Political Corruption and Instability in Brazil

Political Corruption and Instability in Brazil

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Matthew M. Taylor, adjunct senior fellow for Latin America studies at CFR and associate professor at American University’s School of International Service, discusses Brazil’s political and economic outlook following the recent impeachment of former President Dilma Rousseff, as part of CFR's Academic Conference Call series.

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Speakers

Matthew M. Taylor

Adjunct Senior Fellow for Latin America Studies, Council on Foreign Relations; Associate Professor, School of International Service, American University

Presiders

Irina A. Faskianos

Vice President for National Program and Outreach, Council on Foreign Relations

IRINA FASKIANOS: Good afternoon from New York. And welcome to the CFR Academic Conference Call Series. Welcome back to the new school year. I'm Irina Faskianos, vice president for the National Program and Outreach here at CFR. Today's call is on the record and the audio file and transcript will be available on our website, CFR.org, if you'd like to share with your colleagues or classmates.

We're delighted to have Matthew Taylor with us today to discuss Brazil's political and economic outlook following the recent impeachment of former President Dilma Rousseff. Dr. Taylor is CFR's adjunct senior fellow for Latin American studies. He is also an associate professor at America University's School of International Service. He has lived and worked extensively in Latin America, most recently as a member of the Political Science Department at the University of San Paulo, where he was a faculty member for five years. Dr. Taylor is the author of "Judging Policy: Courts and Political reform in Democratic Brazil," which was awarded the Brazilian Political Science Association's Victor Nunes Leal Prize for best book. He has also co-edited two volumes on Brazilian politics and foreign policy, and his scholarly work has been published in a variety of journals.

Matt, thank you very much for being with us today. As I referenced, President Dilma Rousseff was impeached. Could you talk a little bit about that, what the impeachment represents for the Brazilian government, and its political and economic outlook?

TAYLOR: Yes. Well, thank you very much. Good afternoon, everyone. And thank you for the nice introduction, Irina.

Let me—you've given away the punchline. Impeachment took place on August 31. Dilma Rousseff, who had been governing since 2011, was removed from office in a vote of 61 senators with only 20 senators supporting her. And she was replaced by her vice president, who had been a member of her coalition, Michel Temer. And he's been governing all month, for the last two weeks. So this is a very interesting moment in Brazilian political life. It's a very challenging moment as well.

What I'd like to do is tell you a little bit about why or how I see impeachment, how it proceeded and how it came about. But then also, as a result of those very forces that brought about impeachment, how I see Brazil proceeding over the next few years, certainly up until the 2018 election that will select Michel Temer's replacement. But also highlighting the fact that this is a transformational moment in Brazilian democratic history. Brazil returned to democracy in 1985. It's been a democracy full of ups and downs. But it's been a democracy that seemed by many—according to many, to be proceeding and developing and consolidating in a hopeful direction.

The crisis of the past three years has suggested that there was a little bit of overeagerness to believe that Brazil had somehow broken with structural problems that it's faced in the past. But I think that the crisis of the past three years suggests that the trajectory of Brazilian democracy is under challenge, that it will have to change. And hopefully after today's talk you may have a better sense of what the forces are that are driving that transformation.

So with that preamble, let me suggest to you that there were three major pillars to the Dilma Rousseff administration. Those pillars have largely fallen apart. And much of what we're seeing now, both on the political front as well as the economic front, is the result of the collapse of these three pillars. The first pillar is the system of coalition presidentialism in Brazil. And Brazil has had for much of the past 20 years three very significant parties.

On the left, the Worker's Party, Dilma Rousseff's party, President Lula's party, her predecessor. The Worker's Party, also known by its Portuguese acronym, the PT. On the right, or the center-right, the PSDB, the Social Democratic Party. And in the middle, 33 other parties, anchored by the PMDB, which happens to be Michel Temer's party. The problem those, as you heard me say, there are 35 parties. And so this is an extraordinarily unwieldly party system. Usually the president comes into office with fewer than 20 percent of the legislative seats, and rapidly has to put together a coalition. That coalition has been anchored under governments of both right and left by the PMDB.

The second major pillar that undergirded the Rousseff administration and her predecessor, the PT, and to a certain degree as well their predecessors on the center-right, was the system of state capitalism in Brazil. And we can talk more about this in the Q&A, but state capitalism has been enduring in Brazil, this economic system by which the state plays a very significant role in the economy both through state-owned enterprises as well as through cross-shareholding and minority shareholding in a variety of private sector firms.

