{"id":13118,"date":"2016-04-22T11:12:14","date_gmt":"2016-04-22T15:12:14","guid":{"rendered":"http:\/\/multiplier-effect.org\/?p=13118"},"modified":"2016-04-22T11:12:14","modified_gmt":"2016-04-22T15:12:14","slug":"the-crisis-in-brazil-and-the-narrow-path-for-economic-policy","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/the-crisis-in-brazil-and-the-narrow-path-for-economic-policy\/","title":{"rendered":"The Crisis in Brazil and the “Narrow Path” for Economic Policy"},"content":{"rendered":"

The big\u00a0political story\u00a0in Brazil is the potential\u00a0impeachment of\u00a0President Dilma Rousseff (Brazil’s lower house of congress voted in favor of impeachment; the motion now moves\u00a0to the senate for consideration). To get an idea of\u00a0how messy\u00a0this situation is, note that the man leading the impeachment attempt, Speaker of the House Eduardo Cunha, is facing 184 years in prison for his role in the Petrobras corruption scandal. (In the NYTimes<\/em>‘ Room for Debate series, Laura Carvalho describes<\/a>\u00a0the impeachment process\u00a0as\u00a0a parliamentary coup.\u00a0See also Felipe Rezende’s critical take<\/a> on the\u00a0charges\u00a0for which Rousseff is ostensibly being impeached:\u00a0violation of the Fiscal Responsibility Law.)<\/p>\n

All of this is happening\u00a0against the backdrop of a multi-faceted economic crisis. Here’s Fernando Cardim de Carvalho’s summary of the situation from his latest policy note<\/a>:<\/p>\n

Brazilian real GDP is estimated to have contracted 3.8 percent in 2015. Meanwhile, annual inflation reached 10.7 percent in 2015\u00a0…\u00a0The overnight cost of bank reserves in the interbank market (SELIC) is currently 14.25 percent. The exchange rate to the US dollar is around R$4, a 50 percent increase over a year ago. Fiscal space for implementing recovery policies is practically nonexistent, with fiscal deficits reaching 10.3 percent of GDP …\u00a0Unemployment has been growing rapidly and the outlook for 2016 is not promising, to say the least, with the International Monetary Fund (IMF 2016) projecting a further contraction in GDP of 3.5 percent. Concerns about the solvency of large firms that have sharply increased their foreign indebtedness in recent years intensified with the steep devaluation of the real in 2015.<\/p><\/blockquote>\n

Cardim de Carvalho\u00a0recently\u00a0presented his analysis of\u00a0Brazil’s\u00a0political and economic\u00a0challenges\u00a0at the 25th Minsky Conference<\/a>. He\u00a0observed\u00a0that for once the balance of payments has not played a key role in this economic crisis; nor are there any easily identifiable “external villains” this time around: “this … is an entirely domestically generated crisis.” (Here are the slides<\/a>\u00a0from his presentation; video is embedded below the fold.)<\/p>\n

As he\u00a0points out in the policy note (pdf<\/a>), even a fully functioning, stable government would\u00a0have a hard time addressing\u00a0this mix of economic problems, but as it stands, it isn’t even clear who will be running the country in the near future. Cardim de Carvalho pins Brazil’s hopes[1]<\/a> partially on maintaining the devaluation of the Brazilian real and advocates a\u00a0change up in fiscal policy. But even here, there’s not much room for policy maneuvering: “For all practical political purposes, Brazil is stuck with fiscal austerity,” he laments.<\/p>\n

Under the circumstances, policymakers might be able to do less damage by turning to what Cardim de Carvalho calls “smarter austerity”: \u00a0“an increase in public investment paired with less damaging spending cuts and revenue increases, could limit the negative impact on aggregate demand.” The problem, as he explains, is that implementing this kind of budgetary shift\u00a0would require managing some complicated\u00a0political trade-offs. Reading the headlines this week, it’s hard to imagine\u00a0the political system\u00a0pulling this off, no matter who ends up running the country until the 2018 elections. He’s\u00a0not optimistic:<\/p>\n

Only skillful negotiation led by a trusted political leadership could obtain current sacrifices from participants with a view to achieving better results in the future. Unfortunately, there does not seem to be the slightest possibility that such a negotiation could happen in the near future. The government does not seem capable of doing it. All initiative was lost when avoiding or beating an impeachment process became its first and practically only priority. On the other hand, no legitimate organized opposition exists to present demands and lead a negotiation on behalf of the people. The country has no \u201celders\u201d to appeal to, no statesmen of recognized stature who deserve the trust of the nation.<\/p>\n

Under such circumstances, until Brazil gets closer to the presidential elections scheduled for 2018, there seems to be no plausible alternative to the continuation of the recession and political uncertainty.<\/p><\/blockquote>\n

You can read the policy note here<\/a>. See also Cardim de Carvalho’s working paper<\/a>\u00a0for more detailed data on\u00a0how the Brazilian economy got to this point.<\/p>\n

[1]<\/a> “Hope” being the operative word: “While the extent to which the recent devaluation will help to engineer a sustained recovery is unclear, there is little doubt that a return to the overvaluation characteristic of the post-1994 period would kill any such possibility.” He expresses concern that\u00a0Brazil’s\u00a0deindustrialization may\u00a0limit any potential expansionary effect from devaluation.<\/p>\n

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