Catherine Osborn
Hi, everyone. Welcome to this Chatham House discussion of Brazil’s Economy Beyond the Elections. We’re speaking one day after the first round of voting in Brazil’s 2022 general elections, and we’ll be looking at what’s ahead for the next administration. The Presidential election will go to a run-off vote on October 30th between former President Luiz Inácio Lula da Silva and current President Jair Bolsonaro. Yesterday, Lula earned 48.4% to Bolsonaro’s 43.2% of valid votes in the first round. Bolsonaro widely outperformed polls and his allies performed well both in Brazil’s Congress and in local elections, which we’ll be discussing.
I’m Catherine Osborn. I’m a Journalist based in Rio de Janeiro and the Writer of Foreign Policy’s Latin America brief, and we’re joined today by three wonderful panellists. Mansueto Almeida is the Chief Economist at BTG Pactual, the largest investment bank in Latin America. He served in Brazil’s Economy Ministry from 2016 to 2022 and was Brazil’s Treasury Secretary for the latter part of that time.
Richard Lapper is a Writer and Consultant. He’s an Associate Fellow at Chatham House US and the Americas Programme. He worked for the Financial Times for 20 years and published a book about Bolsonaro’s Brazil entitled “Beef, Bible and Bullets.”
Monica de Bolle is a Senior Fellow at the Peterson Institute for International Economics, and the former Director for Latin American Studies and Emerging Markets at Johns Hopkins School of Advanced and International Studies.
Today we’re going to talk some about the election and the outlook for Brazil and the period to come. We’re coming off a period in which President Bolsonaro, aided by Economy Minister Paulo Guedes, aimed to implement economic reforms around fiscal responsibility and market incentives, and while Brazil remains a diverse economy with strong sectors, including agriculture, fintech and services, the country is facing economic headwinds and political uncertainty, and we really can’t have this discussion without focusing on the politics and specifically yesterday’s results. So that’s what we’re going to begin with, looking at the results with Richard.
Each of the speakers will give around five minutes of initial comments before I ask them some questions, and then we’ll follow with questions from the audience. So please, go ahead and feel free, throughout the event, to start typing questions into the chat on Zoom. This event is on the record and it’s being recorded, so, we’ll go ahead and kick off our comments with Richard.
Richard Lapper
Thanks very much. I mean, yeah, this election has been a bit of a – a huge surprise really, to me at least, in the sense that the polls have been predicting a win for Lula. The big debate last week was whether Lula could win in the first round or whether he wouldn’t achieve the 50% plus to getting into the second round. But really, over the course of the last 18 months, the polls had Lula between seven and 15 points in front of Bolsonaro, and Bolsonaro’s vote seemed to have a ceiling to it of about 37/38% maximum. And in fact what’s happened is that Bolsonaro’s voter has been a lot higher; he won 43% of the vote, so he’s only five points behind Lula. The centre candidate, Simone Tebet from the Democratic Movement Party, and the centre-left Ciro Gomes, scored far fewer votes than had been expected. So we go into a second round where, you know, that Lula’s still ahead and is still favourite to win.
Now, the other thing that happened yesterday is that the elections for Congress and for the Governorships in Brazil, which are hugely important in the political system, did not go well for Lula. In Congress, the centre – the right really strengthened their grip on both the Lower House and the Senate. We had a – you know, the centre parties that have all – have been declining really, the PSDB and the PMDB, which were the pivots around which Brazilian politics worked during the 1990s, the 2000s, that were hit in the 2010s by Lave Jato and the recession really have performed extremely badly, so, that sto – that narrative has continued.
The balance has really shifted further to the right, and there are two big blocs of right-wing representatives in the Senate. One is that people loyal to the Liberal Party, which is Bolsonaro’s latest party, one of the ten parties that he’s been associated with in his 30-year political career, and the other is the parties linked to what is known in Brazil as the centrão, which is a group of physiological, self-seeking parties of the centre-right. They together really control the Congress. They’ve got, on my calculation, and this is very rough, I’ve made it at some ridiculous hour this morning, but they’ve got about 330 of the Lower House seats of 517 Lower House seats, so, they really have the Whip hand.
I mean, Lula’s own left-wing alliance, which is built around the PT won 80 seats in the Lower House. In the Senate, the picture’s even more dramatically in favour of the right, and really the thing that took my attention last night was the way in which a number of key figures in Bolsonaro’s Government, who were seen as being a bit of an aberration really, people – I mention their names: Eduardo Pazuello, who was a catastrophic Health Minister, a General, one of many military people serving in Bolsonaro’s Government, who presided over the disasters of pandemic management in Brazil, when Brazil was hit harder than – as hard as any country, really. He has been returned to the Lower House with a vote – with more votes in Rio de Janeiro than any other Deputy – any other candidate for Deputy, so, that’s an incredible turnaround really.
Then we’ve had various Ministers: Teresa Cristina, Damares Alves; Damares, well-known as a, kind of, very strong social Conservative and evangelical. Marcos Pontes, who was the Minister of Science; they’ve all come back into the Senate. Sergio Moro, who was Bolsonaro’s Justice Minister and, of course, sentenced Lula – pursued Lula through the courts in the Lava Jato case, resign – split from Lu – Bolsonaro in 2017; he’s back now as a Senator for Paraná (state). And what we – Hamilton Mourão, the Deputy President, has won in – won a Senate seat in Rio Grande do Sul in the South. What we’ve seen is a real wave of support for Conservatives and people close to the Bolsonaro camp, and I think there’s – the results show a big divide in Brazil between some of the cities, the North East, which is poorer and generally more pro-Lula, and the West of the country. The West of the Amazon has gone pretty much to Bolsonaro.
The Centre West, which is Brazil’s grain belt, has gone, very wealthy grain belt, and the South, the South East has largely gone to Bolsonaro. Bolsonaro’s won in 14 of the 30 – of the 27 states, so, this is a bit of a turn-up. The Governorship elections, which have been – many have gone to second rounds, but – where there’s no overall winner at this stage, but the balance so far definitely favours Bolsonaro. He’s won the Governorship of – he’s retained the Governorship of Rio de Janeiro, for example. He’s got a very good chance, I think, of winning the Governorship of São Paulo. Now, you know, São Paulo’s 22% of votes in Brazil, so, these are two – this is one of the biggest electoral constituencies, and this will make it very, very difficult to move on to the question of what this means.
