Teetering at the Precipice: Brazil and the 2016 Summer Olympics

Laurie Garrett, CFR Senior Fellow for Global Health, Shannon K. O’Neil, CFR Nelson and David Rockefeller Senior Fellow for Latin America Studies and Director of the Civil Society, Markets, and Democracy Program, and Neil Shearing, Chief Emerging Markets Economist, Capital Economic Ltd, discuss the issues facing Brazil as the country prepares to host the 2016 Summer Olympics. The experts examine the implications of Dilma Rousseff’s impeachment trial and Brazil’s deepening economic recession for the country's future.  They also discuss the health concerns, including the Zika virus and widespread water pollution, that confront Brazil as the Olympic Games begin. 

RUBIN: So good afternoon, and thank you all for being with us here tonight. My name is Art Rubin. I work for SMBC Nikko, a Japanese back here in the U.S., where I cover our clients in Latin America.

Our meeting today is Brazil—“Teetering on the Precipice: Brazil and the 2016 Summer Olympics.” And we’re here with Laurie Garrett, Shannon O’Neil, and Neil Shearing. You’ll find their biographies in the packet that you were given when you came in, that gives more detail on what each of them do.

I want to welcome CFR members from around the nation and the world who are participating in today’s meeting through a livestream and teleconference, and we will—they’ll have an opportunity to ask questions during the Q&A session at the—at the end.

So, with that, let’s get going. Clearly, the topic on everybody’s mind that thinks about Brazil, and then some, are the Olympic Games, which are set to start a week from Friday. And for better or for worse, the eyes of the world are on Brazil. And unfortunately, it is probably not a moment that most Brazilians would like to have the world’s attention focused on them.

The press, just reading the headlines in the last few days, has been dominated by stories of unhygienic water in Rio, unfinished athletes’ quarters and high-profile athletes skipping out of the games, some of them over concerns about the Zika virus. So this seems like a good moment to take stock not only of how the Games will actually go, but also how the Games are being viewed by Brazilians themselves, and what the legacy of the Games will be politically, socially, and economically.

So, Shannon, if we could start with you, given the currently charged political climate in Brazil, how are the Games being perceived in the context of this? Could the timing of this event, on the eve of Dilma Rousseff’s trial for impeachment, have any impact on the outcome of her trial and more broadly political trends in the country?

O’NEIL: Sure. Well, thank you, Arthur. Thank you all for coming.

And it is interesting, right. When Lula went to make his case to have the Olympics come back in I think it was 2009, he beat out Obama’s Chicago. Everybody was there positioning themselves. I don’t think this is what he expected, right—(laughter)—what he was trying to—and, you know, unfortunately, rather than being at the height of their power and their glory and their influence on the world stage, or thinking they were really rising, finally becoming the country of the present, now everybody’s descending on Rio in probably the worst and both dual political and economic crisis Brazil’s seen for decades, if not modern history. So it’s a very difficult time for them to come.

On the one side, Brazilians haven’t been paying much attention at all to the Olympics, right? So outside of Rio, where people are beginning—you know, have been sort of displaced, or some have been displaced, or, you know, the construction and the like, which started late and is not yet done—as we’ve found out from those news articles—there’s been some dislocations. But more broadly, people aren’t really thinking about it because they’re wrapped up in either the economic crisis, right—we have double-digit unemployment, we’ve had GDP falling for two years straight, and maybe bottoming out but still looking pretty rough—and then on the political side. And they have their own big telenovela going on, and the president has stepped down and is waiting to be impeached, and so that will be going forward. And, in fact, there’s big demonstrations planned for this weekend, so right on eve of the Olympics a lot of people are focused on that rather than the Olympics.

I mean, that said, everybody here—many people here I know know Brazil well, and Brazil knows how to throw a good party. (Laughter.) And so they did it in the World Cup, right? Rio did it, but so did many other cities around Brazil. And for all of the problems that we’ve heard about with the infrastructure and the like, Rio welcomes over a million people every year for Carnival. So they know how to move people through. They expect 500,000 foreigners to come in. So they know how to manage these people. I mean, it may be a bit chaotic, but it could in the end end up being a lot of fun.

RUBIN: You mentioned the World Cup. And certainly, I think that it was a case of Brazil managing everybody’s expectations down so low that whatever happened was going to look good, and I suspect there may be an element of that in the Olympics. If it winds up being a smashing success, does that have political consequences either for the previous administration, which seems to be on the way out, or for the political dynamic that’s going on?

O’NEIL: So far, this hasn’t seemed to me to be very partisan. I mean, the most partisan or more difficult aspect is Secretary Kerry is going to go to the Olympics and, you know, who sits on his left or who sits on his right in terms of, you know, Dilma and Temer both showing up at the Olympics. It’s like—it’s like having your divorced parents come to your wedding, you know? (Laughter.) Sort of how do you—how do you seat them?

But so far you haven’t seen this become an incredibly partisan issue, right? Is this—this is not a PT failure. This is not—I mean, if we see a failure there—or, particularly, I think the biggest failure we might see is if there is a terrorist attack or some sort of action like that—then you might have some finger-pointing between the mayor of Rio, the state of Rio, and the federal government: did you not provide enough security, who was responsible, was there not enough month put forward. But I think that is going to be maybe the biggest threat, and so there you might see some party politics. But I don’t see this really being easily pinned, say, on Lula or those for bringing this to Brazil back seven years ago.

RUBIN: So, Laurie, the Olympics has gotten caught up in a broader dialogue about the Zika virus, which disproportionately impacted Brazil and Rio in particular, and more broadly has fed into questions about the state of public health in the state of Rio and in Brazil generally. So, clearly, Zika represents a serious threat to women of childbearing are who are pregnant or could become pregnant. But could you put the global concerns about the Zika virus into context? Why is this something that has gotten so much attention, to the point where there was some discussion of canceling or moving the Olympics? Was that justified?