The third pillar was the trio of economic policies that have guaranteed a certain stability to the Brazilian economy since 1994. And this includes fiscal responsibility, inflation targets, and a floating exchange rate. As you may know, Brazil faced extraordinary hyperinflation prior to 1994. And so most of these economic policies have been targeted at preventing a return to devastating hyperinflation.

So the three pillars—coalitional presidentialism, state capitalism, and this trio of economic policies—were severely eroded by the Rousseff administration. Dilma Rousseff has many qualities. She is not known, however, as a particularly able politician. She was unwilling to play the game of coalitional presidentialism. She fought with the central party in her coalition, the PMDB. And she so we saw just an extraordinary fragmentation and the turning of Congress against her.

The second problem was that simultaneously a major investigation called the Lava Jato or Car Wash investigation destabilized many of the political and economic bargains that lay behind both coalitional presidentialism and state capitalism. And then, third, Dilma Rousseff's preferred economic policies, which were more statist than her predecessor, and that deepened the fiscal deficit, destabilized the economy and destabilized the trio of economic policies.

So the destabilizing of these three pillars of the Rousseff administration, and more broadly pillars of the PT governments of the last 13 years, led to a very slow-moving train wreck. Dilma Rousseff was impeached by the lower house of Congress in May. And the trial against her proceeded in the Senate. And as I've already mentioned, she was removed 15 days ago. The irony here is that she was replaced by her running mate, Michel Temer, a member of the PMDB, the centrist party. And Michel Temer is governing with many of the same coalition members who supported the PT and supported Rousseff herself.

So I think there are several questions going forward. I'm sure you all will have many other questions. But the questions I have going forward really go back to the three pillars I've talked about. What will happen to coalitional presidentialism? What will happen to state capitalism? And what happens to economic policies? And I'll proceed in reverse order here.

On economic policies, Temer has shown that he really wants to work in a more rightward direction on economic policy. In many regards, I think he has very little choice, because the fiscal situation is so dire. The country is running a primary fiscal deficit of 10 percent of GDP. So this is very, very significant.

With regard to state capitalism, the Temer administration has moved extraordinarily quickly to put into place policymakers within Petrobras, within the National Development Bank, in key positions within the bureaucracy, who are, quote, unquote—and I don't like this term very much but I'll use it anyway because it summarizes their position quite neatly—they are, quote, unquote, "neoliberals." And these are appointees who are expected to cut staff, who are trying to bring budgets into order. And just yesterday the Temer administration announced a set of privatization and concessions, an initiative to sell-off state assets that I think we'll see dominating the next two years of his term.

Finally, and this is, I think, the biggest question, is what happens to this unwieldy coalitional political system? And Temer has shown no sign of wanting to reform the electoral or the party system. But at some point in the next decade, Brazil will need to do so. I think it's become increasingly evident that Brazil's current political system cannot continue to function in a manner that is as unwieldy as the current coalitional system. Just by way of reminder, this is actually—Dilma Rousseff's impeachment is the second of the six presidential terms—seven presidential terms we've seen since the return to democracy. And you know, she's only the fourth elected president in that period. So this is a system that is still feeling its way. And I think the impeachment suggests that reform is needed.

But at the same time, Temer is going to be forced to deal with all of these problems against a backdrop of deepening scandal. And when I say that it's a deepening scandal, let me suggest to you that what we have seen so far with the Car Wash investigation is only the tip of the iceberg. In the past year, there was another major investigation opened up—the so-called Zealot investigation, that looks at abuses and corruption by tax authorities. Just in the past two weeks the Greenfield operation by the federal police began looking into massive corruption—we're talking in the billions of reals, within the pension funds. And there's talk now of percolating investigations into the National Development Bank, as well as into other parts of the administration.

So I think that corruption and corruption scandals are here to stay. The question is, what do they do to destabilize both the Temer administration, but then more broadly do they destabilize the coalitional system further? This is a coalitional system that's already sort of teetering, I would argue, given the extraordinary investigation of corruption that has been the Lava Jato, the Car Wash investigation of the past two years. So you know, as I began I noted that Brazil is on the cusp of a change in its trajectory. I don't claim to know where that—where the new trajectory will lead it. But I think that the combination of these three pillars comes together to suggest that Brazil that we see at the end of the next full presidential administration in 2022 is likely to look very different than it does today in 2016.

