What now? The trade-offs and budget cuts needed to fix Brazil’s finances (Entire series)

As Brazil’s interim government gets to work, its main task is fixing Brazil’s finances after identifying a record budget deficit. Although the specter of austerity looms large, the good news is that budget cuts don’t need to affect Brazil’s social programs. The country’s real fiscal problems can be alleviated by addressing large-scale inefficient and wasteful spending elsewhere. The following five-part series examines where some of these savings could come from.

Briefly after taking office, the interim government of acting Brazilian president Michel Temer announced a record budget deficit of R$ 170 billion, almost double the figure estimated by his predecessor, Dilma Rousseff, who has been suspended pending an impeachment trial. The size of the hole in the budget is staggering, and reflects unsustainable spending by Rousseff’s administration. Now, as Brazil faces its worst economic downturn since the Great Depression, one of the main tasks of the interim government is to restore stability and confidence by getting the fiscal situation under control. This will inevitably require painful spending cuts.

There is no question that government spending in Brazil needs to be examined and changed. The current rate of public spending, accounting for 40% of GDP (double the rate of the United States), is clearly beyond the means of the government. This is unsustainable and has had serious consequences for the country, including the repeated downgrades in its credit ratings, which further increase the cost of borrowing, placing the government in an ever bigger hole.

Amid rampant speculation about where funding will be slashed, the following five-part seriesexamines the trade-offs and decisions that the Brazilian government will have to make moving forward to stabilize the country’s financial situation, examining spending on social programs, subsidies to the wealthy, public employee benefits, and political fragmentation and corruption, as well as the opportunity cost of the misallocation of resources and the lessons learned from the successes and failures of the past decade.

Bolsa Família: A small investment with great returns

Brazil is one of the world’s most unequal societies, something that stunts development and creates a whole host of social problems. Nevertheless, recent government initiatives to help alleviate inequality and poverty have often been the target of criticism. A common refrain among supporters of Dilma Rousseff’s impeachment and opponents of her Workers’ Party (PT), which has been in power for the past 13 years, is that the government’s lauded welfare programs for the poor, a central tenet of the PT’s policies, are simply too expensive. It is all too clear that many wealthier Brazilians have a negative perception of social programs like Bolsa Família, which provides cash transfers to poor families. As the government works to close a record R$ 170 billion budget gap, some have argued that cuts will have to be made to these social programs.

However, they would be well advised to rethink these positions: as the country’s premier social welfare program, Bolsa Família should not be considered an expense, but an investment. And as far as investments go, it is a bargain: In total, the program has a yearly budget of about R$ 28 billion, accounting for just 0.5 % of GDP. Further, economists estimate that for each real disbursed, Bolsa Família has generated an increase in GDP worth R$ 1.78.

Meanwhile, cutting Bolsa Família would take away critical aid to a huge amount of people: 11 million families, or 46 million people; that is, roughly one-fourth of the total Brazilian population. These are the most vulnerable members of society, who have historically suffered from neglect and lack of opportunity and are now disproportionally affected by the consequences of Brazil’s economic crisis, the worst since the Great Depression. They are particularly vulnerable to rising unemployment and inflation, especially increasing food and energy prices. Removing their assistance would worsen the economic downturn by strangling their purchasing power even further. This is because the modest payments disbursed to recipients, which average R$ 70 a month, essentially double their incomes. That is money that the roughly 25% of the country’s population that benefit from the program can spend, supporting the economy as a whole (studies indicate that most of the money is spent on food, school supplies and children’s clothing). In light of the terrible crisis, the economy certainly needs all the help it can get.

This type of internal consumption is especially critical in a country like Brazil, where economic growth is highly dependent on the export of commodities. Low oil prices and weak demand for commodities in general have taken a huge toll on Brazil, with GDP expected to contract by almost 4% in 2016, after having contracted by a similar amount in 2015. As the commodities slump continues, Brazil will have to rely on internal consumption to recover from the economic crisis. Taking modest government assistance away, then, would end up being extremely costly to the economy as a whole while doing little to fix the country’s finances in the short-term.  

Nevertheless, calls for reductions to the program have accelerated in recent days, after news surfaced alleging widespread fraud. It was found that between 2013-2014, about R$ 2.5 billion were paid out irregularly, representing almost 10% of Bolsa Familia’s yearly budget and affecting up to 1.4 million people. It appears that payments were given out to people who did not possess tax identification numbers, or who had multiple such numbers, as well as deceased individuals and people ineligible for the program, including public employees, campaign donors and business owners.

Clearly, this is a huge problem. Yet it also represents an opportunity: It means that Bolsa Familia can be streamlined simply by eliminating such fraud, saving over R$ 2 billion without cutting benefits to the 90% of recipients who actually need them. In addition, according to the economist behind the program during the Lula years, Ricardo Paes de Barrosfurther budget cuts could come from reducing inefficiencies and waste.

No welfare program is perfect, and there are indices of fraud and inefficiency anywhere in the world where such programs exist (consider the vocal critics of the American welfare system). This is not a reason to get rid of such programs, which serve an essential function. It just means that they must be constantly monitored, refined and improved.

