Paulo Roberto de Almeida
Brasília, 1 de fevereiro de 2016
The Great Destruction in Brazil: How to downgrade an entire country in less than four years, by Paulo Roberto de Almeida
Although the recent degradation of the
Brazilian economy was not the product of a single presidential term, it
was during the first mandate of president Dilma Rousseff (2011-2014),
and under her direct responsibility, together with that of her main
economic advisors, that the Brazilian economy underwent a consistent,
irrepressible and fatal descent into the abyss of its worst economic
recession in 80 years, with a mega destruction of wealth never seen
before in the economic history of Brazil. The definitive deformation of
the economic situation took a little longer, but the essential and
decisive strikes that were at the origin of Brazil’s loss of its
investment grade status – announced first by Standard & Poor’s in
September 2015, shortly thereafter by Fitch – were mainly inflicted
during her first term in office. She deliberately planned and prepared
the changes and completed them in less than four years.
The president and her economic team were
the authors of a strange animal called the “New Economic Matrix”,
conceived with the objective of sustaining an enlarged demand for
consumption goods, as part of a promised “vast domestic mass market”.
What it provoked, instead, was more inflation, less growth, worrying
double deficits, a significant exchange devaluation, a total budget
disorganization, together with an entire series of failed sectorial
policies and an overall degradation of economic governance. The
troublemakers blamed these consequences on an inexistent “international
crisis,” but they were entirely made in Brazil.
To understand how this happened, and
explain how Brazil underperformed in the context of the world economy,
at a time when many emerging economies were growing twice or almost
three times as fast as the advanced countries, we have to look at the
larger picture, with a certain sense of the historical perspective,
taking also into account the regional and international contexts, and
the political and social implications of Brazil’s economic policies
implemented in recent times. The solution of the current crisis, which
is certainly the worst since the early 1990s, and probably since the
1930s, cannot be purely economic. Nor can it wait on the resolution of
an alleged international crisis. Fundamental changes in Brazilian
governance will be needed.
A brief economic history of a mounting disaster
Brazil has not experienced an equivalent
economic disaster since the great crash of 1929 and the following
recession of 1931 and 1932. Certainly, Brazil experienced many smaller
crises, some provoked by external transactions disequilibrium and a
rapid exchange deterioration, others by accelerating inflation and
disorganization of the public accounts. Turbulence was recorded during
the oil shocks of the seventies, and an humiliating penury of exchange
followed the external debt default at the beginning of the eighties, as
well as the moratorium unilaterally declared in 1987, creating a
prolonged low growth period that was not surmounted before the hard
renegotiation of the commercial and official debts during the first
three years of the nineties. Successive adoption of six currencies
attempted to ameliorate the dramatic acceleration of the inflation,
until the Real Plan (1994) came to reintroduce a certain sense of
rationality into a system of political and economic governance that had
forced Brazil to seek rescue from the IMF three times between 1998 and
2002.
There were middle term adjustments in
the Real Plan including first an exchange anchor system and then an
inflation targeting system, together with the adoption of a floating
exchange regime in1999 and a fiscal responsibility law in 2000 that
prepared Brazil for a new phase of productivity gains and a competitive
integration into the world economy. Energy shortages in 2001, and the
final collapse of the convertibility scheme inaugurated in Argentina ten
years earlier brought new turbulence to that picture. This was
exacerbated by the presidential campaign of 2002, when the prospects for
a victory of the PT’s candidate caused a decline in the exchange rate,
and an increase in Brazil risk and in inflation. But after the election,
the new socialist leader ignored his party’s rhetoric and preserved the
same policies established by the previous economic team. As a result of
these sensible policies a virtuous cycle of economic growth and
external transactions improvements followed for the next five years
starting in 2003.
Those years, which saw a “Chinese
bonanza” pushing commodity prices to historical peaks – soybean at 600
dollars a ton, iron ore at almost 200, and many others –, were not
exempt from policy retrocessions, such as the renewed growth of the
state and the increase in the number of public officials (many, if not
all, selected from party apparatchiks), both moves that interrupted a
positive process of trimming the excessive state apparatus built up
during the military regime. Lula, the effective president during both
his and Dilma’s administrations, started a conscious and consistent
program of rebuilding state power in Brazil, creating many new public
agencies, squeezing the regulatory bodies that were implemented during
Cardoso’s times and expanding a comprehensive program of social benefits
– Bolsa Familia – that was created out of the many separate sectorial
benefits that existed previously. The public legitimation for the later
was “social inclusion”, but in fact the intention was to consolidate a
vast electoral device in favor of his party. It worked: Lula was
reelected once (2006), as the amended Constitution (by Cardoso, 1997)
authorizes, and was able to elect (2010) and re-elect (2014) his
right-hand assistant, Dilma Rousseff.
