The World Cup of Politics (Brazil Elections)

Hello, listeners. Welcome to the podcast.

Hello, listeners. Welcome to another episode of the Jacob Shapiro podcast. Joining me on the podcast today is Monica DeBull. She's a senior fellow at the Peterson Institute for International Economics. We are recording this Friday, October 23.

We're gonna push this episode out right now because the 2nd round of Brazilian elections, happens on Sunday, and we we previewed, those elections. I'm actually happy that we're doing it now, because to a certain extent, we get to preview what we think is gonna happen, but also what this means for Brazil in either scenario and to make it a broader conversation rather than just to focus on exactly what's gonna happen on Sunday in general. So hopefully, you listen to this podcast either before or after the election and you have some sense of what any result in the election means. I certainly feel better knowing about that as well. Also, emphasis on Brazil and Brazilian content here because this is really important and I find that people are distracted or not talking about it enough.

So thank you to Monica. She has an incredibly busy schedule and was able to fit us in. Listeners, can email me at jacob@jacobshapiro.com. If you wanna talk about anything you've heard on the podcast, if you wanna talk about me as a speaker at some of your events, anything like that, please reach out. Feel free.

Take care of the people that you love. Cheers. I will see you out there. You know, a couple weeks ago, it seemed like Lula was done, and we were all waiting for the the coronation of Flavio Bolsonaro. I don't know.

The polls look a little weird to me. Why don't we start there? I know that we can't predict these things and the polls are hard to predict. But what do you think is gonna happen here in the 2nd round of elections going forward? What is your base case?

So it's a complete unknown. I mean, there's there's no way that I can emphasize this enough. It's a complete unknown because, yes, a few weeks ago, 3 weeks ago when, we had the 1st round of the elections, it definitely looked like, you know, it was just gonna be impossible for Lula to surpass Flavio Bolsonaro. The the margin was small, but nonetheless, the momentum seemed to be all on the on the Bolsonaro camp. But things have turned, you know, in 3 weeks.

I mean, this is Brazil. Brazil is a kind of a crazy country because there are so many people, who spend almost the entirety of their days online. Yeah? And so again, about 3 weeks ago, was this huge digital movement, on social media to sort of try to turn the tide. And that turned into actual street demonstrations, have swept the country in the last 3 weeks, pro Lula demonstrations.

And now, you know, the latest we heard from the polls is that the 2 candidates are tied numerically, so it's 50 50. So so it feels like... It kind of feels like, you know, the World Cup of politics this election.

The... Yeah. It's crazy. And you you mentioned Brazilians being online. I I actually have some experience of this because, you know, we put the video of this podcast out on YouTube as well.

And for some reason, Brazil content outperforms almost all the other content that we put out there, which was a surprise to me. I would have... I would not have expected it, but it it actually does. So I... It's just in sort of real terms, I have that evidence.

You mentioned also, I mean, the the thing about Brazilians being online. Do you think that the controversy around Meta and the incidents about, you know, them, Was it... Were they restricting different posts on social media related to Lula? Do you think that that had any kind of impact on how people were thinking about this, or is that unrelated?

I think it has had an impact. I think it's helped mobilize the pro Lula camp by a huge extent. There's this... So the... So a couple of things here that that are actually going on.

1 1 thing is there's this deputy in the Brazilian lower house who decided to create a WhatsApp channel. He had a pretty good following on social media already, but he decided to create this WhatsApp channel about a couple of weeks ago. And this channel, it's a public channel. It now has about... Well, it's closing in on 10,000,000 subscribers.

Yeah? 10,000,000. And what he's been doing on this WhatsApp channel is that he's been telling people to, you know, put up hashtags and distribute, you know, certain content and all of this. He's been flooding social media with Prolula stuff. And what's happened in the in the interim is that Meta has actually brought down quite a few of those posts.

You know? And and and there is an... There is a there is a call for an investigation into how Meta has been treating this election because, apparently, they've been broadcasting more the pro Bolsonaro, stuff than they've been broadcasting the pro Lula stuff. The pro Lula stuff is being taken down. So there's definitely something to that, and we'll have to see what happens afterwards.

So for for our listeners who are not following Brazilian politics maybe as as as closely, you know, as some of the other things that are local to them, what is at stake? So I... Since we have uncertainty in the polls and I'm not gonna force either 1 of us to make a prediction when there is so much uncertainty, What does it mean if Flavio Bolsonaro prevails in the end? And what does it mean if if Lula prevails? Especially considering that in the 1st round, I mean, it was a pretty big victory for the right in general.

Even if we... If if Lula pulls a rabbit out of his hat and wins, you still got, what was it, 4 Bolsonaro's that are gonna be in the government and, you know, Lula's not really gonna be able to do all that much. So help us understand what's at stake here, in the 2nd round.

