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.

The Strange Death of Progressive Brazil

Strange indeed

I've been off for a few days for Thanksgiving, as you might have noticed. I visited Argentina, and will have something to say about the situation there in a few days. Here is something I was thinking about what is going on in Brazil, that seems to be in a never ending economic and political crisis. I find the situation particularly concerning for the future of the left in the region.

There is a very nice little book about The Strange Death of Liberal England, (oddly enough, it's also the name of a band) written in the 1930s, when Labour took over as the main opponent of the Tories in parliament, and the Liberal Party of Gladstone, Asquith, Lloyd George and Maynard Keynes became irrelevant and vanished. The book, if memory doesn't fail me (I read it many years ago, when I found a used copy in bookstore in New York; I remember Godley telling me he read it around the time it was published), shows how the divisions on the Irish question and the Gold Standard, together with the rise of a more militant labor force, and new social movements overwhelmed the liberal establishment.

Something similar is happening in Brazil, but in this case, I suspect, the vindictiveness of the right is particularly important to understand the demise of the Workers' Party, that had significant losses in the last municipal elections, including, perhaps more importantly, in São Paulo and in the periphery of that city, where the party was born. One way of looking at the demise of the Workers' Party is to emphasize that it was associated to the corruption scandals of the last few years, in particular those connected to the Operation Car-Wash (Lava Jato in Portuguese) and related to the state controlled oil company Petrobras, as for example the WSJ suggests in the link above.

However, as I noted before, there is little evidence that corruption increased during the Workers' Party 13 years in power. Corruption, as I said then, has a long standing tradition, and is structural, associated to the way the country is managed. By the way, the specific problems with construction contractors, and the state oil company, exactly because they go back all the way to the the 1950s, and in particular, the military dictatorship, indicate that corruption is probably orthogonal to the process of economic development, since up to the early 1980s, Brazil was among the fastest growing countries in the world, up there with Japan and South Korea (nope China and India were laggards back then).

The more recent literature on corruption coming from the Word Bank, tends to suggest that corruption is inimical to growth. However, an older literature tended to suggest, in contrast, that corruption greased the wheels of business and helped promote growth. Samuel Huntington famously argued that: "In terms of economic growth, the only thing worse than a society with a rigid, over-centralized, dishonest bureaucracy is one with a rigid, over-centralized and honest bureaucracy." And no, I'm not in favor of corruption. My point is that you probably don't have a simple linear relationship between corruption and growth.

Besides, as I've also noted before, most measures of corruption are not objective, that is they do not measure the quantitative effects of corruption (money embezzled, etc.), but simply the perceptions. Perceptions of corruption, maybe or not correlated to actual corruption, of course. And one should note that there is always the nagging question of causality. That is, corruption might be the result of lack of development, rather than its cause.

The corruption argument, in spite of its prevalence in the international media, does not explain the collapse of the Workers' Party.* On the other hand, it seems far more reasonable to believe that a combination of right wing resentment, prevalent in the middle class, related to the expansion of social programs, with the acceptance within the party of several elements of the neoliberal discourse, which undermined its support within its base, are at the core of its current problems.

Protests in 2013 started on the basis of legitimate problems related to the cost of public transportation, led by the Free Fare Movement (Movimento Passe Livre in Portuguese). But the protests rapidly broadened the scope of complaints and right wing groups that were against the Workers' Party became more prominent. Note, however, that in spite of the massive protests and the complaints about economic problems, and about corruption, Dilma Rousseff won the elections in 2014, promising to expand the social welfare programs of the Workers' Party. The real problem for the Workers' Party was the post-election volta face, when Dilma appointed Joaquim Levy, a neoliberal economist from Bradesco, one of the largest banks, to the finance ministry, with a plan to promote fiscal adjustment.

