Don’t blame the global slowdown for Brazil’s economic ruin
If the diverging fortunes of Africa make it palpably clear that the Brics hysteria about the inevitable rise of most emerging markets is intellectual fool’s gold, what is going on in South America definitively drives a stake through the heart of that argument. For yesterday’s darling Brazil continues to fall off the table, just as unheralded Colombia takes flight.
In terms of Brazil, what a difference five years makes. At the end of the second term of former President Luiz Inacio Lula da Silva (universally known as “Lula”), Brazil seemed at last to have reached the economic promised land. A leftist populist, Lula had made his peace with the market, inaugurating a period of macroeconomic stability in Brazil, which had allowed a country always blessed with natural resources to take off. I remember joking at the time that, speaking as a Thatcherite, Lula was the leftist politician I had been waiting for my whole life.
Fiscal sanity under Lula was coupled with Brazil’s new role as part of the Chinese supply chain, harnessing its abundant resources to China’s seemingly insatiable demand for them. As Lula handed over power to his handpicked heir and former chief of staff, Dilma Rousseff, Brazil seemed set for a golden age.
Of course history does not work that way. As TE Lawrence put it, “Nothing is written”. It is we poor humans who do the writing, always having the capacity to make things a great deal better, as well as to gum up the works. And there is no doubt Rousseff, much like President Zuma of South Africa, amounts to one of history’s incompetents. It is for this fact, rather than her relatively minor offences fiddling the numbers over the country’s deficit, that she must now endure an impeachment trial that is likely to permanently remove her from office.
Read more: Rousseff's impeachment is Brazil's best chance at revival
In hindsight, tracking China’s slowing growth, Brazil was certainly headed for a downturn. But its hard-won economic reputation for competence did not need to become a casualty of that process. That is Rousseff’s fault. Brazil is now going through its worst recession since the 1930s, with economic output declining by a whopping 3.8 per cent in 2015, and set to fall again this year.
A ruinous pension system is at the heart of the matter, a challenge the Rousseff government fled. Brazil presently spends more than 13 per cent of GDP on pensions, more than any other industrialised country except Italy. More than 70 per cent of fiscal expenditure is insanely and automatically linked to entitlements, meaning that, without concerted efforts at reform, economic ruin awaits.
And under Rousseff, no such effort was forthcoming. Dependent on core left-wing allies in her Workers' Party to save her, the price for their political support was that there would be no reforms to upset the noxious status quo. Once again, as has happened so often in its history, Brazil’s leaders have snatched economic defeat from the jaws of victory.
Good News in Colombia
However, in unheralded Colombia, long a watchword for civil war, drugs, and chaos, very good news has been emanating from this unlikely source. First and foremost, elusive peace is now a real possibility, as the government is in the homestretch of three and a half years of talks with the two main guerrilla groups, the FARC (around 7,500 fighters) and the ELN (around 1,500).
President Juan Manuel Santos has insisted on a truth commission process, wherein rebels escape jail, but only if they detail the extent of any crimes they committed. By getting the history right, Santos hopes that Colombia can at last put the scourge of war behind it.
Blessed with energy wealth, Colombia has suffered due to the tumble in oil prices. However, unlike Brazil, the country has refused to become merely a victim of global economic forces. In 2015, growth fell to a still healthy 3.1 per cent, if the lowest rate since 2009. Santos immediately responded in February 2016, by cutting the Federal Budget by 3 per cent, in line with declines in the energy market. While urgent fiscal reforms are necessary, in Santos, Colombia has a leader determined to change the trajectory of his country, in terms of both war and peace.
Future emerging market analysis, having outlived the Brics fad, is all about disaggregation, following the policy proposals of real leaders over real time. Nothing is written, indeed.
This article appears in the May edition of City PM's Money magazine, which will be distributed with the paper on Thursday 26 May.