international analysis and commentary

Bolsonaro’s victory: where is Brazil heading?

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Brazil’s most polarized elections are finally over, and the country is now more divided than ever. Although the victory of the far-right wing candidate Jair Bolsonaro is likely to radically change Brazil and South America’s interstate relations, nobody can be certain in which way he will do it.

Economy: who is in charge?

During the electoral campaign, Bolsonaro has repeatedly confessed his ignorance about economic matters. Therefore, since the beginning of his campaign, he has indicated Paulo Guedes as a “super minister” to implement the structural reforms they believe the country needs. Guedes, a former banker and economist of the “Chicago School”, has clear ideas on how to lead Brazil out of the most severe recession in its history: privatizations, deregulations and spending cuts. This approach will completely reverse the path that the country took with the Working Party’s economic reforms pursued in the period 2003-2016 under the governments of Luiz Inácio Lula da Silva and Dilma Rousseff.

Brazil’s new President Jair Bolsonaro

 

Undeniably, Brazil suffers from structural conundrums which need to be resolved. In 2017, the state pension system reached a $84.173 billion deficit – around 4% of the country’s GDP. The current pension system heavily impacts Brazil’s budget deficit, currently around 7% of GDP. Without a reform, the federal pension bill will increase to 19.5% of GDP in 2040, putting extreme pressure on the new government to quickly change the pension regime.

The pension system shows a relevant imbalance between public-sector and private-sector workers’ benefits. In 2016, despite the fact only 3.4% of all pension receivers were former public employees, they accounted for 34% of the fiscal deficit. The pension system is also very unequal; 35% of pension subsidies – which is not then accrued by workers’ contribution – is directed to the richest 20%. A further issue is the early minimum age retirement requirements, which allow male taxpayers on average to retire at 56 years of age and female taxpayers at 53

The government of Michel Temer – who succeeded Roussef in August 2016 – unsuccessfully tried to overhaul the existing pension system, increasing the minimum retirement to 65 for men and 62 for women. However, the proposed bill was rejected by Bolsonaro’s party. The political reason behind Bolsonaro’s opposition is that the main beneficiaries of the current pension system are former members of the armed forces, policemen and upper middle-class workers, i.e. the new President’s core constituency. Although Guedes has proposed reform schemes that do not differ greatly from those advocated by Temer, it is not clear how the next government will tackle the imbalances of the current pension system.

Moreover, there is uncertainty on how Guedes and Bolsonaro will reform the current taxation system, which is biased against the poor, as the top 10% normally pays in taxes a fifth of their income, while the bottom 10% pays in taxes a third of their income.

Additionally, there is no alignment on privatizations between Guedes’ free-market plans and Bolsonaro’s personal beliefs as we can judge them from his political records. Guedes has called for “privatizing it all”, from the oil company Petrobras to Banco do Brasil. However, Bolsonaro has often praised the state-driven economy of Brazil’s military government during the 1970s. During his long political career, the new President has opposed the privatization of the telecoms industry and the ending of the state monopoly in the oil sector. Moreover, in a recent interview, Bolsonaro has declared to be against the complete privatization of Petrobas, without going in further detail, leaving uncertainty over the speed and the extent of the privatization campaign.

However, deregulation is a key political goal on which Bolsonaro and Guedes seem to fully agree. In particular, Bolsonaro has said that he will open up indigenous reserves to farming and mining and will reduce environmental protections and anti-forestation efforts in the Amazon. Brazilian agrobusiness has boomed between 2010 and 2018 due to Chinese high demand for soybean, as Brazil’s exports to China grew by 60% (with soybean accounting for 40% of the growth). As a result, the agricultural industry, which represented just 15% of GDP at the end of the 2000s had reached 23.5% in 2017. The new President also said that withdrawing from the climate Paris agreement, as Donald Trump did for the US, is an option.

Land use near Perdizes, Minas Geiras

 

Despite the not identical views of Bolsonaro and Guedes and the lack of detail in Bolsonaro’s thoughts on topics like taxes, pensions and privatization, the new government’s market-friendly orientation can probably be taken forn granted: there will be attempts to slash bureaucracy and eliminate legal constraints in order to boost investments. Markets and investors have been enchanted by the prospective of Guedes leading the platform of economic reforms of the new government. However, it is not clear at all if Guedes will be able to deliver the free-market transformations they are hoping for, depending on whether Bolsonaro is willing to commit politically to implement those reforms.

Regional cooperation: the end of multilateralism

Bolsonaro’s victory is not only a game-changer for Brazil but potentially for the whole of South America, as Brazil – which accounts for almost 50% of the region’s GDP – is the leading political and economic power of the region. Today, right and center-right parties govern the four biggest countries in South America – Brazil, Argentina, Colombia and Chile.

This regional transition to more conservative and free-market oriented governments has ended South America’s “Left-Turn” political experience. The Left-Turn has been mostly studied as a political phenomenon affecting domestic politics. Yet the ideological affinity of so many left-wing parties simultaneously in power also impacted interstate relations within South America, giving rise to the Union of South America Nations (UNASUR) in 2008. For the first time in the continent’s history, UNASUR combined economic integration with a holistic approach to cooperation, aiming to implement a strong social dimension in its cooperation agenda. Brazil’s Working Party’s governments (especially bunder Lula and Rousseff) were a paramount influence in shaping an integration process which was designed to go beyond commercial cooperation.

However, the new Brazilian President is likely to reconfigure Brazil’s foreign policy, undermining multilateral regional agreements and introducing protectionist measures. Bolsonaro has promised to continue his country’s membership in the preexisting Southern Common Market (MERCOSUR) trading bloc but he will work to move it away from any political aim. Nevertheless, Bolsonaro’s priority is to increase the role of bilateral agreements, undermining any attempt to improve regional cooperation mechanisms.

This shift would represent a reversal of the diplomatic approach promoted by the Working Party, which was focused on deepening Brazil’s relations with its neighbours. Although Paulo Kramer, Bolsonaro’s main foreign policy advisor, has declared that Brazil will have a pragmatic and non-discriminatory foreign policy, there is the danger of escalating tensions between Brazil, Venezuela and other left-wing governments in the region. The new Vice-President, General Hamilton Morao, has announced that he will not recognize Maduro’s government while Bolsonaro has often said that he will increase sanctions against Maduro, worsening the confrontation with Venezuela.

In short, both domestically and in foreign affairs, the future of Brazil is an enigma. In the face of the the extreme polarization of Brazil’s society, Bolsonaro’s victory is, in any case, a turning point in the history of the country and possibly of the whole region. Yet it is not clear which direction history will take.