Long term persistence of fiscal conservatism was a hall mark of the Workers' Party ideology, briefly lifted during the 2009 crisis with the Plan for Growth Acceleration (PAC in Portuguese). But these views were entrenched, and the experts with anti-austerity, Keynesian (Lernerian to be more precise) views were often marginal. Don't get me wrong, after the initial austerity and the pledge to follow responsible policies (the infamous letter to the Brazilian people), they expanded social spending, and that certainly played a role in economic growth and the increase in tax revenue (hence, the fiscal balances didn't deteriorate), and more so after PAC with increasing public investment. But the ideological notion that fiscal deficits are problematic remained central within the party, and not surprisingly Dilma's economic team accepted the verdict that adjustment was necessary.

The huge recession caused by the austerity policies led to collapse of the economy, which could be and was used to claim incompetence and invent reasons for the impeachment (essentially the criminalization of relatively innocuous and routine policies, the delay in payments to public banks, the so-called 'pedaladas').** Worse, some of the ideas that were discussed during the fiscal adjustment in 2015, like a limit to government spending, are now being implemented. The Constitutional Amendment Project 241/55 (PEC in Portuguese) imposes a limit, for 20 years, on real spending, that is, corrected by inflation. The rule solves a problem that does not exist, that is, it presupposes that the 1988 constitution gave too much in terms of social benefits, that this led to a runaway increase in government spending, that caused both the recent inflation and the lack of growth.*** At any rate, these rules are created essentially to stop progressive policies in the future.

So a combination of the mistakes of the Workers' Party**** and the revanchist rancor of right wing opposition, with significant support in the middle class, explains the incredible collapse of the Workers' Party. Their (they who, you ask; the opposition consolidated in power through the mediatic-juridical coup) work is not over yet, and the question is whether the judges and prosecutors associated with the Car Wash Operation will decide to jail Lula -- on the basis of information obtained from plea bargains with self-confessed criminals, but without any material proof of guilt, at least so far -- in order to preclude his possible return as a candidate. The abuses of the judiciary system are by now well documented, not just regarding the jailing of accused people with no formal ruling (it seems that you are guilty until proved innocent now) and the use of the media to humiliate them, but also the fact that they explicitly target the Workers' Party with no investigation of Social Democrats (yep in Brazil the right wingers call themselves social democrats), which have been caught also in the same types of accusations.

There are many implications of the current events in Brazil. The corruption scandal has not only precluded any kind of serious discussion about public investment, since the modus operandi of government procurement rules in Brazil required several of these practices that are under scrutiny, but it led to a consolidation of a consensus view that fiscal deficits are by definition the instruments of corruption. Further, the crisis has almost certainly destroyed the possibility of using Petrobras as an instrument of industrial policy, to buy specialized equipment and so on (my guess is that right wing groups will at least try to privatize it). Note that in the United States corruption is as endemic as in Brazil, even if in many cases it is sanctioned by law (that is, it is not illegal, even if it is morally unacceptable). And also the US keeps its ability to do industrial policy through the defense budget.

The electoral chances of the left in Brazil are incredibly diminished. I'm skeptical both about the possibilities of Lula, if he escapes the inquisitorial witch hunt, and more so about the possibilities of the splinter from the Workers' Party, the Party of Socialism and Liberty (PSOL in Portuguese), which looks very much like PT 30 years ago. With no channel for the use of the public machine to promote demand growth or to promote technological upgrading through some sort of industrial policy, even in the hands of a right wing conservative government, the future prospects for the country are grim. Without a left of center party capable of winning the elections and using the state apparatus to promote a modicum of welfare redistribution, by increasing social spending and the minimum wage as the Workers' Party did, Brazil seems condemned to maintain its long history of social inequality. And this does not bode well for the rest of the left in Latin America.

* Note also that while there is no evidence of direct involvement of Dilma Rousseff in any of the corrupt deals in Petrobras, congress or any other place, that is not true about her vice-president now in power.

** Something similar is taking place in Argentina, the criminalization of the decision about the exchange rate by the central bank. More on that when I post about Argentina.

