What I’m Expecting from Round 2 of the Brazilian Presidential Elections

Tomorrow (Sunday, October 28) is the second round of the 2018 Brazilian Presidential election, almost inarguably the most consequential in the modern history of Brazilian democracy.

After a landslide first round result which saw Jair Bolsonaro win 46% of the vote (short of the 50% required for an outright victory), Bolsonaro will face off against Workers’ Party (PT) candidate Fernando Haddad (winner of 29% of the primary vote) in a battle of the insurgent outsider versus the entrenched party politician; with one side promising to blow up the existing political institution, and the other one promising stability and a continuation of the Workers’ Party regime of Lula and Dilma Rousseff.

Since the October 7 primary, the polls have narrowing slightly, but continue to predict a rout for Bolsonaro: from an 18-point advantage (59/41) on October 18th to a 12-point advantage (56/44) this week. Late breaking news, including an endorsement of Haddad by the former head of the Supreme Court, Joaquim Barbosa, and an overtly apolitical non-endorsement by 3rd place finisher Ciro Gomes (positioning himself for a 2022 run), are unlikely to change the minds of many Brazilians.

In Brazil, the sides are as polarized as ever: to Bolsonaro supporters, and even just anti-Lula/PTistas, the idea of a Workers Party victory is so anathema that I genuinely fear how a Bolsonaro loss / Haddad victory would be received: almost certainly cries of electoral manipulation would follow, as well as manifestations across Brazil. Whether or not this would lead to violence would depend on the response of Bolsonaro himself. As we’re increasingly seeing in the United States, mild denunciations of violence are insufficient for avowed extremists. Given Brazil’s existing culture of violence and the already-incensed extremists among Bolsonaro’s faithful (resulting in acts of violence and even murder), it is safe to expect the absolute worst.

While many Bolsonaro supporters would consider themselves committed to Brazilian democracy, the prospect of 4 years of PT rule would likely lead to calls of a military intervention. Army Chief Eduardo Villas Boas has been mostly silent since his comments on the Supreme Court decision on Twitter regarding the imprisonment of Lula. Maybe alarmist, but if Haddad seems primed for victory, I would expect a response of some sort from General Villas Boas on Twitter.

In the increasingly more likely instance that Bolsonaro is elected, I would expect outward jubilation from Bolsonaro’s supporters, with manifestations in support of the newly elected President. Given the empowerment already felt by many of his supporters, there may be violence in the event of a Bolsonaro victory as well, violence that I suspect would be more targeted against supposed enemies – feminists, LGBT individuals, and other minorities. In the days following, I would expect to immediately assume a muscular posture through anti-gang and trafficking actions, followed by other punative actions meant to demonstrate his ‘zero-tolerance’ policy towards criminals in Brazil.

Meanwhile, the international press has been near-united in its opposition to Bolsonaro (as well as its general antipathy towards Haddad) and the expected consequences of the election and Brazilian democracy.

  • The Economist editorial – Containing Jair Bolsonaro (October 27): “his corrosive rhetoric may make Brazilians more receptive to autocracy in the future.”
  • A letter published in The Guardian – Bolsonaro threatens the world, not just Brazil’s fledgling democracy (October 25): “The international community, and in particular France and the European Union, must take action and support Brazilian democrats, regardless of the outcome of the presidential election.”
  • A letter published in Le Monde – Brazilians, don’t give up your values (October 26): “we wish to express our immense concern by addressing in particular Brazilian voters still undecided, so that they position themselves in favor of democracy.”
  • The New York Times editorial – Brazil’s Sad Choice (October 21): “a sad day for democracy when disarray and disappointment drive voters to distraction and open the door to offensive, crude and thuggish populists.”

Further, the New York Times has provided a consistent anti-Bolsonaro soapbox via ongoing editorials from Brazilian politicians (Lula – August 14), celebrity activists (musician Caetano Veloso – October 24), authors / commentators: (Vanessa Barbara – October 24 and October 2), and researchers (Robert Muggah – October 8).

The only pro-Bolsonaro editorial that I came across leading up to the election was from the Wall Street Journal, entitled “Brazilian Swamp Drainer” (October 8). Doubling as an endorsement of Bolsonaro, the article lauds Bolsonaro’s supposed “outsider” status, frames his alarming rhetoric towards racial minorities, LGBT, and other threatened communities as “traditional values,” and claims his opponent’s economic policies to be from the “Hugo Chavez playbook.” After recounting the failures of the PT era under Lula and Dilma Rousseff, the editorial concludes: “After so much political turmoil and corruption, it’s hardly surprising that Brazilians are responding to a candidate who promises something better.”

Taking into account the financial markets’ reaction to Bolsonaro’s result in the first round, the Journal’s editorial makes a lot more sense. The morning after Bolsonaro’s result, the Brazilian stock exchange, Petrobras (the national oil company), and the Brazilian real against the US Dollar, all bellwethers of international sentiment towards the Brazilian economy, all shot up. The conclusion is clear: the international financial markets and global capital are clearly placing their hopes on President Bolsonaro and the neoliberal economic stewardship of his minister Paulo Guedes. Again, how much this indicates a vote of confidence in Bolsonaro himself, or a statement against the Haddad and the Workers Party, is difficult to ascertain (a running theme.)

In the likely event that Bolsonaro does win, it will be interesting whether markets will rally further in Brazil’s favor, or whether much of the impact of Bolsonaro has already been priced in following the primary result.

