On the 31st of October, Luiz Inácio Lula da Silva was pronounced the victor of Brazil’s 2022 General Election, following heated months of debate with current right-wing president Jair Bolsonaro. Lula, former union leader, and already two-time president of Brazil, rooted his campaign around the promise of improving healthcare services, exempting low earners from income tax, and saving Brazil – the country with the second highest death toll from COVID-19 – from rising economic turmoil. During his presidency between 2003-2010, Lula implemented a Cash and Voucher assistance program (CVA), lifting millions of people from poverty, and giving him an approval rate of 83% after leaving office in 2010, although Bolsonaro’s supporters kept pointing at Lula’s criminal record – where he was imprisoned for 12 months (albeit charged with 12 years) for a money laundering scandal in 2017. On the other hand, Bolsonaro’s campaign revolved around political rhetoric and the embodiment of traditional conservative and Christian values – earning him the nickname “Tropical Trump”. As a pro-market advocate, Bolsonaro has publicly neglected Brazil’s responsibility to tackle the Amazon’s deforestation, ultimately neglecting indigenous communities and marginalized groups in Brazil.
Above all, Brazil’s presidential election reiterates a phenomenon that has been echoed across Latin America during the past five years – leftist pro-government regimes gain unprecedented support amidst rising inflation, humanitarian crises, rampant corruption, and political turmoil. Colombia’s Gustavo Petro, who was recently elected on June 19th, has pledged to make university free nationwide and give all unemployed people a job in the public sector (11% of the population). Gabriel Boric, winner of Chile’s president election in 2021 promised to make public transport and free universal healthcare nationwide. Peru’s Pedro Castillo is also keen
on providing free healthcare nationwide, albeit the fact that his economy is shrinking by 11% per annum, and that poverty rates have increased from 20% to 30% in the last year.
It has only been 15 years since Paul Collier’s publishing of “The Bottom Billion”, where he
posited that poor governance was one of the main factors impeding growth amongst Low
Income Developing Countries (LIDCs). By extension, it can be said that it is fiscal
irresponsibility that perpetuates economic crises, which in turn gives rise to populism and
unfounded political promises – perpetuating poor governance indefinitely. Lula, amongst
Latin America’s new presidencies will have to exercise fiscal discipline if they wish to
continue to integrate themselves into investors’ portfolios. In particular, Lula must find a way to tackle widening inequality and a lack of healthcare services without deepening Brazil’s sovereign debt, which is projected to reach 89% of nominal GDP next year, compared to the continental average of 71.3%. In fact, Lula has inherited an even greater budget deficit than anticipated, as Bolsonaro went on a spending spree to attract votes from low-income earners by raising welfare payments by 50% until the end of this year – exacerbating their debt by 26 million Brazilian real, or close to 0.3% of their real GDP.
What’s next for Brazil?
One of the main ideas posited by the Washington Consensus to help LIDCs develop was to
attract Foreign Direct Investment (FDI) within the economy. In this case, Lula’s officials
must find ways of halting deforestation in the Amazon Rainforest, which, under Bolsonaro’s regime, saw an increase of 72% between 2019 and 2022. Doing so, would make Brazil more attractive for ESG investors – thus boosting FDI and Brazil’s aggregate economic activity.
Not only does Brazil have to begin to exercise fiscal discipline, but they must also reconsider the effectiveness of their current investments; Brazil spends more on healthcare than France or Germany as a percentage of GDP, yet 60% of Brazilians have less than four years of schooling. Likewise, even though Brazil has a corporate tax rate of around 15% – the OECD’s interpretation of the “optimal tax rate” as per the Laffer Curve, which helps boost MNCs presence nationwide – Brazil redirects most of its revenue to state-controlled oil producer Petrobras. Brazil might soon fall into Sachs’ Resource Curse and should put an emphasis on intensive rather than extensive growth during its new regime.
Indeed, Collier was right about the role of poor governance in inhibiting development –
Brazil’s future depends on whether Lula and his team are capable of ameliorating public
institutions without dissuading private-sector economic activity.
This article was written by Gabriel González Núñez, a first-year BSc Economics student at the LSE.