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Capitalism: The Case of Brazil

With the closing ceremonies over, we can breathe a sigh of relief about Rio. The worst snafus of the Olympics were the algae in the diving pools and vandalism by a mendacious American swimmer. As with the Sochi games, the press ran scary pre-competition reports of substandard conditions. In the event, the Russian and the Brazilian just-in-time habits of organizing an international spectacle turned out to be good enough to get by.

There was extra nervousness with Brazil, a country in the midst of economic and political turmoil that claimed the presidency of the recently impeached Dilma Rousseff. According to Moody’s, the credit rating agency, in the wake of the 2016 summer games, the city of Rio de Janeiro gained by its new infrastructure and transportation projects but Brazil will “wake up once again to its deepening recession.”

The country’s problems, and its people’s rather amazing ability to muddle through, are captured in a fine new book called Brazillionaires. Author Alex Cuadros, a veteran of Bloomberg News, tries to address why Brazil never takes the leap into industrial modernity that Brazilians, and everyone else, are always expecting. The expectation comes from Brazil’s being such a richly endowed country— whether one is talking about natural resources, or sheer acreage (it is nearly as large as the United States), or about literature, music, or art.

Cuadros came to know Brazil as a reporter tasked with investigating the finances of ultra-rich Latin Americans and calculating their net worth so that they could be ranked by Bloomberg on the company’s “Billionaires Index.” He gradually lets on in the book that that was a rather silly assignment. Sleuthing the moguls’ offshore financial accounts and generally following them around Sao Paulo and Rio did, however, afford him a picture of the elite that he was able to supplement with interviews of Brazilians of all walks of life, including denizens of the favelas, to create this highly readable meditation on an entire society.

Whether he is travelling to the dams along the Xingu River in the state of Para; sitting in an evangelical revival meeting; taking a helicopter ride with a construction magnate (helicopters are how the country’s billionaire class avoids the congestion of Brazil’s cities); or describing the students to whom he taught English in two of Sao Paulo’s favelas, Cuadros circles around a unifying theme: meritocracy. He weighs the degree to which the rich and powerful men in this story—Roberto Marinho, Eike Batista, Paulo Maluf, Blairo Maggi, Jorge Paulo Lemann, and others—owe their success to their own individual efforts.

That Horatio Algers are not common enough in Brazil is something all will admit, but the reasons why not are disputed. Cuadros, an able financial journalist and lively feature writer, does not display a full grasp of these matters but he is on the right track in one major respect. The country’s economic difficulties and its racial and social stratification rest upon a flawed foundation that can be summed up in a phrase he uses: “state capitalism.” The entwining of political power with economic power is an ill against which every modern democracy fights. Brazilians, though, have not waged the fight effectively.

In Brazil, extortion and bribery in permitting and licensing are routine; government regulations are pervasive but not well-enforced; and the legal process is opaque to the ordinary citizen. We read here of Brazil’s state development bank, the BNDES, which makes subsidized loans to businessmen and has lent billions to the construction industry. We read of the steering of government contracts, the elite’s buying up of shares in each other’s companies at bargain prices, and the gifting of radio stations and television stations to members of the legislature. The last-mentioned cronyism “may explain why, even though the new [1988] democratic constitution called for a ban on media monopolies and oligopolies, Congress never drew up the legislation to implement it,” observes Cuadros.

Given all of this, there could scarcely be an individual Brazilian—whatever that individual may believe, or may have told Cuadros in an interview—who could accurately say he amassed his fortune without the government’s help. Nor are “neoliberal” or free market policies the source of the acute levels of inequality prevailing in this country of 209 million souls, though Cuadros seems loath to draw that conclusion. The market isn’t free; it’s heavily controlled by the state. And to understand how this state capitalism arose and why it is so persistent, the history of the entire region ought to be taken into account.

As the Chilean historian and sociologist Claudio Véliz has written, Latin American politics were and are characterized by the “authoritarian benevolence of O’Higgins, Bolivar, and San Martin.” Véliz’s landmark book The New World of the Gothic Fox (1994) emphasizes the influence on her colonies of Spain, the powerhouse of the 16th century’s Counter-Reformation. Portugal’s colonies bear these same effects, because Castilian-style centralism “was embraced by the nascent republics” in the 19th century and it “has survived virtually undiminished into our time,” according to Véliz. The inclination toward a statist concentration of power, he adds, “has no political color and is as evident in the single-party systems of Mexico and Cuba as it was in the former authoritarian regimes of Chile and Argentina, or the social democratic regimes of Peru, Colombia, and Brazil.”[1]

Cuadros’ sketch of Brazil’s recent history basically tracks with Véliz. The regime of Getúlio Vargas (1882-1954), known as the “father of the poor,” is fondly remembered by the Left but he curbed civil liberties, censored the press, banned opposition political parties, and, as Cuadros says, “rounded up and tortured communists.” It was Vargas who established the business-coddling BNDES. Vargas had been ushered into power by the military, and when a repressive military regime later took over (1964-1985), it did many of the things he did. Right-wing and left-wing regimes have engaged in state capitalism, with several of the capitalists nimbly surviving from one to the other with little loss of fortune or clout. Both kinds of regime, incidentally, come off in this book as well-meaning at least in their goals—trying to move Brazil forward but unable to avoid the inefficiencies, the stagnation, the coerciveness, and the depressing levels of corruption inherent in state capitalism.