In any case, none of this is the fault of the tens of millions of legitimate program beneficiaries. The fraudulent payments in this case are merely a classic example of a long-present pattern in the Brazilian system: politicians looting government coffers to buy loyalty by doling out patronage. The fact is that money is skimmed everywhere, as exemplified by the scandal at the state-owned oil company Petrobras, where an estimated R$ 6 billion were stolen through inflated contracts and kick-backs. Still, no one is suggesting that we get rid of Petrobras, just that we root out the corruption and punish those responsible. The same should go for Bolsa Familia.

No matter how much we would like to believe otherwise, Brazil is and remains a poor country. The fight against poverty is critical to Brazil’s long-term growth prospects, and Bolsa Familia has proven to be an invaluable asset in that fight. Sensible reforms that ensure that less money is wasted while more money gets to the needy are essential, but the larger framework should stay. The same goes for Brazil’s other social programs, like Minha Casa Minha Vida, which helps increase home ownership among the nation’s poorest and was also this week the target of speculations regarding fraud. That these programs were used unfairly by some does not mean that they should be taken away from all. Those committing fraud (and those in the government that allowed the fraud to happen) should face the consequences of their actions. The nation’s needy are not at fault here and, having already suffered more than enough, should not be punished for the misdeeds of the political classes.

Having considered all of this, we must also maintain a sense of perspective regarding the small size of Bolsa Familia relative to Brazil's larger fiscal problems. If fraud represents 10% of a program that represents 0.5% of GDP, we are talking about just 0.05% of GDP. The fraudulent amount of R$ 2.5 billion is a lot of money, but it hardly makes a dent in the budget deficit of R$ 170 billion. Clearly, optimizing and streamlining programs like Bolsa Familia is not enough. Much more savings need to be found, and given Brazil’s massive bureaucracy, there are far greater targets for cuts.

The next section of this series will examine a far fairer and more promising area for budget cuts: the government subsidies that end up benefiting Brazil’s wealthy.

Subsidies to the wealthy: Bolsa Empresário and a flawed educational system

As Brazil’s interim government looks to balance the country’s accounts in light of the record R$ 170 billion deficit expected for 2016, there is no shortage of viable candidates for cuts. Although some have suggested paring back Brazil’s social programs, there are several more promising low-hanging fruit. For example, while Bolsa Família, Brazil’s premier social welfare program, has a modest annual budget of about R$ 28 billion, roughly ten times as much is earmarked for subsidies and tax breaks to corporations. These corporate benefits, sometimes referred to as “Bolsa Empresário” or “Corporate Welfare,” add up this year to about R$ 270 billion. Although some of these incentives may in fact help create jobs and generate economic growth, a lot of it ends up lining the pockets of people who are already unbelievably wealthy.

Tax breaks or subsidies to certain industries or companies are common measures of public assistance to private sector development, and there are myriad examples in Brazil. Indeed, beneficial tax regimes and other subsidies are given to ports, chemical companies, oil companies, wind turbine manufacturers, and agribusiness companies, to name a few. The justification for this largesse is that it is intended to help the less developed Brazilian industries and regions. However, the fact that 52% of the funds go to Brazil’s most developed region, the southeast, indicates that much of the funds are going to places that probably don’t need any help.

An even bigger problem of late has been the provision of subsidized loans to large companies. After a 2007 policy went into effect, the Brazilian Development Bank (BNDES) and other public banks began offering such loans, which charged interest well below market rates. The value of these subsidies jumped from 0.4% of GDP to almost 10% per year, to the point that the market share of public banks now exceeds that of private ones. As a result, the BNDES now lends out more than even the World Bank.

Indeed, a major contributor to the 2015 budget deficit (the previous record holder, before the 2016 estimate blew it out of the water) was caused by the repayment of the off-balance sheet debts, known as “pedaladas fiscais,” for which suspended president Dilma Rousseff is being impeached. Although she has often stated that these illegal accounting maneuvers were done to pay for social programs, the fact is that much of the “loans” obtained through the “pedaladas”were used to fund the BNDES loans. Although the money was supposed to help Brazilian entrepreneurs and SMEs, huge amounts of below-market-rate loans ended up going to large companies. Notable examples include Odebrecht, the largest construction company in Latin America (and the company at the center of the Petrobras web of corruption, as uncovered by the Car Wash investigation), and JBS, the largest meat exporter in the world, which was the single greatest beneficiary of the program. Meanwhile, the Brazilian Treasury, i.e., the taxpayer, is on the hook for the difference between the subsidized interest offered by the BNDES and the market rate. It clearly makes no sense for the government to provide assistance to already successful, billion-dollar companies. These funds could be much better used elsewhere.

Government assistance to large corporations aside, there are many other ways in which the government subsidizes the wealthy. One salient example with long-lasting consequences is the way the government approaches the country’s educational system. For example, public universities, which can accommodate only 25% of college students, are free; remaining students must pay for private universities. The problem here is that the public universities, which are the most competitive and prestigious, are generally inaccessible to those who have not received private primary and secondary education: the public university entrance exams are just too hard and public schools are generally too poor in quality to prepare students for them. Even kids who went to private school sometimes have to take an additional year or two of specialized review courses (also private, of course) to pass them. So we end up with a situation in which students whose families can afford to pay for them to go to private school their whole lives then get to send their kids to the best universities for free, setting them up to get the best jobs, while those who could not afford private schools can only pass the exams at less prestigious private universities, which they may not be able to afford. And yet, in the past decade, the government has opened 15 more public universities. This hardly addresses the problem: in order for all students to have a fair shot at attending public universities, public schools need to be brought up to the standard of private ones. Simply creating more public universities only further extends the educational subsidy provided to wealthier Brazilians. This is not an efficient allocation of government resources.

