Brazil

By all accounts, Mauricio Macri has had a remarkable honeymoon since he was inaugurated December 10, quickly moving to revise Argentina’s economic policies, restructure its relations with the world, and tackle a variety of rule of law challenges, ranging from corruption to the drug trade. President Obama’s trip to Argentina last week was in many ways the capstone to Macri’s dynamic first hundred days in office. The visit signaled a generational shift in U.S. policy toward Latin America, seeking to repair some of the worst damage done by U.S. support of the military dictatorship that took office when Obama was a teenager, but Obama and his entourage of more than four hundred business representatives were even more convincing in their strong praise for the Macri administration’s new openness to foreign investors. Indeed, Macri’s presidency has moved very quickly to change the climate. It has freed the foreign exchange market, cut government spending, fired public sector workers, raised repressed energy prices, reduced export taxes, and opened up trade. Early today, the government scored a major victory as the Senate approved legislation needed to end a fifteen-year debt dispute with creditors, paving the way for a return to international markets and demonstrating the government’s ability to corral the opposition toward pragmatic policies. The government’s rhetoric has been overhauled, shifting quickly away from the dirigiste and southern-focused language of Cristina Kirchner and her economics minister Axel Kicillof, and turning instead toward the global north and potential OECD membership. Hoping to change the tone, Macri has met the United Kingdom’s David Cameron to reassure him of his desire to improve ties between the two countries, flown to Brazil to reassure Rousseff of his desire to restart trade and revamp Mercosur, and moved toward isolating the chavista regime in Venezuela, including by withdrawing support for the Bolivarian-inspired broadcast company Telesur. For all these successes, however, the challenges Macri will face in coming months are formidable. Argentines are twice shy about economic liberalization after the deep trauma that accompanied the collapse of Domingo Cavallo’s convertibility plan and the subsequent debt default of 2002. Meanwhile, the economic situation Macri inherited is dire: high inflation, exchange rate depreciation, low foreign reserves, a primary fiscal deficit nearing 6 percent of GDP, and projections of negative real GDP growth in the coming year. Correcting the excesses of the past decade will be painful: utility and food prices are rising in response to Macri’s reforms, even as unemployment threatens, commodity prices remain low, and neighboring trading partners stagnate. Politically, Macri is governing with a bureaucracy populated by Kirchneristas and faces a court system stacked with the previous administration’s appointees. His Cambiemos coalition lacks a majority in either house of Congress, with only 15 of 72 seats in the Senate. Macri has managed to prevail in the crucial votes on debt repayment, but moving forward on deeper reforms will require him to continue to seek out common ground with portions of the opposition, such as the Frente Renovador faction of the Peronists, whose enthusiasm for radical reform is limited and self-interested. These conditions mean that while Macri represents a shift in Latin America, away from the “pink tide” of leftists who have governed the region since the turn of the century, his will not be a hard right turn. The positive upshot, as Andres Oppenheimer notes, is that Macri may be the leading edge of a “pragmatic cycle” in Latin America. But even accomplishing this pragmatic turn may be difficult until the economy and jobs creation perk up. In the interim, Macri may need to rely on symbolic and outward-looking moves that attract investment and build popular support, such as reforming Mercosur, driving forward EU-Mercosur negotiations (initial proposals are due on April 8), and perhaps even pushing a deal between Mercosur and the United States or signing on to the Trans-Pacific Partnership. Don’t be surprised if there are further surprises from Buenos Aires.

Brazil’s drama has escalated at breakneck speed. On March 4, former President Luiz Inácio Lula da Silva was detained for questioning. On March 8, construction magnate Marcelo Odebrecht was sentenced to nineteen years in prison for his role in the Lava Jato scandal. On March 9, state prosecutors in São Paulo filed a motion for Lula’s arrest, and on March 13, an estimated three million Brazilians hit the streets in the largest anti-government protests of recent years. On March 15, the plea bargain signed by Workers’ Party (PT) senator Delcídio Amaral was approved by the country’s high court, the Supreme Federal Tribunal (STF), revealing accusations against President Rousseff’s confidante and minister Aloizio Mercadante, against erstwhile government allies Vice President Michel Temer and Senate President Renan Calheiros, against opposition leader Aécio Neves, and even against Rousseff herself, who is alleged to have pushed judges to tamper with the ongoing investigation. Yesterday, March 16, spontaneous protests broke out in several cities after a wiretap was released of Lula and Rousseff discussing his appointment as presidential chief of staff, with protesters interpreting the conversation as obstruction of justice and an effort to ensure Lula special standing in a high court that has long been deferential to politicians (ministers, including the chief of staff, can only be tried in the STF). The speed with which the crisis has developed is reminiscent of another chaotic March, more than a half century ago, which culminated in the military coup of March 31, 1964. Today’s military is thankfully content to remain in its barracks, but although the democratic regime seems secure, the Rousseff administration is in deep trouble. A variety of well-informed observers are predicting Rousseff will be unseated. The arrest of Rousseff’s campaign manager, the charges against Lula, the turning of Senator Amaral, the likelihood of further explosive plea bargains within the next month, and the weakening of support from the PT rank and file all bode poorly for Rousseff. Stock markets have risen and the Brazilian real has strengthened, perhaps unreasonably, on the belief that any new government will be an improvement on the Rousseff administration’s disastrous economic record. But although the government is teetering, Rousseff’s removal is far from a done deal. The odds are still too close to call: a single revelation from the Lava Jato investigation could tip the balance at a moment’s notice. But the obstacles to removing Rousseff are significant enough to suggest that the crisis may still play out for some time, despite the tumult of the past few weeks: Legitimacy: As I noted last week, a central concern driving the calculations around Rousseff’s fate is “legitimacy.” Impeachment is more of a political process than a legal one, and the opposition is both