GARRETT: Well, first of all, I don’t think that there was any serious possibility that they would ever have moved the Olympics because of Zika. The World Health Organization did a calculus and decided that, if you look at the three most endemic Zika countries in Latin America and compute how many human beings travel to and from those countries as a matter of business, tourism, et cetera, that you were looking at about 40 million people. And, as Shannon just said, we’re talking about a half a million for the Olympics. So their calculus was it’s trivial risk compared to the overall burden of globalized travel through the region.

But we can’t minimize how serious the Zika threat is overall. Brazil experienced a record mosquito year, clearly, in 2015 because of the El Nino event, which completely altered the weather patterns across the Amazonia region. And so they had a surge and near-record numbers of Dengue, of Chikungunya, and the first-time-ever arrival of Zika. And combined, you’re looking at about 400,000 identified cases, which means they had symptoms, because we don’t have really good tests to discriminate between the three diseases and to do random testing of asymptomatic people. So the assumption is that well over half a million people in Brazil have had Zika, most of them asymptomatic. The problem is that a finite percentage—about 5,000 cases—have had microcephaly babies, and this is not to be underestimated.

And we now know, with Zika, it’s a lot more than microcephaly. That’s one end of a spectrum of brain damage that goes broader than the 1964 rubella catastrophe, where we had birth defects across the United States as a result of a rubella epidemic among pregnant women. So it’s a—it’s a range from hearing disorders, things that we think are going to be developmental measures that the kids don’t reach as they age—remember, they’re mostly still infants—and all the way to absolutely devastated brains and physical deformities, and a very large percentage actually is miscarrying. So this is serious.

Now, some people would say, well, why get so upset about Zika? It’s only affecting pregnant women and their babies. Well, first of all, the “only” is not an issue that most women would take kindly. But secondly, an ever-increasing percentage of Zika transmission in the world is not as the result of mosquitoes, but rather sexual transmission. And we now know, based on studies in Brazil—and, unfortunately, some cases in the United States—that the Zika virus can survive in an asymptomatic man whose blood tests negative, but in his semen for 93 days. So sexual transmission has now been confirmed in—both from female to male, and male to male, and male to female. So it’s increasingly looking like as likely a sexually-transmitted disease as, say, hepatitis B. And that poses some very serious challenges for the whole global community in terms of controlling and limiting the problem, and is one of the reasons the Brazilian government is giving out a few million free condoms to people who attend the Olympics.

But there’s a larger background here. You know, just in my dealing with colleagues in Brazil looking at the Zika situation, even before the Dilma impeachment reached the catastrophe point, I was already getting emails from colleagues saying: I really don’t know if I’ll have a job tomorrow, so I can’t answer your Zika questions; or, I can’t work with your CDC or your NIH in the United States because I don’t dare leave the country for fear that when I come back my job will be taken away from me. And since the government has changed, that anxiety has only increased. It’s made collaborative science very difficult for everybody involved in the Zika problem.

And then you have to add to that that a huge percentage of doctors and nurses have gone unpaid now for several months. Rio’s hospital situation is so dire that they think—they hastily purchased 150 ambulances in time for the epidemic, and they’ve tried to add hospital beds to the primary hospital that will be used for all athletes and spectators that may suffer some health problem. But it remains woefully deficient.

And then, finally, you’ve all heard about the polluted waters, and Rio bay, and the concern for the swimmers and canoers and so on. It’s not trivial. Hospital waste is actually pouring directly into Rio bay, as is some of the sewage. And one of the key factors found in the bay is MRSA—some of you have heard of this, Methicillin-resistant Staphylococcus aureus—not a pleasant infection. And one study showed—that was done jointly by our CDC and the Brazilian health authorities—showed that one hour of immersion in the water was 100 percent infection rate. So, I mean, if you’re a triathlete and part of your event involves swimming across Rio bay, that’s one of the reasons Australia invented a special micro-proof suit for their swimmers, but your face still has to be immersed.

So there are significant issues.

RUBIN: So let’s turn for a second to the economy. Brazil’s economy has shrunk for seven of the—seven out of the last eight quarters. And the outlook, although maybe starting to get a little better is still generally bleak. Back in January of this year, if you had told someone that one of the challenges facing the Brazilian Central Bank right now was to prevent the currency from appreciating, they probably would have told you to have another caipirinha. And yet, this is the reality that we’re in. Certainly, there is signs of hope. President Temer—acting President Temer has appointed an economic dream team to run the central bank. And the finance ministry, which the markets have loved maybe too much, both Petrobras and the Brazilian government and some corporates have successfully issued bonds in the international capital markets which have been well-received and oversubscribed.

So, Neil, given the signs of hope, maybe even verging on euphoria, do you think that the financial markets’ re-embrace of Brazil is premature? And are investors properly discounting the risks that you see out on the horizon?

SHEARING: Well, I think, to understand what went wrong in Brazil, you’ve got to cast your mind all the way back to 2009, I think. You know, the Olympics were awarded to Rio. I mean, at that time, Brazil’s economy was taking off. You all remember that famous Economist cover that had the Corcovado taking off; the headline was “Brazil Takes Off.” And it proved, I think, to be ephemeral for three reasons.

The first was, well, what was driving that? China was a big thing. So China has become Brazil’s biggest trade partner by far, and Chinese growth has now slowed.

Allied to that, China’s growth was pushing up global commodity prices. What’s Brazil’s major export? Commodities. So it had this huge rise in income through its—through the value of its exports. That translated into a consumer boom on the ground, and that propelled the economy.

And then the third thing was a huge expansion of credit and a debt binge. Donald Trump calls himself the king of debt. Well, he should go to Brazil, because that really is something else. (Laughter.) It’s not just the government; it’s households, it’s companies. And we’re starting to see some of that work through, as well, now.

All of that, as you say, came together. It means that Brazil is now pretty much in its worst recession since we started collecting data. We get reliable data back to about 1900. We’ve not seen anything comparable, all the way through the ’80s and the ’90s and that lost decade or decades for Latin America. Nothing in terms of the impact on GDP has been as bad as this crisis.