** Of course recent inflation has no relation to excessive fiscal expansion. In the last couple of years it went hand in hand with a recession and fiscal contraction. The behavior of wages and the exchange rate is considerably more important. And if the recession caused by fiscal contraction has not convinced you about the fallacy of "expansionary contractions" (I assume you don't cade for evidence) nothing will.

**** On this one should also add that the Workers' Party members always complained about corruption, as a moral issue, and suggested that their government was going to be different. A huge mistake, since the problems with corruption, that should be combated don't get me wrong, are structural. That is, they are intrinsic to the way the country is governed, and it was obvious that a Workers' Party administration would not be immune to it, and would need to have mechanisms to deal with it and try to reduce it.

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.

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.

A time to reap

Conceição Tavares worked hard and now is time to reap the benefits. From Marx21 (hat tip Tomas Rotta).

Renowned professor and economist Maria da Conceição Tavares received yesterday, May 17th 2012, the highest scientific prize granted by the Brazilian government. The national foundation for scientific research (CNPq) awarded Conceição Tavares for her lifetime theoretical and practical achievements. Tavares has influenced generations of students, scholars, and state officials. The significance of the award is that it goes to a female Marxist economist. Dilma Rousseff, Brazil’s first female president and herself a former student of Conceição Tavares, personally handed the prize. During the official ceremony Dilma made clear in her brief speech that “Conceição Tavares treated economics as it should be treated, as political economy.”

Read the rest here.

PS: By the way, while it's true that Conceição was certainly influenced by Marx, it's far from clear that one could call her Marxist rather than say Structuralist. Her famous 1978 full professor dissertation (you had to write one to get a chair at a public university then) is basically Kaleckian, and was clearly influenced by Keynes. And as any Brazilian economist she was heavily influenced by Marxist historian Caio Prado and by the quintessential Brazilian structuralist Celso Furtado, beyond several structuralists at ECLAC, like Prebisch and Anibal Pinto. A more detailed story 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).

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.

The Brazilian Election or Brazilian Fahrenheit 11/9

#nothim protest in São Paulo

This is, hands down, the most important election in Brazilian recent history. Haven't seen any exit polls, but if the last polls are trustworthy expect a second round between an openly fascistic candidate, Bolsonaro, and the Workers' Party (PT in Portuguese) and Lula's candidate Haddad. Maybe Ciro Gomes has a shot. The US and international media have been part of the problem, in all fairness, for the rise of Neo-Fascism. They suggest that Bolsonaro is not acceptable (like many in Brazil that have protested, pictured above), but they suggest that the Workers' Party is as dangerous and radical, but on the left of the political spectrum. Red scares continue to dominate the media decades after the collapse of Soviet communism. It's a bit tiring.

Note that as I argued in many posts in the past the Brazilian situation is not the result of an economic crisis, fiscal or external. No real economic problem existed. It was, and it still is, a political crisis. Corruption exists, but it is also not the problem. That's what right wingers have used as a political instrument to counter their inability to win elections. The main cause of the political crisis is the result of the moderate improvement in social conditions and inequality during the PT administrations, and the backlash that this has caused in segments of the middle and upper classes.

Interestingly, Dilma Rousseff, the impeached president, is not accused of anything and might have a shot at the Senate seat held by Aécio Neves, her rival in the last election, who is trying desperately to win a seat in Congress to avoid being prosecuted (contrary to Lula, that has been jailed as a result of someone saying he owned an apartment, without a single shred of corroborating evidence; Aécio is recorded asking for a R$2 million bribe, suggesting his cousin would pick it up, since it was a person he could trust and kill if he opened his mouth, and the cousin was later filmed and caught with the money).

It is far from surprising that the Workers' Party is still in the dispute, and might win. Life conditions for the vast majority did improve in their governments (even if there is a lot to criticize in their policies). And they did win the last four elections. They are responsible for a frustrated right wing base that cannot win elections and resents social improvement. But the responsibility for the rise of Neo-Fascism in Brazil should all be placed squarely with the Brazilian Social Democracy Party (PSDB), the main alternative to PT, that failed to win elections since 1998 (20 years now), and to abide by the democratic rules when loosing.

