Brazil Sticks With Statism. Odds are that the country’s reputation for economic mediocrity is safe for another four years.
By Mary Anastasia O’Grady - Oct. 26, 2014 7:30 p.m. ET
Dilma Rousseff, gives a thumbs up, shortly after voting at a polling station in Porto Alegre, Brazil, 26 October 2014. ENLARGE
Dilma Rousseff, gives a thumbs up, shortly after voting at a polling station in Porto Alegre, Brazil, 26 October 2014. European Pressphoto Agency
An economic recession, inflation running at 6.7% and revelations of an audacious skimming scheme at the state-owned oil company Petrobras were not enough to deny Brazilian Workers’ Party (PT) President Dilma Rousseff re-election to a second term on Sunday.
With 99% of the vote counted, the incumbent led with 51.56% of the vote against challenger Aécio Neves, of the Social Democratic Party of Brazil, with 48.44%.
Ms. Rousseff ran as the anti-market, welfare-state candidate, which may be why she fared far better in the poor, dependent north than she did in the prosperous agricultural heartland and here in Brazil’s largest city, where the economy relies heavily on services and value-added manufacturing.
Like the U.S., Brazil has its upper-class, urban voters who feel virtuous backing state intervention in other peoples’ lives and supporting Cuba’s military dictatorship. But there is also an aspirational Brazil—which is made up of risk-taking entrepreneurs, globally competitive farmers and a rising middle class that hungers for greater engagement with the world. These Brazilians badly want the change Mr. Neves represented. They made Sunday’s contest the closest in Brazilian history.
Like the proverbial dog that caught the car, Ms. Rousseff now has to figure out what to do with her next four years. She may believe she can further the consolidation of PT power—her highest goal—if she sticks to the policy mix she has been using thus far, no matter the cost to the economy. Alternatively, she could make pragmatic economic adjustments with the goal of restoring confidence and growth.
The latter is certainly possible. But it is unlikely because the party militants, who have fattened up during PT rule, want more power, not less. She may utter some conciliatory statements and in the short run take some small steps that favor liberty, just as her PT mentor, former President Lula da Silva (2003-10), did when he first took office in order to calm markets that were plummeting out of fear. But Lula soon reverted to form.
Odds are that Ms. Rousseff will do the same, making Brazil’s legendary reputation for mediocrity safe for another four years. Only if a criminal investigation proves that Ms. Rousseff and Lula knew about the graft at Petrobras are things likely to go differently.
The great irony of the campaign is that while Ms. Rousseff and Lula claimed the credit for Brazil’s turn-of-the-century revival, they both opposed the reforms of the 1990s. The privatization of state companies, the limited opening to foreign competition, and the 1994 “Brazilian real” currency plan to defeat hyperinflation all stimulated development and made more generous welfare programs, the trademark of the PT, possible.
But the PT never followed through on those reforms and the “Brazilian miracle” died in the crib. At best the country runs in the middle of the emerging-market pack. More often it brings up the rear.
Neither Lula nor Ms. Rousseff seem to care about development. According to Goldman Sachs , from 2004-13 government spending grew at almost 8% a year, in real terms, which was more than twice the rate of GDP growth. Inflation is now 7% year-over-year on prices for goods and services not regulated by price controls and 8.6% for services alone. Inflationary expectations are rising.
Ms. Rousseff thought she could fix the problem by capping the price of gasoline, which is supplied by Petrobras, and of ethanol, which is made by local sugar mills and used to make flex-fuel. But since production costs are not capped, Petrobras and the sugar mills are sustaining large losses. Some sugar mills are already bankrupt and others that I talked to said they won’t survive if the policy continues.
The PT boasts about helping the poor with welfare but what it gives with one hand it takes—and more—with the other. Rising protectionism, steep payroll and consumption taxes, lousy infrastructure and heavy labor regulation are hidden costs that make all Brazilians worse off.
More worrying is the damage the PT might do to institutions and the rule of law over another 48 months. Civil society here jealously guards civil liberties and pluralism. But as one astute businessman told me, “We are noticing, bit by bit, a trend toward copying Argentina, Bolivia and Ecuador. The tendency is to reduce democracy.” One example is Ms. Rousseff’s May decree empowering “popular councils,” which would move the country away from representative democracy à la Venezuela. Congress has so far refused to approve the measure but if the usual vote-buying goes on, that may change.
This is creepy for anyone who has read history. As the 18th-century political philosopher David Hume observed, “It is seldom that liberty of any kind is lost all at once.” Today Mrs. Rousseff is a politician who won an election. But Brazilians may someday learn that the one-party state and indefinite rule are the real long-term projects of the PT.