Political instability in Brazil has impacted the national economy since 2008, and now a challenging global public health crisis is added to it
A politically unstable environment affects the most dynamic variable of an economy: investment, which in turn effectively generates economic growth and productivity.
Business leaders and investors assess both the current scenario and a long-term horizon; therefore, the more predictable this horizon is, the greater the incentive or motivation to make that investment. Thus, in a scenario of political and economic instability, they tend to hold back on their decisions, seeking environments or moments that are more favorable for investment.
Hardly anyone enters a game where the rules can change overnight; as a result, political instability in Brazil has created insecurity among potential investors across all areas and sectors, as they are unable to foresee returns, in addition to facing the risk of rule changes—including legal ones—over the short, medium, and especially long term. This directly impacts capital allocation, exponentially hindering the country's economic development.
When we talk about investment here, we mean it broadly: encompassing new businesses that generate jobs and income, as well as equities, assets, and productivity. No matter how high the expected and projected return may be, business leaders and investors will always assess the risks in the face of a politically unstable scenario.
Every business relies on strategic planning and a business plan that factors in cost estimates, revenue forecasts, among other variables. This plan is based on the legislation of the jurisdiction where the investment is made. In a politically unstable environment, where the legislation itself can change, a warning sign goes off; consequently, an economy without investment cannot grow substantially.
During an interview with the general director of a telecommunications company, we obtained a practical example of how this works:
“Imagine that we have a new technology for the telecommunications sector where we need to invest to deploy it, allocate funds for supplies, equipment, and personnel costs, and understand how much the consumer is willing or able to pay. All of this is quantifiable. However, given the risk of operating in an environment with a political landscape where the ‘rules of the game’ change at any moment—where today there is a law setting a tax burden of ‘x’, and suddenly that tax burden doubles—attracting an investor becomes extremely complicated. Ultimately, political stability is a decisive factor for investment in an economy, and investment makes the wheels of the economy turn.”
Crisis Mediation
Crisis management is always challenging. Compounding this is the fact that Brazil is currently facing multiple simultaneous crises, making the situation even more complex. The country was already in the process of economic recovery, with high expectations regarding key reforms under consideration in the National Congress.
Then—unexpectedly—a health crisis emerged as a result of the COVID-19 pandemic, which is having a direct impact on the economy, causing recession and uncertain forecasts, as there are still no definitive prognoses regarding the pandemic, even on a global scale. In parallel, there is also a political crisis caused by uncertainties surrounding the current administration.
To successfully navigate both the health crisis and the economic and political situation, Brazil must look at the big picture and address the situation in a multidisciplinary manner. Seeking alignment between scientific knowledge and economic science is a way to find creative paths and solutions to the challenges faced, especially in this period of acute crisis.
“Any action or measure that removes barriers to facilitate international trade will be beneficial to the economy and must be carried out judiciously,” commented the general director interviewed by our team. Tax or customs barriers, for instance, act as a source of inefficiency, he noted, also considering the streamlining of foreign trade bureaucracy as a measure that can help manage and address the current economic crisis regarding duties, taxes, and related levies.
Finally, public-private partnerships in Brazil have proven to be a viable path to balance the state’s revenue and expenditures, providing relief to the domestic market by generating efficiency gains in the economy.
However, any forecast made at this point is mere speculation. It is a time for caution, combined with a search for options to stimulate the economy alongside the necessary health measures to contain the pandemic.