So with that, let me stop. And I'm happy to take lots of questions. And I'm sure that you have questions about issues that I haven't addressed. Thank you.

FASKIANOS: Thank you, Matt. That's terrific. So let's go to questions.

OPERATOR: At this time we will open the floor for questions.

(Gives queuing instructions.)

Our first question comes from the University of Toronto.

Q: Hi. I'm Alexis Waat (sp). And I'm a student at the Munk School of Global Affairs at the University of Toronto.

I was actually in Brazil last December, December 2015, doing research on the social assistance program, Bolsa Familia, which is a federally run program but implemented municipally. And we were there because we were working at why it is so much more successful than other similar conditional cash transfer programs. I'm wondering how the social assistance programs and the social safety nets that have been put forward by the PT over the last decade will be affected by the new belt-tightening direction that Temer will be having to take the government?

TAYLOR: Well, thank you. That was a—that's a wonderful question. I think, you know, there are a couple of countervailing pressures here with regard to the conditional cash transfer program, Bolsa Familia. Bolsa Familia has been enormously popular and, I would argue, is responsible for the reelection of Lula and, of course, the election of his indicated nominee, Dilma Rousseff. And I think as a consequence of that popularity, it's a bit of a lightning rod as well. That is, it would be very difficult for any government to try to restrict spending on the Bolsa Familia. It would be politically very dangerous for them to do so.

This is particularly the case for a government like the Temer administration, which is plagued by doubts about its legitimacy, and also in a country in which neoliberal is very much kind of a bad world. It's been Cardoso was the last government—the Cardoso administration was the last government that could be defined loosely as neoliberal. And many people—he left office at an extraordinarily low popularity rating. And many people, you know, I think looked to the PT as the saviors from the crisis left behind by Cardoso's administration. The Bolsa Familia was a big part of that.

On the other hand—so I think that the—you know, the starting point is that it's a lightning rod and any politician who decided to cut it overtly would face enormous political repercussions. On the other hand, though, I think that there's a countervailing pressure, which is the fiscal imperative. And the Temer administration really has no choice but to tighten the collective belts of the public service. The most recent proposal made by the Temer administration is to put a cap on spending that would be adjusted according to inflation. And under that cap, you would basically halt the pie—the spending by the government from growing.

And what that means is that if the pie doesn't grow, Brazil is going to have to take a very close look at how it's allocating spending. Right now, I won't get into all of the details, Bolsa Familia is really not a huge component of spending. It's about a half a percent of GDP. But you could imagine that as that cap begins to bite, the pie won't be able to grow, and hard choices will need to be made. Is it—is it better to keep Bolsa Familia or is it better to increase civil service wages? And, you know, I know what I would answer to that question, but the civil service is very strong. And so we could see pressures that might force—whether politicians wanted to do so or not—but that might force a reduction in Bolsa Familia.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you.

(Gives queuing instructions.)

Our next question comes from City College of New York.

Q: Hi. I want to ask what role did the United States play in the impeachment and removal of President Rousseff?

TAYLOR: It's a—it's a—let me make sure I'm still talking to an audience. It's a great question, especially because the United States played a role in the 1964 military coup that removed the last democratic regime in Brazil. And there have been those who have suggested that this is a coup as well, that the removal of Dilma Rousseff was illegitimate and didn't follow democratic process. So I think the question is a very good one.

The U.S., I think, took a relatively standoffish approach. And to the extent that it took any position at all, it stated that I thought that the impeachment was following the institutional and constitutional rules of Brazilian democracy. To my knowledge, though, that was the extent of the U.S. involvement in the impeachment process.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Next question comes from Harvard University.

Q: Hello. My name is Chichi Aguierni (sp). I'm an international affairs major at Howard University.

My question was, do you—what do you know about Temer, the current president's, requirements on labor and pensions privatization plans?

TAYLOR: On labor and privatization, is that correct?

Q: Yeah, because apparently he released, like, something that he was saying that he was saying that he's going to—like, he has a privatization to like boost economy in Brazil. But it wasn't, like, specific. So I was just wondering if you had any specifics.

TAYLOR: Yeah. So let me—these are wonderful questions. So right now, let me just paint a broader picture. Right now, what we know about what the Temer administration wants to do is, to a large degree, speculative based on selective leaks and a few announcements. But the Temer administration has been playing a very difficult game politically. Up until 15 days ago, Temer was the interim president, but he was trying to hold together a coalition that would vote for impeachment. So you can imagine under those conditions he was reluctant to say anything about what he would do. He sent many signals about what he might do, but he was reluctant to come out with any major plan.