This highlights a critical fact about education spending in Brazil: the government generally over-spends on higher education while under-investing in primary and secondary education, all but ensuring that inequality of opportunity will be perpetuated. Providing access to quality public education is one of the few approaches to poverty reduction that has consistently been shown to be successful, and the public school system in Brazil is notoriously inadequate. Indeed, it seems that public education has even deteriorated recently, as would be indicated by the many occupations of public schools by dissatisfied students all around the country. The fact that Brazil’s public education system has not improved demonstrably under the Workers’ Party government is the real scandal here. Brazil is now in dire straits, but there was a time when the economy was booming and the president at the time, Lula, enjoyed almost unlimited political goodwill. Yet, instead of trying to get at the structural roots of systemic poverty, he focused on palliative measures and neglected to address some of its long-term causes, like unequal access to quality education. That is the real scandal here: The squandering of this opportunity to actually effect lasting change is worse than any corruption or budgetary irresponsibility.

Given the gargantuan budgetary constraints the country is now facing, it is likely that the fight to improve public education will once again be put off (indeed, the government has been cutting the educational budget for the past few years in light of the tight fiscal conditions). Students will continue to have to wait, and another generation of people will have grown up without benefiting from access to decent schools and the associated job prospects. Meanwhile, political pragmatism dictates that what little political goodwill remains will be used to push through reforms that will have more immediate effects. A prime candidate is the large amount of money spent on government bureaucracy itself.

The next section of this series will examine likely candidates for cuts in the massive Brazilian bureaucratic machine, including benefits to public sector employees and an unsustainable and underfunded pension system.

Largesse and waste in the Brazilian public sector

As Brazil’s government works to balance its books, an obvious but politically difficult place with much room for budget cuts is the large and expensive government bureaucracy. This is not to say that there is anything inherently wrong with having a large government per se. But it is clear that in the case of Brazil, where public spending accounts for 40% of GDP (double the rate of the United States), the size of the government apparatus is entirely disproportional. This creates distortions and inefficiencies that need to be remedied.

In this regard, the interim government of Michel Temer is already off to a bad start. Despite calls for sacrifice and austerity as the government works to close a record R$ 170 billion deficit, yesterday, instead of cutting such already bloated expenses, the Brazilian Congress ridiculouslyraised the salaries of several (elite) categories of civil servants (including themselves). The total impact of this on the budget will be some R$ 64 billion over the next three years, hardly the cuts and sacrifice that regular Brazilians will be expected to make in the name of righting the ship. Particularly cynical is the salary increase for judges, including those on the Supreme Court, who are responsible for overseeing investigations into corruption by high-ranking government officials. Here, it is notable to mention that 60% of Brazil’s Congress is currently facing charges for some crime or another, ranging from money laundering to homicide. Due to Brazilian law, which grants such officials the legal privileges known as “foro privilegiado”, they can be tried only by the Supreme Court. This tends to lead to impunity as the court is a notoriously overburdened and slow body of just 11 people facing tens of thousands of new cases every year.

What cuts will be made to compensate for this increased expense remains to be seen. However, there is one clear candidate: the Brazilian pension system. This overcommitted and underfunded system has been in desperate need of reform for years, and Temer has requested that a proposal for reforms be delivered as a priority in the early days of his interim government. The pension system currently accounts for more than half of primary public expenditures each year. A recentWall Street Journal article explains the problem:

Over the past 15 years, public pensions have increased from 3% to 7% of GDP. Brazilian men typically retire at age 54 and women at 52, earlier than in any major European country, drawn into the golden years by generous benefits. On average Brazil pays pensioners 90% of their final salary, compared with an average of 60% in developed countries.

If this is allowed to continue unchecked, it is estimated that pensions will cost 20% of GDP in 25 years.  For comparison, the OECD average is 7.9%, while the countries that currently spend the most are Italy and Greece, with respective expenditures of 15.8% and 14%.  Meanwhile, theaverage retirement ages in OECD countries are 64 for men and 63 for women. Clearly, Brazil is way off the mark here. The country’s changing demographics, with lower fertility rates and longer life expectancy, along with the economic crisis that is strangling government tax revenues, only compound the problem. Raul Velloso, a specialist on public finances, put it bluntly: “Public pensions in Brazil have long been a slow-motion disaster.”

It may seem that average Brazilian workers benefit disproportionately from all this largesse, but the fact is that pension generosity is unevenly distributed, with private-sector workers often receiving less than their public-sector counterparts. The overall average pension numbers are highly skewed by some outrageous outliers: for example, former president Fernando Henrique Cardoso has received a generous monthly pension (over R$ 22,000 per month as of 2014, which was greater than even the Sao Paulo state governor’s monthly salary at the time) since he “retired” from his job as a professor at the public University of Sao Paulo in 1968, at the age of 37. He is hardly the only one to receive this type of benefit: in 2014, there were almost 2,000 other retired people in the state of Sao Paulo alone who received more than the governor’s salary as their monthly pensions. Such disproportional largesse skews the figures and conceals the inequality present in the system. For every beneficiary of a disproportionally generous civil servant pension, there are countless low-level civil servants and private sector workers who retire much later and receive much less.