So a couple of things are at stake, and they're pretty major. 1 of the things that is at stake is Brazil's Brazil's institutions, basically. Brazil's constitution, Brazil's supreme court, and a number of other institutions because the Bolsonaro camp has defended in the past and has defended again in the very recent past, certain interventions in the functioning of the Supreme Court that would look a lot to things that Viktor Orban did in Hungary when he was elected back in 2010. And that's not even by chance because the the Bolsonaro family, and in particular, the candidate, Flavio Bolsonaro, as well as his brother who's currently here in Washington DC, The 2 of them have made many postings on social media saying how they greatly admire Viktor Orban and all of this stuff. So there is a move to kind of dismantle certain institutions in Brazil, which many people view as, you know, a move towards a liberal democracy in a way.

So, you know, it... It's not... I don't like to say that democracy is at stake, but I think we probably should because there is a there is a question mark here pertaining to, you know, exactly what is it that the... That these... The the the Flavio Bolsonaro candidacy or the Flavio Bolsonaro as a president would actually do once in office.

And 1 thing that's important to keep in mind is that in the Brazilian Supreme Court in the next few years or during, you know, whomever becomes president during their term in office, the Supreme Court will have at least 3, perhaps 4 appointments. Yeah? And there are 11 justices in the Supreme Court. So a Flavio Bolsonaro presidency would be able to appoint 4... At least 3 or 4 Supreme Court justices.

There are already 2 Supreme Court justices in the Supreme Court who are very much aligned with the Bolsonaros, and so that... That's a problem. So there's the institutional question on the Bolsonaro side. And then there's the economic question. You know, what is going to happen to the economy?

The Brazilian economy isn't doing very well. Debt is very high. Public debt is very high. Growth has been relatively low. It hasn't been horrible, but hasn't been good either.

Inflation has come down, but the cost of living is still very high. So, you know, there there are things to be done on that front. And fam... And households are very indebted. There's a big problem with household debt and very high interest rates.

So there are a number of really difficult challenges to sort out beginning with the fiscal situation in Brazil. And the and the 2 candidates, this is... This goes for both Flagibol Sonaro as well as Lula, the types of policies that they've been proposing on the campaign trail are populist. Lula is more of a controlled populism because he, you know, he he he he seems to have a sense of what would happen if he went all out and started, you know, just doing all sorts of things to attract, voters. But Flavio Bolsonaro, who's relatively inexperienced, is also promising a lot of populist policies.

And this is interesting because up until recently, the markets were were thinking that, you know, possibly flavable scenario would be Brazil's melee, you know, and would come in and do drastic spending cuts and things like that. But it really doesn't... That really doesn't seem to be the case. So, you know, we are looking whichever way it goes, on Sunday. We're looking at a country that is going to face some very massive economic challenges.

And as you said, you know, in the... On the Lula camp, on the Lula side, given what's already happened in the 1st round with the congress being take... Being taken over by chiefly the extreme right, but also a lot of other people who are aligned with Flavio Bolsonaro, this will make it very difficult for him to push reforms through.

Yeah. I wanna wanna dive a little bit deeper on on something you said here because I I find this a little confusing. I know that, you know, Yair Bolsonaro, when he governed, was talking... Was talking about taking a very orthodox stance. And you can say that for the 1st year or 2 in office, he was actually doing what he said he was gonna do.

But then the pandemic hits, and he turns completely the opposite direction and he's totally populous. I'm not following Brazilian politics as closely as you are, but I have not been able to figure out exactly what Flavio Bolsonaro was promising in the 1st place anyway. And in some sense, it seemed like he was just surfing on Lula's unpopularity and not having to put himself out there and talk about the actual things he that was gonna do. And it... And it's doubly confusing because, you know, somebody who's just parachuting in and looking at Lula's macro record, I mean, it looks okay.

I know you said growth was unimpressive, but relative to other countries in the region, it's actually pretty good. Like in The United States, you've got unemployment at record lows. You've got average wages, you know, hitting record highs around the same time. You've even had declines in in poverty and food insecurity. And for me, the big 1 was that Lulu was able to push through meaningful legislation on tax reform.

That's not the, you know, bricks left card carrying Lula that everybody's afraid of. That sounds to me like a political pragmatist who was thinking about what are the best ways to unleash the Brazilian entrepreneur in the world. So I know the flip side of that though is that interest rates are high, that to your point, you know, indebtedness has increased significantly, and that even though Lula cut, you know, the budget deficit, technically high interest rates have increased, the amount the payments of... That the government has to make. So really, you're getting rising public debt in the 1st place.

So I guess the the question that I'm searching for in there is is a 2 parter. Number 1, why do you think the market allowed itself to think that Flavia was anything other than a populist? Because I see no evidence for for anyone to think them... For for anyone to think anything else. And then number 2, whether he wins or not, what do you think Lula's legacy is for this 3rd term?

Because I I know it's mixed and if Bolsonaro comes back politically, his legacy is gonna be tarnished. But the economic record, I I don't know. It looks pretty good to me. It looks like some compromise, some meaningful reforms, some good numbers, some bad numbers. Like, I wouldn't have looked at it and said, oh gosh.

He's really hemorrhaging in the polls. Help us understand what's going on here.