The second constraint on Temer is that he faced municipal elections—or, excuse me—the country will be going through municipal elections all during October. And these are the most wide-open elections—municipal elections that we've seen in living memory. The PT has been significantly weakened, but it's not clear who will replace the PT. And under these conditions, politicians—the last thing politicians want to do is get stuck talking about unpopular reforms. And so the Temer administration has tried to move slowly, but they are under pressure from one of their coalition allies, which is the PSDB, the Cardoso party—Cardoso's party, now headed by the presidential candidate who lost to Dilma Rousseff in 2014, Aecio Neves. And Aecio Neves and his fellow party members have been pushing the Temer administration to fulfill their promises—to fulfill Temer's promises to the PSDB, and undertake major reforms.

So he has begun talking about reform. The talk on labor reform is so far very vague. We don't know a lot about what they're planning to do, but it sounds like what they want to do is, quote, unquote, "flexiblize," make more flexible the labor law. And the labor law in Brazil dates back to Getulio Vargas in the 1930s, and his labor laws that were implemented in 1937. These are laws that are, to use a term that we might want to define later in the classroom, corporatist. But you know, laws that if you're a member of the formal workforce, which only about half of Brazilians are, are very generous. But of course, they only apply to about half of the workforce. And so the effort here would be to try to loosen the laws a little bit so that they could cover a broader swath of the labor force. But in so doing, they would weaken many of the benefits that formal workers find of interest.

The other three reforms are privatization, social security, and the fiscal cap that I've already talked about. The fiscal cap seems to be moving forward. Pension reform, social security reform, we still don't have many details but, again here, the effort is to try to cut the costs of social security, including by raising retirement—the retirement age. And the final thing is privatization. Yesterday a plan was put forward that would sell off or create public concessions covering about 35 billion reals. That's roughly $10 billion worth of public assets. So it's nothing to sneeze at. That being said, it's also a little bit of a rewarming of policies that were already underway under President Rousseff. So Rousseff had already been pushing public concessions. She had been doing so because she was facing this enormous fiscal crisis.

And, you know, I think that many of those policies are still a part of the government's package. It probably goes a little bit further than Rousseff would go. But I think generally speaking, the big question is, where are these investors going to come from? The major construction firms that might have been very influential in public concessions have been essentially decimated by the Lava Jato investigation. And foreigners are, you know, remarkably reluctant to come into Brazil at this point in time. I think many investors would rather wait until the political scenario has been—has quieted down and there's a clearer trajectory in place.

OPERATOR: Thank you. Our next question comes from VCU. The next question comes from VCU.

FASKIANOS: Maybe we should move on and then come back?

OPERATOR: Yes, ma'am. The next question comes from the University of Kansas.

Q: Hello. My name is Carla (sp). And I'm a student at the School of Journalism at the University of Kanas. And I had a question regarding your quote saying Brazil—the Brazil we see in 2022 will look very different from the Brazil we are seeing today in 2016. Could you further elaborate on that, please?

TAYLOR: I wish I could. (Laughs.) Carla (sp), it's a great question. The problem is that I think there's still a lot to be decided by Brazilians. I've talked a little bit about reform. The other issue is whether the Temer administration is successful or not. As an administration has basically two years and four months left in office. And then we go into the 2018 elections.

Right now, I think this is the biggest uncertainty hanging over Brazil, because President Lula, Dilma Rousseff's predecessor and political mentor—President Lula has been extraordinarily weakened by the corruption investigation. There is some speculation that he will be indicted in the coming months, maybe even weeks. And so his potential to spark a resurrection of the PT is in doubt and in question. That being said, he is currently the leading candidate in most polls, at least in a first round of voting. And in Brazil, the president is elected in two rounds of voting. If no candidate passes the 50 percent mark, then it goes to a second round. Right now Lula does not cross the 50 percent hurdle and he gets beat in most polls in the second round, no matter who he's running against.

That being said, the other candidates are very much also suffering from the uncertainties raised by the corruption scandal. Aecio Neves of the PSDB has been named in some of the testimony. He denies any participation, but he's been named. There are other candidates who have not been named—Ciro Gomes and Marina Silva. But they don't seem likely to surpass—at least right now, they don't get—poll above 20 to 25 percent, even in the second round. So these are—it's very uncertain what the 2018 election will bring. And there's even the possibility that we might get an outsider candidate. I think it's unlikely, but it's still possible.