It makes it very difficult, even if Lula is able to win in – at the end of October, it gives him very little room for manoeuvre, in terms of how he’s going to run his Government. This is not back to 2003. Lula’s in a very much more difficult situation, and I think, you know, he’s going to try to look, over the course of the next four weeks, to appeal to the centre, to appeal to the agribusiness constituency, the evangelical constituency, that are key parts of Bolsonaro’s voting blocs. He’ll try and – he’ll probably appoint someone like Henrique Meirelles, the Conservative Banker who is, you know, is part of a centre-right party, but who was a crucial figure in Lula’s first two administrations, again to try and reassure the markets, win the private sector over.
Even if he wins, though, even if he wins, it’s still going to be very difficult, because, you know, two huge problems that Brazil faces, and I’m sure that Mansueto and Monica will be able to talk in far greater detail about this than myself but, I mean, the fiscal problems that Brazil faces now, after the spending that Bolsonaro has engaged in, in recent months, are very significant. There’s a huge primary deficit of, I think, more than 7% of GDP. That has to be looked at. There’s all sorts of other issues.
It means that any of Lula’s chances of introducing social reforms like tightening up labour laws, for example, which he promised to do, would make – would be almost impossible to achieve, I think. I think uncertainty is still likely to be a factor, which will undermine international confidence, although today the immediate reaction on the markets has been fairly positive, with the real being marked up in early trading. But that is…
Catherine Osborn
Richard…
Richard Lapper
That’s, kind of, a rough round-up of stuff anyway.
Catherine Osborn
Perfect, thank you so much, Richard, for that context, and understanding this and, sort of, acknowledging Bolsonaro’s strong performance last night and his allies’ strong performance. Could we go to Mansueto a bit and discuss some of these economic challenges and understand a bit about where Brazil is right now economically and what – where were the discussions about priorities before yesterday’s election? And then we’ll return a little bit to the political limitations and just the general political outlook introduced yesterday. So, Mansueto, I’ll turn it over to you.
Mansueto Almeida
Great, I mean, thank you. Let me, I mean, let me speak and talk a little bit about the economic numbers. There is one surprise and concern in Bolsonaro Government and the government that was, that came before Bolsonaro [inaudible – 12:40]. In the last six years Brazil was able to approve many important reforms. At the beginning Temer’s Government, it was a very weak Government, Temer’s popularity, the approving rate of Temer was very, very low. Just to give you an idea, Temer finish his term with the lowest approving rate since President Collor in 1990, and President Collor was impeached in Brazil back in 1990. In 1991, 1992 he was impeached. And Temer was very unpopular, but despite that, developed many important reforms, including the very important, you know, fiscal rules that we call the spending cut bill to control the growth of the public sector federal [inaudible– 13:21] expenditure, approved a labour reform, and also approved a new law concerning the regulation of state companies.
And then came Bolsonaro, that was elected in 2018, and despite being very weak, in terms of political support in the Congress, because at the beginning of his Government, Bolsonaro didn’t have a political support. But, you know, we – the Congress approved one of the most important reforms in Brazil that we tried for many, many years, for 20 years and we failed, and then finally, we approve it back in 2019, which was the pension reform. And it was very important to approve the pension reform, because we were talking about out country that, you know, people used to get retired around, you know, 54-years-old before 2019, it was very, very young.
And finally, in a new government with our political support, we approved the pension reform in 2019 and that’s the debt. Last year, Brazil approved another very important reform that was very unpopular in Brazil. Eight years ago was almost impossible, you know, to debate that reform, which is central bank independency. Last year, Brazil approved central bank independency, which is a very sensitive reform. You know, eight years ago it was a very unpopular topic among Politician, but, you know, in the middle of COVID, we approved the central bank independency.
In addition to that, Brazil approved many important reform, in terms of regulatory framework that was, I mean, very successfully attracting private investment to infrastructure projects, to ports, to airports, to sewage, to hayways – to highways. So, I mean, when you put everything together, you know, I think we are finished this movement but if, with some, let’s say, a big surprise coming from the economic indicators, because everybody, two years ago, including myself, “Well, I was expecting that the numbers will be much worse,” and that is not the case.
If you go back two years ago in 2020, when the world industry was hit by COVID-19, we had, in Brazil, a primary debt in 2020 of 10% of GDP and a fiscal deficit, when you include the interest payments, of 40% of GDP. This is quite similar to what happened in UK and the United States. The surprise came in the next year, in 2021, everybody was expecting another primary deficit for the public sector, and then we have a primary surplus of 0.7% of GDP, and then this year, 2022, probably we finish this year with another primary surplus of 1.2% of GDP. So, these are good numbers. Back in 2020 we finished the year with a gross debt to GDP at 88% of GDP, and we respectively finished this year, 2022, with a gross debt to GDP of 77% of GDP. So, I mean, much lower than what it was two years ago, and a little bit higher than what it was 2019.
2019, the gross debt to GDP in Brazil was 74.4%, and we have ended this year with a gross debt around 77% of GDP. So, I mean, this is very good vis-à-vis what we expected two years ago, and in addition to that, you know, the GDP growth this year is a big surprise. Because at the beginning of the year everybody was expecting, because of a very high interest rate, because of the monetary policy to fund inflation, we were expecting that the GDP growth would be near zero and probably will finish this year with a GDP growth, a real GDP growth of 3%, and last year we had a real GDP growth of 4.8%.
Then if you look to the numbers of the labour market in Brazil, you know, the last number that was published by the government official statistic office, our unemployment rate today is 9%, and that’s the lowest number since 2016. So, at the end, you know, the economy, the numbers, the economic numbers are better than we expected.
You know, part of that is linked to commodities, because we talk about a country that, 80% of export is linked to commodities. 54% of Brazilian export is four products: it’s oil, iron ore, soybean and meat, so, I mean, we have the huge advantage, a huge growth, I mean, linked to the commodity sector. But when you look ahead, despite all this short-term good numbers, you have, you know, a massive challenge. First of all, I mean, nobody’s expecting that, you know, the commodity price will continue to grow; it’s quite the opposite. We might have some recession and if this happen, the commodity price could go down and this could affect the GDP growth and the revenue as well.
