Brazil

As President Dilma Rousseff’s polling numbers fall far into the single digits, the calls for her impeachment grow louder. In Congress, PMDB lower house head Eduardo Cunha has broken with Rousseff, intimating his support for her removal. On the streets protestors too call for a change, marching by the hundreds of thousands to express their anger and frustration. The legal case against her is currently weak. As the Petrobras corruption investigations expand to include dozens of high profile names, among them former President Luiz Inácio Lula da Silva, Eduardo Cunha himself, and construction magnate Marcelo Odebrecht, Rousseff has not—at least yet—been publicly named. Even if she is, impeachment is only possible for crimes committed as president (the Lava Jato scandals primarily occurred while she was chairwoman of Petrobras, from 2003 to 2010). Some political opponents believe they could try her instead for breaking campaign finance rules or for fudging government accounts. To move forward, two-thirds of the lower house of congress would need to vote to impeach; in the case of criminal charges the Supreme Court would then weigh in. If tried on corruption charges, the Senate would preside. Eight of the eleven sitting Supreme Court judges are Rousseff or Lula appointees. In the Senate her coalition, though weakened, still maintains a majority. Politically, impeachment doesn’t necessarily help her most avid opponents in the PSDB. If removed before January 2017, Vice President Michel Temer of the PMDB would take over, strengthening the hand of a potential rival for the 2018 election. And even with the tensions within Rousseff’s own party, the PT, none benefit from her ouster. Finally, Rousseff’s impeachment could set a worrisome historical precedent. This isn’t Brazilian democracy’s first impeachment go round. In 1992, the opposition PT and PMDB pushed congress to impeach then President Fernando Collor de Mello on corruption grounds. Though he resigned in an effort to stop the proceedings, he was found guilty and barred from public office for eight years (today he is a senator and actively being investigated for accepting bribes in exchange for lucrative government contracts). At the time some hailed it as a democratic achievement, taking on the most powerful and corrupt; others saw it as the political backlash of those opposed to Collor de Mello’s austerity and other measures to root out vested interests (none question the actual corruption). Another impeachment, particularly if done for political or popularity (rather than rule of law) reasons, could weaken Brazil’s thirty-year-old democracy. It is this fear that has brought opposition PSDB elder Fernando Henrique Cardoso to the presidency’s defense. In the words of the former president, “You’d need to have a crime, and a political consensus in Congress as well as in the street. I don’t think that’s the situation here.”

Alex Grigsby is the assistant director for the Digital and Cyberspace Policy program at the Council on Foreign Relations. Brazilian President Dilma Rousseff’s was in Washington D.C. this week to meet with President Obama. The trip came two years after she had famously cancelled a state visit in 2013 in protest following allegations that the NSA had spied on Brazil and Rousseff personally. At the time, the Brazilian president was very public and vocal in her denunciations, calling the espionage "manifestly illegitimate" and expressing her outrage at the United Nations. While the U.S.-Brazil cyber relationship hit the rocks in the immediate aftermath of the Snowden disclosures, it seems like time and some deft diplomacy has helped patch things up. At this year’s Summit of the Americas, Rousseff indicated that she’s moved on. Things have improved so much in fact that the Rousseff-Obama joint communiqué dedicated five paragraphs to Internet issues. Most importantly, both leaders have agreed to resume the Brazil-U.S. cyber working group. The United States and Brazil share the understanding that global Internet governance must be transparent and inclusive, ensuring full participation of governments, civil society, private sector and international organizations, so that the potential of the Internet as a powerful tool for economic and social development can be fulfilled. Both countries acknowledge the agenda approved by Netmundial conference (São Paulo, April 2014) as a guide for discussions regarding the future of the global internet governance system. Both countries reaffirm their adherence to the multistakeholder model of Internet governance and, in this context, reaffirm their commitment to cooperate for the success of the Tenth Internet Governance Forum (João Pessoa, November 10 to 13, 2015), and extension of the IGF mandate. Likewise, they reaffirm their interest in participating actively in the preparatory process of the High-Level Meeting of the UN General Assembly for the Ten-Year Review of the WSIS outcomes, to be held in New York in December 2015. Bilateral cooperation on cyber issues will be resumed by the convening of the Second Meeting of the Working Group on Internet and Information and Communications Technology in Brasilia in the second semester.  The meeting will offer the opportunity of exchanging experiences and exploring possibilities for cooperation in a number of key areas, including e-government, the digital economy, cybersecurity, cybercrime prevention, capacity building activities, international security in cyberspace, and research, development, and innovation. The resumption of the working group is significant. While the United States and Brazil don’t always see eye-to-eye on cyber issues—particularly on the Internet governance front—they recognize the importance of an un-fragmented and open Internet. That makes them important allies to push for a renewal of the IGF’s mandate and the adherence to multistakeholder model in the face of opposition from countries that question its worth. It will also help both countries coordinate each others’ negotiating positions in the run up to the negotiation of the WSIS+10 outcome document, expected to be issued later this year where the usual suspects are likely to push for a greater decision-making role for UN institutions in Internet governance. While some may be calling out Rousseff for flip-flopping, the resumption of the working group is unequivocally a good thing for the prospects of an open, global Internet.

