Boycott the Rio Olympics to Defend Brazilian Democracy

By Thomas Palley

Terrible anti-democratic events are now unfolding in Brazil with the constitutional coup against President Dilma Rousseff, organized through a cooked-up impeachment trial.

The impeachment coup represents a naked attempt by corrupt neoliberal elements to seize power in Brazil. Make no mistake: it is a threat to democracy and social progress in Brazil, Latin America, and even the global community at large.

If Brazilian voices concur, the world should respond by boycotting the Rio Olympics scheduled for this August.

Read full text here.

Brazilian coup and US misinformation

Brazil has an enormous past ahead

As I suggested last month the coup had succeeded. Today Dilma Rousseff was effectively removed from the presidency. No real news here. I just want to correct, to some extent, the huge misinformation campaign in course in the US.  Monica de Bolle was saying many incorrect things on NPR this week (for example, that "the origins of the program called Bolsa Familia came from actually Cardoso's government, so the previous government, the PSDB government that came before the Worker's Party government," when it actually came ideas from Betinho and Cristovam Buarque from the Workers' Party's, PT in Portuguese, government in Brasilia; note that the lie is that she seems to indicate they like spending on the poor, but will have to cut social programs because the new government must be fiscally responsible), which is not a surprise.*

Today the New York Times pitched in also spreading incorrect news. The Times suggests that Rousseff "is charged with violating budgetary laws in order to conceal a deficit before what she anticipated would be a tough 2014 re-election campaign, borrowing money from banks that the executive branch controls to fund domestic programs, and making changes to the federal budget without congressional approval." Actually, the impeachment is based on delays on payments to public banks in 2015, not 2014, and, hence, not related to the re-election campaign. And the primary balance was changed and approved by congress. But the mistakes are all over the place (listen to this on Bloomberg radio; yeah things are going to be wonderful because markets are confident).

The worst part of all of these, and there are many things, not the least the collapse of the economy and the brutal increase in unemployment, is the criminalization of fiscal policy. Note that the Workers' Party maintained primary surpluses for almost all of its period in power. For the most part because a growing economy implies higher revenue. It should be noted that people on the left, like yours truly, always complained of the difference between the primary surplus (red line) and the nominal deficit (blue line), averaging 6% of GDP. The gap corresponds to interest payments that go mainly to the wealthy (see the book on the side for more on that).

It is only with the crisis itself that the fiscal accounts worsened, and that went hand in hand with austerity policies. Actually more primary spending, and less financial spending, would have accelerated growth and revenue without creating any fiscal problem. And yes net debt went up, but remains below the initial level (see below). And more importantly the debt is in domestic currency. Foreign debt and the current account are not really problems, since Brazil has a pile of international reserves and has access to international capital markets that maintain (and will continue to do so) low interest rates.

There is no fiscal problem. There is, however, a backlash among the middle and upper classes against social programs, and the greater visibility of the poor in places that were reserved to the elites (airports, malls, universities, etc.) and a discomfort with the stronger rights for workers (for example maids; if you didn't see the movie The Second Mother you should, it would give you an idea of the social tensions in the country). This is a testament of how much the social hierarchy has been challenged, even by a relatively moderate left of center government. Don't be fooled, it is a coup, and as coups usually do it will turn on its enemies. They will try to jail Lula, not just to wreck his legacy, but more importantly because he seems still to be among the few viable politicians in the country.

*  PSDB stands for Brazilian Social Democracy Party in Portuguese (which in Brazilian politics is really conservative, not social democratic at all).

Some thoughts on the impeachment and the right wing turn in Brazil

Riding the coup bike without the military

Brazilian President Dilma Rousseff has been impeached. The vice-president, Michel Temer, will assume the presidency temporarily while she is judged by the Senate. While the final outcome is still uncertain, it is very unlikely that she will return to office. This closes the long cycle of the left in Brazil, which started with the election of Luiz Inácio Lula da Silva to the presidency in 2002, and that led to the election and re-election of the candidates of the Workers’ Party (PT in the Portuguese acronym) since then. The roots of the current crisis are deep, and are not simply associated to corruption or to discontent with economic the poor performance of the country.

Protests started as far back as June 2013. The spark for those protests came from the cost of public transportation in São Paulo and other major cities, and the groups initially connected to the organization of the movement were clearly associated to left of center positions. On the other hand, as the protests gathered momentum the range of demands increased, to include spending with the 2014 World Cup and the Olympics and against corruption in general, with an increasing number of right wing groups linked to the popular demonstrations. In other words, there was a broad range of demands, and the groups associated with the popular protests had a mixed political character, from left of center movements to right wing libertarian groups, some of which were funded by the Koch brothers.

