Lesson from Brazil’s Populist Bust
Now that the American presidential election has produced a result that seemed impossible to many experts, driven by a campaign termed “populist” by the media, what is the likely economic fallout for the rest of the world?
A puzzling aspect of the US election aftermath is that stock markets have cheered the victory of Donald J. Trump, sending the Dow Jones industrial average to a new record high, despite earlier predictions (and claims that his economic program might produce a recession).
The world has seen “populist” candidates and policies in many countries produce roller coaster results over many years. The Brazilian political experience of the last decade, which despite very different circumstances echoes much of Trump’s brand of populism to date, is a case in point. So it is worth looking at Brazil’s difficulties for clues to how “populism” can fare in the economic arena.
Brazil’s economic troubles have been a source of much bafflement, both in the country itself and to outside observers. How did it fall from grace so fast? What are the key factors that led to the sharpest and most prolonged recession in Brazil’s history? In my most recent book, How to Kill the Blue Butterfly: A Chronicle of the Dilma Era (for now only available in Portuguese), I try to dispel two common misperceptions about the country’s recent history: on the one hand, that Brazil’s problems were the result of a hostile turn of the global environment, led by falling commodity prices and China’s slowdown; on the other, that its collapse started in 2014. The book delves into former president Dilma Rousseff’s unsustainable and cumulatively disorganizing policymaking over the course of her five years in office, interrupted in August 2016 by her impeachment and removal from office. It shows how a sequence of bad policy choices aimed at maintaining the growth momentum of the 2000s instead supported falling unemployment and rising wages, leading to disastrous outcomes that culminated in a deep recession and a fiscal crisis.
However, like the more recent experience of Britain’s vote to exit the European Union, the economic fallout was not immediately visible in Brazil. In fact, the government’s high-spending policies artificially boosted growth and employment, creating the impression of a stable underlying economy. Underneath, imbalances were building that would eventually push the country into its deepest recession in modern history.
On August 31, 2016, Dilma Rousseff was removed from office following a 9-month long impeachment process. The controversial proceedings added to Brazil’s political polarization in the wake of investigations into several corruption scandals, most of which relate to wrongdoings at Petrobras, the country’s oil company. Rousseff, however, did not lose her mandate because of involvement in corruption, but rather was charged with so-called “crimes of responsibility,” administrative charges for having infringed two budget laws that are the pillars of Brazil’s fiscal framework. Prior to her removal, Rousseff was facing significant popular pressure from economic mismanagement over the last several years, which culminated in recession and rising inflation. It is therefore not unreasonable to say that her downfall was largely the outcome of policies gone terribly wrong.
The record of many Latin American countries is rife with examples of economic ruin following bouts of inward-looking, anti-immigrant protectionism.
It is dangerous to compare the specifics of the generalized campaign agenda Trump has proposed for the United States with what has happened in other countries. But the record of many Latin American countries is rife with examples of economic ruin following bouts of inward-looking, anti-immigrant protectionism. Early indications are that the Trump administration’s first objectives will probably be to deliver some economic growth through a combination of tax cuts and infrastructure spending. And that means heavy budget deficits. In the short run, such a program could bump up GDP. Trump critics are likely to worry about soaring deficits and debt-to-GDP ratios of the sort that have endangered the economies of Brazil and other countries turning to populism. But it remains to be seen how much stimulus Congress and the Trump administration will tolerate, what the monetary policy response would be, and what the political fallout would be from the resulting boost in economic growth. The Cassandras worried about long-term difficulties may be right, of course. But it will take patience to see whether they are.