Brazil’s Backstop: The Modernization of Brazilian Agriculture and its Contributions to National Development by Mark Langevin

Brazilian agriculture is a fundamental pillar of national economic development in the 21st century. Baer reminds that agriculture has been the “engine of economic growth” since the colonial era (2014:281) and Barros reports that “Agriculture was the foundation upon which Brazil’s economic system functioned up to the beginning of the twentieth century (2009:83).” Agriculture was exclipsed by manufacturing and services during the twentieth century, but the onset and deepening of Brazil’s import substitution industrialization (ISI) model and the rapid pace of urbanization required signficant income redistribution from agriculture and mining to finance mounting fiscal demands placed upon the state. Today, Brazilian economic and fiscal stability continues to be anchored to agriculture and agricultural commodity exports. Agriculture is Brazil’s backstop.[1] 

Read the entire Brazil Initiative Working Paper here.

[1] The term “backstop” is used in finance and refers to “the act of providing last-resort support or security in a securities offering for the unsubscribed portion of shares. A company will try and raise capital through an issuance and to guarantee the amount received through the issue, the company will get a back stop from an underwriter or major shareholder to buy any of the unsubscribed shares.” Investopedia. Accessed at: http://www.investopedia.com/terms/b/backstop.asp.

Temer and Earmark Populism by Mark Langevin

Brazilian President Michel Temer dodged a bullet yesterday by galvanizing a majority in the lower house of deputies of the Brazilian Congress to vote against his removal and trial by the Supreme Court for corruption. Temer’s approval ratings hover around 7 percent, and most Brazilians want him investigated for corruption; but these documented facts did not dissuade 263 deputies (from a total of 513) from absolving the president.

Why did so many betray the popular will?

Earmark populism is a method for obtaining the votes of congressional representatives and pacifying their constituents at home. President Temer used the promise of earmarks to trigger votes in his favor; and supply his congressional supporters with justification that can be sold to voters back home. According to the Folha de São Paulo’s report, Temer has promised more than 4 billion reais in additional spending in 2017, spread across dozens of earmarks, to obtain the necessary parliamentary support to stave off a trial in the Supreme Court. Contas Abertas also reports that Wladimir Costa, federal deputy from the state of Pará and member of the Solidariedade party, made famous by his tattoo “Temer” received a promise of $7 million reais in earmarks. Costa stated that his tattoo cost 1,200 reais and served as a memorial to Temer, “The best president in the history of Brazil.” His claim does not deserve a response.

Costa’s earmarks will apparently be spent on such programs as sustainable rural development and strengthening the universal health care program SUS in the state of Pará.  These seem to be worthwhile public initiatives, but the use of government funds to secure a vote to avoid prosecution for corruption is ironic and disappointing for those committed to fighting corruption in Brazil. Moreover, most of Temer’s supporters in the lower house of congress voted in favor of the impeachment of former President Dilma Rousseff last year for her fiscal management, her use of the so-called “pedaladas.” Many of these same deputies were willing to accept or coordinate earmarks just as the government appears to be failing to meet its fiscal deficit targets (spending more than forecasted to deepen the deficit).

Remember, many notable economists supported Dilma’s impeachment due to what they argued was fiscal mismanagement. Today, these economists are either silent or stand betrayed by the consequence of their own political action.

The well-respected economist Monica de Bolle defended her support for Dilma’s impeachment in the pages of Terraço Econômico, in part by claiming that the former president was responsible for fiscal mismanagement related to the pedaladas.  It is important to remember that the so called pedaladas were budgetary operations that simply delayed transfers from the Federal Treasury to the Banco do Brasil e Caixa Economica for public programs, including small farmer financial support and the Bolsa Familia social welfare programs.  Bolle and others, including Mansueto Almeida, claimed these budgetary actions were irresponsible at best and possibly constituted the “crime of responsibility” that served as the justification for impeachment. Then came Temer.