divided and uncertain about how to proceed. The Workers’ Party has skillfully pushed a narrative about the conservatism of the media and the coup-mongering (golpismo) of the opposition parties (including Neves’ PSDB and the DEM, with its historical ties to the authoritarian regime). This narrative gives the opposition pause, and this hesitation has only been exacerbated by the ham-handed prosecutorial overreach by São Paulo state prosecutors last week, which allowed Lula to pose as the victim of a targeted onslaught, and led some Brazilians to question the legitimacy of the ongoing (and multiple) prosecutions of wrongdoing under the PT. Yesterday’s decision by Judge Sérgio Moro, presiding over the Lava Jato case, has generated controversy about potential judicial bias: the wiretap had been lifted by Moro several hours before the taped call, and although the conversation was suspect, it also suggested that the Lava Jato case has taken a more political turn. Meanwhile, none of the opposition has been particularly brave about leading the anti-Rousseff charge, except for Chamber President Eduardo Cunha, who is himself neck-deep in scandal and therefore not the best advocate for a procedurally legitimate impeachment. Street protests and the PMDB: Sunday’s protests sought to pressure Congress. In a secret vote on the impeachment process in December, Rousseff was able to garner 199 votes, only 28 more than she needs to block impeachment. The calculation is that the government has a hardcore bloc of about 125 supporters who are unlikely to switch sides, but the remainder are fair-weather friends, who may melt away if public disapproval is vehement enough. The PMDB is central to this calculus. Ominously, it has put off a decision about whether to support the government until April. But the protests may have less of an impact on changing the PMDB’s posture than many think. The Sunday protests remained a largely upper middle class phenomenon, heavily concentrated in the wealthy southern states, whose PMDB politicians were already largely in the pro-impeachment camp. Protesters reacted angrily to the presence of opposition politicians at Sunday’s march in São Paulo, forcing a hasty retreat by Aécio Neves and others, and suggesting that riding the political wave of impeachment may be fraught with peril. The events of recent weeks have exacerbated fissures within the PMDB: the Lava Jato investigation seems to be getting closer to many PMDB heavyweights, including Vice President Temer, which affects their ability to concentrate on organizing the party; and the PMDB is a fractious party of mutually jealous rivals, many of whom can be peeled away by a government willing to dispense goodies, such as the increasingly pressing renegotiation of state debts. This susceptibility to government pressure may be even more marked in the Senate, where governors’ concerns carry even greater weight, and may become more pronounced in coming months, now that Rousseff has hired a politically-savvy chief of staff. It is no coincidence that one of Lula’s first announced objectives is to begin a discussion of state debts. The path of removal: Rousseff has ruled out resignation, which leaves only two democratic avenues for removal. Impeachment is the most obvious, in part because it would be the most legitimate. Cunha intends to begin selection of the impeachment committee today. But a second path would be for the electoral court (TSE) to void the 2014 election, on the basis of campaign finance violations. Although Gilmar Mendes will soon become the president of the TSE, and he is not known for his love of the PT, TSE removal of the president would be an institutional innovation by a historically timid body. The TSE has traditionally turned a blind eye to almost all campaign finance violations, and over the past thirty years, it has removed only a handful of lower-level politicians for electoral wrongdoing. Furthermore, any TSE decision would likely be appealed up to the Supreme Federal Tribunal (STF), which would not necessarily agree with the TSE, and in any case, would string out the decision. The day after: Politicians deciding whether to support impeachment are also thinking about the day after. Already, there are allegations pending against every single politician in the line of presidential succession: Vice President Michel Temer, Chamber President Eduardo Cunha, and Senate President Renan Calheiros. Delcídio Amaral’s testimony even raises a cloud over the fourth in line, STF President Ricardo Lewandowski, as well Rousseff’s rival in the 2014 race, opposition leader Senator Aécio Neves. If the selection of a new president were thrown to the Congress—which it would be unless Temer survived or Rousseff and Temer were removed before the end of 2016—there are very few politicians who are both unsullied by allegations and simultaneously capable of pulling together the governing coalition needed to approve any meaningful reform that might jumpstart the moribund economy. Timing: The impeachment and Senate trial of Fernando Collor took seven months from start to finish. Next month, sitting politicians in both the Rousseff cabinet and the Congress will have to step down if they wish to run in October’s municipal elections. This is likely to lead to considerable turnover, muddying the impeachment calculus, and perhaps ensuring that any final decision comes in 2017, with only two years left in the Rousseff administration. Will it be worth the effort, especially if the justification for impeachment is weak, and the likelihood that the new government could turn things around is remote? Will it be worth the effort to join an impeachment drive driven forward by an unsavory Congress, only to replace Rousseff with an equally scandal-ridden Temer or Cunha administration? Justification: Impeachment is all about politics, and although the Lava Jato investigation seems to be marching inexorably toward the upper rungs of the political establishment, there is as yet no smoking gun against Rousseff that would tip the scales. There is evidence of massive campaign violations, confirmation of the kickbacks that helped convict Odebrecht, and allegations of government meddling in the courts. Yesterday’s wiretapped conversation with Lula also puts Rousseff in an unpalatable position, but the presidential palace has claimed that there was good justification for the conversation. Because of the legitimacy concerns noted above, none of these, as yet, seems sufficient to generate the momentum needed in the final push for impeachment, especially in the context of a rudderless, divided, and increasingly discredited opposition.

I had the pleasure yesterday morning of sharing the stage with Brian Winter, vice president of policy at Americas Society/Council of the Americas and editor-in-chief of Americas Quarterly, to talk about Brazil for Foreign Affairs’ Brazil Economic Summit. We discussed the ongoing corruption probes, President Dilma Rousseff’s chances of survival, and the possibility and paths for recovery. You can watch our discussion here.