And second, despite all these good fiscal numbers in the short-term, you know, next year, it doesn’t matter who will win the election, probably one of the most important social problems in Brazil that used to call Bolsa Família and now they named it Auxílio Brasil, which it’s a social transfer to low-income families. This programme used to be 0.5% of GDP from 2003 to 2019, and now this programme probably will be something near 1.5% of GDP, three times higher than what it was before COVID, in a country that, you know, still needs to, you know, do a fiscal adjustment, because although you had a primary surplus last year and this one as well, everybody’s expecting next year a primary debt of 0.5% of GDP, you know, in the best case scenario; it could be worse.
And this means that in order to control the growth of the debt to GDP, you know, to stall the growth of the debt to GDP, Brazil needs to run a primary surplus of at least 2% of GDP. So, we’re talking about a fiscal effort, a fiscal adjustment that the next government need to do, around 2.5 percentage points of GDP, and that is not able to do it because, you know, it’s very difficult to curb expenditure, you know, in the context of Brazilian economy, because over 90% of the budget is mandatory, and you don’t have space to cut public investment.
Just to give you an idea, that export in Brazil is 34% of GDP. That export at a federal level is around 21% of GDP, and then, the public investment next year that’s already on the budget for the next year, at the federal level, will be 0.2% of GDP. So, it’s almost nothing. We don’t have space to cut public investment anymore and to cut all the other, you know, items of the budget, it’s very, very difficult.
So, the next government needs to do a fiscal adjustment of 2.5 percentage point of GDP, that will not be easy to curb expenditure, and on the other hand, it will not be easy as well to increase taxes, because the total revenue collection in Brazil, the tax burden is around 34% of GDP. It’s quite similar to UK, so you don’t have space to cut taxes, and it’ll be very difficult to increase taxes as well. So, I mean, the – a good scenario depends a lot on some things that it is not directly controlled by the government, like for instance, this continual boom in the revenue.
In the last two years, the total revenue collection in Brazil for the public sector as a whole went up by 2.5 percentage point of GDP. But, you know, this is linked to inflation, because 45% of the revenue collection in Brazil is indirect tax, but there is linkage to prices. So when you have inflation, it helps a lot, in terms of, you know, increasing the revenue collection, and there is a linkage to commodity, and you cannot count on that, you know to have a good scenario for revenue collection. So, it’s, you know, it’s a very challenging scenario in a country that, you know, although you finished this year with public debt, around 77% of GDP, it is still very high for emerging economy, for comparing Brazil with all the other emerging economy.
So, in a country that people expects a lot from the government. So, I mean, you know, again it doesn’t matter who win the election, it’s a difficult scenario that you need to talk a lot with Congress, a Congress that is – that will be today, that will be in the next term much stronger than what it used to be four, ten years ago, because nowadays the Congress control, I mean, a big portion of the budget. So, I mean, that’s the challenge and it’s not easy, so, we have, I mean, let’s say, difficult times ahead.
Catherine Osborn
Thank you so much, Mansueto. That discussion of the difficult times ahead, massive challenges on the economic front, as Mansueto mentioned, are connected to challenges on the social front. He discussed how much Brazil is spending on its social welfare programmes right now, and the new Congress will be so influential on making these decisions, and so, when we go to Monica, I’m curious about who is exactly this Brazilian right that has been voted into Congress again in such large numbers, and what do we know about what their economic priorities are, and also, their other political priorities? I know, Monica, you’ve been studying what direction the Brazilian right has taken under Bolsonaro, and so, can you tell us a little bit more about that?
Monica de Bolle
Yes, absolutely. So, good morning to everyone, and good afternoon to everyone else. I guess good morning is just myself and Mansueto at this point. I’m very happy to be here and it’s always a pleasure to speak at Chatham House. So, the question of that what’s happened in the political landscape of Brazil is an extremely important one and one that can’t be exaggerated from the point of view of not just these results that we have seen coming out of yesterday, but also, kind of, the long-run implications as well as, how did we get here, that question, how did we get here?
I think there’s been very little attention to the “how did we get here?” question. I mean, not exactly little attention, I guess, there’s been attention, but attention focussed on the wrong aspects of the “how did we get here?” question. The far-right in Brazil has been a project for a long time, it is not something that came out of the blue. It certainly gives that impression, because the elections of 2018, kind of, gave us the impression that “Oh, and suddenly here’s Bolsonaro, and he’s presenting himself as this anti-establishment candidate, and he sweeps all the votes.” But it really didn’t happen like that.
It has happened through many, many years of a conjunction of factors that have come together and that have really formed a movement, and these factors do include what we call the evangelicals, which, may I say, is a very, very misleading way to refer to these groups, because the evangelicals actually encompass a lot of different groups within that particular, let’s say, religious denomination. There are progressist evangelicals, there are evangelicals, which are not involved in politics, and then you have a more, if I may say so, fundamentalist group of evangelicals, which has become increasingly political. That’s not a novel phenomenon. That’s been happening since the 90s, and it has been well documented by academics in Brazil, how much that particular movement has grown.
Back in 2018, or 2019, I think it was, I published a paper that looked at the municipalities where evang – these particular groups within the evangelical community had the largest participation, according to the 2010 Census, and whether or not there was an association with the Bolsonaro vote. And, lo and behold, what I found was that there was an extreme association between these more fundamentalist religious evangelical groups and the Bolsonaro vote.
So, you know, this – the connections with religion have been there for a while. The growth of these groups and the growth of these groups within politics has been there for a while, and now we have the connection with the agribusiness folks, and so, the – this far-right movement that has shaped up in Brazil, over the last few years, is really a coalition of religious movements coupled with agribusiness and the, let’s say, what agribusiness in Brazil aspires to become, in terms of economic power and political power, because they have both. They’re present in Congress.
