A New Era for Brazil

The Brazilian Senate impeached President Dilma Rousseff yesterday, bringing an end to the era of Worker Party rule, which began there in 2003.

Rousseff and her supporters have disingenuously denounced the impeachment, calling it a coup d’état. But it is likely that her removal from office will strengthen the country’s institutions and lead to an improvement in the policies that have led Brazil into its worst recession since the 1930s and that Latin Americans in recent years considered a model to emulate because it was seen to combine economic stability and enlightened social policies.

Let’s first of all dismiss the idea that Rousseff’s impeachment amounts to a coup. Whether we favored the political trial or not, it was conducted under the rule of law, and to assume otherwise weakens the legitimacy of the Congress and Brazilian democracy. As my colleague Juan Carlos Hidalgo has pointed out, the Constitution clearly delineates how and in which circumstances an impeachment should be carried out, and the Supreme Court has endorsed the legitimacy of this particular case. The fact that eight out of eleven members of the court were appointed by Rousseff and her Worker Party (PT) predecessor, Lula da Silva, undermines the credibility of coup claims.

The last time a Brazilian president was impeached was in 1992 and, as analysts Diogo Costa and Magno Karl observe, it was hailed as a “Victory of Democracy,” and ended up improving the country’s policies. (And it’s not that the PT does not believe in impeachments; the party attempted to impeach the three democratically elected presidents who preceded Lula.)

This trial may also have a positive impact. It will likely reduce to some degree the crony capitalism that was the essence of the Lula and Rousseff administrations. Alex Cuadros, who will speak at a Cato book forum on September 13, describes these policies well in his new book Brazillionaires. The PT’s policies have consisted of strengthening ties between the political and economic elite and were inspired by the idea of investing in strategic industries, generating high economic growth, and funding social welfare programs such as “Bolsa Familia.” Thus, the state granted easy credit to large companies and prominent businessmen. Subsidies from public banks increased from 0.4 percent of GDP in 2007 to 9.7 percent in 2013.

In practice, the unhealthy relationship that has long existed between Brazil’s politically and economically powerful deepened—one in which businessmen, with the aid of state credits, were financially supporting important politicians who also backed these business leaders. State subsidies were so important that by 2014 public banks had a market share larger than private banks, and participated in more than 700 large Brazilian firms.

These policies were not sustainable –and were even less so when the commodity boom came to an end—and led to an increase in government debt. According to Cuadros, what Rousseff “spent in one year on interest payments—money transferred to banks and wealthy families—exceeded twelve years of spending on the Bolsa Familia welfare program.” The Brazilian economy continues to shrink, which has led to cuts in social programs.

The PT’s economic model also encouraged large-scale corruption. The most prominent cases are “Mensalão,” in which legislators were bribed in exchange for votes; and “Lava Jato,” where billions of dollars in illegal transfers from the state-owned Petrobras oil company benefited leading businessmen and politicians.

The most surprising aspect of these corruption cases is that they have resulted in the arrest and conviction of numerous powerful people from the world of politics and business—a rather unusual outcome in Latin America. As I wrote about here, this is due to institutional and legal changes, such as allowing the use of some forms of plea bargaining, and the appointment over the course of many years of prosecutors, judges and police officers based on merit. Rousseff’s impeachment should also strengthen Brazil’s institutions, since the process increases the president’s and Congress’s accountability.

The new president, Michel Temer, seems to have control of the Congress in a way that Rousseff did not, and plans to carry out reforms to control public spending and open the economy to some degree.  We should not expect radical reforms, but rather policies that are somewhat better.