And so without knowing who wins the 2018 election, it's hard to know what trajectory Brazil will be on. But I think that there's a constant here, which is whoever is governing is going to be governing under much less generous conditions that were present during the commodity boom that began to peter out around 2008, going into 2010. And the fiscal numbers are so dire that Brazil is going to have to make choices about where to cut budgets, not just at the federal level, but also at the state and municipal level. And so you could imagine that that has economic effects, but it also has carryover political effects.

So I'm sorry that that's not a very satisfactory answer, Carla (sp), because it didn't give you a clear sense of where Brazil will be in 2016. But I still will stick to my original statement, which is it will be a very different place in 2022 than it is in 2016.

OPERATOR: Thank you.

(Gives queuing instructions.)

Next question comes from the University of Connecticut.

Q: Professor Taylor, hello. My name is Lucas Silva Lopez (sp). I'm a political science major here at the University of Connecticut. And I know we just talked about the 2018 elections. I've been following some polls. And the name of Jair Bolsonaro from Rio de Janeiro comes. His name is growing, especially among the middle and upper classes. So I was just wondering, do you think the many scandals that the Rousseff administration faced has perhaps led to the public in Brazil sliding more to the right end of the spectrum? And do you think Jair Bolsonaro may have a chance at the presidency in 2018?

TAYLOR: That's a wonderful question. You know, Lucas (sp), I think that the—Bolsonaro is fairly outside the mainstream of Brazilian politics. I always like to tell my American friends that Brazilian politics is—if you were to put it on the spectrum of Democrat and Republican in the United States, most Brazilian political parties are, you know, to the left of the Democrats. (Laughs.) Certainly to the left of Hillary Clinton. Jair Bolsonaro is, you know, an apologist for the military regime, somebody who's in favor of the free use of weapons in a country that has extraordinary problems of criminality and violence. But you know, kind of a conservative—ultra-conservative.

I suspect that his support—his level of support is somewhat—there's probably a ceiling on support for somebody like Bolsonaro at about 12 to 15 percent. And he's never gotten—I think he's currently around 10 to 12. I'd be surprised if he could go much further than that. I think the disturbing thing, though, is that if somebody like Bolsonaro on the right, or somebody extreme on the left, were to be elected president, then they would have to govern in a system where they have to put together coalitions that in many cases need to surpass 60, 70 percent of legislative seats if they're going to undertake reform.

So I think this is significant. You raise an important question. We've never before seen—at least, in the past 30 years—we've never before seen a candidate of the hard right do so well in polls. Having said that, I think it's also important to point out that although the PT has been extraordinarily weakened, the left in Brazil consistently polls at about 30 percent, whether you're counting the PT or counting other parties of the left, even after this enormous corruption scandal, even after the impeachment of the president. The polls are suggesting that you have a very steady left in Brazil that accounts for about a third—a little less than a third—but still, a third of the body politic.

And you know, that's a very significant swath. So I don't think we can write off the left in the 2018 elections. So I think that Lula's going to win? Probably not. But a good candidate of the left could potentially, you know, have a very successful campaign, whether or not they end up in the presidency.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from St. Edward's University.

TAYLOR: Hello?

OPERATOR: Our next question come from St. Edward's University.

Our next question comes from Washington University Law School.

Q: Hi. I'm Fabio (sp).

I had a couple of quick questions. One, about the removal of former Minister Juca, after his wiretapping in which he spoke about promoting the impeachment to stop the Lava Jato investigation. And the other one about the—(inaudible)—Emendamento Constitutional (sp) 231, that would put a limit on the expenses, on education and health care for the next 20 years. Thank you.

TAYLOR: So I appreciate you raising the first question. I'll address it probably more broadly than you were intending. But Fabio (sp) is raising a question, for those of you who are not following Brazil as closely as he is, that is very interesting, that is, you know, what is the pushback from within the Temer administration against, I guess, anti-corruption or accountability initiatives? And we have definitely been seeing some very disturbing signs, even though the Temer administration is relatively young. There have been a number of signs, including the resignation of the attorney general, the advogado-geral da união, under pressure from high-level officials within the administration that suggests that the administration is not eager to empower prosecutors or even to allow the Lava Jato investigation to go forward as freely as Dilma Rousseff had.

