In 2006 massive amounts of oil were discovered off the coast of Rio de Janeiro.  This discovery understandably touched off an era of euphoria as Brazil’s time as a real international economic player was about to come.  Corresponding confidence in the foreign investment arena ensued, but in the following years, the reality of the situation rendered the euphoria a fantasy.  Not only did the oil turn out to be an economic albatross, the political aspects of this fateful discovery laid the foundation for the most wide ranging corruption probe the country has ever seen.

 

Lava Jato

 

In what is known as Operation Lava Jato (Portuguese for Car Wash, referring to the discovery of bribery payments exchanging hands at a car wash in Brasilia, pictured in this page’s background), the Brazilian judiciary has aggressively investigated, charged and in some cases prosecuted senators, congressmen and wealthy businessmen for political corruption.  The probe has also led to the impeachment of one sitting president (Dilma Rousseff, though she was not personally accused of corruption), the indictment of another sitting president, Michel Temer, for corruption (though congress declined to allow the trial to go forward), and a conviction which carries a sentence of almost 10 years for a former president, Luiz Inacio Lula da Silva, for the same offense.  While corruption, as seen in the previous section of this post, has been a part of Brazilian politics for many years, it is important to note these actions being taken by the judicial branch.  If this is indeed evidence of strong and independent institutions and a clear separation of powers, Brazilians can rest assured that their country will not follow the path of their Venezuelan neighbors’.  A closer look at the Lava Jato scandal and subsequent investigation will shed some light on its prospects.

 

Following the deep water oil discovery, President Silva, who generally goes by Lula, designated the state-run oil giant, Petrobras, as the sole developer of the find, a pivotal decision both for the Brazilian political system and the people it serves.  This meant Petrobras needed an enormous infrastructure build up, and that development needed to happen quickly.  Looking back, this should probably have raised more red flags than it did at the time.  The fact that a major infrastructure build up was necessary, and huge amounts of new equipment were needed underscores the fact that Petrobras lacked experience in the difficult and expensive work demanded by deep water oil extraction.  While Lula’s decision to keep foreign investment out of the game makes sense in that a larger share of the profits would be kept in Brazil, it was a risky move betting on the state-run company’s ability to turn those profits given the massive outlays of cash necessary at the outset.

 

Unfortunately for Brazilians, Petrobras’ urgent need for equipment and infrastructure presented a lucrative opportunity for corrupt politicians and businessmen.  According to Robert Rotberg, three percent of the revenue from contracts related to the infrastructure buildup was diverted to Lula’s and Rousseff’s Workers’ Party (PT), as well as others in Lula’s ruling coalition, for their electoral campaigns, amounting to at least $3 billion.  With that portion of the scheme alone, Petrobras’ operations cost Brazilian taxpayers $3 billion more than they should have, but the corruption and its fallout did not end there.  All of the big political parties, and most frontrunners in the 2018 presidential election have been implicated.  Lula himself is in this boat.  Once a popular prediction to return to office, he was found guilty of taking a R$2.2 million apartment as a kickback (The Economist, Conviction).

 

After Brazilian taxpayers were forced to overpay for a number of contracts, the cleanup of this scandal has resulted in even further economic hardship.  Odebrecht, a huge Brazilian construction company, had its head arrested and is one of the companies whose people have implicated large numbers of politicians as part of their own plea bargains.  The chaos within the company caused by the investigation and arrests has led to nearly half of its employees being laid off.  The engineering industry in Brazil has been hit especially hard as scores of engineers from Petrobras, Odebrecht and other companies, have received pink slips and are still struggling to find work (Lopes, June 19).  These issues combined to push Brazil into two years of the worst economic depression in the country’s history.

 

While taxpayers and industry have certainly taken their hits, the effects of Lava Jato have been visited equally, if not more so, upon the Brazilian political system.  The scandal and investigation have ensnared a large portion of Brazil’s political class, made up of older career politicians who have in many cases been at least complicit in making corruption such a large part of Brazilian politics.  One might say that this is not a problem at all.  The congressmen or senators who lose their seats because they are corrupt all deserve to be in the unemployment line.  The system will be better without these members, and politics in Brazil will become more honest and transparent as the delinquents are weeded out.  That very well may be the case, but this line of thinking makes an important assumption: that those who take over will do better than their predecessors.