Today, Mansueto Almeida remains in his position with Temer’s government, but silenced by the President’s earmark populism to avoid prosecution. Monica de Bolle is a strident critic of Temer, and recently noted that he needs to leave or risk “institutional corrosion” that might place Brazil on the path to become another Venezuela. Ameida, last May, argued that the government must carry out a fiscal adjustment and push forward a reform agenda that can initiate economic recovery, and that two years under Temer is sufficient to place Brazil back on the road to growth and fiscal stability.

Monica and Mansueto are entitled to their critique of former President Dilma and her fiscal affairs. They both spent 2015 and 2016 trying to explain the details of the pedaladas and how they may have jeopardized fiscal stability and economic development.  However, Temer’s earmark populism and Attorney General Rodrigo Janot’s charge of corruption against the president pose a more straightforward challenge to explain. No doubt Monica and many others will bear down on the damage done by failing to achieve the fiscal targets set for 2017, and others including myself, will point to the now obvious connection between earmark populism and congressional efforts to protect the guilty from prosecution. Mansueto continues to work for Temer’s Finance Ministry, but for how long?  How long will it take for Mansueto and his boss, Finance Minister Henrique Meirelles, to understand that the government they work for is now actively working against fiscal stability, economic recovery, and the Lava Jato prosecutions?

I hope it does not take too long because Brazilian democracy hangs in the balance.

Temer and the Brazilian Amazon by Mark Langevin

Brazilian President Michel Temer has stepped back from the country’s commitment to protect the Amazon. Economic recession has pushed people toward the frontier, some in search of work and others in search of exploitative opportunities left by a government unwilling or incapable of enforcing the law. Temer’s government appears to be unwilling to take the necessary measures to combat deforestation.

According to the World Resources Institute, Brazilian deforestation spiked up to 29 percent in 2017. Even though the annual rate is well below historic highs, it signals that the federal government is turning its back on environmental protection and international commitments.

Temer’s willing neglect has consequences. The government of Norway, sponsor of the Amazon Fund, recently announced a cutback in funding of more than $35 million USD due to the “rise in forest destruction.” According to Reuters,

“Norway has invested more than $1.1 billion in an Amazon Fund since 2008 to help Brazil protect the forests, which are under threat from logging and their conversion to farmland.”

Temer responded that

“Brazil was working to protect the Amazon, for example, by expanding national parks.”

However, reasonable people would conclude otherwise. The Financial Times quotes the World Wildlife Federation to report that Temer and his government are poised to pass a new law that opens up the Jamanxim national forest in the state of Pará to the private sector. Temer’s Minister of the Environment, José Sarney Filho, has also reassured landowners in the Jamanxim area that the government is committed to opening up the forest reserve, even though Temer vetoed earlier legislation that would have reduced national forests by 600,000 hectares.

Temer does need to find ways to reboot the Brazilian economy, but risking further deforestation and the support of the government of Norway does not seem like a sensible alternative, especially as the world’s attention is turned toward the “carne fraca” scandal that calls into question Brazilian law enforcement and regulatory control over the production of agricultural exports. Temer should work with both producers, environmentalists, and residents near the forest reserves to path together policies and programs that expand sustainable economic activities that provide prosperity while also highlighting the federal government’s commitment to environmental protection.

Unfortunately, Temer is more worried about his own job, than the Amazon and the people who live there.

Agriculture and the World Trade Organization by Mark Langevin

The Committee on Agriculture Special Session (COASS) of the WTO was held last week on July 19 to 20, 2017. The meeting anticipates the 11th WTO Ministerial meeting to be held in Buenos Aires in December. Nothing surprising happened at last week’s meeting, but a few comments are in order since agriculture remains the largest obstacle to concluding the Doha round in the Trump era.

First, the COASS meeting is important because it provides an arena to advance interests, proposals, and possible solutions to the political and structural bottlenecks that plague the international trading relations between developed and developing nation-states. It is an X-ray that all can see.

Last week the European Union, Brazil, Colombia, Peru and Uruguay floated an updated proposal to gradually phase out domestic subsidies for tradable agricultural commodities, including cotton. The proposal is sensible, really offering member-states the opportunity to decide what level of subsidies should be permitted today, and then setting up a rational system to phase them out, in a graduated process that favors developing nations, but only modestly and during a short time frame. It also allows the least developed nations (few of which are commodity exporters of any consequence) greater latitude.