So, when we look at the composition of the far-right, that’s what the far-right basically is, you know, if we just simplify it, in terms of these groups. It ha – it holds obviously extremely Conservative views, but it has a very convincing narrative for what has plagued Brazil over the past few years, and why it is that the country hasn’t really advanced. And I think when we’re trying to, kind of, root out, you know, these origins of the far-right, all of it connects with the 2013 protests in Brazil because at that point, you know, there was a manifestation of political dissatisfaction, it was extremely diffuse, but these protests were extremely large.
And what’s interesting about 2013, and what we have to keep in mind, is that even though you had all segments of Brazilian society protesting in that particular year, in June of 2013, by and large, a lot of those demonstrations were organised by the so-called “rising middleclass,” or the middleclass that had risen under Lula. So, this is the “class C”, what we came to call the class C or the new middleclass in Brazil.
And I think one of the most interesting phenomena, in terms of the growth of the far-right in Brazil, is watching particularly this group of people. It’s a very large group of people, it’s a large group of people that gained social mobility under the Lula years. So, they basically got to where they are now, or to where they have been, because many of them have fallen back, but they got to where they are now because of the policies that were put in place in the Lula years, and of course the very beneficial external scenario that dominated that period, from 2002 to 2010. And these – that is en masse the group of people that have switched to Bolsonaro, and these are people who – where do they live? Yes, some of them live in rural areas, and many of them live in the peripheral of urban areas, where these evangelical churches are very present.
And so, there’s a sociological phenomenon here that hasn’t been, I think, well studied enough, and that hasn’t been looked at enough and which, because it hasn’t been looked at enough, lent this element of surprise to yesterday’s elections. Because if we look at the numbers, as, you know, Richard was telling us before, if you look carefully at the numbers, the big surprise was not – was – well, there were lots of surprises, but there were surprises in Congress, as Richard pointed out, there were surprises in the gubernatorial races, and there was a big surprise in the Bolsonaro vote.
We did not expect Bolsonaro to – or at least the polls were not showing that Bolsonaro would get as many votes as he did. Lula fell within the margin of error, according to the polls, but Bolsonaro fell well outside the margin of error, and where did these votes come from? Yes, some of them came from, you know, Ciro Gomes and Simone Tebet, the two other candidates who were running, but a lot of that vote also came from people who simply did not manifest their vote in the polls, and who are these people? Well, I’d wager that a lot of these people are precisely the ones that I’m talking about.
And what you see behind the scenes now is this consolidation of this far-right movement, which we’re calling Bolsonarismo for lack of a better name, but that’s really a misnomer, because the far-right is much bigger than Bolsonaro. So, it won’t really matter if we’re looking, you know, to the next three weeks, it won’t really matter if Bolsonaro wins or loses in the run-off vote, because the fact is that the far-right is well consolidated, well established and very much alive in Brazil. And so, we need to think about that and we need to think about, where do things go from here, and what is it that they have – what is – what are their proposals, and what is it that they have in mind?
There are a couple of things, or at least there are a couple of hints of what it is that they have in mind, and these hints, they lie in certain groups that have popped up in the social media sphere. This – there’s one particular group; it is actually quite large, in terms of viewership, they have a YouTube channel. They’re called Brasil Paralelo, or Parallel Brazil, putting it differently, and they have – so, they have this YouTube channel with a very, very large following, and they espouse, I think, the views that you could very much associate with what this far-right movement really represent. And that is, on the one hand, they have, you know, the entire culture wars agenda in their hands, so, that’s one side of the equation, and of course, the religious movements and everything that comes with that, the religious fundamentalist movement.
And on the other side of the equation, agribusiness as the salvation of Brazil. So, they articulate everything around agribusiness, so – and the argument goes, you know, “Brazil is an agricultural powerhouse, it is a country that has a comparative advantage in that sphere, it has an agribusiness sector that is very modern and developed, and the world, as it is right now,” and it is very convincing because, of course, there is an element of truth to this, “the world is going to need, as we go forward, the world is going to need food, and who is better placed to provide that? Well, the agribusiness sector in Brazil, because there’s a lot of land, there’s a lot of territory, there has already been a lot of advancement in the agribusiness sector in Brazil, that’s where investment should be going to,” the narrative goes, “so that biotechnological development can happen, and you can actually reindustrialise the country via the agribusiness sector.”
The catch is, there are two things, they say, that you need in order to do this, and these two things are, on the one hand, you need to massively deregulate the economy and by deregulating the economy, they refer back to the minimal state. Remember, this was in the Bolsonaro, kind of, rhetoric back in 2018, so, they articulate that in talking about the agribusiness sector as the sector that is going to actually generate sustainable growth in Brazil. So, you need to give them space, you need to give them space to do business, so, you need to deregulate, and here they’re talking about environmental laws. They’re not saying it, but they’re talking about environmental laws, so, going even further than Bolsonaro has gone in dismantling what Brazil currently has.
If you hear them speak about the Amazon, they see absolutely no issue in expanding the so-called “agricultural frontier”. So, they’re very much for pushing – you know, they don’t say it, but for pushing the agricultural frontier, and that means deforestation, which of course is the word that they don’t say, and on the other hand, you know, the – so, space, so, when they’re talking about space, they’re taking about, on the one hand, you know, having – not having regulations, and on the other hand, you know, being able to push and to expand and to have more territory.
So, this is their view, this is where they’re going, and of course, if you then try to bridge this with what Lula is proposing and the people he has around him, you know, people like Marina Silva and, you know, others, this is a direct conflict, right, this is a direct, direct conflict.
Catherine Osborn
Yes.
Monica de Bolle
And because they have now become such important players in Congress, you can see that the two agendas don’t match up. And so, one of the big issues I think we have is, how do you use – how do you actually co-ordinate, or how does Lula negotiate with him? Because they’re on different agendas.
Catherine Osborn
Thank you so much, Monica, that’s a fantastic point, and I wanted to jump over to Mansueto actually, based on Monica’s comment about, you know, the – many of the right-wing lawmakers who are now back in Congress appear to have a deregulation agenda. And I thought it was also so interesting to hear about low ability to meet expectations of Brazil’s rising middleclass, and looking historically, we’re coming off a decade of much lower Brazilian growth than the previous one, when Lula was first in office. And, Mansueto, I’ve heard you, in other interviews, speak about the need to, as tough as it is, with all the challenges that we have facing the next administration, the need to also try to get Brazil on a higher growth trajectory than it’s currently on. And it seems like these disaffected, potentially new middleclass voters who are – have been more sympathetic to Bolsonaro are convinced that, you know, the government can provide them with a better standard of life.
