Over the weekend, I was pointed to an article in the Wall Street Journal that reframed some of my thoughts on the curious position of Brazil’s current President, Michel Temer.
August 16, 2018, Wall Street Journal: Brazilians Denounce Their Leader, but Economists Offer Praise
As former Americas Economist editor Michael Reid recounts in his book, Brazil: The Troubled Rise of a Global Power, Brazil’s macroeconomic and fiscal issues are numerous, centered around a bloated and unsustainable budget and pension system, gross inefficiency in government spending, and endemic corruption that extend from local fiefdoms to national politics.
In his book, Reid claims that the go-go bullish years of President Lula Inácio da Silva, where investment surged into Brazil and millions of citizens were pulled out of poverty, was a lost opportunity for Brazil to modernize its governance and fiscal spending. Rather than using the tide of macroeconomic goodwill to implement reforms, Lula ramped up government spending, buoyed by the high price of oil, winning over the Brazilian population and leading President Obama to call him “the most popular politician in the world.”
President Michel Temer, on the other hand, has been dramatically unpopular in Brazil from his assumption of power in 2016, after the impeachment of President Dilma Rousseff for budgetary infractions. To many Brazilians, Temer is seen as illegitimate, the byproduct of a rigged and corrupt political system that kicked Rousseff out of office.
FORA TEMER – Signs, chants, and graffiti envoking Temer’s illegitimacy can be seen across Brazil, as seen in this image from a 2016 protest on São Paulo’s Avenida Paulista
However, this illegitimacy has had a somewhat counterintuitive impact on Temer’s tenure. It appears that Temer has made the calculation that while there is little change that he will reclaim any of the popularity, that that by planting the seeds for medium-term macroeconomic success through unpopular reforms, history will judge him by his legacy of setting the stage for the success of successive leaders.
Per the Wall Street Journal:
The team cut inflation from 9% when Mr. Temer took office to 3% last year, the lowest since 1998, helping to alleviate the strain on household budgets. In a country beset by budget overruns and high public debt, his administration won constitutional approval limiting government spending for the first time.
Mr. Temer also cobbled together the legislative backing to loosen labor law restrictions, leading to a 25% drop in job-related lawsuits. His administration opened up a moribund oil sector to foreign investment, auctioning deep-water oil fields that won the government a nearly $2 billion signing bonus.
Under his watch, Brazil’s central bank trimmed its main interest rate to a 6.5% historic low from 14.25% two years ago.
Through these actions, Temer seems to be using the example of former President Fernando Henrique Cardoso, the architect of the 1994 Plano Real as Itamar Franco’s Minister of Finance, and subsequent President. Cardoso is oftentimes seen as the father of modern Brazil, and the individual most responsible for setting the stage for Lula’s (and Brazil’s) success.
As the article cites, Temer has not touched the most controversial and dangerous fiscal threat: the country’s bloated and unsustainable pension obligations, but the steps taken have served to shore up much-needed investor confidence, and set the stage for the upcoming October elections. In a year without a clear frontrunner or hegemonic party in Congress, whoever wins the Presidency will likely have to secure a coalition of different parties, preventing much of the hard work left to be done. While the elected President still has a-ways to go to restore confidence in Brazil, Temer’s recent tenure has laid some of the groundwork for future success, a curious position for one the most unpopular Presidents in Brazilian history.