Brazil has undergone three distinct political and economic phases over the past 30 years, each under a different president. The first involved a transition away from military rule to democracy beginning in 1985. The second phase began in 1994, when the implementation of a set of conservative polices known as "the Real Plan" ended prolonged hyperinflation that plagued the country during the late 1980s and early 1990s. The third — and current — phase began in 2003. Since then, the country has seen the rise of a new middle class and a gradual decline in economic and social inequality. Over the past four years, however, the Brazilian economy has slowed down while the cost of living has increased. Meanwhile, public demands for better social services have put pressure on the political system, as seen in the protests that took place throughout Brazil in June 2013. Each of these phases presented a different challenge: In 1985 the focus was on political liberalization, in 1993 on economic stabilization, and since 2003 on reducing unemployment and social and economic inequalities.
Cardoso Stabilizes the Economy
Rousseff and Neves represent different projects led by their respective parties that have been at odds since at least 1993, when Fernando Henrique Cardoso — first as finance minister and then as president from 1995 to 2002 — implemented economic measures that stopped hyperinflation and reduced the size of the state apparatus through a wave of privatizations of state-owned enterprises.
Though the Cardoso administration helped stabilize the Brazilian economy, its policies also led to high unemployment as many inefficient industries struggled to compete amid the process of liberalization. Brazil also suffered from a poor external economic environment, particularly a series of financial emergencies such as the Mexican peso crisis in 1994, the 1997 Asian financial crisis, and debt defaults in Russia in 1998 and Argentina in 2001. These prevented Cardoso from fully implementing his economic modernization and liberalization agenda. For example, state-owned banks continue to play a central role in the Brazilian economy, and trade protectionism, though diminished, remains the norm.
At the time, Cardoso's main political adversary was Luiz Inacio Lula da Silva, the future president, who strongly opposed Cardoso's privatizations and fiscal policies aimed at reducing public spending. Cardoso remained popular enough to win re-election in 1998, but his chosen successor, Jose Serra, lost to da Silva in 2002.
Da Silva and Rousseff Turn on the Taps
Da Silva's two presidential terms between 2003 and 2010 were known for the expansion of social programs for the poor, as well as the growth of the middle class, with some 26 million Brazilians lifted out of poverty. Increases in global soybean and iron ore prices, along with rising Chinese demand for Brazilian commodity exports, allowed the government to increase public spending without having to continue with economic reforms such as cuts to subsidies for inefficient industries via state-owned banks. As a result, public spending increased from 15.7 percent of gross domestic product in 2002 to 18.6 percent in 2010. Moreover, minimum wage increases were not only above inflation, but also above productivity rates. As a result, da Silva enjoyed high popularity rates and saw the election of Rousseff as his successor in 2010.
Under Rousseff, the state has continued to play a central role in fostering economic growth and reducing inequality. However, the Brazilian economy has not enjoyed as favorable an external environment as it did under da Silva. In contrast, Brazil's main economic partner in Latin America, Argentina, has been gradually restricting imports from Brazil, while Chinese demand has been slowing. In the first seven months of this year, for example, Brazil's exports to Argentina dropped 22.1 percent compared to the same period in 2013. As a result, the Brazilian economy has grown by less than 2 percent over each of the past three years, while inflation has remained above 6 percent. Notably, however, unemployment dropped to 5 percent in August, the lowest level in recent decades. To some degree, this factor has helped keep Rousseff's popularity above 40 percent, but it has also made it more difficult to implement austerity measures that would have negative social effects.
Meanwhile, Rousseff has largely continued da Silva's foreign policies, albeit somewhat more timidly, as the current president has never prioritized foreign affairs. The Rousseff administration has focused on expanding relations with the developing world, particularly Mercosur and African countries, while maintaining an independent — and at times distant — relationship with the United States. U.S.-Brazilian relations became particularly strained after accusations surfaced that the U.S. National Security Agency had spied on Rousseff's communications. Rousseff's lack of interest in foreign policy has been mainly due to her greater focus on domestic issues, namely on reducing interest rates and expanding government investment in infrastructure. Interest rates indeed declined to 7.25 percent in April 2013, but to fight inflation, they have been allowed to climb since then. (They currently stand at around 11 percent.) Infrastructure projects are also underway but have suffered delays.
Brazil at a Crossroads
If Rousseff represents the continuation of a vision that has guided Brazil since da Silva's election in 2003, Neves' agenda is a flashback to the Cardoso era. Indeed, both da Silva and Cardoso have been highly engaged in the campaigns of Rousseff and Neves, respectively. Neves has announced that he would appoint as finance minister Arminio Fraga, Cardoso's Central Bank governor from 1999 to 2002 who oversaw implementation of Brazil's "macroeconomic tripod" of floating exchange rates, fiscal surplus and inflation targets. Under Rousseff, progress on these polices has floundered, with the Central Bank intervening in the currency exchange daily via currency swaps, the budget surplus decreasing gradually, and inflation persistently reaching 6.5 percent, the limit of the target set. Other economic proposals from the Neves camp include reducing subsidized state-owned bank lending to inefficient industries, a reform aimed at simplifying and reducing taxation, and lowering trade protectionism.
Meanwhile, on the foreign policy front, Neves would likely depart from Rousseff's course by seeking closer relations with the United State and the European Union, while trying to ease some of the consensus-based rules applied by Mercosur that limit Brazil's independence in trade policy. Brazil's relationships with Venezuela and Cuba in particular would likely not remain as close as they have been under Rousseff's administration.
Even if elected, however, Neves will need to attract backing for his economic agenda from a broad coalition of political parties in Congress to secure passage in both the lower house and the Senate. This makes it critical for Neves to retain the support of the parties that backed Marina Silva and the Socialist Party in the first round. Until a few weeks prior to the first round of the presidential election, Silva led both Rousseff and Neves. Her campaign floundered while sustaining attacks from both her competitors — but mainly from Rousseff — leading a majority of Silva's political coalition to ally themselves with Neves. Since the opposition candidate will need these parties to win the election and to effectively govern thereafter, he could be forced to adopt some of Silva's policies, such as stricter environmental policies, political reforms eliminating re-elections for presidents, governors and mayors, and increased autonomy for the Central Bank. Silva's economic proposals are similar to Neves, and the Socialist Party has already said that they will back the candidate regardless of what Silva decides to do in the future.
Rousseff, on the other hand, already has a majority of the seats in Congress. If re-elected, the vision that sees the state as fundamental to fostering social and economic development will remain. Nonetheless, whoever wins will need to balance the policies that enlarged the middle class over the past decade with austerity reforms aimed at reducing the cost of living. Failing to sustain this delicate economic balance will complicate the political challenges facing the next president, with Brazil likely to see a return to the political protests that brought millions to the streets in June 2013.