Many saw the 2013 protests as the beginning of the end of PT’s dominance in Brazilian politics. And it was true that some elements on the left were part of the protests, and that, in a range of issues from the economic to the social, PT had failed to live up to the expectations. It is important to note there were many reasons to be disappointed with PT’s achievements, since the party had accepted conservative economic policies early on in the 2002 “Letter to the Brazilian People,” in particular putting fiscal discipline and inflation at the center of the economic agenda. And Brazil’s economic performance was below the average for Latin America for most of the 2000s, with growth of about 3.5% per year between 2003 and 2014, which would be considered mediocre by the standards of the other BRICs that were lionized in the media as the next big thing in the world economy.

Further, the problems were not just in the economic front. Brazil was much slower, and considerably less effective than other left of center governed countries in the region in dealing with the human rights record of the military dictatorships. Something that also was to some extent expected by left of center groups. To make things worse, the security policies maintained a pattern of abuse of human rights, discrimination and racism, which have a long history in Brazil. The ‘pacification’ policies is in many cases were just part of a pattern of criminalization of poverty and state sanctioned killings of slum (‘favela’) dwellers. Not surprisingly the 2013 protests had a strong component of left wing participants.

On the other hand, in spite of the poor economic performance and the limitations of the human rights policy record, the expansion of formal employment, the doubling of the minimum wage, the expansion of the social programs, among them the Bolsa Família, the implementation of affirmative action policies and the expansion of public education, have led to a significant reduction of inequality over the last ten years, even if it is hyperbolic to suggest, as many social analysts have done and the mainstream media repeated ad nauseam, that a new middle class has emerged as a result. On the strength of the social record of her policies, Dilma won a narrow reelection in 2014, with the promise to expand social spending, to promote economic growth and to stand against banks' greediness, reducing interest rates. After the reelection, however, the government did a 180-degree turn, appointed a Finance Minister, Joaquim Levy, who came from one of the largest banks in the country, and adopted austerity policies, fiscal adjustment and higher interest rates to control inflation. Growth, not surprisingly, collapsed with a decline of GDP of about 3.8% in 2015.

Protests intensified in the streets, while the corruption charges, in particular those associated with the scheme of bribes and payments at the State oil giant Petrobras, within the so-called Car Wash (‘Lava Jato’ in Portuguese) Operation, taking center of stage. A few things should be noted in this context. Corruption is not limited to the government or the parties in its coalition, and in fact it is clear from the investigation that corruption at the state oil company goes back many years, certainly all the way to the government of Fernando Henrique Cardoso of the Brazilian Social Democracy Party (PSDB in Portuguese), a right of center party, in spite of its name. Interestingly enough, while Aécio Neves, the PSDB candidate that lost the last election in 2014, has been named in the corruption scandal, president Rousseff seems to be completely untainted by accusations of corruption. More importantly, the central issues related to corruption are the structural ones. That is the elements that make corruption a necessary feature to manage the country, like the need to buy votes in congress to pass legislation, something that has made the Brazilian Democratic Movement Party (PMDB in Portuguese) an essential element for governability. In fact, PMDB is at the center of all corruption scandals and the beneficiaries of the impeachment, including the Vice-President, are members of that party.

Clearly, the impeachment of Dilma Rousseff is not about corruption, and the actual process hinges on the delay in the payments to public banks (the so-called 'pedaladas'), which in the view of some imply the government is borrowing from public banks, which is against the Law of Fiscal Responsibility, but not on the corruption scandal per se. Note that this fiscal accounting devices were a common practice, even in previous governments, were never questioned, and can hardly be considered a crime that requires the impeachment of the president. Further, although her government is highly unpopular, since even left of center groups have been protesting, and more so since she embraced the austerity policies after reelection, it is not true that the impeachment is popular. Public manifestations against the impeachment have been as large, if not larger, than pro-impeachment protests, and the country remains essentially evenly divided, as it was during the 2014 election. In that sense, the impeachment is certainly not about the preservation of democratic institutions.

Socioeconomically speaking the poorer and the afro-descendants tend to be against impeachment, and that was reflected in the votes in Congress, to a great extent because these groups were the main beneficiaries of PT’s social policies, and real wage increases. On the other hand, the middle class and the business groups, as represented by Federation of Industries of the State of São Paulo (FIESP in Portuguese), have been decidedly in favor. There is a clear class, and that in Brazil means race too, component to the impeachment process. So there are good reasons to believe that the impeachment represents a modern type of coup, based on the utilization of media for the mobilization of public opinion, and for bringing down a government, that, even if moderately, has reduced inequality in one of the most unequal countries in the world. The impeachment is about social class and inequality, and the possibility of a left of center project.

