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A new economic blueprint for Brazil’s Rousseff
February 6, 2015, 6:19 am

President Dilma Rousseff, in her first mandate, attempted to implement a reliable economic growth policy to protect the Brazilian economy from the effects of the global recession. At the time, there was higher disposable income resulting in consumer demand to respond to such an objective. The policy strategy was based on fiscal and credit expansion, as well as the removal of the payroll tax in 56 industrial sectors, a broad tax decrease in both consumer goods and energy tariffs, aiming to revamp Brazilian growth and employment rates.

It did NOT succeed.

It ended up in a larger fiscal deficit, higher inflationary pressure, an unstable monetary policy, and an unpredictable exchange rate.

What led to this state of affairs? A simple explanation would be – the duration of government stimulus remained for too long, boosting social demand for consumer goods and services over three years.

There was a demand and supply mismatch of the industrial production and logistics capacity. Demand above supply resulted in higher inflation and interest rates, and exchange rate appreciation.

In the end, by 2014, it engendered in higher consumer indebtedness, a higher rate of commercial bank delinquency for consumer credit, lower growth and larger federal and state debt. No wonder then that investors remained skeptical about Brazil’s growth prospects.

During President Dilma Rousseff re-election campaign, there was considerable political turmoil. Most political analysts wrote her off.

Defying all political punditry, she ended up being reelected.

Brazilian President Dilma Rousseff (3rd from left) with her newly sworn-in Cabinet Ministers, including Finance Minister Joaquim Levy (extreme right).

Brazilian President Dilma Rousseff (3rd from left) with her newly sworn-in Cabinet Ministers, including Finance Minister Joaquim Levy (extreme right).

Now with a fresh second mandate, she faces an acute challenge of restoring the government’s credibility with domestic and foreign investors.

Interestingly enough, the current economic policy program proposed by President Dilma was neither presented nor debated during the high-pitch presidential political campaign.

It is far from any previously imaginable political and economic reforms proposed by her party. The neoliberal opposition political party, PSDB, is angry about President Dilma´s economic program since it contains some of their avowed basic neoliberal economic principles, in particular, the fiscal adjustments.

Conversely, President Dilma´s fiscal adjustments and tight monetary policy to reduce inflation and the cost of capital caused some disappointment even in her own political party, the Labor Party. They expected an equivalent program used during her first term in office to be re-implemented. All in the name of economic growth, that didn´t really flourish in the past couple of years.

Instead, President Dilma has opted to save her political legacy as a developmentalist based on a solid fiscal and pragmatic base.

The new economic policy, announced by her team, seems to be a neoliberal one, but it is not. Pragmatically, the Brazilian economic policy reversal represents what has to be done in order to ascertain fiscal stability and sound monetary policy to restore investor´s confidence in Brazil’s future.

The new economic ministers, Joaquim Levy, Minister of Finance, Nelson Barbosa, Minister of Planning, and Alexandre Tombini, Chairman of the Brazilian Central Bank, have the mission to rebalance the federal budget, remove most of the subsidies stimulus for consumer demand, and readjust all prices managed by the federal government.

However, they must be acutely aware that the budget equilibrium will not be achieved by cutting federal expenses alone, but also by some tax increases, public price adjustments (hydro energy, oil and gas), as well as the price of public transportation and utilities.

Nonetheless, it will cause a mild recession this year and Brazilians must brace for it.

However, the Brazilian federal government´s fiscal realism will strengthen the monetary policy mandate to maintain control over the local currency´s purchasing power, reducing both costs of capital and production. Only then, will it be possible to plan for stable and higher economic growth.

The new economic policy by Rousseff’s re-calibrated team is already working to bring fiscal balance to an acceptable equilibrium, preliminarily, by cutting and reprioritizing federal outlays, reviewing pension for death, unemployment, and health benefits. All these fiscal measures must result in $30 billion in federal resources necessary to render a primary fiscal surplus of 1.2% of GDP this year, and 2% next year.

