In order to minimize the effects of the long international crisis, it is necessary to avoid the temptation of increasing fiscal and parafiscal expenditures.
I open the internet edition of an influential foreign newspaper and the main headline begins like this: “Imminent collapse of …”. In normal times it would be easy to guess what the subject was before getting to the end. But nowadays there are many big things that can go wrong. I imagine that the article may be about the collapse of the Euro, with Greece declaring that it will default on its debt, thus spreading contagion to other countries. Or the collapse of big European banks (or even US ones), which may go bankrupt under the burden of PIIGS´s (Portugal, Ireland, Italy, Greece and Spain) debt. But the article was in fact about the collapse of the bipartisan super-committee negotiations aimed at finding ways of reducing the USA’s fiscal deficit in coming years, which will probably trigger another reduction in the credit rating of the US and may contribute to pushing the country back into recession.
We are definitely not living in normal times. Not only due to the lengthy duration of the crisis but also because even the “optimistic” scenarios predict a long period of low growth in the central economies. The pessimistic scenarios, on the other hand, envisage different combinations of the possible “imminent collapses” mentioned above, with a consequent dip back into recession and worsening of credit constraints. For Brazil, the central question is to design the best strategy to respond to the crisis.
Despite the differences between the two periods, it is worth drawing a historical parallel with our reaction to the 1st oil crisis (1973). Then, the Geisel government (74-79) initially hesitated between combating inflation and increasing aggregate demand, but ended up choosing the latter path. Official propaganda touted Brazil as an island of tranquility in a stormy sea. The struggle between the ministers of Finance (Simonsen) and Planning (Velloso) was won by the latter who tacitly implemented a strategy that involved more inflation and a higher level of foreign indebtedness. According to the Minister of Planning himself, in 1976, the government “… deliberately avoided synchronization with the world recession… overcoming the oil crisis by increasing exports and [by seeking ] self-sufficiency in basic inputs” (A Ordem do Progresso, Ed. Campus, page 307). The strategy to avoid synchronization with the world recession, based on far-fetched plans and lots of public financing, ended up falling on its face in the medium term, paving the way for a long period during which the Brazilian economy remained in thrall to its own “stagmegainflationary” problems while the world was rapidly growing.
Even though Brazil is in a much better position than it was during the 1970s, one should not ignore the historical parallel. After all, it is quite natural not to want to pay for a crisis essentially generated by the planet’s wealthiest economies. However, the recourse to mere voluntarism is not the best way of implementing a successful strategy aimed at minimizing the damage associated with the long crisis.
When the Lehman Brothers bank failed in September 2008, there was a rapid and very severe international credit crunch which led to a huge devaluation of the BRL. Economic policy reactions involved a moderate amount of monetary easing together with abundant fiscal and parafiscal expansion engineered by the expansion of credit from government-owned banks. The result was that the reduction of interest rates had to be interrupted when the basic interest rate (Selic) was still quite high (8.75%). The fiscal and public credit expansion, whose timing had much more to do with electoral considerations than fighting the recession, contributed significantly to the higher rate of inflation, which is still with us today.
During the current stage of the long crisis, the international credit system has not (yet) suffered a sudden contraction, although international credit is becoming increasingly scarcer. Even without a sudden contraction similar to the one that occurred in 2008, Brazilian economic indicators, as well as economic agents’ forecasts regarding the future of the Brazilian economy, are narrowly correlated with external developments. Although the transmission channels of the crisis are not perfectly understood, it is certainly not easy to interrupt this contagion.
Nowadays, the official discourse is quite different from that of the second Lula government, although the Minister of Finance is the same. It is apparently recognized that fiscal and parafiscal moderation are essential in order to enable the Central Bank to undertake greater monetary easing without letting inflation get out of control. 2011’s fiscal results have so far been quite good, albeit still based on once-for-all revenue increases and curbing public investments, which the government intends to increase considerably.
The next few months will be decisive for the government to show whether the change in discourse will be translated into action. In both the “optimistic” scenario of a prolonged crisis in the central economies and the pessimistic one of a deepening of the world recession accompanied by a credit crunch, it is fundamental that there be no return to the apparently easy way out of even greater fiscal expenditures and more credit from public banks. If Brazil does this, in the hope of stimulating economic growth, it may lose most of what was achieved, at such great cost, to fix similar mistakes made in the past. As Bertrand Russell used to quip, never make the same mistake twice or you’ll never get around to all of them.