The UK’s Modern Slavery Act now requires companies to report efforts to prevent human trafficking and slavery in the making of every part and every process of production, from headquarters down to individual suppliers along production chains. In the United States, the Dodd Frank Act’s disclosure rules for conflict minerals hold mining and technology companies to similar standards. But surveys and reports show companies still fail to monitor their suppliers, let alone prevent abuses. To comply with these laws, multinationals must investigate the origin of each chip, stitch, or mineral in its products, and workers’ treatment at each stage. Many do not for two reasons: Supply chains have become more geographically dispersed. Today products are mostly made across countries rather than within them. A Ford Fusion sold in a U.S. dealer’s lot counts parts from 234 suppliers in 32 countries. An iPhone brings together minerals from Mongolia and pieces manufactured in Korea and Taiwan before assembly in China. To follow their intricate production chains, companies must inspect labor practices on each factory floor, farm, or mine in every country, from raw materials to manufactured parts to fabrication. Subcontracting of subcontracting. Agreements between brands and suppliers can be just the start. After a factory signs a contract, they often subcontract to smaller firms that subcontract to even smaller ones. The demands of fast fashion in particular mean that suppliers routinely farm out large contracts to dozens of not just smaller factories, but also networks of sewers, finishers, and embroiderers working in their own homes. These workshops don’t have government permits and often lack basic sanitation, ventilation, and lighting. They demand long hours and deny paid maternity leave. One study of Bangladesh’s apparel industry found that out of 7,000 producers, about half are informal subcontractors. These realities make it difficult for corporations to monitor working conditions. Even well-known multinationals struggle. After long hours and low pay drove desperate Chinese iPhone makers to suicide, Apple started publishing yearly reports on labor rights in its factories. Four years later, these reports show worker conditions are still unsafe, and hours often exceed two to three times the legal limit. Nestlé grapples with child labor in Ivory Coast cocoa suppliers, even after adopting measures to address the problem. Some of Nestlé’s suppliers in Thailand use slaves to catch fishmeal that ends up in the brand’s pet food, and it buys coffee beans from plantations in Brazil that may rely on slave labor. Still, there are success stories. Intel now maps its entire electronics supply chain, tracing metals it buys in China and Russia to African smelters. Working with other electronics brands, Intel helps smelters in the Democratic Republic of Congo identify conflict-free sources, enabling them to support often poor tantalum miners without funding the nation’s violent militias. And for corporations looking to improve their practices, help exists. Outside auditors can map supply chains, identifying risks and violations. Many non-governmental organizations (NGOs) partner with companies to spread awareness and educate local governments on what counts as abuse and how workers can report cases so that the company can respond. Others design and deploy technologies, including text messaging and social media analysis, to help companies pinpoint labor violations. The UK and U.S. laws set important guidelines for today’s global factories, though the response so far shows these laws are just the first step. To be successful, legal norms need to proliferate, moving beyond industrialized nations to emerging economies where workers rights are often most tenuous. And they need to be internalized by companies, becoming a part of everyday practices and operations.

Latin America’s corruption scandals of the past two years are moving slowly toward resolution. As they move forward, it is interesting to note that in a region that has been particularly protective of its sovereignty, foreign cooperation has played a significant role, whether it is via bilateral exchanges between prosecutors, mutual legal assistance treaties, or even United Nations support, as in the case of Guatemala’s International Commission Against Impunity (CICIG). But these various forms of international cooperation may soon be joined by another international anti-corruption effort that is less well understood in Latin America: prosecution by U.S. attorneys. The Petrobras scandal has so far touched down in Argentina, Peru, Panama, Brazil, and the United States, making it a truly hemispheric corruption case. I was therefore taken aback when a well-informed colleague from the region suggested to me that in his view, the United States would never prosecute Petrobras, because doing so might harm U.S. foreign policy interests. In reflecting on this remark later, I think that he meant that a U.S. government that seems to be trying hard to mend fences in the region would be loathe to be seen as violating national sovereignty or acting in ways that could cast the United States in the familiar role of an avaricious exploiter of Latin American resources. This perspective has deep roots. Brazilian academics have argued that the United States seeks to limit Brazil’s energy self-sufficiency as part of its broader geopolitical strategy of hegemony. A Brazilian senator echoed this perspective in floor debate last week, noting that, having weakened Petrobras, investors were now seeking a reduced role for the oil company that would hand “the future of Brazil to Shell.” Meanwhile, other prominent Brazilian politicians have shown little understanding of the independence of their own national prosecutorial office, and therefore may not be ready to accept that the discretion of U.S. prosecutors is also significant, even when foreign policy is on the line. Domestic legal calculations also play a role: Brazilian prosecutors, for example, have been very careful to paint Petrobras as a victim rather than a target. There are many reasons for this prosecutorial caution: there is doubt about the culpability of many of the firm’s directors, Brazil’s Clean Company Law is new and untested, and there are a variety of more attractive targets for prosecution. Furthermore, there may well be trepidation about the political costs of taking down the the crown jewel of Brazil’s state-owned companies: most Brazilians are up in arms that Petrobras has been so violated by graft and gross mismanagement, but they understandably do not want to see it further damaged. On the U.S. side, however, the big question is not really whether U.S. prosecutors are going to prosecute wrongdoing, but when. Given the sharp drop in Petrobras’ market capitalization—from a high of $380 billion to $23 billion today—the U.S. Securities and Exchange Commission (SEC) may have little option, given that its mandate is to curb behaviors that cause damage to shareholders and stock market integrity. Already, Petrobras has taken a write-down of more than $17 billion for overvalued assets, including $2 billion associated with corrupt acts, and the U.S. Department of Justice (DOJ) and SEC have announced investigations. News reports suggest that Petrobras could be the target of the largest ever penalties ever levied by U.S. authorities in a corporate corruption investigation, exceeding the record-breaking $800 million paid by Siemens in its 2008 agreement with the DOJ and SEC. If such fines came to pass, they would have a shocking effect on a Brazilian public already reeling from more than their fair share of bad news. A former Brazilian Supreme Court justice predicted that for those who are unaware that it is coming down the pike, a U.S. prosecution will be a “humiliation and a devastation.” U.S. prosecutors will also be keen to understand kickbacks and corruption that may have taken place on U.S. soil, as in possibly fraudulent refinery purchases, or that might have passed through U.S. banks via offshore accounts in Panama or Switzerland, as Brazilian investigators allege. There are a variety of potential avenues for enforcement, ranging from SEC administrative sanctions through a full prosecution under the Foreign Corrupt Practices Act (FCPA), made possible because Petrobras is publicly listed on the New York Stock Exchange (NYSE), and made more likely by the DOJ’s recent efforts to ramp up FCPA prosecutions. Prosecutions could be led by state prosecutors, the DOJ, by the U.S. Attorney for the Southern District of New York, whose office has been aggressive in prosecuting violations of corporate malfeasance, or by some combination of all of these autonomous actors. Potential oversight bodies could also include an alphabet soup of agencies involved in asset forfeiture and money laundering, in the DOJ and U.S. Department of Treasury, as well as state governments. And of course, Petrobras is already facing civil litigation in the United States, as well as the legal costs associated with nearly 300 foreign business partners who are also potential targets of investigation. In sum, the international dimension of Latin America’s corruption saga is only just getting underway. Legal action by the United States may not be greeted with acclaim across the Brazilian political spectrum, but together with Brazil’s enthusiastic prosecution of the case, it brings the hope that the regional compliance environment may change for the better.

