Rarely in the history of economic reform has the fate of so many hinged on the actions of so few: Brazil’s elected representatives hold in their hands the very future of their country.
It all depends on whether they approve the critical pension reform, which is currently making its way through the lower house.
If the parliament passes the pension bill, the Brazilian economy will, very likely, be able to bounce back and enter a long and sustainable expansion.
On the other hand, if parliament fails to approve the reform they will almost certainly plunge Brazil into a fiscal crisis the likes of which makes the recent downturn seem like a minor dip in the business cycle.
Never in recent history has the outlook in Brazil looked so binary.
Businesses in Brazil are holding their breath. International investors are holding their breath.
The economy is slowing as investment and consumption decisions are placed on hold pending the outcome in parliament.
So, which direction will Brazil take?
Before considering this question, it is helpful to examine how Brazil ended up in this predicament in the first place.
The sorry tale began on January 1 2003, when Luiz Inacio Lula da Silva was sworn in as Brazil’s 35th president.
Initially fearful of Lula da Silva, markets soon fell in love with him – and with Brazil.
Lula da Silva surprised investors by appointing orthodox policy makers.
Contrary to all expectations, he preserved the market-friendly macroeconomic framework, which had been put in place by his predecessor.
Inflation declined, rates came down. Growth rates soared. External conditions were also highly supportive with sky-high commodity prices and strong demand for emerging markets assets among global investors.
Soon, however, the cracks began to appear.
Already during Lula da Silva’s first term in office, key officials began to get arrested for corruption, including the respected finance minister, Antonio Palocci.
Brazil, having failed to set aside savings in the good times, was then ill-prepared for the downturn in global conditions as the US sub-prime crisis unfolded. Investors absconded and the economy tanked.
Dilma Rousseff succeeded Lula da Silva, but she never commanded the same authority as her predecessor.
Operation Car Wash
At the precise moment when Brazil most needed to reform, Sergio Moro, a crusading judge, paralysed parliament by unravelling the largest election campaign funding scandal in modern Brazilian history.
‘Operation Car Wash’ – or ‘Lava Jato’ – saw Lula da Silva, a handful of parliamentarians, a large number of executives of Petrobras and other state-owned enterprises and private sector companies sent to jail.
Ms Rousseff was impeached, but only after her finance minister, Guido Mantega, had damaged the fiscal accounts almost beyond repair, turning the public finances into a ticking macroeconomic time bomb.
The political fallout from the many years of policy failures culminated in the 2018 general election, which saw voters wipe out Brazil’s traditional political parties and shove Jair Bolsonaro – a right-wing populist with little experience and no majority in parliament – from political obscurity into the country’s top job.