There are turns to, you know, religion and online communities and, etc., and you can talk about, all these elements have led to, you know, the strength of the current right. But can you talk, Mansueto, about Brazil needing to be on a higher growth trajectory, and communicate this to its citizens, and what are some of the steps that can be taken on the economic front to try to activate some specific sectors that could be potentially higher-growth sectors in the economy over the next administration?
Mansueto Almeida
Well, that’s a good question. You know, it’s not easy to answer that, but let me stress first that, you know, it doesn’t matter if you’re talking, here in Brazil, about the right or the left. Everybody expect a strong role of the government of the state. Just to give you an idea, you know, despite all this very interesting debate that Monica told us about, you know, the minimal state, you’re talking about a country that you have a public sector expenditure that is over 40% of GDP. So, Brazil, it’s a big – it’s a – it’s a country that people expect a lot from the state.
We have, you know, a, you know, a very big welfare state, but it’s not very effective because, you know, when you calculate, you know, the cut income and the fall income inequality before and after the state intervention, it’s very low. The problem in Brazil, it’s not very niche when you create expenditure, it’s different for all the others Latin America countries. The problem here in Brazil is that we need to change the composition of the expenditure, and it’s not easy because, you know, what we call middleclass in Brazil, you know, they demand more progressive expenditure, more progressive taxation.
But on the other hand, you know, we don’t see this debate going on because it’s assumed that the left in Brazil is talk about, you know, a different model of development but, you know, I have the feeling there is not much different from the right. Everybody, he expect, you know, that the state, you will lead, you will led development, will push for higher growth and, you know, here in Brazil we have a problem of very, very low growth of productivity. It’s a long-term phenomenon, it’s not for the last three, four, five years, it’s, you know, in the last ten, 20 years.
So, I mean, if you look ahead, in order to Brazil to grow more and please the middleclass, you know, first of all, I mean, the only sector that I see that could push the short-term growth is agriculture sector. It’s service, of course, but, you know, service to productivity is very low and a little bit, I mean, the oil sector.
I note that, you know, all over the world the CapEx, the investment in oil sector is going down, but it’s different for Brazil because in the last 12 years, we invested a lot in the pre-South oilfield. So, if you look to the production growth of the oil sector in Brazil, it will increase a lot in the next eight years. It’s different for the rest of the world, and the agriculture sector still have access to subsidised crediting, to a very low tax burden, and the agriculture sector is very competitive, so they will continue to grow.
In terms of the growth of the industry in Brazil, that is so important. You know, it’s an open question. We have very important industrial firms here but, you know, the majority, the industrial sector here, the manufacturing and production in Brazil, it’s pretty much flat in the last, let’s say, ten years. So, it’s an open question whether or not, you know, you have, kind of, let’s say, an economy that will grow around 2.5% per year in the next four years.
It’s possible it is, because you have a new phenomenon, which is the investment on infrastructure, based on all the concessions that already happened. We have, you know, in the coming four, five years a CapEx, you know, investment, a flow of investment on infrastructure around 0.8% of GDP and this could help the growth. So, I mean, I think, you know, this short-term growth, even if in the long-term growth, because if we look to Brazil for the next ten/15 years then, you know, the challenge is much higher, because it depends on the quality of institution and the quality of education, depends, you know, on sustainable productivity growth.
So, when I look to Brazil, in the long-term, I have much more open question and doubts than looking to Brazil in the short-term. In the short-term, if the next goal there, I mean, make some clear, some commitment, whichever the fiscal adjustment, and also try to approve then, security reform and tax reform. I think, you know, we could perform it relatively well and grow around two to 2.5% per year. It’s not that much, but have in mind something quite interesting: we will start the next government with unemployment rate around 8%. 8% of unemployment rate in Brazil is almost full employment. So, I don’t think that the labour market will be a major problem in the next government; it’s quite the opposite.
I think that the next government you might face some problem with, you know, lack of a qualified labour force, lack of qualified, skilful workers. So, I mean, the challenge for the next government is give the right signals that, you know, it doesn’t matter who in direction, you have some responsibility concerning the fiscal rules. Of course, I mean, there is the debate to change the fiscal rules. Okay, change it, but put something in place and show that you’ll be fiscal responsible.
And second, that means some commitment, in terms of continuing to approve reforms. Although, I mean, we don’t have the slightest idea what the, let’s say, consensus is about reform, about tax reform, for instance, but if you have a very – but if you have a high tax burden and we don’t have the space to cut that, but we can give a tax reform, improving the tax rules, and making it more simple, which is not easy because we have many special tax regime and every time that we try to change that, you know, the middleclass, the entrepreneurs, you know, they are against to change this rule. So, you’ll have many challenges ahead.
You know, it’s possible to please the middleclass, you know, in the short-term with growth, it is possible to please the middleclass, in terms of improving economic condition. But again, I mean, we have – we’re talking about a country with a very, very high income inequality, it’s still very high poverty rates, it will not be easy to change that in the next three to four years.
Catherine Osborn
Thank you so much, Mansueto. I’m going to go to Richard with one more question and then after that, start reading some questions from the audience. So, I want to remind everyone that you can go in the Q&A area and type in some questions here, we already have some good ones coming in. Richard, I wanted to ask you about, you know, it appears that approaching the second round of the election, Lula has already looked to the centre quite a bit and made all sorts of pledges about having a more pro-reform agenda economically.
He – it appears that he would implement, you know, less potential heavy spending that he would have if he didn’t have Alckmin as a running-mate, or made many of these alliances. Speaking about Bolsonaro and the potential possibility that he could win in the second round, I wanted to ask you about what his administration has shown us about what happens when his pledges of a liberal economic agenda and liberal economic reforms interact with this Congress that he had in his term, that you’ve written about?
You’ve written about the caucuses, the beef by bullet caucus, and Mansueto has spoken about some of the reforms that did happen, you know, pension reform, central bank, a long process of central bank independence, you know, finalised under Bolsonaro’s administration. But how did these Congressmen, who composed his base, affect his economic policy, and, you know, what does that tell us about his poten – a potential second administration and what we could expect from them on the economy front?