So what’s now going to happen? Well, there are signs of hope, I think. If you look at the incoming economic data over the last couple of months, it does seem that the economy has reached a bottom. It does look like the second quarter GDP data, which we’re going to get in a couple of weeks’ time, that will probably be better than the first—than the data in the first quarter. So I think we are at that turning point.

The question is, have financial markets, as you say, got ahead of themselves? And I think they probably have.

In particular I think, although the economic data are improving, that’s not really that much of a surprise. You had things like investment was contracting at 20 percent year on year, is falling 20 percent year on year. It can’t continue to fall at 20 percent year on year for two years. You know, it would be—there would be no investment at all in five years at that pace. So it was always likely that it was going to bottom at some point, so we shouldn’t be too surprised that the economic data is improving.

Where I have real concern is on the political front. As you say, new government, interim president, economic “dream team”—quote/unquote—change at the central bank, change at the finance ministry, talking a good game to financial markets, I think policies that make sense. They’re not trying to tighten fiscal policy to close this massive budget deficit too quickly for fear of derailing the economy again. Instead, they’re trying to focus on some of the more structural problems embedded in high levels of expenditure within the constitution. I think all that makes sense. But you’re going to come up against this massive roadblock in Congress, where you’ve got pork-barrel politics, vested interests. And actually getting some of these constitutional amendments which are needed through Congress I think is going to be really tough.

So I think there’s a possibility that what’s going to happen is the next six months looks quite good. The economy starts to turn. Financial markets are quite content. The Fed’s keeping policy loose as well; that’s going to keep kind of global markets nicely oiled. But come the turn of the year, we might start to rub up against, I think political realities. There’s the 2018 election, as well, which is going to be looming on the horizon at that point. So my sense is the economy getting better, but there’s still these huge unresolved political issues.

RUBIN: Do you hold out any hope that the massive demonstrations on the street that we’ve seen thus far this year could trigger wiser heads in Brasilia to really try and confront issues, particularly during this window, on the assumption that Dilma is out—that there is a two-year period until the next elections? Temer has said he doesn’t plan to run again. It may give him political space to do things that would be hard to do if he was worried about reelection.

SHEARING: I wouldn’t discount that possibility. We do know from history governments that go on big reform drives only tend to do so once there’s political and popular pressure for that. But by the same token, people aren’t out on the street saying: “What do we want? Spending restraint! When do we want it? Now!” (Laughter.) So, you know, look at what’s happening in the U.K. with Brexit, in the U.S. with Trump, in France with Marine Le Pen. This populist—well, this pressure from the ground up is just as likely, I think, to lead to a populist reaction amongst politicians as it is to any kind of market-orientated reforms that are needed to really get the economy going again.

RUBIN: So the big story in Brazil for the last year—there have been a lot of big stories—has been the corruption scandal that has touched every corner of Brazil’s business and political community. Shannon, I know that you recently had the opportunity to meet with Sergio Moro, who’s the crusading jurist who lit the anti-corruption fire in Brazil with his Lava Jato investigation. So I’d love to hear more about your thoughts, having had a chance to talk to him about what’s happening with the corruption investigations going on now, but more broadly about what impact the anti-corruption drive in Brazil is going to have on its society and political system going forward.

O’NEIL: I mean, this is the issue, actually, that people are out on the street on. They’re not for spending restraints, but they’re for cleaning up, you know, the economy and then also the politics of Brazil. And you look at the polls, and the most popular political official is not anybody in Congress, nor the president or the perhaps soon to be former president, but Sergio Moro, right, this crusading judge, and the prosecutors and federal police that are working with him to bring these cases. So this is an incredibly big issue, a very popular issue, one that has made a lot of progress. I don’t think they’ve hit the bottom yet in terms of what is there. But it’s also one that I think it very much depends on public support to continue.

And what’s interesting to me in Brazil is I do actually think Sao Paulo gets the anti-corruption issue, and Sao Paulo being shorthand for the business community. So you’re starting to see big companies, but even medium, smaller size companies create their first compliance department. You know, I was talking to a friend who is head of—dean of one of the law schools there, and they’ve started offering classes on compliance, and they’re totally oversubscribed by mid-career lawyers who are there, sent by their companies to try to begin to change the way they do business.

And I think one of the most telling recent events that there is a change in the business community happened somewhat recently when Itaú, the biggest bank in Brazil, someone from the finance ministry came to someone at Itaú and asked for a bribe to make some legal issues go away, and Itaú for the first time—and maybe the first time of any company in Brazil—instead of deciding how to pay the bribe, decided to go to the officials. And that person from the finance ministry was arrested rather than actually benefitting from their request. And that really, to me, is a sea change. I think you’re seeing a change in the Sao Paulo community or business more broadly.

I haven’t yet seen the change in Brasilia, right? And that, I think, gets back to some of the issues there. And partly that is a long-engrained way of doing politics in Brazil. It’s partly because of the institutional basis for Brazil, right? They have an open list, proportional representation system, which—and get out of political science wonky speak—means that you—when you’re running for office, you’re running against people in other parties, but you’re running against people in your own party, right? So there’s a list there and your names are all there. So what that means is, one, it costs a lot of money to get your name distinguished, and you need a lot of money to run a campaign; and, two, you can win with very few votes. So I think someone I saw did a calculation: in Roraima, you can actually win a federal deputy seat or a representative seat with 17,000 votes. You can buy those pretty easily, right? And so what you get is a proliferation of parties, dozens of parties, very based on monetary exchanges.

