Brazil gave up structural microeconomic reforms and is progressively letting the macroeconomic policy deteriorate, thereby jeopardizing economic growth.
The Workers’ Party (PT) has governed Brazil for one decade. Such political continuity has not been reproduced in economic policy. During the crisis of 2002, in order to warrant minimal governability conditions, President Lula was forced to break away from the economic policy that had been historically supported by the PT, and embrace the policy adopted by his predecessor, President Fernando Henrique Cardoso, even deepening some of them, as the increase in the primary surplus target. In the words of an expert, Lula discovered that he was in the edge of a cliff, and wisely backed away. The continuity of good economic policy, until 2005, allowed the Brazilian economy to surf the commodity boom caused by China.
Unfortunately, as soon as the pressure was off, the politically costly structural reforms that should boost economic growth were abandoned. Instead of preparing for the coming winter, Brazil spent most part of the world economy’s summer singing, mimicking the grasshopper portrayed in the La Fontaine fable. Now, the summer has come to an end, and Brazilian economic policymakers, visibly bewildered, try to survive by leaps and bounds to the cold winter of poor economic growth and rising inflation. They blame the external crisis, as if the arrival of winters was something new. Even the continent’s ants, Chile, Colombia, Mexico and Peru, have flaunted a solid growth with inflation under control, in a clear demonstration that a much better path was possible.
However, unlike the grasshopper in the fable, life goes on. So, it is crucial to evaluate if Brazil is at least preparing itself for the future. Unfortunately, the picture does not seem auspicious.
It is important to look back at the main errors of recent economic policy. Many of those derive from the use of inappropriate tools for the desired purpose. Looking at the anti-inflationary policy, the (correct) goal of lowering interest rates, but without a corresponding fiscal adjustment, is producing numerous distortions. Taxes are cut in order to control inflation. Even though Brazil needs to lower the tax burden, (temporary?) tax cuts should not be a part of anti-inflationary policy. Besides, if there is not a simultaneous cut in government expenses, the tax cuts will raise the fiscal deficit.
Import tariffs have been raised in order to favor national industry (despite Brazil being one of the most closed economies), but now, due to predictable price increases, Finance Minister Mantega threatens to lower them back. Tariffs should not be used as anti-inflation instruments, and such policy distorts the behavior of the business community, that has shifted their focus to lobbying in Brasilia, which is considerably more lucrative than the highly costly and uncertain investments to boost productivity.
The government wants, correctly, to lower the cost of manufacturing. Since a broader tax exemption is unfeasible, due to the high fiscal expenditures, compensations through cheap credit are offered, which will compromise future budgets, increasing the economy’s fiscal risk.
In fact, subsidized credit not properly recognized in the budget has become the panacea of economic policy. Energy prices have been lowered, but the cost of the use of thermal plants threatens energy distributors. The solution? Subsidized credit. Privatization of infrastructure services came late and was generally ill conceived, forcing the government to provide subsidized credit to make the investments viable, even in a world of abundant liquidity. Brazil is once again creating the fiscal skeletons that will compromise future economic growth. As even the most unsuspecting supporters of the current economic policy recognize, accounting tricks to improve fiscal statistics are jeopardizing the country’s reputation.
Going back to monetary policy, outdated practices, thought to be dead and well buried, seem to come back from the grave, like zombies. Recently, the Central Bank has authorized the release of part of banks’ reserve requirements to finance specially chosen infrastructure projects, in a revival of the late mechanism of “selective credit”, created during the 1970s. Reserve requirements are an instrument of monetary policy. Subsidized credit should be in the fiscal budget. It would not be so surprising if the next foolishness was the use of foreign reserves to finance investments projects. And, who knows, spinning the history wheel backwards, the role of development bank, that the Brazilian Central Bank had until the mid-eighties, might be formally reinstated!
To sum up, the abandonment of the structural microeconomic reforms agenda and, gradually, of the macroeconomic tripod (substantial primary surplus, inflation targeting and floating exchange rate) has transformed the Brazilian economic policy in a Frankenstein, in which every new part added creates even more collateral damage. Brazilian economic policy nowadays is totally tactical, lacking a coherent medium term strategy.
What are the odds of going back to the good path Brazil had followed from the Real Plan until 2005? Many pundits think that the change of the economic team would solve the problem. The magazine The Economist (December 8th, 2012) even ran an editorial calling for a new economic team (promptly rebuffed by President Dilma Roussef). Unlike President Lula, who lived all his life in the labor union world, in search of concrete results, President Roussef received a heavy ideological training in old economic concepts that prevailed among leftist parties before the fall of the Berlin Wall. Besides, Brazil’s current comfortable situation, with almost US$ 400 billion of foreign reserves, places her far from the cliff faced by her predecessor in 2002. The current economic policy belongs to the President. It is not likely to go through major changes.