Furthermore, there have been very serious allegations raised about many of the ministers within the Temer administration. There were wiretaps that were made public showing connections between the head of the Transpetro state-owned enterprise and very senior officials in the administration. And I think we can't forget that many of the members of the PMDB, the most senior members of the president's party—Renan Calheiros, Juca, Sarney, Cunha, who was just removed from office yesterday, the speaker of the lower house—have all been implicated and, in many case, indicted in the Car Wash investigation.

So this is definitely something to keep an eye on. At the—you know, I think at its most—at my most optimistic, I sometimes hope that the Brazilian Congress will push through some accountability reforms. There are some currently some proposal that come from the prosecutorial service that are pending in Congress. But it looks like the PMDB and its allies are unlikely to move forward on those. At my most optimistic, though, I hope that that's where they'll stop, that they won't work to undermine either prosecutors or the federal police. But that's very much an open question right now.

With regard to the constitutional amendment proposal 231 that you mentioned, I've been referring to it as the fiscal cap. But as Fabio (sp) points out in his question, this is a really—this has potentially very important consequences, including for health and social spending—excuse me, health and education spending, because those are guaranteed under the constitution. The 1988 constitution guarantees that a certain percentage of revenues are allocated automatically to health and education. And the fiscal cap would weaken those constitutional protections.

Economists will say that that may not be a bad thing, because at some level you have to make choices. This is not an expanding pie, but a pie that is beginning to shrink. But the fact of the matter is if constitutional amendment, this proposal, is approved, it will—it could potentially lead to the reallocation of revenues away from those constitutional guarantees and towards other expenditure items, some which are important, like, you know, paying down debt. Some that I think are more—perhaps less popular, like civil service salaries, which have been expanding at a continuous rate for much of the past 30 years.

FASKIANOS: Thank you. Next question.

OPERATOR: Next question comes from the University of Toronto.

Q: Good afternoon, Professor. My name is Dain Peshwani (sp). And I'm a Master's global affairs student at the Munk School.

As far as the Brazilian economy, the prices of, you know, soy, iron, and oil were booming, and that's what sort of did good things for the economy, especially in the early millennial years. However, in 2012, around 2012, all of those prices dropped. Now, in the current scenario, isn't—like, with the impeachment process as well as the political instability—wouldn't that hinder the economic condition of Brazil even further? So where do you see the Brazilian economy going, especially with the political instability that's taking place right now?

TAYLOR: That's a wonderful question. You know, I think that the investors seem to be relieved that the political crisis of impeachment had been overcome. Whether or not they were happy with Temer's, you know, swearing is another matter. But many investors seem to be relieved that the uncertainty was behind them, and behind Brazil.

Going forward, you know, I think I frequently say that there is nowhere for Brazil to go now after the last three years but up. The Brazilian economy shrank by about 10 percent—GDP per capital shrank by about 10 percent over the past three years. That suggest that there were—it would be very hard for it to continue to shrink at that rate. And most economists are suggesting it will begin to rebound next year. The big question, of course, is it going to rebound in a stable—in a significant manner? And is it going to do so in a sustained manner? And so mathematically it's going to rebound. It's probably going to be a very slow rebound. The external scenario for Brazil is still not very good. Commodity prices have not been rising. And China, which was driving much of the commodity boom of the 2000s, has not, you know, recovered.

The picture from the U.S. and what happens to U.S. interest rates is always influential in Brazil and in Latin America as a whole. That's also a significant issue. So, yes, I think—you know, some of the uncertainty is behind Brazil, but it's, I think, going to be a rather tenuous recovery. And this helps to explain why the Temer administration is trying to do everything it can on the fiscal side and then also to begin to undertake some of the productivity reforms, reforms that would increase the productivity of workers, like labor reform, you know, while there's still time, as an effort to kind of prime the pump without increasing fiscal spending.

Whether that's—you know, I think that the time table for those kinds of reforms to have an effect is probably longer than the two years that Temer has in office. But maybe they begin to bite and have some effect by the time his successor comes into office in 2019.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Next question comes from Florida Atlantic University.

Q: Good afternoon. Our question revolves around how this current political instability impacts Brazil's international positioning. Very specifically, whether or not you see this as affecting their ability or their desire to take on more of a leadership role in the international community, specifically within the United Nations or the Security Council.

