Source: Ideas and Institutions Issue #19
Analysis
The Meanings of President Lula’s Victory
The return of President Luiz Inácio Lula da Silva in Brazil is as dramatic as it is instructive. A prominent figure in Brazil's politics since 1980, Lula first contested presidential elections in 1989, when direct elections to the post were restored. He won the presidency for the first time in 2002. In his two terms between 2003 and 2010, Lula delivered impressive performances. Brazil’s economic outcomes were noteworthy–significant acceleration in economic growth, low to moderate and stable inflation, sharp decline in poverty, and so on.
Due to term limits enumerated in the constitution, he left office at the end of his second term in 2010. At that time, he enjoyed the highest approval rating of any leader in a major democracy. But the 2010s were harsh for him. He was bogged down by corruption allegations, eventually convicted, and ended up serving 20 months in prison. His latest victory in the elections comes less than three years after he was released.
This drama of Lula’s rise, fall and rise again holds many insights for observers of developing democracies. This drama’s immediate setting is Brazil’s political economy, with the global political economy providing the broader context. While the historical and international context lays the ground for the choices to be made, political leaders enjoy some discretion in interpreting, communicating, and changing the direction of history, and in choosing a nation’s own path. For leaders, possibilities are usually open for creating new paths. This can be seen in Lula's achievements as President.
Brazil was once a growth miracle. Between 1967 and 1980, its GDP per capita at constant prices (in purchasing power parity terms) grew by a staggering 6.2 percent per annum. After 1980, growth slowed down and remained low for more than two decades. It was a stunning reversal – between 1980 and 2001, GDP per capita growth averaged only 0.9 percent per annum. This period was also marked by high inflation. Brazil has a long history of high inflation, but inflation was particularly high from mid-1980s to mid-1990s. Brazil’s economy seemed stuck in a terrible trap in spite of significant natural resource endowments and reasonably good human capital.
The episode of rapid growth had been achieved when Brazil was governed by a military dictatorship – the dictatorship lasted from 1964 to 1985 – while the period of "stagflation" coincided with rapid democratization (in Brazil’s case, it was re-democratization). Many drew lazy associations between democratization and economic stagnation. But then, things got better even as Brazil continued to be a democracy.
By the late 1990s, inflation had been reined in. Brazil’s central bank adopted a policy of inflation targeting in 1999 to sustain this achievement. But growth did not pick up. Lula built on this foundation to take Brazil's economy forward. It can be argued that the episode of rapid growth started in 2002, just before Lula came to power. However, Brazil’s best growth experience since 1980 was achieved from 2004 to 2008, when GDP per capita growth averaged 5 percent. Overall, in spite of a year of negligible growth due to the global financial crisis, GDP per capita growth averaged 4.2 percent during Lula’s eight-year rule.
This period also marked a decline in inequality and a sharp decline in poverty. Lula was fiscally prudent, and careful about macroeconomic stability. He did not loosen the fiscal purse strings even in the re-election year of 2006. Rapid economic growth was achieved while maintaining macroeconomic prudence. Poverty alleviation and a reduction in inequality were achieved without attacking the incentives for accumulation. Lula achieved this through improvements in the allocative and operational efficiency of welfare expenditure. This was accomplished by devising new schemes that were continued by his successors and emulated across the globe.
It helped that Lula took office during an expansionary phase in the global economy. However, such outcomes do not simply occur. They must be brought about by a country’s political economy. After all, the global economy had been expanding even before Lula came to power. For every country that benefited from and contributed to the global economic expansion, there are several that failed to do so.
Lula is a good example of how political leadership matters for delivering economic outcomes, not just because he delivered good outcomes, but also because he delivered them after many years of stagnation, and because the economy again went into decline soon after he left office.
The period since Lula left office has been tough for Brazil. From 2013 onwards, Brazil’s economy has been in a decline. So much so that in 2019, well before Covid hit the economy, Brazil’s GDP per capita at constant prices was lower than what it was 2010.
While the grand narrative arc for the global political economy in 21st century typically turns around the global financial crisis, each country’s experience must be seen in its own terms. Each country’s political economy has processed the period of expansion, the shock of the crisis and the subsequent recovery efforts differently.
Brazil went from a growth regime of near stagnation to one of rapid growth, with growth rate more than quadrupling across the two growth regimes. Such dramatic changes in growth regimes typically arise from changes in the political economy. Unless there is some new natural resource discovery, an economy that was essentially stagnant for more than two decades would not start growing rapidly without any changes in the political economy.
