The return of PT to power would be a tragedy from which Brazil might not be able to ever recover
Pedro Jobim and Leonardo De Paoli
Former president Lula recently mentioned a few elements of what could possibly be considered part of his government plan, in a hypothetical return of PT (Worker´s Party) to the presidency. Oddly enough, this triggered a reaction of surprise in some pundits. Among other proposals, the former president defended the annulment of the labor reform; the adoption of GDP growth targets by the Central Bank, and the reactivation of BNDES loans as a “growth induction” policy instrument. Previously, the former president had already defended the end of the fuel pricing policy of Petrobras, based on international prices, and advocated, also, scrapping the fiscal expenditures ceiling (the pillar of Brazil´s fiscal policy), a proposal he reiterated in the past few days.
These comments shouldn´t have provoked any surprises. They are aligned to the practices implemented by PT throughout the thirteen years it governed Brazil, which culminated in a decline of almost 7% of GDP and an 8pp increase in the unemployment rate between 2015 and 2016. This was the sharpest recession Brazil ever recorded, since the beginning of national income computation, in 1901.
In this article, we shall limit the discussion to the intention of scrapping the expenditure ceiling; the challenge to Petrobras commercial practices, and the proposal to, once more, use BNDES as an active policy instrument.
Let´s first address the fiscal policy proposal. The rejection of fiscal discipline is to be expected from PT. Total central government expenditure, as a proportion to GDP, grew from 15,8% in 2002 – the last year before PT rule – to 19,8% in 2016, the year it was ousted from office, reflecting, on average, a 6% real annual increase, in the period. This figure might be decomposed in 4% growth for personnel expenditures, and 8% for social expenditures, in the same metric. A large part of the growth in social expenditures, in this period, can be traced back to the real increase in the minimum wage, which indexes most of the social security disbursements, and grew an average of 4,6% above inflation between 2003 and 2016. The rapid expansion of social security total benefits would become one of the factors of fiscal destabilization that would deepen the 2015-16 recession, a way out of which could only be found when the change in government permitted the introduction of the new fiscal regime, in 2016, further solidified by the social security reform, approved in 2019.
The expansion of BNDES loans to PT´s business friends was a strategy pursued along the entire period the party remained in power, and that would end up playing a central role in the magnification of the crisis, from 2014 on. The bank´s credit concessions would grow from an average of 2% of GDP between 1999-2002 to 3,0%, between 2003 and 2015, having reached a peak of 4,3% in 2010. Among the ventures funded by such loans we can identify egregious industrial and financial disasters, such as the construction of Comperj, initiated in 2008; Abreu e Lima Oil refinery, started in 2007, and Sete Brasil, in 2010. Beginning in 2014, lower commodity prices helped to uncover the government´s feckless credit policy, mostly exercised through BNDES and other estate owned banks, as non-performing bank assets enhanced the severity of the recession. BNDES was also the main tool used by the government to generate spurious primary surpluses, which, on an accounting lens, was a byproduct of the bank capitalization with National Treasury’s resources (in a total amount of R$ 440 billion, or 5% of GDP, between 2008 and 2014), and later payment of its “dividends” to the Union, its sole owner. These were the infamous “fiscal pedalings”, which, in addition to having concurred to fiscal deterioration and, thus, to the depth of the recession, had also an important role in the characterization of the fiscal crimes which prompted the impeachment of Lula’s successor, Dilma Rousseff.
The critic Lula made to the commercial policies of Petrobras is also most natural. During the PT years, Petrobras did not practice the parity of its fuel prices to the international benchmarks, what contributed to its decapitalization. Besides, it makes sense to Lula not having expressed his intention to privatize the company. During his and his successor’s terms, Petrobras’s indebtedness grew substantially, as billions of dollars were diverted into overpriced and mismanaged industrial initiatives, the largest of which – the aforementioned Abreu e Lima, and Comperj – remain unconcluded. Comperj was launched to be a major refinery and petrochemical hub. Following massive resource diversion and continued malfeasance of public funds, it consumed US$ 15 billion of resources between 2008 and 2015, and is, today, in a state of abandonment, since the resources necessary to complete it far exceed business break-even levels. After many years, Abreu e Lima refinery is now partially operational. It is, reportedly, one the most expensive refineries in the world to have ever been built, on a capex per barrel refined metric. According to CDPP, a Brazilian think-tank, it cost about 6 times the average of similar plants around the world1. The company would also spend hundreds of millions of dollars in other deteriorated assets, such as the Pasadena Refinery in Texas, finally sold, in 2019, for a fraction of the initial purchase price.
As lower oil prices came into the scene, from 2014, the deterioration in the company´s balance sheet began to surface, triggering the first results of Operação Lava Jato (Car Wash Operation – a joint investigation pursued by the Federal Police and a group of prosecutors), which would result in settlements for the return of large sums diverted by some of its administrators during the PT years. According to the Federal Attorney Office at the State of Paraná2, Petrobras already received back R$ 6,2bn in previously diverted resources, or US$ 1,2 bn.
Much more could be written on the iniquitous practices of PT and their nefarious consequences for the country. For example, the corrupt relationship between some of the most important figures of the party and their allies, and one of Brazil´s largest construction companies, during an extended period, is richly detailed in journalist Malu Gaspar’s book, “A Organização”.
