Brazil’s troubled economy: Prospects for recovery in the midst of growing polarisation

Brasil Observer - Dec 06 2016
Brasília - Para evitar confrontos entre manifestantes pró e contra impeachment a Secretaria de Segurança Pública do Distrito Federal definiu divisão de espaço na Esplanada dos Ministérios (José Cruz/Agência Brasil)
José Cruz/Agência Brasil

By Marieke Riethof

In the aftermath of Dilma Rousseff’s impeachment last August, Brazil has been struggling to escape from the increasingly protracted political turmoil and economic crisis. Both Dilma’s and Michel Temer’s governments have faced destabilisation as result of these economic problems, translated in turn into growing polarisation and protests. Recent political developments illustrate that intertwined nature of Brazil’s economic and political crisis, driven by intense protests on the left and the right, suggesting that even if economic indicators show sign of improvement, the crisis is far from over.

Although it is tempting to attribute the recession to Dilma Rousseff’s policies, the roots of the crisis are complex, which means that Brazil’s economic future depends on a multiplicity of political and economic factors. With the world in turmoil after the EU referendum in the UK and the US presidential elections, the likelihood is that the growing uncertainty will harm rather than benefit Brazil’s economic prospects.

The late 2000s marked the end of Brazil’s economic boom, leading to a deepening recession that started in 2014. The Brazilian economy shrank by 3.8% in 2015 and the figures for 2016 indicate that this decline has continued this year. The recession has also affected the country’s position in the world economy as an emerging power. While in 2012 Brazil briefly overtook the UK as the world’s sixth largest economy, it has now dropped to ninth place, after France, India and Italy.

In social terms, the recession has led to increased unemployment, rising to almost 12% in the second half of 2016. Meanwhile, spending power has fallen while the number of people working in the informal labour market has increased, reversing some of the improvements seen during the 2000s, when unemployment decreased steadily. These trends suggest that the recession’s impact on ordinary Brazilians has been negative and that social improvements may lag behind economic recovery in the near future.

The recession also marks the end of an extraordinary cycle of economic growth, peaking at 7.5% in 2010. Explanations of this reversal reveal both conjunctural and structural factors that will shape the fortunes of the Brazilian economy in the near future. Although critics of the PT governments have pointed to corruption, overspending and other inefficiencies as the main cause of the economic downturn, the changing global context has proved to be equally important.

Even more so than other Latin American countries, Brazil benefitted from the boom in global commodity prices and growing trade with China in the 2000s, gearing the economy to mineral, agricultural and natural resources exports. Now the global prices of these goods have dropped substantially, the export-dependent Brazilian economy has started to suffer.

Although state involvement in the economy expanded under the second Lula and first Dilma administrations, opinions about the role of government policy in the country’s development have not pointed universally to government mismanagement and overspending but other voices have argued that economic growth was associated with the expansion of public investment in the second half of the 2000s. Others have argued that the high commodity prices in the 2000s obscured long-term structural problems, such as poor infrastructure and education that dated from long before Dilma came to power.

A recent article in The Economist detected some glimmers of hope since September this year, noting that certain economic indicators had improved, such as business confidence. Controversially, the magazine attributed this change to the outcome of the impeachment process, arguing that Michel Temer’s government is more business-friendly. However, the new government itself is far from immune from corruption scandals so the prospect of another protracted impeachment process could create further political and economic stability. Despite these political problems, the OECD is also moderately optimistic and expects a “slow and gradual recovery” in 2017, with unemployment forecast to increase in the near future.

To tackle the country’s formidable economic problems, the new government under president Temer has emphasised fiscal discipline focused primarily on public spending while cutting interest rates to stimulate the economy. To promote spending and borrowing, the Central Bank reduced interest rates by 0.25% to 14% in October 2016 and decided on another 0.25% cut in November, alluding to further cuts in the future. Rather than expanding consumer spending through social policies and minimum wage increases as happened under the PT governments, the current government’s has focused on credit availability to boost the economy. Whether this strategy will work while the economy continues to contract is nevertheless doubtful.

Controversially, the government also proposed to freeze public spending for the next two decades, based on the view that the recession’s roots can be found in the previous government’s excessive spending. The constitutional amendment – known as PEC 55 – imposes a cap on public spending freeze until 2037. PEC 55 ties future governments to the spending freeze, raising the question once again to what extent current legislators have a democratic mandate to make such far-reaching decisions without a general election.

Moreover, critics have argued that the spending cap will hurt many Brazilians who need public services such as health and education, particularly now they are struggling with job and wage losses. Dissatisfaction with public health and education spending provoked the mass demonstrations in 2013 and there is no sign that these sentiments have abated.

The proposed spending cuts have sparked protests as well as violent clashes between demonstrators and the police. While the Senate voted in favour of PEC 55 on 29 November, 10 to 12,000 people demonstrated outside the National Congress in Brasília. There was a strong presence of students among the protestors, reflecting the recent surge in school occupations and student protests against the government’s education policy.

The deepening opposition to austerity has also provided the anti-impeachment protestors with a renewed focus against unpopular and controversial government policies. Together with the continuing economic problems, the polarised political context suggests that even if the economy recovers next year, this is unlikely to bring the economic and political stability that Brazil needs.


  • Marieke Riethof is a lecturer in Latin American politics at the University of Liverpool