Corruption and Impeachment in Brazil, Chance for Change in Brazil's Scandal

By: STRATFOR

For the past two years, Brazil has been mired in the costliest corruption scandal ever uncovered in a democracy. Evidence surfaced in 2014 that contractors in Brazil had formed an alliance to overbid on projects for government-owned energy company Petroleo Brasileiro (Petrobras). Contractors pocketed the extra cash and bribed politicians and Petrobras executives to keep quiet. The scandal — the investigation of which came to be known as "Operation Carwash" — was so blatant and implicated such prominent political figures that it shocked Brazil, a country accustomed to high-level corruption. And now the odds that Brazil's president, Dilma Rousseff, will survive the fallout are looking slimmer and slimmer.

The Brazilian middle class reacted swiftly and harshly to the Petrobras revelations, staging massive protests whose scope eventually transcended the scandal. More than corruption, the protests are about waning patience with the ruling party as Brazil's economic recession drags into its second year. Swept up in the frustration is Rousseff, who has not been directly implicated in the Petrobras scandal, though she served as the company's chair for several years. Instead, Rousseff faces imminent impeachment proceedings, set to be voted upon in Brazil's lower house of congress April 17, for allegedly manipulating government budgets in 2014 to make the country's budget deficit appear smaller ahead of an election. The Petrobras affair supplied more fodder against her and proof, in the eyes of her detractors, of her ineptitude.

Analysis

Brazil's unfolding political tribulations are a significant departure from its recent trajectory. Just a couple of years ago, Brazil seemed destined for greatness. The biggest economy in South America, Brazil is part of the so-called BRICS (Brazil, Russia, India, China and South Africa), a group of emerging economies highlighted for their massive growth potential. Social progress accompanied its economic advances. The World Bank praised the country for reducing inequality and raising the standard of living for its poorest citizens from 2003 to 2014. So how did Brazil fall so far? To ensure that the Petrobras scandal becomes a milestone in the country's progress, rather than the event that derailed its rise, Brazil must examine its underlying causes.

A Deterministic Geography

Brazil is a massive country spanning several varied environmental zones, a fact that has historically made it difficult to develop and to govern. On top of this, the country's formidable geographic challenges have had an almost deterministic effect. Northern Brazil comprises vast tracts of challenging jungle terrain, including the resource-rich but unforgiving Amazon Basin. South of the Amazon Basin, tropical savannah characterizes the inland region known as the cerrado, featuring extremely acidic soil and a dearth of waterways. Farther south, the Rio de la Plata region — named for the major estuary into which the Parana, Uruguay and Paraguay rivers empty — connects Brazil's cities to Argentina and Paraguay. This area of interconnected rivers has allowed for the growth of economies of scale in Brazil, though Argentina controls most of it. The traditionally arable land that is found in the southern part of the country is considered Brazil's economic core.

Accounting for less than 7 percent of Brazil's overall territory, the core is responsible for fueling the nation's economic growth. But its location atop the Brazilian Shield, a plateau that abuts the Atlantic Ocean, has forced Brazil's cities to form in the few places where the plateau does not reach all the way to the coast. This limitation has isolated the cities from one another and constrained their growth, contributing to enduring deficiencies in the country's infrastructure.

In turn, Brazil's infrastructure problems help perpetuate the boom and bust cycles that define its history. Brazil is prone to inflation because of the high input costs needed to overcome its infrastructure situation. Growth almost always causes prices to rise; that inflation then tempers growth. Additionally, high investment costs have historically limited the economic opportunities available to most citizens, preserving the oligarchic system created under colonialism. The country's tendencies toward elitism and inflation have conspired to increase the national dependence on commodities, rendering the Brazilian economy even more volatile.

The Brazilian economy's vulnerability to commodity prices further intensifies the country's boom and bust cycles. From the late 1990s until around 2012, China's growth and the resulting demand for commodities gave Brazil a boost. The Brazilian government increased social spending, causing its popularity to climb. Then, China's economy began to slow, and with it, the demand for commodities. The slowdown, coupled with other regional factors, started to dampen Brazil's economy. In 2009, Brazil's growth rate dropped dramatically and, apart from a brief rebound, has been steadily declining ever since. Last year, the Brazilian economy contracted by 3.8 percent.

During Brazil's rapid economic climb, abundant cash combined with the country's historical elitism to encourage rampant corruption. And despite the social strides that were made while Brazil prospered, inequality has remained a problem. Once the economy began to falter, support for the government began to decline, making revelations of this corruption all the more damaging for the country's rulers. Without the cushion of high economic growth, the Brazilian government is being forced to confront the long-term structural problems caused by its geography, high spending and corruption.

An Environment Ripe for Scandal

Beyond its tumultuous economic patterns, Brazil is a country predisposed to corruption and scandal. It was one of the last of the countries in Latin America to seek independence. When it finally established its sovereignty, the country remained a monarchy (first led by Portuguese Prince Pedro I) for decades. For years after that, long periods of dictatorship and military rule — only occasionally interrupted by democratic civilian rule — marked Brazil's history. The democracy currently in place was not born until 1985.