There are only three ways to solve this problem: cut overall pension benefits, increase overall contributions, or raise the retirement age. All are unpopular and politically difficult measures to implement. Since these reforms will have to be passed by politicians, many worry that the private sector will disproportionally bear the brunt of the changes while the public sector will remain as cushy as ever, further skewing the inequality between them.

Excessively generous benefits to the public sector have long been a point of contention in Brazil, and this is illustrated not only by differences in pensions but also in salaries. Indeed, although inequality has decreased in the past 15 years among those working in the private sector, it remains stagnant in the public sector. This means that some public sector salaries are disproportionally high. A recent New York Times article highlights these so-called “super salaries:” a parking valet at the Sao Paulo city council building who earned over US$ 11,000 a month, a Minas Gerais librarian who earned USD $24,000 in one month, and a Sao Paulo state judge who earned more than USD$ 360,000 in one month are just some egregious examples. In the Chamber of Deputies (the lower house of Congress) alone, 1,500 employees were previously found to earn more than the constitutionally mandated ceiling for public sector workers. The problem is only exacerbated by the growth in public sector employment, which has increased by 30% in the past decade. Meanwhile, school teachers and police officers can earn less than USD $1,000 per month. Cutting the outrageous salaries reserved for some public workers is an obvious way to save money without affecting the poor.

But high salaries are not the only problem. Notorious are the excessive perks enjoyed by some public employees. The recent suspension of controversial Chamber of Deputies president Eduardo Cunha, who is facing various corruption-related charges, highlights just how generous the government is to some officials. In light of his indefinite suspension, outrage has emerged ashe continues to retain not just the typical trappings of a high political office (such as an official vehicle and security detail), but also an official residence, the use of planes owned by the Brazilian Air Force and a staff of 64 people (23 at his Chamber offices and 41 at his official residence).

For comparison, in the US, the maximum number of staffers any member of Congress can employ is 18 full-time and four part-time workers. The Speaker of the US House of Representatives, Paul Ryan, who holds the job analogous to that of Cunha, has 17 staffers. American congressional leaders don’t get official residences. In fact, when in Washington, Paul Ryan prefers to sleep on a cot in his office, as do about 50 other members of the US Congress. Even President Obama isresponsible for his family’s personal expenses at the White House. Meanwhile, the Brazilian taxpayer foots the bill for Cunha’s chef, three cooks, three kitchen assistants, four waiters, two housekeepers, four drivers and eight private security guards (in addition to the 16-person legislative police detail), for a total cost of over R$ 500,000 per month. This would be absurd under the best of circumstances, but the picture deteriorates even further when we consider that Cunha has been found hiding millions stolen from the state-owned oil company Petrobras in Swiss bank accounts. In the meanwhile, millions of ordinary Brazilians lack access to even basic sanitation and drinking water.

Perks of high office aside, politicians in Brazil have become experts at milking the system for as much as possible, and nothing exemplifies this better than the abuse of the fractured party system. Indeed, many political parties exist for no purpose other than to gain access to fundingreserved for political parties. This is why, among the whopping 28 parties currently represented in Congress, there are, for example, the Workers’ Party, the Democratic Labor Party, the Brazilian Labor Party, the Christian Labor Party, the Labor Party of Brazil, the National Labor Party and the Brazilian Labor Renewal Party. Small new parties are springing up all the time simply to capture funds. Their proliferation, aside from being expensive, only helps to further congressional gridlock as it can be extremely difficult to get anything done with so many different interests and parties involved. The cost of the fragmentation is therefore doubled: it absorbs a huge amount of funds and leads to excessive inefficiency.

One sensible reform to address this would be to create a minimum threshold for congressional party representation. Indeed, a proposal to limit such representation to only parties which had received at least 5% of the vote in a national election was defeated a few years ago but could be brought back now. Nevertheless, it will be very difficult politically to achieve this.

It is important to note that the government’s expansion in recent years has not only been limited to the domestic sphere. Another area in which public spending has risen dramatically over the past decade relates to the increase in Brazil’s foreign embassies. Between them, former president Luiz Inacio Lula da Silva and suspended president Dilma Rousseff opened 48 new embassies, mostly in the Caribbean and Africa, in an attempt to gain votes at the UN, with the ultimate goal of securing a highly coveted permanent seat at the UN Security Council. The investment did not pay off, however. The permanent seat never materialized, and Brazil is now in arrears with the UN and other multilateral organizations by over USD$ 800 million, potentially affecting its right to vote. A cost-cutting initiative would therefore be to close any of Brazil’s 139 embassies that are not necessary. Perhaps this would be easier, politically, than some of the previously mentioned reforms, although the ultimate financial impact is unclear. Still, every bit helps.