Besides, the justice system is now seen by many as a corrupted system itself, and the impunity of proven corrupts within PSDB has sapped their support within the middle and upper classes. That empty space has been occupied by Bolsonaro, that claims to be anti-corruption, as Collor did back in the 1990s, and is probably all but. PSDB will probably collapse as the main opposition party after this election. And the middle and upper class are as a result left with a more radical and authoritarian alternative.

In this respect, the Brazilian situation is not very different than the American one discussed by Michael Moore in his last movie Fahrenheit 11/9. Sure there are many reasons for the rise of Trumpism. But the elites in the Democratic Party have an important part in that rise. So-called liberals that did not respect democracy (e.g. the fact that all West Virginia counties went for Bernie, but Hillary got the delegates), or pushed and defended Neoliberal policies (e.g. the shocking role of Obama in the Flint catastrophe) were central to explain what happened (and more important than Russia).

In similar vein, many PSDB intellectuals that had a lot of pride about their fight against the last dictatorship in Brazil, are co-responsible for perhaps helping lead to a new one (since many in the Bolsonaro camp, including him, have suggested they would not accept the results if they loose). Aécio was explicit about not accepting the results of the elections in 2014. And PSDB supported the coup, hoping to be able to win elections as soon as PT was tarnished as corrupt. From jail Lula has defeated them once again. Decent people around the globe now hope he can defeat Fascism too (if he has a chance).

But the blame for this is all in the hands of the supposedly reasonable and well-behaved Brazilian Social Democrats. And the US media, by suggesting that PT is as despicable as the Neo-Fascists is helping them too. If Bolsonaro wins, you know who is to blame.

At any rate if you are interested in digging any deeper go read my previous posts, going all the way back to December of 2015, that chronicle the unfolding of the crisis:

1. Goodbye Lula, Hello Failed State
2. The Strange Death of Progressive Brazil
3. The Mediatic-Parliamentary Coup in Brazil
4. Brazilian coup and US misinformation
5. Some thoughts on the impeachment and the right wing turn in Brazil
6. New York Times on the Brazilian coup... I mean impeachment
7. The strange and misunderstood reasons for the Brazilian crisis

The Mediatic-Parliamentary Coup in Brazil

President Dilma Rousseff was finally toppled down today. Yes, it's a coup, different in nature to the previous ones (last in Brazil was in 1964), but with the same consequences. I have discussed the nature of the process here, here, here, and here (this last more on the economy, from last year) before. It is a coup that has received discrete support from the US government, by the way, as much as the elected neoliberal government of Macri in Argentina (Obama visited the latter, a government that basically tries to vindicate the last and genocidal dictatorship in Argentina).

A good summary of the mess is available here. Important things to remember: she is NOT implicated in corruption (contrary to Fernando Collor that was impeached in 1992, so that was NOT a coup), and even if one has qualms about the fiscal transfers ("pedaladas") that are the formal cause for the impeachment (and one shouldn't really, since these are not crimes of responsibility, or crimes at all), it's not even clear that she violated the rules by which she was overthrown. Note that the worse that can actually be said, and it was repeated ad nauseam by the opposition, is that she lied during the campaign. And she did. She promised a government against bankers and for the people, with expansion of social expenditures, and did a u-turn, and delivered the neoliberal policies that the opposition was requesting.

What comes next is more of the same neoliberal policies that are spreading throughout the continent, support for free trade, privatization, including cuts to social security, lower real wages, fiscal adjustment, and more unemployment. The economic collapse of the last year and half is far from over.

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.

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.

