Brazil is on a hangover from the 2008 crash

September 2018 marks the 10-year anniversary of the collapse of global financial services firm  Lehman Brothers, often portrayed as the starting point of the 2008 crash. At the time, Lehman was the fourth-largest U.S. investment bank, with over USD 600 billion in assets diversified globally. Its bankruptcy had a ripple effect on the global economy the likes of which the world hadn’t seen since the 1929 Great Depression.

Then Brazilian President Luiz Inácio Lula da Silva downplayed the 2008 crash, as the U.S. and Europe were engulfed by crisis. “There, the crisis is a tsunami,” he said in October. “Here, if it hits us, it’s going to be a little wave, not even big enough to surf on.” In 2010, Brazil’s GDP growth was of 7.5 percent and the country lived in a state of economic euphoria.

Fast forward ten years, and the roles have been reserved. While GDP growth in the U.S. is hovering around 3 percent and the country is roughly at full employment, Brazil’s sluggish economy is still struggling to claw its way back from the country’s worst recession on record. Part of the blame for this desperately slugging recovery can be placed on the measures that actually helped Brazil dodge the crisis a decade ago.

lula 2008 crash wave tsunami political crisis economic recession

Lula: 2008 crash would be “small wave”

How did Brazil go from boom to bust?

To prevent the economy from collapsing, the Lula administration stimulated credit and gave fiscal advantages to specific sectors, especially the automobile and home appliance industries. It worked, and Brazil’s economy didn’t feel the effects of the crisis anywhere near as much as richer countries did. However, what seemed to be an adequate measure in 2008 later turned out to be poisonous.

In the U.S., the government also injected billions of dollars to prevent banks and industry giants from going bankrupt (the case of General Motors, for instance). However, subsidies were eventually pulled. In Brazil, the antidote used against the crisis became the rule for the government’s strategy. When the economy started slowing down in 2011, Dilma Rousseff’s administration doubled down on the measures launched by Lula.

During Ms. Rousseff’s years, the government lowered interest rates, froze gas and electricity prices to control inflation, and gave more tax benefits to specific industrial sectors. The former president was hoping that companies would invest in the “real economy” – i.e., into more production.

Unofficially, Dilma Rousseff’s administration coped with higher inflation and an increasing deterioration of Brazil’s primary results in the name of more growth. The idea behind this was to reduce production costs, increase the competitiveness of Brazilian companies and stimulate family consumption (which accounts for roughly two-thirds of the country’s GDP).

However, once the government was no longer able to keep inflation in check, prices shot up. Gas prices immediately went up 6 percent (and eventually sparked the May 2018 truckers’ strike), and electricity bills increased by half.

Brazil’s economic mistakes after 2008 crash

dilma rousseff 2008 crash

Did Dilma Rousseff know how to handle 2008 crash?

The government’s strategy failed to stimulate growth. The fiscal cracks also began showing in 2014, when Brazil registered its first primary deficit since adopting primary result goals. Since then, public deficits have only grown larger.

The excessive interventionism by the government shattered confidence levels in the Brazilian economy, which led to investors fleeing the country, the economy shrinking, and unemployment going off the charts. The retraction of the economy was so severe in 2015 and 2016 that the GDP per capita will only return to pre-crisis levels in 2023, according to projections by economists at think tank Fundação Getulio Vargas (FGV).


brazil fiscal primary deficit


When the money was flowing, Brazil failed to invest in infrastructure. Railroads are still a distant reality. Water transportation is still incipient, even though Brazil has one of the world’s biggest hydric potentials. The solution is instead to transport goods on trucks – and the logistics of this transport consumes around 11 percent of companies’ budgets in Brazil. In May of this year, we saw how risky it is to depend on a single mode of transport.

Additionally, the country never invested in becoming more than a mere exporter of commodities. In the opinion of Raul Velloso, a former secretary of the Ministry of Planning, Budget and Management, the most worrying data is the low level of investments in Brazil. “It shows that the recovery capacity has diminished,” he explains. “It should come as a warning to government officials – it is imperative to correct the current model of the economy, which is one of increasing public spending.”

Dilma Rousseff’s share of the blame

While Dilma Rousseff’s administration didn’t have a stellar economic performance, it would be an overstatement to blame the current crisis exclusively on the unpopular former leader. At least, according to FGV economist Bráulio Borges. In a September 2017 article, he said that “bad luck factors” coupled with “bad policies” were responsible for creating the current environment.

Mr. Borges analyzed the economic performance of 23 countries during two periods: 1999 to 2011 (during the commodity boom) and 2012 to 2017 (when basic products prices fell). For his comparison, the scholar chose emerging countries which are commodity exporters and have medium to high income levels. 


brazil gdp recession


According to his study, countries with economies similar to Brazil’s also experienced a slump in recent years. Maybe not as big, but the discrepancy is not so high. The median GDP per capita reduction for these countries is 1.3 percent, when comparing the 2012-2017 period to 1999-2011 – while in Brazil the reduction was of 3.3 percent.

“Did bad policy have a marginal effect on the crisis? Far from it. But the dominating narrative makes it look [as if it were the only cause],” Mr. Borges wrote. “[But] it seems reasonable to say that at least 38 percent of the country’s GDP per capita reduction is connected to external factors.”

Mr. Borges’ writings sparked controversy among economists and scholars. Samuel Pessoa, an economist linked to the Social Democracy Party who also works at FGV, wrote another article disagreeing with his colleague. “Nothing prevents other economies from adopting the same failed policy-making strategy that reigned under Dilma Rousseff. Venezuela is an example of such country,” wrote Mr. Pessoa.

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MoneySep 10, 2018

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