the new economic matrix was dismissed, and the Chicago-trained head of the asset management division of Brazil’s second largest private bank installed at the finance ministry, with a mandate to curb inflation and restore confidence. The imperatives now were to cut social spending, curtail credit from public banks, auction state property and raise taxes to bring the budget back into primary surplus. Soon the Central Bank had hiked interest rates to 14.25 per cent. Since the economy had already stalled, the effect of this pro-cyclical package was to plunge the country into a full-blown recession – investment declining, wages falling and unemployment more than doubling. As GDP contracted, fiscal receipts fell, worsening the deficit and public debt. No government’s ratings could have withstood the speed of this deterioration. But the meltdown of Dilma’s popularity was not just the predictable result of the impact of recession on ordinary living standards. It was also, more painfully, the price of her abdication from the promises on which she was elected. Overwhelmingly, the reaction among her voters was that her victory was an estelionato, an embezzlement: she’d cheated her supporters by stealing the clothes of her opponents. Not just disillusion, but anger followed.
Half-hidden, the roots of this debacle lay in the soil of the PT’s model of growth itself. From the outset, its success relied on two kinds of nutrient: a super-cycle of commodity prices, and a domestic consumption boom. Between 2005 and 2011, the terms of trade for Brazil improved by a third, as demand for its raw materials from China and elsewhere increased the value of its principal exports and the volume of tax receipts for social expenditures. By the end of Lula’s second term, the share of primary commodities in the Brazilian export package had jumped from 28 to 41 per cent, and manufactures had fallen from 55 to 44 per cent; by the end of Dilma’s first term, raw materials accounted for more than half the value of all exports. But from 2011 onwards the prices of the country’s leading tradable goods collapsed: iron ore dropped from $180 to $55 a ton, soya from $18 to $8 a bushel, crude oil from $140 to $50 a barrel. Compounding the end of the overseas bonanza, domestic consumption hit the buffers. Throughout its rule, the core strategy of the PT had been to expand home demand by increasing popular purchasing power. That was achieved not only by raising the minimum wage and making cash transfers to the poor – the Bolsa Família – but by a massive injection of consumer credit. Over the decade from 2005 to 2015, total debt owed by the private sector increased from 43 to 93 per cent of GDP, with consumer loans running at double the level of neighbouring countries. By the time Dilma was re-elected in late 2014, interest payments on household credit were absorbing more than a fifth of average disposable income. Along with the exhaustion of the commodity boom, the consumer spree was no longer sustainable. The two motors of growth had stalled.
Picked by Lula to succeed him, Dilma Rousseff, the former guerrilla who had become his chief of staff, won the presidency in 2010 with a majority nearly as sweeping as his own. Four years later, she was re-elected, this time with a much smaller margin of victory, a 3 per cent lead over her opponent, Aécio Neves, the governor of Minas Gerais, in a result marked by greater regional polarisation than ever before, the industrialised south and south-east swinging heavily against her, and the north-east delivering an even larger landslide for her – 72 per cent – than in 2010. But overall it was a clear-cut win, comparable in size to that of Mitterrand over Giscard, and a good deal larger, not to mention cleaner, than that of Kennedy over Nixon. In January 2015 Dilma – from this point we’ll drop the surname, as Brazilians do – began her second presidency.Within three months, huge demonstrations packed the streets of the country’s major cities, at least two million strong, demanding her ouster. In Congress, Neves’s Brazilian Social Democracy Party (PSDB) and its allies, emboldened by polls showing Dilma’s popularity had fallen to single figures, moved to impeach her. On May Day, she was unable even to give the traditional televised address to the nation: when her speech on International Women’s Day in March had been broadcast people banged saucepans and blew car horns, a form of protest that became known as panelaço. Overnight, the Workers’ Party (PT), which had long enjoyed by far the highest level of approval in Brazil, became the most unpopular party in the country. In private, Lula lamented: ‘We won the election. The following day we lost it.’ Many militants wondered if the party would survive at all.