Latin America’s corruption scandals of the past two years are moving slowly toward resolution. As they move forward, it is interesting to note that in a region that has been particularly protective of its sovereignty, foreign cooperation has played a significant role, whether it is via bilateral exchanges between prosecutors, mutual legal assistance treaties, or even United Nations support, as in the case of Guatemala’s International Commission Against Impunity (CICIG). But these various forms of international cooperation may soon be joined by another international anti-corruption effort that is less well understood in Latin America: prosecution by U.S. attorneys. The Petrobras scandal has so far touched down in Argentina, Peru, Panama, Brazil, and the United States, making it a truly hemispheric corruption case. I was therefore taken aback when a well-informed colleague from the region suggested to me that in his view, the United States would never prosecute Petrobras, because doing so might harm U.S. foreign policy interests. In reflecting on this remark later, I think that he meant that a U.S. government that seems to be trying hard to mend fences in the region would be loathe to be seen as violating national sovereignty or acting in ways that could cast the United States in the familiar role of an avaricious exploiter of Latin American resources. This perspective has deep roots. Brazilian academics have argued that the United States seeks to limit Brazil’s energy self-sufficiency as part of its broader geopolitical strategy of hegemony. A Brazilian senator echoed this perspective in floor debate last week, noting that, having weakened Petrobras, investors were now seeking a reduced role for the oil company that would hand “the future of Brazil to Shell.” Meanwhile, other prominent Brazilian politicians have shown little understanding of the independence of their own national prosecutorial office, and therefore may not be ready to accept that the discretion of U.S. prosecutors is also significant, even when foreign policy is on the line. Domestic legal calculations also play a role: Brazilian prosecutors, for example, have been very careful to paint Petrobras as a victim rather than a target. There are many reasons for this prosecutorial caution: there is doubt about the culpability of many of the firm’s directors, Brazil’s Clean Company Law is new and untested, and there are a variety of more attractive targets for prosecution. Furthermore, there may well be trepidation about the political costs of taking down the the crown jewel of Brazil’s state-owned companies: most Brazilians are up in arms that Petrobras has been so violated by graft and gross mismanagement, but they understandably do not want to see it further damaged. On the U.S. side, however, the big question is not really whether U.S. prosecutors are going to prosecute wrongdoing, but when. Given the sharp drop in Petrobras’ market capitalization—from a high of $380 billion to $23 billion today—the U.S. Securities and Exchange Commission (SEC) may have little option, given that its mandate is to curb behaviors that cause damage to shareholders and stock market integrity. Already, Petrobras has taken a write-down of more than $17 billion for overvalued assets, including $2 billion associated with corrupt acts, and the U.S. Department of Justice (DOJ) and SEC have announced investigations. News reports suggest that Petrobras could be the target of the largest ever penalties ever levied by U.S. authorities in a corporate corruption investigation, exceeding the record-breaking $800 million paid by Siemens in its 2008 agreement with the DOJ and SEC. If such fines came to pass, they would have a shocking effect on a Brazilian public already reeling from more than their fair share of bad news. A former Brazilian Supreme Court justice predicted that for those who are unaware that it is coming down the pike, a U.S. prosecution will be a “humiliation and a devastation.” U.S. prosecutors will also be keen to understand kickbacks and corruption that may have taken place on U.S. soil, as in possibly fraudulent refinery purchases, or that might have passed through U.S. banks via offshore accounts in Panama or Switzerland, as Brazilian investigators allege. There are a variety of potential avenues for enforcement, ranging from SEC administrative sanctions through a full prosecution under the Foreign Corrupt Practices Act (FCPA), made possible because Petrobras is publicly listed on the New York Stock Exchange (NYSE), and made more likely by the DOJ’s recent efforts to ramp up FCPA prosecutions. Prosecutions could be led by state prosecutors, the DOJ, by the U.S. Attorney for the Southern District of New York, whose office has been aggressive in prosecuting violations of corporate malfeasance, or by some combination of all of these autonomous actors. Potential oversight bodies could also include an alphabet soup of agencies involved in asset forfeiture and money laundering, in the DOJ and U.S. Department of Treasury, as well as state governments. And of course, Petrobras is already facing civil litigation in the United States, as well as the legal costs associated with nearly 300 foreign business partners who are also potential targets of investigation. In sum, the international dimension of Latin America’s corruption saga is only just getting underway. Legal action by the United States may not be greeted with acclaim across the Brazilian political spectrum, but together with Brazil’s enthusiastic prosecution of the case, it brings the hope that the regional compliance environment may change for the better.