Another limited result is likely to be achieved through a reduction in the large number of government ministries and cabinet-level positions. Although Temer flip-flopped on this issue considerably, weighing the savings from streamlining the ministries and cabinet appointments against the benefits of distributing as many such posts as possible to cement allegiances and strengthen his tenuous and unpopular government, he ultimately did reduce the number of ministries from 32 to 23. In any case, the actual impact of these ministerial reductions on the government’s finances remains to be seen, but it nevertheless represents an important symbolic gesture.

In any case, given the political difficulty involved in making the most impactful cuts, especially in terms of public sector pensions, it is clear that other measures that address waste must also be implemented to cover the government’s shortfall. As demonstrated by the far-reaching Car Wash investigation into state-owned oil company Petrobras, an egregious source of fiscal hemorrhaging in Brazil is corruption. Although corruption and impunity have long been a part of Brazilian politics, if the recent success of the Car Wash investigation is any indication, there is reason to be hopeful that this can change and that it will be possible to root out malfeasance, send those responsible to prison, and recover stolen funds.

The next section of this series will examine the cost of corruption in Brazil and what can be done to alleviate it.

The costs of corruption in Brazil

There is no question that the single driving force behind all of the political upheaval that Brazil is currently experiencing is not political at all. It’s not entirely the economy either, although the recession has certainly intensified the situation. The real culprit behind all of this mess, the 800-pound gorilla in any room where a political discussion is taking place, is corruption. Namely, themulti-billion dollar corruption scandal discovered at the Brazilian state-owned oil company Petrobras: Revelations regarding a sophisticated kick-back scheme run by a cartel of Petrobras contractors along with prominent politicians has been rocking the nation for the past couple of years.

The scandal has ensnared dozens of politicians and business leaders. The brazen nature of the graft, the audacity of its magnitude, has scandalized Brazilians. The scheme’s gutting of the company, a huge contributor to GDP, has devastated the economy and catalyzed political unrest. The aggressiveness with which the investigation has been pursued and the tough sentences issued have the political establishment terrified. Petrobras was supposed to be the country’s cash cow, responsible for a bright future in which wealth from newly discovered oil reserves would finally propel Brazil to fulfill its potential. All the repercussions of the scandal, the practical bankrupting of Petrobras itself and many of its contractors, all the lost jobs resulting from the screeching halt in the energy and construction sectors, are alone thought to have cost the economy at least 1% of GDP. The fact most of the graft happened while Dilma Rousseff was the chair of the Petrobras board of directors, stoked anger and propelled calls for her impeachment after her additional budgetary crimes were revealed.

This is the central theme of everything that has always been wrong with Brazil. For all of its history, corruption has been a cancer that has stunted development. The Petrobras investigations have merely revealed what Brazilians have always intuitively felt: the reason the country can’t seem to rise to its potential is because of corruption and all the distortions that it causes. What is to be done about such a huge problem, one that seems to be an integral part of the Brazilian political system? It is hard to know where to begin. Given the scale of the problem and the seeming involvement of the entire political class, it can be easy to lose hope. Still, there are a few clear starting points.

One place to start is reducing the number of political parties, which could help reduce incentives for corruption. This is because in Brazil’s highly fragmented system, where dozens of parties vie for power, governments can only rule by building coalitions. Since there are so many parties, all with their own disparate interests, leaders often resort to patronage to get anything done. Indeed, that is ultimately what the Petrobras scandal is all about. The previous scandal of the century, the “Mensalão” vote-buying scandal, which rocked Brazil a decade ago, also came down to this. Back then, during the presidency of Luiz Inacio Lula da Silva, investigators discovered a scheme run by his chief-of-staff, José Dirceu, to pay off members of Congress in exchange for their support of the president’s agenda (Dirceu was imprisoned for his role as the scheme’s mastermind, and has since also been sentenced to 23 years in jail in unrelated charges stemming from the corruption at Petrobras.) Reducing the number of parties, then, by decreasing this fragmentation, could help eliminate some incentives for the systemic corruption otherwise needed to grease the wheels of government.

Another source of incentives for corruption is Brazil’s massive government bureaucracy. Like everything else in Brazilian politics, public sector employment, which has grown by 30% in the past decade, has often served as a pretext to dole out patronage and buy loyalty. Indeed, as interim president Temer looks to push through unpalatable reforms to Brazil’s overextended pension system, he has ceded to pressure from public employee groups and unions that might resist this change by allowing them to get a salary increase. This type of politics has long led to the creation of redundancies and outrageously unjustifiable expenses as people in power look not only to forge alliances, but also to provide their friends, relatives, campaign donors, etc., with government-issued salaries. No surprise, then, that this helps to feed the culture of corruption.

Indeed, people have been known to get government jobs even if they already have other jobs, and even if they don’t live in the city where they are supposed to be working. This was discovered in the case of interim Chamber of Deputies president Waldir Maranhao. While living and working in Brasilia as a congressman, he was found to receive the salary of a full-time professor (R$ 16,000 per month) at a state university in his home town of São Luis, while his son, a physician in São Paulo, also received a salary as a full-time employee (R$ 7,500 per month) of a local government tribunal in his home town. Both men received such salaries for jobs they did not do for years, receiving in aggregate hundreds of thousands reais worth of public money. This is merely one egregious example of something that happens, on a smaller scale, all over the country, where such “phantom” employees are an epidemic. Such incidents highlight the need to decrease the size of the government, not only because it is disproportional and inefficient, as explained here, but also because it creates incentives for corruption.

