The purpose of this article is to discuss many contradictions of economic policy in Brazil in the last 78 years, from Getulio Vargas (1930-1944 and 1951-1954) to Lula (2003-2008), including a military dictatorship (1964-1984), and other political democratic “intervals” such as Dutra (1945-1950), Juscelino (1955-1959), Janio and Jango (1960-1963), and the eighties and nineties with Sarney, Collor, Itamar and Fernando Henrique.
People in Brazil like to say: “Que País é Esse?” What is this country after all? A country with an excellent record of economic growth, particularly from 1945 to 1980. A country with an awful record of inflation and balance-of-payments crises, including external debt payment difficulties, mainly in the 1930s and in the 1970s/1980s/1990s. A country which is clearly the more Westernized one within the group of BRICs, including an excellent legal framework. But at the same time a country with a tradition of horrible labor laws, high tax burden, huge interest rates, and a very big Government size. A Central Bank which has been compared to the Bundesbank in the past ten years, but at the same time a fiscal policy which does not require printing of money but requires more and more taxes to finance social programs, eventually populism.
At the end of the day (or the decade), what is going to prevail? From 1964 to 1984, under a military dictatorship, brilliant non-interventionist economists such as Simonsen, Campos and Bulhões were not able to avoid a growing participation of Government in the business world, including a growing number of State Companies. From 2003 to 2008, under a supposed leftist Government (Lula), we see a certain “conservative populism”, that is, Government social spending and Government salaries and pensions exploding but being financed by taxes rather than debt or money.
Is that neutral? In other words: even without a huge public deficit, the fact that Government is growing dramatically in size is not a problem in itself?
Economists used in the seventies and eighties an expression called “crowding-out” to reflect the fact that any increase in Government spending is a problem, irrespective of being financed by taxes, debt of money. The public sector is “crowding” the credit market, the labor market and other markets. Salaries in the public sector are excellent now. Private companies are facing the twin problems of high taxes and high interest rates.
But nobody seems to care very much, because after all Brazil is growing again at 6% per year – after many years of very low growth (perhaps since 1988 – 20 years). Not only that: inflation is now very low by historical standards and the external accounts are doing well, with huge international reserves and trade surpluses.
We feel, however, that something must be wrong in an economy with two-digit nominal interest rates (without a two-digit inflation rate), as well as with a tax burden which corresponds to almost 40% of GDP. High nominal and real interest rates as well as a high ratio between taxes and GDP do not normally appear in a typical macroeconomic model, which tends to emphasize only Government deficits for fiscal policy and interest rates for monetary policy.
Our point here goes beyond short-term macroeconomics. Perhaps we are going back to the old Denison debate: why growth rates differ among countries? And perhaps we are finally finding an explanation for the bad behavior of the Brazilian economy as far as inflation OR growth is concerned. We had high inflation between 1930 and 1994 and very little growth between 1980 and 2007.
In spite of the excellent animal spirits of Brazilian entrepreneurs, we fear that the growth of Government in this decade – just like between 1930 and 1955 – might have a major long-term negative impact on the economy. A country where the young population is choosing clearly the absence of challenge and the lack of dynamism of public employment – as opposed to the period 1955-1980, when the opposite was true – has something wrong. Brazil might become a big Uruguay in the near future, full of retired public employees with excellent salaries due to their foundations, and with an “active economic population” with absolutely no drive to work. The old Portuguese tradition of public employment seems to be winning again, in contrast to the Anglo-Saxon drive which – for some reason – fed somewhat the Brazilian entrepreneurs between 1955 and 1980.
A Bundesbank is not a sufficient condition for good economic growth and low inflation, even though it certainly is a necessary condition. Look at Germany. Brazil really needs a capitalistic shock, something that in fact has never happened on a continuous fashion, not even in 1955-1980. One should mention three interesting attempts: 1967-1971: dozens of IPOs followed by a major stock market crash; the wave of privatizations between 1991 and 1999, clearly incomplete (without Petrobras and Banco do Brasil); and another round of IPOs between 2005 and 2007 which stopped entirely this year.
Neither politicians nor businessmen nor newspapers nor the public in general like to talk about profits and wealth in Brazil – in contrast to the USA. On the contrary, the ones that present themselves as billionaires tend to be disliked by the population – and are not highly regarded.
Another aspect that is clearly incomprehensible is the maintenance of exchange rate controls. It is terrible difficult to make simple investments in Brazilian securities, not to mention the trade bureaucratic barriers. This is particularly difficult to understand in the XXI century when Brazil accumulated huge international reserves but maintained basically a “closed” economy full of tariffs and bureaucratic fears of foreign exchange evasion whatever than means.
When Adam Smith wrote “The Wealth of Nations” in 1776, he explained very clearly the difference between Brazil and the United States as far as colonization was concerned, just by considering the religious differences between Portugal and England. Again, in the XIX century, Brazil stagnated for 100 years while the USA grew dramatically for the same reasons indicated by Adam Smith. And it seems that now in the XXI century, Brazil again is becoming a big Portugal (or Uruguay). The paradise for public employment. Frankly: not very exciting. Let us not be fooled by short-term good macroeconomic figures.
To complete the non-capitalistic cycle of the last 78 years, we have now Lula repeating Vargas. “O petróleo é nosso”. The oil is ours. Estatization of the so-called pre-salt oil in very deep waters. Difficult to believe and to understand. And things like that certainly affect the drive that normally businessmen would have in favor of Brazil as opposed to Russia ( dictatorship and wild capitalism), China ( communist country), and India (with castes and religious old-fashioned traditions). A pity.