This element of the proposal reads:

A) Developed Members shall not provide tradedistortingdomesticsupportinexcessof [X%]  ofthetotalvalueofagriculturalproduction  asof[2018],  whiledevelopingMembers shall not provide trade distorting domestic support in excess of [X+2%] of the total value of agriculturalproductionasof[2022]. 

 

Or

 

B) Developed Membersshallnotprovidetradedistortingdomesticsupportinexcessof [X%]  ofthetotalvalueofagriculturalproductionasof[2018],  whileDevelopingMembers shallnotprovidetrade-distortingdomesticsupportinexcessof[X%]  asof[XXXX].  From [2022] until[XXXX],  developingMembersshallnotprovidetrade-distortingdomestic supportinexcessof[X+Y%]  ofthetotalvalueofagriculturalproduction. 

Thisparagraph shall not apply to least developed Members

Of course, the placeholders are key, but global trade liberalization depends on agreeing to their numbers. Otherwise, fences will be built and the Trump era will confirm, possibly codify the process of hand picking markets, diversionary regional trade agreements, and increasing inequalities among member-states of the WTO.

It would seem impossible to focus on the placeholders and get an agreement in the era of Trump, but stranger things have happened… Trump’s election for one.

The document also provides a way forward for cotton, and consistent with the overall logic of the proposal. Accordingly, the proposal reads,

Members shall review the impact on trade of the product specific limit for cotton no later than [2019]  with a view to agreeing on the next steps to be taken in phasing out trade-distorting domestic support provided for cotton.

The proposed meeting in 2019 could provide the big bang that most cotton producers around the world are looking for. By 2019 the Trump effect, namely the open defense of nationalistic protectionism will have already reached its rhetorical apex, and its main proponent, the Trump government may be in intensive care. Also, the U.S. Congress is unlikely to pass a Farm bill in 2018, so 2019 could be a critical year that repeats a duel between beneficiaries of U.S. agricultural socialism (subsidies) and opponents of such fiscal largesse.

Yes, all quiet on the WTO agricultural front for now, but expect the next two years to heat up considerably.

 

Agriculture: Brazil's Backstop by Mark Langevin

            Brazilian agriculture is a fundamental pillar of national economic development in the 21st century. Baer claims that the agricultural sector has been the “engine of economic growth” since the colonial era (2014:281) and Barros reports that “Agriculture was the foundation upon which Brazil’s economic system functioned up to the beginning of the twentieth century (2009:83).” For decades agriculture fed a growing nation and financed its development despite the onset of an inward oriented, import substitution industrialization (ISI) model launched by President Getúlio Vargas and his Estado Novo after the Great Depression. Although a majority of Brazilians moved to the cities to work in manufacturing and services, the present and future of Brazilian economic and fiscal stability continues to be anchored to agriculture and agricultural commodity exports. Agriculture is Brazil’s backstop.[1]

            If Brazilian agriculture was rooted to a colonial past of coffee and sugarcane plantations, then its modernization during the last century grew from “neglect and even outright discrimination against” this sector by policymakers representing the budding cities and the emerging industrial elite of the post World War II era. With an emphasis on ISI, the agricultural sector was responsible for keeping pace with the growing urban demand for foodstuffs and the foreign exchange needed for the more capital intensive ISI activities. From 1945 to 1980 the Gross Domestic Product (GDP) grew at an approximate annual rate of 7 percent while the agricultural sector, with fewer government supports and less protection, lagged behind at 4.5% annual growth (Baer 2014:282). Agriculture’s contribution to the Gross Domestic Product (GDP) slipped from from 27 to 11 percent by 1980. This sector’s modest supporting role during this high growth period made modern economic and urban development possible, but both civilian and military governments did little to mitigate this sector’s underinvestment, low productivity, and increasing conflicts over land tenure (Bacha and Carvalho 2014, Helfand 1999, Santana and Nascimento 2012).