The emerging markets investor Jean Van de Walle offered a more nuanced look at the published economic plans of both Haddad and Bolsonaro, entitled: What is it that the foreign press doesn’t get about Brazil’s Bolsonaro?. After acknowledging Bolsonaro’s tendency towards “loose lip[pedness],” Mr. Van de Walle points to a sentiment shared by many Brazilians: the Workers Party’s presiding over a disastrous span where Brazil’s economy failed to capture the growth in emerging markets to the long-term benefit of the country. Through mismanagement (and corrupt usage) of state-run assets and growing indebtedness during their tenure, the PT has become synonymous with wasteful spending, uncompetitiveness, and corruption. And per Van de Walle’s analysis of the published plans of both candidates, “Haddad offers a continuation of the failed policies of the past without any explanation for why they would now work, while Bolsonaro hopes to bring about a complete break.” While Bolsonaro’s plan, focused on privatization, decentralization, and free market orthodoxy, is certainly far too extreme for any country, let alone one as complex as Brazil, it is easy to see how the financial markets, where capital famously has no ideology, would pit their short-term bets on Bolsonaro’s ability to create a short-term turnaround bolstered by this market confidence.

However, as the New York Times and The Economist have pointed out, Brazil’s growing deficit and public debt loads and to-date unaddressed needs for pension and tax reform are creating a looming fiscal cliff, whereby Brazilian could reach 100% of GDP and trigger a recession. If no action is taken to reduce Brazil’s pension obligation by 2020, any gains over the next year or so would disappear, and Brazil would likely lose all investor confidence. Bolsonaro’s desire, and subsequent ability to push through these deeply unpopular reforms through a Congress where he will have few formal alliances will quickly prove Bolsonaro’s ability to effectively make difficult decisions that extend beyond mere rhetoric.

Meanwhile, as I speculated in my post on US/Brazil ties in the event of a Bolsonaro Presidency, Bolsonaro has begun to ramp up his rhetoric against the Chinese, signaling a likely cozying up to the United States following his election. Per Reuters in a fascinating analysis of Chinese-Brazilian relations, China is now scrambling to position themselves as a continued partner to the Brazilians and trying to sure up an annual $75B bilateral trade agreement. No doubt leery of many of the short-sighted trades of capital in exchange for control offered up by many emerging markets, Bolsonaro has positioned himself against Chinese involvement in Brazilian infrastructure investment, stating in a recent interview that: “China isn’t buying in Brazil, China is buying Brazil! Are you going to leave our energy in the hands of the Chinese?”

Considering his plans to privatize much of Brazil’s state-run energy sector, Bolsonaro is already sending a mixed message to the international investor community. Whether his rhetoric against China is a strategic attempt to woo the Americans, or an indication that Bolsonaro plans to pursue a Trump-esque nationalist trade strategy of alienating friends and enemies alike remains to be seen, but in either case runs counter to the economic orthodoxy of his supposedly deputized Minister Guedes. Either way, one has to feel some level of sympathy for Chinese class of diplomats and political and trade advisors, who will now have another confounding leader on the global stage, adding to what I’m sure has been a dizzying few years.

Expectations for Bolsonaro, Trump, and US/Brazilian Ties

Brian Winter from Americas Quarterly (my former intern-employer!) wrote a useful explainer entitled What to Expect from Jair Bolsonaro. It’s a realistic and useful look at what’s to come in the wake of Bolsonaro’s likely 2nd round election on October 28th. Underlying this likelihood, the first DataFolha polling released post-Round 1 has Bolsonaro winning 58% of the vote.

One aspect of the article that I left uncovered in my last post was Bolsonaro’s likely impact on US-Brazilian relations, and the expectation that he will firmly tether himself and his policies to Trump’s.

Per Winter:

Bolsonaro’s team has held meetings with U.S. officials in recent months – common practice during campaigns – and made clear that if elected he will be an exceptionally loyal ally on foreign policy. “It’s like (Washington) made a list of what it wants from Brazil, and they read that list back word for word,” said one person with knowledge of the discussions.

Indeed, you may have to go back to the “carnal relations” of Argentine President Carlos Menem during the 1990s to find a South American government that aligned so enthusiastically with Washington. What does it mean in practice? A much tougher line against Venezuela (and Cuba), full cooperation on anti-drug issues, the possible move of Brazil’s embassy in Israel to Jerusalem, withdrawal from the Paris climate accords, and enthusiastic support for Washington at the United Nations and other international bodies.

While alignment on these mostly US-centric policy goals may seem like minimal concessions to a country historically unconcerned with regional, let alone international policy, I’m especially curious to see if Bolsonaro will join Trump in its actions against China, which I believe is a much trickier tightrope to walk, given China’s existing entrenchment in the country.

It’s not impossible to imagine the US and Brazil joining forces in their economic strategy towards the Chinese. As I’ve written in the past (Trump, China, and the Americas – Part 1 and Part 2, and US/LatAm policy update) Trump’s distance and general incoherence towards a foreign policy in Latin American has created a vacuum that the Chinese has eagerly begun to exploit, propping up supportive, autocratic leaders via investment and long-term loans in exchange for access to land, consumers to purchase Chinese products, and benefits to Chinese soft power in a part of the world traditionally dominated by United States influence.

However, Bolsonaro’s ascendance may have essentially solved Trump’s LatAm problem for him – if President Bolsonaro completely parrots the US stance towards the rest of the world, and especially its antipathy or conflict-seeding towards China, a substantial wedge would be created in Latin America, where most of the countries are connected via free trade agreements. A muscular Brazil aligned with the US seeking to exercise its will as a regional power could force smaller Latin American countries to renegotiate trading terms with China, and fall in line with the new Brazilian order.

In the process, Trump/Bolsonaro and their respective trade and finance ministers could also set the stage for a US-Brazil free trade agreement along the lines of similar agreements recently signed with our Asian allies (useful explainer on Trump’s trade ‘strategy’ here per the NYTimes: Trump’s Trade Strategy is Coming into Focus). While likely inconsequential for Trump, I imagine this would prove incredibly popular in Brazil, where consumers routinely pay exorbitant markups on electronics and other imported goods, making Brazil the most expensive place to buy an iPhone in the world. Even Brazilians wholly unconcerned with politics would likely laud this accomplishment as a tangible result of Bolsonaro’s tenure and further his popularity in the country.

