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Thursday, October 1, 2015

Brasil's President Strikes A Deal With Her Allies

Brazil's President Strikes a Deal With Her Allies

    
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Summary

Brazil's ruling party has had a difficult year, and its political rivals are looking to leverage the party's troubles to their advantage. Falling commodity prices and diminishing Chinese demand have left Brazil's economy in tatters, and the country's leaders have several difficult choices ahead if they are to mitigate the ongoing economic crisis. But disagreement between Brazilian President Dilma Rousseff's Workers' Party and the Brazilian Democratic Movement Party (PMDB) — the two most powerful parties within the ruling coalition — could threaten any efforts to make the tough reforms needed to get Brazil's economy back on track.
With an upcoming Cabinet reshuffle expected on Oct. 1, the PMDB will likely try to pressure Rousseff into granting it as many as seven ministerial posts in exchange for its support for the president's proposed economic measures. Public approval ratings for Rousseff's Workers' Party are low amidcorruption scandals and a flagging economy. Because of this, the party cannot afford to lose its biggest political ally — particularly one that holds the power to prevent Rousseff's removal from office. Therefore, the president will likely yield to the PMDB's demands and cede it greater power within the Cabinet in hopes of holding the coalition together and protecting herself from the looming threat of impeachment.

Analysis

Beginning in the early 2000s, a decade of high commodity prices largely driven by rising Chinese consumption fueled a period of economic growth in Brazil. The country's exports of commodities likeiron oreoil, gold, coffee, soybeans, sugar and meat surged, and the Brazilian government used its newfound income to boost social spending. In turn, its support among voters rose. But in the past few years, global commodity prices have plummeted, and Brazil's fortunes have taken a turn for the worse.
In light of the country's new economic reality, the Brazilian government faces the difficult prospect of both raising taxes and cutting social spending. Rousseff is planning to implement a financial transactions tax aimed at increasing government revenue by hiking taxes on banking transactions next year. At the same time, lawmakers plan to cut around $6.5 billion from the government's budget in 2016, and some low-income housing programs have already been canceled. But because the ruling Workers' Party draws most of its electoral support from low- and middle-income voters, significant slashes to spending on social welfare packages could result in the loss of its support base ahead of Brazil's presidential election in 2018 — a risk party leaders are not willing to take.

A Coalition Divided

Rousseff's tax policy, though economically sound, has encountered stiff opposition from members of her own coalition, including the PMDB. The Workers' Party governs Brazil within a coalition composed of several parties, but it relies most heavily on its fellow center-left PMDB for support. Brazilian Vice President Michel Temer is the leader of PMDB, and the heads of both the lower and upper houses of the Brazilian parliament are PMDB members. The party also commands the second-largest bloc in the lower house and a plurality in the senate. Put simply, Rousseff does not have the political clout to single-handedly impose a new economic package without the PMDB behind her. 
Initially, the PMDB withheld its support for Rousseff's proposed measures, refusing to accept the tax initiative unless revenues were equally distributed among municipalities and states, particularly those where the PMDB enjoys strong support. The PMDB is well aware that the Workers' Party's public approval ratings are sliding amid economic hardship and a protracted corruption scandal in semi-public energy company Petroleo Brasileiro, or Petrobras. The party likely plans to use promises of political support to extract concessions, including control over several of Brazil's more powerful ministries, from a president who has few other allies to turn to. Indeed, Eduardo Cunha, the head of Brazil's lower house of parliament and a PMDB member, has now indicated that he is open to discussing the tax initiative.
Both the Workers' Party and Rousseff have much to gain from their partnership with the PMDB. With its large presence in both houses of the Brazilian parliament, the PMDB holds the power to stall or initiateimpeachment proceedings against the president. Opposition parties have used the recent Petrobras scandal to push for this in pursuit of their own interests. At the same time, the Workers' Party lacks the power to implement its reform agenda on its own; without the backing of its coalition, and especially the PMDB, the ruling party would have difficulty making any substantive changes to the economy.
But the alliance has come under increasing strain in recent months, and the PMDB must decide whether to remain a part of the ruling coalition or defect to the opposition. The Petrobras scandal threatens to taint the credibility of Workers' Party partners, and many of Rousseff's former allies are keeping their distance to avoid accusations of culpability. Simultaneously, the scandal has increased the ruling party's reliance on the PMDB to govern effectively, creating an opportunity for the PMDB to boost its own clout and prestige within the coalition.

Trading Power for Protection

Workers' Party leader and former Brazilian President Luiz Inacio Lula da Silva, who has been the primary liaison between the Workers' Party and the PMDB, is advocating for his party to comply with the PMDB demands for appointments to several key Cabinet posts in the upcoming reshuffle. And given the Workers' Party's predicament and the economic reform challenges ahead, Rousseff will likely have little choice but to acquiesce. Thus, the upcoming Cabinet reshuffle will probably result in the PMDB gaining control of a number of ministries that are critical to the country's economic management and to the coalition's support base. These could include the ministries of energy, agriculture, civil aviation, ports, tourism, culture and healthcare. Meanwhile, the ruling party's other left-wing allies, like the Democratic Labor Party, may also receive posts elsewhere, such as the Ministry of Communications.
In exchange, Rousseff will be able to maintain the support she needs to pass legislation and, more important, to slow the impeachment process. However, her bargaining power will continue to wane as the corruption scandal plays out and Brazil's economy continues to stall. The PMDB, for its part, will hold up its end of the bargain. In return for a greater share of power, the party will continue to block Rousseff's impeachment and smooth the way for legislation that benefits the coalition's constituencies.