“Victory for the people! The hike was reversed! The fight continues in search
of improvements for the country. Down with corruption ... down with inflation,
we want investment in transport, health, education and security.”
So read the Facebook status of Diana Oliveira, who, like more than a million other Brazilians, took to the streets last week to voice anger about an array of economic and political grievances.
The rapid escalation of protests across the country has shocked its political leaders and confused much of the world. Until recently, a notable characteristic of the Brazilian slowdown in growth had been the apparent relative contentment of Brazilians in a country that rebounded fast from the global financial crisis.
What’s more, the redistributive policies started under president Fernando Henrique Cardoso, who governed between 1995 and 2003, and deepened by Luiz Inácio Lula da Silva and his successor Dilma Rousseff, were said to have boosted social mobility and reduced income inequality.
Indeed, a recent World Bank report found that the country’s Gini coefficient dropped from 0.592 to 0.537 between 1998 and 2009 – still high by global standards. Furthermore, the fruits of growth seemed better accrued to the low-income sectors of the population.
Between 2002 and 2009, the incomes of the bottom 10% grew by nearly 7% per annum, well above the 2.5% national average and even further ahead of the 1.1% rise experienced by the top 10% bracket.
What a difference a week can make to the narrative of the political economy of Latin America’s largest market. Brazil has now joined Turkey in the ever-growing line of the world’s youth voicing their discontent with broad societal issues.
What began as relatively small-scale protests against a fare hike on public buses has rapidly become a nationwide expression of “exasperation with corruption and all the other problems of the country”, in the words of Félix Alfredo Larrañaga, an academic based in São Paulo.
Trying to find direct causality for this collective outpouring of discontent remains a sketchy task, but the grievances, while extensive, have generally centred on clear themes that have merited a direct political response from Rousseff.
What might surprise some outside observers is that corruption is such a target. In Transparency International’s (TI) 2012 Corruption Perceptions Index, Brazil ranked higher (ie less corrupt) than any other Bric nation and almost all of its South American neighbours, save Chile and Uruguay.
That said, coming 69th out of 176 countries still represents some way to go before parity with Scandinavian countries can be achieved.
In addition, the TI survey fails to capture the complexities of a political system that, while not always abused explicitly – although corruption scandals are far from uncommon – creates opportunities for self-enrichment that give alternative meaning to the term career politician.
Brazilians see politicians who rank among the world’s best paid and question how these salaries translate into responsive governance – what they don’t see is much hope for improvement, in particular with the PEC 37 constitutional amendment that is being considered in Congress.
If passed, this would transfer responsibility for criminal investigations from the public prosecutor’s office to federal police. The rationale for taking investigative powers away from a body that has achieved notable success in cases combating organized crime, drug trafficking and high-level corruption is questionable – more so when those responsibilities are being assumed by an already overworked body that lacks the same level of independence from political interference.
Analysts also say there are economic reasons behind the protest. For many, capital investment has been “weak and badly targeted”, according to Larrañaga – billions of reals have been flowing into preparations for the World Cup and Olympics, while the queues outside the country’s “slow and expensive” ports extend further and further along worn-down roads.
Investment at 21.2% of GDP falls short of the 25% target. Fixed capital investment has dropped from 21.3% in 2010 to 4.7% in 2011 and then to -4% in 2012. What’s more, growth engines are stuttering. Exports and imports have declined since 2010.
Meanwhile, private consumption, which has been one of the cornerstones of growth, was down from a 2010 high of 6.9% to 3.1% in 2012.
While there is no doubt the country’s most recent ‘economic miracle’ has spread the benefits of growth more widely than previous episodes, 2013 has been a tight squeeze, with slowing growth and rising inflation at 6.59% in April, and the collapse in the real this week will send import prices soaring.
This pressure on living standards seems to have reached its limit with a price increase on a public transport system with no correspondent improvement in service.
However, it should be noted that while the Passe Livre movement has formed a fundamental part of protesters’ demands, initial demonstrations were relatively small. What seems to have escalated them so rapidly is another corner of the national establishment that many Brazilians feel deep ambivalence towards: the police.
Elizabeth Sara Lewis, a demonstrator at the rallies in Rio de Janeiro, says the peaceful initial demonstrations early in the week had come to resemble a war zone by Thursday. The willingness of police to use tear gas led to a rapid escalation in violence.
For many who live in the favelas and peripheral zones of Brazil’s urban centres, a strongly militaristic policing strategy has long been the face of national law and order. Much of the organization’s structure remains unchanged from the days of military dictatorship, and the residual legacy of authoritarian ethos and corruption represents a complex target for reform.
Nevertheless, the response of Rousseff, who has given her approval to the spirit of the protesters, stands in notable contrast to the authoritarian rhetoric of Turkish prime minister Recep Tayyip Erdogan towards demonstrations in his country.
Investor confidence is now ebbing as the Brazilian government has substantially less room for policy flexibility.
According to BCA Research, the government will continue to boost demand instead of addressing supply-side constraints, making it harder to enact policies that will ensure the country’s long-term growth prospects are intact while keeping inflation under control.
“Amidst anaemic growth, Brazil’s policymakers have misdiagnosed the economy’s supply-side bottlenecks and lack of structural reform, and have instead opted for a sustained demand-side push,” it continues.
“This misdiagnosis has meant that massive fiscal and monetary stimulus has failed to lift Brazil’s growth by much. Now, as inflation is rising, room for further policy stimulus is limited. Additional fiscal stimulus will only lead to more inflation and cause the currency to drop significantly further. In turn, interest rates will shoot up even more.
“As such, the current economic and political backdrop is bearish for Brazil’s financial markets, including equities, the real, domestic bonds, and sovereign and corporate credit.”