Winter concludes that Bolsonaro’s cozying to Trump is likely to result in less US (and international) criticism for extrajudicial killings and torture, as well as other actions that fall outside of the constitution or broader Democratic norms. If Trump’s defense of actions by Putin, Kim Jong-un, Duerte, and other leaders is any indication, this is a fairly safe assumption to make, and a dangerous outcome for a country that will become increasingly in need of international watchdogs and accountability.

For Bolsonaro and Trump, the likely election result seems like a win-win – in exchange for his fealty to Trump (something that Trump is sure to appreciate), Bolsonaro is likely to receive cozier economic terms and increased bilateral trade as a bulwark against China. In the process, there will be ample invitations to the White House, and plenty of opportunities to demonstrate his leadership in the country, region, and broader international landscape (something Lula unsuccessfully tried to do via quixotic mediations on the Iranian nuclear program, socialist/capitalist relations in Cuba, Venezuela, etc.)

For the “Brazilian Trump,” as he’s increasingly being labelled, Trump himself represents a gift-wrapped reset for the two countries, and vice-versa for the Donald. What a world.

Brazilian Elections Update – The people’s will: a Face-off between 2 polarizing candidates

Over what was a relatively slow news weekend considering our daily newscycle whiplash, the world turned its attention to the first round of the Brazilian elections, which took place on Sunday (10/07). Even John Oliver’s Last Week Tonight turned his attention to the state of affairs in Brazil, which is both a useful summary and much more entertaining than what you’ll read below.

If you’re still with me and eager to catch-up, here’s a quick round-up of my election-related posts over the past months:

Just to toot my own horn a bit, here’s my take back in March, three months into my time in Brazil:

As familiar as this story [Bolsonaro] sounds, the Brazilian people that I’ve spoken with aren’t yet convinced of the inevitable ascendance of Bolsonaro. As if seeking to validate my hypothesis on the ability of outsiders to evaluate a political temperature, they claim that cooler / more sensible heads will prevail, and that a more palatable, middle-of-the-round candidate (such as former Governor of Sao Paulo Geraldo Alckmin, or former Governor of Ceara Ciro Gomes) will rise above the fray to become the next President of Brazil, as if asking a populace to eat its vegetables, as opposed to the more immediate and attractive short-term “sweets” of Bolsonaro – the law and order, by any means necessary, candidate. To me, this seems like an inevitable outcome and a continuation of the global populist trend.

I’m oftentimes reluctant to offer predictions with any level of certainty, given my conviction in the occurrence of Black Swans and the reality that in fact no one really knows much, but in this case, considering my status as an outsider looking in, I feel like this diagnosis is appropriate. Regardless, an exciting year to come.

While there has certainly been a great deal of twists and turns since March, the economy has remained sluggish, with extremely high rates of unemployment and unabated and alarming crime statistics. Several weeks ago, the Financial Times published a series of helpful charts that contextualized much of the malaise felt by Brazilians leading up to the Presidential elections, entitled In charts: what is bothering the Brazilians?.

While not copying at risk of reproach from FT’s draconian copyright policies, the highlights include:

  • An unemployment rate in excess of 12%, the highest in Brazil’s recent history (since 1984)
  • A country whose GDP contracted 7% from 2015-16 and continues to slowly recover from its worst recession in history, levels unseen since the pre-Real days of hyperinflation in the 1980s and early 90s (another plug for this enjoyable NYTimes op-ed on the topic)
  • Over 64k ‘intentional’ and documented homicides over the past year, a number that exceeds the United States and all of Europe combined (h/t John Oliver for the comparison)

Combine these depressing statistics with Operation Car Wash, and it is easy to see why Brazilians are so disgusted with the state of affairs in the country, leading about 85% of voters to conclude that the country is heading in the wrong direction. The wide-ranging investigation into political corruption implicated most of Brazil’s ruling political class and leading political parties, namely the Workers Party (PT) (home to the now-jailed Lula), the Brazilian Democratic Movement (PMDB, President Michel Temer’s party) and the Brazilian Social Democracy Party (PSDB), as well as several of its prized private and private-public sector enterprises, including Odebrecht (construction), Petrobras (oil & gas), and JBS (meat) in graft, bribery, and corruption that totals in the tens of billions.

Amid these circumstances, Bolsonaro’s first round supremacy, where he captured somewhere around 46% of the vote (just short of the 50% threshold for outright victory) is hardly surprising. In a now all-too familiar story, despite Bolsonaro’s lack of access to the typical political organization and traditional campaign tools (including the support of a political party and minimal representation on tv ads), he was able to achieve a massive victory. Using social media (the NYTimes amazingly reported that Bolsonaro spent just $235,000 in support of his campaign, against Haddad / PT’s $6.3M), specifically Facebook and Whataspp, to spread political memes and personal messages directly to the electorate, Bolsonaro was able to build a broad coalition of individuals young and old and across the country (excluding the North East). Like Trump and as a seven-term representative, Bolsonaro was hardly an outsider, but he sold himself as incorruptible and unconnected to the political class, which is technically true, given his limited record of actual Congressional legislative success.

Brazilian voter dissatisfaction did not merely extend to the Presidential elections. Impeached President Dilma Rousseff, who continues to be seen as a martyr by her supporters after being impeached from office in 2016, was romped in a senatorial election in her local Minas Gerais that she was expected to win on name recognition alone. Former Environmental Minister Marina Silva, who won over 21% of the vote in the 2014 elections, received just 1% of the 1st round vote, just shy over 1m votes. To the delight of most Brazilian voters, many of the mainstream politicians have been thoroughly rebuked.

As the world is beginning to notice via the #EleNao campaign and international election coverage, Bolsonaro is a well documented homophobe, misogynist, and racist, as well as a former military commander who expresses sympathy for the torture-laden military dictatorship regime that led Brazil for more than 20 years. In one of the world’s largest (and relatively young – just since 1988!) democracies, a man who is being likened to Trump (somewhat simplistically), and more recently to Hungarian President Viktor Orbán and Filipino President Rodrigo Duerte for his populist and authoritarian bent is just three weeks away from assuming the Presidency.