Although Lula’s years were characterized
by overall positive results after a bad start – which was caused by
market fears of an adventurous economic policy, in the hands of a
formally socialist party – the fact is that there is a clear break of
style and substance in economic policies from his first term in office
to his second term. In his second term Dilma Rousseff emerged as the new
powerful cabinet head following the demise (already for corruption
scandals) of the “great vizier” of the first Lula government (José
Dirceu), and acquiring even more power after the demise of the first
Finance Minister (Palocci) – who acted totally in line with the previous
economic policies –, she inaugurated the practice – supported by Lula –
of having the public expenditures growing always ahead of the GDP’s
growth rate, and even ahead of the inflation rate and of the tax
receipts. Not surprisingly, annual budgets started to be voted and
applied with a certain stress in the public accounts, which were
conveniently disguised under questionable accounting practices, mixing
some flows between the Treasury, the National Bank for Development
(BNDES), and state companies and banks (like Petrobras, Banco do Brasil
and Caixa Econômica Federal).
It was in the context of such practices
that it became possible to give generous benefits to the assisted people
of Bolsa Família – who knew “Chinese rates” in their income growth, in
fact a mere subsidy for consumption – and rises in the minimum wage
above the inflation rate and also incorporating a politically fixed
“productivity growth”. Of course, many of those social policies
materialized only because the fiscal charge was continuously expanding,
from the 34% of the GDP to almost 38% (in fact, just 35.9% in nominal
terms, but only due to a methodological correction in the national
accounts); the heavier taxes penalized goods and services consumed by
the middle classes as well as the productive activities of the business
sector. In fact, expanding expenditures benefitted much more a small
bunch of crony capitalists – who are the great financiers of PT and its
apparatchiks – than the poor people of the Bolsa Família.
Lulanomics worked relatively well during
the Chinese bonanza years, up to the American housing and financial
crises, when some Keynesian measures were taken to contain the reduced
external demand and the changes in the foreign credit supply. Other
measures – almost all in the public sector – were introduced, supposedly
for a transitional period, but maintained for a longer extension of
time than required by the partial recovery of the world economy after
2010. Dilma’s presidency, starting in 2011, represented the exacerbation
of the worst kind of policies of the old school of ECLA’s (the Economic
Commission for Latin America of the UN) “developmentalism”: sectorial
subsidies and tax exemptions, State intervention in the micromanagement
of investment policies in the case of SOEs, requirements of local
content in contracts for all public companies, a “new automotive
investment framework” in a clear disrespect for WTO rules, and many
other commercial and trade policies devices, as if Brazil still had an
“infant industry” to protect.
Adding to this confused set of
improvised measures, there were political fixes and opportunistic
manipulations of both interest rates and exchange rates, which resulted
in increasing inflation, exaggerated devaluation and declining growth.
At a certain moment Brazil had a totally contradictory picture of a
declining unemployment rate and an increase in the insurance payments
for the unemployed. More disturbing was the perspective of not having
the national accounts properly reflecting the erosion of tax receipts, a
true result of the fiscal falsification already in the run. When the
terms of trade inverted the course, due to the lessening of China’s
growth, the castle of cards start to crumble, although it was not
immediately visible, precisely because of the hidden indicators in the
public accounts. The downturn accelerated during the 2014 presidential
campaign, and was finally revealed in the open just after the ballots
confirmed Dilma’s victory for a slight margin of votes.
Dilma’s economic unraveling of Brazilian economy, or the Big Destruction
Again: the process of deformation of the
Brazilian economy was not only the product of misguided economic
policies during Dilma’s years. It is the result of many years of
erroneous macroeconomic and sectorial policies during Lula’s presidency,
which shaped the two main features of PT’s economic management:
commoditization and deindustrialization. The economic consequences of
Lula’s government were reflected first of all in the aggrandizement of
the state, secondly in the over-stimulus of the demand side of the
economy, combined to a total lack of care for its productive, for the
infrastructure and against the basic requirements for a productivity
growth, which would have required set of reforms – labor, taxation,
social security, education, etc. – that were never undertaken by Lula or
Dilma.
Commoditization and early
deindustrialization are the two sides of the same coin: an over reliance
on the high price peaks of exported Brazilian commodities, and a
gradual loss of competitiveness of the domestic manufacturing basis.
Over valuation of the Real – due to the huge inflow of dollars – and
high prices in the domestic supply – taxed for an average rate of 40%,
either in goods or in services – turned Brazil into a very expensive
country, inducing the middle class to look to external markets to
purchase many durable items: Miami became the new big shopping mall for
the affluent and even the less fortunate consumers of the middle class.
At a certain point in the American crisis, Brazilian buyers were
acquiring plenty of Florida low-priced condos, and flooding Miami
shopping malls, for as high as 4 or 5 billion dollars a year in their
purchases.
