BRAZIL-Waiting for Godot. Will he show up?

The search for a prefix

The suffix “-cracy” derives from the Greek “Kratos” translated as “power”. Brazil appears to be a country in search of a prefix to attach to “-cracy” in order to define itself.

The prefix most bandied about is “demo” that yields “democracy”. However, an historical analysis of Brazil suggests that there is hardly a national consensus as to what constitutes “democracy”. With 35 political parties, it is naïve to suggest that there are 35 different definitions of “democracy” based on ideology. I will have to come back to this after looking at other prefixes.

The current form of political organization in Brazil is defined by the prefix “auto-“. There is little doubt that Dilma Rousseff is the sole source of power in Brazil. Not even her own party subscribes to many of her policy initiatives. I do not base this assertion on my own views. Today’s press (and much of the press from the past) reported numerous times that Dilma is in charge. She doesn’t always get what she wants, but she never ceases to pursue it. And she is known for not heeding counsel.

Another prefix to “-cracy” is “merito-“. Meritocracy is not widely practiced in Brazil but there is a significant contingent of those who support it to at least make some political noise.

By a large margin, the most widely applicable prefix in Brazil is “klepto-“. Kleptocracy is ubiquitous, as the Lava-Jato investigations have shown. Brazil is now into the 22^ndphase of the Lava-Jato cases and just today some 23 new search and seizure mandates were issued. It is not unreasonable to assert that corruption is endemic in Brazil. Brazil fell 7 rungs on the Transparency International’s “Perception of Corruption” ladder. It is now in 76^th place with a “grade” of 38. This puts the country in rather poor company. 

However, it is important to observe that for the first time in Brazil’s 515-year history, those who have traditionally enjoyed impunity – i.e. members of the “elite” – are now being tried and sentenced to prison for corrupt and illegal practices.

This takes me back to the opening paragraph of this post. The seed of institutional “democracy” has been planted with the Lava-Jato investigation. The only reason I can discern for why democracy has not grown and blossomed in Brazil is that those in charge are still fighting over the booty of kleptocracy. 

Dilma Rousseff is obsessively concerned with the risk of impeachment and the opposition obsessively seeks to eliminate the PT.  No one is really paying attention right now to the “demo-“ prefix. However, with elections scheduled this year for over 5,000 municipalities, one can expect that the “demo-” will gradually become more influential and eventually affect national politics.

You cannot expect this process to be either smooth or fast. What you can expect is that the economic recovery will be faster than the change in the political culture. The latter requires the emergence of new leadership accompanied by the continuation of the efforts to discover and sanction corruption. This requires that local communities mobilize and exercise their constitutional rights. That’s a steep learning curve to be negotiated and it will have to be accompanied by some serious structural reforms that will also take a lot of time to be implemented.

Essentially, this means that “doing business in Brazil” will change markedly, especially for the foreign investor. Market volatility will increase. New markets will surface as new consumers enter the economy. You might have to downsize in some markets and re-size in others. You will most certainly need to review your financial controls and have an iron-clad compliance program.

Some signs of improvement are ephemeral. For example, the foreign trade account has improved dramatically. However, this is caused by two negative trends: the first is a deep recession that has curtailed imports, and discouraged travel abroad. The second is the devaluation of the Real that has made manufactured exports more competitive albeit with no change in productivity in the manufacturing sector nor the investment rate. Those are simply market demand phenomena that have very little effect on the structure of production and distribution n Brazil.

So you should be prepared for a long and not necessarily smooth transition in Brazil once the War of the Kleptocrats is brought to an end.