Looking for change

THE Brazilian sertão is inhospitable at the best of times. Now in its third straight year of drought, the semi-arid scrubland wedged between the north-eastern coast and the Amazon rainforest to the west verges on desolate. Maria Raimunda da Silva, a 49-year-old sertaneja who lives with her mother and three sons near Serrinha, a town of 77,000 in the state of Bahia, recalls carrying water in a bucket from a muddy pond, half a mile down a dirt track. She would go early to scoop up the clean liquid near the surface, “before the animals came and stirred it up”.

A year ago Ms da Silva received a 16,000-litre water tank, courtesy of the federal government’s “Water for All” programme. Drainpipes channel any precious rain into the cistern. A municipal tanker lorry tops it up without charge. The Bolsa Família (family fund), a federal benefit received by 14m households nationwide, supplements her family’s precarious earnings from selling maize, cassava and beans by 302 reais ($125) a month.

Without federal help, Ms da Silva would be desperately poor. With it, “we can buy flour, even meat and fish,” she says. Her home has a refrigerator, gas stove and TV. One son owns a mobile phone.

Stories like this, repeated millions of times, help explain why the left-wing Workers’ Party (PT) has held the presidency since 2003—and why the incumbent, Dilma Rousseff, topped the poll in the first round of the election held on October 5th, with 42% of the vote. The poor north-east voted solidly for her; in Serrinha she got a whopping 69%. In a run-off on October 26th she will face Aécio Neves of the opposition Party of Brazilian Social Democracy (PSDB), a centre-right outfit which is strong in the richer south-east. In the first round he got just 15% in Serrinha, less than half his national share. “Everyone here votes Dilma,” says Ms da Silva.

Since Ms Rousseff took office in 2011 the government has installed 670,000 water tanks across the country, twice as many as in the previous eight years under Luiz Inácio Lula da Silva, her predecessor and patron. (Ms da Silva is no relation.) Drive along the roads slicing through the sertão and you pass convoys of lorries stacked with plastic tanks that can be installed in a matter of hours. And “Water for All” is but a small part of “Brazil without Poverty”: 14 schemes that also include subsidised housing and vocational training. Last year Bolsa Família, its biggest programme, handed out 24.5 billion reais (0.5% of GDP).

In many ways it is money well spent. In the past decade the PT helped lift 36m Brazilians out of poverty. The World Bank reckons that Brazil cut “chronic poverty”—a broader measure that includes access to basic services as well as income—by three-quarters from 2004 to 2012, to just 1.6% of the population. The figure now is almost certainly lower. Last month the UN Food and Agriculture Organisation erased Brazil from its World Hunger Map.

More than half of Brazil’s 203m people now belong to what Marcelo Neri, Ms Rousseff’s secretary of strategic affairs, dubs the “new middle class”: households earning around 2,000-8,600 reais a month (see chart 1). The number comfortably off by developed-world standards has also grown, from 14m in 2003 to 30m. Between 2003 and 2013 median income rose by 87% in real terms; that of the poorest tenth more than doubled. Inequality fell, partly because of handouts but more because of paid work. Just 5% of Brazilians are jobless.

But despite all the progress, this year’s election is the most open since 1989, when Brazil held its first free vote for president following two decades of military rule. Three Brazilians in four tell pollsters they want the next government to do things differently, more than when Lula ousted the PSDB in 2002. On October 5th 61m voters cast ballots for the opposition: 35m of them for Mr Neves and 22m for Marina Silva (also no relation), a charismatic former environment minister under Lula, who is supporting Mr Neves in the run-off. That is 18m more than voted for Ms Rousseff.

Partly, the PT is a victim of its own success. Rising living standards have changed attitudes: on polling day in Capão Redondo, a favela (shantytown) on São Paulo’s periphery, even some poor voters decried a dependency culture fostered by benefits, which they see as discouraging hard work. And having secured the baubles—mobile phones and TVs—that higher incomes afford, Brazilians now crave improvements outside their front doors. Ten years ago jobs were their main concern. Now they cite health care and security, with jobs in third place. Education comes fourth.

Not by bread alone

But Brazil’s government has not lived up to such nouveau bourgeois aspirations. Though the public health system is supposedly free and universal, it gets little more than 4% of GDP, and more than half of all spending on health care is private (though the number of doctors in poor regions has been boosted by Ms Rousseff’s policy of importing Cuban ones to work in places the natives shun). Murder rates are rising, especially in the north-east. In August Ms da Silva’s brother was killed by a stray bullet in a shootout between police and drug traffickers near Serrinha. Though the government now matches rich countries in its spending on education as a share of GDP, the country lags behind in global rankings. According to the education ministry, secondary-school attainment fell between 2011 and 2013 in the federal district and 15 of the 26 states, including three of the four biggest.

Frustration came to a head in June 2013. A plan to raise bus fares in São Paulo by 20 centavos (then 9 cents) sparked the biggest protests in a generation. More than 1m took to the streets in dozens of cities to bemoan shoddy public services and ineffectual, corrupt politicians. Higher wages, it seemed, were no longer enough.

