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Brazil in Crisis

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CRS INSIGHT Brazil in Crisis July 6, 2016 (IN10471) | Related Policy Issue Latin America and the Caribbean Related Author Peter J. Meyer | Peter J. Meyer, Analyst in Latin American Affairs (pmeyer@crs.loc.gov, 7-5474) Brazil, the fifth most populous country and ninth-largest economy in the world, is in the midst of severe economic and political crises that are closely intertwined and unlikely to be resolved quickly. The country's deep recession has taken a toll on U.S.-Brazilian trade, with U.S. exports declining by more than 25% ($10.8 billion) in 2015. The ongoing crises could also hinder Brazil's preparations for hosting the 2016 Summer Olympics in August; its response to public health challenges, such as the Zika outbreak; and its ability to address foreign policy concerns, such as stability in neighboring Venezuela. President Dilma Rousseff of the center-left Workers Party is currently suspended from office pending the outcome of an impeachment trial in the Brazilian Senate. A supermajority in Brazil's Chamber of Deputies voted to impeach Rousseff in April Brazilian President Dilma Rousseff of the center-left Workers Party was permanently removed from office on August 31, 2016—a little more than a year and a half into her second four-year term. Officially, Rousseff was impeached and convicted by supermajorities in both houses of the Brazilian Congress for violating the country's fiscal responsibility law. Many analysts contend, however, that Rousseff's fate was determined more by legislators' political calculations than by the legal merits of the impeachment charges. Rousseff's political base collapsed over the past year as a deep economic recession eroded Brazilians' living standards and a damaging corruption investigation split the governing coalition. Brazil experienced strong economic growth from 2003 to 2010 but has been hit hard by the economic slowdown in China, Brazil's largest trading partner, and the decline in global commodity prices in recent years. Rousseff's economic policies exacerbated the situation, contributing to rising inflation and fiscal deficits and to declining consumer and investor into her second four-year term—for allegedly violating the country's fiscal responsibility law by using state-run banks to cover budget expenses and thereby opening credit lines without congressional authorization. Rousseff argues that her administration's fiscal maneuvers do not constitute an impeachable offense and that removing her from office would amount to a "coup." Some analysts have questioned the legal merits of the charges against Rousseff and argued that the impeachment attempt is a misuse of democratic procedures. Other analysts contend that impeachment is an inherently political process and assert that the process may help preserve democratic stability by providing the Brazilian Congress with a constitutional mechanism to remove an unpopular president who has proven incapable of resolving the country's challenges. According to a poll released prior to the Chamber of Deputies vote, 13% of Brazilians evaluated the Rousseff Administration positively, 63% evaluated it negatively, and 61% supported impeachment. Rousseff lost much of her popular support as a result of Brazil's deteriorating economic situation. The country experienced strong economic growth from 2003 to 2010 but has been hit hard by the economic slowdown in China, Brazil's largest trading partner, and the decline in global commodity prices in recent years. Rousseff's policies exacerbated the situation, contributing to rising inflation and fiscal deficits and to declining consumer and investor confidence. The Brazilian economy contracted by 3.8% in 2015 and is projected to contract by 3.8% again in 2016. The 3% this year. The labor market has weakened considerably over the past year since Rousseff began her second term, with the unemployment rate climbing from 8.1% to 11.2%. 6.8% in the quarter ending in January 2015 to 11.6% in the quarter ending in July 2015; real median wages fell by 4.3% over the same period. Some of the nearly 40 million Brazilians who joined the middle class during the boom years have now fallen back into poverty. The economic crisis also inhibited Rousseff's ability to maintain political alliances by reducing the resources available for distribution to her coalition partners. A sprawling corruption investigation under way since March 2014 also contributed to the erosion of Rousseff's political supporthas further complicated political dynamics in Brazil. Beginning in 2004, appointees at the state-controlled oil company, Petrobras, colluded with construction firms to systematically drive up contract prices. Executives pocketed a portion of the funds and funneled the rest to politicians and parties in the ruling coalition. Petrobras lost an estimated $2.1more than $2 billion to the corruption scheme, which has implicated prominent business leaders and left much of the political establishment scrambling for survival. Rousseff served as much of Brazil's political class. Investigators believe these types of practices extended well beyond Petrobras and included contracts throughout the public sector. About 60% of federal legislators are facing charges or are under investigation for corruption or other serious crimes. Rousseff served as chairwoman of Petrobras from 2003 to 2010 but has not been directly tied to the corruption scheme. She lost several key congressional allies as a result of her support for the investigation, and at least some impeachment proponents have sought her removal to bring the corruption investigation to a close. Vice President Michel Temer is serving as the interim president while Rousseff is tried by the Senate. He hails from the Party of the Brazilian Democratic Movement, an ideologically amorphous party that traditionally has entered into governing coalitions in exchange for control over government posts and expenditures. Since assuming office in May, Temerlinked to the scandal. She alienated key sectors of her coalition by allowing the corruption probe to proceed unimpeded; some legislators pushed for her impeachment, believing a new government would stop the investigation.