While there may be endogenous pushes for change, political leaders have to make choices to guide the political and administrative settlement to enable rapid growth. One key change that is usually required is to create conditions for making deals that enable growth. This involves allowing some discretion for decisions that promote growth, but require some deviation from the laws to create rents and to overcome state capacity constraints. So, rapid growth in developing countries is often accompanied by an environment wherein it seems like a “free for all”, with deals being struck all over the economy. There is an air of permissiveness that is amenable to growth but also breeds corruption.
In Brazil’s case, an additional factor was that the major driver of growth during the Lula years was the export of low complexity agricultural products and minerals. Growth based on exports of such products typically does not create political economy pressures for reforms that would enable improvements in more productive, complex sectors of the economy. Further, since these are rent-heavy sectors, growth opportunities in these sectors usually accompany rent-seeking that is not easy to curb.
In such a context, it was easy to question the means by which growth was achieved. Anti-corruption rhetoric and enforcement efforts gained prominence. It is easy to see the political incentives at work. When Lula left office, he was very popular, and his party colleague Dilma Rousseff won the presidential election quite comfortably in 2010, and again in 2014, albeit with a narrower margin. Whatever the facts about corruption may have been, anti-corruption enforcement became the main plank to take down this popular leadership of their party PT. Rousseff was impeached in 2016 on corruption charges, and Lula was sent to prison. Jair Bolsonaro won the presidency in 2018.
The only saving grace was that this time democracy was not supplanted by an authoritarian regime. Half a century earlier, Brazil had seen democracy giving way to a dictatorship. At that time also, Brazil’s democratic government had delivered a reasonably good economic performance, which was not considered good enough by many in the civil society. Albert Hirschman put it in the context of Latin America of that time: “…ideological escalation may well have contributed to that pervasive sense of being in a desperate predicament which is a precondition for radical regime change.”
Corruption is an issue that makes people in civil society jump to a corner of signalling pure virtue, lest they be accused of being apologists for graft. When anti-corruption rhetoric is combined with enforcement by independent institutions, it becomes even more difficult to challenge it politically. Brazil’s politics endured a polarizing turmoil that continues till date, with anti-corruption enforcement led by independent institutions of the state at the centre of this churning.
Things were, however, not as black and white. Investigative journalists found that the judge and the prosecutor seemed to have colluded to convict Lula. This does not mean that corruption did not happen, but only that anti-corruption enforcement need not always be concerned with curbing corruption. It may be a political strategy to defeat one’s opponents. Those who did not see that anti-corruption enforcement was being politicized could claim that they were deceived. But, as Leszek Kolakowski once observed, in politics, being deceived is no excuse. Lula always maintained that the enforcement actions against him were politically maintained, but he did not launch an all-out attack on institutions. He continued to strike this balance even when he went to prison.
Lula’s experience shows the difficulty of achieving and sustaining rapid economic growth while holding on to political power in a democracy, especially one with natural resource endowments. But the story obviously does not end with his incarceration. Since his release from prison, Lula made a concerted effort to launch a comeback. The key to his return is that he saw, through experience, that it is the popular democracy of Brazil that could hand him his salvation.
What can be expected from his presidency? The circumstances have changed drastically. The rhetoric of the election campaign was extreme, and Lula campaigned as a left-wing populist, which is a departure from his politics. In the campaign, Lula equated his victory with the very survival of Brazil’s democracy - a common rhetorical device in anti-right-wing politics. He compared Bolsonaro’s supporters with Ku Klux Klan members, and accused Bolsonaro of committing genocide. On his part, Bolsonaro claimed that the election was being rigged against him, and called Lula a thief. The friend-enemy distinctions were being starkly made, with little common ground and room for compromise.
It is too early to say whether this marks a transformation of Lula into a left-wing populist. It could be that his populist rhetoric was only meant to counter right wing populism of his opponent. However, there are at least three aspects associated with the conditions in which he is taking power that would push him in the direction of populism. First, the extreme polarization of Brazilian politics at present may not allow much moderation. Different factions are beginning to see themselves as not just competitors, but sworn enemies. It is politically expedient to adopt populist rhetoric under these circumstances. Second, the global trend towards multipolarity and deglobalization support a populist turn in politics, which pits domestic interests against foreign ones. Lula has long held a strong sovereignist vision, wanting Brazil to run an independent foreign policy, but now this could be given a populist flavour. Third, if Lula is unable to achieve improvements in the economy, he would have an incentive to rely on emotional populist rhetoric. Lula is taking over at a difficult time for Brazil’s economy, which has been in decline for close to a decade. The fiscal situation is fraught, with Brazil running large deficits even before the pandemic hit. Brazil’s overall political economy continues to boast a predominance of low complexity, rent-heavy sectors.
