In politics, the ‘art of the possible’ isn’t always the most constructive and productive for a country’s economy.

Ivan Barboza, partner at Clairfield Brazil, examines the deeply polarised election in the world’s fourth-largest democracy as the second round of voting approaches. Polarization is inevitable on Brazil’s political stage, but Ivan highlights the country’s need to look behind the political protagonists and focus on the ensemble cast. He urges turning attention to the election of the senators and deputies, not just those front and centre. This way, he says, we can strengthen rather than dilute political actions and make economic progress.

Elections 2022: Lula or Bolsonaro?

As is usual in presidential elections, almost all public discussions about politics revolve around who will be the next president. Meanwhile, the offices of the National Congress, which largely determine the future president’s possible actions, occupy a distant background in media and public attention. This lack of attention to legislative positions seems to derive from two causes. Firstly, the concentration of power is in a single person’s hands (the deputy candidate would be one out of 513, and the candidate for senator one out of 81). The second reason is the lack of understanding of how the legislature works, especially the dynamics of its interaction with the executive branch. In this article, we will summarize the main aspects of the interaction between the president and the National Congress before sharing our vision of what awaits us in both scenarios of Bolsonaro or Lula winning the election.

What the President of the Republic does

We will focus on the duties of the Brazilian president that have the most impact on the economy. The primary role is as head of state, in which the president leads the country’s diplomatic agenda and represents it before other nations. The President directs the political alliances that Brazil maintains with other countries, which reverberates in international trade and attracting foreign capital. A recent example of this function was Bolsonaro’s negotiation with Putin to guarantee Russia’s supply of the fertilizers necessary for Brazilian agriculture.

The second most important function is the right to appoint and dismiss ministers without needing the National Congress’s approval. Thus, the president defines the team responsible for day-to-day management of issues under the federal government’s responsibility, and decides how the federal government’s budget will be used. The president also has the power to directly interfere in companies controlled by the Union, as is the case with Petrobras, which underwent successive CEO changes under Bolsonaro’s direct interference throughout his term.

In other key areas, the president is dependent on approval from the legislature, which will make clear the importance of having a base of support in the National Congress.

How does the president depend on the National Congress?

For better or for worse, the public administration must follow a very broad set of laws. Despite appointing ministers, the president cannot create or dissolve ministries and other public administration bodies without congressional approval, so he or she is obliged to govern with a fixed organizational structure if he or she does not have the legislature’s support. The executive branch also depends heavily on the National Congress to manage the Union’s finances. Government revenues are derived primarily from tax collection, which is done in accordance with tax legislation passed by Congress. The executive branch has some autonomy to change the rates of certain taxes (import and export taxes, IOF, IPI and fuel taxes). Still, any other actions in the fiscal sphere depend on the creation or amendment of laws and, therefore, need the support of Congress. In turn, the use of Union revenues must respect the Annual Budget Law (LOA), which considers an estimate of the Union’s revenue for the following fiscal year, sets government expenditures, and is approved annually by Congress. The LOA, in turn, must be made in accordance with the Budget Guidelines Law (LDO), which determines government spending priorities and is also approved by Congress. The LDO, on the other hand, must respect the Pluriannual Plan (PPA), which determines the goals of public administration for four years and must be approved by Congress.

The end result is that the Union’s revenues and the destination of the collected resources are deeply influenced by the National Congress. The LOA, in particular, greatly limits the executive branch’s management decisions, as it prevents the reallocation of resources between different topics of public interest. For example, the government cannot use transportation capital in the LOA for education investments without congressional approval, regardless of context. Budget rigidity prevents the indiscriminate use of resources, which can also cause challenging situations. And so, when faced with huge increases in food prices, you have to go hungry, yet you can still travel at the end of the year, as there would be no reallocation of resources from the tourism budget to the food budget.

The practical effect of our system of government

Overall, the president can do little without the support of the majority of federal deputies and senators throughout the presidential term. The president is thus practically obliged to negotiate with Congress and give whatever is necessary to secure its support in order to make impactful change. Under this dynamic, the composition of the National Congress greatly influences each government’s direction, as it determines which presidential proposals will be accepted and executed. That is why the election of our deputies and senators, so overlooked by the general public, deserves more attention. Voters should even be careful to vote for a coherent ticket, in which their candidates for senator and deputies have ideological alignment with their candidates for president and governor. Otherwise, they are voting for a dysfunctional government with clashing executive and legislative powers throughout the term. Leaving aside what should ideally be done, the Congress’s current (and historical) composition is quite fragmented. In the Chamber of Deputies, the most represented party (PL) has 15% of the votes. In the Senate, the most representative (MDB) has 16% of the votes. The minimum number of parties that need to align for an absolute majority, assuming that all members of those parties vote together, would be five parties in both the House and Senate.