            During the depths of the “lost decade” of the 1980s the rural sector overcame decades of neglect and conflict to reinvent agriculture through migration to the Center-West “Cerrado” region (Bacha and Carvalho 2014, Santana and Nascimento 2012:75-85). The migration to the Cerrado by commercial agricultural producers and family farmers was encouraged by the innovative development of tropical cultivation systems by the Brazilian Agricultural Research Corporation known as EMBRAPA or the Empresa Brasileira de Pesquisa Agropecuária (Bacha and Carvalho 2014:6-9). During subsequent decades the application of increasing levels of technology intensive production methods, greater scales of economy through the concentration of productive units in the Cerrado, and the vertical coupling of modern agriculture to industry to form what is now known as agribusiness served to launch a promising cycle of rural modernization. Together, Brazilian agriculture and its vertical based value chains now comprise a third of the national economy and feature many of the world’s most productive farmers. In addition, agribusiness represents one of Brazil’s most internationally competitive economic activities and source of exports.

In February of 2015 the monthly value of agricultural exports reached $3.7 billion USD, but twelve months later the value grew to $5.76 billion USD, the highest monthly return since the data series was established in 1997

            In so many ways the agricultural sector plays the role of backstop to the country’s economic development by providing a reliable and widening stream of private investment and government revenues. The current recession shines a limelight on agriculture’s role as a backstop for economic development and stability amidst an historic contraction of economic activity, deindustrialization, and falling government revenues. Indeed the brightest spot for the current Brazilian economy is agriculture and its exports. Despite the economy’s contraction by 3.8 percent in 2015, the agricultural sector grew from 21.4 percent of GDP in 2014 to 23 percent in 2015.[2]  From February 2015 to February 2016, agricultural exports rose by 36.9 percent in U.S. dollar value (USD) and 113.26 percent by volume.[3] In February of 2015 the monthly value of agricultural exports reached $3.7 billion USD, but twelve months later the value grew to $5.76 billion USD, the highest monthly return since the data series was established in 1997.[4]

            During the first five months of 2017 (January to May), the top ten agricultural exports were valued at 31.9 billion USD, 39 percent of all Brazilian exports during the period and 87 percent of all agricultural exports. Soybeans led the way, representing 34 percent of agricultural exports and 15 percent of all Brazilian exports (Confederação de Agricultura e Pecuária do Brasil 2017:4). Today, agricultural exports are responsible for generating billions of U.S. dollars in foreign exchange, preserving Brazil’s positive trade balance despite the national recession, and adding more than its fair share to government revenues. Without Brazilian agribusiness and its exports, the country’s current economic slump would be catastrophic.

 

[1] The term “backstop” is used in finance and refers to “the act of providing last-resort support or security in a securities offering for the unsubscribed portion of shares. A company will try and raise capital through an issuance and to guarantee the amount received through the issue, the company will get a back stop from an underwriter or major shareholder to buy any of the unsubscribed shares.” Investopedia. Accessed at: http://www.investopedia.com/terms/b/backstop.asp.

[2] Agência Brasil. “Participação da agropecuária no PIB sobe para 23% em 2015. December 10, 2015 and accessed at: http://agenciabrasil.ebc.com.br/economia/noticia/2015-12/participacao-da-agropecuaria-no-pib-sobe-para-23-em-2015.

[3] Confederação Nacional de Agricultura e Pecuária do Brasil (CNA). “Boletim Agronegócio Internacional.” March 2016:3-4.

[4] Ibid.

Waiting for Elections: My Week Traveling Brazil by Mark Langevin

 President Michel Temer

President Michel Temer

This week I traveled to Campo Grande, Mato Grosso do Sul, Cuiabá, Mato Grosso, Cristalina Goiás, Brasília and Vitoria, Espirito Santo. I spoke with citizens from all walks of life, urban and rural, agriculture, manufacturing and services; and those in government. Political polarization is rampant, but the one unifying thread among all the Brazilians I came across during my week; everyone is waiting for the 2018 elections to clean up and repair Brazil. Many are worn-out by the Lava Jato investigations and prosecutions, including the recent conviction of former President Lula. Most I spoke with are reeling from three years of recession and the uncertainty and volatility of government responses. Nearly all are cautious about the possibility of working through the crisis by elections. Yet, every Brazilian is hopeful that the 2018 presidential and congressional elections can serve to catapult Brazil forward, as fast and far from the crisis as possible!