So I think... And you're right to point that out because it is true that when... If we look at Lula's presidency, you know, the the... This last term, yeah, which was his 3rd, in office, it really hasn't been bad. I mean, yeah, debt has gone up and, yes, families are very heavily indebted and households are very heavily indebted, but they were very heavily indebted already before.

So, this is a trend that's been in place in the Brazilian economy forever now. I think what's happened with respect to Lula is really that, you know, this... He's running for office for 0.25 time. And I think for people who are kind of fatigued, who think that the country doesn't really have a, you know, a very consistent direction and who are sort of seeing themselves as being, you know, not not in a place they'd like to be. So cost of living is still high.

Some people are very indebted. They're not see... Really seeing the prospects, you know, going forward. I think there's a mixture of, oh, okay. Well, Lula, we already know what he does.

Yeah. He's not gonna make things terrible, but he's not gonna make things extremely good either, because the situation's complicated. So I think there's that, playing in. With respect to Flavio Bolsonaro, you're absolutely right because at no point during the campaign or even before the campaign has he ever shown himself to be economically responsible? Let's put it that way.

He simply hasn't. I mean, he he he really has ridden the anti PT, the workers party, Lula's party, the anti PT wave, and the sort of anti Lula sentiment, and he's pretty much run that to the ground, I think. But he hasn't offered anything. I mean, he he tried to play this game where, you know, he's been communicating back and forth with Millay, and then he's trying to signal to markets that, look. I'm gonna do what Millay did in Argentina, and I'm going to save Brazil's fiscal accounts, and I'm going to cut spending, and everything's gonna be great because then interest rates will come down.

And if interest rates come down, then that resolves the debt problem, and that resolves, you know, household indebtedness. And he's been telling this story. And markets... I don't know if naively or what, but markets have basically taken that story as the truth. And then now, you know, in in the final week, really, in the final week of the campaign, so this week that's ending now, is really when some of his actual proposals came to light.

And they are contradictory because he's saying that, oh, I'm gonna slash, you know, public spending. I'm gonna slash spending by 1.5 percent of GDP. But then at the same time, he's promising a buy... A debt buyback program. So he's promising to buy back household debts to the to the amount of of of 1.5 percent of GDP.

So he's cutting... He says he's gonna cut spending on the 1 hand. And then on the other hand, he says, oh, but I'm gonna use all of the... This money, the same amount of money to buy back household debts. And so as I said, it's all very contradictory.

It sends the wrong signal in my view because it does sound very irresponsible. And yet, you know, markets seem to be, for the moment at least, oblivious to this.

I mean, I I imagine that markets are looking at Brazil overall as a macro story in a more multipolar world, and they see good things. They see, you know, food exports and commodity exports and a young population and rising entrepreneurship. Like there's lot of macro factors to be happy there. But this is actually 1 thing I wanted to to ask you. I wanna ask a deceptively simple or maybe simplistic question for somebody like you who's following Brazil so often.

Why are Brazilian interest rates so high? I mean, they're at 13.75%. I mean, that that feels awfully high considering everything that's happening in the global marketplace right now. What what structurally about Brazil is is forcing rates up to be that high? Not not to sound like a Bolsonaroista or something like that, that rates should come down or Lula.

Lula also wants rates to

come down.

But I look at that... At the rates and I'm like, well, that seems pretty high. I don't quite understand that. So why are they so high?

So, Jacob, that is the 1 question that no 1 has ever been able to answer. And I think in part, to answer that question, 1 sort of has to go back to... In... To Brazil's economic history, recent economic history, and look at what Brazil used to be. So in the 19 eighties and the 19 seventies and the 19 eighties and the better part of the 19 nineties, Brazil was this country that sustained extremely high inflation levels for a very long time.

It's kind of unique in a sense because when you look at the different histories of hyperinflation in different parts of the world, hyperinflations tend to be relatively short lived because they're extremely disruptive. Yeah? So, you know, once you get a hyperinflation going, then something happens and, you know, it it it eventually ends and it eventually ends. It may end in catastrophe, but it ends rather quickly. In Brazil, that was not the case.

Brazil lived with hyperinflation for over 25 years. Yeah? And what allowed that to happen was really a number of structural issues and structural, behaviors and and parameters in financial markets that actually allowed this situation to be sustainable. So 1 such thing was, for instance, Brazil had massive amounts of indexation. Everything was indexed in the economy, literally everything.

When in the mid nineties, Brazil finally was able to stabilize macroeconomically, bring down inflation with the real plan. So this was the big currency and fiscal reform that happened in the mid nineties and that ended hyperinflation, a lot of that indexation went away, but not all of it. And the part that didn't go away is exactly the... Well, is 1 of the contributing factors to these high interest rates because the way by which the government, issues debt, there are all sorts of different bonds, but there's this 1 bond in particular called LFT, and this is a bond that is indexed to the interest rate. It is indexed to the policy rate or something very close to the policy rate of the central bank.