The always-fascinating Robert Muggah of the Instituto Igarapé, a Brazilian think-tank, wrote an op-ed piece in the NYTimes that I think is a useful summary of the uphill climb that Brazil must undergo over the next years, which will only be further complicated by Bolsonaro inevitable election. Trust in politicians, whether at the local, state, or national level, is as low as it’s ever been, which is part of Bolsonaro’s appeal. His solutions are extragovernmental, or overly simplistic so as to ignore the political process.

His challenger, the PT’s Fernando Haddad, winner of 29.3% of the vote, represents a party that was at the forefront of much of the graft and corruption that has made Brazil a source of national embarrassment, and continues to be maligned by much of the Brazilian populace.

The New Republic optimistically posted an article in the wake of the first round results, entitled The Man Standing Between Brazil and Authoritarianism. In the coming weeks, I believe we’ll see many such articles imploring Brazilian voters to unite around Haddad as the lesser of two evils. Unfortunately, I believe this article, and the hopeful opinions of many are too optimistic about Haddad’s chances. While I believe the economist and University Professor Haddad is much more of a centrist than he lets on (or at least hardly the radical communist his detractors paint him as), his party has chosen to tether him directly to the jailed Lula, rather than trying to offer any nuance to the Brazilian electorate. As lampooned in John Oliver report (and personally seen in campaign posters), the Workers’ Party has essentially created a situation where Haddad is a glorified Lula ‘stooge,’ as the Party has tried to capitalize on the jailed former President’s popularity rather than actually try and field a differentiated candidate.

Two interesting graphs shared by economist and Linkedin commentator Ricardo Amorim contextualize the ubiquity between Haddad, Lula, and the Workers’ Party, and the PT’s decline in popularity, and continued stronghold on the Northeast region of Brazil. As many point out, Lula’s tenure saw millions of Brazilians brought out of poverty, both via macroeconomic headwinds and as recipients of Lula’s most famous government program that won plaudits around the world, the cash-for-school attendance Bolsa Familia.

Graph one:  The States (in red) where the Workers’ Party won the majority in the First Round

pt_graph_one

Graph two:  The % of the population (per State) who participate in the Bolsa Familia financial assistance program:

pt_graph_two

As seen by the lower proportions in the South and Southeast regions of Brazil, it is not hard to see how resentment has been stoked by the right-wing Bolsonaro against the PT and the North East, leading to further division and a stark choice between the right-wing Bolsonaro and leftist Haddad. Playing into this false dichotomy, the Brazilian real and stock exchange (up 5%) were strongly positive today, indicating a clear-preference for Bolsonaro’s simplistic calls for privatization and market friendly policies, and his temporary deputization of the economy to the Chicago-educated Paulo Guedes. For those in the US reading this – remember Gary Cohn?

In a country with tens of political parties, it is hardly surprising to see the second round results pit the anti-party Bolsonaro (with 50% disapproval ratings) against the entrenched Workers’ Party (with 50% disapproval ratings). Unfortunately, most centrist voters who voted for other candidates in the first round are likely to opt for Bolsonaro over the Workers’ Party. The socialist failure of Venezuela is at the forefront of the minds of many, and given the pandering / squandering of the Dilma Rousseff regime (Lula’s successor from the Workers’ Party), with its political corruption, redistribution of wealth, and mismanagement of government-run businesses.

As the Economist summarizes in an article alarmingly entitled Brazil is shaping up for a unique kind of financial crisis, the next President of Brazil will have to tame an ever-increasing government spending situation, including a bloated pension system that will only continue to grow (now at 55% of public spending). As the Magazine notes, an inability to adequately address the fiscal deficit and indebtedness in the 2020 Budget will spell near-collapse, and certain capital flight, a falling currency and rising bond yields.

This is the situation that the next Brazilian President will inherit. Outsider or not, we will soon see the result of the will of the Brazilian people, and its downstream impact. In typical lighthearted yet dour Brazilian fashion, all I can say is that it won’t be boring, and will continue to be educational.

 

Latest Polling and Pension Paralyzation in Brazil

One continued theme of my analysis of the Brazilian Presidential election has been the parallels between the insurgency of Trump in the United States, and the continued rise of Bolsonaro in Brazil. In both cases, the candidates have been able to leverage their status as outsiders to the political system, general dissatisfaction with the status quo within the electorate, and a general weakness / unlikeability among mainstream candidates to their advantage. Both candidates have been doubted for their ability to win over female and minorities voters based on unhinged campaign comments, and for their inability to competently govern if/once elected.

The main difference between the two candidates is their likelihood of being elected – while Trump was seen as a long shot even on election night, Bolsonaro has managed to capture the vacuum from Lula’s ineligibility and fracturing among the left to take the lead in the polls, and is now seen as a near-certainty to make it past the October 7th first round and into the second round of the Presidential election.

Late last week, the Folha de Sao Paulo released its latest polling data from its research apparatus, Datafolha and another data company, IBOPE, the first credible polls released since Bolsonaro’s stabbing in early September (covered last week).

For the first time (that I’ve seen), the data is broken out to provide a clear picture of the Brazilian electorate and their preferences by sex, age, race, region, education level, and wealth. The data provides an surprising picture of Bolsonaro supporters, and some similarities and other breaks from the parallels seen between Trump and Bolsonaro and their assumption to the Presidency.

Per exit polling that has since become canonized by op-ed reporters, analysts, and aspiring bestselling authors since, Trump was able to take the White House on a coalition of voters that leaned male, older, and white. Indicators along education and wealth followed one’s race – both poorer and less educated and richer and college-educated whites leaned Trump, while poorer, richer, educated, and uneducated non-Whites alike overwhelmingly voted for Hillary. Trump dominated among catholics and evangelicals / protestants, while Hilary was even stronger among Jews, Muslims, and atheists / non-practicing individuals. The data demonstrates that US partisanship and division is as strong as ever, and drawn along very clear-cut lines: age, race and religion.

