Lessons Unlearned From Brazil’s Recession

As she was sworn in for her second term last week Dilma Rousseff publicly stated government spending would have to be cut. Yes, you read that right; the leader of the Workers’ Party just said her own administration is spending too much taxpayer money. It might be a day late and a few billion dollars short, but could it be Brazil’s president just had her Eureka moment?

ReaisYears of spending billions of dollars on stadiums and infrastructure for a 4-week event has left the Brazilian government with little to brag about. While the world has moved on to other things the World Cup’s relics lie mostly unoccupied in a land of poverty, police corruption and gang violence. After the artificial boom created by said event the bubble has definitively burst. Yet to hear one of South America’s most adamant cheerleaders of government intervention admit to it is remarkable to say the least.

Government figures show Brazil’s economy had already fallen into a recession before the World Cup even got underway. This year the central bank expects the economy to grow by a dismal 0.38 percent while inflation hovers north of 6.5 percent, well above the 4.5 percent target rate. Industrial production is forecast to expand by no more than 0.7 percent, with the country’s current account deficit widening to $78 billion. Predictable though the downturn may be, its sheer magnitude is forcing the Dilma administration to consider some rather uncharacteristic measures. Or is it?

The budgets of a few dozen ministries and some secretariats may be cut by one-third, reportedly amounting to some $700 million in savings, the new Finance Minister Joaquim Levy was quick to add expenses listed in the constitution will be unaffected – a constitution about as thick as Ayn Rand’s novel Atlas Shrugged, by the way. In addition taxes on imports, credit, cosmetics and fuel are set to be raised. To make matters worse, an income tax reduction already approved by Congress was recently vetoed by Dilma herself.

Naturally, the fact that Brazil’s tax burden of 36% of GDP is far higher than that of other middle-income countries cannot be allowed to keep failed economic policies from going full steam ahead. The logic on which excise taxes or protective tariffs on imported goods rest, i.e. that raising prices of certain goods discourages their consumption, suddenly loses all its validity when it comes to such activities as human labor or investment. Can Brazilians really be expected to keep working just as hard despite essentially working two out of five business days just to sustain a giant bureaucracy? Can a society really be expected to achieve any sort of meaningful growth when forty percent of its productivity is sucked out of it?

It is obviously too late to take all of the resources spent on the aforementioned projects and redirect them into the private sector, where they would have contributed to sustainable economic growth. It is not too late, however, to reverse the trend and stop adding fuel to the fire. Besides, imagine how much more expensive that fire will be considering rising fuel taxes!

As the famous quote attributed to Thomas Edison goes, “I have not failed, I’ve just found 10,000 ways that will not work.” The latter can also be said for the idea of taxing and spending one’s way to prosperity. Edison’s point, however, was that making mistakes can be useful if one learns from them. Unfortunately that message does not seem to have reached Brasilia.


Brazil: Time For a Property Rights Revolution!

During the Language of Liberty Institute’s Liberty Seminars in the south of Brazil last May, the attendees were treated to a talk about freedom and human prosperity. Using the Economic Freedom of the World report CATO’s Latin America expert Juan Carlos Hidalgo made a convincing case for (economic) freedom as a prerequisite for human progress. One of the points he made about underdeveloped countries relates to how poor protection of property rights stifles economic growth.

In Brazil this lack of recognition of property rights is most pronounced in the infamous favelas. In the years and months leading up to the World Cup the evictions generated some press, but now that the international spotlight has shifted elsewhere it is business as usual. While major sporting events in third world countries have become somewhat notorious for leading to these practices, they certainly are not a requirement.ForcedEvictions

One state over from Rio de Janeiro is Minas Gerais, epicenter of Brazilian coffee and milk production. Its capital and largest city Belo Horizonte boasts the third largest metropolitan area in the country after Rio and São Paulo and is a major financial hub in South America. Consequently it has attracted swaths of lower-class jobseekers who, lacking the financial resources necessary to buy a home in the city, opted to build their own communities on the outskirts of town. Now, local authorities are threatening to forcibly evict the 8,000 families who have taken up residence there.

