CRS INSIGHT
Brazil in Crisis
April 6, 2016 (IN10471)
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Related Policy Issue
Latin America and the Caribbean
Related Author
Peter J. Meyer
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Peter J. Meyer, Analyst in Latin American Affairs (pmeyer@crs.loc.gov, 7-5474)
Brazil is in the midst of deepening economic and political crises that are closely intertwined and unlikely to be resolved
quickly. Given that Brazil is the world's 9th-largest economy and the 12th-largest U.S. trading partner, the country's
deteriorating situation could impact U.S. businesses. The crises could also hinder Brazil's response to the Zika outbreak,
its preparations for hosting the 2016 Summer Olympics in August, and its ability to address foreign policy concerns,
such as stability in neighboring Venezuela.
Brazil's economy experienced strong growth from 2003 to 2010 but has been hit hard by the slowdown in China and the
decline in global commodity prices in recent years. President Dilma 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 expected to contract by 3.5% in 2016. The labor market has weakened
considerably, with the unemployment rate climbing from 6.8% to 9.5% and real wages falling by 2.4% over the past
year. Some of the nearly 40 million Brazilians who joined the middle class during the boom years are now at risk of
falling back into poverty.
Rousseff has attempted to implement some economic adjustments since the start of her second four-year term in January
2015, but many of the initiatives have stalled in the fragmented Brazilian congress, which includes 26 political parties.
Rousseff and her center-left Workers Party (PT) campaigned against austerity measures during the 2014 election, and
much of the party is opposed to Rousseff's policy switch. Several parties that—until recently—were nominally allied
with the PT, such as Vice President Michel Temer's Party of the Brazilian Democratic Movement (PMDB), have few
ideological commitments but condition their support on control over government posts and legislative earmarks. Given
the country's fiscal situation, Rousseff has had fewer resources to distribute. Meanwhile, opposition parties that
campaigned in support of economic adjustments, such as the Brazilian Social Democracy Party (PSDB), have
demonstrated more interest in opposing Rousseff than in advancing their policy preferences.
A sprawling corruption investigation under way since March 2014 has further complicated the situation, deterring
investment and sending much of the political establishment scrambling for survival. Beginning in 2004, appointees at
the state-owned oil company, Petrobras, colluded with construction firms to systematically drive up contract prices.
Corrupt executives pocketed a portion of the funds and funneled the rest to political campaigns and politicians. These
practices extended well beyond Petrobras and included contracts throughout the public sector. Investigators reportedly
have uncovered bribes totaling about $1.7 billion and total losses to the Brazilian state estimated at between $7.9 billion
and $11.5 billion (at current exchange rates). While the investigation has focused primarily on members of the PT and
PT coalition partners, it also has implicated some opposition politicians. Rousseff served as chairwoman of Petrobras
from 2003 to 2010 but has not been directly tied to the corruption scheme.
As economic conditions have deteriorated and revelations of systemic corruption in the political system have come to
light, Rousseff has lost nearly all her political support. Her approval rating collapsed within months of her narrow
reelection in October 2014. As of March 2016, 10% of Brazilians evaluated her administration as "good" or "excellent,"
while 69% evaluated it as "bad" or "terrible" (see Figure 1). Key coalition partners have abandoned the government,
including Vice President Temer's PMDB.
Figure 1. Public Evaluation of the Rousseff Administration
(September 2014-March 2016)
The political opposition has sought to channel this popular discontent into an effort to remove Rousseff from office.
Brazil's Chamber of Deputies is considering an impeachment motion that accuses her of misrepresenting fiscal accounts
and opening credit lines without congressional authorization in violation of the Fiscal Responsibility Law. Rousseff
maintains that impeachment would be a "coup," arguing that such fiscal maneuvers were routine among her
predecessors and do not constitute an impeachable offense.
Many analysts assert that legislators' political calculations, rather than the impeachment charges' legal merits, likely will
determine Rousseff's fate. To stop the impeachment process from moving forward, Rousseff must secure the votes (or
abstentions) of 171 of the 513 deputies in Brazil's lower house. Former president Luis Inácio Lula da Silva, who is
under investigation for corruption but still has considerable political capital, is helping Rousseff round up votes. They
are negotiating with small parties and individual legislators, reportedly exchanging government positions and other
favors for support. About 60% of legislators—including the leaders of both congressional chambers—are facing
criminal charges or under investigation. Lula has also helped rally the PT base, which has taken to the streets to protest
impeachment even as polls indicate that more than two-thirds of Brazilians support removing Rousseff from office.
The full Chamber of Deputies could vote on impeachment as early as mid-April. If two-thirds of deputies vote to
proceed, Vice President Temer will assume the presidency for up to 180 days while Rousseff is tried by the 81-seat
Senate. If two-thirds of senators vote for conviction, Rousseff will be removed from office permanently and Temer will
serve as president for the remainder of her term, assuming he is not impeached. Chamber of Deputies President
Eduardo Cunha, who is third in line to the presidency, also faces removal from office.
Whoever ends up president will likely struggle to lead Brazil out of the current crises. Brazilian society has become
increasingly polarized, and many will likely view the outcome of the impeachment process as illegitimate. Corruption
investigations and popular mobilizations will likely continue to put pressure on the political class, complicating efforts
to form a governing majority and implement the sweeping budget cuts advocated by many economists. Structural
reforms to strengthen the political system and address barriers to economic growth may be delayed until after a new
president and congress, scheduled to be elected in October 2018, take office in January 2019. New elections could be
held sooner if an independent inquiry into alleged electoral fraud leads Brazil's electoral court to nullify the 2014
presidential vote.