Meanwhile, the PT’s consumption-led growth model has been losing steam, putting those wages at risk. In the past year earnings have barely kept pace with stubbornly high inflation, running at 6.7%. Output fell by 2.4% (at an annual rate) from April to June, pushing Brazil into recession. On October 7th the IMF slashed its growth forecast for 2014 to 0.3%. Brazil will have grown by at best 1.6% a year on average during Ms Rousseff’s four-year term—less than under all but two heads of state since Brazil booted out the monarchy in 1889.

The government blames all this on the weak global recovery after the financial crisis in 2007-08. Others lay the fault at the government’s own door, and include the period before Ms Rousseff took over. Vinicius Carrasco, João Pinho de Mello and Isabela Duarte of PUC-Rio, a university, and Insper, a business school in São Paulo, compared Brazil from 2003, when Lula took office, until 2012 with a “composite country” made up of a weighted average of emerging markets that had best tracked Brazil’s economy in the seven years to 2002 (see chart). But rather than continuing along the same track, by 2012 Brazil’s GDP per head was 10% lower than that of the composite country, though it had started out slightly higher. It scored similarly on cutting poverty and only a little better on cutting income inequality.

Reasons for Brazil’s underperformance are well-rehearsed. Under the PT the tax burden rose from 32.6% to 36.4%—as high as in rich countries but offering little in return. The tax code is Byzantine: it takes an average mid-sized firm 2,600 hours a year to comply, according to the World Bank. In Mexico it takes 334 hours. Infrastructure is shabby and there isn’t enough of it—just 14% of roads are paved. Sewage from almost half the population goes untreated.

Other big developing countries spend twice as large a share of GDP as Brazil on infrastructure. In an attempt to catch up, Ms Rousseff launched a huge public-works programme, worth 1.6 trillion reais in 2011-14. But many projects are delayed. Contas Abertas, a watchdog, reckons that just 13% of 15,590 clinics supposed to have been built by the end of 2014 are finished; construction has yet to begin on 6,500.

Such structural defects were masked in the past decade’s commodity boom. China was snapping up Brazilian iron ore and soyabeans. Exports soared, as did Brazil’s currency, the real. Juicy royalties and taxes on commodity exporters helped balance the budget. The government spent heavily on income redistribution and subsidised credit for individuals and firms.

Shoppers took to imported goods with gusto. In 2013 Brazil ran a deficit of $83 billion in manufactured products, from a surplus of $20 billion eight years earlier. Uncompetitive domestic firms struggled. New workers were absorbed by the service sector, which now accounts for 69% of output, up from 63% in 2004 and a bigger share than in other emerging markets. Brazil became “a huge service economy underwritten by a small, productive commodity sector”, observes Tony Volpon of Nomura, a bank. Productivity flagged: it is harder to squeeze more out of a shop assistant than out of an assembly-line worker. As indebted Brazilians became more reluctant to borrow, and banks less keen to lend, retail sales suffered, and with them the service sector as a whole.

To keep consumption going after the financial crisis, the government loosened the purse-strings—and never re-tightened them. Since 2012 it has also resorted to legal but dubious practices, such as pretending that current bills weren’t due for a while, to disguise the fiscal deterioration. The disguise hurt its credibility with investors. And even flattered by gimmicks, the primary deficit (before interest payments) reached 14.5 billion reais in August, the fourth month in a row in which the government failed to put aside cash to pay creditors. The primary surplus over the first eight months of 2014 was just 0.3% of GDP, well shy of the finance ministry’s target of 1.9% for the year.

Brazil’s high interest costs—at 66% of GDP, government debt is lower than in most rich countries, but it pays a bigger share of output, 5%, to service it—have pushed the public-sector deficit to 4% of GDP, the highest level since the huge stimulus package of 2009. In April Standard & Poor’s, a ratings agency, downgraded Brazil’s sovereign debt by a notch, to just above junk. Last month Moody’s, another agency, changed its outlook for the country from stable to negative. A cut to junk looks possible, with the consequent outflows of capital from pension and mutual funds obliged to hold investment-grade assets.

A deficit of macroeconomic discipline has gone hand in hand with a surplus of microeconomic meddling. Capped petrol prices have cost Petrobras, the state-controlled oil giant, an estimated 48 billion reais in the past three years—while undercutting an innovative sugarcane-ethanol industry that Lula had championed. The oil firm’s management, once admirably clean and competent, has also been weakened by political appointments under the PT: prosecutors are investigating claims that its contracts with suppliers were padded and the proceeds used to swell the coffers of the party and its allies.

In 2012 Ms Rousseff unexpectedly offered automatic renewal of operating licences only to electricity utilities that agreed to slash bills. Those that accepted her terms now teeter close to bankruptcy: this year’s record drought has starved them of cheap hydropower and forced them to tap pricier oil- and gas-fired plants. The government may need to spend more than 20 billion reais this year on propping them up. Attempts to micromanage the rate of return on private investments in roads and airports have further sapped confidence. The boss of one big multinational laments Ms Rousseff’s “mistrust of market prices”.

