MercoPress. South Atlantic News Agency

The Economist and President Rousseff clash over ‘Brazil cost’ and Mantega

If Dilma wants a second term she should get a new economic team, suggests The Economist

President Dilma Rousseff reiterated she wouldn’t be influenced by The Economist magazine’s call for her to oust Finance Minister Guido Mantega after a growth report that fell short of government forecasts.

“Under no hypothesis will a Brazilian government elected by free and secret vote be influenced by the opinion of a magazine that isn’t Brazilian,” Rousseff told reporters in Brasilia. “We grew 0.6% last quarter and we’ll grow more in the next one.”

The London-based publication, in an article, “Breakdown of trust” urged Rousseff to fire Mantega for misleading investors with growth forecasts that were double the expansion registered in a third quarter report last week.

“She should fire Mr. Mantega, whose over-optimistic forecasts have lost investors’ confidence, and appoint a new team capable of regaining the trust of business,” the magazine wrote.

“In no way will I take under consideration this, shall we say, suggestion,” Rousseff responded. “I will not.”

Rousseff added that inflation is under control in Brazil, and unlike Europe, the country is not suffering a sovereign debt crisis.

Mantega was named Brazil’s finance minister in 2006 by Rousseff’s ally and predecessor Lula da Silva. In 2010, he presided over the country’s fastest growth in two decades, when GDP expanded 7.5% and won attention abroad for accusing rich nations of starting a “currency war” fuelled by record-low interest rates.

The Economist recalls that when President Rousseff was elected the country’s economy was booming but then it grounded to a halt and is now struggling to recover. “Despite increasingly frantic official efforts at stimulation, the moribund creature grew by only 0.6% in the third quarter—half the number forecast by Guido Mantega, the finance minister. Most market analysts now expect GDP growth to be less than 1.5% this year and not much more than 3% next year”

The motors of growth that powered Brazil in the past decade are sputtering. Prices of commodity exports, though still high, are no longer rising. Consumers are using more of their income to pay off the loans with which they had bought cars and televisions. Low unemployment means there are fewer idle hands to be put to work. Instead of relying on consumption, growth now has to come from higher productivity and investment. That means hacking away at the “Brazil cost”: the combination of red tape, heavy taxes, expensive credit, creaking infrastructure and an overvalued currency that makes it a punishingly expensive country to do business in.

Ms Rousseff has recognized the need to improve competitiveness. Her economic team says its aim is to prompt a supply-side, investment-led recovery. In the past 15 months the Central Bank has slashed interest rates by 5.25 percentage points, to 7.25% (only two points above inflation). That has helped to weaken the currency and help manufacturers. The government has cut payroll taxes for industry (but not most services). It is also slashing electricity tariffs and inviting private operators to upgrade airports, roads and railways.

Despite all this, investment has fallen in each of the past five quarters. It now amounts to just 18.7% of GDP, against 30% in Peru in 2011 and 27% in Chile and Colombia—Latin America’s new high-growth economies.

Business is cautious because the government meddles too much. A prime example is its apparent desire to drive down the return on investment by diktat, not just for banks but also for electricity companies and other infrastructure-providers. Even more than her predecessor, Lula da Silva, Ms Rousseff seems to believe that the state should direct private investment decisions. Such micro-meddling undermines trust in macroeconomic policy as well.

The Central Bank may be tempted to react to the latest figures with another interest-rate cut. That would be a mistake. Instead the government should redouble efforts to cut the Brazil cost—by, for instance, tackling labor laws—and thus letting the private sector’s animal spirits roar. The worry is that the president herself is meddler-in-chief. But she insists she is pragmatic. If so, she should fire Mr Mantega, whose over-optimistic forecasts have lost investors’ confidence, and appoint a new team capable of regaining the trust of business.

Ms Rousseff’s hope seems to be that full employment and rising real wages will be enough to secure her a second term in 2014. But these depend on renewed growth. Lula da Silva won a second term because his policies lifted millions of Brazilians out of poverty. The electorate similarly rewarded Fernando Henrique Cardoso, Lula da Silva’s predecessor, because he slew inflation. And Ms Rousseff? Voters may judge that in trying to juggle so many economic balls, she dropped most of them.