Arrest of Rio de Janeiro Governor highlights deep cracks in state finances

. Nov 29, 2018
rio de janeiro governor arrested Governor Pezão arrives at the Federal Police headquarters in Riio

A frail economy, a bankrupt state, and a political system in tatters: welcome to Rio de Janeiro. Brazil’s second-wealthiest state is set to register primary deficits for the next decade, with a surplus estimated to happen only in 2029. Only in twenty years will Rio be capable to fully pay its debt to the federal government. The lack of money has taken its toll on every area under the state administration’s watch. Civil servants face delays in receiving their salaries, healthcare units don’t work properly, violence rates have spiked. In short, Rio de Janeiro is a mess.

And a big chunk of the blame lies on the doorstep of the state’s political class. Corruption seems to be present in every aspect of Rio’s political life, a perception that grows stronger as the Federal Police arrested Governor Luiz Fernando Pezão this morning. He is accused of pocketing a monthly stipend of BRL 150,000 during his time as the state’s lieutenant governor (a system of bribes which included a yearly “Christmas bonus” and two separate BRL 1 million bonuses).

</span></p> <p><span style="font-weight: 400;">Pezão was, according to Operation Car Wash investigators, part of &#8220;bribeland&#8221; (a reference to the </span><i><span style="font-weight: 400;">tangentopoli</span></i><span style="font-weight: 400;"> scandal in 1990s Italy), a scheme to pay monthly stipends to Rio de Janeiro lawmakers in exchange for their support for former Governor Sérgio Cabral (currently in jail for multiple crimes of corruption). Between 2007 and 2015, Pezão is alleged to have received BRL 25 million, according to prosecutors. &#8220;Evidence shows that criminal groups continue to act in Rio, despite the efforts of Operation Car Wash, especially in money laundering activities,&#8221; said Prosecutor General Raquel Dodge.</span></p> <div id="attachment_12199" style="width: 1034px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-12199" loading="lazy" class="size-large wp-image-12199" src="" alt="rio de janeiro governor arrested" width="1024" height="657" srcset=" 1024w, 300w, 768w, 610w" sizes="(max-width: 1024px) 100vw, 1024px" /><p id="caption-attachment-12199" class="wp-caption-text">Luiz Fernando Pezão (L) and Sérgio Cabral (R)</p></div> <p><span style="font-weight: 400;">Just three weeks ago, the Federal Police arrested lawmakers involved in the scheme and carried out search and seize operations inside the state legislature. With the governor&#8217;s arrest, these are Rio&#8217;s top officials who have been sent to jail, as pointed out by Mauricio Santoro, a political scientist at the Rio de Janeiro State University and a columnist for </span><b>The Brazilian Report</b><span style="font-weight: 400;">:</span></p> <ul> <li style="font-weight: 400;"><span style="font-weight: 400;">Every governor elected since 1998;</span></li> <li style="font-weight: 400;"><span style="font-weight: 400;">Every State House Speaker between 1995 and 2017;</span></li> <li style="font-weight: 400;"><span style="font-weight: 400;">10 of the 70 state lawmakers;</span></li> <li style="font-weight: 400;"><span style="font-weight: 400;">5 of 6 members of the Rio de Janeiro Accounting Court, and</span></li> <li style="font-weight: 400;"><span style="font-weight: 400;">The state&#8217;s former top prosecutor.</span></li> </ul> <p><span style="font-weight: 400;">And that list doesn&#8217;t even include former Congressman Eduardo Cunha, one of the most influential politicians in the past few years. The politician from Rio de Janeiro was convicted to 15 years in prison for corruption, after having pocketed kickbacks from oil companies in a deal in Benin.</span></p> <h2>How corruption made a frail economy even weaker</h2> <p><span style="font-weight: 400;">Despite being the country&#8217;s second-wealthiest state, Rio de Janeiro doesn&#8217;t have a sustainable economy. The state relies too much on the money coming from taxes on the sale of goods, the federal fund for states and municipalities, and money coming from royalties that oil exploitation companies pay as compensation for the environmental and social consequences of their activities. But as the crisis hit Brazil, consumers bought fewer goods, and the federal administration had less money to dole out. Coupled that with oil prices plummeting in recent years and Rio de Janeiro entered a perfect storm.</span></p> <p><span style="font-weight: 400;">Billion-dollar investments in infrastructure and preparing the city for the <a href="">2014 World Cup</a> and the 2016 Olympics had little to no oversight. Eduardo El Hage, a federal prosecutor working on <a href="">Operation Car Wash</a>, states that the administration of former Governor Sérgio Cabral &#8220;siphoned money from every single area of the state.&#8221; In the health care sector alone, BRL 300 million went to the pockets of corrupt politicians and businessmen.</span></p> <p><span style="font-weight: 400;">The alliance between Mr. Cabral&#8217;s state administration, Rio&#8217;s Mayor&#8217;s Office and the federal government created a political environment of no opposition—making checks and balances even weaker.</span></p> <p><span style="font-weight: 400;">The result is a near-bankrupt state. According to Guilherme Mercês and Nayara Freire, from the Rio de Janeiro Federation of Industries, &#8220;Rio de Janeiro is the most indebted state in the country: 234 percent of the gross current revenue.&#8221;</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-12198" src="" alt="Arrest of Rio de Janeiro Governor highlights deep cracks in state finances" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">In 2016, almost 14,500 companies based in Rio shut up shop—the highest number in 17 years. And 2,500 more are in jeopardy unless the state is capable of resuming its programs of offering tax benefits to local businesses. As Rio undergoes a financial reorganization process (similar to bankruptcy processes for companies), it is <a href="">unable to grant tax exemptions</a>. This means that the state is set to lose BRL 5.6 billion, representing a 1-percent drop in the state&#8217;s GDP.

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