Brazil is getting back to business after an exuberant carnival that brought irrepressible Brazilian humor to bear on serious national travails, including the Zika virus, Lula’s legal troubles, and the Olympics. Reality’s bite may be harsh after two months’ holiday respite from the high political drama of 2015. The coming year will be jam-packed, including the highly contested election later this week of new party leadership, a PMDB party leadership convention in March, the April deadline for ministers and governors to step down if they are running for office, the August Olympics, and the October municipal elections. Layered over these events will be the ongoing Lava Jato and Zelotes corruption investigations, campaigns against the Aedes Aegypti mosquito, and of course, the continued drama of Chamber of Deputies’ president Eduardo Cunha’s cage match with President Rousseff. Looking ahead, the only major certainties for the year ahead are that GDP growth will be negative, and that there will be significant political upheaval, as a consequence of the elections and the corruption investigations, which have no end in sight. But there are also significant uncertainties that overlap with a compressed political calendar to raise questions about where Brazil will stand a year from now: The Olympics: most observers believe Rio is capable of pulling the Olympics off splendidly, despite lingering concerns about overspending, violence, and pollution. However, last week U.S. soccer icon Hope Solo expressed the fears of many foreign athletes, signaling that Zika may have a measurable impact on the success of the games and on the country’s tourism, which was expected have a boon of at least a million additional visitors during the games. Rousseff’s presidency: the impeachment drive hit a major roadblock in December, as the high court (STF) stepped in to restart the process. But support for impeachment was already fraying: the fiscal premise for impeachment seems flimsy, Vice President Temer is not a consensus replacement, Rousseff still holds the votes she needs to block impeachment in Congress, and the opposition parties, especially the PSDB, seem to be taking a more cautious posture. But impeachment was never the only risk to Rousseff: the electoral court (TSE) will consider charges against the 2014 Rousseff-Temer ticket later this year, which could void their election on campaign finance grounds. And though it seems far off, there is still the possibility that Lava Jato could reach the president, whose ties to Petrobras ran deep during her time in the Lula cabinet. Eduardo Cunha: The president of the Chamber remains on tenterhooks over accusations that he had a role in the corruption of Petrobras’ international operations. Cunha spent most of the past four months finding procedural runarounds of a congressional ethics investigation of his Swiss accounts, and he is likely to continue to play out the clock for as long as he is able. But the STF will resume hearings this week into his removal. Needless to say, Cunha’s ouster would remove one of the worst impediments to the Rousseff administration’s legislative agenda, while slowing congressional investigations of the president. Lula: the former president is in the crosshairs of two massive corruption investigations. January brought the Lava Jato case a step closer to the former president’s door, as plea bargaining witness Nestor Cerveró made allegations of forbidden foreign contributions to Lula’s 2006 campaign, a close friend of Lula’s was arrested, and a beachfront apartment and country home used by Lula’s family were investigated. There is increasing certainty among political analysts that Lula’s political future is grim; the uncertainty is what this means for the Workers’ Party (PT) in the 2016 municipal elections. PT party support has fallen closer to the level of more traditional parties, such as the PMDB and PSDB, and the 2018 presidential race is looking more open than anyone would have predicted as recently as a year ago. As yet, however, no force has risen to fill the void: the traditional opposition is divided, and there is as yet no new emergent force that could generate consensus. Fiscal reform: the government is pushing new spending cuts, pension reform, and new taxes to tackle the severe fiscal imbalance. The opposition seems more inclined to cooperate this year, but it is unclear how much Rousseff can deliver: the PT and many government supporters on the left oppose pension reform, and most of the government proposals remain either vague, or simply recycle old credit stimulus policies adopted during Rousseff’s first term. The streets: the demonstrations that have rocked Brazilian cities for three years began to taper off in 2015, as the organizers became more shrill and conservative than most of the angry middle class. But anger is palpable, some groups have already called for protests on March 13, and the spontaneous emergence of new protests similar to those seen in 2013 cannot be discarded. A Nixonian surprise?: Rousseff has not been an outside-the-box thinker, and she is deeply constrained by the fact that she relies on a coalition constructed by Lula, governs at the helm of two parties (PT and PMDB) that distrust her, and is heavily reliant on what remains of this coalition to block impeachment. The result is political immobility worse than any since the return to democracy in 1985. But this very paralysis might lead to policy creativity: perhaps a push for more active trade policies, akin to those being proffered by Development Minister Armando Monteiro, or perhaps negotiations for a unity coalition that might provide a space for consensual reforms?