How had it come to this? In the last year of Lula’s rule, when the global economy was still gripped by the aftermath of the financial crash of 2008, the Brazilian economy grew 7.5 per cent. On taking office, Dilma tightened policy against risks of overheating, to the satisfaction of the financial press, in what looked like the kind of reinsurance policy Lula had himself taken out at the start of his first term. But as growth fell sharply, and world financial skies darkened once more, the government changed course, with a package of measures intended to prime investment for sustained development. Interest rates were lowered, payroll taxes cut, electricity costs reduced, loans to the private sector from private banks increased, the currency devalued and limited control of capital movements imposed. On the heels of this stimulus, halfway through her presidency, Dilma enjoyed an approval rating of 75 per cent.
But, far from picking up, the economy slowed from an already mediocre 2.75 per cent in 2011 to a mere 1 per cent in 2012, and with inflation above 6 per cent, in April 2013 the Central Bank abruptly raised interest rates, undercutting the ‘new economic matrix’ of Guido Mantega, the finance minister. Two months later, the country was swept by a wave of mass protests, triggered by higher bus fares in São Paulo and Rio but quickly escalating into generalised expressions of discontent with the quality of public services and, fanned by the media, of hostility to an incompetent state. Overnight, the government’s approval ratings halved. In response, it beat a retreat, starting cautionary reductions in public spending and allowing interest rates to rise again. Growth fell further – it would be nil in 2014 – but employment and wages remained stable. At the end of her first term Dilma waged a defiant campaign for re-election, assuring voters that she would continue to give priority to improving the living standards of working people, and attacking her PSDB opponent for planning to reverse the social gains of PT rule by slashing social benefits and hitting the poor. In the face of a continuous ideological barrage against her in the press, it was enough to give her victory.
Before her second term had even formally begun, Dilma reversed course. A spell of austerity, she abruptly explained, was required. The architect of the new economic matrix was dismissed, and the Chicago-trained head of the asset management division of Brazil’s second largest private bank installed at the finance ministry, with a mandate to curb inflation and restore confidence. The imperatives now were to cut social spending, curtail credit from public banks, auction state property and raise taxes to bring the budget back into primary surplus. Soon the Central Bank had hiked interest rates to 14.25 per cent. Since the economy had already stalled, the effect of this pro-cyclical package was to plunge the country into a full-blown recession – investment declining, wages falling and unemployment more than doubling. As GDP contracted, fiscal receipts fell, worsening the deficit and public debt. No government’s ratings could have withstood the speed of this deterioration. But the meltdown of Dilma’s popularity was not just the predictable result of the impact of recession on ordinary living standards. It was also, more painfully, the price of her abdication from the promises on which she was elected. Overwhelmingly, the reaction among her voters was that her victory was an estelionato, an embezzlement: she’d cheated her supporters by stealing the clothes of her opponents. Not just disillusion, but anger followed.
Half-hidden, the roots of this debacle lay in the soil of the PT’s model of growth itself. From the outset, its success relied on two kinds of nutrient: a super-cycle of commodity prices, and a domestic consumption boom. Between 2005 and 2011, the terms of trade for Brazil improved by a third, as demand for its raw materials from China and elsewhere increased the value of its principal exports and the volume of tax receipts for social expenditures. By the end of Lula’s second term, the share of primary commodities in the Brazilian export package had jumped from 28 to 41 per cent, and manufactures had fallen from 55 to 44 per cent; by the end of Dilma’s first term, raw materials accounted for more than half the value of all exports. But from 2011 onwards the prices of the country’s leading tradable goods collapsed: iron ore dropped from $180 to $55 a ton, soya from $18 to $8 a bushel, crude oil from $140 to $50 a barrel. Compounding the end of the overseas bonanza, domestic consumption hit the buffers. Throughout its rule, the core strategy of the PT had been to expand home demand by increasing popular purchasing power. That was achieved not only by raising the minimum wage and making cash transfers to the poor – the Bolsa Família – but by a massive injection of consumer credit. Over the decade from 2005 to 2015, total debt owed by the private sector increased from 43 to 93 per cent of GDP, with consumer loans running at double the level of neighbouring countries. By the time Dilma was re-elected in late 2014, interest payments on household credit were absorbing more than a fifth of average disposable income. Along with the exhaustion of the commodity boom, the consumer spree was no longer sustainable. The two motors of growth had stalled.
by Perry Anderson, LRB | Read more:
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