Kevin P. Gallagher On The Fed, Emerging Markets, & Role of The Dollar

By Kevin P. Gallagher

From Foreign Policy Magazine

Emerging-market and developing countries resented U.S. Federal Reserve Chair Ben Bernanke during his spell in office. In 2012, Brazilian President Dilma Rousseff scolded Bernanke and the Fed's loose monetary policy for creating a "tsunami" of financial flows to emerging markets that was appreciating currencies, causing asset bubbles, and exporting financial instability to the developing world. It may just turn out that they dislike Janet Yellen even more.Although it was Bernanke who started tapering the Fed's loose policy, Yellen will be the one to end quantitative easing and, eventually, raise short-term interest rates. And those could be an even bigger problem for emerging markets than the initial tsunami.Yellen's recent confirmation that quantitative easing (QE) will cease in October 2014 is the latest and firmest signal that U.S. monetary policy is reversing direction. The Fed began the year talking about the "tapering" of loose monetary policy, relaxing QE's bond-buying program and potentially raising interest rates. Now a concrete end to QE is on the horizon. The big question that emerging markets are now asking is how quickly and how suddenly interest rates will go up. Following the latest numbers that the United States' GDP grew by 4 percent during the second quarter, some monetary policy hawks are calling for interest-rate hikes soon to cool the economy. That's exactly what emerging markets are worried about....

Read rest here.

And for more on the role of the dollar in the world economy see here, here, and here

The paradox of Brazil

By Eduardo Crespo

Brazil has all the conditions to become a regional power able to push the entire region on the path of progress.

Beyond having a large domestic market, there is no reasonable expectation of an external constraint in the near future. Brazil has 380 billion dollars in reserves, its foreign debt is negligible, the impact of the international crisis was irrelevant and it can even borrow in its own currency in international markets. It has large and efficient state organizations such as Petrobras, Embrapa and BNDES. It was particularly favored by the commodity boom and exports increased with the agricultural boom. For the first time in history a tropical country became a major food exporter. And if that weren't enough, large oil reserves were discovered.

And yet, despite all these promising signs, the economic performance of Brazil has been disappointing. In 2011 and 2012 growth rates were 2.4% and 0.8% respectively. The early 2013 data also suggest a poor performance. The Brazilian economy grows less than the world average and has among the lowest rates in South America. What's wrong with Brazil? The explanation is not in the economy. It is in politics. Leaders and business elites have a marked distrust of the social effects of growth. The rise in real wages and the gradual advancement of the popular sectors creates cracks in the traditional mechanisms for social control. The reaction, almost instinctive, imposed by Dilma Rousseff, was to apply the self inflicted stagnation therapy, based on fiscal adjustment, wage stagnation* freezes and pro-business measures such as tax cuts and exchange rate devaluation."

Read the rest (in Spanish) here (h/t Marcia Pressentin for link and translation).

* Note of the editor: Average wages have not grown much, while the minimum wage has increased significantly in the last decade.

PS: One clarification. Objectively the protests in Brazil started with a demand for reduction in the cost of public transportation, which could be seen as a demand for more public spending in transport infrastructure. But that has sort of morphed into something else. The suggestion, not from Eduardo, but from this blogger is that the paradoxical lack of growth in Brazil might have something to do with what is going on.

Neoliberalism Resurgent: What to Expect in Argentina after Macri’s Victory*

No need for a helicopter

The election of businessman Mauricio Macri to the presidency in Argentina signals a rightward turn in the country and, perhaps, in South America more generally. Macri, the candidate of the right-wing Compromiso para el cambio (Commitment to Change) party, defeated Buenos Aires province governor Daniel Scioli (the Peronist party candidate) in November’s runoff election, by less than 3% of the vote.

Macri is the wealthy scion an Italian immigrant family that made its money on the basis of government contracts. He went on to work for the family business and later, defying his father’s wishes, became president of the most popular professional soccer club in the country, Boca Juniors. In 2007, he won election as mayor of the capital city, Buenos Aires—the springboard for his eventual election to the presidency.

This is a momentous change in Argentina’s history, since it is the first time that a right-wing party has won the presidency by electoral means. In the past, conservatives had only gained power through military coups or by disguising neoliberal policies under more progressive electoral promises and the mantle of a left-of-center party—as in Carlos Menem’s Peronist government in the 1990s.

