Brazil’s Lessons for the U.S.

To mask the failure of her left wing policies, Brazil’s President Rousseff allegedly violated federal budget laws by using loans from government banks to hide the size of her administrations’ budget deficit. The charge has led to an impeachment.

Brazil’s poor balance of trade, the unaffordability of its social welfare policies, its rejection of free market solutions, the lack of concern for the middle class and the increasing use of left-wing policies that are bankrupting the nation are the hallmarks of her regime. Brazil has experienced its worst recession in nearly a century.  To U.S. voters, those problems seem familiar, and Brazil’s near collapse is a warning for America’s future.

Brazil and the United States are both giant Western Hemisphere nations. They have, however, taken different paths politically and economically.  Those differences in the past, and potential similarities going forward, are instructive in determining what policies produce desirable social and economic results.

Brazil did not have a constitution until 1891, and during its early history actually had an emperor. Subsequently, military and strong-arm rule inhibited the nation’s development, as did its eventual engagement of leftist policies. Whether monarchial in its early days, strong-arm rule later on and leftist currently, the vast South American nation has fairly consistently been subjected to a top-down brand of economic governance rather than a grass roots capitalist approach.

The end result was a nation with poverty only temporarily mitigated over the past few decades, primarily by commodity prices for its vast mineral and agricultural wealth. The commodities boom funded social welfare programs that lifted, according to Global Advisor, 40 million people out of poverty by the years after 2013.  But the gains were temporary.

An adherence to policies that inhibited the rise of the free market prevented the commodities boom from being used to develop a truly viable national economy. As a result, notes Ruchir Sharma in the Wall Street Journal, Brazil’s GDP growth rate has fallen from 7.5% in 2010 to minus 3.5% in 2015. Government spending accounts for 41% of GDP. Focus Economics   panelists see the economy contracting 3.4% in 2016, which is down 0.5 percentage points from last month’s forecast.

“Today,” Sharma reports, “the average Brazilian income is about 16% of the U.S. average, with basically no gain for 100 years.”  Average income has fallen from $13,000 in 2011 to $8,000.

Brazil endures a sharp divide between a comparatively small group of wealthy families, a beleaguered middle class, and a large number of citizens in poverty. The inequality explains the attraction of leftist policies, which produced very significant, but temporary, gains at the cost of eventual prosperity. In essence, Brazil has never truly changed its strong-arm government. It merely replaced monarchial, military, and strong arm rule with socialism, and all have basically the same inhibiting effect on the free market. Its economy has contracted by 3.8%.

Jacob Maslow, writing in the Streetwise blog, believes that socialist policies briefly appeared attractive when commodity prices were high, but now “expensive government programs are taking their toll. It is going to be a long time for Brazil to get out of the hole that it is in right now. I am not sure if improvements in global commodities prices will do the trick. The problem is more systematic than people care to admit. Not surprisingly, the Brazilian rial has dropped against the US dollar by 18%. Expect it to drop even further.”

Rather than invest in measures that would produce a more varied free market economy that could withstand the boom and bust cycle of commodity prices, President Rousseff and her Workers’ Party adhered to socialist policies that gained support among the poor for the temporary relief it brought, at the expense of long-term gains. Trade union figures play a key role in her regime, and they are not particularly prone to make compromises that replace temporary current benefits for long-term economic growth.

The U.S., thanks to a capitalist philosophy, has developed into the world’s most powerful economy. Brazil languishes in financial doldrums.  It is ironic, then, that the Obama Administration, and the policies of the two Democrat candidates vying to succeed it, have supported policies which are more akin to the failed South American giant then to the traditional path the U.S. has followed.

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