Lula exemplified prudent, pragmatic left-wing leadership during his previous terms. Lula would have to summon all his experience and wisdom to find a way out of this present turmoil and towards a politics of progress and common good.
—By Suyash Rai
Review
Measuring the Costs and Benefits of Government Subsidies for Rental Housing
Affordable housing policy in India has become an increasingly important policy priority. While successive governments have focused on providing home ownership, adequate attention has not been paid to facilitating rental housing. This focus on ownership versus rental housing has arguably obfuscated the demand for transitional housing in urban areas as well as housing for students, industrial workers, outstation professionals, etc. If left unattended, the unmet demand for rental housing will continue to make labor mobility difficult in a rapidly urbanizing country.
One of the few proposals for facilitating rental housing has been to promote the rationalization of archaic rent control laws through the Model Tenancy Act proposed by the Indian government in 2019. As scholars have noted, rent control disincentivizes the supply of rental housing into the market. However, policymakers also have other potential tools at their disposal—financial subsidies to make renting houses more affordable. While this alternative has obvious fiscal consequences, it is worth examining its costs and benefits.
A recent paper published by the Banque de France does exactly this. The authors, Céline Grislain-Letrémy and Corentin Trevien, use French housing data to assess the long-term impact of housing subsidies in the private rental sector. The paper “The Long-Term Impact of Housing Subsidies on the Rental Sector: the French Example” (September 2022), uses data from 1984 to 2016 to analyze the impact housing subsidies have had on rents, housing quality, and the elasticity of rental housing supply.
According to the authors, housing subsidies to tenants are the most significant fiscal component of housing benefits provided in France. These subsidies were first started after World War II but increased considerably in 1977. This marked a pivot from house building subsidies that were prevalent earlier. From the 1990s onwards, “all low-income households, including students, become eligible for housing subsidies, which were previously restricted to specific categories of households.” Housing subsidies accounted for approximately sixteen percent of the rent in 2016, and subsidized households accounted for close to forty-five percent of the private rental market in 2015. Despite this, the proportion of household income going towards rent in low-income families has increased continuously.
The calculation of the subsidy to be received is complex and “takes into account household characteristics and resources, as well as, to a very limited extent, the rent level.” The amount of subsidy is also determined by location—Zones I, II and III, which are largely determined by agglomeration size. Zone I receives the highest subsidies and comprises Paris and its neighboring areas. Zone II comprises agglomerations of more than 100,000, and Zone III covers the rest of the country. Additionally, even within the zones, the subsidy depends on household characteristics. The outcome of this system of calculation is that the number of recipients is largest in the group that holds one-room private rentals.
To identify a causal link between subsidies and rents, the authors employ an instrumental variable analysis. The instrumental variable “relies on the link between the subsidy amount and the dwelling’s location.” The treatment effect is “estimated by using rents of dwellings located in agglomerations of between 50,000 and 180,000 inhabitants” in a sample of 60 agglomerations (3 percent of total agglomerations).
The authors find that subsidies have a significant inflationary impact on rents in the private sector. In addition, the increase in rents is secular and affects both categories of households—those who receive an allowance and those who do not. They find that “all in all, this policy increases the willingness to pay of a large part of tenants and might consequently increase the equilibrium rent of all dwellings, including those that are not occupied by subsidy recipients.”
In addition, the paper notes the heterogenous impact of subsidies on housing supply. The authors note that a demand subsidy should ordinarily lead to an increase in supply unless it is completely inelastic. They find, however, that while there is a “significant treatment impact on the shares, among primary homes, of private furnished rentals and private one-room rentals,” this is not the case for more spacious dwellings. The authors speculate but cannot confirm that this is likely due to the entry of a greater number of students into the rental market. They explain, based on previous research, that the extension of subsidies to students in the 1990s allowed some of them to move out of their parental homes.
Rental housing subsidies in France have therefore led to an increase in the ability to rent for some segments of the population, while causing an increase in rents. However, the impact has been heterogenous. Housing supply for larger houses has remained inelastic, while rents have increased. For one- or two-room dwellings, while rents have shown an increase, but they stopped increasing significantly a while ago. The increase in the supply of housing in this segment has reduced the inflationary impact of the subsidies.
This has implications for rental housing policy in India as well. It highlights how supply inelasticity in the housing market can potentially cause landlords to shave off any rental housing subsidy. Increasing the supply of rental housing is therefore an important mechanism to ensure that those looking for rental accommodation are able to enter the market. The reform of restrictive tenancy laws is therefore complementary to any fiscal mechanism that would subsidize tenants. The absence of increased housing supply will most likely exacerbate rent-seeking behavior.
—By Anirudh Burman