In with the Old

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Institutional gymnastics in Brazil deserve a gold medal. Politicians orchestrated a slick maneuver that led to President Dilma’s impeachment but saved her, at least temporarily, from the loss of the right to hold political office in spite what the Constitution mandates. This bit of political chicanery orchestrated by Renan Calheiros, the Workers Party (PT) and Supreme Court Justice Lewandowski, and likely sanctioned by President Temer, amply illustrates the permanence of Brazil’s political culture of accommodation and innovation through the use of the “jeitinho”.  The move further weakens respect for the Constitution, the Supreme Court and the overall political process.  In the end, it means institutional degradation and for anyone looking from the outside in, they can only scratch their head and wonder if Brazil will ever have rules that apply in a universal fashion.  If you are a foreign investor thinking about playing in this trillion-dollar market, what is your impression?

The impeachment (with attenuation) raises basic questions that demand answers: Is Brazil’s culture perverted in such a way that institutions cannot solidify and function? For how long will the Brazilian political body be subject to the whims and wiles of manipulative and astute members of the political elite?  Why do the major economic players condone and acquiesce in such ad-hoc maneuvering?  What is necessary for institutional stability and growth?

The short answer goes back to Brazil’s historical heritage, the weight of slavery and patrimonialism. Brazilians are aware of and frustrated by contemporary anecdotes about the difficulty of encountering the promised future.  Some say that Brazil needs another 500 years to shake off the elitist centralization inherited from the Portuguese crown plus another plus another 500 years to remediate the sins of the world’s most intense slave trade.  In 1800, slaves made up more than half of Brazil’s population and Brazil still has the largest share of African blood in the Western world.  Paradoxically, miscegenation, partially driven by demographics, led both to the myth of racial democracy but also reaffirmed Brazil’s unequal distribution of power and property based on racism.  “White” society prevailed over the many gradations of darker and poorer.  Brazil took its time in abolishing slavery (1888) and even by the end of the Empire (1889), suffrage in the newly proclaimed Republic favored the rural based patrimonial elites who could control “their” people and guide the limited suffrage that would come into place.  Illiterates were barred from voting and education was restricted, thus favoring the status quo.

From the abolition of slavery and the Republic to the present day, the vestiges of the system remain in place.  Even the shift of population from 90% rural in the 19th century to 90% urban in the 21st has only slowly, extremely slowly, begun to reverse this inheritance.  Brazil remains stubbornly unequal in education, income and the distribution of power and participation. This unevenness can be seen along the racial spectrum from white to black, rich to poor, the privileged to the destitute, from those who live in hillside favelas to those with beach-front homes.

Even as Brazil industrialized, urbanized and made great strides in wealth generation and economic opportunity, social advancement remained highly dependent knowing the right people.  Brazilians always have had to value what is called a high IQ or in Portuguese, Quem Indica – Who do you know?  Years ago, young women aspired to marrying a functionary of the Bank of Brazil and today young people are still avid seekers of employment in the public sector and preferentially to a post based on personal referral.

Since the 1930’s and even before, economic development has been state led.  Those with political power and those able to create economic surplus looked to the government for investments, loans, incentives, protection, and the benefits to be derived from positions and sinecures in state run enterprises.

With power and resources, those in government treated society and the population in a paternal and/or populist manner. Look at how members of Congress members of the president’s administration behave. Their policies and favors are for friends and family.  Although society and the economy have grown in sophistication and complexity, the political system remains largely traditional.  It is and always has been the duty of the governing to anticipate, control and genuflect toward popular demands.  In Brazil, the government has a long history of signaling and promoting social and economic benefits.  Thus today’s labor code (CLT) with its roots in the Estado Novo dictatorship provides Brazilian workers with the benefits of European social democracies before these were actually demanded and negotiated in a political struggle.  Cooptation and control prevailed over political mobilization and the winning of rights through active political participation.

While Brazil is a capitalist economy, nothing gets done without the government.  Statist ideology, state capitalism, state control and intervention are all too present.  Brazil needs to decide the role of the state in the 21st century economy.  Dilma was ejected because the state fell down on its ability to perform and coopt.  The new President promises changes and is trying to promote a more traditional style of capitalism with competition, rules, private property and the right to profit.  However, the current system is stacked against this.  And while, the Worker’s Party has expanded the state as an employer since 2003, this tradition started much earlier with entrenched interests in the state with its tentacles in all sectors is difficult to budge.  Politicians don’t want to change as they can allocate resources in the form of jobs and benefits.  Those on the receiving end or even potentially on the verge of power also lack incentive to change.

Economic complexity, a population of 210 million, a GDP that has shrunk to less than 2 trillion, societal diversity and increasing yet still poor levels of education are all factors demanding a new model.  Not much will happen with President Temer.  He has only one bullet and that is to somehow revive the economy and this will be a challenge.  Moreover, his term is too short and if he tries to run for reelection in 2018, that act will trigger another crisis.  Brazil needs to find leadership but the population also needs to decide on a future where the state has a greatly reduced role in collecting and allocating resources.  Because this will involve pension reform, tax reform, privatization, de-bureaucratization, losses of access to easy jobs and privileges, the process can only take place over a long time frame.

It remains to be seen if the old can survive until the future arrives.

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