Brazil Has Learned It Can Reach Prosperity Only by Building Its Democracy

Brazilians at Florianópolis beachBrazil’s mid-year approaches with the country’s poor northeast region being punished by torrential rains whose effects have caused the deaths of at least 45 people and displaced as many as 400,000. It is a human tragedy for those affected, and a reminder of the continued development challenges in this vast and contrasting land. 

At the other side of the ocean the country’s peripatetic president, Luiz Inácio Lula da Silva, returns from a state visit on May 18-20 2009 to the People’s Republic of China walking tall. On May 19 he signed 13 trade and finance agreements with his Chinese counterpart Hu Jintao, with further commitments to strengthen ties and create a “closer strategic partnership” that would have “even greater significance in the current complicated international situation”.

Between Brazil’s local realities and its global reach, the president is now moving towards the end of his second and (unless he follows the example of some neighboring leaders and seeks to abolish such term-limits) final term of office. The next election will be held on October 3. 2010, which leaves Lula limited time to entrench a national legacy that has so far won wide domestic as well as international acclaim.

How then will Lula’s contribution be judged here across the entire canvas of his presidency: in terms of the economic security and prosperity of Brazil’s citizens, the influence and prestige of the country in its region and the world, and – not least – the quality of Brazilian democracy?

The Economics of Reform

A provisional assessment might be found via the government’s search for reform of a (mostly) respected national institution, the Caderneta de Poupança. The Poupança (as it is widely known) is a traditional depository fund created by the Brazilian government especially to allow poorer Brazilians to earn some extra (tax-free) money with their savings through access to the financial markets. The fund has a statutory duty to use most of its money to finance affordable housing.

The direct benefits from the fund are usually very modest, as befitting the fact that almost all the savings invested are below 50,000 reais (US$ 25,000); but their tax-free nature has made the Poupança an attractive option. The way it has operated has changed over time and in accordance with the fluctuations of the Brazilian economy; but since 1994 and the establishment of the Real plan – which stabilized the market amid a period of hyperinflation – the fund has been paying a fixed rate of 6% a year, with an index to the monthly interest-rates paid by the public sector creating the possibility of further gains.

The problem is that interest-rates have been falling in Brazil, and with them the earnings of (for example) the more conservative financial funds. As the Poupança’s rate is fixed by law and investment in it does not carry any federal or administrative taxes, it suddenly became very attractive – and not only for the poor. In the current situation, the Poupança is paying a tax-free 7% a year, against a real (and taxable) interest-rate on the public debt of 5.75%.

This situation creates the danger of rising inflationary pressures in a highly indexed economy. It also presents the federal government with possible difficulties in the administration of public debt, in the event that a good part of the financial-markets’ resources routinely used to cover the public deficit are drawn to the Poupança.

The economic debate is important, especially at a time of turbulence in the national and international economy (albeit Brazil is in a better place to weather the global financial storm than many countries). But the economic questions are also political ones. In particular:

* how can a government change the rules of a system that was designed for the poor and (basically) serves the poor, without harming those who are most in need?

* how can a government do this without creating political problems for itself, especially when it faces presidential and legislative elections of 2010 and seeks to ensure the succession?

The Politics of Change

Two leading figures in Brazil’s political and financial class – Guido Mantega, the economy minister, and Henrique Meirelles, president of the central bank –  announced on May 14 2009 a proposal that will now be debated in the Brazilian congress: to impose a tax on savings of up to 50,000 reais (US$ 25,000) at the Poupança with effect from January 1st 2010 (by law, the rules for the fund cannot be changed in mid-term), and to reduce immediately the taxes applied to some conservative financial funds.

Many analysts argue that the Poupança aspect of this package is flawed, on the grounds that it will not solve the issue at hand while also creating a fiscal benefit for the rich in the financial markets. They say that it would be better to address the Poupança’s fixed-earning element, which was inherited from the inflationary moment of the 1990s.

These arguments, however, restrict themselves to the economic dimensions of the case. But economics and politics are increasingly intertwined, in Brazil as elsewhere. It is equally important to ask: is or is not the solution proposed by Lula’s government a mostly democratic one?

Many recent political debates in Brazil call to my mind the work of the Canadian economist John F Helliwell on the “price of democracy” and the importance of “social capital” – the latter defined by him as “networks together with shared norms, values and understandings that facilitate cooperation within or among groups”.

Helliwell, in an interview for a Brazilian weekly magazine conducted in 2002, said that in a democratic political system, political and economic institutions are “stronger and more transparent” than under an alternative order; and because of that they produce “a benefit most needed for any nation to prosper: social capital. This is a measure of trust that the population has in its country. In a nation with high social capital, people feel safe to buy, bet and invest.”

Helliwell went on to say that “democracy is the political system most able to improve people’s lives, and because of that it is desirable in any circumstances”. However, he also emphasized that democracy alone in no way guarantees that the country will prosper. Rather, “it is a luxury. A benefit which people will pay for”.

A study by a Brazilian economist published by Folha de São Paulo in April 2009 exemplifies this perspective. This shows that in between April 2006 and February 2009, Brazil’s annual federal spending on the salaries of the bureaucracy grew by 40 billion reais (US$ 20 billion), while the entire cost of the public sector (salaries excluded) rose by 26.7 billion reais ($13.35 billion). In the same period, national investments in infrastructure, healthcare, education, and public security increased by only 14.7 billion reais ($7.35 billion).

These data follow research done at the Brazilian congress. This calculates that in 1995-2004, the federal government spent 1.07 trillion reais (US$ 500 billion) on salaries; 2.78 trillion reais (US$ 1.4 trillion dollars) in the public sector, excluding salaries; and only 884 billion reais (US$ 442 billion) on capital investments that in the areas of basic public benefit cited above (health, education, justice and public security among them).

There is no need to be a financial wizard to see that there is something wrong with this balance of expenditure – and that the solution proposed by Lula’s government to the Poupança problem is indeed not ideal. But to confine the discussion to these figures omits the issue raised by John F Helliwell: isn’t this also part of the “price” of living in a democratic and stable system – one that imposes high political costs on radical institutional ruptures, and forces politicians to think about the political and “social-capital” consequences of their acts?

The Benefits of Maturity

In fact, it is here that the very best contribution of Luiz Inácio Lula da Silva’s government since the president’s election in 2002 can be seen: in managing and maintaining the political process as something that slowly makes the government work for the people in a democratic way.

This is the indispensable domestic foundation of what many people around the world regard with respect as the modern Brazilian achievement. The patient construction of a prosperous future can be sustained only by the continuation of the process of political democratization that the country is living day-by-day since the fall of the military regime in 1985 – a process that carries great financial costs, but is now led by a government responsible in its acts and clear about the need to avoid great convulsions.

This process has indeed been making Brazil’s institutions “stronger and more transparent”, and forming a measure of trust amongst the population that can be called “social capital”. The reality and the context greatly differentiates Brazil from other (and in many respects noisier, and more glamorous to outsiders) political experiences in Latin America. It is perhaps the greatest contribution of Lula’s government to have remained on and strengthened this path – one that now reveals the benefits of its and Brazil’s political maturity.

There are rains, financial tides and global deals in the affairs of a nation. But many 21st-century Brazilian citizens can truly say: democracy is changing our lives, and for the better.

Arthur Ituassu is professor of international relations at the Pontifícia Universidade Católica in Rio de Janeiro, Brazil. You can read more from him at his website: This article appeared originally in Open Democracy –


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