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The Brazilian Political Economy Today Fernando Ferrari Filho Full Professor of Economics/Federal University of Rio Grande do Sul and Researcher CNPq, Brazil Visiting Scholar at the Department of Land Economy/University of Cambridge Email: [email protected] http://www.ppge.ufrgs.br/ferrari King’s Brazil Institute, London, March 19, 2012 Objective 1) Analyse the Brazilian Economic Authorities (BEAs) response to the contagion effect of the global financial crisis; 2) The idea is to show that, despite the recession in 2009, Brazil`s economic recovery was strong in 2010, showing a remarkable resilience; 3) In this context, we speculate about how Keynesian has been the Brazilian recovery. Framework 1. Keynesian economic policies; 2. The Brazilian economy during the Lula da Silva’s terms and the first year of the Dilma Rousseff term; 3. BEAs response to the 2007-08 financial crisis and 2010-11 Euro crisis; 4. Final remarks: is Brazil a Keynesian show-case? Keynesian economic policies for coordinating the dynamics of monetary economies • Keynesian economic policy is structured to mitigate the problems of monetary economies, mainly unemployment. Thus, the idea is to manager endogenous features in monetary, fiscal and exchange rate policies. Monetary Policy (i) Monetary policy should be operated to keep inflation under control and, especially, to expand the economic system; and (ii) Big Bank (Minsky’s idea) to regulate the activities of monetary and financial institutions and act as a lender-of-last-resort. Exchange Rate Policy (i) Keynes’ exchange rate policy thinking and proposals point towards arranging a managed exchange rate regime in order to assure external balance and, particularly, price stability; (ii) Moreover, he proposed an automatic clearance of trade imbalances and capital controls. Fiscal Policy • Keynesian fiscal policy constitutes the main instrument of State intervention. It is anchored in: (i) Tax policy: to enable unequally distributed income to be reallocated, either by income tax or inheritance taxes; and by expanding the State’s spending capacity, it allows aggregate demand to be boosted in the economic system; (ii) Public expenditure: Meanwhile, administration of public spending centers on constituting two budgets: • current budget relates to the funds necessary to maintain the basic services that the State provides to the general public; • capital budget discriminates public expenditures relating to productive investments made by the State in order to maintain stability in the economic system. Such investments should be made by public sector, providing this was done with the clear intention of regulating the economic cycle by supporting entrepreneurs’ expectations of effective demand for what they decided to produce in the present. In short, Keynesian economic policies (monetary, exchange rate and fiscal) are intended to maintain levels of effective demand for the purpose of mitigating involuntary unemployment by stabilizing business peoples’ state of confidence; “socialization of investment”! Brazilian Economy and the economic policies during the Lula da Silva’s terms (2003-2010) and the first year of the Dilma Rousseff term 2003-2006: (i) The economic policies were similar to those adopted by Fernando Henrique Cardoso`s second term (1999-2002): New Consensus Macroeconomics (inflation targeting regime, target for primary surplus budget and flexible exchange rate in a context of capital mobility); (ii) During this period, there was a positive external environment related to the Chinese demand (basically commodity) and a boom of capital flows; (iii) Brazilian economy performance: GDP growth (average) = 3.5%; Inflation rate (average) = 6.4%; Balance of Payments (BP)/Current Account = surplus; and Exchange rate appreciation. 2007-2010: (i) Monetary and exchange rate policies: Brazilian Central Bank (BCB) operated monetary and exchange rate policies in such a way as to meet inflation targets; (ii) Fiscal Policy: It was operated to support implementation of the Growth Acceleration Program (PAC) to boost public investment; (iii) Other policies: Expanding Social protection, income transfer programmes (“Bolsa Família”) and real increase in the minimum wage; (iv) Benefits of higher commodity prices; (v) Brazilian economy performance: GDP growth (average) = 4.5%; Inflation rate (average) = 5.1%; BP/Current Account = deficit; and Exchange rate appreciation. 2011: (i) Monetary policy: From January to August, the interest rate increased (from 11.25% to 12.5%), while from September to December the interest rate was reduced (from 12.5% to 11.0%); (ii) Exchange rate depreciation and capital controls; (iii) Fiscal austerity, from January to September, and some fiscal flexibility (tax reduction and subsidies) in the last quarter; (iv) Other policies: “Plano Brasil Maior” (industrial policy program); (v) Brazilian economy performance: GDP growth = 2.7%; Inflation rate = 6.5%; BP/Current Account = - USD 52.6 billion; and Exchange rate depreciation. Inflation Rate and GDP Growth (%), 2003-2010 BCB Interest Rate (%), 2003-2010 (end of period) Nominal Exchange Rate (R$/USD), 2003-2010 (end of period) Trade Balance and Current Account, USD billion, 2003-2010 Foreign Reserves, USD billion, 2003-2010 Fiscal Surplus/GDP (%), 2003-2010 Macroeconomic Data, 2011 Inflation Rate GDP Growth 6.5% 2.7% Trade Balance BCB Interest Rate (end Nominal Exchange Rate (R$/USD) of period) (end of period) 11% Current Account USD 29.8 billion - USD 52.6 billion 1.8751 Foreign Reserves Fiscal Surplus/GDP USD 352 billion 3% The impact of the global crisis on the Brazilian economy 2008: Onset of the global financial crisis • At the end of 2008, due to the economic scenario (average GDP growth around of 6% per year), Lula da Silva and BEAs underestimated the international financial crisis; 2008-2009: • Brazil felt effects of the crisis (recession in 2008/IV and 2009/I quarters). In 2009, GDP growth was - 0.6%, despite some signs of recovery in 2009/III; • Implementation of countercyclical economic measures: BCB injected liquidity into the economy and reactivated the credit market, tax rates were reduced, public investments were expanded and a more flexible target fiscal surplus was introduced; • Falling commodity prices and, as a result, problems of BP. 2010: • GDP growth = 7.5% = f(countercyclical economic policies, commodity prices and basis for comparison, 2009). 