Haddad vs Bolsonaro: Clash of Economic Models

By: Kathyrn Kellyne Chong, Shreya Kasibhatla, Takyeon Kwon

Research Head: Shreya Kasibhatla Editor: Akshat Daga

Illustration by Ng Jia Ying Abstract Amidst slow recovery from recession, political and socio-economic issues plaguing Brazil’s economy, the 2018 Brazil Presidential Elections brought far-right candidate Bolsonaro head-on with leftist Workers’ Party (PT) candidate Haddad. This article explores the economic models proposed by both candidates and whether the elected president, Bolsonaro can turn the tide for Brazil’s economy.

1. Brazil’s Economy in 2018 Brazil suffered its worst-ever recession in 2016 (BBC, 2017) causing 7% real GDP contraction in 2015-2016 and lacklustre growth in both 2017 and 2018 (IMF, n.d.). Coupled with poor economic outlook and increasing debt consisting over 80% of its GDP (IMF, n.d.), corruption scandals caused debilitating investor confidence and spike in unemployment rate from 6.5% in 2014 to 12% in 2016 (BCB, n.d.). According to a 2018 Gallup poll, one-third of Brazilians struggled to buy food and a quarter could not afford shelter. 2. Haddad & Bolsonaro’s Background After the original PT presidential candidate and former president, Lula was jailed for corruption, former education minister and mayor of Sao Paulo, Fernando Haddad was nominated as PT’s candidate for the 2018 presidential elections (Child, 2018) and eventually lost to Bolsonaro (Charner and Reverdosa, 2018). Jair Bolsonaro was a right-wing candidate from Social Liberal Party though he formed his new party named Alliance for Brazil later. Regarding economy, he insisted on strong neo-liberal policies including pension reform, austerity, and privatisation.

3. Proposed Economic Models

3.1 Haddad’s Model Haddad proposed a social-developmentalist, progressive model, targeting the following issues: Public Spending Limit: He believes public spending limit impedes Brazil’s investments in necessary sectors like education and health (Europartner, 2018). Pension Reform: Haddad prefers cutting national deficit by boosting economic growth and employment, instead of cutting pension benefits as previously proposed by Michel Temer, Brazil’s former president from 2016 to 2018 (Christofaro, 2018). Tax Reform: Haddad proposed progressive income tax model: reduce taxes for the poor by taxing the rich more, and value-added tax to replace other taxes (DiLorenzo, 2018). Brazil is ranked 184 out of 190 countries in the World Bank’s ‘Paying Taxes 2018’ report, indicating it is a difficult country to do business in, given high taxes and complex bureaucratic processes. To boost business prospects, he proposed cutting interest rates and increasing credit supply (Riveroll, 2018). Labour Reform: Haddad planned to introduce labour-friendly laws and programs including workers’ training to meet future production demands (Paraguassu, 2018), after condemning 2017 labour reform which relaxed labour laws, allowing flexible working hours and voluntary contribution to unions (BBC, 2017). Privatisation: Despite public concerns regarding state-owned companies’ inefficiency, Haddad proposed limiting privatisation of state-owned companies’ which he believes are critical for Brazil’s development (Riveroll, 2018).

3.2 Analysis of Haddad’s Model A model similar to Haddad’s was adopted from 2003 to 2016, during which PT was in power. This model has achieved steady 3.3% economic growth and decreasing poverty (Phil's Stock World, 2018). However, the 2011 plunge in global commodity prices damaged exports and shook Brazil’s stability (ECB, 2016). Government corruption scandals and the 2016 recession caused public discontentment (Leahy and Schipani, 2018). Haddad's plan to reverse important reforms would initially cause falling business confidence and weakening economy. Ultimately, weak legislative coalition due to poor relations between PT and its former coalition bloc after the latter supported impeachment of the former President Dilma Rousseff, and economic pressures would compul adoption of practical economic approaches. Business sentiments would then improve, though no structural reforms would mean limited investment and growth (BMI, 2018).