New York Times on the Brazilian coup... I mean impeachment

So for the correct view (yes, it was a coup) see Laura Carvalho here. As she says:

The impeachment process of President Dilma Rousseff started as a retaliation by the speaker of Brazil’s lower house of Congress, Eduardo Cunha, indicted for taking as much as $40 million in a kickback scheme at the state-owned oil company Petrobras. Cunha, whose name is also tied to the Panama Papers, initiated the impeachment process shortly after a public announcement by government allies that they would not stop investigations in the Congressional ethics committee that could lead to his removal.

And, as I noted before the actual farce in Congress last Sunday, Dilma is accused of something trivial, delays in payments to public banks, which is certainly not an impeachable crime. The opposite view here, for what is worth.* Hard to agree with the criminalization of fiscal policy. With that criteria several heads of state should be impeached, including in the US (see IMF on this, which suggests that there are several ways to improving fiscal accounts through accounting devices).

It's also important to note that Obama and his State Department have been silent about this coup in a crucial country in the region.** Mark Weisbrot speculated about Obama's role in all of this. He said:

The massive spying on Brazil — and especially state-controlled oil company Petrobras — that Edward Snowden and Glenn Greenwald revealed in 2013 also points in this direction [Washington's support to undermine Workers' Party government]. It could be a coincidence that all this information about Petrobras was gathered by the U.S. government just prior to the scandals at the company; or perhaps Washington shared some information with its allies in the Brazilian opposition. And there is no doubt that the biggest players in this coup attempt — people like former presidential candidates José Serra and Aécio Neves — are U.S. government allies.

What's next? That's the important question. In terms of the economic policy expect more fiscal adjustment, including cuts in social programs (Delfim Neto, which had supported the Workers' Party for most of their governments, today refers to recipients of the Bolsa Familia program as parasites; sign of things to come).

* I'll try to have something longer on this later, but in my view the deep causes of the impeachment are ultimately related to class warfare. The improvement in the minimum wage, and the share of wages in income, ultimately caused the reaction from the elites and a good chunk of the middle class.

** Glenn Greenwald on this here.

Brazilian growth during the Workers' Party adminstration

Overall from 2003 to 2016 about 2.4%. If the last two years (2016 being an estimate are not counted) it's 3.5%.

The collapse does not explain the impeachment (on this more later). It's more the result of the Workers' Party administration already caving and accepting the austerity policies promoted by the opposition.

Latin America's turn to the right and American policy

Tom Jobim said that Brazil was not for beginners, and he was right. The Brazilian economy is in free fall. As I noted before the causes are strictly internal, and not related to any fiscal problem. Inflation was low, even if closer to the top margin of the inflation target. Devaluation of the currency has led to higher inflation, on the low two digit level, just slightly above 10%. At the same time, fiscal contraction has led to a collapse of about 3.5% of GDP last year. There is little need for discussing that again. Nothing much has changed.

What I said about corruption in that not so old post from last December still stands. In short:

(1.) there is no evidence that corruption increased;*
(2.) corruption is not limited to the government or the parties in its coalition;
(3.) the central issues related to corruption are the structural ones, the ones that make it a necessary feature to manage the country (and those have been there for a long time).

Things have, however, got out of control in the last month, and the judiciary (which is as corrupt as other institutions in Brazilian society, no more, no less) has been clearly used for political purposes. The investigation of accusations related to members of the government coalition and not of those in the opposition, and the illegal questioning and then the bizarre request by prosecutors to jail ex-president Luiz Inácio Lula da Silva (with citations of Nietzsche, and Marx and Hegel, rather than Engels) have politicized the corruption investigations.

In addition, this has gone hand in hand with the establishment of impeachment procedures against the current president, Dilma Rousseff. The basis for the process is the delay in the payments to public banks (the so-called 'pedaladas'), which in the view of some imply the government is borrowing from public banks, which is against the Law of Fiscal Responsibility. Note that this was a common practice, even in previous governments, was never questioned, and can hardly be considered a crime that requires the impeachment of the president. So far nothing has connected the president to the corruption investigations, in contrast to her opponent in the last election, Aécio Neves, whose name has appeared in the same investigation for which Lula has been questioned and almost jailed. Many think that this is a thinly veiled coup d'état. It is hard to disagree.

I should add that these events in Brazil, a pivotal country in the region, takes place at the same time that in Argentina a right of center party, with members with ties to the last dictatorship, that has promised to stop investigations into human rights abuses, won narrowly an election. That, in Venezuela, political maneuverings to shorten the mandate of Maduro are in place, while in Bolivia, Evo has lost the chance for re-election.