Macri’s economic team includes among its most prominent members Alfonso Prat-Gay, an ex-president of the country’s Central Bank who also worked for JP Morgan Chase. He will be the next finance minister. Federico Sturzenegger, secretary of economic policy in the Economics Ministry under infamous finance minister Domingo Cavallo—author of the main economic policies of the 1990s—is likely to be the next Central Bank president. In other words, the economic team clearly signals a return to the market-friendly policies of the 1990s. This is also true on the foreign policy front, were Macri has already announced that he intends to use the so-called “democratic clause” of the Common Market of the South (Mercosur), the regional trade agreement, to exclude Venezuela for alleged violations of democratic norms. (Macri has backed off that plan since the victory of the right-wing coalition in Venezuela’s recent parliamentary elections.) He has also signaled a closer alignment with the United States.

The economic program of the new administration is quite clear, even though Macri tried to hide his economic advisors before the election, to reduce the impact of their unpopular views at the polls. They will unify the foreign exchange market, in which there is currently a large gap between the official and black-market exchange rates. This implies a “maxi-devaluation” of the peso, from around nine to about 15 pesos to the dollar (assuming that the current black market level is their desired nominal exchange rate). The effects of a depreciation of this magnitude will be massive.

In contrast to previous devaluations—most recently in 2002, after more than ten years of a fixed one-to-one peso-to-dollar exchange rate under Cavallo’s so-called “Convertibility Plan”—this one is not caused by an external crisis. While it is true that Argentina’s current account balance is negative, and that its reserves are relatively low, there is no significant danger that Argentina will default on its external debt now.

The current account deficit is not big, by historical standards or in comparison to other countries in the region, and international reserves can cover the country’s immediate obligations. Besides, under current conditions, with low international interest rates, it would be relatively easy to attract capital flows with higher interest rates, and borrow in international markets. (That would certainly be easier if Argentina could finalize an agreement with the so-called “vulture funds,” the holdout bondholders that did not agree to the rescheduling of debt after the last default.) And, if anything, Macri’s (unnecessary) promise to give in to all the vulture funds’ demands and rapprochement with the United States and International Monetary Fund (IMF) would resolve any short-run problems in financing the current account deficit.

The question, then, is why the Macri government would promote a huge depreciation of the currency with no clear external crisis on the horizon. The notion that the depreciation would solve the current account deficits is fraught with problems. Not only is the external situation not dire—so depreciation would be a “solution” to a non-existent problem—but there is also no evidence that exports will boom after a depreciation. Exports respond more to the growth of the global economy than to a change in relative prices. So for example, China will not demand significantly more soybeans from Argentina, as a result of lower prices, if the Chinese economy is not growing faster.

Actually, the only significant way in which the depreciation will reduce the external problems of Argentina is by causing a recession. Depreciations tend to reduce real wages, since the increase in the price of imported goods leads to inflation, which is not fully recovered by workers. As a result, consumption declines, with a negative impact on economic growth. Macri and his economic team have been very explicit about the need for a huge devaluation and the closing of the gap between the official and the black-market (or “blue,” as it is known in Argentina) exchange rate. This has already triggered an inflationary surge, as noted by the outgoing Economics Minister Axel Kiciloff.

The reason for the devaluation is precisely to cause inflation and a recession, both of which would weaken working-class bargaining power and, as a result, lead to lower real wages. And that is the ultimate goal of the new Macri administration. He has explicitly said so, in one of the videos that his campaign tried to suppress. The video shows him suggesting that the way out of the problems of the 1990s—when devaluation was not an option due to the Convertibility Plan—was to reduce real wages to increase external competitiveness. The maxi-devaluation of the peso will most likely be accompanied by a “fiscal adjustment plan” or, simply put, austerity. This would push the economy further into recession, reducing the bargaining power of workers even more.

Some skeptics suggest that Macri cannot pursue the classic IMF economic package of devaluation and fiscal adjustment, since that would bring about both inflation and recession, a politically explosive combination. However, the administration will deflect political problems caused by the economic crisis that these policies will trigger by suggesting that both inflation and the recession are the results of the negative legacy of twelve years of “populism” under the previous two administrations. In fact, Macri is already doing this, with intensive media support, suggesting that the inflation since the announcement of the depreciation is just a correction to its true level. One can easily see how higher unemployment would be justified in the same fashion, as an adjustment to the true and sustainable level.