As a result, investment collapsed by 11% year on year in the second quarter. Analysts have halved to just 2% their estimates of Brazil’s potential growth rate—the maximum speed at which the economy can expand without stoking inflation. Business sentiment is plumbing depths not seen since the aftermath of the financial crisis, when it plunged, only to rebound briskly. But this time the decline has been gradual. Businessfolk have twigged that the economy’s defects cannot be fixed overnight, says Aloísio Campelo, who compiles confidence indicators at Fundação Getúlio Vargas, a university. Any recovery in sentiment, and investment, is therefore likely to be slow.

Confidence boost

A victory for Mr Neves would lift business spirits. His liberal instincts run deep. He is a tested manager—as governor, he turned Minas Gerais from a bankrupt basket-case into one of Brazil’s best-run states. He can also tap first-rate talent, led by Arminio Fraga, a former head of the Central Bank whom Mr Neves has said would become his finance minister.

Mr Fraga promises economic orthodoxy. This includes autonomy for the Central Bank (which has been undermined during Ms Rousseff’s presidency by her insistence on premature interest-rate cuts and currency intervention), trade liberalisation (which the PT minister responsible for trade has said would spell “disaster” for domestic industry) and an end to budgetary obfuscation. All hidden subsidies will be revealed, he vows, including the cost of the cheap credit funnelled to government-favoured firms through BNDES, Brazil’s huge development bank. This opaque Bolsa Empresário (Boss Fund), as it is mockingly known, is thought to cost around 0.6% of GDP, more than Bolsa Família (which, contrary to Ms Rousseff’s scaremongering, Mr Neves would continue).

The aim would be to show where best to trim fat and, Mr Fraga hopes, boost confidence by demonstrating a strong commitment to balancing the books. This in turn would offer breathing space for longer-term reforms to taxes and bureaucracy. Small wonder the stockmarket rallies whenever the polls shift towards Mr Neves; if he were to win it would soar.

Besides banking on speedier global growth to pull Brazil along with it, Ms Rousseff has signalled that during a second term she would continue to subsidise lending (since, she argues, private banks charge too much) and industry-specific tax breaks (to add to an already bewildering array). Last month she said that her much-criticised finance minister, Guido Mantega, would not be staying on. But few think this signals a policy shift. “Dilma is her own finance minister,” says Antônio Delfim Netto, an economist who was close to Ms Rousseff before becoming critical of her management of the economy.

Nor is Ms Rousseff’s style likely to change. Virtues she exhibited as Lula’s energy minister proved vices in a president. Attention to fine detail, all very well when running a single portfolio, became micromanagement with 39. Should she cling to office, her tepid enthusiasm for reform would be further cooled by a weakening currency and rising costs for government borrowing—making the fiscal adjustment required to stabilise public debt larger and a ratings downgrade likelier.

As well as promising to restore fiscal balance, Mr Neves has some fine ideas for political reform. He wants a minimum vote-share for parties to enter Congress and smaller constituencies (currently, states vote as single constituencies and some are very large: São Paulo has a population of 44m). But even for such a seasoned operator, getting any of this done will be a struggle. On paper, he would have the necessary support in Congress: true to the venal tradition of Brazilian politics, many in Ms Rousseff’s coalition, which kept a healthy majority in congressional elections also held on October 5th, would swing behind him if he won, in exchange for cushy posts in ministries, government agencies and state-controlled firms.

But the lower house, home before the election to an unwieldy 22 parties, next year will have 28 (and that is just to start with; splits are common). Interest groups, such as the powerful farming lobby, often trump party loyalties. Party discipline is almost non-existent. And bills have become harder to pass in recent years: Ms Rousseff has had a bigger majority in Congress than Lula ever did, yet fewer congressmen voted with her (though that is partly because she lacks the requisite arm-twisting skills).

A daunting task

A recent congressional report found that when rosy assumptions about revenues and expenses in the budget that Ms Rousseff’s government has drawn up for 2015 are replaced by more realistic figures, the result is a shortfall of 37.8 billion reais (around 0.7% of GDP). Any serious belt-tightening would need congressional approval. Political reforms would require cajoling Congress to reform itself. They would also mean fiddling with Brazil’s doorstop of a constitution—as indeed would many other necessary reforms, including to taxes and labour laws, which it treats in painful detail. After the 2013 protests, with their vague demands for political renewal, Ms Rousseff briefly hinted at rewriting the constitution. But she backed off when Congress cried foul. Both she and Mr Neves have promised to try again.

If Brazil is to prosper, and meet Brazilians’ rising expectations, the next government will have to undertake many tasks that the current one has shirked. In Serrinha a grateful Ms da Silva thinks Ms Rousseff is the right person for the job. “If I could vote for Dilma a thousand times, I would,” she says. Millions of her compatriots, who believe Mr Neves offers a better prospect of the changes Brazil needs, will be relieved that she cannot.