MercoPress. South Atlantic News Agency
What is behind Brazil’s high rates: loose fiscal policy, low savings or politics
Lula da Silva appealed to the best tradition of Brazilian politics to become the most popular leader in half a century With Brazil’s benchmark interest rate at 11.75% and prospects of further increases Latin America’s largest economy poses a challenge to economists and analysts. The answers are not only economic but also political.
Capital Economics points out to fiscal policy which it describes as “too loose” and the country’s savings rate, “very low by international standards” which makes the problem “structural” rather than cyclical as the Brazilian government tends to argue.
The poor fiscal performance is supported by the fact that although Brazil in the last eight years had a most orthodox and strong personality at the helm of the Central Bank, Henrique Meirelles, the inflation target (4.5% plus/minus two percentage points) has been consistently above that of other emerging economies, and even more significant with real interest rates, by far the highest among its peers.
A recent study by the Brazilian Central Bank suggested that a fiscal tightening of 1% of GDP would have the same impact on the real economy as 125bps of interest rate hikes.
On this basis, raising the public sector primary surplus to levels above 3% of GDP, as in other emerging economies, would enable interest rates to fall by over 3 percentage points.
Similarly with State Development Bank, BNDES, which all Brazilian governments use to promote industry, agriculture, exports, (prestige) and in hard times such as the 2008/09 recession to bail out Brazilian corporations cut off international credit or heavily exposed in credit or currencies gambling.
The other big issue is very low domestic savings rate which makes the economy dependent on foreign funding to finance its development, which in turn requires high interest rates in order to attract the necessary capital.
Furthermore Brazil with a very recent history of stable prices, following on decades of high inflation, when not hyperinflation has consumers accustomed to borrow even at very high rates and most reluctant to save.
Governments are also very receptive to demands from manufacturing and agriculture, most of the time not necessarily to improve international competitiveness, rather the contrary, and Brazilian diplomacy believes the country has a leading role to play in regional politics.
Under former president Lula da Silva this was further expanded to Africa and as a first line player in the emerging economies group (BRICS) and in the South/North, emerging/industrialized nations’ dialogue.
Whatever the most influential of the economic reasons behind high Brazilian interest rates, changing consumers’ attitudes will take time and require unpopular reforms, for example to the current generous pension system for federal and state employees which will be politically difficult to push through.
Former president Fernando Cardoso in the nineties when he was virtually king-maker was unsuccessful in convincing Congress on the reforms and had no qualms in absorbing states’ public debt (billion of US dollars) in support of the constitutional reform that allowed him to run for a consecutive second term.
His follower Lula da Silva didn’t even make a serious attempt with Congress, where he never mustered a majority, besides the fact he never ceased to expand the federal payroll or be involved in generous handouts to poor states (mainly northeast of the country) to ensure political support.
Lula da Silva in his first term managed to survive the famous “mensalao” scandal, paying lawmakers with money and favours to support bills which ended with the decapitation of half his cabinet and his Workers Party leadership.
In his second term to gain support from the Senate Lula da Silva had to stand out for the president of the upper house Jose Sarney, a most corrupt leader who had all the staff employed in his family’s different residencies (including gardeners) paid by the Senate, plus an enviable ‘love nest’ with all state of the art facilities in the solemn Brazilian Senate premises, plus tolerating Mr. Sarney son companies’ as privileged direct suppliers (no bidding process) of the Legislative branch.
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Read all commentsMercopress has a history of publishing crappy economic analysis. This last piece only adds to the pattern.
Apr 19th, 2011 - 10:07 am 0That the author would have chosen to measure fiscal policy on inflation targeting is very weird. Inflation is, to say the least, a very indirect measure of fiscal responsibility, since many factors influence inflation - not only government expenditure, but also private spending, capital markets liquidity, and currency issues. The latter - not government expenditure - is the main cause of Brazil's inflation. Inflation had exploded twice a little before Lula became president of Brazil in 2003 - once in 1999 and another time in 2002. And for both times the cause was the same: large current account deficits that occasionally resulted in capital flights and severe currency devaluation (a currency crisis), the latter being the cause for inflation. And the current account deficits had as cause the very same tight monetary policy the article tries to justify as being a counterbalance of fiscal policy.
If one actually takes a look at the budget deficits the government has been having, it can be seen that fiscal policy is not “loose.” In 2008, for example, deficit was 1.5% of GDP, probably one of the lowest deficits in the world. Deficit in 2009-10 deficit increased to 2.5-3% of GDP. That, however, was only a temporary response to the financial crisis with the aim to warm up the economy. And that deficit is very close to that of China, and much inferior to Russia's or India's -- all countries whose interest rates are much inferior to Brazil's. Ergo, monetary policy in Brazil has little to do with fiscal policy.
As for the rest of the article, the other parts are so ill-written, it is hard to know what it's being said.
I think we all know *exactly* what is being said.
Apr 19th, 2011 - 07:06 pm 0The last four paragraphs are explicit statements of proven state corruption at the highest levels of government.
And Forgetit does his reputation no good by feigning lack of understanding.
@GeoffWard
Apr 19th, 2011 - 09:52 pm 0I went to read the article again. But to no avail.
“The other big issue is very low domestic savings rate which makes the economy dependent on foreign funding to finance its development, which in turn requires high interest rates in order to attract the necessary capital.”
“Governments are also very receptive to demands from manufacturing and agriculture, most of the time not necessarily to improve international competitiveness, rather the contrary, and Brazilian diplomacy believes the country has a leading role to play in regional politics.
”Under former president Lula da Silva this was further expanded to Africa and as a first line player in the emerging economies group (BRICS) and in the South/North, emerging/industrialized nations’ dialogue.“
This isn't good writing - no cohesion, no coherence. And I see no reason to debate the allegations of the last four paragraphs. As seen in its very ill-argued assertion on the connection of monetary and fiscal policies in BR, the author isn't a serious analyst of the BR economic moment. To measure fiscal policy on inflation when there are numbers about the budget shows dishonesty. And so does the author's cynical explanation for Lula's support for the poorest states, those of the Northeast, as being driven by political interest alone.
- ”besides the fact he never ceased to expand the federal payroll”
As I said previously, budget deficits under the Lula government were very much under control (much more so than under neoliberal president FHC). Current public expenditure under his govt grew 4% aa - about the same as GDP growth. I don't know how that compares with FHC's government as a whole, though I do know that in his last year as president, 2002, current spending also grew 4% aa.
As for the last paragraph, that can be an outright lie as far as I'm concerned. The author isn't concerned with the truth but with pushing an agenda.
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