This fiscal re-equilibrium program is expected to reduce inflation and interest rates, reestablishing the competitiveness of the exchange rate, and stabilize expectations of basic Brazilian economic fundamentals.

Although the tight fiscal and monetary policies can offer the economy a new market equilibrium, the Petrobras scandal is bleeding the domestic and foreign investors’ portfolio, as well as the confidence in the country’s political and judiciary systems. This Brazilian graft scandal could end up being just another factor that pushes the economy into a recession.

But here’s a thought: If this is the social and economic price to be paid to restore the country´s political and economic strength, let’s do so as soon as possible. President Dilma Rousseff has nominated the Minister of Finance, Joaquim Levy, to head the restructuring the company’s new board of directors and to get its accounts certified by auditors.

For now, it’s a “wait and watch” policy for Brazil commentators as the Latin American giant scrambles to get its act right.

There’s a lot riding on the new economic policy, expected to show results in the near future. If it fails, President Dilma will her lose political support in both houses, and weaken the fragile economic recovery.

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

6 Responses to A new economic blueprint for Brazil’s Rousseff

  1. S. Hileret Reply

    February 7, 2015 at 7:46 pm

    The author knows (or ought to know) that the solution to Brazil’s predicament is absolutely NOT limited to the two false options he offers us: either “easy money” “progressive” policies of “redistribution” (Lula 1&2, Dilma 1) OR “tight money”, “fiscal responsibility”, “primary surplus”, etc.

    To the extent that we touch on the monetary factor, we should begin by stating that it is NOT the be-all and en-all of economic and financial management for a country.

    In the specific case of Brazil, the main monetary failing that is hampering the healthy expansion of its economy is Brazil’s own lack of vision and proper orientation in leading the organization of financial affairs for South America as a region.

    In a world of increasing regionalization — and ever sharper competition among and between regions — South America simply isn’t on a level playing field vis-à-vis the United States, or Europe, without its own __stable__ and __strong__ regional trading currency. Something along the lines of the ECU, which preceded the Euro.

    Such a currency would be a necessary pre-requisite for two essential developments:

    1. – The ability for the region’s central banks to issue __sovereign credit__ __targeted to major works of infrastructure__ (as well as high and sustained investment in science and technology) that __will__ boost productivity and thereby proivde a __genuine source of wealth__ to elevate the quality of life of the average citizen, while at the same time __paying for themselves__ over time, and

    2. – Provide a credible, stable currency for the savings of the citizens of the region to be invested in for the long term, thereby providing another large source of credit, this time for the more rapid development of the private sector economy, based on individual initiative and entrepreneurship.

    But even this will not suffice to solve the conundrum facing Brazil, and, therefore, South America.

    Things will truly begin to change when Brazil, and the BRICS as a bloc, firmly demand the dismantling of the anarchic, chronically unstable “floating exchange currency” regime under which the world operates today (clumsily stumbling from “crisis” to “crisis”, and barely making it in the intervening years, with austerity imposed on the population while the speculators get bailed out).

    What’s needed is a swift return to the sensible regulation that prevailed during the high growth, low inflation period that extended for about 25 years from the end of the 2nd World War. That period was anchored on the simple, clear and — therefore — hard to dodge regulations contained in the Glass Steagall Act passed in the U. S. in 1933, and whose last remnants were repealed during the decline of the Clinton presidency, in 1999, under an intense barrage of pressure and lobbying by the financial establishment of the City of London and Wall Street.

