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The room went quiet once Jacques Rogge, president of the International Olympic Committee, received the envelope that held the much-awaited decision. Rio de Janeiro and Madrid were the finalists to host the largest sportings event on the planet, as Chicago and Tokyo had been eliminated in previous voting rounds. The stakes were high and the competition had been notoriously stiff. Even President Barack Obama had done some lobbying on behalf of his hometown, the first sitting U.S. president to do so.
Rogge struggled to open the envelope as if purposely adding drama to the small piece of silence that turn into jubilation when he said Rio was the winning city. The Brazilian delegation went wild, with officials cheering right and left. Then President Luiz Inácio Lula da Silva broke into tears. A South American city was trusted to host the Olympics for the first time in history, thanks in many ways, to Brazil’s commendable growth.
“Today is the most emotional day in my life, the most exciting day of my life,” Lula said. “Now, we are going to show the world we can be a great country. We aren’t the United States, but we are getting there, and we will get there.”
Seven years have passed since that Olympic committee meeting in Copenhagen and Brazil — Latin America’s largest economy — is now an ailing giant. Three presidencies, a pending impeachment trial, high-profile corruption scandals, and a massive recession have pushed the country into a historic downturn that took many analysts by surprise. The Rio Olympics start today and Brazil is suffering under a spotlight that has shined on it almost nonstop since it hosted the World Cup in 2014. Only three other countries have dealt with the financial expectations of managing the World Cup and the Olympics back to back. Yet only Brazil has done so in the wake of both a global economic downturn and a historic economic contraction of its own amidst losses in its largest company, Petrobras.
Petrobras, a publicly owned energy company, is facing the aftermath of a mismanagement and corruption scandal that cost Brazil at least $30 billion in gross domestic product (GDP) last year and is much to blame for the slump. Yet experts in the United States and Brazil told ThinkProgress the Brazilian dream of prosperity so promising less than a decade ago became a nightmare not just because of the Petrobras scandal, but also in part due to mistimed policies and external factors beyond the country’s control.
The long, bumpy road to growth
Brazil’s economy has been characterized by booms, busts, and staggering poverty rates over its history. Just 25 years ago, 66 percent of Brazil’s rural population and 38 percent of its urban residents lived below the poverty line, according to the Inter-American Commission of Human Rights. Mismanagement has been a prime issue. Excessive spending and borrowing, and over-reliance on volatile export markets have made Brazil stumble every time the world’s purchasing habits change. So in a way, the latest downturn is an extension of historic problems.
When it was a Portuguese colony, sugar gave Brazil a massive revenue push until the end of slavery raised costs and other countries entered the market further harming prices. Then, as the 20th century unfolded, the country thrived in gold, then in coffee, then in rubber, and soybeans — all while experimenting with dictatorship-appointed technocrats who devalued Brazilian money to encourage foreign trade, and engaged in massive borrowing to finance infrastructure projects like dams or highways.
At first, these all worked. By the early 1970s, economists talked about the Brazilian miracle. Its GDP showed double-digit growth, according to World Bank data, and over the next decade, it grew to have the tenth-largest gross national product in the world. But the country relied too much on foreign oil, and couldn’t keep up with the series of global oil shocks that dried up consumption and foreign investment through the 1970s. In 1981, just some 10 years after an unprecedented boom, Brazil entered the “Lost Decade,” the worst economic recession of the country’s modern history.
“When Brazil is growing it grows faster than the United States, but then those conditions exhaust themselves and BAM — they get a significant recession, or if it’s not a recession, dealing with some other really awful externality,” Mark S. Langevin, director of the Brazil Initiative at George Washington University, told ThinkProgress.
It was a terrible mess, particularly because gains up to that point had benefited only the lucky few. During the 1980s, Brazil’s inequality was the second highest in the world, with only Sierra Leone doing worse. Some economists dubbed Brazil as Belindia, a portmanteau describing a nation where a small group enjoyed the level of affluence seen in Belgium, while most experienced the type of poverty seen in India. Conservative figures show that 24 million Brazilians, or some 17 percent of the population, were below the poverty line in 1990. Some four years later that number had doubled, though it would soon be in decline.
The second miracle
In the mid-1990s Brazil began resurging with the introduction of the Real Plan, a series of policies that included a new currency called the real — and other measures that quickly lowered rampant hyperinflation.
