Brazil has had little to celebrate as of late. Unemployment has jumped to 7.6% in August, up from 5% a year ago. With an inflation rate of 9.5% significantly greater than an increase in nominal wages of 6.3% over the last 12 months, real wages have actually fallen by 3.2%. Household consumption, the main driver of Brazil’s recent economic growth, is thus expected to fall by 4.0% by the end of the year. The Central Bank of Brazil now expects GDP to contract by 2.7% in 2015, accentuating a recession that has dragged along for nearly a year. Investor confidence has plummeted. Standard and Poor’s has relegated Brazil’s debt bonds to junk status.
The current recession has a wide variety of causes, both short and long term. In the short term, China’s slowdown has hammered an economy that grew increasingly dependent on commodities exports. Speculation over the Fed’s possible increase in interest rates led to a sizeable capital flight from Brazilian markets. The collapse of Brazil’s partly state owned oil giant, Petrobrás, which during the heydays in the past decade accounted for nearly 10% of gross domestic product, has delivered an enormous blow to the economy. A series of bribery schemes orchestrated alongside Brazil’s biggest construction and petrochemicals corporations drained the company’s coffers. With the fall in the oil price across the globe, years of incompetence and corruption have finally taken their toll. In the last year alone, Petrobrás has lost over half its market value.
Scenes of a recession: a job center in São Paulo
In the long term, the recession is the product of years of insufficient and inefficient spending on infrastructure, which has led to gargantuan bottlenecks and transportation and production costs (the infamous “Brazil cost”). As the flow of commodities dollars has stopped, Brazilians have become painfully aware of the cost of these inefficiencies. The misuse of financial capital during the boom years can be summarized by a quote from businessman Alan Goldlust: “We’re filling our stomachs but not our heads”. However, it is hard to address these problems now because nearly all major construction corporations have been caught in the legal turmoil surrounding Petrobrás’s downfall. Saddled with fines and prohibited from conducting business with the federal government, most of these corporations now face bankruptcy, adding to the present economic woes. Brazilian economist Eduardo Giannetti claims one of the most important causes to today’s recession is the institutionalized mismanagement of public funds. According to Giannetti, subsidies to well-connected companies and an ever-expanding government machine with an unjustifiable amount of public servants are the main hurdle to Brazil’s economy. He cites the creation of 1,300 sparsely populated new municipalities since 1988 as one such example of extraordinary public costs that carry little justification in terms of social gains or increases in productivity. Public sector pensions are “scandalously distorted”, he claims, and the old-style method of governing by handing out public offices (Brazil has over 40 ministries, with aberrations such as Sports and Fishing) has finally collapsed.
Brazil’s economic troubles are compounded by its political crisis. President Dilma Rousseff’s approval ratings are running on the single digits—Brazil is the one country in the world where the President’s approval ratings are below the rate of inflation. She faces stiff opposition in Congress, where politicians attempt to gain political capital by declaring war on her every policy. Calls for impeachment are growing louder.
There is, however, a silver lining. The current Petrobrás scandal has shown a strong and independent judiciary, unafraid of prosecuting and jailing top politicians and oligarchs. Compared to other emerging markets, Brazil has courts with teeth. As Mrs. Rousseff stated in her recent address to the U.N., “Brazilians demand that the law be the limit to all”. Discussion around the misuse of public funds has exposed the urgent need for far-reaching reforms in government spending and oversight. Public dissatisfaction and media backlash have served as a severe wake-up call to politicians who have for far too long considered public funds to be an extension of their bank accounts.
In spite of the economic storm, tech companies are still registering double-digit growth. This winter alone (the Northern Hemisphere’s summer), as the recession deepened, startups announced over USD$150 million in new funding. This is even more impressive when taking into account that only USD$650 million have been invested in Latin America as venture capital since 2010. Consumers are flocking to businesses that provide more practical and efficient approaches to everyday tasks.
Analysts agree Brazil has reached a tipping point. The old style of governance has been laid bare. Long needed infrastructural reforms, ranging from a simplification of the tax code and labor laws to the construction of modern railways to bring goods to port, are being demanded with unprecedented furor. It is now up to politicians and policy makers to decide whether the country will sink or fly once it is over this tipping point. As Anderson Thees, a leading tech entrepreneur, puts it, “When everything is great, people tend not to change behavior. People are more likely to pay attention to efficiency now, and they might be more willing to experiment with new things”.