Brazil’s Presidential elections saw a narrow electoral victory for one of its most popular leaders of the past, Luiz Inacio Lula da Silva – popularly called Lula – over his far-right political incumbent Jair Bolsonaro.

Da Silva’s winning margin (50.8% of total votes) over Bolsonaro (49.2% of total votes) is the closest since 1989 when Brazilians voted for the first time since the end of the military dictatorship.

In Strongmen Saviours: A Political Economy of Populism in India, Turkey, Russia and Brazil – co-authored by this writer – the case study on Brazil under Bolsonaro had observed a notable decline in his mass popularity during the second half of his electoral term. This was the result of rising discontentment against Bolsonaro’s policies during the pandemic, his social stances on key issues – from same sex marriage to abortion – signalling a possible return to power for da Silva.

“Bolsonaro is witnessing a sharp drop in his approval ratings during the second half of his first term in office. This critical drop in approval ratings might have a significant impact on Bolsonaro’s future, given how Lula received an annulment for the corruption charges against him recently and is all set to re-enter politics in the next election. It would be interesting to witness how Bolsonaro leverages his existing popularity to face-off against a political giant whose downfall acted as a springboard for his own election prospects.”

From Strongmen Saviours: A Political Economy of Populism in India, Turkey, Russia and Brazil

Now with da Silva back in power, albeit with a narrow electoral margin, it would be useful to compare the circumstances of Brazil’s economy under his last presidential term from 2003-’11 against Bolsonaro’s term from 2019-’22.

Under Bolsonaro, Brazil was marred by public corruption scandals. A comparative glance may highlight some key challenges Lula faces ahead.

Trade union roots

Da Silva began his career in politics as a trade union leader who headed a workers strike against the military in the 1970s and early 1980s. He then founded the Workers’ Party and later went on to become president of Brazil in 2003.

When the Brazilians last voted da Silva into office, his rise to power stemmed from the widespread discontentment of nearly a decade of neoliberal economic reforms that left the low-income classes and working groups behind.

Brazil’s economy had been slipping into a “middle-income trap”, as analysed by economist Eduardo da Motta Albuquerque. According to the World Bank, the middle-income trap is when a middle-income country “fails to transition to a high-income economy due to rising costs and declining competitiveness”.

The low-income social and economic groups and a large base of the working class voted for da Silva in the hope of progressive change. Did a lot change for Brazil under da Silva then?

On growth

Looking at the average gross domestic product, or GDP, growth rate for Brazil under da Silva’s 2003-’11 term, a steady trajectory can be observed in Figure 1. Growth was not too high, but maintained an average rate of above 1.7%-1.8% annually. Lula also tried to ensure more investor and business-friendly measures, such as by appointing career banker Henrique Meirelles as the head of the Central Bank of Brazil, to keep the economy growing.

Figure 1: Brazil’s GDP growth under da Silva as presidential from 2003-’11. Credit: Trading Economics.

Under Bolsonaro, however, GDP growth rate plummeted to new lows, as seen in Figure 2. Barring a brief quarter in early 2021, the growth rate was below the 1% mark.

Figure 2: Brazil’s GDP growth rate under Bolsonaro’s from 2019-'22. Credit: Trading Economics.

On trade

Under da Silva’s more centered economic agenda, Brazil enjoyed sustained growth, largely due to a rise in the consumption demand for commodities and rising incomes among lower income groups that helped improve its overall terms of trade.

Figure 3: Brazil’s Terms of Trade under da Silva as presidential from 2003-’11. Credit: Trading Economics.

Improved terms of trade and a more expansive trading system allowed Brazil to come out of a high trade deficit situation post-2009 under da Silva. The benefits of this spilled over to the next growth cycle (post-2011) and for much of Bolsonaro’s presidential term as well. The Covid-19 pandemic shock however, brought trade down and made it more volatile post-2020 (as seen in the figure below).

Figure 4: Brazil’s terms of trade under Bolsonaro’s term from 2019-'22.

On welfare and income share

For the working classes and low-income groups, da Silva’s last presidential term showed a significant rise in income share, as seen in the World Bank data below.

Figure 5: Income share held by lowest 20% under da Silva's term. Credit: World Bank.

This was largely the result of the positive effects of pursuing a pro-worker policy agenda. Da Silva’s government focused on increasing government expenditure to expand the social welfare safety net, created jobs for low-income and middle-income groups and invested in the development of Brazil’s natural resources.

Figure 6: Brazil’s income share by highest 10% under da Silva. Credit: World Bank.

This was not the case for the top 10% income earners under da Silva. Most of the elite and wealthy classes saw a marginal decline in their income growth under da Silva.

Nevertheless, maintaining macro-economic stability and steady economic growth made Brazil, under da Silva, the world’s eighth largest economy, and witness a period that saw more than 20 million people rise out of acute poverty.

Inclusive economic rise

While choosing a more centrist economic stance, da Silva was able to maintain his socialist ideology. He increased the minimum wage and introduced a slew of social welfare programmes aimed at lowering economic disparity and supporting rural development.

Figure 7: Expenditure on Bolsa Familia (as % of GDP) under da Silva. Credit: Chapter 16 of Strongmen Saviours: A Political Economy of Populism in India, Turkey, Russia and Brazil.

Bolsa Familia was one such programme that provided allowances to families for food and education. Such initiatives contributed to the growth of da Silva’s popularity across Brazil.