As argued above, the instrumentalization of Petrobras and BNDES for political purposes and the feckless fiscal practices were at the core of PT’s resource despoliation project executed between 2003 and 2016. Thus, it is no coincidence that Lula´s advocation of ideas which, by themselves, could be seen as constituting simply bad economic policy, were, however, the same which created conditions for the recession and impunity chaos to where PT dragged Brazil, leaving scars which will take decades to heal.
The contrast of such practices with the results of the current administration could not be sharper.
On the fiscal side, the expenditure ceiling, despite having been battered by the Constitutional amendment 23/2021, is still standing, and will permit the current administration to be the first, since the promulgation of the 1988 Constitution, to end up the four-year term displaying a lower total expenditure, as a proportion of GDP, than it received from the previous government.
Most of this remarkable result comes from the discipline imposed by the current administration to contain social security and personnel expenditures, which represent 65% of the central government budget . Chart 1 below displays shows the average increase in the minimum wage in each presidential term, since 1998. Chart 2 displays the fall in the number of public servants since 2018, a consequence of the current policy of not replacing retirees (note, in opposition, the sharp increase in the number of servants between 2003 and 2013, during the PT years), which played an important role in this result. Chart 3 shows the total personnel expenditures growth along the years, which evolved from an annual 4% average increase, in the PT era, to an average 3% annual decrease, under the current administration.
Regarding BNDES, in addition to the return of R$ 218 billion in bank´s capital to the National Treasury between 2019 e 2022, the annual credit concessions, in the current term, are being kept below 1% of GDP, the lowest since the early 90’s.
Finally, in what concerns Petrobras, the current administration continued the financial recovery process initiated in the Temer government, rescuing it from the state of bankruptcy it faced in 2015, when the company, despoiled by corruption and malfeasance, was in such a fragilized situation that it could not even honor the publication of its financial statements. Today, Petrobras is a healthy company, which will disburse, in 2022, almost 4% of GDP to the federal and state governments in the form of dividends, taxes and royalties, representing, in complete opposition to what was observed under the PT years, a significantly contributing factor to the strength of both public finances and the country´s economic growth.
Some could still argue that, despite all the corruption and diversion of public funds practiced by PT, the Brazilian economy grew, during a significant part of the period under discussion. It is true. This was a result, however, of a combination of some factors: a few correct economic policy choices; a very unfavorable starting point for the economy, in 2002, (25% interest rates, 12% inflation, weak exchange rate, total credit / GDP of only 26%), indicators which could be easily improved ahead with minimum effort and few trade-offs; strong growth of the Chinese economy, which commanded a powerful commodity prices cycle, most favorable to Brazil. Also importantly, Brazil was then younger and enjoyed a 1,5%+ annual growth in its working age population.
This set of conditions permitted the irresponsible fiscal and credit policies, and public funds misfeasance to remain “under the radar” during many years, until the commodity cycle inversion exposed the many wrongdoings, some of which we discussed.
The circumstances of the global and Brazilian economies are, today, significantly more adverse than those of twenty years ago. The repetition of the same policies, as defended by the former president, would be quickly punished by the emergence of undesirable economic results and impoverishment of the Brazilian population.
We have yet to issue a final comment on the open preference some respected pundits revealed on the return of the PT over the re-election of the current administration, on the allegation that the incumbent represents a “risk to democracy”.
It is true that corruption of public officials and the use of state-owned companies for patronage purposes has been present in Brazil and other states for a long time. The PT innovation would turn out to be, however, the seizure of the state’s resources and their divesture into the party funds, in order to support a plot for its perpetuation in power. In two centuries as an independent state, this was the first time the country and its resources were sequestered by a political group organized around such an objective. We have to go back to the XVIII century to find a comparable episode in the History of Brazil. Indeed, this was a time in which the Portuguese crown would tighten its grip upon the recently discovered Brazilian gold, to help sustain the rest of its decadent colonial empire. There´s an obvious, large difference in this occasion: Brazil was, back then, a colony of Portugal, while most of PT members are, at least formally, Brazilians. The PT template could be also compared to extreme forms of patrimonialism seen in Imperial Russia, or under some contemporary dictatorships in Africa.
The violence perpetrated upon Rule of Law, in Brazil, by PT, in the form of the corruption schemes widely documented in multiple court proceedings, businessmen whistleblowing, books and all other kinds of media is beyond denial. Democracy – naively or deceitfully associated by many to the simple practice of the universal suffrage – is just a small component of the Rule of Law structure, which, in Brazil, is indeed under serious threat. But not by the current president, who despite his sometimes acid rhetoric, does not disrespect the constitutional order, contrary to what some members of other constituted branches of government frequently do.
The return of PT to power would be a tragedy from which the country could arguably not be able to ever recover.
Pedro Jobim is a founding partner at Legacy Capital, and holds a Ph.D in economics from the University of Chicago.
Leonardo De Paoli is a partner and economist at Legacy Capital and holds a MA in economics by PUC-Rio
1/ https://cdpp.org.br/2021/08/10/o-custo-de-abreu-e-lima-e-do-comperj/