And so I don’t see any change in Brasilia. I don’t see it in the President Temer—interim President Temer’s Cabinet, right, the 22 people he appointed. Three have already had to leave the Cabinet for corruption charges. I don’t see it in the Congress; 60 percent of the Congress has corruption charges or other crimes—charges against them right now. So I don’t see that change there. And, I think worrisomely, we’ve started to see some bills going through or being presented into the Brazilian Congress—not yet passed, but presented—to limit some of the tools that Sergio Moro and other judges have been using. So things like plea bargaining and the like, limiting their use in corruption or other types of cases. So I think that’s worrisome. They haven’t passed yet, but there is some pushback from the political establishment, and I think that’s worrisome.

On the potentially optimistic side, though—and back to sort of your comment of, like, what would need to change, right? Brazil, we all know sort of the economic prescription, right? It needs to reign in entitlements. It needs to de-index the economy. It needs to deal with the bureaucratic morass that that we all get in. It needs to restructure its tax code. There are all these things that we know need to happen. It’s very hard to have those happen because it has to get through a constitutional reform. But perhaps one thing that could happen, if this public anger and outrage continues, is you could see an electoral reform. Maybe that could happen. And if you get an electoral reform, you change some of the underlying rules so the incentives move a little bit away from the money, maybe some of these things could be tackled down the road.

RUBIN: To what extent has there been, Neil, an impact on the real economy from the uncertainty created around all the corruption investigations?

SHEARING: It’s very difficult to untangle all of this because you had China’s economy slowing, you had global commodity prices halving, you had a decade-long credit binge unwinding, and then on top of that you had this political mess and corruption scandal that just happened to engulf Petrobras, which, depending on which way you cut it, might account on its own for about 5 percent of Brazil’s economy. And then you’ve got to add on all of the associated construction companies and everything else that were affected. So it’s very difficult to I think say, oh, X percent of the 7 percent fall in Brazil’s GDP is due to this corruption case and scandal and the fallout from it.

But, all that being said—so that’s the get-out-of-jail card—but I think, you know, it’s very clear that it has had an impact. If you look at what—the big driver of the fall in output has been investment. It’s not really been exports. It’s not really been government consumption. It’s not really been household spending, up until at least very recently. In the early stages, it was investment. Now, that’s kind of normal. We kind of—we normally see investment falling as the first kind of component of GDP to fall in a downturn. But in Brazil’s case, it was very—it was very obvious and very early, and it was very large, the fall in investment. And I think that kind of makes sense. If you’re a business and there’s this huge uncertainty on the political—in terms of the political environment, there’s a corruption scandal, you’re not quite sure who’s going to be pulled in next and how this is going to play out, then you just don’t invest. And that’s what we’ve seen. And that’s, I think, contributed to the—to the downturn.

RUBIN: Laurie, you touched on this in your remarks earlier, the failings of the Brazilian public health system, the fact that hospital employees aren’t getting paid. When you talk to people in Brazil that are working in public health or for the government or think tanks, universities, do you get a sense from them that the popular protests against poor government service could mark a sea change and maybe trigger a renewed effort to address some of the failings in providing public services—public health services in Brazil?

GARRETT: Not really. (Laughter.) You know, the professionals feel trapped. On the one side there’s the masses that Shannon was referring to that are out in the streets, and on the other side is this corrupt government. And because most of Brazil’s health system is a state-run system, and even their pharmaceutical production system has this interesting sort of blend—it’s sort of part public, part private; Fiocruz, their major research institute that’s kind of Brazil’s NIH, is also a private-sector pharmaceutical manufacturer—it’s all kind of created this weird Never Never Land for the—for the professionals in the health and science sector. They don’t really know if there’s any direction they can turn to for help or to place their trust.

So they’re—you know, just as an example, just an anecdote that’s illustrative, I think, many Brazilians in the health sector are deeply proud, and justifiably so, of Brazil’s legacy in handling HIV/AIDS. It was the first country in the world to guarantee free access to anti-HIV medicine to all of its population, something we’ve not successfully done in the United States. And it became a manufacturer violating patents in the United States, which led to a real conflict between the U.S. government and the Brazilian government. Many of the people that led that effort in the 1990s are now, as physicians and researchers, at that sort of retirement age point. And I have heard from several they’re afraid to actually try to cash in on retirement. They’re afraid to not show up at their lab or their medical post every single day because they fear that they’ll get sort of “lost from the rolls” and never receive their retirements.

And so, I mean, I have friends that feel stuck. They’re not getting paid. They don’t know if they ever will get paid. They haven’t—they have—they’re seeing patients that can’t pay for their care and aren’t getting their care covered. They’ve been ordered to dilute the doses on vaccines, dilute the doses on drugs in order to stretch the supply out. They’re starting to hit stockouts. And many of them, especially those that worked in HIV, have for years worked in places like Angola and Mozambique in sort of, you know, Brazilian solidarity efforts, and now they feel like, my God, this is the stuff we used to do in Mozambique, this is what we used to do in Luanda. And they’re—I would say they’re really deeply upset, and they don’t see any of the political or economic changes working in their benefit, for what they’re working on.

RUBIN: Thank you.

So, at this time, I’d like to invite members to join the conversation with our panelists, with your questions. Just a reminder that this meeting is on the record. If you raise your hand, I’ll recognize you. You’ll get the microphone. Please speak into it and, as always, state your name and affiliation before asking your question. We’d ask that you limit yourself to one question and keep it as concise as possible so we can work in as many questions as possible. This is being livestreamed, so national members who are on the line, you can email your questions to [email protected], and I have my technology here that will allow me to get your questions. And so we’ll try and work those in along with your questions.

So, with that, just raise your hand and—

Q: Hi. Thank you very much. Your health analysis is nothing less than brilliant.

But, for Shannon, since you’ve been talking to Juiz Moro, who we all adore, I’d like your assessment on the Supreme Court. As you know, nine of the 11, if I’m not wrong, were appointed by Dilma and Lula. Now, until they put 30 to 50 politicians in jail, the whole impunity thing is, you know, academic. He must have comments about that. And how would you assess it? Because there’s a lot of reading that those characters—and some of them are very mediocre judges, let’s face it; I’m sorry—but how do you see that rolling out? Because right now they’ve made a hundred decisions that have made the impeachment process go forward, as you know, and they’re still involved. He’s going to be the president of the trial and the whole thing. They are playing a role that the Supreme Court has never played, which is an innovation for the good for Brazil, I would say. But still, those people and the decisions that they’re making, until Paulo Salim Maluf goes to jail, you know, it’s all a joke.

