Five Upsides to Brazil’s Crisis

Brazil is in the midst of the longest recession of the democratic era that began in 1985. Between 2015 and 2016, the economy will shrink by 7 percent, more than in any other two-year period in the past century. The Economist’s dire cover story this week summarized the sad state of affairs: a downgrade in the country’s debt to junk status, a massive corruption scandal, rising public debt, two-digit inflation, and a rudderless political system, all contributing to “Brazil’s Fall.”

Many Brazilian pundits and academics agree on what needs to be fixed. In the short term, to rein in government spending—the nominal deficit now stands at 10 percent of GDP—they call for shrinking government credit subsidies, reforming the social security system, and reducing the overall size of the public sector. In the longer term, these analysts argue for improving competitiveness, boosting innovation, and above all, restoring the industrial sector.

Given the depth of the crisis, 2016 was always going to be a painful year. Making it worse is the government’s inability to do much to soften the blow. The December departure of Finance Minister Joaquim Levy, who proved to be less of a fiscal scissorhands than markets hoped, underlined the huge political challenge of fiscal reform. The governing Workers’ Party (PT) has been ambivalent if not just plain opposed to austerity measures. Its fickle allies in the centrist PMDB have been unwilling to take up the burden without a clear sign of government commitment, and the opposition is happy to bleed President Dilma Rousseff dry. Congressional backing for the government has fallen, and the cost of legislative support has risen in inverse proportion to the perceived weakness of the Rousseff administration. The tragic result is that the very reforms that might build the foundation for restoring growth seem unlikely in 2016, or even during the remainder of Rousseff’s second term, which is not scheduled to end for another 1,090 days.

If anything, the political climate is likely to worsen in the new year. Although impeachment still seems unlikely, it will continue to dominate Brasília’s attentions when Congress returns to session in February. Whatever bandwidth remains will probably be filled by the Lava Jato and Zelotes investigations, which are increasingly focused on senior political figures. In this climate, neither the government nor Congress will push for legislation that requires super-majorities, such as tax, electoral, pension, or civil service reforms. Public consensus about these themes has not yet coalesced, and some pundits argue that the situation may need to worsen even more before politicians are willing to undertake such unpopular choices.

Where are the upsides, then?

While none of these are exactly silver linings, they could, along with the Rio Olympics, bring hope to a beleaguered nation.