Richard Lapper
Well, we could spend another two or three hours talking about that, I mean, but let me just say that I agree completely with Monica, You know, the point she makes that this right-wing movement is not new, that it’s been long in the making. Just one factoid. 1980, Brazil had 6% Protestant population. It now has, according to the most recent polling, one in three is Protestant. In that group, the most rapidly growing are, as Monica says, the fundamentalists, the neo-Pentecostals , this home-grown group of neo-Pentecostal churches, which has been pretty much solidly Bolsonarista. These are – that this is a very important sector.
The – you know, it is very significant, I think, that Lula, during his campaign, has tried to deal with the fragmented character of evangelism. He’s tried to work, he’s – I mean, I know petista activists, in various places, who tried to work with Pastores from evangelical churches, have tried to work with them on the social agenda. It’s not easy, and Lula clearly hasn’t made a huge amount of progress. I suspect that the evangelical population, and particularly the more fundamentalist part of it, voted very heavily for Bolsonaro and his supporters this weekend.
So, in terms of what – and the other point I think is worth making, in terms of this very long period of gestation, about this right-wing movement is that in many respects it’s a reaction to liberalism in Brazil. You know, the evangelicals are reacting to social liberalism, the environme – the agribusiness movement, and particularly, I think, not so much the big agribusiness groups in Brazil that have bought into a green agenda, certainly in rhetorical terms, but the smaller, more marginal, medium-sized farmers in the Amazon that are doing a lot of the deforestation, the guys who are doing the garimpos, the guys who are doing logging, all these kind of guys, they’re the guys who are reacting against the environmental agenda, against the green agenda, and that’s a very big part of Bolsonaro’s base. And it’s one of the reasons why we saw Bolsonaro doing so well in the Amazon; the whole West of the Amazon voted for Bolsonaro.
And, you know, the third element of this, of course, is the security agenda, the you know, “Beef, Bible and Bullets”, you know, is the title of the book that I wrote, and the bullets agenda is also very significant, because there’s a lot of hard-line opposition to liberal approaches towards crime. Now, this is a complex matter, and not something, you know, you can sum up in a half a minute or something. But I mean, it is – I think that we’ve got to see this right-wing movement as a long – is a long process of formation, very difficult for Bols – for Lula to deal with it.
He will try to buy off certain elements of the centrão, and one of the advantages that he’ll have is that centrão are completely buyable. I mean, this is a par – these are Politicians who will go to the highest bidder. I think if he wins, he will be talking – he’ll already be talking to Arthur Lira, the President of the Lower House, to Pacheco, who’s likely to be the President of the Upper House, to Ciro Nogueira, who’s Bolsonaro’s Chief of Staff, they’ll be talking to the – he’ll be talking to these guys, trying to get some sort of deal.
The problem is, that won’t – it’ll take Brazil a long way away from the kind of reforms that it needs to get the growth that’s necessary to sor – to provi – and Brazil’s got a very – got a state that’s dysfunctional, in many respects. So, I’m not optimistic, quite honestly. I mean, the scale of the deficit – I think I said earlier that it’s the primary deficit that’s huge, it’s the nominal deficit that’s more than 6/7% but, you know, this is a big problem and he’s got to deal with these things, and this – I think it’s going to be quite a turbulent period whether or not Lula wins.
The right are part of the equation, this new right and it’s, you know, this complex alliance of right-wing interests. It’s part of – Brazil’s a Conservative country with a lot of vested interests. It’s going to be tough.
Catherine Osborn
Thank you so much, Richard. I have a question for Monica. I’m going to go to questions from the audience now, so, thank you guys so much for sending them in, and we’ll be able to read several of them. This question is about a specif – a very specific challenge. It’s from Ana Júlia Castro Fernandes and she says, “My question is about what’s been called the secret budget, which is essentially the ability for lawmakers to hand out money with low transparency that has been revealed in the past few months here. How can investors trust a government that allows this lack of transparency, lack of accountability and mismanagement to something so key and serious for any country’s fiscal policy, and are we likely to continue to see more of this practice with Lula or Bolsonaro?”
Monica de Bolle
So, that’s an excellent question, and it allows me to just do – add a point to what I was saying before. One of the elements, I think, that was completely disregarded, in terms of looking at what would possibly happen in the Congressional elections, including because everybody was so focussed on the Presidential elections, was precisely the role of the secret budget in bringing in these people who were former Bolsonaro Ministers into Congress. Because of course the secret budget did, you know – that was the use of the public sector for electoral purposes. So, you know, Bolsonarismo is well – is alive and well in Brazil, very much in part because of the secret budget, too, so, we shouldn’t, you know, leave that aside ‘cause that’s a really important point.
Going forward, Lula has said that this is not what he’s going to do, and he has actually condemned this practice, as have other candidates who were in the campaign. But he will, as Richard was saying, he will have to buy off the centrão, I mean, that’s just the reality; how is he going to govern if he does not buy out the centrão? Looking at it very objectively, we now have a Congress that is way more right-wing than the Congress that we currently have, or at least we will have a Congress that’s way more right-wing than the one that we currently have. So, how is Lula going to negotiate these conflicting agendas, his own and the far-right, without the centrão in the middle as being the arbiter that it always is? And for that he’s going to need to buy off the centrão. How is he going to buy off the centrão? That we have yet to see.
With Bolsonaro, well, the secret budget actually did work very well for him, as we’ve just – as I’ve just said, and so, should we expect more of that? Unless there’s some kind of real pushback, there’s been some, but there hasn’t been real pushback, so, unless we see real pushback, I’d say that that is a newish practice that is now here to stay. We will see more of it, or something like it, if things don’t change, because the reality is, governing with this Congress that has a very clear agenda defined in the far-right corners of it, and which do align with Bolsonaro somewhat, if he does get re-elected, but even so, governing with this Congress is going to involve these sorts of things.