  2. Eraldo Marcelo Kopp Reply

    February 10, 2015 at 4:11 pm

    The above remark makes sense, however, there is a chonical problem is this country and it comes from soccer! Back in the 60´s and 70´s Brazil USED to be the greatest team player and ever since the culture has developed a mental state of Brazil X the rest of the world! Read the News from back then. The point is it does not have any advantage reorganizing the politics if the politicians do not act as gentlemen! THEY WANT STEAL! This fact can not be denied! Watch the News from the state own oil company petrobras, what have they done thus far? The population has low education and lack international experience. The reality shows a country not ready for Dragon Mart! Cancun is being ready for the new trade system and Brazil is yet locked in the sport Brazil X the rest of the world! When DM is ready for trade the products of Brazil are placed directly on the shelf. Reason is highly taxed products… China has the objective of bringing the products from Asia and trading them in the Américas and so providing products at reduced cost and so Brazil is sacked! There is no hope or solution other than the military taken over and the population back to university…..
    GDP is 0.13% for 2015 and government is sambles… Can we have hope? Truly this point shows Brazil can not even get mathematics and physics above the minimum average from the South American countries and as far as the English language the best is not even making any remarks…
    Truly sad from a country with so many vast resouces mineral and any other way but any gains are stolen under the people very noses… Lets smile for nothing!

  3. S. Hileret Reply

    February 14, 2015 at 2:52 pm

    The degradation and corruption of society — as I understand it, the main theme of Mr Kopp’s comment — is, indeed, a difficult one to solve.

    Yet, it is not impossible to solve.

    Historically, it has tended to take a very deep “dark age” to get humanity to react strongly in the opposite direction, by going back to an earlier era of healthy and balanced human existence to learn from it and try to bring it back into daily practice.

    Not coincidentally, this “re-animation” of a previous period of what one can only call true sanity is known as a renaissance.

    We had one in the mid-to-late 1400’s, following the deep dark age of the black plague, largely triggered by the collapse of a usurious financial system, that of the Bardi and Peruzzi banks in Florence. (Sound familiar?)

    It’s important to understand that these periods in which the most valuabel virtues of the human spirit flourish and take the lead don’t just happen.

    It takes dedication on the part of — at the very least — a small group of people who understand that the survival of humanity is at stake, and set out to do everything they can to prevent their species from destroying itself.

    In the 1200s and 1300s it was people like Dante Allighieri, Petrarca, Bocaccio, who wrote literary works to educate and elevate the average citizen to a higher level of culture.

    This, in turn, created the “fertile ground” for the seeds of the Renaissance to take hold when they were sown.

    Today we need to take the same urgent, yet infinitely patient approach.

    Be just slightly irrationally optimistic that the situation can be turned around (and I say slightly irrationally because appearances strongly suggest that the situation is hopeless). But if one refuses to be defeated before one even attempts it, then it makes sense to do what one can to present oneself and others with the BIG argument for hope: human creative reason.

    It’s always been human creative reason that has allowed us to __discover__ the next stage in our development, which is the natural way in which our species “keeps up” with the development of the universe which we inhabit.

    Those species which fail to evolve tend to be eliminated periodically in great shifts that take place every 60 million years, or so.

    Our species has been given the greatest imaginable gift. The gift of creative reason allows us to decipher, little by little, the extraordinary richness and depth embodied in the principles of the universe. This, in turn, we then use to take greater and greater control over our surroundings, creating entirely new levels of viability for the continued evolution of our species.

    It’s a fascinating challenge, and it’s always before us.

    President John F. Kennedy famously told the American people that he was proposing to send a man to the moon and bring him back alive before the end of the decade “not because it is easy, but because it is hard”.

    Today our society is so degraded that we don’t even take on much lesser challenges, such as the proper development of the African continent, which we could EASILY do in a few decades, at most, if we set our minds to it. To a large extent the same goes for Iberoamerica, from Tierra del Fuego to the Rio Grande.

    The BRICS approach to economics, finance, and international relations is a ray of hope. These countries are doing some of the necessary things, even as they — at least — address other important matters in the form of words.

    We need to deepen and massively accelerate that process, so that we can stop having to witness all kinds of cruel and needless wars, or the completely unacceptable sacrifice of thousands of lives a year, as desperate African youth drown in the Mediterranean trying to reach Europe.