In the middle of the retreat of the left in Latin America, Obama will basically go down to Argentina and Cuba to cheer about the rightwing turn in the region (note that the Post is wrong, this is not a swing to the center; these are radical right-wingers; on the policies pursued by the Argentine government go here; note that the main beneficiary of the agreement with the Vultures is Paul Singer, a backer of Marco Rubio). And the president that once said he wanted to revise NAFTA, will push for free trade with Argentina. If one adds the defense of Kissinger in one of the debates by Hillary Clinton (note that Bernie not only defended Cuba, but also cited the coup against Allende as an American mistake, part of the infamous Monroe Doctrine that he criticized), and her own ambiguous history with free trade, one cannot but be concerned about the American influence in Latin American affairs, even if Democrats remain in power. The continent, like Brazil, is not for beginners.

* Note that most measures of corruption are related to subjective surveys, not objective measures. Also, the fact that more people, including some wealthy contractors and many politicians have been jailed, may indicate a healthy reduction of impunity rather than more corruption.

Political Aspects of Unemployment: Brazil’s Neoliberal U-Turn

New paper by Franklin Serrano and Luiz Eduardo Melin. From the abstract:

Throughout the world, the reversion of fortune suffered by the Brazilian
economy since reaching its zenith as recently as 2010 has confounded shrewd commentators, seasoned analysts and market players alike. As 2015 unfolded, ominous projections (“An Economy on the Brink”, “Brazil’s Economy Falters” “Worse May Be To Come”) were no less widespread than expressions of bewilderment (“Whatever Happened to Brazil”, “Brazilian Waxing and Waning”, “Brazil’s Scandalous Boom to Bust Story”), and, more recently, of alarm (“Goldman Sachs Says Brazil Has Plunged Into ‘An Outright Depression’”) concerning the fate of the South American BRIC country. 

Despite profuse official protestations to the contrary, however, Brazil’s afflictions turn out to be of its own making, as it so often proves to be the case. Looking at the set of clearly laid-out policy choices made by the Brazilian government – and the almost as clearly spelled-out political objectives underlying them – should provide enough explanatory evidence to sort out this cautionary tale for developing countries everywhere.

Read full paper here. 

The strange and misunderstood reasons for the Brazilian crisis

Almost done for the year. So do not expect many posts before the end of the ASSA conference (January 5). But as I promised, here are some brief thoughts on the Brazilian crisis.

Brazil is a mess. The economy is collapsing, with an estimated decline of about 3.5% in GDP this year (perhaps worse), and inflation has accelerated, to two digit levels, way above what used to be the upper limit of the inflation target band. Worse, politically the country is paralyzed, with an impeachment process in course with a very uncertain outcome.

The conventional view is sort of split on why this happened. Some suggest that it was the slowdown of the international economy, and the decline in commodity prices, that forced Brazil to adjust (for example, that would be Simon Romero's story in the NYTimes, if you add corruption to the mix; more on that below). The alternative is more explicit about the negative effects of the Workers' Party (PT in Portuguese) policies, suggesting that they reduced confidence and, hence, investment (something along these lines can be seen in the Wall Street opinion pages; see here; subscription required).

In the policy/confidence variation version the argument is that the government spent too much, in particular, in the second Lula administration, and more so in the aftermath of the Global Financial Crisis. There was an attempt to reduce fiscal spending with Dilma Rousseff's election (in this interpretation mostly disguising the spending with creative accounting, more on that below), but that was temporary, and only after Dilma's reelection did the fiscal problems became unsustainable and required adjustment.

Both stories are flawed. First, even though the global economy is growing slowly, and some peripheral economies like China are also slowing down, Brazil has no clear external problem. Current account is negative, but the country is in no danger of an external crisis or default on its foreign obligations, in particular because it is sitting on a huge pile of international reserves. As I noted before Standard & Poor's actually agrees with that view on the justification that they used to reduce Brazilian grading status (last week Fitch's followed the lead and also downgraded Brazil's debt), since they do not cite the external situation as a problem.

So the notion that Brazil needed a fiscal adjustment, to throw the country in a recession, and reduce imports, and solve the external problem seems unfounded. The same is true for the notion that a huge depreciation of the real was needed. In fact, the depreciation has only contributed to the acceleration of inflation, with no impact on the external accounts. Exports have tanked (since the global economy is not doing well), and so did imports (given the recession). Inflation will also have a significant impact on real wages, and will worsen income distribution (which had improved during the PT administration).

But what about the internal problems (both S&P and Fitch actually do blame the fiscal problems). This arguments is even worse, and has some serious logical limitations. Note that this suggests that fiscal deficits in domestic currency might be unsustainable and that inflation results from excessive demand associated to too much government spending. I have discussed this several times in the blog, so I won't delve too much into it.