3.3 Bolsonaro’s Economic Model Austerity: As a part of the attempts to reduce the debt of Brazil, Bolsonaro began austerity of his government, mainly from education, welfare programs, and natural environment. The government released the proposal which includes 18% cut in education spending in 2020 compared 2019 (Iolanda, 2019). This cut includes the fall in the budget of public universities by nearly a quarter and the suspensions of the scholarships which used to be given to the master and doctoral students. Many Welfare programmes including ‘Minha Casa Minha Vida’ and ‘Bolsa Familia’ in Brazil experienced cuts in their budget under Bolsonaro. The spending for the other social expenditures including occupational safety, health inspection, and technical education was cut as well (Thiago, and Danielle, 2019)

Pension Reform: In 2019, Bolsonaro’s pension reform, which increased the minimum wage to receive pension passed the parliament. Financial Times (2019) predicted the reform would like to reduce the burden on the government by $194bn over the next decade. Privatisation: Public sector occupies a huge portion of Brazilian economy. In OECD, Brazilian economy possesses the biggest public sector in terms of the proportion of public sector to GDP (Diego, 2019). Bolsonaro started privatising public companies. He already privatised 12 airports, port terminals in Santos and Paranaguá , and part of the North-South railroad (Brenno, 2020).

Though many of these assets were sold to other government sectors including the subsidiaries of Petrobras, still it is undeniable Bolsonaro already made a huge step towards privatisation. The government raised BRL 96 billion in total from the privatisation. The raised finance would be spent on the government’s plan to construct more railroad and other infrastructure to reduce its reliance on roads for transportation (Anthony and Jake, 2019).

3.4 Analysis of Bolsonaro’s Economic Policies

Bolsonaro’s policies aimed at reducing public debt succeeded in restoring investors’ trust in Brazil’s economy. It is shown by the bond yield of the Brazilian government. In the graph above, Brazil’s 10Y bond yield is falling, indicating now Brazil can pay smaller interest to borrow money owing to regained confidence in Brazil’s economy.

Furthermore, his policies which reduce the importance of the public sector in the economy would likely increase efficiency in Brazil as he had intended. The public sector of Brazil has long been inefficient. Brazil currently spends 10% of its GDP on paying its public servants’ salaries and this expenditure has risen by 48 percent between 2007 and 2017 (Felipe, 2019). Therefore, Bolsonaro’s policies to restrict the government influence on the economy would be a remedy for Brazil’s inefficiency problem.

However, his policies could worsen inequality in Brazil. In 2017, its GINI index recorded 53.7 (Worldbank, n.d.). During PT’s terms, the GINI index continuously decreased owing to the welfare programs which Bolsonaro’s austerity targets. Though the Ministry of Economy announced that the pension reform can help even the poorest 10% of Brazil (Jamie, 2019), it is doubtful if the report is free from political pressure. His policies might worsen Brazil’s brain drain as not only the poor, but also the educated labour force, including Masters and Ph.Ds graduates, are under his austerity (Shannon, 2019).

4. Conclusion 4.1 Brazil’s Economic Projections

Brazil’s economy experienced slow growth of about 1% in Bolsonaro’s first year as president (Statista, n.d.). Economists forecasted faster recovery from recession this year at about 2%, but would lower given the recent coronavirus (Biller, 2020). The GDP is projected to grow at a stable 2% over the next few years, which would be a slow but nevertheless improved recovery for Brazil’s economy.

4.2 Impact on Brazil’s Trade Relations The fall in Brazil’s trade surplus by 20.5% in 2019 (Passport, n.d.) is likely attributed to the rise in domestic demand which spurs imports and slowing foreign demand for exports with global economic unpredictability due to the U.S.-China trade war and political and economic turmoil across Latin America. Given that these global and regional complications are still unresolved, Brazil’s trade balance is likely to fall in the meantime.

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