Rugitsky, Fernando - Austerity Reaches Brazil - 09.2015

8/18/2019 Rugitsky, Fernando - Austerity Reaches Brazil - 09.2015

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Austerity Reaches BrazilPolicies to combat inequality in Brazil have buckled under

investor pressure.

By Fernando Rugitsky

Brazil’s recent turn towards austerity has been impressive in its swiftness and

severity. Since January, the government has announced successive budget cuts, the

postponement of a major housing program, and contractions in public investment. It

proposed legislation to restrict access to unemployment benefits and pensions, and to

eliminate the payroll ta reduction implemented in the last few years.

!dditionally, the current finance minister insists that this is not enough and that net

year social programs and public services will have to bear further cuts. "he fact that

these changes have occurred in a situation of political continuity # $resident %ilma

&ousseff, from the 'or(ers’ $arty )$"*, was reelected in last year’s election # ma(es

this turn appear all the more puzzling.

+owever, despite the seemingly abrupt policy shift, the embrace of austerity is the result

of longerterm, underlying conflicts that gained momentum during &ousseff’s first term

from -// to -/0, when developmentalist ideas dominated economic policy debates.

$erhaps even more importantly, the reversal shows the privileged position corporations

hold in any capitalist democracy.

Encouraging Investors

In !ugust -// the Brazilian 1entral Ban(’s monetary policy committee opted to



lower the interest rate from /-.2 to /-3 # a surprising aboutface given its decision to

raise the rate in its previous meeting. "he committee maintained a downward course

from there, dropping it to 4.-23 by 5ctober -/-, where it stayed until the following

!pril.

!t the same time interest rates were falling, the government also began devaluing the

country’s echange rate. Beginning in -//, the government changed foreignechange

regulations, imposed new reserve re6uirements, and raised the ta rates on some

financial transactions.

1oupled with the falling interest rate differential and a reduction of international

li6uidity following the aggravation of the financial crisis in 7urope, these measures

pushed up the Brazil’s currency, the real .

!fter reaching the lowest monthly average )/.28 reais per dollar* since the fied

echangerate regime was abandoned twelve years ago, in July -// the real started to

plunge against the dollar, and between 9ay -/- and 9ay -/:, Brazil’s echange rate

fluctuated around -reais per dollar.

"hese simultaneous moves by the Brazilian state were intended to stimulate investment

by undoing two longstanding aspects of orthodo economic policy in the country;

etraordinarily high interest rates and an overvalued echange rate.

<or policyma(ers, the logic was simple # by reducing the cost of capital and by

etension the return on financial investments )by lowering interest rates*, and improving

the competitiveness of national production in foreign mar(ets )by devaluing the real *,

they could encourage investors to transfer capital to productive activities and thus spur

growth.

7conomic policy shifts were not restricted to macroeconomic policy. "he Brazilian

government also attempted to improve the competitiveness of the economy by ma(ing it

cheaper for firms to operate within the country.

"o this end policyma(ers pushed through a number of changes, including renegotiating

the rate of return on public infrastructure contracts, reducing the cost of energy, cutting

payroll taes, and trimming the interest rates charged by public ban(s in order to impose

competitive pressure on private financial institutions. "hese policies # in combination

with the macroeconomic policies # were in part designed to allow for more e6uitable



growth, limiting the profits appropriated by big, concentrated industries.

But these efforts did not bear the epected fruits # output growth and investment

remained stagnant. &ecent revisions to the national accounts data show that the

investment rate, after increasing from /4.: to -.83 of =%$ between -8 and -/,

stagnated in the three following years and then fell almost one percentage point last year

)see graph below*.

Sluggish investment brings down economic growth; the average =%$ growth rate almost

halved # from 0.2 to -./03 # between the first two $" governments )-:>-/*

and &ousseff’s first term.

Note: Quarterly data. Bold line is a one-year moving average.

$art of the failure stems from declining demand for Brazilian eports, which is most

easily demonstrated by loo(ing at the trajectory of the Brazilian economy’s terms of



trade )the ratio of eport prices to import prices*. Between -0 and -//, this ratio

grew more than 03 annually, on average, demonstrating increased global demand for

Brazilian goods and eplaining, in part, the output growth acceleration observed in that

period.

+owever, the terms of trade pea(ed in September -// and in the subse6uent three years

fell at an average annual rate of nearly 03. "his price inversion was caused by a drop in

the international prices of several primary products eported by Brazil )a conse6uence of

the 1hinese economy’s deceleration*.

Brazil’s worsening terms of trade, and the reduction of aggregate demand it indicated,

were bad news for the government’s developmentalist policies. <irms that, on the one

hand, saw their costs being reduced, watched, on the other, as their stoc(s piled up.

?ac(ing epectations that demand would recover, Brazilian firms had little incentive to

increase productive investment.

Insufficient demand was not eclusively the result of international factors however.

5ther changes in government policy also played a role, creating obstacles for the

developmentalist turn. <or eample, policies designed to reduce systemic ris( adopted

from late -/ on led to a contraction in consumer credit.