Leaflets spread over the region announced military police would – absent a court decision – follow their orders to repossess the land “in accordance with the constitution and the fundamental principles of human rights”. Residents of the three communities, however, have unanimously decided to stay in their homes after the state government pulled the plug on negotiations with them. The land is said to be wanted for development and projected to be worth $6.5 billion, providing plenty of incentive to evict the locals even if it means rendering them homeless. Without any legal recourse they are left with two choices: leave, or face the jackboot of the state.

Reports from human rights organizations confirm the situation in Belo Horizonte is hardly the exception. Since the 1970s many people from Brazil’s poorer north have been migrating to the south and southeast in search of opportunity. Needless to say, the majority ended up in much the same situation as the aforementioned 8,000 families. For decades the issue was of no importance but as we know, multi-billion dollar deals have the power to make politicians dance to a completely different beat. The poor they always profess to care so much about cannot be allowed to obstruct lucrative projects that can be used to one’s political advantage.

Ending the current situation of legal ambiguity with regard to property rights is paramount both to the lot of the poorest in society and to the cause of liberty. Left-leaning critics of libertarian thinking often accuse proponents of the free market of being mere shills for corporate interests. While many Brazilians are still unfamiliar with libertarianism injecting issues like these into the public debate can do a lot to take the wind out of the sails of those detractors. After all, if there is one thing that makes our attitude towards the poor unique it is our focus on empowerment rather than dependence. If the most down-trodden can be reached with that message real change can be made.

Is Brazil Sitting On a World Cup Bubble?

Just hours before the opening ceremony of the World Cup last Thursday, protesters clashed with police in the streets of São Paulo and Rio de Janeiro. Striking airport workers and teachers also made the headlines, seemingly confirming the concerns many Brazilians have about civil unrest during the tournament.

Now that the spotlight is on Brazil for an entire month, different groups of disgruntled citizens are expected to attempt to garner international attention for their cause. The first protests were largely sparked by the billions of taxpayer money that have been spent on stadiums and infrastructure in a country that has yet to join the ranks of the 100 wealthiest nations in the world.

In order to be able to claim that the stadiums were financed by private construction firms, Brasilia lent money to them at astonishingly low interest rates less than half the going rates. Coupled with the fact that politicians are notorious for their cozy relationships with the construction sector, it is no surprise that no self-respecting Brazilian believed these claims. An Audit Court report released last May found $275 million in alleged price-gouging for the Brasilia stadium alone.


Prime example of a white elephant: Arena da Amazônia in Manaus

Just like four years ago in South Africa, the stadiums have become known as “white elephants” for their huge cost before, and uselessness after the tournament. The city of Brasilia has no major professional team to use the stadium after the World Cup, while the $270 million Arena da Amazônia in Manaus is so remote construction materials had to be shipped up the Amazon River as no trucks could reach the place. Naturally no team would even consider playing their home games there, yet Brazilian politicians decided to have their cronies build a stadium there.

Needless to say, the surge in government spending in the last months and years has artificially and temporarily boosted the economy. As those who understand Austrian Business Cycle Theory know, however, the subsequent market correction is inevitable. Regardless of the outcome of the Copa this correction, and the government’s response to it, will have a much greater impact on the lives of Brazilians.

Just as we have seen with the expansion of the Brazilian economy, it will likely take some time for the bubble to deflate. Besides, with the presidential elections just around the corner, the incumbent Dilma administration will not shy away from injecting more stimulus into the economy if need be. Still, the government’s role in the economy will have to shrink considerably if the country is to see more steady economic growth in the future.

Though last decade saw some rapid economic growth the expansion has slowed down considerably in recent years, averaging only about 2.5 percent. At the same time, inflation has been hovering around 6 percent. But monetary policy is not the only area where government intervention is hampering the economy; according to the World Bank’s Ease of Doing Business Index setting up a new business in Brazil currently takes a whopping 107 days and 13 procedures. Another ranking that puts the country squarely in the bottom half of the world is public spending as a percentage of GDP, which is well above 20 percent in Brazil. This is in large part due to astronomical spending on pensions for government workers where the country ranks second in the world.

