September 1, 2015 / 8:17 PM / 2 years ago

COLUMN-Four reasons not to give up on Brazil

(Joao Augusto de Castro Neves is a Latin America Director at Eurasia Group. The opinions expressed are his own.)

By Joao, Augusto, de, Castro and Neves

Sept 1 (Reuters) - Brazil is enduring one of its most acute crises since the return of democracy in the 1980s. Amid a sharp economic downturn, the combination of growing popular discontent and a massive corruption scandal involving state-controlled oil giant Petrobras and major construction companies has prevented President Dilma Rousseff's administration from being able to govern effectively.

The remainder of Rousseff's second term looks bleak. A lingering recession and expected rise in unemployment are likely to keep the political environment tense. Protests and strikes will occur more frequently. Add an austerity agenda, political bickering in congress and a somewhat unpredictable corruption scandal, and Rousseff will have a difficult time advancing the country's economic recovery.

But not all is lost. Despite these mounting troubles and a likely worsening of the situation in the near term, there are a few bright spots in Brazil. The first is that Brazil's institutions work. The current turmoil, which is driven by deep political and economic difficulties, does not constitute an institutional crisis. It is precisely because of the independent nature of Brazil's legal institutions that the Petrobras corruption probe (known as Lava Jato, or "Car Wash") became a real risk to the government. Legally, Brazil's politicians have little opportunity to interfere in the investigations, which sets the Petrobras case apart from recent corruption scandals in other countries in the region.

Despite a number of other high-profile scandals in Brazil in the last couple of decades, the Lava Jato probe is not "just another corruption scandal." Its colossal magnitude, while enough to put it into a class of its own, should not overshadow important - albeit slow - institutional advances. In the past few years, Brazil's legislature has introduced new laws, such as the 2013 Anti-Corruption Law, that have helped to bring the country's oversight structure closer to OECD standards. The 2013 law gives authorities more legal mechanisms to investigate corporate wrongdoing and gives companies more incentives to improve their corporate governance. When the last major scandal broke out in 2005 - involving vote-buying during former President Luis Inacio Lula da Silva's first term - instruments such as leniency agreements or plea bargains didn't exist or were rarely used.

Another reason for cautious - yet longer-term - optimism is Brasilia's long history of shifting economic policy to keep the country afloat. During past economic crises, Brasilia has been pragmatic about its economic policy, rather than sticking with ideological experiments. This process has been evident since Rousseff's reelection in October, when she chose a new minister of finance to spearhead a multi-year fiscal consolidation plan to put the country's finances in order. Even though a more acute crisis could push Rousseff's Workers' Party to the left and away from the fiscal adjustment, she will likely move to the right in an effort to spark an economic recovery that would save the remainder of her term. This "course correction" will eventually translate into a more pro-business set of policies across different sectors of the economy, particularly those at the center of the current scandal - energy and infrastructure.

In a way, the same political and institutional factors that have frequently hurt structural reforms in Brazil - such as multiple parties, a fragmented congress, and judiciary independence - are the same factors that have pushed the country toward moderate policymaking. This framework helps explain why Brazil lagged behind when most of Latin America followed the neoliberal principles of the Washington Consensus in the 1990s, but also when many of these same countries a decade later shifted toward the resource nationalism championed by populist leaders such as former Venezuelan President Hugo Chavez. In the end, policymaking in Brazil did not move very far from the center of the policy spectrum during those periods.

Moderate behavior from business and political elites in Brazil - ranging from industrial groups to select members of the opposition - reinforce this trend. While the government response to the deepening crisis has so far been underwhelming and slow, the alternative - using "all or nothing" tactics like supporting spendthrift legislation - would aggravate the situation. In fact, many of the so-called fiscal bombs currently in congress will only truly impact the next administration. Since the most viable presidential succession scenarios - either after the 2018 election or earlier, in case of impeachment - would bring either the main opposition party (PSDB) or the largest party in congress (PMDB) to power, an uncompromising opposition to the government's policies now could backfire in the future.

A similar logic applies to the discussion surrounding Rousseff's impeachment. Unpopularity or political ineptness are not legal grounds for ousting a president. Without concrete evidence of Rousseff's involvement in the corruption scandal, it is unlikely that the major political forces in congress will push for her impeachment. For the time being, it makes sense for both parties to keep the president under pressure and relatively weak.

What could change this scenario? The biggest threat to Rousseff's government is the Lava Jato corruption probe. If investigations continue at the current pace, they could spread to other sectors of the economy, which might push the country into a deeper recession. Politically, the investigation could get closer to Rousseff and the core of her party, creating the conditions for her impeachment. We are not there yet. (Joao Augusto De Castro Neves)

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