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Brazil’s Economic Policy: Does Not Compute

The Brazilian government bets that the domestic market will save the Brazilian economy: that the wage increase above productivity, apart from reducing inequality, will create demand for the Brazilian industry and will offset the overvalued exchange rate.  In other words, the same recipe that produced good results under the Lula administration, it hopes, could be repeated under the Dilma administration.  But this time I am afraid that it does not compute.  It will still be possible to increase real wages without increasing inflation, because international commodities prices are trending down, but this is precisely what leaves no room for the government’s economic policy.

During the Lula administration, the GDP growth rate doubled, while the decrease in economic inequality, which was already underway, accelerated.  But this was achieved without the government facing up to the fundamental problem of the Brazilian economy: the overvalued exchange rate.  Instead, it took advantage of the continuous appreciation of the real (which was R$3.95 per dollar in January 2003) to keep inflation low while wages increased.  In this setting, deindustrialization, which had begun in 1990, continued, but the industry survived because it could rely on a doubly heated domestic market: by the increase in the minimum wage and by the increase in real wages resulting from the reduction in dollar prices.  The country, which should have had a high surplus thanks to the huge increase in commodity prices, went back to the current account deficit.

In the medium term, a growth policy oriented to the domestic market is as unfeasible as the alternative of an export-oriented economy.  The domestic market and exports need to grow concurrently.  A policy that combines exchange rate appreciation with nominal wage increases is suicidal in the medium term, because industrial corporations less efficient than ours will soon occupy our domestic market.  This is what is happening today.

Brazil will have grown less than 3% this year, and it is unlikely that it will have a better performance next year.  Investors are not being stimulated to invest, either by the domestic or by the foreign market.  The foreign market is plummeting, pulled down by Europe, and followed by China and India, which have already reduced their growth rates.  In this adverse international setting, and without internal room for the government’s preferred economic policy, it is most probable that the Brazilian economy will continue to show poor growth.  And there is always the risk of a significant drop in commodity prices, which will have a catastrophic effect on the economy.

For the moment, the single major gesture of the Dilma administration in the economic domain was the reduction in the interest rate determined by the Central Bank.  This measure opened the way for the State to invest more in infrastructure.  The large increase in the minimum wage already provided for by law will represent another stimulus.  But they are not enough.  Brazil will continue to grow slowly, and the orthodox economists and the indifferent middle classes guided by them will continue to attribute deindustrialization to the “inefficiency” of Brazilian enterprises.  In much the same way conservatives attribute the responsibility for poverty and exclusion to the poor, neoliberals are now attributing the responsibility for deindustrialization to entrepreneurs.  It is a repetition of the reactionary process of blaming the victim, albeit applied to very different victims.  And the government seems paralyzed, facing this situation.


Luiz Carlos Bresser-Pereira is a Brazilian economist.  The original article “A equação não fecha” was published in Folha de S. Paulo on 19 December 2011.




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