It's actually indexed to the interbank rate. And what that means is that whenever interest rates go up, the holders of this debt, they make money out of that. They get a capital gain. Yeah? So that that type of indexation actually creates a lower bound beyond which it is...

Below below which it is difficult for interest rates to fall. And so you sustain... You know? So it's almost like you have a system where interest rates can't fall very much because if they do, then the holders of this... Of these government bonds are going to dump them, and that's going to create a problem for the government in terms of rolling its debt, yeah, forward.

Therefore, you keep this indexation system in place, but then what that means is that you can only bring interest rates down to a certain level, but you can't really go below the floor. And the floor for Brazil is not 0 because of this indexation. It is something much higher than 0. So that's part of the story. Yeah?

That's not the full story, though, because there are other things too that contribute to high interest rates. For instance, Brazil also has massive amounts of subsidized credit. Brazil has these public banks, these public financial institutions that are very active in in lending and in lending markets and credit markets. And 1 in particular, which is the country's development bank, does a lot of subsidized lending. And because it is a very large volume, that also kind of creates obstacles for lowering interest rates because you have a segment of the market that is simply not responsive to policy rates.

You know, they're responsive to these subsidized rates. And so that kind of segmentation also makes it very difficult for interest rates to fall, by more. So Brazil really needs some kind of big reform here to address, you know, the indexation issues on the debt, the subsidized credit issues. In other words, Brazil needs a financial sector reform that it has not done. So the RealPlan, if we go back to the mid nineties, the RealPlan instituted fiscal and monetary reforms, but it didn't really do much on the financial front.

And that is the element that's missing. That's what's needed in order for Brazil to become more normal when it comes to interest rates.

Understanding, of course, that there are political constraints, which is probably the reason why you have both Lula and Flavia Bolsonaro behaving like populace. Neither 1 of them really behaving like their ideological credentials. But, you know, if I could give you a magic wand and you were advising either 1 of them and you said, look, this is what you should do irrespective of the electoral constraints or the other things that you're talking about. Like, what are some steps that Brazil could take to solve this? And what would be signals to you that a future Brazilian government is actually tackling some of these issues rather than just kicking the can down the road?

So there are actually some things that Brazil can do. I mean, the the the budget process in Brazil is very complicated. Yeah. The politics are even more complicated. The political economy of the whole situation is very...

Is is very hard to get your head around. But there are things that that the government could do on the spending front even if spending is very rigid. So it... Just just to to step back for a 2nd, spending in Brazil, a lot of spending in Brazil is constitutionally mandated. And this is why, you know, just bringing spending down usually requires constitutional amendments, which is a crazy thing, that you think, you know, you have to manage your fiscal accounts by changing the constitution.

That's very crazy, but that is how it is. And so... You know? And and that's not gonna happen because a lot of... Well, it might with Flavio Bolsonaro, but it won't with Lula.

What could... What what what leeways... What levers does does does the government have? Well, there's a lot of spending on programs. There are many, many programs that are just being run on automatic pilot.

They're not being revised. So there are there's a... There are ton of inefficiencies, in the in the public sector. The World Bank has done several spending reviews for Brazil and has identified a number of spending items that could just be taken off the books completely, and that would really have very little effect in terms of the population... The the people who would be affected by the elimination of those of those particular lines of spending, but it would save a lot of money for the government.

And so, you know, the the Brazilian government has all of these expenditure review reports that the World Bank has done, but it has never actually taken the steps to apply some of those recommendations to cutting spending. And so 1 of the things that can very well be done is that. Then there's another another issue, which is Brazil has created over many, many years this incredible amount of tax breaks, specific tax breaks for sectors, companies. You know? It's it's all over the place at this point, which creates a revenue fall...

Fall off, which shouldn't be happening. I mean, these... Some of these tax cuts are as inefficient as well. They're not having the desired effects. They're not stimulating production in any meaningful way, so they can be rolled back.

And if you roll them back, you get something back on the revenue front. So there are things that can be done both on the spending side as well as on the revenue side that are not being addressed, but could be addressed. And in principle, the politics of things doesn't really stand in the way of that because these are items that are just sitting in the books and that could go away.

So is it fair to say that no matter who wins, these issues will be addressed, whether it's Lula or or Flavia, or is it fair to say that no matter who wins, these won't be addressed whatsoever?

I think at this point, Jacob, it's it's it's better to say... Or at least my... In my opinion, it's better to say no matter who wins, these issues will will remain unaddressed because they just haven't been addressed, you know, in in in any government. The PT, the Bolsonaro administration back in 2019 to 2022. Even though, as you said, you know, when they came into office back in 2019, they came into office with a very sort of orthodox, you know, recipe of measures, and they managed to do...

To keep themselves in line for about a year until the pandemic hit. And then after the pandemic, it was... You know, everything was let loose. But even even then, when they they had the chance to do it in their 1st year in office, and they didn't do it. So I don't think, you know, any future government, whether it's Flagio Bolsonaro or Lula, will touch these things, but they should, you know, because because that's where that's where you can actually make some progress.

