On June 20, 2013 protests erupted throughout Brazil drawing at least 250,000 people and eventually peaking with over a million participants. Many throughout the world and certainly within the Brazilian government were shocked by the seeming suddenness of the discontent.
Taking place primarily in urban areas, the protests were initially sparked by a 7% increase in subway and bus fares, but were driven by many underlying forces. Dubbed the Revolta da Salada, the demonstrations included acts of vandalism, arson attacks on various government buildings, and periodic clashes with police. The strength of the protests and the tenuous truce that has seemed to end them are suggestive of deep issues within Brazil that extend far beyond a ten-cent transport fare increase in Sao Paulo. The driving causes of these demonstrations and how the government responds have important consequences for organizations seeking to invest and do business in Brazil.
In the last decade, Brazil has undergone remarkable economic growth and weathered the 2008 fiscal crisis better than other leading economic powers. During this period of dramatic growth, Brazil’s economy expanded at an average rate of 4% per year, while hyperinflation (a historic problem in the country) was contained and 30 million Brazilians joined the middle class. Simultaneously, capital inflows expanded at an astounding rate, growing from $5 billion in 2007 to over $70 billion five years later.
Yet, a significant degree of this growth was predicated on commodities. Thus, once the commodity craze ended, Brazil’s growth began to slow considerably. The slow growth served to unmask a variety of serious issues that Brazilians had previously been willing to overlook. Chief among these is the comparatively low level of investment in infrastructure. Average emerging market infrastructure spending floats around 5% of GDP, but in Brazil it is a paltry 2%. Protestors were quick to point to the irony of massive construction projects for the World Cup and Olympics, while the average Brazilian faces significant challenges just getting to work in the morning.
Can Brazilian President Dilma Rousseff finalise structural reforms direly needed for economic transition before elections in 2014?
Indeed, Brazilians have long complained that they don’t receive an adequate level of services, despite high rates of government spending and taxation. Government spending as a share of Brazil’s economy has risen from around 20% in the 1980s to nearly 40% in 2010. The large welfare state, encapsulated in the Bolsa Familia policy, has been responsible for helping to grow Brazil’s middle class and making some important welfare gains.
Yet, these policies have also encouraged a tax intake of 38% of Brazil’s GDP, the highest among emerging markets. Further, frustrating economic dynamism is the high interest rates that Brazil originally implemented to curb inflation. High interest rates have helped to attract foreign capital, but have severely undercut domestic manufacturing, which has dropped precipitously as a share of GDP. In short, the same policies that helped Brazil achieve economic success in the last decade are slowly becoming detriments to growth in this one.
The sudden emergence of these issues is troubling for political and economic stability. However, the arguably larger and more positive takeaway is that Brazil now has a stable middle class that is demanding a greater level of accountability and transparency. A politically active consumer class can serve as an important check on inefficient policies, corruption, and bureaucratic inertia. This bodes well for Brazil’s long-term economic prospects, despite short-term instability.
Businesses and investors should view the immediate response of the Brazilian government as rather mixed. Unlike recent protests in other countries, the Brazilian government did not use repressive methods to crack down on demonstrators, and while some have criticized the government as slow to respond, President Dilma Rousseff has publicly acknowledged the validity of many of the protesters’ grievances.
However, early steps such as the repeal of the bus fare increases in various municipalities, while illustrating basic responsiveness to popular outcry, are far from addressing the core issues troubling Brazil. In an encouraging sign, the government has promised more money towards infrastructure spending. Rousseff has also indicated that dealing with many of the aforementioned problems will require structural reforms to the political system. Whether she will have the political capital to initiate such changes remains to be seen, given her dramatic drop in approval ratings.
Rousseff has sought a populist approach by seeking to fast track anti-corruption legislation that has been languishing, offering greater governmental transparency, sending a corrupt government bureaucrat to prison (who had been convicted over three years ago), and promising a popular vote on political reform measures. Given that Rousseff is up for re-election in 2014, these targeted reforms partly reflect short-term political calculus, but if implemented correctly they could have important long-run benefits.
Unfortunately, many of the reforms outlined continue to lack specificity, creating an air of uncertainty. The Brazilian economy, at present, is in a state of tenuous transition following commodity price changes and the after-effects of the boom. With growth slowing in critical markets like China and India, commodity prices are unlikely to rebound strongly in the near-term. This means Brazil will need to engage in important domestic reforms to unlock new growth.
The government has taken some important steps in this direction and a newly active middle class will likely push them further. Political unrest often deters foreign business and in most cases it is a serious risk. However, the situation in Brazil is more nuanced. Short-term political battles could disrupt some economic activities, but this new-found activism is likely a critical ingredient for building a better Brazilian economy in the years ahead.