Implications for Brazil

Vice President Michel Temer is expected to serve out the remainder of Rousseff's term, which concludes on December 31, 2018. He has been serving as the acting president since May 2016, when Rousseff was suspended from office to stand trial in the Brazilian Senate. Temer hails from the ideologically amorphous Party of the Brazilian Democratic Movement. He
has assembled a new, center-right Cabinet and called for economic reforms favored by many economists and international investors. These reforms include, including a cap on government expenditures, a cost-reducing pension reform, the privatization of some state assets, and a measure to allow greater participation by international companiesforeign participation in Brazil's oil sector. Although Temer's proposed policy shifts have been well received by some observers, he has struggled politically since becoming interim president. Temer's decision to appoint a Cabinet lacking women or Afro-Brazilians—both of which constitute majorities of the population—was heavily criticized, as was his decision to include several individuals under investigation for corruption. Three ministers already have stepped down as a result of allegations that they accepted bribes or sought to derail corruption investigations; Temer has also been accused of corruption. According to a poll from late June, 13% of Brazilians evaluate the Temer Administration positively, 39% evaluate it negatively, and 66% do not trust the interim president. Most analysts assert that it is still unlikely Rousseff will return to the presidency, but Temer's struggles could lead some Brazilian senators to reconsider their support for impeachment, which could prevent impeachment proponents from obtaining the two-thirds majority necessary to permanently remove Rousseff from office. The Senate is expected to vote on Rousseff's removal in late August. Figure 1. Public Evaluation of the Temer Administration: June 2016 Source: IBOPE Inteligência. Whoever ends up president after the Senate trial will likely struggle to lead Brazil out of the current crises. Corruption investigations and popular mobilizations likely will continue to put pressure on the political class and complicate efforts to assemble majorities in the unwieldy Brazilian Congress, which includes 26 political parties. Far-reaching, and potentially painful, reforms to cut expenditures and address structural barriers to economic growth are unlikely to advance prior to municipal elections in October 2016 and may be delayed until after a new president and congress, scheduled to be elected in October 2018, take office in January 2019. Reforms to the political system, which many analysts argue fosters legislative fragmentation and corruption, may prove even more difficult to enact given that many political parties have vested interests in maintaining the current system. sector.

Temer assumed office with little popular support and is likely to face sustained public opposition. Although polls indicate that a majority of Brazilians supported Rousseff's impeachment, many members of the Workers Party and its allied unions and social movements view Temer as an illegitimate president who came to power through a "coup." They have organized several mass protests in recent weeks and are likely to take to the streets in greater numbers if the Brazilian Congress attempts to weaken labor protections or reduce pension benefits. Temer also faces skepticism among the broader Brazilian public. As of June 2016, two-thirds of Brazilians had no confidence in the new president. With Temer and nearly 60% of federal legislators under investigation or facing charges for corruption or other serious crimes, many Brazilians have lost faith in the country's political class and democracy in general.

Temer has assembled a broad base of support in the Brazilian Congress, but he may struggle to hold the coalition together to enact his proposed policy changes. Some of the far-reaching reforms would amend Brazil's constitution and would require supermajority support in Congress. Although some sectors of Temer's coalition are ideologically committed to his proposals, others are more interested in securing control of government positions and resources. These sectors already have pushed back against the Temer Administration's initial efforts to reduce expenditures. Temer also faces a narrow window to enact his policy agenda because Brazil is scheduled to hold municipal elections in October 2016 and presidential, legislative, and gubernatorial elections in 2018. Few legislators and political parties are likely to support controversial, and potentially painful, reforms in the lead-up to elections.

Given these internal dynamics, it remains far from clear that Temer will be able to enact the policy changes many economists think are necessary to turn around Brazil's economy. Reforms to the political system, which some scholars argue inhibits good governance by fostering legislative fragmentation and corruption, do not appear to be on Temer's agenda.

Implications for the United States

There has been considerable continuity in U.S.-Brazilian relations despite the change in government in Brazil. Although some Members of Congress called on the Obama Administration to express concern about the impeachment process, the Administration asserts that "Brazil's democratic institutions have acted within its constitutional framework." Bilateral dialogues, which facilitate policy coordination on issues of mutual concern, continued during the political crisis, and Secretary of State John Kerry has stated that the U.S. and Brazilian governments will continue working together to address issues such as climate change, Zika, and the crisis in Venezuela.

Brazil's economic recession has had a greater impact on bilateral relations. Bilateral merchandise trade declined by 18% in 2015 and has fallen an additional 17.5% through the first six months of 2016. U.S. exports have been particularly hard hit, declining by more than 25% ($10.8 billion) in 2015 and 20.5% ($3.5 billion) in the first six months of 2016. Brazil's new foreign minister has asserted that Brazil will seek to bolster commercial relations with the United States by focusing on short-term practical solutions for removing regulatory and nontariff barriers to trade.