O’NEIL: He does have comments about the Supreme Court.

Q: Sorry?

O’NEIL: He does have comments about the Supreme Court. But I’m going to share my comments. (Laughs.) I’ll let him share his own at other venues. (Laughs.)

But, you know, I agree, I think the Supreme Court—right, there are weaknesses there and limitations, definitely. But I recognize, and I think he recognizes and has publicly, you know, they also have an incredibly difficult role to fill.

And one of them is just sheer capacity. They have somewhere between 7(,000) and 8,000 individuals in Brazil that anything that they do comes under their purview, so they have that diplomatic immunity or immunity that anything that they do, any kind of case has to go to the Supreme Court and not to the regular courts. And many of those 7(,000) to 8,000 people seem to be the type of people that get into trouble a lot. And so there are so many cases. Part of the reason it takes four, five years, or even more to resolve these cases—whether, you know, conviction or not—is just the weight of them, and you only have so many hours in a day and the ability to do it. So that’s one of the challenges.

Another challenge is that Brazil has a quite robust appeal process. And so many politicians have gamed the system, where—and this is up until recently, when they’ve changed the rules—but have gamed the system, where it takes four or five years and they get a conviction, and then they go through the first appeal process, and then it takes another few years, and then they get a conviction again, and then they go through another appeal process. And so by the time they get to the end of that road, which might be 15 to 20 years, the statute of limitations has run out on the crime and they get out, right? And so it’s partly their system.

Now, that has changed. And we’ve seen that, actually, with the Lava Jato cases, where now you’re convicted and you get one appeal, and then you go to jail. And then you can keep appealing, but you do it from jail; you don’t do it outside, right? And so that is a very different thing. And so the statute of limitations—you don’t have that statute of limitations running out where people never end up in jail.

So I think there is—that’s one of the challenges. I mean, there have been some discussions within legal scholars there about changing who falls under the Supreme Court’s jurisdiction, right? And it does make sense to have the Congress, it does make sense to have public officials. It doesn’t probably make sense to have such a wide range of middle-level bureaucrats and others under there, right? Many of those—or perhaps particular crimes should go under just regular court systems and not have just blanket—you know, when they get a traffic ticket it goes through the Supreme Court kind of thing. So I think there are some challenges there.

And, you know, I think the Supreme Court has a very difficult—well, just to give them a—you know, with all the limitations you mentioned, which I think are quite true, they have a difficult balance, I mean, just like our Supreme Court has a balance. You don’t want to be politicized, but many of the things that you need to decide on are very political acts, right? And we’ve seen that in the impeachment process, some of the role they kind of play. Or particularly right now you have the Supreme Electoral Court, which has an investigation in front of it right now into both Dilma and Temer’s 2014 election financing. And so they are going through the investigation, which probably will continue until the fall. But it’s possible, if they found illegal campaign financing coming into the campaign—which it seems there likely was because we have some people arrested, and using plea bargaining laws have, you know, begun to lay out what had happened—it’s likely that the election could be annulled. And then there’s a question about is Temer even the interim president because he shouldn’t have been the vice president, because—so there’s a question, even if we—even if Dilma is impeached at the end of August, which I think most people think better than even odds—much better than even odds that will happen, there is a chance that he, then, would be removed as well, and so how that all plays out.

So I think it is complicated. You know, what we have seen in Brazil, I think, is courts like Sergio Moro’s—but he’s not the only one—that have asserted independence and, you know, pretty open, transparent, thoughtful, fair judgments in various places around the country. And so I think that’s an important part of thinking about their broader judicial system.

Q: Thank you. Earl Carr representing Momentum Advisors. We’re an international wealth-management firm. And thanks for a great presentation.

My question is more for Neil. Neil, what do you tell investors who want—who are either investing in Brazil or thinking about investing in Brazil, I mean, given the volatility? I mean, you talked about China’s economy slowing, and so you don’t—we’re probably not going to see that kind of commodity, you know, binge in Brazil. Do you tell them to kind of, you know, wait out—you know, stay in there, you know, maybe look at other markets? What’s your overall assessment about long-term growth in Brazil?

SHEARING: Wow. What I normally tell them is it’s your job, right; I’m just the economist in this. (Laughter.) It’s your job how to make money. (Applause.)

But for what it’s worth, so I think if you cast your mind back to 2012, that was the time when, if I was an investor and I had my own book to play, I wouldn’t have touched Brazil with a very long barge pole because the real was ludicrously overvalued, the stock market looked overbought, the bond—you know, this was—we were just coming off the back of the central bank cutting interest rates under political pressure, so bonds looked ridiculously overbought, too. And the economic story—the economy was just starting to slow, and that was—you know, the cycle started to turn and that was souring.

Now I think there’s an awful lot of bad news, notwithstanding the run that we’ve had over the past six months. There’s still a lot of bad news in there. So the currency looks pretty reasonable now for where we are in terms of global commodity prices. Stock market and bond market might be a bit frothy, but not really compared with levels a couple of years ago. So you can construct a far more compelling case, notwithstanding all of the political challenges that we’ve discussed today.

My sense, for what it’s worth, on where Brazil’s going five years hence—I mean it’s always difficult to see how these kind of investigations are going to pan out. But what I also say to clients is you can’t—if you take a step back, you can’t imagine what is happening in Brazil now taking place in Russia or China. And I think that’s a good thing—that it’s happening in Brazil, I mean, rather than in Russia or China. It’s a good thing. It’s got to be a good thing for the long term. So, you know, we’re starting to see institutional maturity and development. And I think that bodes well for growth over a kind of 10-year horizon.

