The detention of Brazil’s former President Luiz Inacio Lula da Silva marks a new stage in the corruption probe that has all but paralyzed the government for the past two years. Meanwhile, as that drags on, the economy keeps spiraling downward. One way or another, Brazil urgently needs to resolve the scandals and turn its focus back to the economy.

Lula, whom U.S. President Barack Obama once called the world’s most popular politician, now tops the Who’s Who of Brazilian leaders caught up in the investigation of a vast influence-peddling and kickback scheme involving the state-controlled oil company Petrobras. (He has repeatedly denied any wrongdoing.) Others ensnared include tycoons in construction and finance, the heads of the legislature, the former treasurer of the ruling Workers’ Party, and the chief campaign strategist of Lula and his successor and protege President Dilma Rousseff.

One sign of the longing for finality in this saga is that Brazil’s currency and equity market rallied on the news of Lula’s detention: It revived hopes that some kind of closure might soon be achieved. Rousseff has so far not been directly implicated in the Petrobras scandal, though the legislature has been weighing a move to impeach her for allegedly doctoring fiscal accounts and fiddling her campaign finances. The street will also have its say: Lula’s detention has already sparked unrest; meanwhile, big pro-impeachment rallies are planned for March 13.

What matters most is that the issue be brought to a rapid conclusion. Until that happens, investors are right to be alarmed. Brazil’s economy is shrinking -- by 3.8 percent in 2015, the biggest drop in 25 years. Output is projected to fall another 3 percent in 2016. The economy is enduring double-digit inflation, a depreciated currency, worsening unemployment and falling business confidence. Visitors to this summer’s Olympics in Rio might be forgiven for thinking they’ve come to a wake rather than a celebration.

Addressing these problems requires a wholesale rethinking of the policies Lula and Rousseff have pursued. In many ways, they failed to channel the benefits of the commodities boom into productive investments, and they pursued pro-cyclical fiscal policies that left the country vulnerable to the inevitable reversal. Statist management turned Petrobras and other public enterprises into sources of patronage, and rewarded corporate donors with contracts and financing that should have gone to smaller, more deserving firms.

Rousseff and Lula can’t be blamed for China’s economic slowdown and the ensuing fall in the price of oil and other commodities. But Chile and Colombia, among other Latin American nations also hit hard by those forces, are still growing -- thanks in part to strong fiscal management, greater transparency and better-run state industries.

Against opposition, Rousseff has taken some steps in the right direction -- for instance, moving to reform pensions, loosen the state’s grip on Petrobras and allow foreign investors a bigger share in airlines. But this isn’t nearly enough. Brazil needs a radical pruning of the government bureaucracy and a complete overhaul of its tax code and labor laws. Rousseff’s struggle to survive precludes such measures.

The scandals have been productive in one way, bringing forth a newly empowered judiciary and prosecutors. But throwing corrupt politicians in jail won’t be enough to lift Brazil from its doldrums. That requires a leadership focused on economic reforms.

Editorial 

Bloomberg