Once a year, policymakers and the press are forcibly reminded of the terrible costs of corruption. This year, it fell on January 27, when Transparency International’s Corruption Perceptions Index (CPI) was released, inciting the ritual gnashing of teeth and beating of chests about relative national corruption gains and losses. This is precisely the sort of attention that Transparency International hopes to draw to corruption. In this sense, the report is very much a continued success. But the CPI’s utility as a policy tool is less clear-cut, not least because there are so many reasons a country might rise or fall, including revelations of previously hidden corruption or simply the movement of other countries, which then push their peers up or down in relative terms. Transparency International routinely acknowledges these issues, and actively encourages readers not to use the measure as a longitudinal indicator. But this advice usually falls on the deaf ears of headline-seeking editors. The CPI remains a blunt tool, which doesn’t provide us much guidance on how and why public perceptions of corruption are changing, or broader lessons about what works in the fight for accountability. Nonetheless, there are a few important takeaways from the report that are especially relevant to Latin America. First, grand political corruption is ubiquitous and no country is immune. Shannon O’Neil pointed last year to the potentially significant political implications of the wave of corruption scandals that have beset Latin America over the past two years. These scandals have erupted at all levels of the CPI: in countries among the highest ranked (Chile, ranked 23rd of 167 positions), at the middle of the pack (Brazil and Mexico, 76th and 95th), and near the bottom (Honduras and Guatemala, 112th and 123rd). Second, if there is one policy recommendation that emerges from recent Latin American experience, it is that increasing checks and balances, granting true autonomy to watchdog agencies, and building budgetary and human resource capacities, all contribute to better control of corruption. Conversely, countries such as Venezuela in which these checks and balances have been eroded for political reasons suffer unintended consequences, including worsening corruption outcomes. Robust democracy, in other words, has some collateral accountability benefits. In the short term, improving capacity may lead to gains in corruption perceptions. One of the most improved countries in the CPI is Honduras, which rose fourteen spots, in part because of massive public protests last year that led a scandal-weakened government to acquiesce to the creation of an independent international panel of judges and prosecutors to investigate corruption: the Organization of American States (OAS)-sponsored Support Mission Against Corruption and Impunity (MACCIH), modelled on Guatemala’s UN-backed International Commission Against Impunity (CICIG). Despite its shortcomings, including fears that MACCIH may merely serve as a smokescreen to protect the president against removal, it is hoped that MACCIH will be strong enough to provide investigatory credibility in an institutional environment marked by a politically-dominated judiciary. Yet even in countries that are moving in the right direction and developing the autonomous capacity of their institutions, the perverse consequence may be the uncovering of major corruption, and a tumble in the CPI, as InsightCrime noted. Guatemala, where last year’s corruption scandal culminated in the forced resignation of President Otto Pérez Molina, declined eight spots. Brazil, where prosecutors have filed more than 1,000 charges, recovered more than a half-billion dollars, and convicted eighty for corruption associated with state-owned Petrobras, has fallen by seven spots. Let me close by floating two suspicions about the extent to which corruption will be relevant to Latin American politics in coming years. First, declining economic fortunes are likely to be accompanied by increasing revelations of corruption that was underway during the boom times. Bad economic times mean turnover in governments, closer scrutiny of past incumbents’ accounts, and an energetic scramble for tax revenue, including through tighter oversight. Able politicians may seek to deflect attention from current economic woes by pointing a finger of blame at corrupt predecessors who wasted the bonanza of the commodity boom. If the first suspicion is correct, the second follows: impunity is likely to be one of the next big political shibboleths in the region. Latin American countries have historically been a paradise for corruption; as Steve Morris noted with regard to Mexico, impunity has long been corruption’s evil twin. Impunity makes corruption much less risky and much more lucrative. A recent estimate suggests that only 3 percent of Argentina’s corruption cases since 1980 have led to convictions, and judges took on average fourteen years to reach final sentences in these cases. Of course, these dismal results are only the tip of the iceberg, since they refer only to those cases that actually saw the light of day. And it seems unlikely that Argentina is an outlier with regard to judicial ineffectiveness, although data on corruption prosecutions and trials is weak around the region. All of this suggests that for all its faults, the CPI release will continue to be closely watched throughout Latin America in years to come.  

Once a year, policymakers and the press are forcibly reminded of the terrible costs of corruption. This year, it fell on January 27, when Transparency International’s Corruption Perceptions Index (CPI) was released, inciting the ritual gnashing of teeth and beating of chests about relative national corruption gains and losses. This is precisely the sort of attention that Transparency International hopes to draw to corruption. In this sense, the report is very much a continued success. But the CPI’s utility as a policy tool is less clear-cut, not least because there are so many reasons a country might rise or fall, including revelations of previously hidden corruption or simply the movement of other countries, which then push their peers up or down in relative terms. Transparency International routinely acknowledges these issues, and actively encourages readers not to use the measure as a longitudinal indicator. But this advice usually falls on the deaf ears of headline-seeking editors. The CPI remains a blunt tool, which doesn’t provide us much guidance on how and why public perceptions of corruption are changing, or broader lessons about what works in the fight for accountability. Nonetheless, there are a few important takeaways from the report that are especially relevant to Latin America. First, grand political corruption is ubiquitous and no country is immune. Shannon O’Neil pointed last year to the potentially significant political implications of the wave of corruption scandals that have beset Latin America over the past two years. These scandals have erupted at all levels of the CPI: in countries among the highest ranked (Chile, ranked 23rd of 167 positions), at the middle of the pack (Brazil and Mexico, 76th and 95th), and near the bottom (Honduras and Guatemala, 112th and 123rd). Second, if there is one policy recommendation that emerges from recent Latin American experience, it is that increasing checks and balances, granting true autonomy to watchdog agencies, and building budgetary and human resource capacities, all contribute to better control of corruption. Conversely, countries such as Venezuela in which these checks and balances have been eroded for political reasons suffer unintended consequences, including worsening corruption outcomes. Robust democracy, in other words, has some collateral accountability benefits. In the short term, improving capacity may lead to gains in corruption perceptions. One of the most improved countries in the CPI is Honduras, which rose fourteen spots, in part because of massive public protests last year that led a scandal-weakened government to acquiesce to the creation of an independent international panel of judges and prosecutors to investigate corruption: the OAS-sponsored Support Mission Against Corruption and Impunity (MACCIH), modelled on Guatemala’s UN-backed International Commission Against Impunity (CICIG). Despite its shortcomings, including fears that MACCIH may merely serve as a smokescreen to protect the president against removal, it is hoped that MACCIH will be strong enough to provide investigatory credibility in an institutional environment marked by a politically-dominated judiciary. Yet even in countries that are moving in the right direction and developing the autonomous capacity of their institutions, the perverse consequence may be the uncovering of major corruption, and a tumble in the CPI, as InsightCrime noted. Guatemala, where last year’s corruption scandal culminated in the forced resignation of President Otto Pérez Molina, declined eight spots. Brazil, where prosecutors have filed more than 1,000 charges, recovered more than a half-billion dollars, and convicted eighty for corruption associated with state-owned Petrobras, has fallen by seven spots. Let me close by floating two suspicions about the extent to which corruption will be relevant to Latin American politics in coming years. First, declining economic fortunes are likely to be accompanied by increasing revelations of corruption that was underway during the boom times. Bad economic times mean turnover in governments, closer scrutiny of past incumbents’ accounts, and an energetic scramble for tax revenue, including through tighter oversight. Able politicians may seek to deflect attention from current economic woes by pointing a finger of blame at corrupt predecessors who wasted the bonanza of the commodity boom. If the first suspicion is correct, the second follows: impunity is likely to be one of the next big political shibboleths in the region. Latin American countries have historically been a paradise for corruption; as Steve Morris noted with regard to Mexico, impunity has long been corruption’s evil twin. Impunity makes corruption much less risky and much more lucrative. A recent estimate suggests that only 3 percent of Argentina’s corruption cases since 1980 have led to convictions, and judges took on average fourteen years to reach final sentences in these cases. Of course, these dismal results are only the tip of the iceberg, since they refer only to those cases that actually saw the light of day. And it seems unlikely that Argentina is an outlier with regard to judicial ineffectiveness, although data on corruption prosecutions and trials is weak around the region. All of this suggests that for all its faults, the CPI release will continue to be closely watched throughout Latin America in years to come.

