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Has Brazil Benefited from Crisis?

Has Brazil benefited from the global crisis? Two differing views.

BY JOHN FITZPATRICK

SAO PAULO --  The chief of the Brazilian government´s economic research unit, Marcio Pochmann, claims that the country has benefited from the international crisis as it forced the government to take countercyclical measures and get the economy running again. He contrasted the way the government of President Luiz Inacio Lula da Silva had reacted with that of Fernando Henrique Cardoso when it confronted the crisis in 1999. Pochmann – who heads the research unit known as IPEA - also predicted that GDP would grow by 4 percent to 5 percent a year in the coming years. When I asked him if the country could afford the bill for these government initiatives, such as introducing tax breaks for certain sectors, freeing up credit from state-owned banks and raising the minimum wage, he said Brazil needed to raise its public investment from its current low rate of 1 percent of GDP and go back to the levels of the 1970s when it came to 4 percent.

This view is not shared by another well-known Brazilian economist, Alexandre Schwartsmann from Banco Santander who is a former director of the Central Bank.  Schwartsmann does not even believe that Lula's policy can even be described as countercyclical and claims it is expansionist. We present a summarized version of their views as follows.

MARCIO POCHMANN

To cope with the crisis in 1998, the government at that time raised interest rates, increased income tax and did not raise the minimum wage or boost credit. However, when the extent of the latest crisis became apparent towards the end of last year, the government took action immediately.

It reduced the IPI tax on vehicles and also cut taxes in other areas so that the price of the product fell. It expanded the minimum wage by 12 percent and increased the “bolsa familia” social allowance as well as other benefits indexed to the minimum wage. It concentrated on the social base and created housing policies which had never been tried before to deal with the shortage of homes for around 7 million families. It strengthened publicly-owned banks so they could expand credit and approved additional social programs.

If these policies are maintained we can look ahead to annual growth of 4 percent to 5 percent to 2016 – the Olympic year. As a result, Brazil has emerged from the crisis in a better state

ALEXANDRE SCHWARTSMANN

To say that the country has benefitted from the crisis because it was forced to adopt anti-cyclical measures is completely wrong. It's like saying it's good to have a car accident as you will no longer have to spend money on gasoline.

Public investment certainly is low but so what? The Brazilian public sector spent around 35 percent of GDP in 2007, a figure which must be higher today. This amount does not even include interest so it cannot be argued that it is spending a lot because of interest. Of the amount spent, 3 percent to 4 percent of GDP refers to investments from federal, state and municipal governments. Spending came to 30 percent of GDP in 1999 i.e. if the government had wanted to raise public spending it could have chosen to boost investment but instead it preferred to raise current spending.

The same is happening today and it is precisely for this reason that only a very short-sighted person would call this policy anti-cyclical. It would be anti-cyclical if the increase in today's spending, with a weak economy, were to be offset by a cut in spending tomorrow, with a strong economy. This is obviously not going to happen as the increase in current spending (public employees, pensions) is also an increase in recurring expenditure.

Higher spending on personnel which Pochmann is so keen on and would add millions of public employees to the public payroll will continue to squeeze demand in 2010 when the economy will be growing.

Brazil´s fiscal policy is like a broken watch which shows the right time twice a day. Brazil´s fiscal policy looks anti-cyclical during a recession whereas in fact it is expansionist in almost all areas.

IPEA MARKS 45 YEARS

In another development, the head of IPEA's macroeconomic policy studies, Joao Siscu, said the organization was maintaining its estimate that the economy would grow by 0.2 percent to 1.2 in 2009.

Pochmann and Siscu were speaking at events to mark the 45th anniversary of the founding of IPEA. The director of social studies and policies, Jorge Abrahão de Castro, presented an in-depth analysis of social studies on changes made in the 20 years since the Constitution was adopted in 1988 and a three-volume collection of statistics by the National Household Sample Survey (PNAD).

John Fitzpatrick, a Scottish writer and consultant living in Sao Paulo, runs Celtic Comunicações. This article originally appeared on www.brazilpoliticalcomment.com.br. Republished with permission from the author. Fitzpatrick can be contacted at [email protected]

© John Fitzpatrick 2009 




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