By Ricardo Frizera
Espirito Santo is a Brazilian coastal state located north of Rio de Janeiro. Because of its location and neighboring states, it’s known for its beautiful beaches and traditional food, moqueca, a fish stew. Espirito Santo’s capital, Vitoria, ranked among the best on Brazil’s Human Development Index, but has been known in the last few days for terror and disorder: an illegal police strike resulted in 100 deaths in just five days — a rise of 650 percent based on the region murder index — and more than R$90 million (US $28 million) in losses for small and medium business like bakeries, groceries and clothing stores.
In order to better understand the current situation, it is important to understand Brazil’s economic situation: 12.3 million people are unemployed (11 percent of the adult population), there was a decrease of -3.5 percent in GDP in 2016 and an increase in inflation by 6.5 percent. The federal debt is at almost R$2.3 trillion, and rising. States are totally broken, unable to pay both government employee wages or basic public services like education, health and security, which are obligatory rights according to our constitution. For instance, Rio de Janeiro, the state in the worst financial situation, has accumulated R$17.5 billion in default in 2016, leading Standard & Poor to rate Rio as SD (selective default) in credit rating scales.
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Also, the judiciary is running an investigation called Operation Lava-Jato, which is the biggest corruption scandal in Brazilian history, a huge case of crony capitalism commanded by Lula and his leftist Worker’s Party. Through it, officials discovered that just in Petrobras, the biggest Brazilian oil company, more than R$40 billion was diverted to political parties, according to the Federal Public Prosecutor Deltan Dallagnol. This led the oil company to a major loss of R$436.6 billion, or 85.55 percent, in its market value, when compared to 2008 numbers. In total, Dallagnol estimated that more than R$200 billion was diverted every year by Brazilian politicians.
The situation is so critical that former Governor of Rio Sérgio Cabral was arrested for diverting R$220 million with help from important people in ex-President Lula’s administration, such as billionaire Eike Batista, the former richest man in the country. Now, Brazil is bankrupted because the government spent more money than it had in an unprecedented management failure. That, in addition to bribery scandals, was the cause of ex-president Dilma Rousseff’s impeachment in early 2016. Meanwhile, Espirito Santo maintained a strong accountability policy commanded by Governor Paulo Hartung. The state kept the budget going with positive cash flow and became a nationwide example of fiscal responsibility.
The connection between the economic crisis and security crisis is tragic, though: Espirito Santo’s police, wanting a 43-percent salary increase, decided to stop working Saturday despite the unconstitutionality of strikes for military and despite the fact that the State Court of Justice has already declared the strike illegal. The result has been a wave of violence that’s haunting the population, causing 100 deaths in just five days and forcing the state to ask for intervention from the armed forces.
The government has a difficult decision to make: let the situation get worse or give in to military corporatist pressures that push the public budget to instability. According to Hartung, R$500 million a year would be needed to pay the requested raise, which would lead to increasing tax rates, considering that the government surplus last year was just R$40 million. He said the police are “kidnapping our freedom” and asking for a ransom his people can’t afford.
He’s right: Coupled with tax increases, this raise would be fatal to the economy, opening space for a distortion in the praised accountability of Hartung’s successful economic policy. In addition, it would set a worrying precedent for strikes and riots of other military branches all over the country.
Tension is rising between the economic crisis in Brazil, the security problem in Vitoria and the accountability policy held by Governor Paulo Hartung. Differing from the brutal crisis that plagues the whole country, Espirito Santo has taken different paths toward cutting spending and efficiency in allocation of public resources, gaining competitiveness and improving the business environment to attract investors. However, a privileged group of public servants, despite having reduced hours of work, higher wages and earlier retirement, is once again seeking a larger chunk of the broke public budget — what the economist Gordon Tullock once called “rent-seeking.”
The corporatist pressures of the police are both illegal and disproportionate: policemen are exchanging lives for money, and pressing the public budget for fatal instability. Espirito Santo’s governor has to be faithful to his principles now more than ever by not responding to blackmail, and instead punishing strikers and give citizens back freedom, security as well as jobs and prosperity.
Ricardo Frizera is an alum of CATO University, Foundation for Economic Education and Institute for Leadership in the Americas. Former director of the Youth Entrepreneurship Federation of Espirito Santo and former state coordinator for Free Brazil Movement and Students for Liberty, was an active leader in Dilma’s Rousseff impeachment process. Now works in brazilian financial markets.