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CHALLENGES 2005-2006:
Brazil's Economic
Policy under Fire
Mario Osava
RIO DE JANEIRO, (IPS) -
From an economic standpoint,
this year in Brazil has ended in
disillusionment, with widespread
criticism of the performance of
Finance Minister Antonio Palocci
and particularly the Central
Bank, accused of maintaining
exaggeratedly high interest
rates.
The 1.2 percent drop in gross
domestic product in the third
quarter of this year as compared
with the previous quarter was
essentially the final straw for
economists who formerly
supported the government's
policy of setting inflation
targets, but have now joined the
side of its critics.
While the inflation targeting
policy was initially adopted by
the previous administration, it
has been taken to extremes by
President Luiz Inácio Lula da
Silva's economic team since he
took office in 2003, say his
critics.
The current state of economic
stagnation is reflected by the
fact that the unemployment rate
has stubbornly remained at 9.6
percent over the last three
months, without the seasonal
decline usually brought about by
increased year-end consumption.
Economic growth for the year as
a whole will amount to a mere
2.5 percent in 2005 and only
slightly higher in 2006,
according to most estimates.
Long-time critics like Fernando
de Carvalho, a professor at the
Federal University of Rio de
Janeiro, have consistently
condemned the adoption of an
economic policy centred on
inflation targets as a "trap"
that has hindered sound economic
growth for many years.
This approach has given the
Central Bank de facto autonomy
in guiding the country's
monetary policy, as if raising
interest rates was merely a
"technical decision" aimed at
curbing inflation, while in
reality it also destroys jobs,
and "it is tragic that Palocci
and Lula seem to ignore this
fact," de Carvalho told IPS.
But at least the government has
given up on a proposal to
officially establish the
independence of the Central Bank
through law, an initiative that
"won't come up again for a good
long time," he added.
During the last two and a half
years, the Monetary Policy
Committee made up of the
president and seven directors of
the Central Bank has been an
endless source of frustration
for the productive sector by
fixing higher than expected
interest rates month after
month, thereby hindering
investments that could boost
economic activity.
The current management of the
Central Bank started out in
early 2003 by raising the Selic
benchmark interest rate to 26.5
percent annually, as a means of
fighting rising inflation that
had reached 12.5 percent in 2002
and the economic turbulence
caused by the election of a
left-wing national government
for the first time ever in
Brazil.
The bank did not begin easing
back on interest rates until
June 2003, despite an economic
recession that eliminated the
danger of a new surge in
inflation from an increase in
demand. According to Joao Sayad,
who served as minister of
planning in the 1980s, this
meant the loss of an ideal
opportunity to further reduce
interest rates and boost the
economy.
The Selic rate continued to
decline gradually until reaching
16 percent the following year,
but rose again to a high of
19.75 percent last May. Thanks
largely to this rise and fall of
interest rates, GDP grew by a
mere 0.5 percent in 2003, and
although 4.9 percent growth was
achieved in 2004, this year has
seen the return of mediocre
economic performance.
In the meantime, inflation fell
from 9.3 percent in 2003 to 7.6
percent the following year.
Although this year's target was
to limit inflation to 5.1
percent, it is estimated that it
will end up being closer to 5.7
percent.
In addition, high interest rates
contribute to the overvaluation
of the Brazilian currency, the
real, against the U.S. dollar,
which causes difficulties for
the export sector, despite a
hefty trade surplus expected to
reach 44 billion dollars this
year. In southern Brazil, a
large footwear factory was
forced to shut down, while
agricultural output has fallen
in relation to previous years.
This was an "absolutely tragic"
year according to Antonio de
Salvo, president of the
Brazilian Confederation of
Agriculture and Livestock (CNA).
Agricultural GDP will have
fallen 3.4 percent by the end of
the year, owing to high interest
rates, unfavourable exchange
rates and insufficient credits
for farmers, in addition to the
severe drought in southern
Brazil, he said.
"Today the nearly universal
assessment is that the Central
Bank went beyond what would have
been prudent," and that it
should quickly begin to reduce
its interest rate, although that
was not the only factor
responsible for the low rate of
growth, said Flavio Castelo
Branco, an economist with the
National Confederation of
Industry business chamber.
The problem is the government's
economic policies, whose various
instruments are inconsistent
among themselves, and which curb
the reduction in interest rates,
he told IPS. Brazil has, for
example, a bulky short-term
public debt which requires
constant restructuring, and a
state with excess current
expenses, he added.
To defend the value of the local
currency and fight inflation,
the only instrument available to
the Central Bank is its control
of interest rates; "It can't do
anything else," said Castelo
Branco. Inflation in Brazil is
still higher than the global
average, he pointed out.
But the economist said the
Central Bank has turned a deaf
ear to the demands and analyses
of the productive sector,
allowing its policies to be
guided by a "very closed" circle
of financial market advisers.
"That increases the risk of
mistakes, by delaying the
perception of tendencies and
errors," he added.
Another problem, he said, is
that when it feels pressured to
lower interest rates, the
Central Bank reacts by doing
just the opposite.
Castelo Branco said the Bank
refuses to admit its own errors,
in order to avoid losing
credibility, acting like a
father who, after realising that
he punished his child too
severely, does not back down
because he believes he will lose
authority.
That seems to be the mechanism
that prompted the Monetary
Policy Committee last week to
adopt the decision to lower the
interest rate only slightly,
from 18.5 to 18 percent, when
even conservative economists and
bankers recommended a much
larger reduction.
Strong economic performance is
essential to President Lula's
hopes for reelection in October
2006, now that his Workers Party
(PT) has lost its claim on
ethics as a result of the
ongoing corruption scandals that
broke out in May.
The scandals brought down the PT
leadership as well as around 70
government officials and
employees of state enterprises,
and two legislators who had
previously provided important
support to the government.
With an "isolated" Central Bank,
which has lost the confidence of
broad sectors of the economy,
and a finance minister who is
also weakened by corruption
allegations, Lula has been left
with very little maneuvering
room on the economic front, said
de Carvalho.
The adoption of measures that
would provide a rapid boost to
the economy would be labeled as
"populist" and could cause
instability by making the
financial market nervous, he
explained.
But with a stagnant economy,
Lula would face almost certain
defeat.
The problem is the inflation
targeting policy itself, not an
"excess of conservatism" in
managing that strategy, as the
"new critics" argue, said de
Carvalho. With that same policy,
the previous government only
obtained mediocre results, he
maintained. |
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