This is a guest post by Emilie Sweigart, an intern here at the Council on Foreign Relations who works with me in the Latin America Studies program. Even as Brazil pushes forward austerity measures and entitlement reductions, the administration of President Dilma Rousseff is hoping to increase infrastructure investment. The recently announced Programa de Investimentos em Logística (PIL) would launch nearly R$200 billion (USD$64 billion) in concessions for rail (R$86.4 billion), roads (R$66.1 billion), ports (R$37.4 billion), and airports (R$8.5 billion). Roughly a third would be completed by 2018, when Rousseff will leave office. There is no question about the need. The World Economic Forum ranked Brazil’s infrastructure 120th out of 144 countries, alongside Mongolia (119th) and Zimbabwe (121st). With few railroads, coffee, sugar, soybeans, cotton, and other export bound commodities travel on run-down roads from the interior to the coast. Once there, trucks can line up for days at the port. Of the tens of billions spent for the 2014 World Cup and now the 2016 Olympics, much has gone to stadiums and sports venues, less to long-term transportation infrastructure. Airport terminal renovations in São Paulo and Curitiba and Rio’s promised subway extension and port expansion remain unfinished. Previous efforts to boost infrastructure spending haven’t turned out particularly well. Rousseff managed to invest just a fifth of the announced R$210 billion in the first phase of the PIL that was launched in 2012. Auctions for 14 railways and over 160 port terminals attracted no bidders, and the vaunted R$35 billion high-speed train linking São Paulo and Rio de Janeiro was shelved indefinitely. This time around, the government promises less regulation and less involvement from the national development bank, the BNDES, opening up more space for private capital. The Chinese in particular sound interested. During a May visit, Chinese premier Li Keqiang promised a joint 50 billion dollar infrastructure fund between Chinese and Brazilian banks for just such opportunities. And the Chinese have already signed onto the single biggest project in the PIL, a R$40 billion railway from Brazil’s Atlantic coast to Peru’s Pacific coast. Still, the political and business climate is difficult. Rousseff’s approval ratings continue to fall, now at just 10 percent. The construction industry remains under the Petrobras scandal cloud, and the recent arrests of Marcelo Odebrecht of Odebrecht SA and Otávio Azevedo of Andrade Gutierrez, the CEOs of Brazil’s largest construction firms, may scare potential international partners. Brazil’s lagging economy, stubbornly high inflation, and significant public debt levels combined with U.S. tapering expectations later in 2015 suggest the government can’t fund much of this ambitious project on its own. Against this backdrop, Rousseff arrives in New York on June 29 to woo the financial crowd before heading to Washington, DC, to meet with President Obama the next day. Most investors believe in her finance minister, Joaquim Levy. Rousseff’s challenge is to convince them about her support for a more market directed and friendly path for Brazil.  

