On the Fundamental Problem of Brazil August 5, 2016

There is an old saying that Brazil is the nation of the future, and it will always be.  Despite the myriads of problems posed by hosting the Olympic Games in Rio de Janeiro, I am still looking forward to the commencement of said Games.  But, the reservations cannot go ignored, and indeed, I have chronicled most of them in a recent article.

The shorthand laundry list of issues includes the notorious favelas, a local term given to the many slums that are part of this megacity;

–Riots in Brazil over the past few months; protests that have disrupted the Olympic torch relay, even extinguishing the flame;

-Fears, possibly exaggerated, of the spread of the Zika virus;

–The murder rate in Rio is on the rise, up 7.5% in the first six months of the calendar year;

-Let us not forget the raw sewage contaminating the local waterways;

–The government is embroiled in a massive scandal of political corruption, with the state-owned oil company, Petrobas, at its epicenter;

–The corruption in turn has led to the impeachment of its current president, Dilma Rousseff.  Her predecessor, Luiz Lula da Silva, is also charged with corruption.

All this in turn has led to a political crisis just when Brazil would desperately want to put its best foot forward, so to speak, as the world descends upon Rio for the Olympics.  Instead, the country itself is descending into chaos.

But at the heart of the majority of these problems is the economic turmoil.  Brazil is in its worst economy since the 1930s.  No, really.  For a while, it seemed as though Brazil’s economy was becoming increasingly robust, so much so that it was about to join the grownups’ table of world affairs.  The acronym “BRIC” (Brazil, Russia, India, and China) became a trendy term to use in economic and geopolitical contexts.  Brazil certainly took advantage of a strongly emerging economy to the utmost, and played on that image to help persuade the International Olympic Committee to grant them the coveted hosting of the Summer Olympic Games for 2016.  Surely the IOC was more than willing to be persuaded, as political correctness no doubt took hold of the organization, and they were more than receptive to the PC siren’s song that it was South America’s turn to finally host the Games instead of proven successful locales in Europe, North America, Australia, or even east Asia.

Then the economic downturn took place in the several years that followed.  The key question becomes, why?  The short answer: Socialism.  This defective ideology/macroeconomic policy, a watered-down version of its monstrous brother Communism, has proven to wreck economies worldwide.  One need only see Brazil’s neighbor to the north, Venezuela, to see how Socialism has brought that country to absolute ruin.  Keep in mind that Venezuela was, for a long time, one of the wealthiest countries on the South American continent what with its robust oil industry.  Not anymore.  After the notorious dictator Hugo Chavez forced socialism on his country, he stifled the people’s incentive to be productive.  When that happens, the every-day exchanges that keep an economy running become stifled as a result.  It does not take a rocket scientist to figure out that when the incentive to be productive is taken away and business exchanges continue to dwindle to nothing, eventually real-world shortages ensue, such as the chronically empty shelves in grocery stores all over that country, and the general chaos that follows as a result of that.  Lest you think that the Venezuelan government has come to its senses, instead of allowing people to keep more of their hard-earned money and to free up regulation for free commercial exchange, its solution is to this chaos is to enslave its citizens (a Draconian way of doubling down on its failed leftist policies).

Did Brazil learn from the mistakes of its neighbor to its north?  Apparently not.  It’s “Worker’s Party” (any political party with the word “worker” attached to it is going to be very hard-Left) has been in power since 2003.  Like other socialist counties, the Brazilian government owns a large percentage of the means of economic production, including the oil company Petrobas, part of the major political scandal embroiling that country right now.  Which begs the question:  why does the Brazilian government need to own such a large company in the first place?  Here in America, ExxonMobil and Chevron are privately owned, and are producing petroleum products quite well.  Grousing about gas prices usually makes companies like these the undue scapegoats, but that only exposes the ignorance of the complainers.  When gas prices spike, it is largely due to crude oil prices spiking on the commodities market.  The other major reason is constricting the supply on the refining end due to government over-regulation.  But more on that at a different time.

What led Brazil to its current economic collapse was the socialist party in power spending too much money on too many things.  It did not happen immediately.  Indeed, for a while, the Workers Party was popular because the economy was on the rise due to the commodities supercycle.  Because commodities prices were spiking for a long period of time, there was lots of extra cash to engage in vote-buying via cash transfers.  Yes, the current crop of crook politicos in Brazil came to power by basically promising voters free stuff, paid for by taking money from people who already earned theirs.  Then, the commodities prices fell, and there was no more cash to throw around.

In other words, to give a nod to the late Margaret Thatcher, the Brazilian government ran out of other people’s money.  Governments with spending problems always do.

So what is the solution to Brazil’s systemic economic problem?  Start by privatizing Petrobas and other state-owned companies.  Governments are horribly inefficient when it comes to managing the means of economic production.  Part of the reason is that normal market forces that incentivize both efficiency and effectiveness for firms in the private sector do not apply in the public sector.  For example, when was the last time you saw the U.S. Postal Service turn a profit?

Indeed, the Olympics themselves are part of the problem, in this case.  What do Athens, Beijing, and Rio all have in common?  They all hurt their local economies by excessive, wasteful government spending on sports venues that have turned into, at least in the case of the first two cities, abandoned money pits instead of profitable enterprises.  Even Beijing’s famous “Birdsnest” stadium has deteriorated some from its 2008 glory.  When American cities host the Games, they rely much more heavily on private corporate sponsorship, and the cities’ economies were actually given a temporary boost in the process (see: Ueberroth, Peter, and Romney, Mitt).

Even if a government-owned corporation like Petrobas in Brazil is profitable, that can lead to other problems.  One, it can conceal possible government mismanagement, at least temporarily.  But more importantly, the revenue from that corporation seduces politicians with too powerful a temptation to spend that money, thus begetting further corruption.  Rampant spending, after all, encourages what economists describe as “rent-seeking behavior” from otherwise private citizens.

Let us not forget that these exact same failed policies of government taking over whole industries is exactly what the so-called “Bernie bros” and their demented, septuagenarian Dear Leader in Vermont currently champion.  But as we have seen in South America and elsewhere in the world, these policies only lead to ruin and government-induced suffering.

The best way to stem corruption in government is to curtail its spending, and one can do that by restricting its means for revenue.  Privatizing Petrobas would be an important start.

Given that there is some important degree of democracy in Brazil, one can hope that these market reforms will be able to eventually take hold so as to avoid the mistakes and further catastrophes that we are witnessing in its next-door neighbor, Venezuela.  If Brazil’s government fails to implement such reforms, however, then their current crises, both political and economic, are but a prelude of worse things to come.