Corruption extends beyond the public sector, however. Indeed, as the Petrobras case highlights, the biggest corruption-related problem Brazil is facing relates to the links between the public and private sectors. Unfortunately, it looks like the inflated contract/kick-back scheme at Petrobras is just one example of systemic corruption around state-owned companies. For example, another state-owned behemoth, the electric company Eletrobras, is in the process of being delisted from the New York Stock Exchange after repeatedly missing deadlines to submit its 2014 financial statements to the US Securities and Exchange Commission. The problem: the company’s auditors can’t to seem figure out how much has been lost to corruption. Such schemes are also being identified in the large construction projects around the 2016 Rio Olympics and 2014 World Cup. Many more are likely to come to light.

Another critical pathway for corruption has been the provision of subsidized loans to companies by the Brazilian Development Bank (BNDES). This type of lending has increased exponentially in recent years, and as a result, by 2014, the Brazilian government had some type of participation in over 700 companies. Given the history of corruption in Brazil, it is hardly surprising that some of these companies receiving preferential subsidized loans from the government turned out to be giving back to the same government in the form of corruption, especially considering that many of the loans did not go to Brazilian small and medium-sized enterprises, as originally intended, butlargely benefited huge, powerful companies.

For example, the multi-billion dollar company JBS, which is the largest meat exporter in the world, received the most BNDES largesse and subsequently poured almost 40% of its 2013 profits into the 2014 electoral campaigns of various politicians. Another company that benefited from subsidized loans and made generous donations is Odebrecht, the largest construction company in Latin America. The company’s CEO, Marcelo Odebrecht, has been convicted to 19 years in prison as a result of the Petrobras investigation. He has recently signed a plea agreement, meaning that he has agreed to testify against others involved with corruption in order to lighten his sentence. His revelations, expected to be the greatest bombshells thus far, will surely rock the Brazilian political establishment once again.

The difference between the treatment received by the business people involved in the scandal and the politicians they were colluding with is striking and represents another important front in the fight against corruption in Brazil: the broad immunity enjoyed by politicians. Consequences for corrupt politicians have been notoriously lacking throughout all of Brazilian history, and this tradition of impunity has allowed corruption to become increasingly audacious and brazen, culminating in the Petrobras scandal, the greatest corruption scandal discovered in any democracy, ever.

For politicians, impunity remains the norm, rather than the exception. This is because it is all but written into Brazilian law through the generous legal protections for which they are eligible. The worst of these is known as the “foro privilegiado,” or “privileged forum,” a provision which dictates that politicians of a certain stature can only be tried by the Supreme Court. This almost guarantees immunity as the court is a notoriously overburdened and slow body of just 11 people facing an estimated 100,000 cases every year (the US Supreme Court, which has 9 justices, deals with about 100 cases per year). Indeed, in the two years since the Petrobras investigation started, the court has failed to sentence a single politician. In contrast, Sergio Moro, the judge responsible for the investigation and who has overseen sentencing for defendants not eligible for legal protections, has issued 105 sentences, totaling over 1,000 years in prison. All told, about 20,000 Brazilian public servants are currently protected by the privileged forum. Although there are some justifications for why sitting politicians should receive some legal protections, the scale of the Brazilian case is clearly disproportional. The current system does nothing but embolden politicians to become corrupt, encourage criminals to run for office, and create delays and gridlock that hurt the country.

Sadly, the legal privileges for politicians don’t end with the privileged forum. Another problem is the almost endless scope for appeals, even for Supreme Court decisions, and the myriad possibilities to reduce the severity of initial sentences. For example, even though the Supreme Court did sentence dozens of people in the Mensalão trial (an unprecedented occurrence which, nevertheless, did not take place until seven years after the malfeasance had been discovered), many of the sentences didn’t stick. Now, of the 24 politicians and business people imprisoned in 2012, more than two-thirds have wriggled out of their original sentences. Some have been transferred to house arrest or semi-open regimens (in which they can leave prison each day to go to work) while others have had their prison sentences transferred to community service or have been pardoned by presidential decree.

A proposed new law supported by the Brazilian Public Ministry would implement 10 measures against corruption to address these failures in the Brazilian legal system. Specifically, the law seeks to reduce incentives for corruption, strengthen penalties for it, and ensure the recoverability of stolen funds. With the support of over 2 million signatures, it has reached Brazil’s Congress. And yet, it has been languishing in the Chamber of Deputies for the past two months, needing only the signature of the previously mentioned Chamber president, Waldir Maranhão, to move forward. This situation exemplifies the challenges that Brazil is up against: beyond the illegalities mentioned above, Maranhão is facing three different corruption-related criminal inquiries at the Supreme Court.

Overall, considering all of the insidious ways, big and small, in which corruption permeates the Brazilian political system, it is clear that it ends up being extremely costly. Indeed, a sizable portion of GDP, estimated at between 3 and 5%, is lost to corruption each year, with the Petrobras scandal alone thought to account for a full 1% of GDP (twice the cost of the Bolsa Família social welfare program, which is able to assist some 50 million impoverished Brazilians with a modest budget of 0.5% of GDP).