Last week, I had the privilege of testifying before the U.S. Senate Committee on Foreign Relations at a hearing titled "Political and Economic Developments in Latin America and Opportunities for U.S. Engagement." Also joining me before the committee were Thomas McLarty, chairman of McLarty Associates, and Eric Farnsworth, vice president of Americas Society and Council of the Americas. In my written testimony I laid out the largely positive trends in Latin America and the benefits for the United States of working more closely with countries in the region. I also called for deepening integration with Mexico and Canada, and supporting the rise of homegrown anticorruption efforts throughout the region. Below is an excerpt. As the United States grapples with extremism and authoritarianism abroad, Latin America is largely a good news story. The region has changed dramatically over the past few decades, mostly for the better. Today the region is overwhelmingly democratic. Authoritarian rule is mostly relegated to the past, replaced by competitive parties, vibrant civil societies, and institutional checks and balances. Latin America is home to an increasing number of market-friendly economies with close ties to the United States. Over the last twenty-five years trade with the region outpaced that with the rest of the world, as U.S. exports to Latin America jumped sevenfold. These nations now buy over a quarter of all U.S. exports, supporting tens of millions of jobs here at home. Many of our products are bought by the region’s middle class, which added over 100 million members during the last decade’s economic prosperity. In South America, this socioeconomic center comprises a near majority of the continent’s 400 million citizens. Latin America is also resource rich, containing 20 percent of the world’s oil reserves, as well as numerous other commodities. Finally, the region largely shares U.S. values, providing many current and potential allies for the United States when negotiating complicated global issues in multilateral forums, including financial architecture, climate change, and transnational organized crime. Recent changes, from the normalization of U.S.-Cuba relations to the election of Mauricio Macri in Argentina, further the potential for positive shifts in bilateral and regional relations. You can read the rest of my written testimony, read the written testimonies of my fellow witnesses, and watch a recording of the hearing on the U.S. Senate Committee on Foreign Relations website.

The past year has altered Latin America’s diplomatic panorama. Among the most significant changes were a U.S. policy turnaround that included U.S. rapprochement with Cuba, a reset in U.S.-Brazil relations cemented during President Dilma Rousseff’s June state visit to Washington, DC, and greater U.S. participation in the Colombian peace talks. In addition to these carefully strategized advances, a variety of far more contingent factors is converging in ways that are likely to shake up established regional alignments within South America. As the region prepares for the fourth Community of Latin American and Caribbean States (CELAC) summit at the end of January, the rightward shift of domestic politics in the region, the woeful state of Brazil’s Rousseff government, and the Pacific turn in trade negotiations are combining in ways that may create a new set of opportunities for regional relations, and will certainly jumble the status quo. The Chinese slowdown, the end of the commodities boom, the decline in oil prices, and the failure to undertake deep reforms that would improve long-term economic and political prospects have triggered a shift in domestic politics across the region. As various sharp analyses have noted recently, this probably spells the end of a long period of extraordinary political stability that has endured for fifteen years in countries as varied as Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Uruguay and Venezuela. In two of these countries, Argentina and Venezuela, noisy change came at the end of last year. The replacement of the Kirchner dynasty by President Mauricio Macri has already led to a substantial shift in economic policy rhetoric. This may be the leading edge of a regional move away from profligacy; as Marta Lagos cleverly noted, there is no populism without money. But the continued popularity of the Kirchner policy mix and the minority status of Macri’s coalition suggests that some of his more ambitious domestic reforms will have limited legislative support. Macri’s limited scope of action at home, combined with a Rousseff government desperate to escape its domestic troubles, might provide an opportunity for a long-overdue reckoning on Mercosur’s political and economic objectives. The symbolic importance of Mauro Vieira’s visit to Buenos Aires in mid-January was hard to miss: the Brazilian became the first foreign minister to meet with his counterpart Susana Malcorra and discuss the two countries’ shared “bilateral, regional, and multilateral” agenda. Simultaneously, there has been a subtle shift in the regional attitude toward the reddest of the so-called “pink tide countries” that had governed much of South America since the turn of the century. The legislative victory of the opposition coalition Democratic Unity Roundtable (MUD) in Venezuela’s December elections triggered the first regional crisis of 2015, and the showdown between the opposition-led National Assembly and the Chavista-friendly supreme court has been the central focus of foreign ministries across the region for much of the past month. Predictably, both the Organization of American States (OAS) and the United States expressed concern about the Venezuelan supreme court’s decision voiding elections in the state of Amazonas and declaring National Assembly legislation null until the contested legislators were removed from office. More surprising, perhaps, was the Brazilian government’s decision to express its confidence that “the constitutional prerogatives of the new National Assembly” would be preserved, a signal to President Maduro’s government that there were limits to Brazilian tolerance for extra-constitutional meddling. Brazil’s rotten prospects for the year ahead—Brazilians joked that when they said “Happy New Year!” on January 1, they were actually referring to 2017—contributes to the regional window of opportunity. Rousseff’s first five years in office were foreign policy averse: she eschewed the globetrotting of the Lula years, even as the country’s BRICS partners stumbled. Gone are the days of a Brazilian quest for a UN Security Council seat, or a comprehensive Doha Round negotiation led by a Brazilian World Trade