In 1941, Stephan Zweig, a prominent Austrian writer of the 20th century, wrote extensively about the “Country of the Future”. He referred himself to Brazil, the nation he chose to go to in 1941.

More than seventy years have gone by since, and in spite of being the ninth largest economy and the fourth largest democracy in the world, some insist that Brazil is and will always be the country of the future – never of the present. Such perception does not seem to be completely flawed and has, in effect, grown significantly in the past years. Why?

Credibility has dwindled due to the country’s current socioeconomic depression, which officially began in 2014 and whose end is yet to be known. After years of growth and euphoria, many are still trying to find the right questions and answers, just like someone who wakes up after a night of heavy drinking. And, similarly to someone in a tremendous hangover, the reasons underlying the terrible “day-after” are, arguably, clearer than glass.
In fact, Brazil has a tendency to commit similar mistakes over time – perhaps like those who don’t learn their lesson after drinking too much. The New Republic, (1985- )which came about after 21 years of military governments (1964-85), brought hope and new perspectives to a country that had gone from being a major economy in the 1970s to a “lost decade” in the 1980s. From an economic perspective, history seems to have, mutatis mutandis, repeated itself.

The “Brazilian Miracle”, enjoyed mostly by General Médici (1969-74) and, to a lesser extent, by General Geisel (1974-79), was only possible thanks to the thorough and tough economic reforms headed by marshal Castelo Branco (1964-67). Correspondingly, the recent exceptional growth, during Luiz Inácio Lula da Silva’s and Dilma Rousseff’s administrations (2003-2010 and 2011-2016, respectively) is, according to many analysts, mostly due to the hardworking macroeconomic stabilization programmes lead by Fernando Henrique Cardoso (1995-2002).

Castelo Branco and Cardoso share the fact that both had to take unpopular measures, so that, inter alia, government budget could be balanced, inflation tamed, the financial system reorganized, and credibility restored. In sum, these two presidents implemented relatively successful frameworks which then paved the way for sound and resilient growth.

Cardoso, more specifically, is responsible for the “Plano Real”,which, among other things, lowered inflation from 2,477% in 1993 to less than 10% throughout most of his tenure – according to numbers from IBGE (Brazilian Institute of Geography and Statistics). Together with a highly qualified group of economists, he devised this plan in 1993, as Minister of Finance, and gave continuity to it by getting elected President in 1994.

From 1994 to 2002, Brazil went through several advances and setbacks. Although inflation diminished significantly, there were negative aspects to the deflationary strategy. To keep markets calm and avoid speculative attacks, the country adopted extremely high interest rates and a rigid exchange rate system, leading to an overvalued currency, un-competitive industry and an excessive burden on government debt due to interest payments.

The consequences of these distortions exacerbated as the Asian Financial Crisis spilled over to other parts of the world. After Russia defaulted on its debt in 1998 markets decided to challenge the Brazilian macroeconomic fundamentals. That is when, in 1999, Cardoso laid the second set of foundations that stabilized the national economy, also known as the implementation of the “macroeconomic tripod”. In other words, it meant that the Central Bank would let the currency float and set an inflation target, while, concomitantly, the government introduced a “Fiscal responsibility Law” that basically lead the country to envisage primary budget surpluses of 2%. In a nutshell, both monetary and fiscal policies were bound to pursue sustainable paths. And, in fact, they did so, as it was widely demonstrated in the following years. Although Lula da Silva came to power in 2003 amid concerns that his administration would default on foreign denominated debt and abandon Cardoso’s policies, he committed himself to stabilizing credibility and macroeconomic stability.

The problem began when the fruits from stabilization began to be harvested. As China’s demand for commodities soared, and markets’ enchantment for Brazil grew, the entire economy was flooded with money. From the current account side, Brazil had spectacular surpluses (from 2002 to 2007) after 10 years of deficits; as to the financial/capital account, the country enjoyed a great amount of foreign direct investment inflow. Brazil was, apparently, getting back to where it belonged, that is, the world’s 6th GDP. And it did reach that position in 2010 according to the World Bank’s nominal GDP ranking. Exactly when the dream began to dissipate.

Lula’s administration, to some extent, just harvested fruits, having forgotten that, in the long-term, if one does not plant, he/she will not eat. To be more precise, the Lula administration stimulated consumption, by means of subsidized credit and transfer programmes, instead of stimulating investments and structural reforms (broadly speaking, labour, tax and pension reforms are among the most necessary ones according to pundits). The rationale of such policy? Political economy. Spending tends to attract more votes than savings and tough reforms. In addition, back then, few models predicted plummeting commodity prices, which made policy-makers believe that the money inflow would not halt. In their view, there was no need to rush. Long story short, while China was building up capital and improving productivity, Brazil maintained low saving rates (its peak was 21.43% in 2008 according to the World Bank) and did not push any of the major reforms. While others were working, Brazil was drinking.

And here we are now, seeing one of the richest countries, in terms of biodiversity and natural resources, diving into the unknown. And what was Dilma Rousseff’s role in all of this? Well, arguably, she was the one who augmented the vodka doses from 2011 onwards. In effect, Rousseff’s administration not only avoided savings and reforms, it altered the Brazilian macroeconomic structure profoundly because of ideological convictions. A former Marxist-Leninist guerrilla fighter, Dilma believed, broadly speaking, that economic growth had to be centralized and state-conducted.

According to prominent Brazilian economists Marcos Lisboa and Samuel Pessoa, her government officially dismantled the “macroeconomic tripod”. By diminishing the Central Bank’s autonomy (she forced the BCB to lower interest rates in spite of market forces, allowing inflation to pickup), and by breaching the Fiscal Responsibility Law – which paved the way for her impeachment process, Rousseff drove the country into a quagmire.

So, will the future ever become present? It is difficult to say. However, this does not mean that Brazil is doomed to committing the same mistakes once more. It is still a country that has a favourable demography, it is blessed with a unique multicultural integration and it is home to an incomparable natural wealth. While a long path lies ahead, the good new is that History has shown that some responsible statesmen have had the braveness to make the right decisions.