There is an old joke that says, “Brazil is the country of the future, and it always will be.” Well, as long as corruption and impunity remain the norm, this old adage will remain true. Brazil, a continent-sized country blessed with innumerable natural resources and a large, diverse population, will never fulfill its potential as long as corruption is allowed to continue as part of the routine, without any serious consequences for the establishment as a whole. The current crisis represents a unique opportunity to make reforms to disrupt this destructive system. Let’s hope it isn’t wasted. 

Learning from the past while looking toward the future

Brazil is currently living a historic moment, or rather, several of them: a historic economic depression, a historic political crisis, a historic corruption scandal. As the country’s leaders try to find a way out this mess, they have tended to focus on the here and now, prioritizing their own survival over the long-term prospects of the country. However, they would do well to remember that these crises also represent a historic opportunity to enact reforms that will hopefully prevent this type of chaos from occurring again. It is important for policymaking at this critical juncture, then, to have an eye toward the future. And one of the best ways to determine what to do going forward is take stock of the past: Considering the previous decade or so, in which Brazil’s economy soared to new heights and then unceremoniously crashed back down to earth, there is clearly a lot to examine.

In this regard, the three-week-old interim government of Michel Temer is off to a shaky start. Although he has put together a strong economic team, he has also made a number of gaffes and questionable decisions, chief among them the appointment of politicians cited in the Car Wash corruption investigation to government ministries (indeed, leaked wire-taps indicating a plot to sabotage the investigation have already forced two ministers to step down). Many fear that a backward-looking Temer, a member of the old-school Brazilian Democratic Movement Party (PMDB), will roll back the more successful policies of his Workers’ Party (PT) predecessors, such as the social programs that have helped tens of millions of poor Brazilians. It would indeed be tragic if this progress were reversed. While these programs represent a modest investment, their continued implementation and improvement is a vital first step in the long-term development and diversification of the Brazilian economy. In addition, progressive ideals like fighting racism, advocating for women’s reproductive rights and ensuring equal protection to members of the LGBT community must remain priorities in Brazilian policy making in order to fight the rising tide of more conservative sentiment, particularly the regressive influence of the evangelical movement, with which Temer’s party has close ties.

In light of these developments, the PMDB is quickly being painted as the villain of Brazilian politics, the long-time “rent-a-party” with no principles, whose allegiance is for sale and whose only objectives are power and enrichment through corruption. This is undoubtedly true, and yet, how quickly we forget that during the past 13 years, when the policies that culminated in the crisis were enacted, the country was led not by the PMDB but by the PT and its presidents, Luiz Inacio Lula da Silva and Dilma Rousseff. When they first came into office, they were political outsiders who vowed to stand up for regular Brazilians against the traditional ruling elites. Now, after more than a decade in power, they have committed many of the same misdeeds for which they criticized the political establishment, perhaps even to a greater extent.

The Car Wash investigation is looking into unprecedented levels of corruption at state-owned oil company Petrobras that took place on the PT’s watch, while Lula was president and Dilma was the chair of the company’s board. Dirty money is thought to have financed PT electoral campaigns across Brazil, including Dilma’s and Lula’s. Dilma engaged in illegal accounting maneuvers to conceal a budget deficit during an election year, something that arguably allowed her to win reelection, barely, under false pretenses. Lula is being investigated for influence peddling and accepting bribes. His former chief of staff was the mastermind of a massive scheme to buy Congressional votes. Leaked wire-taps of calls between Lula and several others, including Dilma, indicate a desire to interfere with the Car Wash investigation. Lula’s appointment to a government ministry by Dilma has widely been perceived as an attempt to obstruct justice by shielding him from prosecution. It was the PT that created a strategic alliance with the PMDB early on in an effort to consolidate its power. The much maligned Temer was named Vice President by Dilma herself, and voted into office by her supporters. She was the one who broke the law and got herself kicked out of office, leaving him in charge. In short, although the PMDB was always part of the ruling coalition and therefore certainly deserves a share of the blame, the PT was the one calling the shots and is ultimately responsible. Its consistent shirking of this responsibility, blaming everyone else instead of owning up to past mistakes, is symptomatic of the broader pathology that has characterized the PT’s tenure.

The PT is polarizing in Brazil. People either love it or hate it, and they defend their perspectives with a ferocity uncharacteristic of the traditionally easygoing Brazilian culture. Many criticisms of the party revolve around its “leftism” or “socialism,” but these are not entirely fair for two reasons. First, there is nothing wrong with leftism per se. After all, leveling the social playing field is an admirable goal and much needed in the context of highly unequal Brazil, and socialist or social-democratic policies work well in many countries. Second, the PT didn’t strictly adhere to leftist ideology much of the time anyway.

The problem with the PT is not its ideology but its populist and demagogue approach, through which it greatly overstated its accomplishments and refused to admit its mistakes. This prevented course-corrections from being made over the past few years, as the economic crisis began to take hold, despite many opportunities to do so. The consequences of this rigidity are tragic considering that the economic crisis could have been less severe if Dilma’s failed economic interventions had been reversed sooner, for example. Further, a divisive rhetoric setting “the people” against “the elite” created deep divides in Brazilian society that will take much time to heal. As a result, during a moment of crisis when the country is in desperate need of action, this polarization has created gridlock and hysteria, further delaying the implementation of solutions and extending collective suffering.

