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Getting to know Brazil #2 (electoral conundrum)

Getting to know Brazil #2 (electoral conundrum)

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Published by Rafael Shin

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Published by: Rafael Shin on Apr 14, 2011
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Getting to Know Brazil
BTG Pactual does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Equities Research
Carlos Sequeira, CFAAnalystcarlos.sequeira@btgpactual.com+55 21 3262 9223Antonio JunqueiraAnalystantonio.junqueira@btgpactual.com+55 21 3262 9278
Getting to Know Brazil
BrazilStrategySector Note25 February 2010
#2 – The electoral conundrum
Brazil holds major elections in 2010
2010 is a major election year in Brazil. The country’s population of 190 millioninhabitants (more than 130 million voters) will elect a new president, 27 stategovernors, 513 representatives of the Lower House, 54 senators and regionalcongressmen across the nation. This is clearly a significant event for the country,and may cause some market volatility due to its potential impacts on the microagenda (which we see as large) and the macro agenda (small).
The electoral process helps slow structural changes in the country
Brazil holds elections every two years. National and state elections are followedand preceded by municipal elections. The small interval between electionsaffects Congress’ efficiency in the second semester every two years. Thisobviously impacts Brazil’s ability to make progress in key structural changes (theso-called reforms), such as tax or public pension reforms. While we could betempted to think that municipal elections have low influence in Congress, theopposite has proven to be the case.
Electoral rules lead to poor-quality voting and a distant Congress
Voting in Brazil is mandatory. At the same time, most Brazilian voters have toolittle information, time, knowledge or motivation to take well-based votingdecisions. According to a poll, a remarkable 74% of Brazilians don’t evenremember who they voted for in the Lower House elections only four yearsbefore the poll was taken. Another poll shows that 13% of Brazilian votersadmitted having switched votes in return for some personal benefit.
Pardon Montesquieu, but the powers are not balanced in Brazil
Despite enjoying really strong macroeconomic momentum, Brazil couldpotentially grow faster if some key legal reforms are carried out. We don’t expectthis to happen in the next presidential term unless the government, which inpractical terms is much more powerful than Congress, decides to push thesereforms. We also don’t foresee a change in the balance of power anytime soon.
Getting to Know Brazil25 February 2010 page 2 
Electoral process slows structural changes
We will debate our view on Brazil’s presidential candidates and their agendas inthe near future. This piece’s focus, though, is broader as we aim to shed light onBrazil’s electoral process and explain its impacts on Brazil’s legislative processand the country’s slow pace of structural changes.Some of the key reforms that Brazilian politicians have been clamoring toapprove for years have simply failed to get off the ground. Politically, thechanges are so tough to implement nowadays that debates such as the pension,tax or political reforms are not even on Congress’ agenda this year.In our view, the electoral process plays a key role in the speed of changes inBrazil. The small interval between elections, mandatory voting, and the rulesdetermining who is elected to Congress are some of the reasons for poor-qualityvoting and legislative agendas, in our view.
Figure 1: The 8-year electoral cycle in Brazil
BTG Pactual
Getting to Know Brazil25 February 2010 page 3 
The electoral cycle – mind the gap
Brazil holds elections every two years. National and state elections, which willhappen this year, are followed and preceded by municipal elections (the nextones are in 2012). As senators have an eight-year term (compared to LowerHouse members’ four-year term), the Senate elects 2/3 of its members in oneelection (2010’s case) and the other 1/3 four years later (see figure 1 above).In our view, the small 2-year gap between elections in Brazil explains part ofBrazil’s sloth in passing key legislative reforms (those with the potential to makethe country grow faster and healthier). Municipal elections, though consideredless relevant than major elections, also affect all parties and many congressmenintending to become mayors of their hometowns.The reality is that, due to the way politics works in Brazil, any politician wantingto fly high knows that his/her chances are higher if they work for the governmentinstead of Congress. Being a mayor of one of Brazil’s key cities can leverage apolitician to become a state governor immediately after. In 2008’s election,roughly 20% of Lower House members tried to become mayors of theirhometowns. And the vast majority of the remaining 80%, despite not trying to beelected, worked towards electing its political allies in order to strengthen itspolitical groups and/or parties.That said, every two years, in the second semester, Brazil’s attentions switchfrom its legislative to its electoral process, reducing the scope for more important(and discussed) changes. This is the reality this year. Even micro reforms, suchas the approval of draft bill #29 (which will allow incumbents such as Telemarand Telesp to offer cable TV services), or the new proposed
Oil Law 
, which willchange the current regulatory scope in Brazil’s pre-salt (affecting Petrobras andOGX, only to mention Brazilian listed oil companies), may not be passed in anelectoral year (unless there is a big push by the government).
The electoral process – poor-quality voters and a distant Congress
Brazil’s electoral process has some factors that lead to both poor-quality votersand a distant Congress. First of all, voting in Brazil is mandatory. And theconsequence in terms of voting quality is crystal clear – according to a Datafolhapoll in October 2008, 13% of all voters admitted having switched votes inexchange for personal benefits (mostly cash). If 13% admitted to this, how manyother voters did the same but were afraid to admit to as much in the Datafolhainterview?Also, the mandatory voting process forces many people who don’t follow politics,have no interest and no information to make a decision they would rather nottake. According to another poll, published in the book “
Reforma Política – Lições da História Recente 
”, published by FGV and written by Alberto Carlos Almeida,74% of voters couldn’t even recall who they voted for in Brazil’s Lower Houseelections four years prior to the year the poll was taken. Poor-quality votersobviously lead to a poor-quality Congress.

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