Lessons from Brazil? Be careful what you wish for – BizNews, 3 September 2016

Brazil’s phenomenal economic success at the time was “catnip for labour movements”. Lula’s Workers Party was credited with the “economic miracle” in which 15 million jobs were created and GDP growth topped 7.5% in 2010.

By Sara Gon

In 2012 ANC secretary-general Gwede Mantashe declared that SA’s “Lula moment starts now”.

Mantashe said that South Africa was ripe for a “Zuma moment” – it was going to look to our new Brics partners — Brazil, Russia, China and India — for inspiration.

Mantashe was evoking an optimistic comparison to the “Lula moment” associated with Brazil’s former president, Luiz Inácio Lula Da Silva, who had risen from poverty to become a poster child for Left-leaning governments.

Brazil’s phenomenal economic success at the time was “catnip for labour movements”. Lula’s Workers Party was credited with the “economic miracle” in which 15 million jobs were created and GDP growth topped 7.5% in 2010.

Before being fired for alleged misconduct in 2015, Cosatu secretary-general Zwelinzima Vavi hailed Lula’s corruption-free achievements at the Cosatu conference in September 2012. “Vavi: Down with corruption, forward with Lula” was the headline in the Mail & Guardian (Verashni Pillay 18 September 2012)

Lula was lauded for policies and programs that accelerated national growth, kept inflation and debt in check, reduced poverty and inequality and greatly expanded the middle class.

Growth was faster than at any time in the past 50 years and inflation remained under control. Unprecedented numbers of Brazilians climbed out of poverty. When he left office, Lula’s approval rating was 82 percent.

Two trends in the global economy in particular bolstered Brazil’s success. First was the huge demand for commodities: Brazil is a large exporter. China was its biggest market – its gross national product was growing at 10 percent or more a year.

Second the U.S. Federal Reserve’s clamp on interest rates encouraged the flow of capital to high-performing, developing countries like Brazil.

Third, just as oil prices were spiking, Brazil discovered major offshore reserves.

Under Lula’s successor, Dilma Rousseff however, the Brazilian economy tanked. This is the Brazilian economy’s third consecutive year of negative growth.

The Lula era’s social gains are slipping away. Unemployment and poverty are growing. New entrants to the middle class are increasingly vulnerable and many public services are deteriorating.

Massive corruption scandals have enmeshed political and business leaders and undermined the state oil company Petrobras, the country’s largest corporation.

According to Peter Hakim, president emeritus and senior fellow of the Inter-American Dialogue, a Washington-based policy organisation on Western Hemisphere affairs, the Lula model may bear some blame. But not because it is inherently flawed in its objectives or design; but because it was badly managed and implemented.

brics_mapsHakim says that Lula’s model is relatively easy to implement when economic conditions are good, but it demands a level of political discipline that is hard to sustain when conditions deteriorate.

The Lula administration could not resist the temptation to spend freely in the boom years, but not save for the bust.

Shortly after Rousseff took office, commodity prices dropped worldwide and growth rates dipped sharply. Government revenues fell, though budgetary obligations and expenditures remained largely unchanged.

Deficits swelled, inflation increasingly threatened, unemployment grew and the public began to lose confidence in the government.

There had to be decisive spending cuts to compensate for declining tax receipts. Lavish subsidy programs for corporations needed to be curtailed. Bloated government payrolls needed to shrink. The rapid growth of social programs needed to be constrained and exceptionally generous pension programs needed to be reformed. Instead, the government tried to restart faster growth with a poorly devised stimulus plan. It tried to avoid price hikes by directly bankrolling energy companies.

Variations of the Lula model are guiding post-Cristina Kirchner Argentina’s as well as other South American countries. Their view is that the Lula model crashed in Brazil largely because of failed implementation. Lula never prepared for the inevitable lean years and Rousseff abandoned fiscal restraint.

Try this for a feeling of deja vu: according to Hakim it also would have helped if either Lula or Rousseff had reformed outmoded policies and institutions, including counterproductive labour laws, unwieldy tax codes, complex business regulations, poor education and many other roadblocks to innovation and higher productivity.

Today, Brazil is rated junk and its economy is set to shrink by 3.5% this year as it faces the corruption scandal to end all corruption scandals, that of the 51% state-owned oil giant Petrobras.

The scandal started with a routine money-laundering probe of a fuel station in 2012, “Operation Carwash”. A wiretap revealed voices belonging to people far more powerful than ever suspected. This trail led to Petrobras, which had paid $2-billion extra for inflated contracts. The cash was laundered and paid to politicians and the business elite.

The police allege “there is evidence that the crimes enriched [Lula] and financed [his] electoral campaigns”. Evidence also suggests that Brazil’s top construction firms, which had contracts with Petrobras, secretly bought Lula two luxury houses.

The five largest companies implicated donated $8-million to his charity, the Lula Institute, ostensibly disguised as “speaking fees” and “donations”. The Jacob G. Zuma Foundation, anyone?

As Rose said it’s a scandal which has incensed Brazil. “I’ve never seen my countrymen so angry,” one political analyst told The New York Times.

The scandal threatens to completely unravel Brazil’s “miracle”.

As the Financial Mail’s Rob Rose surmises, presumably this isn’t the “Lula moment” that Mantashe was hankering for. “The ANC would do well to see Brazil’s crisis as a cautionary tale of how patronage and high-level corruption can gut a party and amputate a country’s prospects.”

In March 2016 Lula was arrested and questioned about whether he had taken kickbacks in the scandal.

On Friday 26 August 2016 Brazil’s federal police recommended that prosecutors file charges against Lula and his wife for money laundering and corruption.

Police allege that they illegally benefited from renovation work undertaken by construction company OAS SA on a luxury beach apartment that was allegedly intended for the two.

Lula also allegedly received other benefits from the builder who calculated the total value of the renovations and other benefits at 2.4 million reais (R10,628,407.41 as of writing).

Lula and his wife have denied the allegations, saying they paid a deposit to buy a different unit in the same building but later decided to ask for their deposit back.

Brazilian prosecutors must now decide whether to ask a judge to indict them.

Lula already faces trial in Brasília for allegedly obstructing the Car Wash investigation. He has denied wrongdoing.

The headlines on the first two pages of the Sunday Times, August 28, 2016 were “I’m prepared to die to save SA from the thieves”, “Treasury ‘taking Denel to court to halt Gupta deal”, “Eskom paid big bucks for dud coal” (to Gupta-owned mining company), “(Gupta) Family-linked R167m Transnet bonanza”.

Maybe the time has come to end taking our economic inspiration from BRICS before we burn all our bridges to the West.

Sara Gon is a Policy Fellow at the IRR, a think tank that promotes economic and political liberty. Follow the IRR on Twitter @IRR_SouthAfrica.

Read the column on BizNews here.