Brazil: Nanny nation

The basis of economic growth that raised Brazil’s living standards is now deteriorating, writes Michener.

Dilma Rousseff (C), presidential candida
Rousseff's "mission" is to address poverty, inequality and discrimination that sustain "nanny culture" [AFP]

At 7.2 million, Brazil has the largest number of domestic workers in the world, according to a 2013 report from the International Labour Organisation. While the report is based on estimates, and the data for China and India are unreliable, Brazil’s numbers are still striking.

They are not entirely surprising, however. From the 16th to the late 19th centuries, Brazil became home to approximately 35 percent of all slaves who came to the Americas, four times as many as went to the US. Brazil was also the last country in the hemisphere to abolish slavery, in 1888.

A culture of domestic workers persisted due to high rates of poverty and inequality and poor investment in primary education. While this culture is slowly disappearing, its signs are still visible everywhere.

Most middle to upper class apartments still have a quarto de empregado, a diminutive domestic worker’s bedroom. And Rio de Janeiro’s exclusive clubs are full of black and brown nannies accompanying white toddlers and wearing obligatory white clothing.

Reducing poverty

On paper, the mission of the Workers’ Party presidents, Luiz Inacio Lula da Silva and Dilma Rousseff, is to address the poverty, inequality, social policies and discrimination that sustain Brazil’s nanny culture. They have made some impressive headway since Lula first took office in 2003.

The Workers’ Party put into place affirmative action legislation and expanded the conditional cash transfers that keep children in school in exchange for sustenance wages. Indeed, programmes such as Bolsa Familia (Family Subsidy) and Fome Zero (Zero Hunger) are partly credited with raising more than 27 million Brazilians out of poverty since 2003 and improving educational enrolment.

These programmes were made possible by economic growth, a global boom in commodities, and reinforced by sound macroeconomic policies put into place during the mid-1990s. Clearly, social programmes helped bring families out of poverty. 

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But the relatively small reductions in Brazil’s inequality (Gini) co-efficient suggest that “all boats rose”: growth fuelled an accumulation of wealth across society, with the poor making some comparative gains and becoming less poor.

The basis of economic growth that raised Brazil’s living standards is now in a process of deterioration. The government engaged in creative accounting in order to avoid a primary deficit in 2012, but effective public sector debt still increased for the first time in six years.

Meanwhile, Brazil broke all previous records for tax collection in 2012, even as its tax to GDP ratio soared above 36 percent, the highest in the Americas. High taxes matched by lax spending are only part of the strategy Brazil’s “nanny state” used to address the problems – its “nanny culture”. The other, more pernicious, strategy is interventionism, which promises to scare away badly needed foreign direct investment. 

Lower energy prices

The government of President Lula da Silva froze gas prices in 2005, a move that served to control inflation, promote car ownership and please voters heading to 2006 presidential elections. Meanwhile, Brazil’s state-controlled publicly traded oil company, Petrobras, continued to invest heavily in its new oil fields and equipment, despite gas prices being frozen since 2005.

It is not hard to see where this formula went wrong: with frozen gas prices, shrinking profits and debts mounting, Petrobras’ flagship stock has dropped 50 percent since 2009. The government finally agreed to raise gas prices less than two weeks ago.

Of course, the government sought to offset the inflationary effects of a rise in gas prices by intervening in other areas. Just before letting gas prices rise, President Dilma Rousseff went on national television to announce an 18 percent drop in electricity rates.

Criticised by the media and opposition for this campaign-style announcement, Rousseff intervened in the electric utility industry despite the opposition of Brazil’s largest energy producers.  

Utilities need money to expand production – the key to bringing prices down – and this latest intervention means tighter margins, less cash flow and spooked investors. The in-stock of Eletrobras, Latin America’s largest power company, has dropped 54 percent since August 2012.

Editorialist Miriam Leitao, who works for the country’s largest media organisation, O Globo, points out that while the US Dow Jones and other markets have recently broken stock records, Brazil’s BOVESPA is down from 70,000 in January 2011 (when Rousseff took power) to 59,000 today – a clear sign that Brazil is “off the path”. 

Brazilian authorities are launching a road show to secure massive international investment for infrastructure modernisation prior to the 2014 World Cup and 2016 Olympics. But it is difficult to imagine that investors will see Brazil as an attractive place to put their money when unilateral decisions jeopardise the predictability of Brazil’s primary industries, much less the country’s economy.

Lower interest rates

Interventionism has also put the independence of the Central Bank to question. The Bank cut the benchmark interest rate nine times over the last year or so, from approximately 12.5 to 7.25 percent, due to pressure widely attributed to President Rousseff. The Financial Times newspaper even poked fun at a news release sent out by Brazil’s Central Bank reassuring investors of its independence. 

“Brazil was the last country in
the hemisphere to abolish slavery, in 1888.”

Lower interest rates have had several unintended consequences. First, lower interest rates increase the likelihood that Brazil may fail to meet its target inflation rate of 4.5 percent for the fourth straight year (inflation currently runs at 5.7). Brazil has been experiencing inflationary pressure due to high unemployment rates and double-digit real wage increases.

Second, lower interest rates have also contributed to consumer debt and arrears on debt payments. At the beginning of President Rousseff’s term, 5.7 percent of Brazilians found themselves more than 90 days behind on their debt payments. That number is now more than two percent higher, at 7.9 percent.

Third, lower interest rates are producing smaller dividends on social security deposits. Beforehand, high returns on principal helped the government meet its bloated pension obligations. But according to Jose Fajardo, finance professor at the FGV University, lower interest rates will either force pension managers to take higher risks or dip deeper into the Treasury.

Replacing one nanny state with another

Brazil’s comparatively lavish pensions are the vestige of an older “nanny state”, a state that coddled the salaried middle-to-upper classes, especially public sector employees. Extravagant social security privileges – such as pensions for the daughters of deceased military officers – added to Brazil’s fiscal malaise.

Social security obligations kept interest rates high and lowered the ability of governments to invest in education, health, infrastructure and poverty reduction. The economic distortions of the current nanny state – one that is ostensibly concerned with bettering the position of the lower classes – may be no less egregious than those of yesteryear.

This is particularly true in terms of remuneration. The country’s 513 congressional representatives each earn roughly US$190,000 per year – more than US congressman. Put differently, Brazilian congressmen earn a multiple of 15 times the median income in Brazil, whereas the ratio is about 3.5 in the US.

The current problem is not so much public sector privilege – an embedded feature of the Brazilian state – but old school electoral populism and unilateral interventions. These political anachronisms spook investors, truncating the country’s long-term prospects for sustained economic growth. Without growth, the social policies that can transform Brazil’s domestic workers into better-earning professionals may lose out to greater economic urgencies.

Gregory Michener is Assistant Professor of political science and administration at the Fundacao Getulio Vargas (EBAPE) in Rio de Janeiro.