 

The scandals exposed by Lava Jato have understandably resulted in a rise of anti-government sentiment among Brazilians.  To some degree, these feelings have been in existence for a number of years, but the recent prosecutorial successes have given hope to disillusioned citizens that the system may be reconcilable, that there may be something to fight for.  This has led to opportunities and support for young “radicals and outsiders” to seize greater control (some of whom will be discussed in the next section).  In that sense change is coming, but whether that change turns out to be positive on balance remains to be seen.  Are the younger politicians people of integrity, or were they simply biding their time trying to climb the ladder?  Are the outsiders more altruist or opportunist?  Will they work to change things or will they feel that they are entitled to profit as their predecessors did?

 

Whatever the answer to these questions, it would be foolish to declare the old guard dead.  Many of these career politicians have held office for a considerable amount of time and are no strangers to political manipulation and controlling narratives.  According to The Economist, Lula’s conviction will “intensify debate as to whether Lava Jato is an overdue holding to account of the powerful, or just a witch-hunt.”  Critics of the process attribute a sort of Jacobin quality to the investigation, insinuating that it is more persecution than prosecution that is over-reaching and out of control.  After all, the judicial branch has authorized full immunity for shady figures like Joesely and Wesley Batista, the meatpacking executives who have participated in massive bribery schemes, in exchange for their testimony when it can be argued that reduced sentences might be more appropriate in cases involving such egregious crimes (The Economist, Conviction).  Is the judicial branch blindly trying to apply the law or has it declared war on the political class, and the ruling PT party in particular, for its own political gains?  It is a good bet that the old guard will be actively selling the latter.

 

Which narrative will be more widely accepted by the public: that the judiciary is trying to assert its power by weakening the legislative and executive branches, or that Lava Jato is a long overdue house cleaning?  The answer to this question should determine whether Lava Jato has real, lasting impact on Brazilian politics, whether the system can be cleaned up at all, and to what degree old notions of politics as usual can be rehabilitated.  These political problems are inextricably tied to the Brazilian economy, which is in a corresponding period of chaos.  Success in one area depends upon success in the other, but it is almost as if they are bent on mutual sabotage.

 

Economic Issues

 

Economic hardship in a Latin American country is not a novel concept, but Brazil was supposed to be different.  Traditionally the strongest economy in Latin America, it was not long ago that Brazil seemed poised to become a major player on the international scene.  It is a sizable country with significant natural resources, and had discovered a wealth of oil laying off its coast.  Things were looking up.  A short time later the country is in the throws of a major depression, its worst ever, and serious economic progress in the near term seems like a long shot.  “Brazil is suffering from the implosion of a state-capitalism model that expanded under the governments of former president [Lula] and his successor, [Rousseff] … In that closed, insular model, big companies paid bribes to secure bloated government contracts paid for by high taxes” (Lopes).  Oil-related issues, not all connected to the Lava Jato scandal and investigation, are a major reason for these problems.  Another issue is Brazil’s bloated and unsustainable entitlement system.  These issues, and the economic hardship they have created, have exacerbated the political problems in the country and lent a desperation to the intense public outcry for change.

 

First, the oil issues.  The “Lula” oil field, as it was named for the president at the time, was discovered in 2006, and while it is at the heart of Brazil’s political chaos, it also sits at the center of the country’s economic problems.  It is what is known as a “pre-salt” oil field, meaning that the oil is located not only in deep water well off the coast, but it is also underneath a thick layer of salt and contains large quantities of toxic gasses that need to be handled delicately (Holder).  All of these factors make the field extremely complicated and costly to drill.  In some ways it is similar to the Deepwater Horizon well that BP was operating in the Gulf of Mexico, which famously and tragically exploded killing 11 and allowing more than 200 million gallons of crude oil to pour into the sea in perhaps the greatest environmental disaster ever.  As previously discussed, Petrobras was essentially unprepared to operate a venture of this magnitude and level of complication, necessitating massive amounts of money for equipment and infrastructure.  

 

As a result, Petrobras took on massive debt to become operational, and being a state-run company, if it fails the taxpayers are on the hook at the end of the day.  The fact that the project was so badly mismanaged, and that it is in the middle of a political firestorm, led the government to open it up to foreign investment in 2016.  It is questionable whether Petrobras ever had the capacity to manage the project in the first place, but in the midst of Lava Jato this is completely impossible.  Typically for pre-salt fields to be profitable, world oil prices need to be between $40-60 per barrel (Holder).  There is no guarantee that the world price would maintain such a level, and given Petrobras’ issues, that break-even price range may be low.  All in all, Petrobras can be seen as a sort of economic microcosm of Brazil itself.  In May of 2008, its stock price was around $72.  By January of 2017 it had fallen under $3.  Brazil was recently an “up and coming” economy on the world scene.  Those days are a distant memory.