And therefore when you ask, you know, what are investors going to do under that scenario, well, they should baulk, you know, they should look at this country and say, “Wait a minute, what’s going on here, and how do we expect, you know, things to ever look fairly normal again if these are the current political circumstances?” This is why I think, you know, more than ever, more than ever in the past, anything that we say about the economy, about growth, about the fiscal accounts, about whatever it is that has to do with, sort of, the macroeconomic outlook and the macroeconomic picture is completely subject to the politics.
If you don’t have a good understanding of the politics and what’s going on between the executive branch and the legislative branch, you won’t see what’s going to happen in the economy. It just won’t be possible. I mean, that has always been true, but we have chosen to ignore it for a very long time. We can’t ignore it any more, that’s the reality, and so, for investors, the outlook is grim, and thus the outlook for Brazil is equally grim. I mean, money is not going to flow into Brazil. It’s already difficult enough with the hostility or the hostile external environment that we have, coming out of a pandemic, having a stagflationary outlook for the global economy, a war still between Russia and Ukraine, the fallout of this on Europe, the problems that we see coming out of China, all of this already makes life for investment to emerging markets in general and to Brazil in particular extremely difficult.
Add to that the political, not just turbulence, but the political opaqueness that currently exists and will continue to exist, you’ll have a recipe for no investment, I mean, that’s the truth, and in that regard I’m with Richard. I’m very pessimistic as to, you know, Brazil’s outlook, whether it be under Lula or Bolsonaro. Of course, I’m more pessimistic under Bolsonaro, but I’m very pessimistic under Lula, too.
Catherine Osborn
Thank you, Monica. The next question I’m going to ask to Mansueto, and it’s a specific one about a scenario in which, if Lula is elected President, he has made some comments recently about being interested in finally moving forward with the Mercosur/European Union trade deal, and this question is from Hugh Jenkins, and the question is, “Is there any likelihood of a trade deal with Europe under Lula?” And I would ask, Lula has even mentioned in the Financial Times he might want to change some things, or at least try to, in those negotiations.
Even if Congress continues with this demand for fiscal spending and there’s not very many reforms possible domestically, could we see an EU trade deal go forward under a potential Lula administration, and what do you envision it looking like?
Mansueto Almeida
You know, I mean, I think, so, you know, and sometimes I know Lula says a lot of things during the political campaign, sometimes very radical but, you know, at the end, I don’t expect that radical movement. First of all, because the Congress will not allow that, since you have this Congress that moved to the centre, to the centre-right. You know, it’s not, I mean, guaranteed that you could reform, but on the other hand, I think it would be a very important counterweight to any radical proposal for any government.
So, at the end, you know, I think, I mean, it doesn’t matter who win the election. I think they will perceive the benefit of Brazil to move ahead with, you know, this kind of trade agreement with European Union, and join the OECD, of course, a new programme…
Catherine Osborn
Yeah, I saw Monica just raised her hand, so I might ask her to respond afterwards.
Mansueto Almeida
Sometimes, you know – and another thing that is quite important, it’s that we have a lot of uncertainty concerning Brazil, an emerging economy as well, as developing country as well. Look to what has happened in UK. I’m completely shocked about a country that is cutting the, you know, the tax burden by 2 percentage point of GDP, increase their expenditure and, you know, and causing a massive, you know, problem with the markets. And it’s quite crazy because, you know, the world is a little bit crazy today, and the funny fact is that, despite all this problem in Brazil with the Congress’s uncertainty, the FDI every year is increasing by 70% vis-à-vis in the last year. Somehow, the foreign investors, you know, are coming.
I know – I agree with many things that was said here, but at the end, you know, if we’re talking about renewable energy, all the major companies in the world are coming to Brazil to invest in renewable energy. Many on agriculture sector, a lot of investment coming to the agriculture sector, to infrastructure investment as well. So, you know, you have a lot of uncertainty, it’s not clear what will be, you know, the commitment to trade up, and that’s of both governments. Sometimes I’ve thought that Bolsonaro will not push this agenda, but at the end, you know, Brazil had a good – you know, moved a little bit ahead.
People in Brazil, especially the entrepreneurs, they are very protectionist, and if you look at what’s happening all over the world, the countries are much more protectionist than what – than they used to be ten years ago. So, it’s a little bit uncertainty, but again, you know, this starting point matters a lot and Brazil, you know, we cannot go through at the wrong direction because otherwise you have a downgrade of rate the agency and things will get worse. And, you know, this new government, doesn’t matter who will be this new government, if he doesn’t give the right message to the market, he will hide a problem, and I don’t expect this will happen.
Catherine Osborn
Thank you, Mansueto. I’m going to go to Monica because she had a comment, and additionally, I wanted to say that we have one final question here and I’m going to ask that folks respond to it and give any final comments that you’d like to give, beginning with Monica. The question is from Melanie Avila, and it is, “How would a Lula or Bolsonaro win affect Brazil’s political and economic role in the region?” So, any comments you want to make about the election and Brazil’s role in the region, and we’ll start with you, Monica.
Monica de Bolle
Okay, thank you. Well, I respectfully disagree with Mansueto. I don’t really see any possibility of Mercosur/EU advancing under either government, certainly not under Bolsonaro’s because the environment has been a major, major sticking point. And under Lula, unless he really is able to revamp the entire structure of environmental legislations and environmental agencies, and that’s a very tall order because, of course, these agencies have been taken over by Bolsonaristas, to a very large extent, so, it would mean, you know, basically taking these people out and putting others in, it’s an effort, it’s not something that you can do quickly, I also don’t see Mercosur/EU moving forward.
So, the environment, climate is a major, major deal for the European Union and Brazil is currently a pariah on the environmental front. This isn’t going to change from day to night, regardless of who becomes President. So, I don’t think the situation’s that easy.
The – on the question itself, can you remind me what the question was?
Catherine Osborn
Sure, it’s about regional relations.
Monica de Bolle
Regional relations.
Catherine Osborn
So, how would either a Lula or a Bolsonaro administration affect Brazil’s political and economic role in the region?
Monica de Bolle
So, Brazil has been very insular for the – well, Brazil has been very insular, period, we can just say that. Under Lula, in the – well, 20 years ago under Lula there was a lot of – the external – the foreign policy, the external policy had a lot of this South-South bent to it. And at the time, of course, there had been what many Political Scientists called the “Pink Tide” in the region. So, Lula had a lot of people who he actually had relations with, and those relations, you know, were, sort of, well-established.