TAYLOR: We could spend the rest of the day on this. This is a wonderful question. I think, you know, there are a couple things that we should be taking about here. The first is, Dilma Rousseff really moved away from the international stage. President Lula has really enjoyed being on the global stage. He enjoyed going around and meeting world leaders and trumpeting Brazil's success. Rousseff really didn't have much interest in doing so. The interesting thing now is that Jose Serra, the foreign minister, is a potential candidate for the president. He has already been a candidate for the presidency in the past. And that makes him a rival to many of the other members of the Temer administration. Serra is, of course, a member of Cardoso's PSDB, the Social Democratic Party.

So, you know, he, Serra, when he came into office as foreign minister, demanded that many of the trade agencies—agencies that deal with trade promotion, be put under Itamaraty— Itamaraty is the foreign ministry—under the foreign ministry's purview. And this led many to believe that he would try to use trade as a way to secure victories on the global stage that have been elusive—certainly during the Rousseff years, but also elusive more generally.

I think Serra has been meeting frequently with members of Mercosur. You may have seen that Mercosur has moved to ban Venezuela from—or, not ban, but to remove Venezuela as the—from the presidency of Mercosur, alleging that they have not met all of their requirements under the Mercosur treaties. So I think Brazil is working under Serra to try to rethink trade in the hemisphere, to rethink trade within Mercosur. But this is at a time also when Mercosur, the trade bloc, is in danger, partly because of the pull of the Pacific. And Argentina has been invited to be a guest member of the—or an observer within the Pacific Alliance. And there's a fear, I think, that Argentina might move in the Pacific direction.

All of this is by way of saying that I think that the larger questions of Security Council participation and a more institutionalized role for Brazil in the U.N. probably have to be held off for some time. Brazil is working to get its house together at home. To a certain degree, it's trying to get its house together within Mercosur. But it doesn't show either the sign or the capacity at this point to, I think, really engage as powerfully as it did when things were booming.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from NYU.

Q: Hello. My name is Sucsana (sp). I'm an IR grad student at NYU School of Professional Studies.

What can you tell us about the ongoing investigations? Who else is currently under investigation? And how will that affect present coalitions and reform?

TAYLOR: Who is under investigation? How about I start—because I don't know the answer to that question. You know, I think—I think we know who has been investigated. We know who is working on plea bargains. And where they go with those plea bargains and those investigations I think is really a secret that's closely held by the prosecutorial service and by the plea bargaining witnesses themselves. But, you know, I think the most interesting revelations that are coming out of the corruption investigation now are coming from the plea bargains of Leo Pinheiro, who was the top executive within the OAS construction firm, and potentially from Marcelo Odebrecht. And Odebrecht is, of course, the heir and presiding executive officer of the Odebrecht industrial and construction conglomerate.

So certainly Leo Pinheiro has been in the news a great deal recently talking about the involvement of a variety of politicians. I probably—you know, I can't—I haven't read his testimony, so I don't want to go into details about all of the people that are mentioned in that. And of course, these are only allegations at this point by a plea bargaining witness who's trying to reduce their potential jail time. So they have to be taken with a grain of salt.

But, you know, I think that if I had to summarize where things stand right now, the Car Wash investigations have hit a broad swath of political parties. More than 50 sitting federal politicians are currently under investigation, and their cases in many cases have gone to the supreme federal tribunal, Brazil's high court. I think, you know, it's important to keep in mind that none of the major parties have been exempted from this. Both the PSDB has—the opposition party until recently has been named. The PMDB, Temer's party, has been named. The PT, of course, has several of its members already in jail. And so this is going to continue to destabilize the entire coalitional system, but on both sides of the aisle, both opposition and incumbents.

I think that the big question right now is what happens to Lula. The big political question, at least. It may not be the most important question with regard to the depth of the corruption itself. But from a political perspective, it had looked for many months as though the Ministerio Publico, the prosecutorial service, was getting closer and closer to filing charges. There is also a separate investigation into Lula and some of the money that his son received in consulting fees. And that's a separate investigation, the so-called Zealot Operation. And of course now, Cunha, the speaker of the lower house, was removed two days ago from the lower house. And his case is now going to move forward in the same courtroom in Paraná, in Curitiba, that is hearing the Lava Jato case. So this is, you know, a broad ranging investigation, and one that hits all of the major players.

OPERATOR: Thank you. Our next question comes from Clark Atlanta University.

Q: How are you doing, Professor? My name is Jay Senawari (sp), a political science major here at Clark Atlanta University.

My question is, with the changes in executive and legislative powers of Brazil, how does this affect the military of Brazil and the role that they play in international relations?