If the Workers’ Party’s Dilma Rousseff is reelected in October there is little hope for such change, however. Just last month she bypassed Congress and signed a decree granting state powers to social movements designated as part of “civil society” by a special committee. While the election procedures for the committee remain unspecified, it certainly represents a political tool to favor some groups and viewpoints over others. In the months leading up to the elections, that could prove to be very useful for Dilma and the Workers’ Party.

Liberdade! The Brazil Liberty Seminar

Reporting from Rio Grande do Sul, the southernmost state of Brazil, where I am helping spread the message of liberty with the Language of Liberty Institute:


The Brazil Liberty Team, left to right: Patrick Reagan, Mart van der Leer, Juan Carlos Hidalgo, Glenn Cripe

On Tuesday morning our Liberty Team left the city of Porto Alegre, capital of Rio Grande do Sul, the southernmost state in Brazil. After a 5-hour bus ride we arrived in the city of Rio Grande, one of the country’s busiest maritime ports. For our wonderful hosts’ group Clube Atlântico, founded about 6 months ago, it was the first time they received international guests. Nonetheless, thanks especially to the efforts of Camilla, Eduardo, Heber and Everson we felt so welcome and comfortable it was like meeting old friends!

In a city known for its strong unions related to the port and city, the group has encountered aggressive opposition from left-leaning (student) groups. Though such groups apparently don’t shy away from vandalizing property in order to make a point, the Liberty Seminar was not interrupted by a confrontation. After a word of welcome from Clube Atlântico’s president Henrique, Glenn introduced the Language of Liberty Institute to the audience followed by Patrick’s empowering speech about educational alternatives and homeschooling, and a talk on marketing liberty by Mart.

After the break the attendees were treated to an eloquent presentation by CATO’s Latin America expert Juan Carlos Hidalgo on how economic freedom leads to economic growth and betters people’s lives. The 35 students that attended the seminar, hailing from all over Brazil, left feeling encouraged and inspired to redouble their efforts for the cause of liberty. During the post-event dinner with our new friends we were told that the event had also attracted new members to the group.

Encountering the sort of opposition we saw in Rio Grande was a new experience even after organizing over 40 programs all over the world, including many former Soviet countries. Still, it is easy to see the amazing opportunity in the city considering the port and the university that attracts students from all over the country. In this hostile environment communicating the message of liberty effectively will be especially important, but if it succeeds the city and its people face a very bright future.

The next day we continued our Liberty Tour and went on our way to Pelotas a little farther inland. The local EPL (Estudantes Pela Liberdade) chapter Clube Austral, founded late last summer, hosted us in the Mercosul lecture room of their university. The event was followed by a dinner at a restaurant called Cruz de Malta, reminding us of our most recent trip with the Language of Liberty Institute.


Early Thursday morning we got on the bus for a long trip through the country en route to Santa Maria – the site of the tragedy at club KISS when a fire cost over 200 young people their lives. Eighteen months later the building is still boarded up, with pictures of students and flowers on the sidewalk reminding everyone of what happened that night. If anything good can be said to come out of such a tragic event, the students and locals bonded and found a lot of support with one another. The local government, however, has made safety requirements so onerous as to prevent any other clubs from continuing or opening up business since, in a city full of young people looking for entertainment.

Authentic Brazilian churrasco!

Authentic Brazilian churrasco!

Presenting the empowering and uplifting message of liberty against such a backdrop felt all the more like a blessing. We were joined by Helio Beltrão, founder of Mises Brazil, who gave us his perspective on net neutrality and other current issues in Brazil. The typical Brazilian churrasco (barbeque) hosted by the local group Clube Farroupilha (lighthouse), which has already attracted more than 100 members in only six months, concluded an inspiring and fun evening.

The billions of taxpayer dollars that went into soccer stadiums and infrastructure in remote areas for the upcoming World Cup seem to have spiked skepticism of government policy among Brazilians. It seems, then, that now is a good time for people like our new friends to seize the moment and show people why liberty is the way. The timing for the Brazil Liberty Seminar could not have been any better.

N.B. To see pictures of the Brazil Liberty Seminars, be sure to visit the Language of Liberty Institute’s Instagram profile at instagram.com/languageofliberty !