It never really went anywhere, because it’s not as if Brazil actually made big, you know, trade deals or investment deals across the board with other Latin American countries. But at least on the geopolitics and the diplomatic front, things did work somewhat better than they – than perhaps they had in the past. Not so much actually, because Fernando Henrique had good relations across the region, too.
Bolsonaro essentially broke that off and, you know, he isn’t – Bolsonaro is a nationalist at heart and so is the far-right, by the way, we should add that. There is an anti-globalisation, a very clear anti-globalisation agenda on the part of the far-right. So, they are nationalists, and being nationalists, they don’t really have the concern of establishing relations with the neighbours, or establishing relations with the region, and we saw that under Bolsonaro. Over the past four years, okay, there was a pandemic in the middle and of course that got in the way, but it could have gone the other way, right?
It could have gone the way of, given that the pandemic is something that has spilled over across borders, and Latin American borders are very porous, there could have been some kind of co-ordination, at least on the public health front, and we didn’t even see that under the Bolsonaro administration. So, another Bolsonaro administration’s more of the same in that regard, and Lula is just going to have so many problems, but so many problems to administer that he’s not going to have time, I think, to think about these issues.
How do other countries reflect what’s happening in Brazil, in terms of their own internal politics? Well, I don’t think that happens very much. I think the situation that we currently see in Brazil has no equivalent anywhere in the region. I mean, all countries in Latin America are at this moment polarised, there’s no doubt about that. There is certainly a movement amongst the electorate to vote out incumbent. There’s no doubt about that either, but there is no “Pink Tide”. I think there’s been, kind of, an effort, at least that we see in the media, of trying to tell the story of a “Pink Tide”, because of the elections in Chile and the elections in Colombia and previously the elections in Mexico.
I don’t think those are representative of any kind of preference for the left at all and they – it’s only representative of the fact that people are fed up with their current political systems and with whomever is in power at that point in time, and so, they vote them out and they vote somebody else in. And in Brazil, that is the situation in a sense, but not exactly, because we have seen, as I was stressing before, and Richard before me, that Bolsonarismo is alive and well. So, even if Bolsonaro does get voted out, he still enjoys a large chunk of support. It’s not as if he’s – if he leaves office, he’s going to leave with still a large chunk of support and a large chunk of rejection, which is the result of polarisation, and his movement is everywhere.
Catherine Osborn
Thank you.
Monica de Bolle
So, I think that’s the main message there.
Catherine Osborn
Thank you so much, Monica. Richard, we’ll go to you.
Richard Lapper
Well, echo what Monica said about the “Pink Tide”. Certainly no “Pink Tide”, I don’t think, at the moment, and I’d echo also what she says about the environment. I mean, it’s clearly going to be a priority for Lula to try to revamp IBAMA and ICMBIO, the state agencies that, very successfully, it must be said, during his first two administrations, tackled the problem of deforestation. He’s clearly going to try and do that. It is going to be difficult to find the money, to be honest. It’s going to be difficult politically, because clearly they have, as Monica said, been taken over by folk loyal to the Chief.
Now, I think one interesting parallel with Brazil in the region that I’d draw to people’s attention is what happened earlier last month in Chile, when polls predicted that the new constitution would be approved in a plebiscite or only narrowly rejected. And the rejection, essentially a vote rejecting a left-wing constitution, was by 25 points. So, in a way, what we had in Chile was the same kind of shy right-wing sentiment that didn’t appear in the polls.
And my suspicion, if we go back to the polling, is that a lot of people who vote for Bolsonaro or “Rechazo” in Chile; they don’t actually bother replying to polls and they don’t answer honestly. And that the polling industry has got to grapple with that because clearly, in both those examples, we underesti – we saw a bit of this actually in the Brexit poll in the UK. We saw a bit in the Trump election in 2016 where, you know, the polls thought that Hillary Clinton would win. The polls thought that we would stay in the European Union and yeah, you know, that happens and people don’t necessarily – these views that are considered to be not respectable. People – I know that people have them. They don’t necessarily declare them, and I think that’s, kind of, a – that’s something we’re going to have to take into account, particularly over the next few weeks, when we’re going to get polls about the run-off, and who knows whether they’re right or not?
Catherine Osborn
Yeah, thank you so much, Richard. Mansueto, we’ll close with you, so, any final comments you have, either about regional relations or anything else you’d like to add?
Mansueto Almeida
No, I mean, not much, you know, but you have many challenges ahead, we have, I mean, you’re in the middle of a strong polarisation where everybody thought that this election, basically you finished. It’s quite the opposite. I think, as Monica and Richard expressed, we’re in the middle and continue a wave of polarisation that will continue. This election, 2022, was not much different from 2018. So, you know, and in order to approve important reform, we need dialogue. We need, you know, different political parties debating with each other in a very calm way, how, you know, to reach compromise, in order to make important reforms of the country.
It still needs to approve to have a more sustainable growth. So, we have many challenges ahead, you know, as it – but it is not much different from what is happening all over the world and equally, in Latin America, but let’s see. Let’s see in the – at the end how this will go. At least, I mean, the starting point is better than you expected two years ago, because two years ago we were expecting to finish this government with a debt to GDP around 94% of GDP. It will be 77. We can, you know, we can screw up or we can, you know, make things work. It’s a big challenge ahead but, you know, let’s hope that we will improve the political debate and move forward, but again, I mean, that’s many open questions, I mean, I had.
Catherine Osborn
Thank you so much, Mansueto, and thank you to all of you for participating and raising these great points, both about the need for dialogue to identify, you know, what kind of progress needs to be made, and also, really understand the magnitude of the obstacles to progress and, you know, look at what the track record is of Brazilian politics over the last administration and see how strong these trends are. They’re not going away any time soon. So, as the second round of the election approaches, we’ll see how Brazilians are able to try to move through this and, yeah, once more, thank you again for providing you guys’s insights, and we’ll stay in touch.
Monica de Bolle
Thank you very much.
Mansueto Almeida
Thank you, bye.
Catherine Osborn
Bye, bye.
