How Brazilians Lost Trust in Their Political and Business Elites

In a dramatic marathon session on August 2, 2017, Brazil’s National Congress voted against putting President Michel Temer, who had ascended to the office only one year earlier, on trial for corruption. The lawmakers spared Brazil yet another cycle of impeachment of a tainted, deeply unpopular leader.

Most members of congress had apparently decided that four years into its unprecedented crisis, Brazil could ill afford more political upheaval. Its economy, in particular, required reform and the uncharismatic Mr. Temer had proven surprisingly effective in instituting change. As shouting matches broke out on the floor of the congress’ lower house, however, other lawmakers were tossing fake bills in the air, bitterly denouncing what they described as a culture of deep-seated, brazen corruption in Brazilian politics.

Lula and Rousseff

The crisis exploded while Mr. Temer’s predecessor, Brazil’s first woman president, Dilma Rousseff, was in office. Ironically, she had initially won widespread support for her valiant stance against corruption. In office since January 2011, President Rousseff quickly had several cabinet ministers resign over allegations of ethical breaches and neared the end of her first year with the highest public approval ratings in history, noted GIS expert Dr. Joseph S. Tulchin in November of that year. “She has dealt with these corruption charges very differently from her predecessor,” seconded Eduardo Lins da Silva, GIS’ leading Brazil expert. “She is much less complacent,” he wrote.

By July 2012, the plot had thickened: more members of Ms. Rousseff’s cabinet were forced out, and now her mentor and founder of the Workers’ Party (Partido dos Trabalhadores, or PT), former President Luiz Inacio da Silva (2003-2010), affectionately nicknamed Lula, was also embroiled in a scandal. “Will this be a setback for the coalition government which pledged to clean up corruption?” asked Dr. Tulchin in his “Corruption allegations run deep into Brazil’s government” report.

The former president’s problems stemmed from Brazil’s Supreme Court trial of 38 officials accused of involvement in what then was thought to be one of the largest corruption scandals in the country’s history. The defendants were accused of using public money to pay members of congress for their votes on crucial issues during the first term of Mr. Lula’s presidency. Among those on trial were key figures in his administration, including his former chief of staff, who was charged with having been the leader of a multimillion-dollar corruption scheme.

“Although conviction of his previous associates might not hurt Mr. Lula directly, it would give the opposition parties a considerable weapon” to attack him and the government observed Mr. da Silva in his September 2012 report on the new tests faced by Ms. Rousseff – the former president’s longtime associate and protege.

Resource Nationalism

By the summer of 2013, the country’s economic outlook began to darken. “Brazil is losing its reputation as the ‘new China’ as its economy starts to falter. The latest figures show the growth rate for 2013 is forecast at around 3 percent at the most. In 2010, it was 7.5 percent. Agricultural exports are holding up but sales of some commodities, particularly iron ore, have fallen as China’s economy itself slows down,” Mr. da Silva warned in a report “Brazil’s economic bubble looks set to burst”.

The oil business was a major factor behind Brazil’s unfolding drama.

“Latin America has 20 percent of world reserves, but only 13 percent of world production. The hydrocarbon industry’s underperformance in Latin America, despite a decade of record high oil prices, is the result of largely political challenges rather than geological limitations,” wrote GIS expert Dr. Francisco J. Monaldi in a revealing report in July 2013.

The discovery of huge new reserves in deepwater off Brazil’s shore electrified its society and brought in what Dr. Monaldi described as an increase in “resource nationalism.” The “government changed future offshore contracts, increasing the state-take and making the national oil company Petrobras the operator of all fields. This marginalized other companies,” he explained.

The politicians’ favors for Petrobras, it turned out, came with a hefty price tag.

The combination of a worsening economic outlook with growing anger at the corrupt elites began to breed huge protests in Brazil.

State Within a State

President Rousseff was preoccupied with securing her reelection in 2014. “Two-thirds of Brazilians wanted change, according to public opinion polls, but the two strongest opposition candidates for the presidency at that time …did not seem to appeal to voters,” wrote Mr. da Silva shortly before the balloting. In late October 2014, the incumbent president was reelected by a thin margin.

“Brazil suffers from the corruption of power and the result disappointed many who had hoped that change could break the culture of patronage and corruption. Dilma Rousseff’s party has won its fourth, uninterrupted term in power,” commented GIS’s founder, Prince Michael of Liechtenstein, in October 2014. He quoted Walter Russell Mead, editor-at-large of The American Interest, a Washington-based international affairs magazine: “Rousseff’s reelection as Brazil’s president could allow her Workers’ Party to become a corrupt state within a state.”

