Brazil's presidential campaign

Falling in love again with the state

Just rhetoric, or is the government learning the wrong lessons from the country’s economic rebound?

WITH each new figure it becomes clearer that Brazil’s brief recession of 2009 was a fall onto a trampoline. The economy is still bouncing upwards: it grew by 2% in the fourth quarter of last year compared with the previous three months, and forecasts are for growth of up to 6% this year. With an election due in October, this is cause for much official self-congratulation. The economy’s new-found resilience has also revived the belief of Brazil’s leaders in the economic role of the state.

To mark this year’s 30th anniversary of the founding of the ruling Workers’ Party (PT) its presidential candidate, Dilma Rousseff, gave a long interview for a celebratory book in which she argued that “during the crisis, after the failure of Lehman Brothers, it was [state-controlled] institutions like the Banco do Brasil, Caixa Econômica Federal and the National Development Bank (BNDES) that prevented the economy from being shipwrecked.” Furthermore, the government pursued “a clear policy to strengthen Petrobras”, the state-controlled energy giant, “rather than to weaken it.” In other words, Brazil’s state capitalism succeeded where the private sector failed.

This might be dismissed as pre-campaign rhetoric to win over members of a party that Ms Rousseff joined only in 2001. For much of its life the PT believed in old-fashioned socialism. It was only after Luiz Inácio Lula da Silva, its founding leader, dumped this that he was elected president, at the fourth attempt, in 2002.

For all the rhetoric, the election is unlikely to alter fundamentally the balance between private enterprise and the state in Brazil. The government lacks capital to build roads, ports and airports, and will continue to look to the private sector to do so. When Ms Rousseff is not praising Brazil’s state companies she often talks about the need for partnerships between the state and the private sector. And some believe her running mate might be Henrique Meirelles, the orthodox governor of the Central Bank.

But there is plenty of evidence that Lula, who many expect would remain the power behind the throne if Ms Rousseff were to win, himself now believes that a bigger role for the state in the economy would be good for Brazil.

Lula has created eight new state companies. Most are fairly small outfits for specific tasks, such as energy research. A recent proposal to revive Telebrás, the defunct state telecoms monopoly, to provide broadband internet services to the poor, looks different. The private sector does not provide services in poor, rural areas, because the investment involved would be unprofitable. This irritates the government, which considers access to the internet to be a matter of “citizenship”. But rather than subsidise customers to encourage telecoms companies to invest, the government wants to go into this business itself.

The state’s economic clout is expanding in other ways. In January Petrobras, which already has its hands full with a massive investment for deep-sea oil, raised its stake in Braskem, a big private-sector chemical company, by 2.5 billion reais ($1.4 billion). Lula has announced that Eletrobrás, a state-controlled electricity company once seen as almost vestigial, should be expanded to become a “Petrobras of the electricity sector”. Meanwhile, BNDES and the pension funds of the big state companies have increased their holdings in many of Brazil’s largest private firms. In the case of BNDES, this has been part of a government policy to create Brazilian champions that are big enough to compete abroad.

For some opponents this is all retrograde. Paulo Renato Souza, the education minister in the São Paulo state government and a close ally of Ms Rousseff’s main rival for the presidency, José Serra, says: “We have had 15 years of continuity, but in the past year things have changed. This is the old PT, the party that we saw in the elections of 1994 and 1990.” Amaury de Souza, a political consultant, argues that “the government used last year’s crisis as an excuse to push a particular ideology.”

Yet the government’s view of how Brazil withstood the financial crisis is at least partly right. It was useful to have state-controlled lenders when credit from abroad dried up at the end of 2008. Banco do Brasil, the biggest state bank, stepped into the breach. This helped to confirm the views already held by Ms Rousseff and the finance minister, Guido Mantega, that the state should use its power to “induce” growth, rather than make itself leaner with more privatisations, according to a civil servant in the finance ministry.

But this is not the whole picture. Brazil’s top private banks fared well too. There were no big bank failures, and no need for government bail-outs—testament to the health of the banking system that emerged from a previous crisis in the mid-1990s. High reserve requirements, which force banks to park much of their capital with the Central Bank, helped too.

The rush to reinvent state companies also ignores the success of privatisation. Petrobras became a world-beater in offshore drilling only after two-fifths of its shares were floated on the stock exchange and it began to act more like a private company. Since its privatisation Vale, which the government often berates for not adding value to the raw materials it exports, has transformed itself from a medium-sized conglomerate to one of the world’s biggest mining companies. Embraer, which makes aeroplanes, has a similar story.

On the other hand many of the old state behemoths were costly failures. Siderbrás, a steelmaker, went bankrupt twice. Telebrás and its regional subsidiaries were so inefficient that they spawned a vigorous secondary market for telephone lines. In their 30-year life they installed 10m fixed lines and registered 1m mobile phones. Since they were disbanded 15 years ago, Brazil has installed 40m fixed phones and now has 174m registered mobiles.

In any event Ms Rousseff has started an important debate, which should reverberate over the next six months. As Fernando Henrique Cardoso, who preceded Lula as president, puts it, this is over whether Brazil would do better with a “bureaucratic capitalism in which the state orders and resolves things” or a “competitive, liberal capitalism”.