President BolsonaroOn Oct. 28., 2019, Jair M. Bolsonaro won the runoff of the 2018 Brazilian presidential elections and became the 38th president of the country. He received 55 percent of the votes against the 45 percent of Worker’s Party (PT) candidate Fernando Haddad.

Most of the coverage coming from international media has been simplistic and is almost only repeating clichés such as calling him the “Brazilian Trump” or comparing him to other right-wing candidates from other parts of the world. Although there are certainly some similarities to other candidates, these comparisons must be done with prudence.

Just like Trump, Bolsonaro is also perceived as someone that does not behave in the same way or says the same rehearsed lines like every other politician. He is perceived as an outsider, as he is breaking the standard polarization of the Brazilian elections between the Worker’s Party and the Social Democratic Party. On the other hand, Bolsonaro has been a member of Congress representing the state of Rio de Janeiro for almost 30 years. He is not a newcomer running for his first political experience, as Trump was.

Mr. Bolsonaro gained popularity in the middle of the most critical economic crisis Brazil has ever had. The GDP decreased 3 percent in 2015 and 2016, a worse result than in 1930 and 1931, after the crash of 1929. This economic crisis was caused by the policies of former President Dilma Rousseff, who supported interventionist policies both on the fiscal and the monetary side.

Quoted text: Most of the coverage coming from international media has been simplistic, calling him the ‘Brazilian Trump.’After Rousseff’s election in 2010, she started to increase government spending to stimulate the economy, lower taxes only for some well-organized industrial sectors, and use government-owned banks to increase cheap credit for mostly large companies. She pushed for crony capitalism in every policy, forcing Brazilian investors to spend more time in Brasilia and lobby for privileges than invest in improving their competitiveness. That made many large companies dependent on government in order to keep their profits. When the fiscal crisis arose, compelling the federal government to step back from its aggressive fiscal and monetary policies, unemployment started to rise and the economy crashed. Make no mistake: interventionism is the cause of Brazilian economic demise.

Being seen as the Worker’s Party main antagonist draws the attention of the Brazilian people. If you have been following or at least read a piece or two from mainstream sources, you might be wondering what are Bolsonaro’s policy proposals and how can they affect the Brazilian economy? Beyond the well-known quotes, the Brazilian electorate see him as a clean politician (unlike the others) and someone that will be tough on crime (unlike the others). At the same time, he appointed Paulo Guedes, who holds a PhD in Economics from the University of Chicago, as economy minister. He picked Mr. Guedes because Chicago classical liberalism is associated with more economic freedom, the opposite direction from Dilma Rousseff’s administration. Bolsonaro and Guedes already talked about some of the reforms they will put forward as soon as they get to office. Let us analyze the most relevant ones.

1) Pension reform
Brazil has one of the most generous pension systems in the world. Some workers, especially government employees, are able to retire at the age of 50 (sometimes even younger), while life expectancy is currently at 75, not far from the 78 in the United States. This made specialists in Brazil call its pension system a time bomb about to explode.

With this in mind, Michel Temer, the vice president who ascended to the presidency after the impeachment of Dilma Rousseff in 2016, tried to push Congress into passing a pension reform. Among its policy changes, the most important is the requirement of a minimum age of 65 to retire. This reform is so urgent that many believe Brazil, in the long term, will not be able to comply with the spending cap amendment if it does not reform its pension system.

In the last two decades, Brazil has become one of the most attractive countries in terms of investment opportunities but its fiscal policy make business and investors fear for the country’s economic stability. The pension reform is key to make local and foreign investors trust the country for long term investments.

2) Tax Reform
Brazil, similarly to the U.S., is a Federal Republic. That means states have a certain autonomy, including the right to set tax rates. For instance, many business and consumers end up paying the state sales tax, a local sales tax (municipality) and sometimes a federal sales tax. All of them with different rates for different products. The same happens regarding other kinds of taxes and, although Brazil has a relatively low top income tax bracket – 15 percent for corporations and 27.5 percent for individuals – the number of other taxes and additional fees puts the Brazilian tax system among the most complex in the world. It is very time-consuming for a business that is located in different cities and in different states to plan their tax payments.

With that in mind, Paulo Guedes has already proposed a tax reform that would implement a flat income tax rate of 20 percent for both individuals and corporations and would eliminate many of the current existing taxes and substitute all of them for a new single tax. Although he can do it “easily” at the federal level, any constitutional reform that could change or limit state and local tax competences would be tough as it would require the support of governors and mayors, what could be difficult as neither business want to pay more in taxes nor state and local governments want to get less revenue. This can be a hard political and economic equation to solve.

3) Privatizations
The federal government owns many businesses in Brazil. From banks and the largest oil company, Petrobras, to smaller ones. In the past years, with the economic recession, many of them required government bailouts. Paulo Guedes has proposed to privatize everything, literally. On the other hand, Bolsonaro said that he favors privatization but wants to preserve government management over “strategic sectors.”

Temer pushed for the privatization of Eletrobras, the largest holding in the generation and distribution of electricity in the country. This will be a good test for the beginning of the Bolsonaro administration.

Another sector that could benefit from private investments, that the administration is well aware of, is infrastructure. Bolsonaro and Guedes want to make it easier for private companies to invest in roads and railways. One of the most audacious proposal, though, concerns the ports. Brazilian federal government owns dozens of ports all over the Brazilian Atlantic coast. With the fiscal pressure, it could not invest enough and many international traders say the ports are not good enough. This might be an opportunity to improve Brazilian infrastructure and attract foreign investments for the country.

Final thoughts

Bolsonaro became the political equivalent of what author Nassim Taleb calls “antifragile.” The more attacked he gets, the stronger he gets. He came to a point where he was able to benefit from the chaotic electoral environment. Now, he is the 38th president of Brazil, he must be evaluated on his policies. He has a good team of people that believe in freedom, democracy and the reforms Brazil needs to start growing again. The main concern Brazilians have right now is whether he will be able to deliver what he has promised.