There is no way a country can default on debt in its own currency. By definition you can  always print money. And yes inflation might follow, but not because printing money causes inflation. The argument implies that economy is generally, and certainly Brazil is not, at full employment. Hence, money printing might lead to more spending and more output, not inflation. However, another effect might be a fear of depreciation, and a run for dollars, and the depreciation might have an inflationary impact.

In other words, the reasons for austerity are not connected really to fear of domestic default. Austerity could be used to solve a current account problem, which is not the case in Brazil, as we saw, or it might be a way of leading to a recession, increasing unemployment and reducing the bargaining power of workers, as Kalecki noted long ago. It is a way to discipline the labor class. And that is what is going on in Brazil (on the slowdown of the economy essentially following the same argument see this paper by Serrano and Summa).

The government could actually spend itself out of the recession (don't worry, it won't). And by the way, since revenue responds to the level of activity, the fiscal outlook would improve. So if the Brazilian crisis is not external and is not fiscal, what caused this crisis. It is a self-imposed political crisis. The relevant question is why is this policy implemented by a left-of center government.

One has to first remember that on some level PT always accepted the conventional thinking when it came to fiscal issues. Lula famously said in his letter to the Brazilian people that he wanted "fiscal equilibrium to be able to grow," suggesting that he had incorporated the notion of contractionary expansion. But, in all fairness, there was some dissent within the party, and with the Plan of Acceleration of Growth (PAC in Portuguese) and, in particular, after the 2008 crisis, it seemed that PT was ready to use government spending to promote economic development. So why after winning the close election last year, in which Dilma decried the economic program of the Social Democratic Party of Brazil (PSDB in Portuguese) did she essentially adopted it?

It is clear that part of the government accepted that fiscal expansion had gone too far, and that workers' demand, and the real wages, were too high. The political pressure was certainly felt, and in addition the nagging issue of corruption might have also played a role. Also, for some reason the so-called New Economic Matrix (which in my view, I might be wrong) was very conventional, trying to reduce interest rates and promoting a moderate fiscal adjustment was seen as a failure for the wrong reasons. The lower interest rates, and the more depreciated currency should have stimulated growth, while the adjustment should have controlled prices. Obviously this New Developmentalist idea failed, since depreciation fueled inflation (which wasn't high, just at the higher end of the target at around 6.5%) and the economy slowed down.

However, the lesson taken from this experiment was that the government lost credibility, since the fiscal adjustment wasn't strong enough and the delays in the payments to public banks (the infamous 'pedaladas'), in particular the development bank (BNDES in Portuguese), were behind the crisis. In this view all depends on 'confidence fairies.' That is, the lack of confidence reduced domestic investment, and lowered growth. A terrible side effect of the generalized acceptance of this view is that now the political use by the opposition of the delays in payments to the public banks, something that was not new, in the impeachment procedures will create a permanent legacy, reducing the ability of future governments trying to pursue expansionist policies.

Finally, a word on the issue of corruption. Yes, there is a significant corruption scandal in Brazil, and before anybody complains, I do hope they get everybody and that the people that are proven guilty end up in paying the price (jail presumably; by the way, if they had something on the president it would have been used for impeachment, rather than a bureaucratic budget issue). I just want to note that there is no evidence (I haven't seen any credible evidence at least) that corruption is worse now, than say with the military back in the 60s and 70s, when most of the connections with big construction firms started. Also, the problems at the state oil company (Petrobras) being investigated go at least back to the Cardoso government. And corruption is not a problem of the government coalition per se. Members of the opposition are involved too, and an impeachment would actually bring to power some of the most evidently corrupt politicians in the country. In that sense, if corruption has not changed, it can hardly be seen as having caused the economic situation. Corruption is just one of the elements used by political groups to obtain advantages.

The problems of corruption that matter in Brazil are associated to the fact that one cannot govern without basically paying for political favors in congress and that means paying the main political force there, the Brazilian Democratic Party Movement (PMDB in Portuguese). It is well known, for example, that Cardoso payed for changing the constitution and allowing his re-election, to cite an example that is old enough, and not connected to the current government. But the country did grow significantly in the past, in spite of corruption.

And, by the way, the susbtitution in the Finance Ministry, with the appointment of my ex-classmate (at all levels, undergraduate, master's and PhD courses) Nelson Barbosa, is unlikely to lead to any significant changes in policy. The fiscal adjustment will continue as he very clearly announced.