But the real promising growth came in the 2000s, when a new commodity boom raised prices for myriad Brazilian agricultural products, including cotton, coffee, soybeans, beef, sugarcane, and ethanol. That boom continued through to the present. The country is now one of the world’s largest agricultural producers and a top exporter of the most widely traded crops. In 2000, Petrobras, Brazil’s state-owned energy company, also discovered a number of sizeable oil deposits that rivaled the most promising offshore oil fields found in Kazakhstan, according to the Economist. Oil brought the biggest investment plans in the history of the country, and the industry became 20 percent of the economy.
“We had about a decade of an environment of economic stability, [and] socio and economic growth,” said Eduardo Svartman Munhoz, political science professor at the Federal University of Rio Grande do Sul, in an interview with ThinkProgress.
More than 30 million of the country’s 200 million people left poverty, said Svartman, and access to medicines and education grew, too. All these came while Lula — who held office from 2002 to 2010 — put in place politics committed to social inclusion.
The minimum wage increased, while unemployment fell from about 12 percent in 2003 to slightly over 5 percent a decade later. Around the same time, Brazil’s income inequality also dropped. According to its Gini index — a measure of a country’s income inequality in which zero means high equality and one indicates otherwise — Brazil inequality declined from 0.6 to 0.53, making it still the 16th most unequal country in the world.
As Brazil made progressive strides domestically, its international profile grew. In 2007, it won the bid to host the 2014 World Cup, something it hadn’t done since 1950. And not long after, it won the Olympics bid, further proof that the world believed Brazil could manage years of planning and billions in infrastructure investment.
“They were on a roll and they decided to take on these challenges as part of this broader [plan] to develop the country,” George Washington University’s Langevin said.
The fall
The U.S. market crash of 2008 was the beginning of the end of Brazil’s affluence. For a couple of years, Brazil proved resilient as a result of stimulus spending like credit subsidies, and other fiscal policies that meant to inject money into the economy. Lula, who had seen the peaks and valleys of Brazilian finances over the years, “was really thinking that the global economy would come back,” said Langevin.
But the market didn’t recover as quickly as lawmakers hoped and spending policies continued for too long driving up the country’s debt. “When you engage in stimulus policy, that shouldn’t last longer than a year,” Langevin said. Yet Brazil started to cut expenditures only after Lula’s successor Dilma Rousseff was re-elected in 2014. (Rousseff was later suspended from the presidency in March after she allegedly tampered with the country’s financial figures.)
Petrobras, which accounts for 10 percent of the Brazilian economy, also suffered when the price of gasoline was kept artificially low to boost the economy. The country’s growing ethanol sector was next when it became less competitive to oil, and that sent shockwaves through the economy due to Brazil’s status as the world’s largest sugarcane ethanol producer. After declining for years, unemployment began increasing in 2014 as wages declined, the Economist reported.
Soon, bribery scandals in Petrobras and political turmoil made matters worse, tainting presidents, ending the rule of the Workers’ Party, and dragging down Petrobras along with the economy.
“The fact is corruption is a very deep issue in the Brazilian political system,” said Svartman.
… And the scandals
High-profile corruption accusations have been ongoing in Brazil for years. But as the economy tanked, the bribery scandal around Petrobras made things even worse.
Last year, Brazilian prosecutors accused top Petrobras executives of colluding with companies for almost a decade to overcharge Petrobras for things like construction projects or servicing a refinery. More than a hundred indictments have come from the investigation, according to the according to the New York Times, and nearly $3 billion in bribes were distributed. Politicians and executives have been arrested, including Lula.
Petrobras has also been accused of inflating its assets. A study released last year found that the company’s mismanagement and planned investment reductions would bring layoffs in construction that would cost Brazil at least $416 million last year.
Scandals and economic struggles have weakened the balance of power that the Worker’s Party had achieved within Brazil’s complex, multiparty political system, said Svartman, forcing governability to suffer. Meanwhile, Rousseff faces an impeachment trial that could start in September. She is accused of manipulating her government’s budget to hide poor fiscal performance, something Rousseff denies.
“It’s really bad luck in terms of all these things happening together, precisely when they are holding the summer Olympics,” said Langevin. Yet he noted that despite the dire economy, the corruption scandals, and the countless controversies surrounding the games, the Rio Olympics may deliver more than expected. After all, Rio de Janeiro has experience with mega events as it yearly holds the largest carnival in the world for as many as five million festival goers. “Rio has been a tourist city for over a hundred years,” he said, adding the city is definitely up for a big party.