The Orloff Effect: A Comparative Analysis of Brazil’s Current Political Climate and Economy Considering Argentina’s Development

By Matteo Amaral

Source: Arthur Menescal/Bloomberg

It has often been observed that in the long-term, societal changes in Argentina foreshadow those in Brazil. This is seen in the social, economic, and political sphere. In the 1990s, a term now infamous in Brazil known as the "Orloff Effect" was coined; it describes this remarkable pattern. The term was derived from a vodka commercial where an actor wakes up hungover and says to himself, in Portuguese, “Eu sou você, amanhã” or “I am you, tomorrow;” therefore, the comparison “Argentina is Brazil, tomorrow” arose. Reporter Helio Gurovitz of Globo News explains that this was mainly due to economic policies which were very similar in both countries at this time; as he put it: “[eles foram] primeiros a viver a hiperinflação, os primeiros a passar por planos de estabilização que deram errado” (“[they were] the first to live [with] hyperinflation, the first to [experience] stabilization plans [gone] wrong”).

The Orloff effect is still visible today but it is as if the casual link between politics and economics in both countries has reversed. While in the past the effect dealt with economic issues repeating themselves because of bad politics, today the opposite is more prevalent and political trends repeat themselves partially because of bad economics. This is the issue Brazil faces today as it patiently awaits the destructive hyperinflation of Argentina repeating itself in Brazil.

Now perhaps the trend of Brazil “repeating” the economic policy of Argentina is a larger phenomenon. After all, in the last couple of years, it was said that Latin America would face a “pink wave,” and this happened through a series of elections which put left wing governments in power. However, Argentina defied this trend and at the beginning of this year, as many already know, elected a libertarian. Quite a shock from a country which had been controlled by left wing politicians for just over 15 years.

With the Election of Milei in Argentina the tables turned and the Peronism or left-leaning policies which have dominated society since the end of the Argentine dictatorship in 1983 came crashing down. Large government spending and social reforms which are key tenets of Peronism were things Milei was not intent on continuing; therefore, it makes sense that the election was controversial.

From an economic perspective, Milei’s return to a classical economic model seems promising for some. Classical economics dictates low government intervention and in theory more freedom for businesses. It means less government spending, less government regulation, and less government employees. For investors the prospective of decreased government regulation sems like an opportunity, especially after years of stringent government controls.

Some examples include the recent reports by AlJazeera of the “slash[ing of] state subsidies for fuel and reduc[ing] the number of ministries by half” This has had mixed reviews from many in society. Union and labor leaders have said that these new regulations hurt workers and on January 30th of this year the supreme court of Argentina struck down a law which made it easier to fire workers. At the same time, AlJazeera reported that bonds reaching maturity in 2041 “rallied by seven percent,” something that typically demonstrates investor confidence. As we can see, this position has been polarizing.  Just last year, when Peronists were in control, MercoPress reported that “Argentina had up to 20 ministries” in the president’s cabinet reflecting a much larger role of government. Moves by the new president seem to be going in the libertarian direction with The Economist calling it a “radical experiment.” One video which was popularized on TikTok and Instagram shows Milei saying “Afuera!” or “Out! [with them]” in reference to him “halv[ing] the number of ministries” in the country according to Atlas News.

This shows that key issues like reducing government regulation, spending, and size are being initiated. However, they do not operate in a vacuum and are facing backlash from those who benefit from the aforementioned policies. These so-called “shocks” are a new chapter for Argentina and maybe represent a change from Peronism. For investor confidence these moves are seemingly great because by and large they are based on technical expertise; after all, Milei is an economist by trade and sought to implement economic reforms.

In Brazil, the opposite is true, and the policies of increasing government regulation, spending and size are being undertaken. After a 12-year long hiatus from power former left- wing president Luiz Inacio “Lula” da Silva returned for his third term. He originally planned to increase the size of government from 23 to 30 ministries, then he created 37, and finally added a 38th ministry to his cabinet. This almost doubled the size of the executive branch of government and is not surprising because the decision was mainly fueled by politics.