Brazil´s Sudden Neoliberal U-Turn

By Franklin Serrano

A sharp slowdown in the Brazilian economy presents a critical challenge for the Workers’ Party (PT) government led by Dilma Rousseff. Between 2011 and 2014, economic growth averaged only 2.1 percent annually, compared with 4.4 percent in the 2004-2010 period.

The recent downturn can be squarely blamed on economic policies implemented by Rousseff’s first administration (2010-14). This policy change sought to reduce the state’s role of directly promoting the expansion of aggregate demand through fiscal stimulus and promoting supply side structural change through public investment, a strategy that had been done quite successfully until 2010. Meanwhile, inclusionary social policies concerned with decreasing inequality remained in place.

Read rest here.

From BBB-razil to BB+razil or the meaning of investment grade

So Brazil (or here about Petrobras, the State oil company) lost its investment grade status with Standard & Poor's. You would think this is huge given the media attention in Brazil. If you read S&P's actual rationale for the downgrading (here) it is essentially about the fiscal situation. They say: "We now expect the general government deficit to rise to an average of 8% of GDP in 2015 and 2016 before declining to 5.9% in 2017, versus 6.1% in 2014. We do not expect a primary fiscal surplus in 2015 or 2016." They do discuss the political problems too, the corruption investigations,* and the political instability that has plagued the government. There is a discussion of the external vulnerability, but here they are quite sensible and know there is no problem. The report says that: "despite the wider current account deficit, Brazil has low external financing needs compared with its current account receipts and its high level of international reserves compared with some of its peers." So this is a fiscal problem in their view.

And therein lies the problem. They had years ago also revised the outlook of US debt negatively (my comments here), also on the basis of fiscal, and political, factors. As much as the US then, Brazil now has no risk of not paying its internal debt in domestic currency. And yes, the fiscal outlook has worsened, and the reasons are no secret. It's austerity. If you cut spending, output falls, and the recession leads to lower revenue and higher deficits. It's part of the problems caused by policies that S&P's analysts actually favor. Austerity also is the cause of the recession, and the worsening of the growth outlook in the next couple of years, which are also discussed in S&P's rationale for the downgrade. So the fiscal problems that are the main cause for the downgrade are self-inflicted wounds (see Serrano and Summa), and the cause of the lack of growth and the worsening of the future fiscal balances.

But more importantly, the downgrade itself is kind of irrelevant. S&P doesn't think, as I quoted above, that the external situation is particularly problematic. The recession will actually reduce the current account problems, by reducing imports. So there is no external crisis. The devaluation of the real has been part of a global trend, and in part has been reinforced by the government that seems to believe, incorrectly in my view, in the New Developmentalist philosophy that fiscal adjustment (to control inflation) and devaluation (to promote export-led growth) are part of the solution. If the downgrade cannot worsen the external situation, certainly it cannot have an effect on the ability of the government to pay its bills in domestic currency.

At any rate, even if in this case the downgrade is kind of irrelevant, it is important to remember that credit rating agencies were, and still are, one of the worst citizens in international financial markets. They were co-responsible in the bubble, that preceded the crisis, and in the meltdown of the financial sector in the 2008 Global Financial Crisis. The fact that they complain about corruption in Brazil, while they profited giving triple-A ratings to subprime junk is outrageous. And as they say, their views are just opinions. I would add biased and not particularly accurate. They should be put out of business with a public rating agency.

* I could go on on the corruption stuff, but I'll post something later.

Brazil's Economic Slowdown Results from Policy Decisions

A new research paper from the Center for Economic and Policy Research examines the causes of Brazil’s recent economic slowdown and finds that policy choices rather than external factors have been the most important cause. The paper shows that the sharp slowdown that Brazil has experienced since 2011 is overwhelmingly the result of a significant decline in domestic demand that resulted from policy choices made by the government. It concludes that this decision to slow the economy was not necessary as there was no external constraint, such as a balance-of-payments problem, that warranted it.

“There have been enormous economic and social gains since the Workers' Party took office in 2003, in terms of reducing poverty (by 55 percent) and extreme poverty (by 65 percent), increasing employment, income growth, and some reduction in inequality,” CEPR Co-Director Mark Weisbrot said. “However, these gains are being eroded and are seriously threatened if the government continues on its current path.”

The paper, “Aggregate Demand and the Slowdown of Brazilian Economic Growth from 2011-2014,” by CEPR Senior Research Associate Franklin Serrano and economist Ricardo Summa, looks in detail at the sharp slowdown in the Brazilian economy for the years 2011-2014, in which economic growth averaged only 2.1 percent annually, as compared with 4.4 percent in the 2004-2010 period. The authors argue that the slowdown overwhelmingly results from a sharp decline in domestic demand led by government policy, rather than from a fall in exports or from any change in external financial conditions.