When we're thinking about what's at stake here, I mean, they're gonna be dealing with a lot of the same constraints. But 1 of the biggest ones, at least to me, seems to be relations with The United States, that the Bolsonaros have a better relationship with The United States. President Trump explicitly said that his tariffs on Brazil were tied to Brazil not treating his friend, Jair Bolsonaro, so well, whereas Lula is very much thinking about the BRICS, thinking about Brazil as a middle power, has a very different sort of geopolitical notion of where Brazil sits in the world order. So talk to me a little bit about, you know, day after the election, if it's Flavio Bolsonaro, what does that mean for Brazil's relations with The US, and what does that mean for the Brazilian economy? His dad, you know, talked a big game about China on the campaign trail.

Functionally, when he got into office, you know, China's Brazil's biggest trading partner. It's 1 thing to, you know, complain about the Chinese when you're trying to get into office. It's quite another when you're the president of Brazil and you have to make decisions. And then also, if if you're Lula, if he manages to pull it out and he has... And he is gonna have the sort of hostile congress, what do relations with The US look like and what does Brazil's place in South America where Brazil...

You know, Lula wins, I mean, Brazil will be isolated in some sense. He's gonna be surrounded by Trump acolytes just about every single place you look, and he's gonna have a hostile congress. So I imagine that'll be a difficult position for him. Is that... Do you think that is a key place where there is some...

Something riding on the election or not?

Well, this is this is a really interesting question because the... 1st of all, the China issue. Yeah? China for Brazil is just as just as it is for other Latin American countries and even those countries that have flipped to the right recently, China is extremely important. China has been entrenched in the region for many, many years now, and no country in the region, particularly in South America, can live without China.

That's just impossible. So when Jair Bolsonaro, Flavio's father, when he was in office, during the campaign, did have... Well, before he was in office, he had this anti China rhetoric, which, of course, went away completely once he was in office because, you know, it's just not doable. Yeah? And I think, you know, it would be the same with Flavio Bolsonaro.

There there won't be any distancing from China because Brazil can't afford that. It simply can't. And in that sense, it is going to follow very much what other countries in the region are doing. So if 1 looks at Malay, for example, Malay also has this approach in Argentina being very aligned with the Trump administration and, you know, the rhetoric is very pro US and all of that. But China is still very heavily involved with with Argentina just as it has been.

Nothing has changed on that front. Emile has been in office for 3 years now. He's gonna be running for reelection next year. The same is true in Chile. The same is true in Colombia.

The same is true in Peru. So I don't really see the the the China issue becoming anything different than what it already is. Yeah? But it is... The the the interesting bit is how should we think about Brazil under Flavio Bolsonaro and Lula from the the rest of it, you know, from the rest of the geopolitical slash trade slash investment questions.

And I think there, things can be very different because of this, you know, stated alignment with The United States. Brazil has never... Foreign policy tradition is 1 of nonalignment. So Brazil has this sort of pragmatic multilateralism thing going on and has had that going on for years now, and that is Lula's approach. I mean, yeah, Lula favors the South South stuff.

He likes to play up the South South, know, trade and investment stuff. He likes to... Obviously, he's very interested in the Bricks. But he's ultimately... And he has shown himself to be very much a pragmatist on foreign policy to the point where even, you know, with with...

Since Donald Trump took office in 2025 and Brazil has faced, you know, tariffs, ever higher tariffs, and other measures as well. Nonetheless, Brazil has been able to still grow its markets for exports because it's been diversifying like crazy. I mean, if we look at what's happened to Brazilian exports, you know, between in in this last year, you know, 2026 compared to 2025, Brazilian exports have grown substantially over this period, and that's been mainly because of market diversification. So under Lula, what has happened is that Brazil has become a lot more varied or a lot more diversified in its in its trade and investment relationships. Flag of Bolsonaro would be a sort of narrowing of that or, you know, a re narrowing, so to speak, because we would kind of go back to where we used to be if, you know, really this sort of rhetorical alignment with The United States ends up taking place.

And this... Again, the interesting bit here is that this would not push out because Brazil can't live without China, but it would certainly push out the Europeans. It would certainly push out, some other countries that Brazil has recently done deals with, including Mercosur. Yeah? I mean, we've seen recently the Mercosur EU deal, the 1 that was in negotiation for over 0.25 of a century.

We saw that come into effect or provisional effect, in May of this year. And we've also seen... Brazil has also signed a a trade deal or Mercosur, I should say, signed a trade deal with the European Free Trade Association. It signed a free trade deal with Singapore. It's working on a free trade deal with, Canada.

It's working on a free trade deal with Japan. And the question that I have in my mind is if Flagio Bolsonaro is the president and if this alignment with The United States is what foreign policy looks like under under Bolsonaro, what happens to those deals? You know? Because I don't think they will be prioritized. And that would be to the detriment of Brazil, but it would also be to the detriment of a lot of these trading partners, these other trading partners.

That would be a real shame because, you know, at the moment, Brazil has this great opportunity in front of it. I mean, it's a country that is very rich in critical minerals. It is very rich in rare earth elements. It's the 2nd largest, deposit in the world right right behind China. It has other very important minerals like niobium.

