This is what The Economist magazine did not say in its simplistic and reductionist report.
In one of many interviews, Oscar-winning producer Brian Grazer said that a person must “know the weeds, to have lived in them”. Grazer meant that a person wouldn’t want to get involved in something which he had not enough knowledge about.
Even though Grazer was explaining his view as to how to become a delegator, his comment also helps explain the poor job done by The Economist in its recent article titled Brazil’s Fall. The report, which by the way has no byline, starts by stating the obvious: what Brazil is as supposed to what it should have been at the start of 2016.
In the following paragraphs, the writer limits his thoughts to reminding the readers about nightmares past, such as the downgrades issued by Fitch, after which Brazil’s rating as a debtor nation was degraded to junk status.
Later, the piece attempts to explain why Brazil is where it is today using irrelevant measurements. “Ms Rousseff and her left-wing Workers’ Party (PT) have made a bad situation much worse.” The argument is based on the reductionist and simplistic premise that the current crisis is Rousseff’s fault because her administration mismanaged public funds in times of bonanza.
“She spent extravagantly and unwisely on higher pensions and unproductive tax breaks for favored industries.” The article then cites the fiscal deficit as having swelled from 2% of GDP in 2010 to 10% in 2015, public debt now accounting for 70% of GDP and inflation being at 10.5% as three of the most important problems for the country of 200 million people.
To these points, someone who actually lives in Brazil and who deals with the Brazilian way of life on a daily basis, has to say that the author never lived in the weeds. Most likely, he never even got to see the weeds.
Brazil’s economic debacle does not stem from tax breaks given to industry. It originated in part from the bloated size of a State that sucks the people dry with continuous tax hikes on energy, food, public services and security, without delivering as expected. By the way, one of the recommendations of the article published by The Economist is to raise more taxes to solve the deficit problem. Go figure!
Brazil spending unwisely was not the origin of the fiscal problem either. The country has been spending extravagantly for over 20 years. Luiz Inacio Lula da Silva, Rousseff’s godfather, spent beyond all expectations in growing his party’s voting base with sterile welfare programs that only guaranteed more central government bloating and more social dependence. Think of Lula‘s spending in the same way as Obama’s leaving the southern border open so millions of Latin American and Middle Eastern illegal immigrants pour into the United States. These illegals will become the Democratic Party’s voting base, which ensures that more democrats will be elected for office in the upcoming elections.
Brazil’s first grave problem stems from the fact that its GDP is constantly assaulted by an ever growing State that spends over 90 percent of its money in maintaining the public bribery system which was created by the political class to sustain the bureaucratic mob that has controlled the nation since the military regime yielded power in the late 1980s. At least 90 percent of spending by the Brazilian government corresponds to ‘untouchable expenses’ that feed the jeitinho brasileiro, of doing business.
No single plan to cut expenses presented by Rousseff, Aécio Neves or anyone else ever mentions cutting down expenses from the bribery system, which is the opium that incentivizes corruption schemes such as that of the oil giant Petrobras, a scandal that divested billions in public funds to pay for political favors to members of all political parties. According to the World Bank, Brazil’s GDP growth rate has never been too high. It was 3.9 percent in the late 1990s and it saw its lowest point in 2015 as it collapsed to 0.1 percent.
If there is one force that could pull Brazil out of the hole in which it is now that force is industry, which is why it is shocking to read that tax breaks given to industry are ineffective. One single large company in an average city directly employs over 2,000 people. Slowing industrial activity in 2014 and 2015 has left many people all over the country unemployed, which has affected -both directly and indirectly- tens of thousands of other jobs that depend on manufacturing and agricultural production. If Brazil cannot guarantee a minimum of fiscal stability to the industrial sector, unemployment would rise nation-wide as more companies would slow down their activity. Such outcome would in turn leave large numbers of Brazilians without a job. Those jobless men and women would immediately seek government subsidies in the form of unemployment checks, burdening even more the empty coffers of the Rousseff administration.
The second gravest problem that Brazil faces today is not inflation or the pension system, as The Economist cites, but the impossibility for foreign companies to operate in the country. In this, the article published on 2 January does make sense, although it does not award it enough relevance. A simpler, more straight-forward process to register and operate a new business in Brazil would save entrepreneurs a whole lot of time and money. More new businesses, especially small and mid-size ones would immediately create jobs and restart economic activity in the country.
More jobs would mean more contributions to the pension and tax system, which would alleviate the current deficit in those areas. It would also mean more consumption, which would result in more demand for goods produced here and abroad. However, instead of providing the proper conditions to enable business owners to create and innovate, the government has gone as far as poking private pension fund managers to invest in Brazilian bonds and public pension funds so the government can gain some liquidity to pay its obligations to people who depend on a government check every month. If that does not spell disaster, I do not know what does.
Incidentally, most of the deficit in which the public pension system is in today, originates on the fact that public servants retire with some of the juiciest pensions in the world. No solution presented by the Rousseff administration or any member of Congress even entertains cutting down the inflated pensions of former presidents, congressmen, deputies, governors, mayors and so on, since they all belong to the untouchable 90 percent which sustains the bribery system. All proposals to cut government spending intend to slash welfare, something that is not a bad idea, but ignore cuts to luxury travel, lodging and lavish parties and events hosted by the central government on tax payer dime.
There are three sins that the last three administrations are guilty of. One, their unwillingness to end the mob state created by the Worker’s Party with the complicity of the whole political class. Two, their imbecility and often times refusal to attract investment. Three, their unwillingness to turn the country into an industrially attractive destination, which would have taken Brazil into orbit.
One final detail that escaped the article by The Economist is the fact that the Brazilian population has been, at least since the end of the military rule, an ignorant and lazy bystander of all the dubious practices employed by their government to gain unlimited control over them. Proof of that is that the 1988 constitution, the first since the country became a federal republic, states that government paid benefits are protected from any attempt to cut spending. In other words, the members of the political mob that took over the country almost three decades ago ensured themselves that they would have a free ride for the foreseeable future. Since 1988, the mobsters managed to knit a system that has always been stacked up against the people.
Although The Economist‘s article presents simplistic explanations and resorts to scapegoating to explain Brazil’s current debacle, the truth is that reality is much more complex than that. But what are they going to do? They have never lived in the weeds. As for solving the problem once and for all, it is necessary to understand its history and nature in order to solve it, but Brazilians do not know anything about it. Brazilians also refuse to own the resolution of the problem because they do not want to live with the consequences. There is no perseverance in their attempts to face reality and shape it to their benefit. Worse of all, Brazilians do not have the slightest understanding of the bottom line or the basic objectives. They do not want to take risks.