Less than half a year later, the once immensely popular president and the PT began to sink. Mr. da Silva thus described the situation in his April 16, 2015 GIS report:

“Brazil’s President Dilma Rousseff … faces calls for her impeachment and public demonstrations as she experiences a perfect storm of problems. Major falls in the price of oil and commodities, the worst drought for 80 years, government economic policies and corruption in Brazil’s energy giant Petrobras, have all contributed to a big drop in popularity.”

Cash Cow

Petrobras is a state-controlled, publicly traded company holding a quasi-monopoly over Brazilian oil and gas production. Its legal trouble began in 2014, when Brazil’s Public Prosecutor’s Office launched investigations into whether executives from the oil giant and some of Brazil’s largest construction firms had colluded to inflate contract prices. Some of the money was siphoned to lawmakers and other officials to fund political campaigns. Many executives struck plea bargains with investigators and implicated political figures.

Prosecutors claimed that the company had bribed PT politicians to the tune of almost $1 billion. President Rousseff was not accused of any wrongdoing, but the fact that she had chaired Petrobras’ board from 2003-2010, as President Lula’s energy minister, was damaging enough in the public’s view. Calls for her impeachment intensified.

Arrests and Indictments

By the fall of that year, Brazil was facing its worst crisis in 70 years. “Its economy is mired deep in a recession that will last at least until 2017. The political scene is in disarray, with a president who was reelected just a year ago now chastened by approval ratings in the single digits,” wrote Mr. da Silva in his October 2, 2015 report.

The biggest drag on the government was “Operation Car Wash,” a joint endeavor by the Public Prosecutor’s Office and the Federal Police to uncover corrupt practices between government officials and large private corporations. “The Petrobras portion of the investigation has already resulted in the arrest and indictment of about 120 people,” reported Mr. da Silva. He continued: “Among them are some of the wealthiest individuals in the country, including owners and executives of the country’s most important construction companies … as well as key political leaders: members of congress, former cabinet members and former state governors. Currently, the speaker of the Chamber of Deputies (Brazil’s lower house of congress), the president of the Senate and two members of Ms. Rousseff’s ‘kitchen cabinet’ are formally under investigation.”

No formal accusations were made against President Rousseff, but requests for her impeachment were sent to the Chamber of Deputies. The president also faced a probe by a federal audits court over whether her administration’s “creative accounting” methods broke the law.

Vice President Temer, head of the biggest party in the ruling coalition, the Brazilian Democratic Movement Party (PMDB), stood to gain the most from Ms. Rousseff’s troubles.

Cause for Impeachment

“The silver lining is that the democratic institutions Brazil has built since the end of its military regime 30 years ago continue to prove strong and effective,” concluded the GIS expert. “The Public Prosecutor’s Office, the Federal Police Department, congress, the courts, civil society and the press are all functioning well, while enjoying freedom and independence. The military, under civilian command, is fulfilling its constitutional duties – and it is unimaginable that it would ever intervene in the political process, as was the norm throughout most of the last century,” he pointed out.

In early December 2015, Brazil’s congress abruptly moved to impeach President Dilma Rousseff. The case for it was not persuasive, argued Carlos da Silva in his January 2016 report for GIS: “Essentially, she was accused of having improperly used funds from state banks to cover budget shortfalls, a practice known in Brazilian politics as ‘pedaling’ (pedalada in Portuguese) and often used by her predecessors.”

The Brazilian economy, meanwhile, suffered sharp decline in 2015. Economists reckoned that the country had entered its worst economic crisis in a century. Inflation was another problem. Brazil’s sovereign credit rating was downgraded and public accounts were in disarray.

The most dramatic indicator of the country’s predicament, though, was the surging unemployment rate after years of virtually full employment. Millions of Brazilians who have climbed above the poverty level in the last 22 years were suddenly faced with the prospect of falling back into indigence.

“It is this economic deterioration that may cause the legally feeble impeachment against Ms. Rousseff to grow fangs,” concluded Mr. da Silva.

Festering Crisis

By May 2016, Brazil was suffering through its worst recession in history. Its GDP was expected to contract by a cumulative 10 percent in 2015 and 2016; unemployment stood at 10.2 percent and was growing quickly. “There is no obvious visionary leader ready to pull the country out of these doldrums, but whoever finally inherits power will run up against the same political strictures that have limited Brazilian politicians’ options for decades,” noted Mr. da Silva in “Brazil faces leadership deficit as Rousseff impeachment looms.”