Surprisingly, the polling data seems to indicate the Bolsonaro has managed to create a wider and more diverse coalition than the left/right divide in the United States:

  • Sex: Bolsonaro dominates among men (35%), but also boast a much smaller %, but still leading % of female voters (18%)
  • Race: While Bolsonaro dominates among ‘white’ Brazilian voters, growing to upwards of 35% of the vote in the past week, Bolsonaro also leads among ‘black’/’brown’ voters (22%) and ‘others’ (20%), widening his lead in each category over the past week.
  • Age: Interestingly, Bolsonaro has managed to capture the imagination of voters across all age groups, from as young as 16-24 (28% of the vote) to voters 55 and over (26%)
  • Education level: Bolsonaro has a slight advantage among less educated voters (19%), but a surprisingly large lead (29%) among the electorate with a ‘superior’ level of education, referring to college educated voters
  • Income: Bolsonaro narrowly leads among a crowded group for poorer voters, while his support grows as income levels grow – reaching 35% for individuals making 5x the minimum monthly salary
  • Region: With the exception of the Northeast, long seen as a stronghold for the Workers’ Party and Lula (though interestingly Ciro Gomes, not Lula’s handpicked successor, Fernando Haddad, leads), Bolsonaro carries the other regions of the country, with as much as 37% of the vote in the generally whiter, more religious, and more conservative South region of the country
  • Religion: Among evangelicals, catholics, and ‘others,’ Bolsonaro leads. While Trump managed to attract Evangelicals for lack of a better option, it is interesting that Bolsonaro leads ahead of Marina Silva, an outspoken Evangelical herself.

As expected, the stabbing seemed to underline the message that has continued to resonate among Bolsonaro voters – the need to reign in public safety and security ahead of all other considerations in the country — the economy, education, etc.

One interesting wrinkle that helps explain some of this data was covered in detail this weekend as part of the Financial Times’ ‘Big Read’ section: ‘Robin Hood in reverse’: the crisis in the Brazilian state.

As the article explains, Brazil is an incredibly unique country for the stark contrast between its  tax levying apparatus and tax rates that rival developed countries like the United States and United Kingdom, and government services, investment spending, and economic / social indicators comparable to poorer countries across the development world. At the core of this juxtaposition is its incredibly bloated, inefficient and unfair pension system, consuming 23% of GDP.

As deftly recounted in Michael Reid’s book Brazil: The Troubled Rise of a Global Power (reviewed here), Brazil has long mismanaged its investment spending, concentrating its focus on public universities (free for attendees), military spending, and lofty infrastructure projects (most famously the World Cup and Olympics), while ignoring more fundamental education, healthcare, and infrastructure investments. In the process, Brazilian public-sector, civil, and military servants have created an increasingly bloated and unstable pension system, making any course correction or investment reallocation extremely difficult.

Even Michel Temer, whose unpopularity gave him a mandate to shore up some of Brazil’s most intractable and democratically difficult competitiveness issues, was unable to push through any changes to the pension system, which understandably continues to be the most politically toxic issue in Brazil.

While the US and UK concentrate its income transfers to the poorer classes through systems such as welfare and social security (92% to the poorest 10% in the UK, versus 2% for the richest 10%), just 31% of all income transfers go to the poorest 10% in Brazil, while a comparatively ridiculous 23% go to the richest 10%. Even more egrigiously, in state pension systems 53% of income transfers go to the richest 20%, with an embarrassing 2.5% going to the poorest 20%.

As a NYTimes investigation back in 2015 explains, the average retirement age in Brazil is 54, and many early retirees manage to collect full pensions for the remainder of their lives. Through commonly-known loopholes and Brazilian laws, oftentimes spouses and families of former civil servants and military servicepeople are able to collect pension benefits even after the receipt has passed away. Politicians and judges have long been seen as the most lucrative recipients of the pension system estimated to earn $4,000 – $6,000 per month on average by the FT.

As the FT article explains further, crony capitalism limits tax receipts to government-affiliated companies and others through a series of well-intentioned (but unrealistic) legislation initiatives, incentives and loopholes, has placed an undue tax burden on relatively poorer individuals, who do not benefit from the incentives given to small- and medium-sized businesses. Brasilia-based special interest groups serve to perpetuate these benefits and loopholes, deploying their electorate and pocketbook power to protest any changes to the existing system.

In the process, Brazil has seemingly copied the US income-based taxation system and the Chinese example of state-led encouragement of industrialization through tax benefits and incentives, and combined it with a Scandinavian approach to labor laws and a Greek pension system. The result is a system that “already consumes more than 90 per cent of the federal budget and, if nothing changes, will reach 120 per cent in the next decade.”

Bolsonaro, as a former member of the military and neither an economist nor a(n) (experienced) politician, has demonstrated little will to change the lucrative pension system nor any of the other existing loopholes, likely winning him significant support among Brazil’s vast civil service and aging electorate, akin to Trump and Clinton’s (and every US Presidential hopeful in recent memory) insistence that they will not touch the faltering and unsustainable US social security system.

Rozane Siqueira, a professor of economics at the Federal University of Pernambuco, has coined this system “Robin Hood in reverse,” whereby the rich are inordinately rewarded relative to the poor.

When Siqueira was asked why are the poor not out in the streets in protest of these gross inequities, she responded: “That’s a question I ask myself. It’s shocking.”

Updates on Brazil, Venezuela, Argentina, Central America, and US/LatAm policy

There has quite a bit of interesting and/or alarming US/Latin America-related news over the weekend:

Financial Times: Argentina creaks under extreme stress (Sept 7, 2018)

“if Mr Macri’s technocratic government, which heads the G20 and has followed economic orthodoxy while also enjoying full international support, cannot ride out fickle markets, who can?”

Trump’s strengthening of the US dollar, Turkey’s ongoing economic struggles and related contagion, and Argentina’s significant indebtedness have led to a significant devaluation of the Argentine peso and a rush to shore up the government’s coffers via a $50B IMF loan.