Q: Hi there. My question is sort of back to the—

RUBIN: Could you just state your name?

Q: Oh, yeah. Jove Oliver, president of Oliver Global and a member here.

So my question is back to the political implications of the Olympics. And when I was last in Brazil, Eduardo Paes’s name was floated as a sort of rising star. Obviously, he’s the mayor of Rio. I wonder, if he pulls it out and does well, does that lift his stock? Does it kill him—(laughs)—if he does poorly? And who are some of the other rising stars with, you know, Dilma likely out, Temer saying he’s not going to run again? Thank you.

O’NEIL: So, right, I mean, if the Olympics come off well, I think he looks good. If the Olympics don’t come off well, that’s—yeah, he can go back to his mansion and, you know. (Laughter.)

I mean, there—right, we mentioned, right, that 2018 is the next election. Let’s say impeachment happened. Let’s say the Electoral Court lets Temer finish his term. Already people are starting to run for the next round, right?

You know, we see some of those from the last go round throwing their name in.

Aécio Neves, though he has corruption scandals and has been named several times. I don’t see him getting a lot of traction this time.

Marina Silva has been mentioned a lot. She has a pretty strong base. She does seem like someone who could probably work across sort of—not that these distinctions, the left-right axis is really the right way to describe Brazil, but could work across many parties, the sort of PT as well as the PMDB/PSDB types. So perhaps she—and she’s a well—she’s well-known after running many times already for president.

You’ve started to see a couple people on the PT side. I mean, Lula, obviously, is there, though he may be brought down by corruption charges. And as we all know, he and Sergio Moro have been at each other in the papers, and trading legal niceties back and forth. But there’s other people there, right? There’s Ciro Gomes. There’s Haddad, the current mayor of Sao Paulo, others who have presidential ambitions. So you could see the PT perhaps choosing someone.

And I mean, it’s interesting. You know, we haven’t really talked yet about does Dilma really get kicked out, right? Is she done, or does something happen? And for lots of reasons, you know, I think she—I think it’s very unlikely that she stays, in part because they’ve already gone this far; in part because the new speaker of the House is a Temer ally, and so there’s some rallying around the flag. But in part also because I don’t think she—the PT doesn’t even have her back, right? And for the PT, as you’re thinking of a leader of the PT or potential leader, one of these potential candidates for the—for the PT, let her go. You probably weren’t that close with her personally anyway, so let her go. Let the Temer government try or even succeed at doing all the austerity measures that need to get done. It’s not going to be great for the average Brazilian, just as it hasn’t been, if they succeed or if they fail. And then you can come back and talk about the 2000s. And we, the PT, we were there in the 2000s, and remember how great things were, and remember how bad they’ve been for two years. So the narrative the PT could construct to try to come back into Planalto and back into the presidency is much more compelling if she goes, I think. So I think there’s a couple, you know, people there.

And then, you know, there’s the forever hopefuls—the José Serras and others—who I think will try. And he’s going to try as foreign minister to sort of make his claim and be out there and sign free trade agreements and bring Brazil back into the—into the world, and it’s accepted by the OECD, you know, in the way perhaps that Macri or others have been doing around Davos and the like. And if he—I think he sees that as his ticket back up to international acclaim. I mean, Brazilians have never been, in my view, particularly interested in the way other people think about them around the world, or those bilateral ties. So I’m not sure, even if he could achieve a free trade agreement with the EU, it would get him much domestic political capital. But I think he sees that as perhaps his path, sort of bringing Brazil back into a—and sort of his view of respectability, market-friendly policies and the like.

And, you know, I think the other thing in Brazil is, you know, two years is a short time, but it’s a long time. There are, you know, a few senators, there’s a few other people around the fringes that could come out of nowhere. And Brazil’s done this before, right? If you—Fernando Collor de Mello, who was in the—you know, the early ’90s, nobody ever heard of that guy, right? He was from a small state, and then all of a sudden he became president because of a lot of political dynamics. And I think we could very much see an outsider like that come in when we look at 2018.

RUBIN: How did that work out for him?

O’NEIL: Not so well. (Laughter.) But he’s back in Congress now. He’s a senator, so. (Laughs.)

Q: Hi. I’m Cores Vades (ph)—(inaudible)—question for Shannon.

I think that, for those observing what’s happening in Brazil, I think most of us would think that at the end of all this process, regardless of how long it is, Brazil comes out strengthened and there is better rule of law. But is there an alternative scenario where there’s a lot of cosmetic, big flashy things happening, but at the end structurally it basically remains where it is?

O’NEIL: I think there’s two bad scenarios, right? The Goldilocks is they get through just enough anti-corruption reforms, and then they get enough investor confidence, and they fix enough things that it goes well.

So one is, right, there is some mouthing of rhetoric that’s good, and on the other side they’re undermining any real change. And that—actually, these bills that are in front of the Congress right now to undermine plea bargaining, to undermine some of the tools that these prosecutors have used, is that, right? So they say that they’re for these changes and for a modern Brazil, but they don’t want to change anything of the sort of very opaque, smoke-filled-room types of decisions. I think that’s one.

On the other side, if you got the Scylla and—what is it, Scylla and—

RUBIN: Charybdis.

O’NEIL: —Charybdis—thank you—is the Italian example, which is the Mani Puliti, or—(changes pronunciation)—Mani Puliti mafia cases, which was a judge, like Sergio Moro, others. And he very much sees this in his head. I mean, he thinks a lot about this. They took down thousands and thousands of people over almost a decade of cases, and they in some ways destroyed the system and led, some argue, to the current Italian case, which is a, you know, quite instable political system that opens up to a Berlusconi or other types of people. And so you can—you want to go after corruption, but if you so denigrate any trust that the people have in any politician and in any business leader, you might just tear the fabric so much that it’s almost unfixable, right? And so I think that’s the worry for Brazil is.