The declining contribution of industry
to national economic activity accelerated at a troubling pace in the
final year of Lula’s presidency and during Dilma Rousseff’s entire first
administration. The plunge in the trade surplus was catastrophic in the
industrial section of the current transactions, although this situation
did not create an immediate current account deficit because the
floating exchange regime – albeit manipulated by the Central Bank with
an eye in the inflation rate – intervened to rebalance the
disequilibrium. But it became clear that the bad results reflected in
the main economic indicators were not a mere side effect of an alleged
“international crisis”, as proclaimed by the government, but a
consequence of the bad policies entirely “made in Brazil”, by the
government.
The deindustrialization was not due to
Chinese competition – although that was always present even if limited
by high tariffs and antidumping measures – but was totally due to
over-taxation, overregulation, super-protection and cartelization, as
well as the already mentioned state intervention at every level, in all
sectors. Excessive expenditures, a chronic deficit in the social
security system (especially in the public sector), too low savings and
investments rates, a marginal (if not negative) labor productivity
growth, and a really poor rate of technology innovation (due to low
quality education at every level) complete the bleak picture of the
current Brazilian panorama.
The dramatic, negative growth in 2015
(-3,8% of GDP), and the very bad prospects for 2016 and 2017, that is,
from recession to depression, clearly point to the longest and the worst
crisis in the Brazilian economic history since 1931. Over a five year
period, we can estimate a loss, for the GDP, of about -10%, that is,
Brazilians are becoming poor, and are due to stay in that condition for a
while. Are there any prospects for an inversion of this vicious circle?
Perhaps, depending on the posture to be taken by the politicians in the
Congress: they have a rent-seeking behavior, but could help to invert
Dilma’s Great Destruction if further deteriorations of Brazil’s risk
assessments by rating agencies intervenes at any time. That will
certainly happen when the domestic debt rise to new highs, that is, more
than 70% of the GDP.
Those ratios of public debt do not seem
to be very upsetting, taking into account the Maastricht criteria of
national debt (60% of the GDP, also considering 170% for Greece and more
than 270% for Japan), but the real question is not its absolute value,
but its cost. Interest rates in the case of public debt in Brazil can be
as high as 14% (half of that in real terms), a significant part of that
being of a short term maturity; the already higher expenditure in the
public budget is the service of the debt, as high as 7% to 8% of the
GDP, which is a truly unsustainable charge. Of course, in the bonus side
of the picture, Brazil possesses enormous natural resources, a largely
renewable energy matrix (based mainly in water powered electricity), a
very competitive agribusiness, no foreign conflicts to be dealt with, an
active professional diplomacy and a well prepared state bureaucracy
(especially federal prosecutors and investigators, who are dealing with
the worst corruption case in the Brazilian history, with the Worker’s
Party occupying the center stage of the crime scene, as its apparatchiks
ransacked the state oil company, Petrobras, and probably many other
state companies as well).
What’s to be done, after the economic and political deluge?
But, the big word, today, in Brazil, is
uncertainty: we do not know what will be the value of the Real in
dollars, tomorrow, the next week, or the next month; we do not know the
depth of the deficits, the ceiling for the reference interest rates
(today at more than 14%); how deep will go the unemployment; if the
investments will continue to be completely paralyzed; and we do not even
know if we’ll have this one or another government in a matter of weeks
or months. Uncertainty, and insecurity, those are the words of the
moment in Brazil. How can an entrepreneur make plans for a year, two
years, or five years ahead? Economists were overtaken by the most
pessimistic statistics in 2015. Even experienced political analysts do
not try to even guess, or imagine, what the immediate political future
could be at the beginning of 2016.
This complex set of problems requires,
at the economic level, three sets of measures to be instituted
simultaneously: (a) urgent measures that have to be adopted in terms of
fiscal adjustment and budget balancing, followed by (b) medium term
decisions that have to be taken to promote confidence building
adjustments, facilitating the return of investments, and (c) the
launching of a long term program of structural reforms in order to
create a new institutional framework looking for the recovery of
competitiveness of the Brazilian industry, and creating a solid basis
for a productivity overhaul of the economy. At the political level it is
almost impossible to foresee any stable governance in the months ahead.
Reforms are also due at the sphere, but the political system is plagued
by a myriad of small and opportunistic parties, and regional differing
interests, all of which makes an impossible dream to have a stable
governing coalition.
Political and economic crises are
sustaining each other, and it is difficult to tell where is the Gordian
knot. Who will deliver the decisive coup? No guesses for the moment…
Paulo Roberto de Almeida, Professor of Political Economy at the Master and Doctoral programs in Law of the University Center of Brasília (Uniceub); career diplomat (www.pralmeida.org; http://diplomatizzando.blogspot.com).
Como citar este artigo:
Editoria Mundorama. "The Great Destruction in Brazil: How to downgrade
an entire country in less than four years, by Paulo Roberto de Almeida".
Mundorama - Revista de Divulgação Científica em Relações Internacionais, [acessado em 01/02/2016]. Disponível em: <http://www.mundorama.net/?p=18052>.
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