This post was co-authored by Gilberto Garcia, research associate for Latin America Studies at the Council on Foreign Relations. How can countries boost productivity and economic competitiveness? Many economists and business leaders turn to economic clusters as an answer. English economist Alfred Marshall first wrote about clusters—the geographic grouping of firms in the same or similar industries—at the turn of the twentieth century. He saw numerous entrepreneurs drawn to particular locations due to physical endowments, and their parallel efforts leading to whole new industries—think California vineyards, Texas oil, or Maine lobster. Proliferation and proximity then brought other advantages: developing a pool of skilled workers, and attracting industry suppliers. As a cluster grew, firms would specialize on a particular step of the production process, increasing their productivity and profits. A century later Harvard Business School professor Michael Porter picked up the idea, envisioning clusters as a way for firms to become or stay competitive in the global economy. For him, the biggest advantage is that proximity enables cooperation. In addition to the workforce and supply chain benefits, firms are more likely to come together to form active business associations, to work with local governments to invest in infrastructure, and to partner with local universities to tailor coursework and research. In the United States, Silicon Valley is the most successful example—with the interaction between startups, large corporations, local governments, and world class universities creating trillions of dollars in wealth and redefining daily life through inventions including the smartphone (Apple), streaming home video (Netflix), and online social networking (Facebook). Many of Latin America’s most promising sectors came about through clustering as well. The aerospace industry in Queretaro, Mexico began with Canada’s Bombardier in 2006, initially attracted by low wages. The state and federal government then worked to attract other producers through tax incentives, cutting bureaucratic red tape, and new trade agreements. The government started a new Aeronautic University, and together with the companies, developed curriculum and shared tuition costs. More than a dozen aerospace companies now operate in the city, bringing in some $500 million in foreign direct investment over the last five years. In 2014 Mexico’s aerospace industry exported more than $6 billion, supporting 45,000 direct jobs and at least twice that number indirectly. In Chile, business and government came together to expand and transform the salmon farming industry. Like minded companies came together to form Salmonchile, a business association that established industry standards and sought out new markets, in particular the United States. The public-private Chile Foundation backed pioneer firms, funded R&D, and passed on best practices to other emerging producers. Over time, Chile’s salmon clusters acquired know-how and developed new technologies, increasing production. By 1992, Chile became the second-largest global salmon producer, and by 2014, exports topped $4 billion, second only to copper. Other Latin American efforts have failed. In the 1970s and 1980s as Brazil opened its markets, shoemakers in Rio Grande do Sul grew rapidly, making leather shoes for numerous large U.S. buyers. Supported mostly by their international clients, numerous Brazilian firms upped production and improved quality. Yet by the early 1990s, these same firms were undercut by cheaper Chinese shoes. With little inter-firm cooperation or support from the government, the potential cluster lost its edge, falling behind in output and never expanding into shoe design or branding. Can, and if so, how can nations create these dynamic ecosystems? Chile is trying with Start-Up Chile, a government program that gives $40,000 and a temporary one-year visa to foreign entrepreneurs to begin their ventures in the Southern Cone nation. Now five years old, it boasts few successes. The young companies are hindered by the short time horizon and limited local venture capital money (a few of the best can receive another $100,000 in financing). 80 percent of participants leave after completing the program, many headed to the United States. If history is a guide, successful clusters grow locally and organically. Still, there is a role for governments to play in nurturing economic constellations. To start, they can protect property rights and open markets through free trade agreements. They can invest in education—including creating higher educational institutions equal to those in other nations (today no Latin American university makes the world’s top 200 as measured by Times Higher Education). And they can boost infrastructure spending, now just half of the 5 percent of GDP the World Economic Forum recommends. State and local governments in particular can encourage and work with local business associations, invest in public works and supportive zoning, develop specialized educational curriculum and training, and fund research and development. In all these efforts policymakers need a long time horizon, as changes and benefits often appear slowly. Yet it is these local custom initiatives that can constitute “smart” industrial policy, and provide promise as Latin America’s nations insert themselves into global markets.

Foreign direct investment (FDI) in Latin America fell in 2014, down 16 percent to $159 billion according to the latest ECLAC report. This outpaced global declines closer to 7 percent, and fell far behind other emerging markets, which saw investments rise 5 percent on average, and 15 percent in Asia. The declines in part reflect the lumpiness of FDI—last year’s $13 billion acquisition of Modelo beer in Mexico by Anheuser-Busch InBev inflated the overall take, compounded by this year’s $5.6 billion divestment of América Móvil by AT&T; otherwise, this year’s numbers would be roughly on par with previous years. It also reflects the end of a commodity supercycle—mining investment returns in particular have been falling and helped bring down the overall average return on FDI in the region to 5 percent from a 9 percent high in 2006. Brazil leads, with $62 billion or nearly 40 percent of total flows, followed by the Pacific Alliance countries—Mexico, Chile, Colombia, and Peru. These five received 80 plus percent of all investment from abroad. While the amount of money coming in fell, the destination mix is more encouraging. Almost half funded services, 36 percent went to manufacturing, and the rest to natural resources. The majority of investments financed medium-high and high technology projects—including automotive investments in Mexico and Brazil among others—in sectors that are more likely to bring benefits to the broader economy in terms of technology, education, and indirect job creation. While much has been made of Chinese interest in Latin America, the numbers show actual money on the table still trails far behind the Netherlands (20 percent), the United States (17 percent), and Spain (10 percent). Asian FDI totals just 6 percent—though Chinese companies did close three of the top twenty deals in 2014. The profits on Latin America’s now substantial foreign owned capital stock (after decades of FDI) have soared from less than $20 billion in 2002 to over $100 billion today. Multinationals on average repatriate roughly half of these profits, reinvesting the other part locally. This has put pressure on the current accounts of Chile, Colombia, and Peru, among others, and potentially their currencies, particularly if the investments don’t contribute much to productivity and economic growth. Looking ahead, 2015 FDI will likely flag along with Latin America’s economies, particularly in Brazil. Mexico may be the exception, where expanding auto manufacturing, some loosening of service sector regulations, and the opening of its energy sector could boost investment. And overall Latin American nations need more money in the years to come for transport infrastructure, telecommunications, and electricity, whether from domestic or foreign funds. With regional savings remaining low, FDI looks to be the most likely source.