Unlike many Latin American leaders and Argentinian predecessors, Macri has mostly followed austerity-based economic orthodoxy and market-first principles in trying to assure investors and international markets of Argentina’s resilience. However, Marci’s upcoming reelection in 2019 is looming, and criticism levied by his political opposition is continuing to mount. Complicating matters further is general Argentine antipathy towards the IMF, who previously put the country into extreme austerty after it defaulted on a 2001 loan.

In the background, the Argentinian public sector, including former President Cristina Kirschner, have been implicated in upwards of “$36 billion”  in public contract graft and broader corruption reminiscent of to Brazil’s Lava Jato scandal. Per Macri, a longtime opponent of Kirschner and her populist agenda: “This beats watching Netflix.”

 

New York Times: Stable After Attack, Brazilian Candidate May See Political Fortunes Rise (Sept 7, 2018)

“This plays straight into his message: the security issues, the violence and the need to address those issues. There are still a lot of undecided voters. It might be that a number of them now say ‘Bolsonaro is our guy.’”

My Whatsapp feed, the ubiquitous social media app known in Brazil as “Zap,” blew up on Friday afternoon with live images of the stabbing of Brazilian presidential candidate Jair Bolsonaro. As the video clearly demonstrates, while Bolsonaro was being paraded through doting supporters, a man approached him and stabbed him in the abdomen.

For a reviled candidate who has been hugely critical of Brazil’s violence, and the inability of mainstream Brazilian politicians to adequately address the violence issue, the stabbing seems to play directly into Bolsonaro’s hands, and has led many to predict that this episode will further strengthen his lead ahead of the October 7th first-round Presidential election.

Following the Supreme Court’s judgment of Lula’s ineligibility to run in the election, Bolsonaro leads a crowded pack of aspiring Presidents in the low-20s, with several center-left/left wing candidates trailing him with 12% of the vote.

As the electoral hour of Presidential coverage has begun, one of the common discounts levied against Bolsonaro is the weakness of his political party, leaving him with under 8 seconds of television time for every 12.5 minute bloc of Presidential political coverage, far behind the leading 5 minutes, 30 seconds for Geraldo Alckmin. However, tv news has been transfixed on the stabbing and Bolsonaro’s recovery at São Paulo’s Albert Einstein hospital, effectively serving as a supplemental platform for Bolsonaro and his views.

Subsequent conversations with Brazilians has led me to believe that Brazilians are increasingly recognizing Bolsonaro as a more serious candidate, and to some a near-certainty to make it into the October 28 second round of elections. Defenders of Bolsonaro sexist, racist, and anti democratic past have become more vocal, as have the doubts from his detractors of his ability to win the second round (“what about the female vote?”), as well as his ability to govern and create a coalition post-election. Again and again, the similarities between Bolsonaro and Trump rear their head.

 

NYTimes: Trump Administration Discussed Coup Plans With Rebel Venezuelan Officers (Sept 8, 2018)

In a series of covert meetings abroad, which began last fall and continued this year, the military officers told the American government that they represented a few hundred members of the armed forces who had soured on Mr. Maduro’s authoritarianism.

Back in February, then-Secretary of State Rex Tillerson raised the prospect of a potential Venezuelan military-led response to the ongoing disaster in Venezuela, which has led millions to flee the country and has left the majority of those remaining subject to constant food shortages and hyperinflation. However, it appears as if Trump has been transfixed with the idea of military action in Venezuela for some time, raising the idea of a military “invasion” of Venezuela, first with his military and diplomatic advisors (the now-ousted Tillerson and McMaster), and then with Latin American leaders including Colombian President Juan Manuel Santos and others. Now, the NYTimes is reporting that a potential military-led coup in Venezuela is not just bluster: there has been US-Venezuela discussions via backchannels regarding a potential military-led rebellion.

As the article recounts, following news leaks of President Trump’s comments on a military option in Venezuela, rebel officers reached out to Washington (again, it seems), seemingly curious whether Trump’s endorsement could lead to concrete support by the Americans. However, the US did not provide a definitive response and many of the plotting officers were detains, and suspected to have been subsequently tortured for their role in the potential plot.

The article also mentions previous attempts by President Obama and his administration to weigh the potential benefit of allowing the Venezuelan military to unseat the Maduro administration against the potential backlash associated with another in a longstanding record of US-supported anti democratic interventions in Latin America, as well as the US’ low opinion of the Venezuelan military, seen as corrupt and complicit in the illegal drug trade in the region. The article presents division within the Obama White House, with some believing in the military’s ability to transition to democracy in the country, and others highly skeptical.

With the aerial drone-based assassination attempt of Maduro last month and the subsequent crackdown on his opposition, and the now-confirmation of the US’ potential role in a military coup, it is likely that Maduro will feel empowered to act with further impunity, creating even-worse conditions in the already beleaguered country.

 

NYTimes: U.S. Recalls Top Diplomats From Latin America as Worries Rise Over China’s Influence (Sept 8, 2018)

“Trump has openly and systematically offended Latin American countries and their people. He labels us as rapists and criminals, has never traveled to the region as president, has deported and separated families, and threatened to cut all sort of aid. China comes with an offer of friendship and economic development (albeit one that I don’t think will pan out). Why the surprise?”

As recounted back in March, China is quietly and effectively asserting itself across the world in an attempt to unseat (or join) the US as leaders on the international stage. Through its belt and road initiative and infrastructure investments across Africa (mostly built by imported Chinese workers), China has been building physical infrastructure across the world in an attempt to increase trade and Chinese exports to these regions, use “soft power” to build Chinese goodwill around the world, and to develop surveillance, intelligence, and military capabilities around the globe (as in the frightening case of the Chinese space station in Chile).

To finance these projects, the governments often sign convoluted deals with the Chinese construction and infrastructure banks that are oftentimes “junk” at signing, i.e., highly unlikely to be repaid. Clauses inserted in these financing contracts allow for Chinese possession of sovereign assets in case of non-payment.