Despite its rhetoric, the PT has generally not operated strictly according to any specific principles, leftist or otherwise, but has rather taken what could generously be described as an “overly pragmatic” approach to government. This has led to an astounding level of short-sightedness, both in terms of irresponsible policies and misguided coalitions. A glaring example of this revolves around the lauded social policies they put in place, policies that may have offered the country’s most destitute some much needed short-term respite, but which have otherwise done little to address the structural causes of poverty in Brazil. Instead of generating real, long-term progress, any gains created by these programs were fragile and easily reversed.

Still,in maintaining its populist narrative, the PT often tries to disqualify protests against it by claiming that they are not the result of general dissatisfaction with the state of the country, but rather stem from the fact that the “elites” want to take away the rights of the poor. However, when it says “elites,” what it really means is the middle classes, who have been hit hard by the recent economic downturn. In fact, the “plutocrats” or “oligarchs” against whom the PT so often rails have actually served as their key allies and have thrived under PT rule, continuing to do so even as the economy tanks (except for the few who have been caught by corruption investigations, of course). The sad fact is that the self-proclaimed defenders of the poor against the elites cynically provided the former with meager assistance while greatly boosting the fortunes of the latter (and, arguably, themselves) through short-sighted deals and plain old corruption.

An important lesson going forward, then, comes not from what the PT did, but what it failed to do. The party that made fighting poverty the center of its domestic agenda stopped at short-term, palliative assistance (the country’s premier welfare program, Bolsa Familia, provides families with modest payments of about US$ 70 per month) and failed to address the long-term drivers of poverty and inequality, like Brazil’s dismal public education or health systems. This led to a situation where poor families could afford to consume a bit more, perhaps save up to buy cell phones or cars, but otherwise did not benefit from any real change in their prospects for social mobility. Indeed, as a result of the crisis, many of the people who were lifted out of poverty in the past decade are starting to slide back. Going forward, social assistance must continue to help in the short-term but have the greater prerogative of addressing the underlying causes of poverty to generate lasting change.

The narratives of fighting the establishment in the name of the poor and fighting for justice in the face of tyranny were also further undercut by the PT’s political strategies. Indeed, it established a number of unholy alliances in its pursuit of power, both at home and abroad. While claiming to stand up for democracy, it was providing support to authoritarian regimes like those in Cuba, Venezuela, Russia and Iran. At home, in an effort to consolidate power, alliances were made with the billionaire business classes, as demonstrated by the fallout of the Car Wash investigation, as well as the corrupt political establishment, exemplified by the PMDB. Given the possible consequences of the interim Temer government, with its potential rollback of progressive policies and the efforts of some of its senior political figures to declaw the Car Wash investigation, it could perhaps be said that of the many strategic mistakes and political miscalculations made by the PT, this allegiance with the PMDB was the worst of all. Instead of fighting against the corrupt establishment machine, the PT tried to co-opt it in its own favor. Instead of fighting patronage, the PT tried to use it as a governing strategy, to buy alliances and political support for its agenda. Instead of solving the problem, this approach simply led to more corruption.

Another lesson moving forward then, is not really about policy making at all, but simply about politics. The PT used a flawed, “ends-justify-the-means” approach full of legally questionable shortcuts to create the illusion of rapid progress. As a result, it was likely doomed to failure from day one. Now, the façade has fallen apart, revealing the rot within. Hopefully, future policymakers will absorb this lesson. There are no shortcuts to real progress: It takes consistent hard work over a long, long time.

Beyond this, there are more tangible lessons to be learned as well. The crises do not have one specific cause, but are the culmination of a perfect storm of calamity: a global commodities glut, misguided economic interventionism, populism, the ever greater ingraining of institutionalized corruption. The cost of all this has been steep, and not just in the obvious form of jobs lost to rising unemployment or purchasing power strangled by creeping inflation. A high price continues to be paid in the insidious and routine misallocation of public funds, with far-reaching consequences in the form of chronic underinvestment in areas that actually generate development.

The problem is not only one of waste and corruption, but also of opportunity cost. Policies thatsubsidize the wealthy can only do so at the expense of something else. Indeed, Brazil consistently under-invests in infrastructure, healthcare and education. This perpetuates poverty and human suffering. Aside from slowing growth and encouraging inequality, this creates new expenses that the country simply cannot afford. Poor infrastructure takes an estimated R$ 150 billion per year out of the Brazilian economy. Beyond that, such policies generate a number of unintended consequences and distortions. Companies will neglect to invest in improving productivity or innovation when they can just lobby for preferential treatment by the government. Corporate subsidies, tax breaks, and protectionist policies stifle competitiveness, efficiency and growth. The government’s single-minded focus on growing the extractive sectors of the economy, like energy and mining, perpetuate the so-called “resource curse” that has plagued so many developing countries, hindering economic diversification and resilience. All of this has impacts on real people, through fewer jobs, higher prices, and excessive dependence on the whims of international commodities markets. In order for the country to move forward, all of this must change.

A good crisis is a terrible thing to waste, and Brazil has several. Let’s hope that at least some of them did not occur in vain, that at least some of them will be used to catalyze change and lead to actual long-term progress.