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Brazil's economy

Jan David Walter / bkOctober 25, 2014

Economic questions could end up deciding the Brazilian election. But analysts say it won't work the other way round - economic development is unlikely to be affected by the outcome of the run-off.

PictureTeaser Wahl Brasilien 2014, Rousseff, Neves

For weeks now, both candidates for the Brazilian presidency have been firing off accusations at one another. Corruption, nepotism, and lies were common allegations. Brazilians have a fitting saying for it: "The dirty talking to the filthy." But the mutual mudslinging won't decide the election, says political scientist Susanne Gratius of the think tank FRIDE. "Corruption is part of the system, and the Brazilians know that the candidates won't be able to change much," she said.

For the incumbent Dilma Rousseff of the Workers' Party (PT) and opposition candidate Aécio Neves of the social-democratic PSDB party, other issues, for instance those affecting the economy, have only moved into the foreground in the few days ahead of Sunday's run-off vote (26.10.2014). That could be an advantage for Neves, because Brazil's economy has stuttered during Rousseff's tenure. Gross Domestic Product even shrank slightly in the first half of 2014.

Though unemployment, at five percent, is still at a reasonable level, the inflation of 6.3 percent has become particularly noticeable on goods that are necessary for daily use, and so disproportionately affects low income people. And that is a lot of voters.

Brasilien Präsident Wahlen Wahlkampf Fernsehduell Dilma Rousseff und Aecio Neves
The Brazilian election is down to a run-offImage: Reuters/P. Whitaker

Player vs. moderator

But the economy is also an exciting election issue because it is one of the few areas where candidates can really set themselves apart. No one dares question social programs, and since the mass protests in 2013 it has become clear that infrastructure, health, and education sectors need to be expanded.

The question is: how can these things be financed? Both candidates want to auction off concessions for private airports and long-distance roads. But Rousseff wants to finance the building work from public banks, while Neves wants to see more private capital flow into such projects. Put crudely, Dilma Rousseff sees the state as an economic player, while Aécio Neves sees it as a moderator.

The latter could be a more sustainable approach, because the economic downturn is also affecting tax revenue. Since 2010, Brazil's new debts have risen from 1.4 percent of economic performance to potentially 4.5 percent by the end of 2014, according to the Moody's ratings agency.

Intervention vs. order

Neves also wants to see more private competition in the crude oil industry - he is even calling for a review of the license auctions of October 2013, when the government had reserved a 30 percent stake in the semi-state-owned oil company Petrobras. That soon became 40 percent, partly because few other companies showed interest - which put a hole in state coffers, since the license was then sold for the minimum offer.

Another sign of Neves' political approach is that he wants to make the central bank reduce inflation to the target rate of 4.5 percent. Meanwhile, the interventionist Rousseff prefers to use the legal range (between 2.5 and 6.5 percent) in order to avoid a rise in unemployment and a sharpening of the recession.

Protectionism vs. free trade

That danger is unavoidable if the central bank raises the base interest rate in order to stabilize the currency. But Neves' riposte to that is a drastic simplification of the taxation of goods, which is very complicated in Brazil. So complicated, that it is often named alongside corruption, poor infrastructure, and export tolls as a reason why foreign companies don't invest in Brazil. In her four years as president, Rousseff has done very little in this regard and so has now suggested much more modest reforms.

That might also be because Brazil's international standing is not as important to the incumbent president as it is to Neves; Though in February Rousseff went to Brussels to meet EU Commissioners to talk about a free trade agreement, she will only sign it once she's made a deal with Brazil's Mercosur partners (Argentina, Paraguay, Uruguay, and Venezuela).

Brasilien TV-Duell Rousseff Neves 19.10.2014
Rousseff is considered an economic interventionistImage: Reuters/Nacho Doce

But the negotiations with the EU and Mercosur have barely moved forward since the end of the 90s. And even within the Mercosur free trade alliance there is an impenetrable jungle of tolls and restrictions. For that reason, Neves even mooted the end of Mercosur. He sees Brazil joining the international economy at the side of the US and the EU.

Election campaigning vs. presidency

Going by the electoral programs, Neves would be a more interesting candidate for the EU, says the political scientist Gratius. But she warns, "What the head of state will actually be able to implement is another matter." The biggest faction in the Brazilian congress is made up not of Rousseff's PT, nor of Neves' Social Democrats, but the Brazilian Democratic Movement Party (PMBD) - whose representatives are not exactly known for their passion for reform.

The biggest hope for the Brazilian economy is probably the reliability of Brazilian democracy. That's also how the actions of Moody's ratings agency could be read too: they released their prognosis for Brazil's credit rating four weeks before the first round of voting. Three days later Moody's confirmed the implicit message with a declaration: Brazil's credit-worthiness does not depend on the result of the presidential election - the vital thing is how successful the next government will be in fighting the economic downward trend.