 

Oil and Petrobras, however, do not deserve all of the blame for the economic difficulty in which the country currently finds itself.  Another major factor is its extremely costly and completely unsustainable pension system.  The system was born in the 1988 constitution that marked the end of the country’s military dictatorship.  In an effort to combat the culture of elitism during military rule, a mandatory pension was written in for men at age 65 and women at 60, whether they had paid into the system or not.  Those who had paid in could retire earlier, depending on the job they had and how long they had been working.  The average age to begin collecting a pension in Brazil is currently 58, and pensions are comprised of full salary and benefits in many cases (The Economist, Reducing).  During the four years I lived in Brasilia I met many former civil servants who had retired in their 40s or early 50s under this system.  They and many other Brazilian civil servants will receive their full compensation in retirement for long periods of time, periods which for a growing number of retirees are significantly longer than their terms of civil service.  The thought that always occurred to me after hearing these stories was, “who thought this would be sustainable?”

 

Unsurprisingly, it doesn’t seem that it is.  According to The Economist, pension spending is currently (February, 2017) equal to 12% of the country’s GDP.  This is a sizable portion, but the more disturbing fact is that the pension scheme has a shortfall equal to 4.8% of GDP.  That is alarming.  Because civil servants were able to retire so early and are living longer than they used to, the number of people on pensions is outpacing the number of those paying into the system.  “The state of Rio de Janeiro supports more public-sector pensioners than working civil servants; for every police colonel on active duty five are retired” (The Economist, Reducing).  Unless the system is overhauled, payments could reach 14% of GDP by 2021, 18% by 2030 and nearly a quarter of Brazil’s GDP could be spent on pensions by 2050.

 

This is an area in which the Brazilian economy is currently clashing with its political chaos.  President Temer wants to rework the system, raising the minimum age to collect retirement and reducing benefits for widows and widowers.  His political problems, however, will make it difficult for him to push through legislation that is sure to be unpopular among a large number of Brazilian voters.  The congress seems keen on allowing Temer to finish out his (Rousseff’s) term, but will they go out on a limb for him on unpopular legislation?  Some entitlement reforms were passed by a house committee in May of 2017, but according to a recent poll by Datafolha, 70% of Brazilians are against them (Leahy).  Will real progress in this area be possible with Temer’s seat so hot?

 

The fact is entitlement reform is absolutely necessary.  The system is a ticking time bomb and Temer seems to know this, but there may not be much he can do.  It is rather ironic that Brazil has a president who is willing to make unpopular reforms that are necessary for the country’s future prosperity, but he may not be able to do so due to allegations that he personally benefitted at the expense of the of the citizens in the very country he’s trying to save.  The Brazilian economy is a mess and political chaos may very well stand in the way of addressing its issues.  Is there a solution?  Is progress likely to occur?  Reasons for both hope and skepticism abound.

 

 

References

 

"Conviction of Lula and the Future of Brazil's Political Purge, The.” The Economist. The Economist Newspaper, 15 July 2017. Web. 18 July 2017. 

 

Holder, Josh, Monica Ulmanu, Lindsay Poulton, John Mullin, James Randerson, Ekaterina Ochagavia, Felix Clay, and Jonathan Watts. "Brazil's Gamble on Deep Water Oil." The Guardian. Guardian News and Media, n.d. Web. 28 July 2017.

 

Leahy, Joe, and Andres Schipani. “Brazil Takes Step Closer to Pensions Overhaul.” Financial Times, 2 May 2017. 

 

Lopes, Marina, and Nick Miroff. "A Corruption Scandal Wrecked Brazil's Economy. Now, Workers Face the Consequences." The Washington Post. WP Company, 19 June 2017. Web. 05 July 2017.

 

“Reducing Brazil's Pension Burden.” The Economist, The Economist Newspaper, 25 Feb. 2017. 

 

Rotberg, Robert I. "The Judge Who Could Remake Brazil." Foreign Affairs. 21 December 2016. Web. 25 July 2017.