I personally think the anti-corruption cases and the investigations, and how autonomous they’ve been and effective they’ve been, is a very good thing for Brazil. And I think turning five, 10 years from now, Brazil will have a much stronger rule of law and be a much better place to do business. And companies that, you know, you would work with if you were doing business down there will have much stronger legal frameworks and do things much more cleanly, and perhaps the political system will change at least a bit in that way. So I think those are all good things. But there is this potential that if it goes so deep, if people just feel the whole system is so corrupt that they can’t trust anything, you could lead to such a fragmentation that you could get sort of an Italian system that becomes quite broken. And I think that is a risk for Brazil. I don’t think it’s a strong one. I don’t think that’s the likely scenario. But there is that scenario that’s possible.

GARRETT: OK, can I ask her a follow up?

RUBIN: Sure.

GARRETT: Do you mind? Because I’m learning so much. Thank you.

But what about the regional pressures? If Venezuela just goes all the way into the tanker, and—

O’NEIL: Further than it is? (Laughs.)

GARRETT: Yeah, but I mean with actual violence in the streets and blah, blah, blah, blah, blah. And if the rest of the neighborhood just starts declining, how does that affect the scenarios you’re laying out?

O’NEIL: So Venezuela, I mean, it’s close to where you were imagining it’s going. But in some ways Venezuela is isolated, right? I mean, they owe the Brazilians a lot of money because they buy a lot of food from there. There’s some commercial exchange. But it’s somewhat isolated. I mean, there is—there could be hundreds of thousands, millions of refugees leaving Venezuela. So Colombia, and Brazil, and other countries would be affected by that. There’s something there. But I don’t see—there is a political, economic, social disintegration reflecting on the way Brazil runs things. And I think there is actually a blog in the FT in the last couple of days that the person called Brazil a failed state, or a near-failed state, which that’s—Venezuela is a failed state, or a near failed-state. Brazil is not a failed state at all.

And in fact, some of the things they’re going through, even though they’re very difficult challenges, show how strong the institutions are, right? They didn’t just kick out Dilma. They went through the whole process. Now, all right, impeachment was a political process, and impeachment’s always a political process, right? In our country, in any country, right? So I hear Moro on this anticorruption. He’s going through very sophisticated steps, and finding these people guilty, or some innocent. So I think that part—I don’t see a regional threat sort of hemming in on Brazil, with the exception, though, you could see a huge refugee crisis perhaps in Venezuela.

One thing that is interesting is actually you’ve seen other countries looking at Brazil as a model. So right now Mauricio Macri is trying to push through a whole set of anticorruption reforms through the Argentine congress, which—many of them modeled on Brazil, and the use of plea bargain, the use of some of the things that have worked in Brazil, the autonomy of particularly ministries and the like, or prosecuting offices and the like. And so I think there’s—in some ways, there’s a modeling that’s happening off of Brazil, in a good way. I know talking with the Mexicans they’re wishing for their Sergio Moro. I don’t know if they’ll find one, but there is a lot of interest in sort of—I mean, I think there’s a diffusion of the ideas from there in a good way. And the risks for Brazil, I think most of them are home-grown.

Q: Hi. Mike Derham, Novam Portam. Thank you guys for taking the time on this.

To kind of follow up on Jorge’s question earlier, you look at Brazil, you look at the economic stagnation they’ve had, you look at the political stagnation they have, it kind of echoes what we’ve seen here in the U.S. and what we’ve seen in Europe over the past, five, 10 years. And but we haven’t seen the kind of radical populism that we’ve seen in Europe, obviously with Brexit and Front National in France, and I won’t say anything about here in the U.S., but you could make an argument that you’re seeing some of that here as well. Why haven’t we seen that in Brazil? I mean, Marina Silva’s not really that. And there hasn’t been anything kind of from the nationalistic right. Why not?

O’NEIL: Well, I’m happy to—if you want to chime in. Well, we’ve seen populism in Brazil in the past, right? You know, Getulio Vargas was the populist, along with Peron. The two of them were there in that phase of Latin America’s 20^th century. You know, what’s interesting right now is we’re not seeing populism across Latin America, as we’re seeing it in the rest of the world, right? And partly that is on this particular issue, Lain America has been ahead of the curve. So Hugo Chavez came in—(laughter)—in 1998, and, you know, Eva Morales, and the Kirchners came in 2001. So we’ve had our populist boom that, you know, continued for longer than some times in the past because of commodities, because of the economic force behind it. And now countries are trying to recover, right?

So Argentina elected Mauricio Macri. Peru just elected an investment banker. We’re seeing a very different—to a very pragmatic, market-friendly base. I do think we could, though, potentially see a populist in Brazil. We haven’t because Brazil—I mean, what’s interesting in Brazil, you look at the last 20-plus years, and for all the economic problems, you know, you had sort of a center right, then you had a sort of center left. They were back to this it’s not a failed state. Everybody was very protective of their democratic institutions. You don’t have undermining of free speech, I mean all the kinds of things that you’ve seen in some of its neighboring countries are not happening there, right? It’s pretty robust. And people—even if they don’t like each other, even if they’re fighting with each other over things, they’re defending those—mostly—those types of institutions. And there’s rise of a judiciary that’s actually quite strong, right? It’s not just the executive legislature, but the judiciary’s quite strong, which is not something you can say about all Latin American countries or others.

So I think that part is good. But that said, and sort of back to the kind of bad case scenario I painted for Jorge, is if you started seeing people just give up on the system, right? They haven’t done that yet, I don’t think. If you started to see them give up, then they would look for those outside populists, right? And I mean, some people are painting Ciro Gomes, who’s a PT person, as the Brazilian Trump, right? And he’s flamboyant. I’m not sure he fills all the other criteria. You guys can fill in what you think the criteria are. But—

RUBIN: But, Shannon, what was Lula, right? I mean, you’ve had 14 years of PT rule. In a way, populism is institutionalized.