In other words, the Macri government will cause a crisis that does not exist right now—though the economic situation may be difficult and growth in the last three years has not been not high—but blame the effects of its neoliberal policies on the previous government. The idea would most likely be to weather a political storm over the next couple of years and then—after resolving the issues with the vulture funds and normalizing relations with IMF—start borrowing abroad again. That would help promote growth again in time for a re-election campaign in 2019. Growth would be also facilitated by the fact that the economy would be coming out of a crisis, with real wages considerably lower and the working class well-disciplined.

Also, Macri will reduce or eliminate export taxes on grain and soybeans (known as retenciones, or “retentions”), strengthening the position of the ruling elites. The reorientation of the economy toward primary-goods (agricultural and mineral) production, along with a larger role for finance, has been the strategy of the Argentine elites since the last military dictatorship. That is why there is such continuity between the economic plans of José Martínez de Hoz under the military dictatorship of the late 1970s and the early 1980s, Domingo Cavallo under Menem in the 1990s, and (one should expect) Adolfo Prat-Gay under Macri in the coming years.

The initial recession and cuts in retenciones would significantly reduce government revenue and most likely lead to larger fiscal deficits. Hence, austerity will actually worsen the fiscal balance, contrary to what the Macri and his advisors suggest. The key is to remember that austerity policies are not designed to reduce fiscal deficits, even if that is offered up as a rationalization; they are a political instrument for disciplining labor. [And if it is any consolation, at least the adjustment will be done by a right-wing party, in contrast to Brazil, where the same program, essentially, is being pushed by the Workers' Party; and yet the right-wing forces are also trying to bring the left of center government of Dilma Rousseff down; more on that on another post].

In fact, the coming larger fiscal deficits will most likely be used to try to cut social welfare expenditures, which increased significantly during the administration of the outgoing president Cristina Fernández and her predecessor (and husband) Néstor Kirchner. It would not be surprising if Macri tries to privatize social security once again, something that Menem accomplished in the 1990s, and which had to be reversed in the 2000s as a result of the private system’s complete failure to provide a decent retirement for seniors.

But if the Macri administration is a throwback to the neoliberal era of Menem, it is important to remember that the current historical context is very different. Back in the 1990s, the fall of the Berlin Wall and the collapse of the Soviet Union gave the neoliberal policies of the infamous Washington Consensus a status of unquestionable truth. Supposedly, ideology had vanished and history had come to an end. No alternative was politically possible. Since then, the 2008 global Great Recession has shown the world the perils of unfettered capitalism, and even if the “Keynesian moment” was brief and austerity policies have reasserted themselves, at least it is widely understood that the “free market” is no solution for the problems of development in a globalized economy.

The socioeconomic situation in Argentina is also very different. Back then, the economy was coming out of two bouts of hyperinflation, a whole decade of very low growth with very high unemployment levels and very low real wages, two decades of social conflict with a considerably weakening of the trade unions, several military coups, and an unresolved human-rights crisis from the last dictatorship. Now, the economy has grown at a healthy pace over the last decade, though with slower growth over the last three years. Unemployment remains at relatively low levels, and though inflation is relatively high, real wages have still grown significantly over the decade, with a considerable reduction of inequality.

Further, not only has the reorganization of the economy strengthened the working class, but civil society has managed to bring violators of human rights to justice, and finally come to terms with the nefarious legacy of the dictatorship, something unique in the region. The new government does not control congress, and the election was close, signaling a divided country. In short, society is more organized and better prepared to face the onslaught of neoliberal policies this time around.

* Forthcoming in the January/February issue of Dollars & Sense (subscribe; the other contributors are actually good). A version of my talk at the Universidad Nacional de San Martín (UNSAM) last month.