    Here’s hoping that some of the major infrastructure projects that are sorely needed in the heart of Africa, such as the massive hydroelectric dam at Grand Inga, on the Congo river, will get under way as swiftly as Egypt, under the leadership of General Al Sissi has undertaken to double the capacity of the Suez Canal.

    How’s that for “Yes, we can!” ?

  4. Luciana Souza Reply

    March 5, 2015 at 10:38 pm

    Ok thats fine and dandy but WHY did the politicians raised their salaries again? Why is our taxpaying money going to pay for TRIPS of the politicians wives?

    Cutting the security social network expenditure is stupid, changing the pattern for the electrical outlets to be “exclusive” was annoying, but I think that more annoying is the fact that the money isnt going to Education or Healthcare, that the money is going to a few fat cats, The Petrobras theft was awful, where is that money? Why push our gas up? Why not incentivize the use of solar power? (we got a lot of it). What we need is to fire a lot of our self serving shitty ass politicians and reduce salary from them. I dont care how much “Economics” you speak, in the end, the money is going to those who HAVE money not to those who dont and need.

    • Marlene Reply

      March 18, 2015 at 6:13 pm

      I agree 100% with you, many political leaders of today are out of touch and see their citizens as “the masses”, instead of identifying their individual potential for building a stable economy and recognizing that human capital, correctly harnessed and employed, is a country’s greatest blessing.
      How can political leaders of third world countries pay themselves annual salaries — not even to mention added perks — far in excess of or even equal to those of prime ministers/presidents of the EU and other First World countries? This is deeply disturbing and shocking and smacks of self serving prestige conscious heads of state, greedy and uncaring of their countries and the people, whom they often forget, they actually serve.
      Surely, a country’s economy can be compared to a household budget, but on a much larger scale, as no matter how large or small, all comes back to gross income and after expenses, net earnings available and how this is applied… cut one’s coat according to the cloth available, the old saying goes. One of Latin America’s leaders owns a 1984 Beetle for heaven sake and Putin too, drove around in an old car for years and this year, he and his cabinet dropped their salaries too.
      Where leaders are IN TOUCH on the GROUND FLOOR with their citizens’ needs, they are naturally aware and informed of key areas where urgent economic reforms are needed and what budget allocations and time these would require to complete, while their continuous direct involvement ensure these reforms are implemented to the letter.
      Good leaders are not interested in becoming billionaires while in office. Good leaders serve their nations and rather take too little, while surrounding themselves with economic expertise to build their countries soundly and at a steady pace, guaranteeing secure futures for all their citizens. In other words, they do what they’re employed for — they SERVE the People with selfless DEDICATION, they’re accountable and become part of their people, one with them, a true father to them.
      When a president and the cabinet works directly with their nation on an equal footing, the all round energy is tangible and productivity becomes a powerful dynamo driving the economy. This results in national pride, whilst the most beautiful natural spin off from this building together as a nation, is UNITY.

  5. Raahul Reply

    April 1, 2015 at 8:16 am

    There are two contradictory facts here. Brasil is rich in natural resources, people, technology, and is part of a block that provides billions of dollars in financing for loans.

    Brasil is well off. And yet, Brasil is growing at 0%, may even be in a recession. How can we reconcile this paradox? Unemployment is also high.
    One way out of this is to get a loan at lower interest from the New Development Bank, expand trade.

    A more outward focus, intending on trading more with the outside world, will really help the Brazilian economy bound forward. That’s how ASEAN, China and most other countries grew wealthy.

    In particular, Brasil is still sitting on implementing Free Trade Agreements with SACU and Bharat. Mercosur has been a remarkably ineffective trade bloc, only concluding 3 agreements in its long history. Especially, concluding trade agreements with fast growing nations like Bharat, who is the world’s fastest growing ecnonomy, is the way to grow out of tough economic times.

    We need what Brasil has to offer. It seems so very simple, but why is it so damn hard in practice?

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