Posse_Dilma_2010_8.jpgEconomy Elections & Institutions 

The Power of the Incumbent

By Cristobal Vasquez

Neither the economic challenges Brazil faces nor the corruption scandals that have rocked President Dilma Rousseff’s party, Partido dos Trabalhadores (Workers’ Party), will affect the electoral power she is expected to wield in the October 5 elections. After trailing her opponent Marina Silva, by nearly 10 percentage points, Dilma is once again in the lead. According to the most recent poll by Datafolha, Rousseff would win 49 percent of the vote in a head-to-head second round with Silva. Despite her new lead, it is expected that a runoff would be necessary to determine a clear winner.

The international community is paying particularly close attention given Brazil’s role in the global economy. It’s the 7th largest economy in the world and the largest in Latin America. Its GDP growth rate has been one of the fastest in recent years (peaking at 8 percent in 2010).  Furthermore, the country has gained international recognition for its poverty reduction program Bolsa Familia (Family Fund), which has pulled approximately 50 million Brazilians out of poverty in the last decade, nearly a quarter of the total population. However, the state-capitalism and export-driven models make the country highly dependent on external economic factors, as evidenced by the recent recession resulting in a contraction of its GDP growth in the first two quarters of 2014.

More specifically, there are two major external economic factors that are currently affecting the Brazilian economy. The first is the deceleration of the Chinese economy, its primary trading partner, which has decreased its demand for natural resources and manufacturing goods from Brazil, subsequently lowering the total exports. The second is the U.S. Federal Reserve bonds’ potential interest rate increase, which will represent a significant outflow of money.

“There is a lot of highly speculative money invested in emerging markets assets around the world that may well flow out if we continue to see a depreciation in emerging markets’ currencies, Fed tapering expectations getting stronger, and the Chinese economy slowing further,” said James Kynge of The Financial Times in an interview earlier this week.

Adding to the risk of a large outflow of capital, which would be devastating for the Brazilian economy in and of itself, the volatility of the commodity prices, the exchange rate of the real with respect to the dollar (weakened by approximately 9 percent in September), and the inflation of almost 7 percent, collectively represent major risks for Brazil’s exported driven economy.

Less inflows of capital, a higher exchange rate, and high inflation are factors that will definitively hurt, if it hasn’t already, the pockets of the average Brazilian.  These factors could translate in lower voter turnout on behalf of Rousseff this Sunday. However, the current polls contradict this hypothesis by giving the incumbent a relevant advantage. But if these variables are not affecting the outcome, how can we explain Rousseff’s popularity?

According to Mac Margolis, a Bloomberg columnist in Rio de Janeiro, Brazil’s economic boost is a result of credit-based programs, which have significantly increased domestic consumption in past years. In fact, some analysts estimate that the indebtedness of Brazilian families has increased from 7 percent to 50 percent in 10 years.

This capacity of indebtedness shows the important power state-owned banks, such as Caixa, Banco do Brazil, and the Brazilian Development Bank (BNDES), have on the country’s economy.

According to The Wall Street Journal, Caixa’s loan book has risen by an annual average of 40 percent since 2009, while that of BNDES, which is almost three times as big as that of the World Bank, has more than quadrupled since 2005.

To maintain the fiscal and monetary objectives, the state-owned companies have also played a crucial role financing budget deficits and inflation targets. As a matter of fact,  several newspapers have revealed how the profits of Petrobras, the largest oil company in Latin America, have been frequently used to other purposes, unveiling corruption scandals that implicate several members of the Workers Party. Notably, some of these corruption cases occurred when Rousseff was leading Petrobras’ Board of Directors.

Not surprisingly, Rousseff’s involvement has led to a great deal of criticism, while simultaneously shedding light on other examples of mismanaged state funds, such as money spent on the construction of a Cuban port, the incompletion of the high speed rail between Rio de Janeiro and São Paulo, and the forfeit of external debt to Nigeria and Mozambique.

But the voters don’t seem to be bothered by this potential mismanagement, and Rousseff appears to be making good use of the political machinery at her disposal. “Dilma has five times more time on national television than Marina Silva, quite an important fact in a country with such a large extension of land,” said Fernando Schüler, a Brazilian political scientist and visiting fellow at Columbia University. Schüler also pointed out that 24,000 public jobs are appointed directly by the president’s office, which becomes particularly relevant on Election Day, given the large number of votes the incumbent can potentially secure.

Nonetheless, given the economic and political issues at play, Rousseff is opting for a more conservative approach to her campaign, constantly repeating, “Let’s not lose what we have already achieved” in her speeches, highlighting the significant in roads in poverty reduction, the increase in credit access, the competitive salaries, and the historic low level of unemployment—now at 5 percent.

It would appear Brazilians are more concerned with the micro-level issues—jobs, subsidies, and credits—rather than with the macro-level issues, such as international economics and corruption scandals. And it is to Rousseff’s advantage that it remains that way.



Cristobal Vasquez is an economic and finance reporter at World Policy Journal.

[Photo courtesy of Wikipedia, Tradingeconomics, Eduardo Dantas]

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