Always the Economy

It was not about the economy. Three months ago, when the Presidential campaign in Brazil started gearing up, it was about personalities and track records, different versions of the past – real or invented –, and being in power. President Dilma Rousseff is the incumbent, and for that fact alone, she was the favorite. The economy was not an issue. Unemployment rates were low, inflation seemed to be under control – or, at least the government managed to pass that message on very effectively –, and lack of growth didn’t seem to be a problem as there were no visible effects on employment and wages. As someone once said, no one eats GDP.

But the world does turn, and things do change, sometimes at mind-boggling speed. Brazil’s Presidential race has not been child’s play. It hasn’t been lacking in drama, either. On August 13th, Eduardo Campos, one of the main contenders, died in a tragic death on the coast of São Paulo. His running mate, Marina Silva, a soft-spoken lady with an impressive background, became Dilma’s main opponent, not only due to her charisma and achievements, but also as a result of an outpouring of emotion over Campos’ untimely passing. Emotion, after all, is a very strong national trait.

Marina’s rise didn’t last. A fierce smear campaign launched by Dilma’s party (PT, the Workers’ Party) all but annihilated the lady from the Amazon. Aécio Neves, the candidate from the Social Democratic Party (PSDB), PT’s long standing adversary, was back in play. And play he did. After two very strong showings in consecutive televised debates, he has now made it to the second round of the elections. Surprisingly, he opened a wide margin over Marina Silva and came in too close for comfort to Dilma Rousseff, standing on the shoulders of the state of São Paulo. With Aécio back in the game, the showdown between the PT and PSDB can only be about one thing: it’s the economy, always the economy. No offenses need apply.

What’s the deal with the economy? Over the last decade, the government has persistently insisted that its most important legacy is the rise of the middle class, the inclusion of millions of Brazilians in the ranks of the not-quite-well-to-do. This was achieved through a number of social programs, including the Bolsa Família, inspired by previous programs championed by ex-President Fernando Henrique Cardoso. But is hasn’t all been about the Bolsa Família. In the mid-2000s, a new indexing rule for the minimum wage was instituted. From that point on, the minimum wage was to be readjusted according to the growth rate of the economy registered two years before and the inflation rate of the previous year. Brazil’s economy grew an astounding 7.5% in 2010. Inflation ran at 6.5% in 2011, the top of the inflation target range. With the 7.5% growth and the 6.5% inflation increase totaling 14%, minimum wages increased generously in 2012.

It has only been downhill from there. Lately, the economy is stalling, inflation is tantalizingly close to the target ceiling, and manufacturing jobs are disappearing, although this hasn’t had any effect on the unemployment rate. Unemployment is low, less as a result of the country’s capacity to create opportunities, and more as a result of adverse demographics and social programs that inhibit job search. Sooner or later, low growth will have larger implications for the labor market, especially if the country falls into recession, a scenario that has been gradually  escalating.

Thus the challenge facing the opposition emerges. President Dilma and the PT have been hammering the message that Aécio Neves and the PSDB represent the past, a past haunted by high unemployment, a wobbly currency, and low wages. A past that was also plagued by sequential financial crises – it is, after all, the 1990s that we’re speaking of. This, of course, is conveniently left out of the official rhetoric. The challenge is to turn the argument on its head by making it very clear that it was under the leadership of the PSDB that macroeconomic stabilization was achieved. Having done this once, the opposition is well-equipped to do it again. Without the adjustments that would put the economy back on track, the past is staring everyone in the face. Social inclusion will be undone, the rise of the middle class will be reverted – not fully, but enough that the population will feel the sting. Some of this is already happening, as the protests that swept the country in mid-2013 made very clear.

And so the debate comes full circle, right back to where it all boils down to. Always and everywhere, James Carville is right: “It’s the economy, stupid.”