Why Riots Now in Brazil?

The Brazil of the 2000s has been a much-admired country until recently. The country was hailed as a role model of pro-poor growth[1] as the incomes of the country´s poorest percentiles improved much faster than those of the richer percentiles. Brazil´s conditional cash transfer policy (Bolsa Familia Programme) was widely advertised as a home-grown policy innovation; that policy should be applied elsewhere, to the advanced countries as well, thus changing the usual direction of North-South policy lessons.

 

Brazil, after Turkey, South Africa and to an extent China now all witness the clashes between a vocal but fragile middle class and authorities that portray themselves as serving first and foremost the needs of those left behind. All the greater is the embarrassment of many academics and commentators who hailed Brazil as a social (democratic) model, while concurrent demonstrators in Turkey were rightly and loudly supported as PM Erdogan responded brutally.

 

At the opening ceremony for the Confederations Cup, Brazil´s President Dilma Rousseff was booed so she could not hold her speech. Brazil, once admired for its soccer skills, now holds revolts in a soccer stade!  Brazil has already spent more than 3bn$, three times South Africa’s total four years earlier, and only half the World Cup stadiums are finished. “First-world stadiums; third-world schools and hospitals”, was one of the slogans advanced.

 

The protests that had started on 6th June over a 20 centavo rise of public bus fares in Sao Paulo have now grown into massive and widespread street demonstrations throughout Brazil´s major cities. Coinciding with the start of the Confederations Cup – a soccer World Cup test event for 2014 – the rallies brought together a wide coalition of people frustrated with the escalating costs and persistently poor quality of public services, lavish investment on international sporting events, low standards of public healthcare and education. There is wide unease about inequality and corruption, made even bitter by the apparent unaccountability of corrupt politicians.

 

Why now? Why Brazil? I have inquired a bit with Brazilians and experts on Brazil[2] on the economic and social background to the unrest.  It appears likely that some features of popular and populist policy are to blame:

·         The public sector offers too little value (quality public goods) for money (with tax ratio at 36% the highest tax burden outside the OECD world). Lack of domestic security in the presence of ubiquitous crime; heavy congestion intra cities and lousy transport infrastructure; deficient public health systems with long waiting lists; bad education achievements in public schools, reinforcing segmentation along class and race lines; an unsustainable pension system unable to cope with Brazil´s ageing population, with a pension replacement rate at 97% (OECD avg 67%), due to a guarantee to pay pensions at least at minimum wages. As rent-seeking in the public sector seems pervasive, with many institutions working as employer of last resort (for family members) and corruption cases multiplying with apparently unaccountable politicians, the low public sector efficiency has made people increasingly angry.

·         Industrial policy dirigism, especially since the Dilma government, has gone along with a decline in industrial production. While National Champions, big conglomerates, are both  pampered and heavily regulated, industry competitiveness in general suffers from high input cost. Lack of finance and of market contestability burden smaller firms. Brazil has become a leading trade protectionist, according to recent WTO data, with average tariff levels at 12% of imports. High taxes, a complex and fragmented tax system and a strong regulatory environment restrain Brazil’s economic potential and curb incentives to invest. In the World Bank’s Doing Business Ranking, which compares the ease of doing business in 183 countries of the world, Brazil is ranked only 126. Extremely high real interest rates further impede investment by limiting credit access for small and medium-sized companies with no access to risk-averse public (BNDES) or foreign finance. Close connection to government, rather than corporate prospects and productivity, seem to guide credit allocation and hence capital misallocation.

·         Inflation is rising, running close to 7% now for consumer prices (although massaged down); it hits especially the poor and the lower middle class as stagnant incomes are hit by higher food prices. While the rise of food prices has exogenous causes (such bad harvests in Brazil and the US), there is a structural reason connected to expansive public bank lending that has spilled into consumption and wages at high employment levels.

 

It seems that the goodwill that the Henrique Cardoso government built 1999-2003 in terms of macroeconomic stabilization, fiscal responsibility and transparency has been used up. Lula was good at distributing the fruits planted by his predecessor; Dilma seems to be destroying them. Although she was quick to condone the protesters (unlike Erdogan in Turkey), military police was brutal in Brazil as well. To be sure, talk is cheap. Eliana Cardoso summarized her views on the current political system on her widely flowed Facebook page as such: " Politicians and political parties have failed to understand how explosive the situation is, because they are guided only by the mechanical maintenance of the spaces of power that they distribute among themselves and, thus, they forgot to feel the social climate of the streets and the initiatives of new emerging groups in virtual networks. It looks as if politicians are now unable to understand and represent the demands of the citizens. Very difficult to say what comes next."

---

[1] OECD (2011), Perspectives on Global Development 2012 – Social Cohesion in a Shifting World. The same report pointed already quite clearly to the limits of policy interventions targeted to the extreme poor and to the vulnerability of the lower middle income strata.

[2] My special thanks, without implicating them, go to Prof. Eliana Cardoso (former Deputy Economic Minister under the Henrique Cardoso administration), Dr. Julia von Maltzahn Pacheco (Getulio Vargas U., Sao Paulo) and Jens Arnold (OECD).