With Its Leftist President Gone, Can Brazil Set the Economy Free?
As you may know, Brazil’s president Dilma Rousseff, from the Workers Party, was impeached some months ago. Since her impeachment, Vice-president Michel Temer took power as president, and the Brazilian economic mess is turning to a slightly more market-guided scenario while the political mess is turning into a much deeper problem.
Many economic reforms have been deemed extreme but necessary after a national debt boom in the last 3 years. The percentage by itself may not seem so big — by American standards — but when your country’s basic interest rate is at 13.75% (even higher, at 14.25%, recently) that’s a huge problem.
Gross Debt as % of GDP
In absolute numbers, the scenario looks terrifying
Figure 2: Gross Debt Growth (in BRL)
Reforms Are Coming — Some Are Not What We Actually Need
The most pressing reform right now is an amendment to the Constitution to limit government spending and a second reform on the pension and social security system.
The first reform, after being approved by a qualified majority of 3/5 in a two-shift vote on the Chamber of Deputies, proceeded to the Senate where it also has been approved, most recently on December 13.
The idea is to index the spending growth to the Brazilian equivalent of the Consumer Price Index (CPI) of the previous year. In this way, if the CPI of 2016 is 6%, the maximum rate for spending growth will be 6%. However, the amendment is not nearly as broad as it should be: it applies only to primary expenses. That is, financial expenses such as debt services, social security spending and expenses from state-owned companies are not included, Moreover, it applies only to the federal government — state and local governments are free to keep on spending.1
The second reform, the pension system reform, is now being analyzed by a commission at the Chamber of Deputies. Since the Net Present Value of Brazil’s Social Security Deficit reached 110% of the GDP, this reform is more important than the amendment, at least in the long-run. Only in 2017 we’re expected to have a 194 billion deficit in the federal level.2
Brazil: A School for Bad Economics
Millor Fernandes, a conservative Brazilian writer and journalist, once said that when ideologies become very old, they don’t disappear, they come to Brazil. The same happens with old — and bad — economic ideas: we’re an empirical testing site for them.
For instance, we had hyperinflation for most of the 20th century, especially in the 80’s and 90’s. How did the government tried to stabilize it? With price controls and changing the currency. From 1986 to 1994 we had 5 different currencies (i.e., 1986, 1989, 1990, 1992 and 1994).
In general, Brazilians forget the past, or at least don’t understand it. Despite our recent economic history of chaos, our politicians didn’t learn that’s not a good measure to index spending to the CPI. First because you’re trying to attach government spending to a phenomenon that results from government spending.
That said, the amendment's power is more political than economic. Rising prices are a threat to any politician’s reputation, so as long as prices tend to stabilize, as we expect for the next several years, it shouldn’t be a huge problem. The good economic point is that, historically, Brazil’s CPI had grown less than government spending. In other words, even if the spending keeps growing, at least it’ll be at a smaller rate.
“Progressives” Against Progress
Now, this amendment is not exactly a radical reform, although the state of our economy would suggest that radical measures are in order. After all, Brazil’s GDP contracted 3.8 percent in 2015.
Despite the clear need for economic reforms, even this modest amendment angered a considerable portion of the population. Brazil’s biggest labor unions and all the intelligentsia linked to culture and academia were engaged in huge campaigns against it. By saying that the amendment will cut spending in essential areas as education and healthcare — which is not true — groups related to the extreme-left’s socialist and communist parties were finding an excuse to “occupy” public schools and universities as a form of resistance against the amendment. Conveniently, these areas targeted for protest also happen to provide, air-conditioning, almost-free food and Wi-Fi.
It is important to mention that many don’t oppose the amendment because of its content. Many are in opposition simply because the reforms have been proposed by Michel Temer. Curiously, the first to propose this very same amendment was Dilma Rousseff herself, and — at the time — she received support from their allies, the same groups that are against it now.
What Should We Expect?
It is hard to predict the future of Brazilian politics and economics. Although we’re not getting much freer (in a sense of less regulatory burdens and more free enterprise) and our political scenario is getting worse at federal level, step by step, liberty ideas are being widespread and we’re getting more rational in our economic policies, especially in state and local level.
In local elections in October, people chose politicians that weren’t on the socialist left, in general. In São Paulo (one of the world’s biggest cities) the new mayor, João Doria, is an entrepreneur who has explored ideas of privatizing parks and reducing bureaucracy and regulations.
The good thing about hitting rock bottom is that you can’t go lower, and Brazilian libertarians are seeing this as a unique opportunity to show new perspectives. Among many rising libertarian organizations in Brazil, Movimento Brasil Livre (Free Brazil Movement) led the Rousseff impeachment effort. (I strongly recommend that you watch a short documentary about it here). Libertarian ideas have also finally begun to influence popular culture. In Porto Alegre, my city, one can find a libertarian band, named La Banda Loka Liberal (Crazy Libertarian Band) that plays songs with lyrics against the government and socialist ideas, usually mentioning libertarian authors such as Ludwig von Mises and Milton Friedman.
The growth of the libertarian movement has been so large that we used to thank Rouseff for her bad policies — in a sense that now it's much easier to demonstrate that our economics are better than hers.
Nevertheless, we have a long path to walk towards freedom and prosperity, and — as usual — we can expect nothing but the worst from the government. Mises once said that “Ideas, and only ideas, can light the darkness;” fortunately, regarding ideas, Brazil may be finally heading in the right direction.
- 1. Reuters reports the amendment limits spending "with the exception of health, education and debt payments."
- 2. The Social Security Deficit mentioned above includes the social security deficits of states public workers, federal public workers and private sector workers on mandatory public social security.