Organization (WTO) president. In their place is a petty spat with Israel that has sputtered on since mid-2014, now focused on what is, to many Brazilians who follow global affairs, the indigestible nomination of a prominent settler in the occupied territories as Israel’s ambassador to Brasília. Meanwhile, the current corruption scandals and the related crisis of state capitalism in Brazil have undermined the country’s regionalized foreign policy, founded on Mercosur and Unasur as counterweights to U.S. influence in the hemisphere. And there is precious little clarity in Brasília these days about where the country should focus its foreign policy. But desperation might be a source of invention. Already, the scramble to find new sources of investment that might make up for the credit-strapped public banks, like the National Economic and Social Development Bank (BNDES) and Banco do Brasil, or to restore the capacity for public infrastructure spending, has led Brazil to new ventures, such as the $20 billion Brazil-China Fund. The crisis seems likely to prize open foreign investment opportunities as well, as state owned enterprises are forced to abandon their prior emphasis on national preferences in a desperate search for partners. Finally, the regional realignment is being driven by the shock imposed by the Trans-Pacific Partnership (TPP). While TPP seems very unlikely to move to ratification during President Obama’s final year in office, the shock of the “Pacific” countries’ turn to Asia—via TPP or the Pacific Alliance—has led to cries of desperation in many “Atlantic” countries who see themselves being left behind. In sum, although declining oil prices, lower commodity prices, and negative growth have diminished the ambitions expressed at the turn of the century, they have refocused South American foreign policy discourse in a realistic and potentially productive new direction.

Brazil is in the midst of the longest recession of the democratic era that began in 1985. Between 2015 and 2016, the economy will shrink by 7 percent, more than in any other two-year period in the past century. The Economist’s dire cover story this week summarized the sad state of affairs: a downgrade in the country’s debt to junk status, a massive corruption scandal, rising public debt, two-digit inflation, and a rudderless political system, all contributing to “Brazil’s Fall.” Many Brazilian pundits and academics agree on what needs to be fixed. In the short term, to rein in government spending—the nominal deficit now stands at 10 percent of GDP—they call for shrinking government credit subsidies, reforming the social security system, and reducing the overall size of the public sector. In the longer term, these analysts argue for improving competitiveness, boosting innovation, and above all, restoring the industrial sector. Given the depth of the crisis, 2016 was always going to be a painful year. Making it worse is the government’s inability to do much to soften the blow. The December departure of Finance Minister Joaquim Levy, who proved to be less of a fiscal scissorhands than markets hoped, underlined the huge political challenge of fiscal reform. The governing Workers’ Party (PT) has been ambivalent if not just plain opposed to austerity measures. Its fickle allies in the centrist PMDB have been unwilling to take up the burden without a clear sign of government commitment, and the opposition is happy to bleed President Dilma Rousseff dry. Congressional backing for the government has fallen, and the cost of legislative support has risen in inverse proportion to the perceived weakness of the Rousseff administration. The tragic result is that the very reforms that might build the foundation for restoring growth seem unlikely in 2016, or even during the remainder of Rousseff’s second term, which is not scheduled to end for another 1,090 days. If anything, the political climate is likely to worsen in the new year. Although impeachment still seems unlikely, it will continue to dominate Brasília’s attentions when Congress returns to session in February. Whatever bandwidth remains will probably be filled by the Lava Jato and Zelotes investigations, which are increasingly focused on senior political figures. In this climate, neither the government nor Congress will push for legislation that requires super-majorities, such as tax, electoral, pension, or civil service reforms. Public consensus about these themes has not yet coalesced, and some pundits argue that the situation may need to worsen even more before politicians are willing to undertake such unpopular choices. Where are the upsides, then? Even though little legislative action is expected, the economic crisis is forcing state-owned companies, and state and municipal governments, into belt-tightening and innovation of their own. Already some states are rethinking their opposition to public concessions, and state firms are reaching out to the private sector for investment. This may lead to a slow dismantling of the crony capitalism at the heart of the Lava Jato scandal. The lousy economic outlook combined with political crisis has led to a more than 45 percent depreciation in the Real from its strongest point in 2014, an adjustment that—albeit inflationary—will improve industrial competitiveness, and contribute to a correction in the uncompetitive real overvaluation of domestic assets. The much-lauded improvement in the performance of the anti-corruption bureaucracy has been slow in coming but revolutionary in its effects. The innovative use of anti-money laundering statutes by the prosecutors and judge at the heart of Lava Jato is being widely studied throughout the judicial system. Already the scandal has contributed to changes in campaign finance, with the high court ruling corporate electoral contributions unconstitutional, and Lava Jato has given new impetus to a popular initiative spearheaded by prosecutors to further strengthen anti-corruption laws. Rousseff’s desperation may lead to beneficial outside-the-box policy initiatives—perhaps working with Argentina’s Macri to remake Mercosur for the post-Chávez era, taming the burgeoning public sector debt, or even rethinking the long-standing labor code. This may be the only means of improving Rousseff or her party’s standing in the run up to October’s bellwether municipal elections. Finally, as the Economist pointed out, Rousseff can’t afford to lose another finance minister, after replacing two in 2015. This gives Nelson Barbosa considerable power, and may enable him to build support for emergency fiscal measures. While none of these are exactly silver linings, they could, along with the Rio Olympics, bring hope to a beleaguered nation.