On August 9, 2016, 59 senators approved the Impeachment Committee’s final report recommending Ms. Rousseff’s conviction; only 21 senators voted in her favor. Earlier in April, the lower chamber in congress voted for impeachment by a 367-137 vote – well above the 342 needed for a two-thirds majority. At that point, Vice President Michel Temer became acting president and Ms. Rousseff was suspended in her duties.

Mr. Temer talked a good game about reforms. A sense of uncertainty persisted in the business community and in society as a whole, however, despite strong market rallies and tranquility on the streets, wrote Mr. da Silva in his August 23, 2016 report. “The government continues to postpone the announcement of specific action plans and timetables for bills to be sent to congress,” he explained.

Mr. Temer’s excuse was that his mandate as acting president had been too weak to institute change. He appeared to be waiting for Ms. Rousseff’s conviction, which would make him president outright.

Cautious Optimism

“Two months after Michel Temer was confirmed as Brazil’s president following the impeachment of Dilma Rousseff, his party and its allies scored an important victory in Brazil’s municipal elections. The new mayors and city council members will be inaugurated on January 1, 2017,” wrote Mr. da Silva in his November 25, 2016 commentary “Brazil’s politics: a small step toward stabilization.”

After the elections, Mr. Temer’s coalition of parties was set to preside over 82.9 percent of the electorate. The president’s party, the PMDB, lost some strategic state capitals, such as Rio de Janeiro, but would remain in control of the largest number of municipalities – 1,038 out of the country’s 5,570 registered. The biggest loser was the Workers’ Party of former presidents Lula and Rousseff. It received only 6.8 million votes, compared to about 17 million in 2012. “The election results show that Brazil, like other countries in the region, is veering to the right after 13 years of leftist populism,” pointed out the expert. The outcome gave President Temer’s administration some legitimacy and weakened the opposition’s claim that the president’s rise to the office was part of a ‘coup.’

As 2017 began, Mr. da Silva expressed cautious optimism about Brazil’s ability to turn itself around. “This year gives Brazil another opportunity to pull out of a recession that has lasted nearly three years and overcome the fiscal chaos that has gripped its federal and state governments,” he wrote, adding: “The first half of the year will be crucial. If President Temer is able to bring forward or pass most of his reform proposals by July, he will probably serve out his full term through the end of 2018. Otherwise, almost anything could happen – even his ouster.”

New Cliffhanger

For a while, things went well for President Temer, the expert reported as the second half of 2017 approached. The president was able to obtain quick victories in the legislature by forming a broad coalition using the traditional patronage methods that have always characterized Brazilian politics. His former lawmaker colleagues cooperated enough.

Then, on May 17, 2017 the bombshell came.

In a secretly recorded conversation between President Temer and Joesley Batista, the billionaire owner of JBS, the world’s largest meat processor, the president seemed to endorse paying hush money to former House Speaker Eduardo Cunha, who was instrumental both in Ms. Rousseff’s downfall and Mr. Temer’s rise to the presidency. The recording, partially published by a newspaper, also seemed to indicate that Mr. Temer may had received bribes and colluded in several crimes committed by Mr. Batista.

Mr. Batista claimed that JBS had bribed more than 1,000 politicians over the past 15 years, including Ms. Rousseff, former President Lula and several prominent leaders in all of Brazil’s top political parties. He said the operation had cost around $250 million.

“The investigation could indeed be apocalyptic for the Brazilian political establishment,” wrote Mr. da Silva, “which was still reeling from an earlier plea bargain deal involving executives at another huge Brazilian multinational company, Odebrecht. … As a result of its revelations, huge swathes of the political establishment have come under investigation, including about a third of President Temer’s cabinet, a third of the Senate, 15 percent of the Chamber of Deputies and hundreds of other politicians, among them former Presidents da Silva and Rousseff, and several state governors.”

Brazil’s Supreme Court has authorized Prosecutor General Rodrigo Janot to investigate President Temer on charges of corruption, obstruction of justice and being part of a criminal organization. “Many thought the president would resign immediately. In a defiant address to the nation, however, he pledged not to quit and went on offense,” the expert reported.

On the second day of August 2017, Mr. Temer’s relentless lobbying in congress brought him a reprieve, though not salvation. At least for now, Brazil’s president remains in office, but the country’s drama continues.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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