Ronaldo Lemos is a professor at the State University of Rio de Janeiro and co-founder and executive director of the Institute for Technology and Society. He helped draft the Marco Civil. You can follow him on Twitter @lemos_ronaldo. It has been just over a year since Brazil passed the Marco Civil, a comprehensive law protecting the rights of Internet users. This was not a trivial piece of legislation. The whole process took more than seven years from its original conception, to numerous public consultations, and the approval by the Brazilian Congress in April 2014. It’s no wonder it took that long. The law deals with quite a few hot topics, such as free speech, privacy, net neutrality, intermediary liability and issues other countries are still struggling to settle. Sir Tim Berners-Lee, the inventor of the World Wide Web, called it “a very good example of how governments can play a positive role in advancing web rights and keeping the web open.” The Marco Civil has been instrumental in curbing the power of the Brazilian government from having undue influence over the net and its content. The law prevents the government from taking down or regulating content, or exercising any pressure on online platforms (e.g. the Twitters and YouTubes of the world) or Internet service providers. Only the courts, by means of due process, and limited by clear legal thresholds, can actually take action regarding online content when it infringes on other rights. This seems like a sensible approach but it was not always obvious that Brazil would go for it. For years, Congress tried to pass very different legislation that would have given both the executive and the courts extensive powers to control the net. For example, one bill proposed to require Brazilians use an online “national ID” to browse the net. It also sought to create a number of felonies for activities such as “jailbreaking” smartphones or moving lawfully acquired music files from your iPod to your computer, with penalties of up to four years in jail. Believe me; you don’t want to spend four years in a Brazilian jail. Contrary to techno libertarian notions of the 90s, the absence of a guiding law for the Internet wreaked havoc on its development in Brazil. Courts issued conflicting decisions, regulators worked at cross purposes, and legislators knew that some guidance was required but were often clueless about what to do. Important issues such as free speech online, intermediary liability and many others were decided for years in a random way. For instance, one judge would hold intermediaries liable to infringing content; the judge sitting next to her would rule exactly the opposite. In one notable case, a court in the state of Sao Paulo issued an injunction ordering the take down of all of YouTube in Brazil because a Brazilian model was captured on video getting intimate with her then boyfriend on a public beach in Spain. Where the judge found the legal grounds for blocking an entire website was anyone’s guess. The legal uncertainty caused by these decisions gave headaches to entrepreneurs, librarians, politicians, regulatory agencies, users and just about everyone else in Brazil. One year since the passage of the Marco Civil, the situation has improved considerably. While the lower courts still insist in injunctions ordering the takedown of online services, appellate courts have been consistent in reversing these decisions by citing the Marco Civil. In the past twelve months, lower courts—still attached to their older habits—have issued injunctions to take down popular WhatsApp, the now defunct service called Secret, and Uber. In all three cases, the outcome was the same: appellate courts reversed the injunction immediately. Had the Marco Civil not been in place, the outcome would have been different and most likely unpredictable. The Marco Civil has also improved the way online platforms provide user data to the police for criminal investigations. Before the Marco Civil, some courts ruled that warrants were required and others didn’t. This year, the court of appeals in Sao Paulo decided that Twitter was not required to hand over data to the Federal Police in the absence of a warrant. The court held that handling the data without a warrant would violate the user’s privacy and violate the Marco Civil. Lastly, the Marco Civil has put the Brazilian government back on track regarding the promotion of a free and open Internet on the international stage. Contrary to other countries, like Russia or Turkey that have expanded the power of the executive to interfere with the Internet, online content and speech, the Marco Civil has pushed Brazil in the opposite direction. In short, the enactment of Marco Civil has had a big influence over the Brazilian legal system and educated the Brazilian public. Not many other countries in the world have been discussing issues like intermediary liability on the pages of Sunday newspapers since 2007. As a result, many Brazilians are now aware of technology policy issues and their broad implications. Brazil has proven that governments of the industrial world should not leave cyberspace alone. Good laws are better than no laws.