Many Brazilians are rightly exhausted, but as my friend Peter Hakim argues, this factor is not central to today’s political drama. According to Hakim, it is the political juncture that leaves many citizens without faith in political action. I agree with Hakim, but for different reasons. Hakim argues that those who pushed for former President Dilma’s impeachment are reluctant to mobilize against current President Temer because it would appear to support former President Lula and his Partido dos Trabalhadores (PT).  In part Hakim is correct, the energy and organization behind the massive demonstrations of 2015 and 2016 calling for impeachment, including the work of Vem Pra Rua, were clearly an ideological expression of opposition to the PT, or what they call Lulopetismo. This movement, including Vem Pra Rua, is clearly an ideological expression of forces allied against the PT and its governments under Lula and Dilma. Rather than wait for 2018, these forces sought the cover of the constitution to remove the PT from the executive branch.

In this sense, Hakim is correct. President Temer is corrupt, but he now represents those forces now allied against the PT and Lula. These forces, including Vem Pra Rua, celebrate Lula’s recent conviction, but are loudly absent from any actions related to the removal of the current president and his corrupt allies in congress. This was evident as President Temer compelled those parties in his government to remove and replace 11 of the 66 federal deputies committed to approving the formal denunciation (and eventual removal) of his corruption in the Justice Committee of the House of Deputies. This “glope branco” against Brazilian democracy was completely ignored by those supporting Dilma’s impeachment. 

Vem Pra Rua was silent.

So the political juncture is important. Those that proposed themselves as combatants against corruption during 2015 and 2016 are locked in their own iron cages. Those that defended Dilma lift the “Fora Temer” banner, but without the credibility required to fill the streets. The rest are left without a banner, without organizations capable and willing to mobilize, without an opportunity to achieve good governance through political action, at least today. Most Brazilians have faith in political action, but that the only meaningful action left to take is the vote in 2018.

Brazil is stuck in its own political crisis and Brazilians know it.

Congresso em Foco reports that 60% or 238 Brazilian congressional representatives with current criminal, corruption and electoral charges pending in the Supreme Court are affiliated with the largest political parties, namely the Partido Progressista (PP), Partido do Movimento Democrático Brasileiro (PMDB), Partido dos Trabalhadores (PT), Partido da Social Democracia Brasileira (PSDB), and the Partido da República (PR). Recently, the convicted coordinator of the Mensalão scandal, Marcos Valério, entered a plea bargain that named former Presidents Fernando Henrique Cardoso (PSDB) and Lula (PT) along with Senators Aécio Neves (PSDB) and José Serra (PSDB) as players in the so-called Mensalão Tucano (PSDB). Certainly Valério has a lot to gain through his testimony, specifically to lessen his own punishment of 37 years for the Mensalão. Nevertheless, his testimony, if accurate, further stains the body politic of Brazil and confirms that the current Congress will not take measures to combat corruption and remove its own corrupt members. The removal of the former President of the House of Deputies, Eduardo Cunha (PMDB), is the counterfactual, the human sacrifice to sweep political accountability under the rug and move on with politics as usual.

Brazilians are weary of those that raised the banner of combating corruption only to burn it as their patrons, including Aécio Neves, Eduardo Cunha, and Temer were denounced repeatedly by plea bargained testimony. Most Brazilians understand that Lula and his PT took short cuts in their efforts to grow Brazil and eliminate poverty, but unfortunately Lula and the PT are unwilling to speak frankly about the Lava Jato and the party’s involvement. Most importantly, Lula and the PT have yet to propose a reliable path forward that prioritizes the hard, democratic work of eliminating corruption and achieving good governance and political accountability. For that matter, no other powerful political party has dedicated its platform to the fight against corruption. This leaves few options for Brazilians, other than wait for elections that matter. In the meantime, Temer governs.