In Zambia, the national power utility ZESCO, as well as the state-owned TV and radio news channel ZNBC are either at risk or already Chinese-owned due to the government’s default on more than $8B in loans. In Sri Lanka, who is more than $3B in debt to the Chinese, the Hambantota Port has been taken over by the state-owned China Merchants Port, creating the awkward situation whereby China now has land and sea access in a sovereign nation.

In an letter written by members from both parties of the US Senate addressed to Secretary of State Mike Pompeo and Treasury Secretary Steve Mnuchin, the Senators call Chinese loan efforts to poor countries ‘debt-trap diplomacy’ and ‘predatory Chinese infrastructure financing’.

Rather than previous liberalist attempts by the US and its allies to tie foreign direct investment to democratic elections and press freedoms, China has made little requests of the sovereign nation/debtors, to the delight of the oftentimes democratically elected leaders. However, one fairly consistent request from China has unwavering and consistent: an adherence to its One China policy, and a subsequent severing of diplomatic ties and recognition for Taiwan.

As the Senators write in their letter, “Beijing’s attempts to weaponize capital is not just limited to Asia and Africa, but extends to Europe,” before citing ties via the Belt and Road initiative to countries in the Balkans such as Montenegro and Serbia. It appears as if the Senators, like Trump so many times over in the first years of his Presidency, overlooked even closer neighbors to the South.

Now, the United States has taken the dramatic action of removing diplomats from three Central American countries with historically warm ties: Dominican Republic, El Salvador and Panama, after each of the countries have severed diplomatic ties with Taiwan, no doubt in an attempt to appease their Chinese benefactors. Due in part to Trump’s indifference, these leaders see the entrance of China and the few strings attached to Chinese capital as a counterbalance to the longstanding US-led hegemony in the region. As the article recounts, there are further fears that the four Central American nations that still recognize Taiwan (Belize, Guatemala, Honduras and Nicaragua) could soon disavow Taiwan as well, complicating matters even further not only for Trump and his administration, but for longstanding ties and goodwill in the region.

Brazilian election update: Lula ruled ineligible

As outlined in a post last week, while onlookers around the world advocated for allowing Lula to run in the upcoming Presidential election, many Brazilians already discounted his electoral status. Given his ongoing incarceration and the ‘clean slate’ law, which prevents potential candidates with criminal records from running for office, it was unlikely that Brazil’s Supreme Court would overturn this law.

The principal argument from the international community was that enabling Lula to run would demonstrate the strength of Brazil’s democracy, and any prevention of his ability to run as politically motivated and an overstep of authority by Brazil’s courts. Lula was seen as the far-and-away frontrunner among a fractured and chaotic pool of candidates, with a solid base of support among Brazil’s working and poorer class.

Lula’s involvement in the endemic corruption exposed in the Lava Jato scandal, the reason for his continued imprisonment, sends a strong signal that even Brazil’s political elites are not immune to prosecution. On the other hand, there is no doubt that while Lula continues to be a powerful figurehead, there were, and continue to be, many other members of the ‘elite’ involved in Brazil’s ongoing political corruption, and remain free to enjoy their accumulated wealth, and even continue to run for political office.

Late last night (August 31st), ahead of the official start of the political campaigning season, the Supreme Court affirmed that Lula would be ineligible to run in the upcoming election. As part of their decision, the Court gave Lula’s party, the Workers’ Party, 10 days to appoint a new Presidential candidate.

The heir to Lula’s candidacy for the Workers’ Party, former São Paulo mayor Fernando Haddad, has a very different background than Lula, whose working class roots and origin story, enshrined in the 2009 film Lula, Son of Brazil, have created a strong political mythology that continues to resonate across Brazil. While Lula has led the polling with as much as 40% of the vote, Haddad has failed to capture the imagination of the Brazilian populace despite Lula’s endorsement, only securing 4% of the likely voters in recent (but pre-decision) polling.

lula-hThe economist/academic Fernando Haddad and the former metalworker and union leader Lula, both members of the PT at a political rally

While some have deemed the Court’s decision as rushed, a ruling was much-needed and anxiously awaited by the rest of the candidates, just 40 days ahead of the October 7th first round vote. In the coming weeks, Haddad and Lula will increasingly cast themselves as inseparable, with Haddad as the executor of Lula (and the people’s) will. Whether or not Haddad will manage to win over Lula’s base of support remains a key question for predicting the outcome of the first round election.

Regardless, Lula’s ineligibility has created the feared scenario of a broad fracturing on the left, between the handselected candidate, Haddad, Lula’s former environmental minister mostly left of Haddad, Marina Silva, the center-right candidate, Geraldo Alckmin, Ciro Gomes, and other more fringe candidates.

Given his party’s strength, Alckmin will be propped up by the most television time during the ‘election hour’ — the legally-mandated proportional representation of political propaganda shown on public television during Brazil’s “primetime” hours leading up to the election. The “electoral hour,” a particularity of Brazilian politics, whereby political candidates (Presidential, Congressional, and state/local) are given free airtime upwards of 70 minutes, all shown free of charge. As mentioned above, the proportionate amount of time dedicated to each candidate is determined by the strength of the candidate’s party representation in Congress.

Given the two-round structure of the Presidential elections, whereby the top two candidates from the October 7th first round advance to a two-candidate second round (held October 28th), it’s easy to envision a scenario whereby infighting on the left results in a single member of the aforementioned candidates reaches the second round, joined by the right-wing Jair Bolsonaro. Bolsonaro, who has been polling in second place behind Lula, will have very little television time as a member of the relatively unknown and curiously named conversative ‘PSL,’ or Social Liberal Party.