TAYLOR: Thank you for raising this. You know, the military—the military played a somewhat more sedate role than they had in the past. They were consulted by some politicians prior to the impeachment. And for the most part, most military officers, by all accounts, followed the letter of the constitution and sought to remain outside of the political sphere—that is, not to get involved in democratic politics. And so this was, in many ways, a relief.

I would point to two different trends, though, that I think are of interest. One is troubling, and that is a number of retired military officials and military officers were called out for their public statements against the Rousseff administration. And I think at least one active military officer was also disciplined for making public statements in this regard. So, you know, the tendency to get involved in politics has been lessened, but not necessarily eliminated. I think the general trend is a good one, but it—you know, there are still a few die-hards who would like to see a military role. I was in Brasilia recently, and there are places where people have up signs right near the Congress—you know, this was prior to impeachment—saying, you know: Please, military, rescue us. Rescue us from these crooks. So you know, that's one aspect.

The other thing, though, that I would say—and this is a little bit more historical—and that is, in Brazil traditionally somebody has always played the role of, quote, unquote, "the moderating power." And this is a term that those of you who study Brazilian history will come across repeatedly. When Brazil had an emperor, he was the moderating power. Under the military and prior to the regime of 1964 the military often was called in as the moderating power. Today the moderating power in Brazil is no longer the military, it's the judiciary. And what we've seen repeatedly over the past few years is that the judiciary has been called in. The courts have been called in to essentially arbitrate disputes.

This is, I think, a positive, in a sense that it follows the constitutional letter of the law. But it is also a little bit troubling because the more that the courts become politicized, the less they're able to actually fulfill their function as neutral arbiters. So that's a really interesting question that you've raised. I would say that I'm hopeful, but there's some troubling signs.

FASKIANOS: Thank you. Next question.

OPERATOR: Thank you. Our next question comes from Miami Dade College.

Q: Hi. Good day. I'm asking a question in regards, like, what if the Brazilian government decided to implement a sort of New Deal-type reform. Would that alleviate the economy? Or would the lack of trust in government actually cause any significant change?

TAYLOR: Well, I'm assuming by New Deal you're kind of—you're suggesting counter-cyclical policies, like, you know, increased fiscal spending or monetary—the loosening of monetary policy.

Q: That's against what's happening now.

TAYLOR: I'm sorry.

Q: That's kind of against what he's been advocating, but would that—

TAYLOR: Yeah. Right. And so, you know, I would just say that the government tried this. Dilma Rousseff, when she came into office, was facing the economic downturn that came as a result of the global financial crisis of 2008, as well as the end of the commodities boom. And her response was very much to deepen public spending, and also to keep monetary policy relatively lax. And there were two effects. One was the fiscal effect and the other was the effect on inflation. And you had an increase in inflation, not to hyper-inflationary levels, but to a level where business began to complain and warn the government. And then you had the much more significant effect, which was the fiscal downturn, which I've already talked about, but that is—you know, I have to say, having watched Brazil for a long time, the fiscal numbers are extraordinarily frightening.

So the possibility—I would say that that was the closest that Brazil would get to a New Deal-type expansionary economic policy. And it failed. And given that it failed as robustly as it did, it will be very hard for any government in the foreseeable future to engage in the same kind of expansionary spending.

FASKIANOS: Thank you. Unfortunately, we are out of time. So we must close the call. But, Mathew Taylor, thank you very much for sharing your insights with us today, we really appreciate it, and for the terrific questions and comments from all of you.

I commend to you the Latin America's Moment blog that we run on CFR.org. And that Matt Taylor contributes to, as well as Shannon O'Neil. So you can go to CFR.org and subscribe to it there. And you should also follow Matt on Twitter. I hope I get this right. Matt, you can correct me if I'm wrong. At @TayloratAM, right?

TAYLOR: Not exactly—@TaylorLatAm, like Latin America, LatAm.

FASKIANOS: Oh, OK—LatAm, thank you. I dropped the L there.

Our next call will be on Thursday September 29th at 2:00 p.m., Jamille Bigio, adjunct senior fellow for Women and Foreign Policy will lead the conversation on women's peace and security. And I hope you will follow us on Twitter at @CFR_Academic for information on new CFR resources, upcoming events, and the like. So thank you all for joining us today. Thanks to Matt Taylor. And we look forward to our next call.

TAYLOR: Thank you all.

(END)

This is an uncorrected transcript.

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