My colleagues Benn Steil and Dinah Walker recently published a great interactive on the spread of central bank currency swaps since the financial crisis. They find the United States provided developing nations with significant support through swap lines at the height of the financial crisis, but that China has been the most active extender of swap lines since 2009. China now has thirty-one swap agreements outstanding. The interactive also tells an interesting Latin America story. Argentina is one of the only countries in the world to take China up on its offer. Last year Argentina activated the swap line, and has since drawn a reported $2.7 billion of an available $11 billion. Under the agreed terms, the RMB may be freely converted into dollars. This is significant for Argentina, whose dollar reserves have plummeted from $53 billion in 2011 to $31 billion today. As such, the swap lines are being used less to settle Chinese goods trade than as a palliative for those unable to rely on the U.S. Federal Reserve, or in Argentina’s case most of the international banking system. International Monetary Fund, "Argentina: International Reserves/Foreign Currency Liquidity," 2015. China also maintains swap agreements with Brazil and Suriname, and just this week signed an agreement with Chile. Notably not on this list is Venezuela, which has already received $56 billion in loans since 2007. Even the Chinese seem to have their limits. Here is a link for more of Steil and Walker’s analyses on the topic.

The Petrobras corruption investigation, known locally as Operation Lava Jato (Carwash), entered a new phase last week, when Rodrigo Janot, Brazil’s general prosecutor, implicated 53 politicians from six different political parties. All but two come from President Dilma Rousseff’s Workers’ Party (PT) congressional coalition. The accused include two of the legislature’s most prominent politicians: Eduardo Cunha (PMDB), the president of the Chamber of Deputies, and Renan Calheiros (PMDB), the president of the Senate. Cunha is accused of taking a personal bribe; Calheiros is accused of trading political support for funds for the PMDB; both deny any wrongdoing. Dilma’s former Chief of Staff Gleisi Hoffman (PT) and former Energy Minister Edison Lobão (PMDB) were also accused of receiving illicit money for political campaigns – Hoffman for her own 2010 Senate run; Lobão to support Roseana Sarney’s gubernatorial campaign in the northeastern state of Maranhão. Sarney – the daughter of former President Jose Sarney – was previously implicated in a scandal involving Amazon development funds. Former president, now senator Fernando Collor de Mello (PTB) made the list for allegedly receiving bribes. This isn’t his first scandal; he resigned from the presidency in 1992 rather than be impeached for corruption (he was later found guilty and barred from public service until 2000). The opposition PSDB didn’t emerge unscathed either. Antonio Anastasia, an influential senator and close ally of defeated presidential candidate Aecio Neves, allegedly received R$1 million to run his own gubernatorial campaign in the state of Minas Gerais. These political revelations expand upon the already extensive investigations into Petrobras employees and numerous private sector firms, including construction firms OAS, with over one hundred thousand employees, and Andrade Gutierrez, with projects in more than 40 countries around the world, as well as the Brazilian conglomerate Camargo Correa, with operations in construction, energy, transport, and engineering. With estimates topping $4 billion in illegal kickbacks over the past decade, two high-level Petrobras executives and 24 private sector executives have been indicted so far. Twelve of the 26 have been taken into custody indefinitely, while fourteen remain under house arrest. All this is happening at a difficult time for Brazil as a nation. When the 2005 Mensalão scandal hit, Brazil was growing rapidly and the country’s president, Luiz Inácio Lula da Silva, was near his all-time highs in terms of popularity. By contrast, Dilma faces a stagnant economy, weak currency, and water shortages and electricity blackouts due to a record drought. In a recent poll, just 23 percent of people interviewed rated Dilma’s performance as “excellent or good,” down from 42 percent in December, and she is bracing for a wave of protests this Sunday. The revelations may paralyze Brazil’s government. But combined with general dissatisfaction, it also could create the incentive for real reform. Dilma’s challenge is to not waste this crisis.