In this scenario, it will be interesting to see whether the left/center unifies around a single Second Round candidate, or whether Brazil’s endemic corruption and distrust of the political class will drive undecided voters to the ‘incorruptible’ military man Bolsonaro. Among the Brazilians I’ve spoken with, there is a strong sense that voters will coalesce under the ‘Never Bolsonaro’ platform, as opposed to any single candidate. However, as I’ve tried to remind my Brazilian friends, anything can happen, including the previously unimaginable, as the scenario elucidated above continues to seem shockingly close to the circumstances of Trump’s rise to power. Beyond widespread uncertainty, the election will be a strong test of strength of party politics (Alckemin, Haddad), versus forces of personality (Bolsonaro, Marina Silva) that will be studied by political scientists for decades to come.

It will be interesting to see how the financial markets react to the Court’s decision on Monday, as the Real has taken a beating against the dollar over the past week, reaching as high as 4.21 before settling at 4.055 by week’s end.

Brazilian Presidential Elections, August 2018 – A “no win” situation?

Here in São Paulo, the city is beginning to come out of its winter season (July / August), a return to the relentless heat that makes up much of the year. Seven short weeks ahead of the first round of the Brazilian election, it feels as if election season is similarly beginning to ‘heat up.’ Before long, I expect the coming elections, arguably the most consequential since Lula’s ascendance in 2002, to embroil the country – inescapable from even passing conversations.

As an outsider to Brazil, I am admittedly insulated from the incessant news media and their daily stories recounting a statement made or question asked on the campaign trail. Even the notorious ‘horario eleitorial,’ a hour each night on broadcast television dedicated to proportionally representing the Presidential candidates (a fascinating breakdown here), will largely pass me by. As a result, much of my media consumption related to Brazilian politics take place via foreign correspondents and contributions to English-language publications. It’s been fascinating to contrast the increasing alarm making its way to international news consumers with my day-to-day conversations with Brazilians.

English language publications are mainly focused on two main stories: the continued and problematic ascendence of Jair Bolsonaro, which I’ve discussed before at length, with yet another red flag raised in the NYTimes’ opinion pages, and the no-win situation surrounding the electoral status of former President Lula da Silva. Lula has increasingly become Brazil’s most divisive figure, adding to his long-held status as its most popular. Since April, Lula has been imprisoned related to a ongoing investigation into corruption allegations, though he has remained a vocal member of the political press, disseminating statements through his lawyers and political allies.

As Reuters explains, over the next week the Brazilian courts are faced with determining whether or not to allow Lula to formally run for President. Given conviction in the “Lava Jato” corruption scandal for accepting bribes in exchange for state contracts, and various related corruption charges either underway or in ongoing appeal, Lula should be ineligible for running for President based on the “Clean Slate” law, passed by Lula himself in 2010.

Lula maintains his innocence on any claims of corruption, and critics and democracy advocates alike have cited the flimsy evidence behind his conviction, as well as accusations of political motivation behind his ongoing imprisonment. Despite his imprisonment and the claims of corruption that have shrouded him throughout the Lava Jato investigation, Lula remains extremely popular to many, and a political prisoner to some, who rally outside of the Curitiba prison that he’s being held in. If permitted to run, Lula would immediately become the frontrunner in the coming Presidential elections, presenting a vexing dilemma for the judges and a test of Brazil’s post-dictatorship democracy.

In the NYTimes, Lula was given an audience in the pages of the Opinion section (also available in Portuguese), calling for his release and citing an “extreme right-wing” conspiracy, led by Judge Sergio Moro but perpetrated by “right-wing, neoliberal elites who have always been opposed to our struggle for greater social justice and equality in Brazil.”

Meanwhile, the US Congress recently took the extraordinary step of writing a letter addressed to Sergio Amaral, the Brazilian Ambassador to the United States calling for the due process of Lula, conflating his imprisonment with the horrific murder of the activist Marielle Franco and the horrific human rights violations and murders associated with Brazil’s landless movement (a shocking and underdocumented crisis, as ably captured in the NY Review of Books). The letter, which includes members at the vanguard of the modern Democratic Party (Bernie Sanders, Keith Ellison, and Maxine Waters),

We also urge Brazil’s judicial and political authorities to ensure fair elections and human rights protections. We recommend that Brazil’s courts promptly assess the merits of the charges against President Lula, in which no material evidence has yet been presented as proof of the former president’s corruption charges. European former government leaders have urdged that President Lula be granted freedom while appeals to his conviction are pending, in accordance with Brazil’s constitutional guarantees. The fight against corruption must not be used to justify the persecution of political opponents or deny them the right to freely participate in elections.

In my conversations with Brazilians in São Paulo (far from a Lula stronghold), there is little doubt that Lula will be disbarred from participating in the election. Bolstering this viewpoint, there is speculation that Lula himself deems his eligibility as a foregone conclusion, but is seeking to keep hope alive among his supporters for as long as possible to prop up the electoral prospects of his partymate, Fernando Haddad and his Workers’ Party. As Reuters reports, Lula has “transformed his jail cell into his campaign headquarters

Jorge G. Castañeda, Mexico’s former Mexican foreign minister, penned an editorial in the NYTimes, weighing the case against the risk of disenfranchising millions of Brazilian voters, who believe deeply in his innocence regardless of any evidence plied against him. He ultimately advocates for Lula being allowed to run on the grounds of strengthening democracy in Brazil, and also as a “best-worst case” in comparison to the right-wing reactionary candidacy of Bolsonaro. Sound familiar?

Castañeda lays out the no-win situation left for the judges:

In the end, though I believe that the Lava Jato scandal, as well as the diligence of judges like Mr. Moro, have served Brazil and Latin America well, I prefer to see Lula on the ballot than in jail.

The charges brought against him are too flimsy, the purported crime so petty (until now), the sentence so brazenly disproportionate and the stakes so high that in Latin America today, democracy should trump — so to speak — the rule of law. In an ideal world, the two go together and certainly do not clash with each other. In Brazil, they do. I’ll go with democracy, warts and all.

Regardless of the judges’ decision next week, there are sure to be fireworks to come — for now, it’s just a question of from which side.