Can We Learn Any Lessons From Brazil?

Probably, you haven't been much following the news coming out of Brazil.  If you had, you would have seen that last week ex-President and left-wing icon "Lula" da Silva was convicted in his corruption trial and sentenced to 10 years in prison.  Lula, who rose up as a charismatic labor leader and left-wing rabble rouser,  had served as President of Brazil from 2003 to 2011.  His hand-picked successor from the same political party, Dilma Rousseff, was accused in the same corruption scandal.  Rousseff was impeached (charged) back in April 2016, and formally removed from office by vote of the Brazilian Senate in August.

The corruption charges basically center around the cozy relationship that left-wing politicians seem inevitably to form with the major state-controlled economic institutions that are the hallmark of left-wing governance.  Wikipedia has a synopsis of the complex situation here.  During Lula's term in the presidency, Rousseff, as his right-hand woman, served as the Chair of the Board of Petrobras, the monopoly state-owned Brazilian oil company.  The most significant charges against Rousseff were that, during the time that she chaired the Petrobras board, she took large bribes from oil services contractors to get some billions of dollars worth of Petrobras business directed to them.  As to Lula, the charge on which he was just convicted involves a contractor refurbishing his beach apartment for the relatively modest sum of just over $1 million.  The Reuters article at the first link above notes that he is also accused of orchestrating the entire massive corruption scheme in which dozens of Brazilian politicians have been caught up, and that he faces some four more trials.  However, other articles I have seen do note that Lula (unlike many of his party colleagues) does not seem to have taken the opportunity to get extraordinary wealth for himself.

The easy lesson to learn here is that corrupt politicians need to be caught and punished.  Fair enough.  But before the world moves on from the tragedy of Brazil, I just want to note a few items that seem to be a pattern in essentially all populist left-wing governments:

  • In the early years in power, government-produced economic statistics seem to show rapid economic growth, improvements in wages, declines in poverty and income inequality.
  • Then one day, the economy suddenly goes into free fall, even as other surrounding countries continue to have growing economies.
  • And finally, it turns out that the political leaders of the left-wing government were massively on the take for years.

For another example of this classic pattern, see my coverage of Venezuela, for example here.  

Is it fair to conclude that Brazil fell into the classic socialist trap -- falsely counting big increases in government spending as "economic growth," even as dependency was exploding and the real economy was hollowing out?  I don't know enough about the details to make a definitive evaluation, and in any event the policies undertaken in Brazil were far less extreme than those of Venezuela.  But still, the parallels to other situations like Venezuela are hard to miss.

Certainly, while Lula was President, the economy of Brazil seemed to be going swimmingly.  Here is a long write-up from the Economist in September 2010, toward the end of Lula's term of office, titled "Lula's Legacy."   A man-on-the-street is quoted as saying that Lula was "the best president ever."  Lula himself is given the chance to expound on his achievements, all of which seem to involve spending more on government programs to benefit the poor:

“Wherever you go in Brazil you will see work financed by the federal government,” he says, highlighting railways, power stations and basic sanitation. After 25 years in which the country failed to maintain its infrastructure, let alone build any more, it is “reacquiring the capacity to carry out the grand infrastructure works that Brazil needs.”  For many of the poor and working-class Brazilians who are his most ardent supporters, Lula's crowning achievements have been big rises in the minimum wage and pensions, and the Bolsa Família programme, which gives 12m families small but life-changing amounts of cash in return for having their children vaccinated and keeping them in school. By boosting domestic demand, these policies have also contributed to economic growth.

Note in that last sentence the abiding faith that more government spending is the sure-fire route to economic growth.  This report from CEPR records average growth of real GDP per capita in Brazil of 2.5% per year from 2003 to 2014 -- which would be quite impressive if it were real.  But then, who can forget David Sirota in Salon writing about Hugo Chavez's "economic miracle" in 2013, 15 years after Chavez's ascension to power and just as the bottom was starting to fall out?

A big recession then hit Brazil some time in 2014.  According to CNN here, Brazil's economy proceeded to contract by 3.8% in 2015 and 3.6% in 2016, even as the world economy continued in a basically expansionary mode.  (By contrast, according to Federal Reserve statistics here, the entire contraction of the U.S. economy from peak to trough in the "Great Recession" was 4.3%.)  Unemployment shot up from about 5% in 2014 to 12.6% early this year.  Nor is it clear that the recession is over for Brazil.

The situation is complex, and again, the government excess is not nearly as extreme as that of Venezuela.  A boom and subsequent bust in commodity prices --on which Brazil is unusually dependent for such a large country -- is very likely to have exacerbated the damage from socialist-style programs.  But Brazil is definitely emerging as another example where big portions of government-led economic growth ultimately prove illusory.  Oh, while the political leaders became wealthy via their crony capitalist friends.