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How to Save Brazil

SÃO PAULO – Brazil’s political crisis appears to be coming to a head. Now that the lower house of the National Congress has voted in favor of President Dilma Rousseff’s impeachment for violating fiscal rules, the Senate’s 81 members will vote in the coming days on whether to try her. If 42 agree, she will be suspended for up to 180 days, during which time Vice President Michel Temer will assume the presidency. If the Senate does not produce a two-thirds vote for conviction during that period, Rousseff will return to the presidency. But the most likely outcome, it seems, will be for Temer to carry out the final two years of Rousseff’s term.

Whatever happens next, Brazil is not out of the woods. Its economic situation is dire – a direct result of populist policies initiated by Rousseff’s predecessor, President Luiz Inácio Lula da Silva, and which she maintained. In the early 2000s, flush with cash thanks to a commodity boom, Lula’s government began to distribute subsidized credit to consumers and businesses, hold down energy prices artificially, and expand government spending at more than double the rate of GDP growth. The result was mounting public debt, which has now reached 70% of GDP, and a widening deficit, which has now reached nearly 11% of GDP.

Rather than acknowledge the problem and revise policies accordingly, Rousseff allegedly resorted to dodgy accounting tricks to enable her government ostensibly to meet its primary-surplus target without cutting social transfers, even as commodity prices collapsed. This enabled her to win reelection in 2014 – and it is propelling her toward impeachment today. (The massive corruption scandal engulfing Petrobras, the state-owned oil company, which Rousseff used to head, has not helped her case.)

But Rousseff is of course far from the only one suffering the consequences of this approach. Brazil is now facing its worst economic recession in 80 years; unemployment stands at almost 10%; annual inflation exceeds 10%; and living standards have collapsed. Though Brazilians pay 37% of GDP in taxes each year – about the same rate as Europeans – the quality of their public services remains very low.