BRAZIL-Life behind the looking glass

It’s all very confusing!

The last week of a calendar year is traditionally reserved for a look back in a kind of “whither have we drifted” analysis. The first week of the new year is reserved for a look forward in a kind of “where are we going” analysis.

If we consider events since the Real Plan we might conclude that at some point Brazil stepped behind the looking glass and into a “back-to-front” world.

The Real Plan, in fact, set Brazil on its head. Ever since colonial times, Brazil had been governed by strong central government, concentrated initially in the monarchy and, after independence, in the emperor. While the titles had changed, the same family was in charge of Brazil from discovery in 1500 to the proclamation of a republic in 1889 followed by the exile of the emperor. A lot happened in the world during those 389 years since Portugal first arrived to Brazil. Brazil, however, was kept pretty much in the dark about what was going on elsewhere in the world.

While Spanish America had established universities in the 16^th through the 18^thcenturies, Brazil did not establish universities until the dawn of the 19^thcentury.

News of Brazil in Portugal was restricted and news of Europe in Brazil virtually prohibited. Private libraries were outlawed. The original geographic division of the country was in the form of 15 hereditary land grants to selected Portuguese nobles (or quasi-nobles) who were the “attorneys-in-fact” of the monarch.

The First Republic was announced over a century after the Enlightenment had brought down monarchical Absolutism in Europe.

It’s not surprising that what followed in Brazil was a rush to catch up to the rest of the world. Strong central government continued as Brazil sought to develop and industrialize and fiscal imbalance was the general rule. Inflation was a constant problem and the Brazilian economy lurched between “boom” and “bust” in response to commodity price cycles while the political environment alternated between populist dictatorship and (ungoverned) democracy.

Throughout, inflation confiscated asset values in favor of a small governing elite, impeding the development of a middle class (a la Adam Smith). Attempts to change this situation were only partially successful. It was only in the mid-90s, after a traumatic period of hyperinflation that Brazil brought the “confiscatory tax” of inflation under control with the Real Plan. By this time, Brazil had been governed for just short of 500 years by “kleptocracy”.

Enter the PT.

It is ironic that the PT that began as a party to reform of (to quote Lula) “everything that is ‘out there’”, once in power grew into a new class of “kleptocrats”. It almost immediately set out to restructure government to ensure control over the Brazilian state. It “defanged” regulatory agencies created by the Real Plan while pretending to accept the governance precepts of the plan. While promising to follow through on required infrastructure development to accommodate a “new middle class” of 40-million individuals (20% of the total population) it concentrated its efforts on populist measures and crony politics to ensure its hold on power. 

This met with the resistance of Brazil's “traditional” class of kleptocrats and a struggle for predominance ensued. I labelled this the “War of the Kleptocrats” in this blog. The “war” is between “traditional” and “neo” kleptocrats over control of the process for confiscating the economic rents of Brazil.

The “war” eventually left the 40-million new middle class to its own devices and as a group to be manipulated by both sides, neither of which is interested in moving Brazil from the status of a rich country to that of a rich nation.

The rules of governance have been set aside by both sides and the only institution that seeks to impose the rules is the Judiciary.

As one would expect, the “war” has moved from simple political maneuvering to outright conflict and political “thuggery”. The 40-million are gradually losing their collective grip over their new-found prosperity. Inflation, on the upswing, has reduced their wealth and threatened their expectations for the future. Job loss was added to the “misery equation” as Brazil stepped behind the looking glass where everything is back-to-front, logic has been turned upside down, and the future looks increasingly like the past. 

For example, the contribution of industry to Brazil’s GDP is now lower than it was in 1950 – 65 years ago! The only way to show progress is to turn upside down the line and bar graphs of key economic indicators.

While the administration promises prosperity and growth, the “numbers” go the other way.

In this back-to-front world the logic is that (as the Red Queen told Alice) “In order to stay in place you must run as fast as you can. To get somewhere, you must run faster than that!”

The clock runs backward and the statements of the administration must be understood as the opposite of what is being said or promised. “Development” means “undevelopment”, “growth” means “shrinking”, and “prosperity” means “poverty”. You have only to look back at the evolution of the numbers and the rules of governance over the past 13 years! Whether by accident or design, that is the way it has worked out.