Brazil's authoritarian past helped to foster not only corruption but also the institutions now combating it. On one hand, the oligarchic legacy left by years of authoritarian rule contributed to the spread of corruption. On the other, Brazil's transition to democracy saw the creation of important institutions to safeguard against future authoritarian rule. Of particular import is Brazil's Public Ministry, which is considered an unofficial fourth branch of government. Because the body works independently from the government, it can hold the other branches accountable for their misdeeds. The Petrobras scandal marked the perfect convergence of the Public Ministry's maturation and the public discontent engendered by the economic downturn. For although corruption could be overlooked or forgiven when the economy was growing, it became more difficult to ignore as the economy slowed.

And as corruption goes, the Petrobras case is an impressive example. The entire affair is estimated to have involved $5.3 billion. Since the scandal broke, Brazil's ruling coalition has all but fallen apart, and support for Rousseff is at a record low. The president is now especially unpopular among the middle class, which has both resources and reason to mobilize, having suffered in the recession. Since Rousseff acted as Petrobras' chair from 2003 to 2010, while much of the illegal activity was taking place, the incident has cast doubt on her efficacy as a leader. Furthermore, the Petrobras scandal has fueled the campaign to remove Rousseff from the presidency on unrelated charges.

Nonetheless, Rousseff maintains support among the lower class thanks to her focus on social welfare programs. Geographically, that means her strongest support is in Brazil's north. Even so, the threat of massive social protest in the event of Rousseff's impeachment is quite minimal, both because her overall approval ratings are so low and because another Workers' Party favorite, Luiz Inacio Lula da Silva, is expected to run for president in 2018. At the same time, da Silva himself has also been indicted in the Petrobras investigation. If he is convicted, resulting protests among some segments of the public could reveal deep rifts in Brazilian society. 

Breaking the Corruption Cycle

In any corruption campaign, various targets emerge as scapegoats who embody the scandal. Once they have been dealt with, citizens — and lawmakers — can be satisfied with the campaign's success and move on. Rousseff, as the leader not only of the country but also of Petrobras during much of the time period under investigation, has come to emblemize Brazil's corruption. If at least two-thirds of Brazil's lower house (342 of 513 congressman) vote in favor of Rousseff's impeachment on April 17, the president will be one step closer to ouster. The case would then go to the Senate. Once a simple majority in the Senate accepts the impeachment case, she would be forced to step down for up to 180 days while it is evaluated. If two-thirds of the Senate members vote to impeach Rousseff, Vice President Michel Temer would officially assume the presidency, where he would be challenged with stabilizing the country politically and economically.

If he did take over the presidency, Temer's first challenge would be gaining enough support from opposition parties and from the parties breaking from Rousseff to form a ruling coalition. Temer's Brazilian Democratic Movement Party, a longtime ally of the Workers' Party, has already decided to leave the ruling coalition and to run its own candidate in the 2018 election. Additionally, Temer has been meeting with opposition leaders such as Brazilian Social Democratic Party President Aecio Neves. Temer would aim to quell investor worries as well as those of the public. To that end, he would pass a spate of reforms, including cutting budgets, overhauling the tax code and loosening labor laws, all to show he is more business-friendly and economically savvy than his predecessor. He would also likely expand privatization efforts to include other state-owned companies along with the select Petrobras assets already being privatized.

But these best-case scenarios for Temer overlook a political wild card that could be more disruptive than even Rousseff's impeachment. Based on allegations that Rousseff's presidential campaign received money gained through the Petrobras collusion, the entire 2014 election could be nullified. In that case, Rousseff, if not already impeached, would lose the presidency anyway. And because Temer was a part of the nullified election, he would also lose power, whether as vice president or president. The final rulings on this are not expected to take place until next year. Depending on the timing, the president of the lower house could assume an interim presidency while early elections are called, or Brazil's congress could elect a new president. Either way, the transition of power would likely be tumultuous.

Unrest, Not Chaos

To be sure, Brazil stands on the brink of political upset. Rousseff's impeachment would inspire some limited social unrest. But the swift approach of the 2018 elections would circumvent mass chaos. Da Silva leads polls at the moment, despite his own indictment. Furthermore, an impeachment would at least buy time until the 2018 elections — time during which protests might lose momentum and ruling politicians could reassure the public. A nullification, with the accompanying political shuffle, has more potential to stoke protests. But even a nullification comes with a clear plan of succession.

Rousseff may well find herself out of office soon. She is caught in what is fundamentally a legal dispute spurred on by political infighting. But her situation is also the product of broader economic forces that have been at work in Brazil for decades: a history of oligarchy and a period of massive economic growth that laid the groundwork for systemic corruption. Even so, Brazil's large-scale anti-corruption probe is a testament to the strength of the country's institutions and the success of democratization. If Temer and other lawmakers handle it well, the resulting reforms could eventually restore investor confidence and lead to stronger and more stable growth. Still, appeasing Workers' Party supporters in the event of Rousseff's ouster will present a challenge. Although they represent a minority in Brazil, their numbers are large enough to create a stir on the streets. Whether da Silva is convicted on corruption charges, along with the circumstances surrounding the next elections, will largely determine the extent of the difficulty this will pose for the next government. Meanwhile, foreign powers grappling with their own corruption problems are watching to see how Brazil emerges from this scandal, as it comes to terms with the regionalism, inequality and economic factors that contributed to it.

Editor's note: The details of Brazil's independence have been updated for accuracy.

"A Chance for Change in Brazil's Scandal is republished with permission of Stratfor."

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