2011: • GDP growth = 2.7% = f(mix of austerity economic policies and heterodox economic policies, deterioration in the external scenario and basis of comparison, 2010). BEAs response to the 2007-08 global financial crisis and the Euro crisis It is important to say that the Brazilian economy was much better protected than in other moments of external turbulence, which resulted in currency crises, due to macroeconomic fundamentals. 2007-08 financial crisis: (i) Delayed response to the 2007-08 financial crisis; (ii) Devaluation of the real and pass-through effect (in 2008, the inflation rate was 5.9%); (iii) In terms of monetary policy, BCB reduced the annual basic interest rate, Selic (from 13.75%, December 2008, to 8.75%, December 2009); (iv) Liquidity easing: (a) BCB increased liquidity to small and medium banks; (b) BCB postponed the timetable for implementation of the increase on reserve requirement of leasing companies and established that leasing companies could deduct from the reserve requirement the amounts referring to foreign currency acquired from the BCB; (c) Government created a new liquidity assistance line; (d) BB and CEF (public banks) were authorized to, directly or indirectly, acquire ownership interest on private and public financial institutions in Brazil, with or without the acquisition of the capital stock control; and (e) BNDES (public development bank) created new credit lines to maintain the supply of credit to individuals and companies in a context of high liquidity preference by private banks and, so, to avoid a sharp drop of the economic activity, as well as there was a cut in the Long Term Interest Rate, from 6.25% down to 6%, the lowest level in history; (v) Credit (basically public credit)/GDP increased (almost 45%). How? Government decided to use the three major federal public banks (BB, CEF and BNDES) to expand credit; (vi) Fiscal policy? Tax reductions, government spending increased (expansion of the PAC, “Minha Casa, Minha Vida” and extension of unemployment insurance benefits) and fiscal surplus flexibility. 2010-11 Euro crisis: (i) Immediate response of economic policy? In the first moment, monetary and fiscal policies were operated to avoid inflationary pressures (pass-through effect). Later, the monetary and fiscal policies became more flexible. Moreover, it was (a) introduced a financial tax (withdrawal of capital controls), (b) created an industrial policy program etc. Final remarks: is Brazil a Keynesian show-case? (1) The adoption of government’s banking restructuring programs during 1995 and 1996 were fundamental to consolidate and regulate the Brazilian financial system: PROER (to preserve the solvency of the private financial system) and PROES (to restructure the state public-sector financial system); (2) Brazilian financial system was not exposure to credit and market risks. Why? Macroeconomic fundamentals and smaller external vulnerability (increase in international reserves and fall in the public external debt); (3) In previous crises, most emerging countries took pro-cyclical measures. In present crisis, however, economic authorities understood that such policies would be completely ineffective; (4) Some programs adopted by the Brazilian government before the crisis (PAC, “Bolsa Família”, Minimum Wage Increase etc.) helped the economy during the crisis (2007-08 financial crisis and Euro crisis); (5) In 2009, emerging countries, including Brazil, took countercyclical measures. These measures were fundamental; (6) In 2011, a mix of some orthodox and heterodox economic policies was implemented; (7) The BCB response to the global financial crisis seems remember Keynes (Big Bank, according to Minsky)? Was the fiscal policy an example of Big Government (à la Minsky)? We are not convinced that they really were Keynesians! Why? We still have a monetary regime dominance. In 2010 and, especially, in 2011, to keep inflation under control the Government increased the interest rate and the primary surplus target. Thus, the question is: were the Keynesian economic policies operated looking at the political cycle – presidential election in 2010? (8) Since the beginning of the Dilma Rousseff government some heterodox economic policies have been adopted, such as: • instead of fiscal surplus targeting, the Government has sought fiscal responsibility; • monetary policy has become somewhat discretionary, encompassing macro-prudential measures; • capital controls were introduced to avoid the appreciation of the real, including operations with currency derivatives; • a new industrial policy was launched to promote strategic economic sectors and the investment on innovation, research and development; • In short, the economic policy adopted by the BEAs since the early 2011 has been different from those adopted during the Lula da Silva government. (9) What is the challenge of the Brazilian government? To keep real Keynesian policies not only in response to international crisis, but, mainly, in normal times, in the monetary, fiscal and exchange rate areas. How? (i) Monetary policy should be oriented by employment and inflation; (ii) Fiscal policy should not sacrifice all other objectives to guarantee the payments for rentiers; (iii) Exchange rate should be managed by BCB and an efficient anti-speculation mechanism to regulate capital movements should be created to avoid currency appreciation and to maintain external competitiveness; (iv) The main objective of BCB must be to stabilize the financial system; (v) Coordination of the economic policies instead of having a monetary regime dominance; (vi) Income distribution has to be improved; and (vii) Mechanisms to reduce the infrastructure bottlenecks supply should be implemented. Basic References BANCO CENTRAL DO BRASIL. (2012). http://www.bcb.gov.br. CUNHA, A.; FERRARI-FILHO, F.; PRATES, D. (2011). Brazil responses to the international financial crisis: a successful example of Keynesian policies? Panoeconomicus, Novi Sad, 5(special issue): 693714. KEYNES, J.M. The Collected Writings of JMK. London: Royal Economic Society (several volumes) MINISTÉRIO DA FAZENDA. (2012). http://www.fazenda.gov.br. MINSKY, H. (1986). Stabilizing an Unstable Economy. New Heaven: Twentieth Century Fund Report.