So, once the “retrospect” phase has ended, we will come to the “outlook” phase for 2016.

Analysts suggest that the “war” is likely to continue into next year with much the same result as we have so far observed.

So, on New Year’s Eve you should be prepared to “ring out the new and ring in the old” as required by the inverted logic of the world behind the looking glass.

Sorry!

BRAZIL-I thought Levy was gone.

Maybe there are protocols in the Finance Ministry too

The Supreme Court wrote up the protocols for impeaching a president. I have to wonder if they also wrote the “script” for replacing a Finance Minister.

Incoming Minister Nelson Barbosa sounded remarkably like Joaquim Levy upon taking office. He promised to take on the task of fiscal adjustment and put everything in order in a calm and orderly manner. Sounded kind of like the “orthodox” approach. Maybe he made the “standard” Finance Minister’s acceptance speech.

Dilma chimed in with her announcement that she has instructed Barbosa to get the economy moving again and do so with caution and prudence, avoiding abrupt changes and sharp turns. That should prove a challenging assignment (but one that must be obeyed).

Most analysts predict that it will not be possible to stimulate growth any time soon. But Brazil is the land of “God willing” (“Se Deus quiser!”) so perhaps some divine intervention is part of the plan.

The PT is now swollen with pride at having achieved some maneuvering room with the new impeachment protocols. Dilma now has more space within which to wield her wrecking ball.

Barbosa can be expected to try to resume the voyage of the Brazilian Titanic while the hold fills with more water. Dilma will go ahead along the land route to Paradise and they will plan to rendezvous there.

Bon voyage? I don’t think so.

Be prepared for a difficult and perhaps even surreal 2016.

BRAZIL-"You be careful, OK?"

A short parable

Two commercial airline flights approach an airport. The radio on the control tower comes alive: “Tower, flight 391 requests immediate landing instructions.” The air traffic controller responds, “Affirmative, flight 391, you are cleared to land on runway N36. Immediately afterward, “Tower, flight 496 requests immediate landing instructions.” The answer, “Affirmative, flight 496, you are cleared to land on runway S144.” Suddenly both flights respond in loud voice, “Tower! Runway N36 is the opposite end of Runway S144!” There is moment of silence after which the air traffic controller responds, “Affirmative flights 391 and 496, landing instructions confirmed. You guys be careful now, OK?”

The recent declarations of Dilma Rousseff are like the instructions from the tower. She has indicated that Nelson Barbosa is to get the economy growing again and to do so without any sharp turns or abrupt movements – i.e. being careful.

How that is gonna happen is beyond my comprehension. Apparently, Barbosa will be dispatched to the Brazilian Titanic to weigh anchor and start the debilitated ship on the way to Paradise with instructions to “be careful”. Dilma will proceed to Paradise via the land route mentioned in a previous blog post and rendezvous with the ship at port with a band playing and flags waving.

Some argue that the Brazilian Titanic is no longer seaworthy in its present condition.

We will soon find out!

Recommendations:

Break out a life jacket and make sure you have access to a lifeboat. The Brazilian Titanic is seriously overweight and the sea is over the ship’s waterline.

It will be a perilous voyage.

I guess that’s enough metaphor for this post. Most analysts agree that trying to force growth will only exacerbate inflation and unemployment. The “numbers” simply do not add up to yield success.

As usual there is no lack of imaginative ways to approach the challenge. Fantasy reigns supreme.

It’s useful to remember that the “economy” is not the issue. The issue is holding on to power regardless of the economic effects. The objective is to make the state the sole source of economic decision-making and policy and for the PT to “rule in perpetuity”. The government intends to impose the “new economic framework” (which is really a very old economic framework) that will simply isolate Brazil from the rest of the world.

The “new middle class” of the Real Plan can be expected to return to its former condition of aspiringto middle class and will proceed to Paradise in steerage class.

As I mentioned in a previous blog post, if your global strategy requires that you have a presence in the Southern Cone of South America, Argentina is now your best hope. Otherwise, look to Chile and Mexico for the “Latin American connection” in the short-to-medium term and join the “new middle class” in Brazil in its hope for longer-term improvement.

Apologies for raining on your Christmas parade!