Brazil: Bouncing Back from Its Biggest Government Scandal

Brazil: Bouncing Back from Its Biggest Government Scandal

Brazilian police are looking to question ex-President Luiz Inacio Lula de Silva’s role in the Petrobras scandal, which has had serious effects on Brazil’s economy.[1]

The oil firm Petrobras struck gold in 2008 and again in 2010 when it discovered the world’s largest oil reserves deep beneath the seabed under the pre salt layer. Its largest stakeholder, the government, ensured that while the oil sector was open to foreign companies, Petrobras would be at the top at every major project. In conjunction, global oil prices rose dramatically due to high demand; upon entering the markets, Petrobras raised over $70 billion, responsible for 2% of Brazil’s Gross National Product.[2]

In the 1990s Brazil emerged as a young democracy desperate for economic stability. With a history of protectionism, little foreign involvement in Brazil’s economy meant an annual inflation of 5000% and largely ineffective national sectors. In a series of reforms the government successfully defeated hyperinflation and opened up Brazil’s economy to the world. Demand for Brazil’s exports in coffee, soya, beef and oil allowed its economy to grow steadily. Petrobras’ discoveries of oil in 2008 and 2010 boosted the economy to new heights.[3]

However, Brazil’s Federal Police discovered that over forty key politicians have been embezzling money from the firm. While Petrobras was the powerhouse of Brazil’s economy, its singular involvement in so many fields made it susceptible to corruption. “If you concentrate everything in a single company controlled by the state it is very easy for the political system to go there and try to grab resources,” said Sergio Lazzarini (Insper Business School). To make matters worse, oil prices have recently fallen due to the abundance of resources.[4]

Brazil’s decision to open up its economy in the 1990s was a necessity that carried risks. New nations are especially susceptible to changes brought about by the global market’s volatile. The scandal speaks volumes about the struggles of a young nation to find its place in the global world without the means of expansion and other resources available to more populous, ancient nations.

by Allison Huang ’17