Niobium... Brazil is the world's largest exporter and producer of niobium. It's responsible for 90% of the global market. And and, you know, so... And and countries want in on these things.

You know? The European Union, China, The United States, Japan. You know? Everybody wants in on these natural resources. So Brazil is in a position to really leverage that to its advantage.

But if it is aligning with The United States in the way that, you know, the Bolsonaro speak of alignment with The United States, it would probably miss out on that opportunity. So that that is also a question that's at play here.

There... There's 2 questions I wanna ask you in response to that. I wanna I wanna sequence them correctly. So the the 1st 1 is I had my friend Ilo on the podcast couple weeks ago. He's a Peruvian and an analyst on politics.

And I I asked him some version of this question that was basically, could we see Brazil start to become a regional leader within South America in general? You mentioned the Mercosur EU deal. I've I've I've read what you've written about Mercosur. Sort of echoes what I've said. I mean, Mercosur looks functionally brain dead.

Yeah. And rather than Brazil being the leader of, you know, a rising South American block, because when you put together all of South America's resources, I mean, it's a very compelling macro case based on what's going on in the world. But South America still behaves like basically basically a depot for commodities for imperial powers from abroad to come and take what they want and take it out. And so you get, you know, high levels of growth and wealth that are being produced, but which are not transferred throughout all of society and it's it's really an old story. And when I asked, Ilo, like, can Brazil lead?

He kind of laughed. He said, Brazil's not gonna lead anything. Brazil's not a leader. They're not thinking about themselves that way. Do you think there's any potential for Brazil to rise, to the occasion of actually leading, you know, a a block in South America and thinking about South American countries building their own, you know, cohesive internal market and and using their strengths to build each other rather than constantly just selling whatever abroad and creating growth that way?

I mean, I I know that that's sort of completely unrealistic because structurally, that's not how the entire continent's politics and industrial economies are based. But it seems to me if Brazil was ever going to lead, they have a golden opportunity now, whether it's Flavio or Lula. So how do you respond to that idea?

Yeah. No. I I completely agree. And I think when we look at how Brazil has look... Has has been dealing with itself within the in the midst of this race for critical minerals in the world.

Yeah? I think it took a while for for Brazilians to realize how important Brazil is in that race. You know? It's it's incredibly it's incredibly tragic, actually, to think about that because it was only, I don't know, maybe a year ago, maybe less than a year ago that the current government really said, oh, wait a minute. Yeah.

We have a lot of critical minerals. We have niobium. We have rare earths. You know? We're in this great position.

We should be looking to not just export raw ore. We should be looking to refine, process, separate, you know, do all of these other activities that will move us up in the value chain. The problem is that they came to that realization, you know, right before facing a very difficult election, which is exactly where we are now. So I do think that a... If we get a lula...

A reelected lula, I think there... The intention... The clear intention to lead in this arena is there. The question that I have in my mind is, okay, but is the technical capacity to do that there also? And that's where I have a question.

Yeah. I think, politically, Brazil could probably pull it off if it wanted to because of its size, because of its market importance, because of how much of these, natural resources it has compared to others. But in order for that to become real, in other words, for that to leave the the the the the the world of intentions and actually go to the world of what is actually being done, you need the technical capacity. And that's where I think things are still not not where they should be. I mean, there there are things going on in different parts of the country that kind of suggest that that capacity is building itself up, but it needs to come, I think, from a more centralized perspective in terms of where the country is being taken and how the country is actually going to respond to this to this opportunity that it faces.

So that... That's what I'd say with regard to Lula. With regard to Flavio Bolsonaro, I frankly don't know how to think about that question because what has been happening recently is that some companies, and in particular, US companies have been able to position themselves in Brazil quite favorably. So USA Rare Earth, for example, currently owns this mine in the state of Goias. And this is a very special mine because it produces a particular kind of rare earth.

It produces heavy heavy rare earths that are used in magnets. And as we know, magnets are used in everything. So, you know, it's huge for the defense industry, but it's also huge for the tech industry and so on. So this... The the mine was initially run by a Brazilian operator, and that operator was purchased by USA Rare Earth.

Now under Lula, when that happened... And and and this purchase was very recent. It was... It happened a few months ago. The purchase itself should have raised some eyebrows in the government, but it didn't.

That ended up happening only at the end of August, so just now, when it was announced, I think it was the Pentagon that announced that it was going to put something like 700 5th... And $50,000,000 into a special purpose vehicle that is tied to USA USA rare earth for this particular mining project in the state of Goias. So when that announcement was made in in late in late August, that's when, you know, the current government woke up and sort of said, oh my god. There's this thing happening. We really should be looking at this.

And the story here is really, I think, telling of how Brazil deals with things because there was a piece of legislation in the Brazilian Congress for regulating critical mineral projects and regulating how foreign companies should be operating in Brazil and so on and and so forth. So the regulatory framework was sitting in the congress, had been approved by the lower house, but had not yet been approved by the senate. And this would probably... If this legislation had been in effect, this would probably have prevented to some degree, not completely, but to some degree, it might have prevented USA Rare Earth from acquiring the complete stake that it acquired in this in this Brazilian company that used to own the mine. Yeah?

