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Marcos Lisboa: Wanted: politicians with the courage to reform Brazil

Fonte: Financial Times – 28/6/2018

Michel Temer, below, and his government caved in to the demands of protesting truckers, revealing that Brazil remains the hostage of special interests © Reuters

A year ago, I was less pessimistic about Brazil. Perhaps due to the severe economic crisis we were going through, we had started to discuss how to deal with our entrenched problems. Now, however, the outlook has worsened.

A 10-day truckers’ strike over fuel prices brought the country to a virtual standstill last month, showing how deeply Brazil’s challenges run. Elections are due in October. Will any of the candidates offer solutions to the economic malaise? Or will they simply promise to maintain Brazil’s historic system of state intervention and patronage?

In the 2000s, Brazil seemed destined to break out of its middle-income trap. After periods of runaway inflation in the 1980s and early 1990s, the country began much needed reforms. Under Presidents Fernando Henrique Cardoso, a social democratic intellectual, and Luiz Inácio Lula da Silva, a former trade union leader, Brazil experienced a notable fall in income inequality and increasingly stable economic growth. It balanced its public accounts, reduced restrictions on foreign trade and expanded social spending.

This agenda, however, was more of a reaction to occasional crises than a coherent development strategy. Many, in both the public and private sectors, continued to champion the old mechanisms of government intervention to favour their sectors. And with economic success came hubris.

Years of growth led to the resurrection of nacional desenvolvimentismo, a package of outdated development policies favouring import substitution, the creation of state-backed national champions and trade protectionism.

The government changed oil sector legislation to benefit the state-run company Petrobras and domestic equipment manufacturers. It expanded subsidised credit to privately owned companies and granted widespread tax benefits to selected industrial sectors, while blocking foreign competition.

The outcome was misallocation of capital, inefficient companies and low productivity. Labour, tax and foreign trade rules became even more cumbersome.

Many multinational companies have more tax or labour lawsuits in Brazil than they have in all other countries put together. Òne side effect of this discretionary distribution of public benefits was widespread corruption.

Brazilians ignored the growing problems during the elections in 2010 and 2014 won by Dilma Rousseff, Mr da Silva’s handpicked successor. Private investment declined and widening fiscal imbalances led to public debt rising from 50 per cent of gross domestic product to nearly 76 per cent in three years. The outcome was a severe recession and record levels of unemployment.

The crisis at least provoked a debate over how to tackle the country’s problems. It pitted two visions of development against each other: the “old Brazil”, which protects vested interests, and the “new Brazil”, a country willing to reduce sectoral distortions and open itself up to competition from abroad.

Key to delivering this was social security reform to create a more just pension system, which currently favours highly paid public servants who regularly retire in their mid-50s.

In the new Brazil, the tax system would be simplified. Public policy would prioritise social programmes rather than special interests.

Since Ms Rousseff’s impeachment, the government of centre-right president Michel Temer passed some measures to modernise the economy. But it, too, has favoured special interest groups.

The government approved a cap on public spending and reduced subsidised loans granted by the BNDES, the state-run national development bank, to private sector businesses. But it also raised public sector salaries, while the all-important pension reform was shelved.

Then came the truckers’ strike, which revealed what many economists already knew: that Brazil remains the hostage of special interests. Mr Temer’s weak government rapidly caved in to the demands of the strikers, agreeing a diesel fuel subsidy and minimum freight prices. As a result, whoever leads Brazil in 2019 will have to make a fiscal adjustment of 3.5 per cent of GDP.

This will require negotiating with an unwieldy congress and a willingness to attack jealously guarded benefits. Unfortunately, the main candidates in the election show little sign of grasping the scale of this challenge.

Will Brazil need to go through another severe crisis in order to find the political will to face up to its problems? The October elections will provide the answer.

The writer is an economist and president of the Insper business school in São Paulo