Download The Brazilian Political Economy Today

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.