So when this whole story kind of broke out, you know, the announcement in late August and all of that, suddenly, Brasilia kind of woke up and said, oh my god. This is happening. We should do something. So then president Lula fast fast tracked the piece of legislation through the senate, signed it into law. So now it is a law, but the deal has already happened.

But the law does allow for the the deal to be revised. That's kind of contemplated, and I think that's where a a future Lula government, if that happens, would likely go. But but the story itself tells you how Brazil is always late in its reactions. Yeah? And it's sort of missing opportunities given that it's it has this delayed kind of, action.

With Flavio Bolsonaro, really, I I don't... He hasn't said a word about critical minerals, rare earths, Brazilian sovereignty, all the things that Lula has kind of woke woke up to lately, Flavio Bolsonaro has said nothing about all of that. So, you know, it's not unreasonable to think at all, and it's the reason why also The US is so interested in the Brazilian election. It's not unreasonable to think that under a flaggable scenario, the gates would be open for US companies to just come in and exploit those those minerals on their own, and Brazil would still be trapped in its, you know, current sort of commodity exporter rule.

Yeah. Let's stick with with Flavio Bolsonaro for a minute because I I don't wanna stick stick too much on his personality. We've talked about him in in particular his policies in a little bit. But instead, wanna ask, you know, what the popularity of him and his father and his family, what does that suggest about how Brazilian society is changing? And I think this is a conversation we get wrong in the context of The United States many times, you know, when when Trump was initially elected and people were protesting not my president.

Actually, he is your president, and his election tells you something about the direction of society and what people are thinking. What does the rise of the Bolsonaro's tell us about how Brazilian society is changing? I mean, if if he loses, you know, maybe they stick around, maybe they don't stick around. If he wins, maybe it's the beginning of a new political dynasty. But I'm interested in the forces that are choosing someone like that to lead Brazil in the future rather than the eccentricities because we could spend all day on on the eccentricities.

There are plenty of them.

Yeah. So this is really interesting because it it is very much a sort of socioeconomic issue. Under Lula, because under his previous 2 mandates, Lula was able to do a lot because, you know, he was president during the 2 thousands, during the commodity boom. A lot of resources were flowing to Brazil, and Lula was able to kind of use that, ramp up social programs, and just bring a huge amount of... A huge segment of the Brazilian population from poverty into the middle classes.

Yeah? And that socioeconomic transformation had a massive effect. Now we are kind of 20 years on from that social economic transformation. What's happened in Brazil is that those people who actually left poverty and have become lower middle class to middle class in Brazil, and middle class in Brazil does not compare to what we think of middle class in The US. They're much, much poorer people who compose the middle class in Brazil than here.

But those people who actually were able to ascend in a way, they were expecting more. They expected more. Many of them became... Brazil has this has this this legislation that allows people to be... Well, and this is recent.

This wasn't true in the past. But throughout, you know, the past few years, people have been able to create their own business. Yeah. So there there are a number, a lot of people in this middle class that that rose throughout the Lula years currently work in jobs where there there are other... They're either digital jobs or something else.

But in any case, they are all these micro entrepreneurs. Yeah? It's no longer... So so... And this is really interesting because Lula, as a political figure, Lula rose from the union movements in Brazil.

So he speaks very much to the factory worker, so to speak, or to the factory floor worker. But he doesn't really speak in in in the the micro entrepreneur who today is in the... Is a micro entrepreneur because of Lula's policies 20 something years ago, that particular person no longer identifies with Lula's political identity because they're not factory workers. You know? They see themselves as entrepreneurs.

And Jair Bolsonaro, when he came to office, he came to office with a message for those people. He came to office saying, oh, you know, I know that regulations make your lives very difficult and that you face all of these problems being micro entrepreneurs and all of that. And I'm going to put in place a number of things. I'm going to deregulate everything. I'm going to make your lives a lot easier.

He came in with that message. This is the same message that Flavio Bolsonaro is using now. So he's attracting a lot of those a lot of those people who actually got to the position, to the socioeconomic position they're at now because of Lula's policies in the past, but Lula no longer speaks to them, you know, politically or economically. They can't make sense of who Lula is in their lives as they see themselves, and so they're going for Flavio Bolsonaro. So that...

There's that, you know, and that that I think is a huge, huge component of this election. And it isn't different in other parts of of the region either because if we look across to Argentina is perhaps the exception because Argentina is very exceptional in a lot of ways. But if we look to Colombia or we look to Chile or, you know, other countries, that have seen the shift from center... Centrist politicians to more extremist politicians, you see the same thing. You know?

It's it's the same sort of story. It's a story where people happy... Have now viewed themselves less less as workers and more as individuals, and they want the political class to respond to them economically as individuals, not as workers. And so the... That that worker identity for Lula gets in the way in the same way that it's gotten in the way for other so called Social Democrats, or Social Democrat politicians, who look very 20th century to these people.