Populist leaders in Latin America today are put in power not by the military but by elections. In Brazil, they are likely to be ushered out of power in spasms of democratic vengeance—impeachment, which ended Dilma’s presidency and also that of Fernando Collor de Mello in 1992, both times when there was an economic downturn serious enough to erode the populace’s toleration for corrupt governance and fiscal mismanagement.

The trappings of modern democracy are present in Brazil. The country’s constitution guarantees free health care and free education. Voting in elections is compulsory. The government has an antitrust office—though Cuadros points out how pathetically weak this office is. It has a securities and exchange monitor. There are official investigations of influence-peddling that put members of Brazil’s wealthiest and most powerful families in the hot seat. Still, the people’s yearning to see egregious rent-seekers perp-walked only gets short-term satisfaction. The reckonings often end anticlimactically, with no real punishment of wrongdoing.

Cuadros taught English in two of Sao Paolo’s favelas during “the Workers Party years,” when the country was doing relatively well under President Luiz Inacio “Lula” da Silva. There were hopes for “the new generation of an emerging middle class,” writes Cuadros. “In the United States you’d call them poor, though they were not poor by Brazilian standards. They ate well, they dressed well, they owned things; they were better off than their parents . . . but their status as citizens remained incomplete.” In the favela known as Paz, he visited “homes that had Internet connections but leaned precariously over a shit-smelling foamy black creek full of trash.” The youngsters he met there “might have flat-screen TVs, but they sleep in a room with four people. They might have smartphones . . . but they have no family doctor.” During the better economic times more than half of Brazil’s population gained access to the Internet but “fewer than half had sewage lines.”

It was Lula who brought those better times. His Workers Party had won popularity by initiating a new welfare program while pursuing fiscal and trade policies that were on the “neoliberal” side. The economy picked up, due in no small part to brisk sales of Brazilian iron ore to the Chinese, whose economy was at that point growing rapidly.

“Like the leaders of the military regime in the sixties and seventies,” says Cuadros, “Lula wanted to build highways and dams and ports, to get Brazil caught up with the developed world.” He pressured banks to offer payroll loans so average families could buy cars and electronic devices. In other words, he was encouraging ordinary Brazilians to improve their material wellbeing by going into debt.

When the worldwide economic downturn hit, and China stopped buying so much iron ore, the economy began to slide and unemployment and inflation began to rise just as Dilma, Lula’s protégé, took office. A few years after that came the crisis, which necessitated, among other measures, a 40 percent increase in people’s utility bills. Only the wealthy could take such things in stride. It was a depression, with massive loss of jobs. Once again the Brazilian dream, ever on the point of realization, had evaporated.

Cuadros’ take on how the dysfunction might be fixed is disheartening. He shows state capitalism to be the source of corruption and injustice but the remedies he reaches for are statist. He’d like to see more regulations put in place.

As for the issue of taxation, he’s right that tax avoidance is a way of life among the well-to-do in Brazil, as in many countries in the region. But the government’s need for confiscatory levels of taxation to feed its bloated size does not seem to strike him as problematic. That need is what ultimately propels the offshore money-stashing that he traced for Bloomberg News. It propels most stratagems of this kind, from the Beatles’ leaving Britain back in the 1960s to the transactions uncovered in the allegedly epoch-making “Panama Papers” that were published earlier this year. Economic nationalists, who want wealth to stay at home, ought to be the first to want limited government. But lots of them (including the ones in the United States, such as protectionists in the Democratic Party and their new recruit, Hillary Clinton) fail to make the logical connection.

None of the foregoing is to suggest that a modern democracy’s having a good constitution guarantees it good government. In that respect, Brazillionaires is sobering not only for what it says about Brazil and the region of Latin America. Reading about Lula cashing in with highly paid speeches to Brazilian construction executives after his presidency brought to mind Gerhard Schroeder, the former Chancellor of Germany, and Schroeder’s ruble-laden dealings with the Russians after he left office. As for the United States, there is only one ex-President who cuts a similar figure. The most depressing part: his spouse is running for President. Against a helicopter guy (Trump’s failing casinos, right up until filing for bankruptcy, were renting a helicopter from Trump for $390,000 a year) who doesn’t want the public to see his filings with the Internal Revenue Service. It seems our next chief executive will be a Brazillionaire.

[1] Claudio Véliz, The New World of the Gothic Fox: Culture and Economy in English and Spanish America (University of California Press, 1994), p. 111.

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