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20 Briefing
Latin America
The Economist
September 22nd 2018
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people in the country. Politicians and the
courts have made modest changes to the
electoral system. The supreme court has
banned corporate donations to parties,
which has cut the cost of this year’s elec-
tion by 70-80%, estimates ChrisGarman of
Eurasia Group, a consultancy. Congress
has enacted a “performance clause”,
which eliminates public funding and me-
dia time for parties that get less than1.5% of
the national vote distributed across at least
nine states (the threshold will eventually
rise to 3%). This may reduce the number of
parties in congress.
But the changes these reforms will
bring about will be gradual, if they happen
at all. One reason is that Lava Jato has
sharpened the incentive for politicians to
cling to office. That is because sitting politi-
cians can be tried only by the supreme
court. At least 30 people suspected of
wrongdoing are running for re-election, ac-
cording to
Folha de S.Paulo
, a newspaper.
Mr Garman estimates that 70% of the new
lower housewill consist ofholdovers from
the current one, up from a re-election rate
in the current congress of 55%. The ban on
corporate donations hasmade it harder for
newcomers to challenge incumbents.
The next congress and president will be
caught between the pressure for further re-
formand a desire for self-preservation. The
bolder ideas range from carving up states
into electoral districts to scrapping Brazil’s
presidential system in favour of a parlia-
mentaryone, but it is hard to see legislators
changing so drastically the system that
elected them. More feasible are proposals
to improve regulation of lobbying and pro-
curement by government agencies and
state firms. Voters will demand that Lava
Jato continue unimpeded; politicians may
try to put grit in the judicial machinery.
“The political system will try to limit the
power of legal institutionswhatever the re-
sults of the election,” predicts Oscar Vil-
hena, dean of the law school at Fundação
GetulioVargas, a university. If the next gov-
ernment continues to buy support with
pork and patronage, but limits outright
bribery, that would be a big improvement.
Bringing economic relief may be easier
than attempting political renewal. That is
what Mr Temer tried to do after he took
over from Ms Rousseff in 2016, with some
success. Congress enacted a constitutional
amendment that freezes federal spending
in real terms at least until 2026. Another re-
form made the labour market more flexi-
ble. Mr Temer came close to a reformof the
pension system in May last year, when a
newspaper made public an audio tape on
which he appeared to endorse the pay-
ment of hush money to a politician con-
victed of taking bribes. Mr Temer spent his
political capital to avoid prosecution.
The aborted reform leaves Brazil’s econ-
omy in a parlous state. The budget deficit is
equivalent to 7% of
GDP
. Spending on pen-
sions for retired public employees and for-
mal-sector workers accounts for 56% of
federal spending and is growing at a rate
four percentage points above inflation. Tax
giveaways, expanded by Ms Rousseff’s
government, are more than 4% of
GDP
.
This, plus the slowgrowthof the economy,
is raising debt to unsustainable levels.
Gross public-sector debt rose from 78% of
GDP
in 2016 to 84% last year.
The danger is not that Brazil will go the
way of next-door Argentina, which has
had to seek help from the
IMF
(see Ameri-
cas section). Unlike Argentina, Brazil owes
money mainly in its own currency and to
its own citizens, so declines in the value of
the real do not greatly increase its net in-
debtedness. The country has $380bn of re-
serves, equivalent to a fifth of
GDP
.
The cupboard is bare
But that does not mean that Brazil is in the
clear. Doubts about its financial stability
will weigh on the real, which in turn will
raise inflation. Real incomes, investment
and growth will suffer. With non-discre-
tionary spending such as pension benefits
consuming more than 90% of the federal
budget, little is left over for such services as
health. Many state governments, which
are responsible for policing and education
among other things, are in even worse fis-
cal shape. Economists reckon that Brazil
needs spending cuts or revenue rises of
300bn reais a year, equivalent to 4% of
GDP
, to stabilise federal debt.
Most presidential candidates now ac-
cept that pensions need to change. That is
partly because voters have come to resent
a system that lets bureaucrats retire in their
50s, often with full salary. Opposition to
the sort of reform that Mr Temer proposed
dropped from 68% to 44%, according to
polls commissioned by the government.
There is also agreement on the need to
raise tax revenue, although the details vary
among candidates.
Despite this glimmer of consensus,
markets are pessimistic. The real has fallen
to a record low against the dollar. In part
that is because the candidates likeliest to
win the presidency are least equipped to
govern. Both the front-runners represent
polarising forces. They will have a hard
time getting support for reforms. Candi-
dates with the best economic ideas are un-
likely tomake it into the second round.
Mr Bolsonaro’s main talent is for whip-
ping up public anger. He trumpets a new-
found interest in liberal economics. His
chief economic adviser is Paulo Guedes,
who was educated at the University of
Chicago, a nursery of market-minded
economists. Mr Bolsonaro belongs to the
tiny Social Liberal Party and has few allies.
“Our party is the people,” he declares. Un-
less he makes peace with the political
class, he is unlikely to get his reforms
through congress.
Mr Haddad, his likeliest opponent in
the second round, has a bigger party be-
hind him and was a successful mayor. He
promises to put debt “on a downward
path”. But his party is less reform-minded
thanhe is. Hewill struggle to shake the per-
ception that he is Lula’s puppet.
The other main candidates are less po-
larising, and less likely to push voters into
the arms ofMr Bolsonaro in the run-off. All
have drawbacks. Ciro Gomes, a left-wing
former governor of the north-eastern state
of Ceará, favours interventionist policies
of the sort that aggravated Brazil’s eco-
nomic crisis, such as subsidised lending.
Two centrists are mirror images of each
other. GeraldoAlckmin, a former governor
of the state of São Paulo, is competent and
backed by an enormous coalition, which
bodes well for his ability to enact eco-
nomic reforms. But he is colourless and be-
longs to the Party of Brazilian Social De-
mocracy (
PSDB
), which is among the most
tarnished by Lava Jato. More inspiring is
Marina Silva, a former environmentminis-
ter who was born into an illiterate rubber-
tapping family in the Amazon and learned
to read when she was 16. Ms Silva shares
Mr Bolsonaro’s unwillingness to engage in
pork-barrel politics, which will make go-
verning hard. She is more likely than the
populist to stick to her resolve.
The voters of Alagoas seem torn be-
tween the handouts and compromises
that come with old-style politics and the
hope of something better. Rodrigo Cunha,
a candidate for senator from the
PSDB
, is
promising reform. Running on an anti-cor-
ruption platform, he is putting up a strong
challenge for one of the two senate seats
up for grabs. But Alagoans alsohave a prag-
matic streak. Jurandi Pimentel, an unem-
ployed taxi driver, says he will vote for Mr
Cunha, but his other senatorial vote will
go to Mr Calheiros. “Alagoas would die
without someone who knows how to do
politics like the rest of them,” he says.
7
Her pension, or his education?