Brazil was booming when it won the right to host the Olympics. But as the Games begin it is suffering its worst economic crisis in living memory. What went wrong?by George Magnus / July 14, 2016 / Leave a comment
Published in August 2016 issue of Prospect Magazine
When President Dilma Rousseff lit the Olympic torch in May at the presidential palace in Brasília, the capital of Brazil, to the cheers of schoolchildren and the sound of Air Force jets flying past, the opening of the Rio Games felt tantalisingly close. Yet less than two weeks later, after a 20-hour debate, the Brazilian Senate voted to bring impeachment proceedings against Rousseff. She was immediately suspended from office for six months. The overwhelming Senate vote (55 votes to 22 in favour of opening proceedings) suggests that when the impeachment vote is finally called, the requisite two-thirds majority will force her permanently from office. Her one-time coalition partner, Michel Temer of the Brazilian Democratic Movement Party, now acting President, will then take office until the next scheduled elections in 2018. It will fall to him to steer the nation through not only a constitutional crisis, but also a grinding economic crisis: Brazil is now going through its deepest recession since records began at the start of the last century.
How did it come to this? Only seven years ago, the Olympic games were awarded to Rio as a sort of exclamation mark on Brazil’s economic success and self-confidence. But now the country’s economy is broken, already 9 per cent smaller than at its peak in early 2014, even though it isn’t at war and there is no financial crisis, run-away inflation or any other large external factor. Brazil went through a 15-year boom driven by high commodity prices and plentiful credit. That boom is now over and deep-seated economic weaknesses have become visible. The amount of money that Brazilians save is 14 per cent of GDP—that’s not enough. The amount they invest is about 17 per cent of GDP—again, that’s not enough. Its emerging market peers such as China and India have savings and investment rates two to three times that size. Although Brazil’s banks are in good shape, the country boasts successful retailing companies and Brazilian aerospace conglomerate Embraer battles for the title of the world’s third largest aircraft manufacturer, much of Brazil’s corporate universe is mired in cumbersome regulatory and tax arrangements. The country suffers from insufficient infrastructure, low integration into the world trading system, shortages of skilled workers and low productivity growth.