On Oil and the Battle between State and Federal Governments in Brazil

The battle between state and federal power in Brazil has heated up recently. Last year, Congress passed a law that transformed the distribution of oil revenues in Brazil. Under the old system, the royalties from oil revenues mostly went to the states that were closest to the offshore deposits – in this case, Espírito Santo, Rio de Janeiro, and São Paulo. This created a natural disadvantage for Brazil’s interior states or for states like  Bahia that do not have oil deposits off the shoreline. Additionally, Rio de Janeiro and São Paulo historically have been Brazil’s richest states for hundreds of years; with the oil royalties remaining there, they continued to benefit from better infrastructure and social programs than areas like the poorer Northeast, perpetuating and further exaggerating regional inequalities. In order to address this issue, last year Brazil’s Congress passed a law designed to more equally redistribute oil wealth throughout the country. Naturally, Rio de Janeiro and São Paulo howled – people in Rio took to the streets to protest the law in late 2012 – as they faced reductions in their state budgets from the law. Compounding matters is that the law would immediately go into effect on all current contracts as well as future contracts. In order to try to find a solution, President Dilma Rousseff used her line-item veto to make the law applicable only to future contracts, allowing Rio, São Paulo, and Espírito Santo to maintain the monopoly on royalties from current contracts. However, Congress has overridden her veto, making the law applicable to both present and future contracts. Unsurprisingly, opponents to the law in oil-rich states are fighting back, with some occupying airports while Rio’s governor has suspended all the state’s payments and legislators prepare to appeal to the Supreme Court. In sum, it has turned into quite the debate over the question of resources, capital, and national wealth versus state wealth.

Certainly, the outrage in Rio, São Paulo, and Espírito Santo is understandable. As the article points out, Rio alone is set to lose nearly $1.6 billion in revenue this year alone under the new law. At the same time, though, it’s an entirely defensible law. On  sheer numbers alone, helping 27 states instead of three states is entirely reasonable.

And that’s not taking into consideration the regional inequalities that have defined Brazil for centuries. After the Dutch occupation of Pernambuco and surrounding areas between 1630 and 1654, the sugar economy that had been the central pillar of the Brazilian economy since the latter half of the 1500s began to decline. Portuguese Brazil, centered in the Northeast (in today’s states of Bahia and Pernambuco in particular) had maintained a near-monopoly on sugar production up to that point, but after the Dutch occupation, Brazil faced competition from the Dutch and English Caribbean; though the Northeast continued to be the colonial center throughout the 1600s, the sugar economy was not as strong as it had been. By the early-1700s, settlers found gold and diamonds in the Southeast in Minas Gerais. The new colonial economy increasingly relied on mining throughout the 1700s, leading to a shift in settlement and wealth in the Southeast, with Rio de Janeiro increasingly serving as the port for importing slaves to the mines and exporting minerals to Portugal. By 1763, the regional shift was complete, as the colonial capital relocated from Salvador da Bahia in the Northeast to Rio de Janeiro in the Southeast, marking the broader economic shift from one region to another.

And so it has remained throughout most of Brazil’s history. Rio was the capital until the inauguration of Brasília in 1960. São Paulo became an economic powerhouse, first with its coffee production in the 1800s and then becoming the industrial center of Brazil in the 1900s. These two states were not alone in wealth; southern states like Rio Grande do Sul also became increasingly powerful, both economically and politically. Nonetheless, the Southeast came to be the richest part of the country, even while the Northeast and North continued to confront socioeconomic inequalities at the most basic levels of society, from income to education, from land ownership to literacy. The Southeast got richer while the Northeast continued to languish. Indeed, in part the rapid growth of Brazil’s cities (from a 70%-30% rural/urban society in 1930 to a 30%-70% split in 1980) was due in no small part to the poor from the Northeast moving to cities like Rio and São Paulo hoping to find work in the bustling cities, often ending up in favelas [suffice to say, the issue of internal inequalities in cities like Rio are a powerful reminder that, even within the wealthiest states, said wealth does not benefit all citizens equally]. These migrants were not always welcome – for example, in São Paulo, people not-irregularly apply the derisive term “baianos” to everybody from poor drivers to less-“cosmopolitan” individuals, implying backwardness that carries more than a hint of racism while revealing the regional inequalities that citizens of states themselves perpetuate. Even today, after programs like Bolsa Familia and Fome Zero [Zero Hunger], designed to improve the lives of Brazil’s poor, notably in the Northeast and North, regional inequalities are still evident – for example, through oil revenues.

All of this is to say that, while the outrage in Rio, São Paulo, and Espírito Santo is perhaps understandable from a state level, it is ultimately hard to feel terrible for these states in the face of the new law. Certainly, they are going to have real challenges in governing with reduced incomes, and there aren’t necessarily any easy solutions to that problem. But to continue the regional inequalities that have defined Brazil for centuries in the name of local governance in the wealthiest states is not a solution to those inequalities either, and Congress’s actions are entirely understandable, even if they hit the largest states in Brazil the hardest.

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About Colin M. Snider

I have a Ph.D. in history, specializing in Latin American History and Comparative Indigenous History. My dissertation focused on Brazil. Beyond Latin America generally, I'm particularly interested in class identities, military politics, human rights, labor, education, music, and nation. I can be found on Twitter at @ColinMSnider.
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