The “Partido dos Trabalhadores” or “Worker’s Party” which Lula is a part of had been out of power since their former leader and President of the Republic, Dilma Rousseff, was impeached on charges of “breaking fiscal policy laws” according to the BBC. This and Operation Carwash, an anticorruption process which unravelled many cases of bribing of politicians, “drained faith in Lula’s Workers Party, which had promised a cleaner form of politics in the early 2000s” according to Chatham House. I believe this means that the party is now seeking power and looking to advance its agenda. Indeed, a situation very similar to that of Peronist Alberto Fernandez of Argentina who after winning the 2019 elections in that country embarked on similar initiatives. Brazil’s Lula now seeks to advance social change which was not a goal of the past government of Jair Bolsonaro.

The problem with the decisions being made by the government of the current president is that they are not technical in nature, and instead are based broadly on political influence. According to Bloomberg’s BNN, two of the latest examples of this policy include the recent decision ordering “state-run oil company Petroleo Brasileiro SA to withhold a $9 billion dividend to investors” and the decision of “a Vale board member [to resign] in protest of the government’s growing influence.” Furthermore, Lula has done this to “boost spending, gin up faster growth and turn around his sinking approval ratings” again focusing on short-term political goals rather than promoting economic policy initiatives.

This issue is quite similar to Alberto Fernandez’s move in 2021 to ban grain exports which according to the Financial Times were “surging to their highest level in years” because the president did not want to initiate “cutbacks to billions of dollars a year in subsidies” or cause prices to rise. Decisions in both Brazil and Argentina were made with short-term political intentions. Lula seeks to create rapid and unsustainable short-term growth while Alberto Fernandez sought to stabilize prices which he had caused to rise. Fernandez’s policies proved to be unsustainable and at the end of his term, inflation had risen from 52.90% when he took office to 211.40% as he left the presidency according to MacroMicro. This being said, his decisions were made with positive political intentions in order to appease voters, and it seems Lula is doing the same.

This is where the Orloff effect comes in. It seems as if Brazil is repeating the same steps Argentina took. Some have called Fernandez’s policies mistakes, and I would agree. They hurt the people who voted for him and when he left office, poverty levels had risen to an all-time high of 40.1% in September 2023 according to Reuters. Now Millei’s government is far from perfect and under his “shock therapy,” poverty levels rose even higher to a staggering 57.4% of the population also as reported by Reuters. He also appointed his sister to control all public media outlets according to the Buenos Aires Times. However, the Times also stated that the state media outlets have become a trusteeship for at least one year and that sources at Radio y Television Argentina said that the trustees who were appointed “are lawyers who know more about media management than programming.” This suggests it was more of a technical decision rather than one influenced by politics. It’s impossible to say if the policies being implemented in Brazil are heading towards the crisis in Argentina; however, the Orloff effect would suggest that history is repeating itself. For some seemingly random reason, Brazil is implementing the same policies as Argentina did under Fernandez though they have different implications. At the same time as the problems both countries face are so different, they are the same. Perhaps it has to do with populism and the polarization of politics worldwide.

Nonetheless, it is undoubtable that the Orloff effect is at play. Politically motivated decisions that happened in Argentina are somehow repeating themselves in Brazil though different issues are being dealt with. True as it may be, the Orloff effect is not inescapable and, in the past, as Brazil developed in the early 2000s, the effect was seen as waning. The only reason this was possible was because of “smart” decisions made by Brazilian governments like Lula’s. In fact, at the start of his first term in office, Lula sought to increase trade between Brazil and Africa with the “aim of improving links with Africa [being] a vital part of his policy” according to the African Development Bank. He managed to increase trade between Brazil and Africa as it rose from “US$ 4.2 billion to US$ 25.9 billion” during the period of 2000 to 2008. Here, Brazil took its own approach based on sound economic and technical reasoning.

In-terms of how Brazil will be impacted by the actions of Milei within the context of the Orloff effect, it remains clear that if Lula does not make decisions which truly promote long-term economic growth, then Brazil will face challenges like Argentina. Perhaps in four years we will see Brazil polarized and choosing a libertarian candidate to lead it. The only way to avoid this is for Brazil to be independent in its policy choices.

Finally, it is clear the Orloff effect can be overcome but only through sound technical decisions by governments which avoid politically influenced choices. Only when Brazil achieves its own goals rather than following long-term trends can it avoid the trap of repeating the mistakes of Argentina.

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Matteo Amaral is a junior high school student at De La Salle College "Oaklands" in Toronto, Canada. He is fluent in both English and Portuguese and is passionate about the political and economic state of the world.

KCL Latin American Society