Read rest here.

New book on the Brazilian economy

If you read in Portuguese this book by Professor Carlos Medeiros is a must. If you don't, learn Portuguese, and read his book. Meanwhile read this paper, on a different topic.

Amado and Rollemberg Mollo on the ‘developmentalism’ debate in Brazil

New ROKE Paper by Adriana Moreira Amado and Maria de Lourdes Rollemberg Mollo

From the abstract:

This article analyses different approaches to ‘developmentalism,’ emphasizing their theoretical origins and identifying their different economic policy implications. Based on the theoretical and empirical characteristics of different growth regimes in Brazil (that is, export-led, demand-led, debt-led, profit-led, and wage-led), the paper recommends that Brazil adopt a ‘social developmentalist’ growth strategy.

Read rest here (free download).

Markets and democracy

Meanwhile the Wall Street Journal and The Economist remind us that they think that markets (wealthy investors really) and not people should vote. Because when people vote there is: "much ruin in a nation." These are just the opening salvos in the battle for austerian policies in Brazil, as noted by Pedro Zahluth Bastos here (in Portuguese).

Financialization and the Resource Curse in Brazil

"Financialization and the Resource Curse: The Challenge of Exchange Rate Management in Brazil"

By Kevin P. Gallagher and Daniela Magalhães Prates

Indeed, Brazil has been blessed and cursed with high commodity prices (from 2003 to mid-2008 and 2009-2011) and low interest rates in the core economies after the 2008 global financial crisis. Such an environment, coupled with the high domestic policy rate and the sophistication of the Brazilian financial system, has made Brazil a much sought after destination for carry trade operations through short-term financial flows that are largely transmitted through the foreign exchange derivatives market. Speculative operations into this market have accentuated the upward pressure on the exchange rate, which has come with higher commodities prices, leading to what we refer to here as a financialization of the resource curse (pp. 2).

Read rest here.

How well has Brazil done during the Workers' Party administration?

First, let me be absolutely clear. I do in general favor the current administration in Brazil, as much as other left of center governments in South America. But I do understand some of the critiques from the left (not the right wing conservatives that are against social spending and more redistribution of income). A good example of the limits to the current experience in the region are provided by the Brazilian case.

Recently a post (in Portuguese; full disclosure one of the authors is a friend) went viral in Brazil. It showed how much Brazil has grown during Lula/Dilma, from the Workers' Party (PT, in Portuguese) compared to the rest of the world, and advanced economies, and the same exercise done for the Fernando Henrique Cardoso (FHC), from the Brazilian Social Democratic Party (PSDB in Portuguese) period.

Clearly, the FHC period (1995-2002) is worse than the Lula/Dilma period (2003-2014), in which the last year is an estimate (all data, as in the viral post, from the IMF's World Economic Outlook). In the Workers' Party period Brazil was growing faster and keeping pace with the rest of the world, and catching up, growing faster than advanced economies.

However, as noted in this blog several times (Dean Baker has been one of the few others that noted this in the US; part of debunking the BRICS myth) Brazil has not grown really that fast. Instead of comparing with advanced economies and the rest of the world, the picture changes a bit if one does it with developing countries, as shown below.

Note that while it is true, as it should be, that Brazil catches up with the advanced economies during the Lula/Dilma period and not so during the FHC one, it is also the case that the Brazilian performance when compared to developing countries is far from stellar. In that sense, there is a certain frustration about the lost possibilities. Mind you, conservative views that Brazil needs to return to more rigid fiscal surpluses, and tighter inflation targeting (presumably with an independent central bank, and higher rates of interest) are NOT the solution. But that is the topic of another post, I guess.

PS: I should note that there is also a frustration on part of the left in the US with Obama, and the notion that an opportunity was lost. In that respect, there is a similarity between left of center critics of the Workers' Party and the US counterparts.

Fiscal balances in Brazil, 2002-2012

This is from an unpublised paper by Fernando Maccari Lara, Roberto de Souza Rodrigues, and Carlos Pinkusfeld Bastos.* Figure below shows the nominal and primary balances as a share of GDP, and the financial expenditures, which make the difference between the two balances (i.e. a primary surplus becomes a nominal deficit after the interest payments on outstanding debt). All figures as a share of GDP.

Note that during the whole Lula, and the first two years of Dilma, the Brazilian government kept primary surpluses, as it has done essentially for a few decades now, with few exceptions. There is a tendency for the expenses with interest rates to go down, they remain at 3.5% of GDP (in 2012), which means that it remains the largest 'social' program in Brazil, larger than the Bolsa Familia.