Figure 8: Education expenditure (% of GDP) rose in da Silva's second presidential term. Credit: Unesco Institute for Statistics, from Strongmen Saviours: A Political Economy of Populism in India, Turkey, Russia and Brazil.

Under Bolsonaro’s far-right economic ideology, driven by tax cuts for the extreme rich, the welfare and social-safety net for the working classes was quite different.

Figure 9: Brazil’s income share held by lowest 20% under Bolsonaro’s term. Credit: World Bank.

Before the pandemic, the income growth share of the lowest income class (20%) increased while for those in the highest 10% it decreased. The trend appears symbolically similar to what was seen under Lula, however, in terms of a new social policy focus, Bolsonaro’s far-right economic push eroded the social welfare safety net for most Brazilians, particularly affecting the well-being of the vulnerable working class over the last three years.

Figure 10: Brazil’s income share held by highest 10% under Bolsonaro’s term from 2019-’22. Credit: World Bank.

For a leader perceived to be outside the status quo political elite, Bolsonaro’s poor handling of the pandemic, his lack of seriousness in imposing adequate public-health restrictions during the outbreak, stance on social issues (from same-sex marriage to abortion), particularly women, angered most low-income communities and working classes.

Da Silva’s recent electoral victory also reflects a renewed focus of the working class – and women – who voted for him in the hope of a better, more progressive economic agenda in the future, reminiscent of what was seen during the 2003-’11 period.

Corruption scandals

Despite the economic certainty and sustained growth that was observed during da Silva’s previous presidential term and his pro-worker social spending policies, multiple public corruption scandals followed his term.

Dilma Rouseff, who was pushed by da Silva as presidential candidate after he was constitutionally restricted from contesting a third term, oversaw multiple corruption episodes that changed the shape and form of the Brazilian political economy between 2011-’18.

The Petrobras Scandal was one of the most significant corruption scandals in recent history, the result of decades of normalisation. It was discovered by chance after authorities detained a man named Alberto Youssef in 2013.

Yousseff had a history of nine arrests for money laundering and was suspected of similar activities when he was detained. During the inquiry, he told prosecutors, “Guys, if I speak the republic is going to fall.”

Eventually, he decided to cooperate with the authorities and began to give information on the original source of the cash. He claimed that the cash belonged to top executives of Petrobras, Brazil’s state-owned oil producer. It came as a shock to the authorities, who suspected that the source of the money was organised crime.

This led to an investigation called Operation Car Wash – or Operacao Lava Jato as it is known in Portuguese – that gained its name from the initial investigation of a car wash suspected to be a front for money laundering.

The investigation led to the arrest of former Petrobras official Paulo Roberto Costa, whom Youssef had “gifted” a luxury Land Rover worth 250,000 reais (about $125,000 at the time). It was this expensive gift that kick-started the investigations, as it struck the authorities as odd that an ex-official was receiving luxury items from a known money launderer.

Costa’s cooperation gave the police information that unveiled the deeply woven corruption scheme, which came to be known as the Petrobras scandal. Brazil’s Public Ministry oversaw the investigation. A constitutionally established public body, the Public Ministry has its own budget and autonomous prosecutors that enable Brazil to resist dictatorships. The Public Ministry’s independence enabled it to take on corruption charges against the powerful elite.

After investigating further, authorities learned that officials from the state-owned Petrobras corporation were receiving kickbacks for awarding inflated contracts to Odebrecht, one of Brazil’s largest construction companies.

It was later discovered that Petrobras, the world’s largest Brazilian company, had served as the setting for a high-profile, high-stakes corruption operation between 2004 and 2014. It included members of Petrobras’s top management, executives from some of Brazil’s largest construction companies, including Odebrecht, and representatives from the country’s political elite. The construction businesses formed a cartel in order to coordinate bids and overcharged Petrobras.

Economic cost, Bolsonaro’s rise

These scandals had a deep impact on the political careers of many leaders, the voting psyche of the citizens, public sentiment and the country’s economy.

According to an estimate, the scandal caused a loss of $27.1 billion, which was equal to 1% of Brazil’s GDP. In 2016, an already ailing economy’s troubles were amplified by then President Roussef’s ill-planned spending on higher pensions and unproductive taxes.

The overall fiscal deficit increased from 2% of the GDP in 2010 to 10% in 2015, while public debt increased to 70% of GDP. In 2016, the scandal and the pressure on the economy triggered the impeachment of Rousseff, who had been the chairperson of Petrobras’s board from 2003 to 2010. She was later succeeded by Vice President Michel Temer.

The macro-chain of political events and episodes of corruption made the wider Brazilian electorate dis-trust the political class elite, allowing a far-right perceived “outsider” like Bolsonaro to rise to prominence. Bolsonaro came to power on a campaign promising change and tough action against public corruption.

For a Lula presidency now to work, fighting public corruption and securing the trust of the wider voter base – beyond the working class – including that of Bolsonaro’s own loyal voter groups, will hold the key. It will require sustained efforts and institutional reforms.

Still, what deserves special mention is that Brazil has voted for progressive change again and gives a much-needed chance to Lula in getting things right. More importantly, Lula’s victory signals an optimistic turn in people’s fight against the rise of right-wing populism across the developing world.

Deepanshu Mohan is an Associate Professor of Economics and Director at the Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University.