Looking into the abyss? Brazil at the mid-2010s

ABSTRACT

In 2015, the Brazilian economy was afflicted by a lethal combination of a falling level of activity and accelerating inflation. Expectations for 2016 are equally or even more adverse, since the effects of rising unemployment emerge only after a lag. The domestic debate has opposed analysts who believe the crisis is due exclusively to past policy mistakes to analysts who believe that all was well until the government decided to implement austerity policies in 2015. A closer examination of the evidence shows that in fact both reasons contributed to causing the crisis, but it also suggests that its depth has a more proximate cause in the political collapse of the federal government in 2015, which led Brazilian society to an impasse for which a solution is not yet in view.

KEYWORDS:

• Brazilian economy
• expansionary policies
• recession

Notes

¹See Ipeadata, Inflação: IPCA (available at www.ipeadata.gov.br/).

²See Banco Central do Brasil, Nota para a Imprensa: Política Fiscal, January 29, 2016 (available at www.bcb.gov.br/?ECOIMPOLFISC). The debt/GDP ratio may not be considered excessive, especially if one compares it with the ratios exhibited by advanced economies in the postcrisis period. Moreover, it is important to keep in mind that public debt is mostly denominated and payable in local currency. Nevertheless, the pace at which debt has been growing lately and the wide use of accounting tricks by the government to disguise it powerfully eroded public trust in the federal government, constraining its fiscal policy choices.

³In fact, Petrobras is not just an oil company. The company was created as a result of intensely nationalistic feelings in the early 1950s manifested in mass demonstrations and even violent conflicts with the government. To many it is a symbol of nationhood.

⁴Insofar as the president was reelected, even the idea of transition may sound strange. However, she announced policies that totally contradicted her campaign rhetoric to such an extent that for all purposes one could consider it a new government.

⁵An examination of the damage imposed by high inflation regimes and the difficulties involved in switching to a low inflation regime is presented in Feijo and Cardim de Carvalho (1992). The attitude of the Germans with respect to risks of an inflationary push, supposedly inspired by their experience with hyperinflation in the 1920s, illustrate how long these feelings can survive in a country’s collective memory.

⁶Petrobras sells stocks in foreign markets to investors who expect those rules to be adhered to on the part of its management. In fact, the firm is currently being sued in U.S. courts precisely for having allegedly broken those rules, among other wrongdoings.

⁷This much was explained in a newspaper interview by a member of Rousseff’s cabinet, who added, curiously, that this was what he thought to be the meaning of the expression “administered prices.”

⁸This happens if one assumes that the time interval between adjustment of contract values is fixed. When inflation rises beyond a certain point, however, agents try to protect themselves against the loss of real income by reducing the time between adjustments. The shortening of adjustment intervals, everything else the same, accelerates inflation. See Cardim de Carvalho (1993).

⁹In some situations, one can argue, though, that this could actually reduce the force of inertial factors. If idiosyncratic factors cause a sharp increase in price, but the remaining prices remain more or less stable, indexation would dilute the force of the idiosyncratic factors. This is not likely to be the case when inflation is rising beyond a certain threshold. Reasons for that are given in Cardim de Carvalho (1993), which explores the implications of Frenkel (1979). One must also remember that existing indexation systems are asymmetric: values rise with the increase in price indexes, but do not fall when indexes eventually fall.

¹⁰This result is not always attained because of the influence of factors such as the timing of price adjustments, which allows some variation of relative prices between adjustments that cannot be compensated by simple indexation rules.

¹¹Since the minimum wage formula is applied with a relatively long lag in the case of Brazil, it may contribute to increasing unemployment when GDP is falling rapidly but wages are still rising, by force of law.

¹²Right after Rousseff’s reelection, in late 2014, one of her appointed ministers declared to the press that the law had to be adjusted to the new times. The president publicly demanded that he recant, which he did immediately. The law was renewed and its last application raised minimum wages for 2016, a time of economic decline, by 11.6 percent.

¹³In fact, in the case of private health plans, annuities are indexed to general price indexes too.

¹⁴Kregel (2009) already pointed out the significant fragilities of the Brazilian growth strategy.

¹⁵Of course, it is always possible to argue that had the government chosen not to act, the situation could be even worse.

¹⁶There are no reliable aggregate data about profits in Brazil. Profit estimates tend to be based on balance sheets of corporations, which, of course, bias the information toward larger businesses. For what is worth, there is evidence of a strong fall in the share of corporate profits among non-financial firms. See, for instance, CEMEC (2015) graph 1, showing a fall in the net profits of manufacturing firms/GDP ratio from 1.38% in 2005 to 0.78% in 2014.

¹⁷A detailed list of government policies adopted between December 2011 and June 2013 is given in IMF (2013), box 4, p. 12.

¹⁸The thesis is the object of intense controversy in Brazil.

¹⁹The concentration on exports of raw materials would, in addition, explain the low sensitivity of exports to exchange rate devaluations.

²⁰This point was emphasized in Lula da Silva’s pitch in favor of his successor in the 2010 elections. He argued that what the country needed at that point was a manager as efficient as Rousseff was supposed to be.

²¹Petrobras has been responsible for about 10 percent of investment in Brazil.

²²Even though many of them still voted against her projects in Congress.

²³In fact, the situation was made more complicated by the continuing investigation of corruption in government, which threatened (still does) to end up in jail sentences for some of the highest political authorities in the land, including some government opponents.

²⁴With more than three years still to go before new elections will be held, in 2018.

²⁵In fact, one cannot say that the majority of representatives in the Chamber of Deputies is actually constituted by Rousseff’s opponents. However, even her supporters saw the chance of improving their bargaining power with the president in resisting the proposed policies.

²⁶One dramatic example was the proposal to reintroduce a tax on payments made through the financial and banking system, known by its Portuguese acronym, CPMF. Opponents of the government declared their vote against the tax right away. Supporters of government just postponed any decision. What was supposed to be an urgent need in the beginning of 2015 will possibly be examined at some point of 2016, with little chance of being approved.

²⁷Excluding December values for 2014 and 2015, one arrives at total federal expenditures of R$981,119 in 2015, only R$48,053 more than what was spent from January to November of 2014, R$933,066. Expenditures by states and municipalities were even harder hit by the recession given their reduced power to determine their revenues.

²⁸The Selic rate is the Brazilian equivalent of the Federal Funds Rate.

²⁹Information published by the Central Bank in its Financial Stability Report, October 2015 (Banco Central do Brasil, 2015) suggests that banks did not yet have reasons to be concerned with nonperforming loans. The report (Graph 2.3.4, p. 23), shows that nonperforming loans of private banks remained fundamentally stable from early 2014 to mid-2015 (last information available), but well above the ratio observed in public banks during the same period. Of course, the information describes the period before unemployment began to increase and the economic decline to accelerate.

³⁰Both Keynes and Kalecki insisted on the importance of public investment as the initiator of a recovery. See, for example, Keynes (1982, pp. 148, 151, 158) and Kalecki (1971, ch. 2 and 3).