From the asbtract: 

Brazilian economy adopts a set of economic policies after the crisis in the end of the 1990s decade. Setting a target for the primary fiscal surplus was the main objective of the fiscal policy, and it has been in used since then. In fact, the Workers Party (PT), which was initially critical to this policy, maintained it after assumed the government in 2003. Therefore, this article analyzes the fiscal policies during this party government period from 2003 to 2012. To achieve this objective it will be used both government's official raw data and a calculation of fiscal impact of outlays and taxation. We conclude that there is no clear rationale behind the determination of primary fiscal surpluses which became more of a political dogma than a useful policy instrument. In terms of economic growth one cannot say that the fiscal policy has been effectively contractionist but in some years it most certainly did not contribute to a more robust rate o economic growth and did not respond to stabilization policy needs.

* To be published in the Annals of the Brazilian Keynesian Association Meetings.

Nassif and Feijó on why Brazil doesn't grow since the 1980s

New paper by André Nassif and Carmen Feijó in the Brazilian Journal of Political Economy (Revista de Economia Política). From the abstract:

"The main goal of our paper is to provide analytical arguments to explain why Bra- zil has not been able to restore its long-term capacity for economic growth, especially compared with its economy in the 1950-1979 period (7.3 per cent per year on aver- age) or even with a select number of emerging economies in the 1980-2010 period (6.7 per cent per year on average, against 2.3 per cent per year on average in Brazil in the same period). We build our idea of convention to growth based on the Keynesian concept of convention. For our purposes, this concept could be briefly summarized as the way in which the set of public and private economic decisions related to different objectives, such as how much to produce and invest, how much to charge for products and services, how to finance public and private debt, how to finance research and development, and so on, are indefinitely — or at least until there is no change — carried out by the political, economic and social institutions. This analytical reference can be connected to the Neo-Schumpeterian National Innovation System (NIS) concept, which emphasizes not only institutions associated with science and technol- ogy per se, but also the complex interaction among them and other institutions. In this paper we identify two conventions to long-term growth in the last three decades in Brazil: the liberal and the neo-developmental. We show that the poor performance in the Brazilian economy in terms of real GDP growth from the 1980s on can be explained by a weak coordination between short-term macroeconomic policies and long-term industrial and technological policies. This weak coordination, in turn, can be associated with the prevalence of the liberal convention from the 1990s on, which has emphasized price stabilization to the detriment of a neo-developmental strategy whose primary goal is to sustain higher rates of growth and full employment in Brazil."

 The whole issue is available here.

Two Transitions in Brazil: Dilemmas of a Neoliberal Democracy

By Alfredo Saad Filho

The mass movements starting in June 2013 were the largest and most significant protests in Brazil in a generation, and they have shaken up the country's political system. Their explosive growth, size and extraordinary reach caught everyone – the left, the right, and the government – by surprise. This article examines these movements in light of the achievements and shortcomings of the democratic transition, in the mid-1980s, and the experience of the federal administrations led by the Workers’ Party since 2003.

Read the rest here.

PS: If you read in Portuguese, an alternative explanation of the protests, by Marcos Nobre, is available here.

Milton Friedman on economic development and the 'Brazilian Miracle'

The Hoover Institution has made available (h/t Robert Leeson) online the Economics Cassette Series, which "was a 215-tape, subscription-based series produced by Instructional Dynamics Incorporated (IDI) between 1969 and 1978. The biweekly series was composed of interviews with Milton Friedman during which he commented on current economic events, and thus was a sort of companion to Friedman's Newsweek columns."

There are many interesting nuggets for those interested in the history of ideas, and in particular about the current economic problems of that period. In one of the talks he suggests that a precondition for economic growth is low inflation. Not much evidence to support that actually. The famous paper by Bruno and Easterly argued that inflation below 40% a year has no evident effect on economic growth. At any rate, you can check here his discussion of the Brazilian Miracle. For him the Military dictatorship instituted political stability (and he said that there was, at least for an external observer like, a great deal of freedom; he goes on a rant comparing Franco and the Brazilian dictatorship favorably against the Soviet Union), and tight monetary control (no discussion of the wage repression policy in explaining stabilization, but he does discuss 'monetary correction', indexation, which led to inflationary inertia, in very positive terms), and that's, to a great extent, what explains the Brazilian Miracle.

In all fairness, for him the Brazilian Miracle, and also the Japanese Miracle before that, was based on access to external technology, without the cost of developing the technology.There are other fascinating things he says, like how unemployment is caused by the high minimum wage, which was not a problem in Brazil since less people depended on the minimum wage (also evidence for that is flimsy at best; see famous study by Card and Krueger here). Note that soon Friedman's papers and almost everything he wrote will be searchable on the Hoover website.