Gravity pulls towards the centre

With deputies from 23 parties and senators from 17 different parties, the fragmented structure of Brazil’s legislatures has created coalition presidentialism: the government must create a political alliance with a number of parties sufficient to reach the majority necessary to pass their bills and budget proposals in the House and Senate. This system of governance provokes criticism, but it is a symptom of the political context in which the president depends on Congress to govern and Congress is dramatically fragmented.

In Brazil ‘politics is the art of the possible.’ The so-called ‘centrão’ are conservative politicians who leave idealism (and often their principles) to one side to focus on passing legislation from the left or right that brings them closer to power. In this political environment, the most purist agendas, whether from the right or the left, do not survive proceedings in Congress. They are diluted by amendments and partial vetoes until they manage to add enough votes to be approved. Thus, any future reforms will likely be slow due to the time it takes to reach an agreement with different political leaders across the ideological spectrum. This dilution process is a result of concessions and moderations to garner votes.

Bolsonaro vs Lula

According to recent polls, the electorate is divided between right and left. The base of Congress will remain fragmented and dependent on several centrist parties. With this premise and the dynamics of the Brazilian political system that privileges the status quo, we understand that either of the two presidents will have to govern through coalitions, with a low probability of being able to implement the campaign proposals in the way that their voters expect. And so, the difference between the two scenarios with one president or another is significantly reduced. In any case, with Bolsonaro and Paulo Guedes as minister of the economy, a more liberal and business-friendly government is expected, valuing the downsizing of the public machine and entrusting the private sector with the mission of promoting the country’s economic development. With Lula, who has not yet indicated who would occupy his ministry of economy, the expectation is for a government that seeks to strengthen the public machine and outline an economic development plan driven by government stimulus policies. In state-owned companies, the Bolsonaro government would probably be less interventionist (despite its history with Petrobras) and would seek new privatization moves, as we have seen with Eletrobrás. On the other hand, Lula’s government would probably follow its history of using state-owned companies as arms of the government to execute policies in the public interest. These actions could lead to these companies being guided by motivations other than the pure interest of their private shareholders.

Our expectations

Regardless of who wins, we do not expect major changes in the Brazilian macroeconomy. We Brazilians have enjoyed very short spans of market enthusiasm for Brazil. Our normal is, unfortunately, times of timid growth or crises. A better future would be a pleasant surprise. Despite this scepticism, we believe it would be positive to continue the course of action adopted by Paulo Guedes, whom we see as an effective minister of economics. In this sense, Lula’s victory would bring uncertainty as to whether he would name an effective minister. There has been a nod toward Henrique Meirelles, whom we see as a good potential occupant of the position, but he struggles with acceptance by the PT base, which makes his appointment uncertain. However, it seems to us that Lula is concerned about not displeasing the market and will avoid controversial nominations.

Looking at the glass as half full, Brazil is now better positioned than many other developed economies. Our foreign trade flow represented 39% of GDP in 2021, compared to a global average of 52% of GDP in 2020. Although not ideal — Brazil could have grown even more had we opened up our markets further — our economy is less exposed now and should suffer less.

Another factor that benefits the country is the new trend to decentralize global supply chains and bring part of the manufacturing activities to friendly shores. Brazil is now a strong candidate to fill this role, because we have the sixth largest population in the world, cheap labor, extensive territory, abundant natural resources, proximity to the United States and Western Europe, and we are closely aligned with Western policy. This could bring a wave of foreign investment, which would boost economic development.

On the looming energy question, Brazil has a very different electricity production matrix compared to the rest of the world. In 2021, 67.4% of the world’s electricity was produced from fossil fuels. China produces a third of global electricity, 65.9% from fossil fuels, 63.2% from coal. In contrast, only 20.3% of Brazilian electricity comes from fossil fuels, and only 3.7% from coal. A primary advantage of the Brazilian electricity matrix is lower exposure to the price variation of fossil fuels. With 77.4% of our electricity coming from hydropower and renewable energy, we are dependent more on rainfall and the weather than on the fossil fuel market. Another advantage is that our energy is quite clean, especially compared to China. A kWh produced in China emits, on average, 541 grams of CO2 and a kWh produced in Brazil emits 142 grams of CO2, an amount almost 4 times less. This is a differential to attract countries that seek carbon neutrality.

During crises, opportunities always arise. Ultimately, we reinforce the importance of choosing our candidates for senator, federal deputy, and state deputy carefully. We wish all of us and our Brazil good luck in these elections!