What’s the Matter with Brazil?
Brazil has a long tradition of infringing on the rule of law whenever outsiders risk taking power and pose a threat to the existing “order.”
In the first round of Brazil’s elections on October 4, the incumbent leftist president received 54 million votes, while a center-right candidate received 56 million, contrary to opinion polls that predicted an easy win for President Lula da Silva. Voters also elected a markedly more conservative Congress, as along with many state governors and legislators.
Markets opened on Monday, October 5, with record jumps in the Brazilian stock market, an unheard-of 8 percent appreciation of the local currency against the US Dollar, and a significant reduction in the interest rates investors demand to buy Brazilian government bonds.
This past Sunday, October 25, Lula won the runoff election with 64 million votes while Flavio Bolsonaro, the center-right candidate, got 59 million. The market reversal was monumental. Brazilian assets have been repriced violently, with the local currency suffering more than 10 percent depreciation, the American-traded ETF that follows the Brazilian stock exchange losing almost 30 percent of its value, and some growth bets on Brazil losing as much as half of their value.
The change in the voting cannot be explained by conspiracy theories about fraud. Yes, there are no reasons to believe that the elections were managed by an independent and impartial judiciary, which allowed Lula’s administration to promulgate some populist measures between the two elections, which is illegal. Most likely, the profligacy and imprudence of the Federal government by showering voters with populist transfer payments worked in Lula’s favor. So far, voters have been shielded from the country’s deteriorating macroeconomic situation. On the other hand, the electoral results, with about 49 percent of the voters supporting the opposition, show a sense of malaise that extends beyond the economy.
Much of this mood stems from crime and impunity for corruption and malfeasance that the public sees in government officials. In addition, large swaths of the electorate no longer identify with the values they see depicted in the Novelas (soap operas), commentary, and editorial decisions of big media, which, thanks to social media, has lost the monopoly on shaping public opinion.
However, to better understand what changes and what doesn’t in Brazil with this election, we need some critical distance.
In 2019, the Brazilian Supreme Court, on a technicality, freed Lula da Silva from jail, where he was serving time for the biggest corruption scandal in Brazilian history. Soon after,, and Lula was allowed to run for office.
The current members of the Supreme Court include former lawyers from his party, his personal criminal lawyer, former cabinet members from his previous administrations, and other followers of “popular” movements linked to him.
An ad hoc tribunal led by Supreme Court members has the mandate to run the elections. to ensure the trustworthiness of the elections. Those decisions have decisively shaped the sense of disenfranchisement felt by many centrist and center-right-inclined voters, which may help explain the violent demonstrations four years ago against Lula’s election for his third term.
Then the Supreme Court subverted the rule of law by judging and finding guilty of “insurrection” people who had not participated in the demonstrations, and put in jail for 27 years the former President Jair Bolsonaro, who was not even in the country at that time, creating a deep sense among a plurality of Brazilians that the Lula administration, the Supreme Court, and the traditional media are united against them and willing to subvert the constitutional order to impose their will.
To make sense of that, we need even more critical distance. Brazil lived under a military dictatorship from 1964 to 1985. During those years, the leftist opposition waged a guerrilla war, aside from bank robberies, kidnappings (including of an American diplomat), and political assassinations. They promised to abandon such “armed struggle” once their parties were allowed to be reorganized and an “ample, general, and unrestricted” amnesty was granted. At the time, many observers, including this author, believed such a promise meant adherence to the rule of law, a commitment to play the political game while respecting the norms established by the 1988 constitution, which “re-institutionalized” the country as a liberal democracy. Boy, how mistaken I was…
Next time someone tells you that the institutions of a liberal democracy are not rules of justice, but instruments of oppression of the “ruling class”, and therefore, as a corollary, no respect for them is necessary, you should believe them.
The guerrilla war indeed ended, and despite the sympathy shown by the left towards organized crime, political violence has been kept to a minimum; still, Lula’s party captured important institutions of government, and unabashedly used them, such as the state-owned oil company, the development bank, funds to subsidize cultural activities, and now, we realize, even the judiciary in obviously unconstitutional ways to remain in power. The billions of dollars in unaccounted-for bribe money received during Lula’s party’s tenure in office have the potential to severely disrupt the political process if that has not already happened. Since you have followed me so far, kind reader, you are entitled to ask yourself how the constitutional order survived in Brazil, and to answer that question, we need to position ourselves once more at an even greater critical distance.
Since its first (1824) constitution as an independent country, Brazil has had, either as part of its “formal” constitution or its “real” constitution, a “fourth” branch of power: the “moderating” power. Except for brief periods in its history as a sovereign nation, Brazil’s constitutional order has been under the “tutelage” of whoever exercises that power. The rationale is simple: it's fine for the kids to play the game of politics from their positions in the three branches of power, but if things go awry, the “adults in the room” take charge and restore “order.” During the monarchy (1822-1899), the emperor held the “moderating power” both formally and de facto, and exercised it except for a brief period (1831-1840) when political institutions operated without “supervision” because the second emperor was underage. With the military coup that dethroned the monarchy and the eventual establishment of a representative republic, the “moderating” power passed to the military, which intervened in the political process about half a dozen times between 1889 and 1988. With the reestablishment of democracy, at the end of the military dictatorship, Brazil started again a short period of “unsupervised” political life, which lasted until 2019, when the Supreme Court took de facto ownership of the powers not established by the “formal” constitution of the country, with the lame excuse (in my point of view) of “saving the democracy.”
So, now you have it. Brazil has a long tradition of infringing on the rule of law whenever, in the political establishment’s view, outsiders risk taking power, threatening the existing “order.” The permanence of those abuses against the constitutional order creates all sorts of moral hazards, such as a high tolerance for corruption and the need to co-opt political support to maintain a sufficiently broad “coalition” among the existing elites.
That is, incidentally, the reason for a second pillar of Brazil's “real” constitution: financial repression. Since the mid-nineteenth century, the state has centralized control over available savings, and credit is allocated not by the market but by political criteria, with such patronage used to secure support among the business elite for whoever is in power at the moment.
The recent scandal surrounding the bankruptcy of Banco Master further undermined confidence in the Supreme Court when unjustified contracts between partners of some Supreme Court judges and that bank became public, along with attempts by those judges to pressure public authorities to bail out the failed institution.
Senator Flavio Bolsonaro's first-round victory in the presidential election and the center-right's strong results in Congress gave Brazilians and investors hope that the constitutional order could be restored to the status it had during the 1988-2019 period. That explains the exceptional performance of macroeconomic indicators before the runoff. The frustration of those hopes after Lula’s final victory explains the violent shift in the mood of investors.
It is not a mere alternation in power that was frustrated; it is the restoration of the rule of law that investors now doubt. Remember, the Supreme Court still sees itself unconstrained by the Constitution, Lula is still in power, and only G’d knows what they are willing to do to “moderate” the political process. The fact that a strong majority of the remaining and recently elected senators (49 out of 81) have explicitly committed themselves to open impeachment proceedings against some Supreme Court justices may or may not be sufficient to deter future abuses of their powers, since it is doubted that, with the patronage the executive branch can offer, such a majority will remain united. Not to mention that the Supreme Court may well find grounds to nullify some of their mandates.
For the good of Brazil and to transform Brazil again into a reliable partner for the United States in South America, a truly democratic country where the rule of law prevails, let us hope I am wrong in my analysis.
Leonidas Zelmanovitz is a Liberty Fund Senior Fellow and a part-time instructor at Hillsdale College.
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