In Brazil, Brazil elections, Economics

An aerial view of the Rio das Pedras favela in Rio de Janeiro, Brazil August 2, 2016. REUTERS/Wolfgang Rattay

In order to understand why a country like Brazil elects a man like Jair Bolsonaro as president, you have to look closely at economic development…

By Heiner Flassbeck

Published on Heiner Flassbeck Economics, Nov 20 2018

In order to understand why a country like Brazil elects a man like Jair Bolsonaro as president, you have to look closely at economic development. The masses of citizens don’t suddenly come up with the idea of making such a figure president, but despair regularly of politics in general. The current economic situation shows in the eyes of the citizens that all attempts to bring reasonable people into such an office obviously fail. It therefore makes radical change seemingly inevitable.

This is evident in view of the development of unemployment. Although the unemployment rate fell significantly from a very high level of 14 percent in 2000 and 2003 (when the Labour Party with Lula came to power in 2003) to 2014, it has since risen to almost 13 percent (by 2017). In 2018 it did not rise any further, but in the summer of this year it still stood at 12 percent.

Brazil had fallen into a deep recession in 1999 in the so-called Latin American crisis (one of the typical overvaluation crises following the Asian crisis), which only ended after Lula took power.

Brazil, which is dependent on exports and raw materials, was then hit hard by the global recession of 2008/2009, but was able to recover quickly thanks to strong domestic demand (Chart 1).

How deeply the recession hit the people who began 2014 can be seen from the slump in private consumption, which fell by more than 4 percent in 2016.

Chart 1: Growth and Consumption


Investments also slumped massively, by around fifteen percent in both 2015 and 2016 (Chart 2). According to various sources, there was another slump in 2018. The invest- ment ratio fell to below 16 percent, which is a simple catastrophe for a catching up economy.

Chart 2: Real Investment Growth and Investment Ratio


In the past, foreign trade was very often the decisive factor for economic development in Brazil. This is also the case this time. After recovering from the global recession, Brazili- an exports did not recover, but remained extremely weak with one exception. Initially, imports rose, which put the current account balance in deficit, but imports have also fallen in recent years. The current account deficit, which fell sharply to over 4 per cent of GDP after 2008, narrowed significantly (Chart 3).

Chart 3: Exports, Imports and Current Account


There was a recovery in exports this year because the real exchange rate has now de- preciated sharply (Chart 4).

Chart 4: Effective Exchange Rates


Brazil has experienced a dramatic roller coaster ride with its real exchange rate. After the crisis of 1999, the Real depreciated sharply and gave the country a major lead in terms of competitiveness, so that foreign trade temporarily became a guarantee of success.

Due to international speculation of the carry trade type, however, President Lula’s first period saw an enormous real appreciation, which only ended abruptly in 2011. The di- mension of this revaluation was enormous. The real effective (i.e. trade-weighted) ex- change rate rose by almost one hundred percent (from 55 to 100 in the chart). This is an almost fatal loss of competitiveness for the industry of any country and must lead to panic in the export-oriented sectors. This is certainly the root cause of the hatred for the Lula government in business-oriented circles.

After 2011, however, the country depreciated significantly in real terms and thus im- proved its foreign trade position again. In recent months, the real has come under mas- sive pressure a number of times, which of course has benefited exports, which are now making a major contribution to the recovery. In recent weeks, the external value has stabilised slightly against the major currencies.

The Brazilian central bank, which had done almost nothing against the appreciation in the period before 2011, has now acted against the devaluation by raising interest rates again, which it gradually lowered after the recession of 2012. In 2016, interest rates were raised by Banco Central do Brasil to over 14 percent, which, with an inflation rate of 8 to 9 percent, meant a considerable real burden on investors and debtors. In the meantime, however, the central bank has let short-term interest rates fall below seven percent again in the wake of the severe recession.

Inflation in Brazil (here the deflator of GDP) was very stable for years at around eight percent and only rose more strongly after the depreciation surge in 2000 (Chart 5). In the meantime, however, the inflation rate has fallen significantly to around four percent.

Chart 5: Inflation


In the second part I will deal with the economic policy possibilities the country would have had objectively at the time of Lula and what it has today. In addition, we have to analyse what the last government did wrong and how absurd the plans of the new president with his extremely neoliberal finance minister are.

(This is a machine translation of an article that was recently published on Makroskop – )


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Runoff results by state of the Brazilian Presidential Election, 2018 Wikipedia: Jules Rohault - Own work, CC BY-SA 4.0