Interesting. I could talk to you for hours. I know we have to start sort of getting to the end at least of this conversation. I hope I hope you'll agree to come back on soon as... And we'll have plenty to analyze here.

The last question I guess I'll I'll focus on is... You're absolutely right that there's nothing that The United States or any other country can do to get Chinese influence out of the region, especially when you get into the Southern Cone. You know, Chinese economic influence is just too deep. But I think you can see the 1 area where The United States could make some waves is on security. And the recent news about potential deployments, they're relatively small numbers, but deployments of advisers, it all has to start somewhere to Colombia, to Panama, some of these other places, maybe The United States using its military have to its security have to do something here.

This And is where I go back to, you know, Brazil, if it wants to be a leader, it had basically nothing to say or do about Venezuela, has had nothing to say or do about the deteriorating security situation in many countries and the rest of South America. Is there any world in which the Brazilian military or Brazilian security forces become more important at a regional level or that a future Brazilian president, matter who they are, thinks about using Brazilian strength from a security or military perspective to build Brazil's influence. Because we we really haven't seen any of that, and it it goes against a lot of, I think, what Brazil talks about. But in this world that is emerging, you know, if you're not going to do it yourself, somebody's gonna do it for you or there's going to be, I think, unfortunate proliferation of security concerns. So just curious.

And and I know also there's all sorts of baggage around the history of the military and its interference in politics, and that goes right to the center of, at least, the Air Bolsonaro too. So, feel free to take that 1 any direction you want.

Yeah. No. That's a really interesting question because Brazil has always been very wary, yeah, of the military. And the military have been wary of themselves as well. So up until, you know, about 2018, 2019 when Jair Bolsonaro was in office and he populated his government with a bunch of people from...

Who were former military officers and tied with security and things like that. But before the the the ascent of of Bolsonaro, the military were completely absent from politics, yeah, and in many ways because of the baggage. Yeah. The military dictatorship, the way by which, you know, things, well, the the the conduction of everything under the dictatorship was horrible. They had a terrible track record on the economy, and they simply wanted no piece of Brazilian politics for the longest time.

And Brazilians also did not want them in in politics or in any arena doing anything whatsoever. That kind of began to change with Jair Bolsonaro, I think. There are parts of the military in Brazil now who see themselves with a bigger role than they used to have. Mhmm. Certainly, you know, the Bolsonaro dynasty as a whole, you know, so from Jair to his sons and and all the aggregates around them, I think there is a completely different view of the role of the of the military and the armed forces more generally.

There is all this talk about public security and how to solve these massive public security challenges that Brazil has. Brazil has some really big, you know, narco traffic organized crime groups, which are spread out all over the region. They're international in scale and in scope. You know, they reach into everywhere. So there is there is a lot of talk about, oh, you know, we really should be gearing up the military to bring...

And bringing in the military to address these problems. And that's kind of... That's that's beginning to catch on. You know? So I think it hasn't quite caught on yet, but I think it would probably advance quite a bit under a flavable scenario administration as compared to a Lula administration.

A Lula administration, I think, would still be tied to this to this baggage of the past and would try to avoid, you know, any semblance of having more involvement of the military in whatever shape or form that that happens to be. But Flagio Bolsonaro, not so much. And a part of the Brazilian population is also voting for him because of that.

I'll get you out of here on this. Are you optimistic about Brazil over the next 4 years? And you can answer that politically, market oriented, economically, however. But when when you're taking... Know, stepping back, like, do you feel optimistic about the next 4 years?

Do you feel worried? Is it a mix of both? Yeah.

I guess it's a bit of a mix of both, though I am wary of my own very slight, very small sliver of optimism. Because if there's 1 thing that I have learned as a Brazilian and as somebody who analyzes Brazil is that the potential to disappoint is enormous. Always, no no matter who wins. Yeah? And so, you know, it's hard to say.

I mean, there there is a unique opportunity here for Brazil to jump on, which is, you know, tied to natural resources, critical mineral... Minerals energy transition. You know, we haven't spoken about energy, but energy is a big deal. Brazil has this massively massively clean, electrical grid and counts on, you know, very clean energy already. It can it can be a leader in that in that regard.

And yet it hasn't been. You know? And so the potential is there. The... I'm afraid that we're gonna end this conversation on a cliche, Jacob, which is Brazil is gonna be the country of the future still.

That's the problem.

Yeah. No. I mean, what? De Gaulle is the 1 who said it's the country of the future and always will be, or at least the quote is attributed to him. Yeah.

I don't know. I I I hope the future is near. I mean, the macro environment is changing.

Said the same thing. The country of the future and always will be. Yep.

Yeah. Well, in any case, Monika, thank you so much for the time. And Thank you. I'm I'm sure we'll talk to you soon. Brazil...

The 1 thing we could say for sure is that Brazil will be interesting. I think that's true.

It will be interesting. Interesting. Thank

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