O’NEIL: So, for me, though, populism—when you say populism—yeah, there’s rhetoric, right? So there is anti—he wasn’t anti-trade. So what is a populist, right? It’s the anti-elite. And Lula, to me, was never an anti-elite. I mean, sure, he wanted to—he wanted to do Bolsa Familia. He wanted to do Zero Fome. He wanted to do some of these programs, but they were actually pretty pragmatic. They were 0.5 percent of GDP. He was—I don’t think—and he didn’t do that anti—he didn’t sort of do the polarization of the Chavez where it’s us or them, we’re against you or not, right? He was pretty happy and inclusive. I mean, sure, he was a hard-hosed politician and threw elbows in backrooms, no question, right, but he didn’t do that.

And the other thing to me, that is definitive of populism, if you’re going to define populism, is you weaken democratic institutions. You consistently undermine other institutions. You undermine freedom of expression. You undermine other political parties. You stack courts. You limit, you know, electoral councils and the like. You consistently undermine the level playing field. And I don’t think Lula did that. I mean, the one thing he did, and Dilma did, and that we have seen, is money into politics, right? And so the money that went through Petrobras, that was washed through there, he was trying to stack the deck in terms of money. But he didn’t do the other things. So I wouldn’t call him a populist, personally.

SHEARING: I’ll add a couple of things to that. I mean, you can argue about the definition of populist and so on and so forth, but I think part of the answer to the question lies in the fact that it was the populist, or, for want of a better word let’s call him populist, that broke here. So that’s why you’ve perhaps not seen a reaction that goes to populism. You’ve seen a reaction in the other direction, the Macris and the Temers.

The second thing is, to your point about this is a risk, I think part of the risk in Brazil stems from the way that the electoral system is structured. It could make it much easier for populism and populists to rise. And the third thing is, to this idea about what is populism, I think actually a lot of the debates, both here in the U.S. and in Europe, isn’t necessarily populist in a kind of way that we perhaps sort of thought about it five or 10 years ago. It’s about open and closed. It’s a lot of the debates in Europe, in particular, it’s about taking up sovereignty. That’s what’s Brexit was about, it’s what Trump’s about, is taking up sovereignty. It’s about reclaiming borders.

And my sense, or you’re much better placed to speak on this, is that, you know, Brazil is just set up in a different way. It’s the way that—it’s history, it’s root, socially, historically, culturally makes that debate far less likely to perhaps happen.

RUBIN: We have a question from a member in the national audience, Rejat Gupta from Bunge Limited: How much importance to you assign to the need for the real to remain weak to preserve competitiveness in order to generate structurally better times in the future?

SHEARING: If I was advising the Brazilian government it’s the one thing I would say to do. You know, throughout every year there’s so many problems. There’s the budget deficit. There’s the rise in burden of household debt. There’s the fallout from the corruption scandal, long-term good but near-term all this uncertainty. For heaven’s sake, try to keep the real as weak as you can, because we were talking earlier about what is the case for investing in Brazil.

Well, I think when you look at the economic outlook, the economy over the next five to 10 years is going to look way different from what it was. The old drivers of growth were consumptions and commodities and credits. The recovery, when it comes, is going to be about investment and manufacturing. It’s going to be all those things that have been stagnant for the past decade. And to get that, you need foreign investment and you need a vibrant manufacturing export-based economy. And to get all of those things, you need a weak currency. So for heaven’s sake, try and keep their currency way below three, ideally closer to four, would be my advice.

Q: Thank you. I’m—(coughs)—excuse me. I’m Dick Huber, and in this context a partner in a railcar leasing company in Brazil.

Neil—(coughs)—excuse me—you very correctly and appropriately cite commodities and commodity prices. Unfortunately, commodities is a pretty big umbrella. And within that—under that umbrella, we have mineral commodities, petroleum commodities. But in my interests are the agriculture commodities. And that is a sector that doesn’t get talked about very much in the case of Brazil, but it is a sector that has continued to invest. And, you know, I’ve always sort of looked as Brazil as being this giant farm. And with—I have felt—and I shouldn’t say that. What do you think are the possibilities of demand returning for basically food products, food commodities, which would have a big impact on Brazil, of course?

SHEARING: Yeah. So a couple of points. The first point is, you’re right. Within the success—you know, let’s take the success story of Brazil over the last 15 years. A lot of that has been about the price of iron ore tripling because of China and the oil prices going up and so on and so forth. But within that, there has been some impressively dynamic and productive companies that aren’t related to the whole rise of China.

Agricultural commodities is a good point. Soy prices have gone up partly related to China, but most other things—most other agriculture commodities are less effected by the Chinese cycle. There’s been some manufacturing stories, Embraer, for example. So we shouldn’t just think—you’re right—we shouldn’t just think of Brazil as this commodity play. It’s very different from, say, somewhere like Chile, where 20 percent of the economy is copper production, one commodity and a much larger share of the economy.

Now, what has been driving shifts in global commodity prices over the past decade has been China. China’s gone on this huge investment-led growth boom—property sector, steel sector, shipbuilding, heavy industry. And what’s that done? It’s sucked in particularly metals and energy. Now, is that—the economy, one way or another, is going to have to rebalance. It can’t continue to invest 45 percent of GDP. And when it does become less investment intensive, its use of commodities will shift. And we’ve started to see some of that has been reflected in the moves in commodity prices over the past two years.

But I think ultimately what we’re left with is a Chinese economy that’s going to be consuming more energy and more food, and less industrial metals. And if you’re a big agricultural producer, like Brazil, there’s light at the end of what has been a very long tunnel, in that story.

RUBIN: And having light at the end of the tunnel is probably a good way to conclude. (Laughter.) Brazil, if nothing else, is about optimism for the future, whatever the reality of today is. So let’s hope that happens. Thank you to Laurie, Shannon, Neil, for taking the time to be with us today. And thanks to all of the members who were able to participate. (Applause.)

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