"here was also a shift in fiscal policy; the government promoted a substantial fiscal

contraction in -// and when it moved bac( to fiscal epansion, in -/-, it prioritized

ta reduction instead of public investment. "hese changes reinforced the downward

pressure on aggregate demand caused by the falling terms of trade.

@et, while shortterm lac( of demand )both global and domestic* is clearly important, it

only eplains part of the declining investment story. "o understand Brazil’s sharp turn

toward austerity it is also necessary to consider the political roots of this economic volte

face.

Capitalist Leverage

In his famous /A0: article "he $olitical !spects of <ull 7mployment,C $olish



economist 9ichal Dalec(i eplained why capitalists oppose full employment. Dalec(i

argued that, even though government policies that boost employment can benefit

capital in the short term by guaranteeing demand for their products, in the long term

these policies face resistance from capital because they remove a powerful means of

shaping government policy # the ability not to invest and create jobs. In the absence

of policies to stimulate demand, employment and economic growth depend almost

entirely on capitalists’ decision to invest.

In order to avoid the heightened unemployment and economic downturns that could

jeopardize their political support, governments develop their policies with the interests

of capital in mind. 1onstant mention of business confidenceC is a manifestation of this

blac(mail # capitalists can threaten an investment stri(eC )to borrow'olfgang

Streec(’s phrase* if governments implement policies that displease them.

"here are, of course, limits to this dynamic. 5wners continually appropriate the surplus

produced by wor(ers in order to reproduce themselves as owners, but if their investment

stri(e goes on for too long their capacity to do so can be dangerously reduced.

1apital almost never bumps up against this limit, however, leaving corporations wide

latitude to shape the basic contours of government policy. "he stagnation of investment

that occurred in Brazil from -// onward demonstrates this political dynamic of

accumulation.

By changing the interest rate policy, imposing competitive pressure on private ban(s,

and disputing the rate of return on public contracts and in the energy industry, the

government antagonized powerful interests. %espite clear incentives to increase

investment, business refused to do so.

Investment decisions are not atomized # firms tal( to each other and often coordinate

their actions. "he economic and the political are two sides of the same social reality, and

as such, investments are subject to bargaining and negotiation.

7ven in a large economy li(e Brazil’s, it is well (nown that big corporate groups control

a significant share of total investment, and that these groups’ decisions, through their

effects on customers and suppliers, have a significant aggregate impact on the economy.

Brazil’s corporate titans aren’t shy about publicly using their veto power; a leading

representative of SEo $aulo’s manufacturing industry recently threatened to shut down



the machinesC if the government raised taes on business. In his words, those who

(now how to turn on the machines, also (now how to shut them down.C

"he capacity of capitalists to resist unwanted government policies depends on numerous

factors, including their own fragmentation and the degree of social mobilization. "he

success of the developmentalist strategy was predicated on a split between industrial and

financial interests.

In hindsight, it is clear that such a schism was overestimated and that the Brazilian

economy is mar(ed by a large interpenetration between industrial and financial capital.

"here is increasing evidence that a growing share of the industrial firms’ revenues comes

from financial transactions.

In the wa(e of the global financial meltdown, one of the main meatprocessing

companies in Brazil went down because of its speculative operations in the foreign

echange mar(et. !nd big Brazilian ban(s and pension funds own substantial shares of

several nonfinancial corporations.

9oreover, the developmentalist policies were not accompanied by social mobilization

from below # they consisted of a set of decisions ta(en without broad public debate

from within a political system that wor(s to impose moderation.

In this contet, Brazilian capitalists could trust that the pressure of an investment stri(e

would effectively undermine and reverse the measures in 6uestion, and that sooner or

later, conventional economic policies would be readopted.

!s !ndrF Singer has pointed out, a tenuous alliance between trade unions and industrial

capital, forged in early -//, was dropped in favor of a reunification of industrial and

financial capital against wor(ers and government policy in late -/-. "he &ousseff

government’s divideandpressure strategy had failed.

'ith investment flatlining, austerity was soon bac( on the agenda. By reducing the

growth of economic activity, low investment decelerated ta collection, putting pressure

on the fiscal policy. !t the same time, the echangerate devaluation increased inflation

and forced the government to retreat from a looser monetary policy.

In !pril -/:, the central ban(’s monetary policy committee (ic(ed off a series of

interest rate increases that made servicing public debt more costly. !s a conse6uence, the

government faced the dilemma of either increasing its fiscal surplus to compensate for



the growing financial obligations or seeing the public debt increase.

%espite their moderate impact, the antiine6uality policies that have been in place for the

past decade claim a growing share of the government budget. Gntil -/, the fiscal

pressure of this redistributive effort was muted by rapid economic growth. But by

slowing down economic activity, the investment stri(e brought the distributive conflict

to the surface.

<orced to choose, elites began arguing that the redistributive policies were unsustainable

and proposed cuts to social programs and public services. "he worldwide trend towards

austerity had reached Brazil.

Austerity Going Forward

But who profits from austerityH 5r, put differently, why did the criti6ue of the

developmentalist policies ta(e the form of a defense of austerity when no balanced

analysis of the trajectory of the public debt pointed toward the problematic scenario

suggested by the conservatives, according to whom the government indebtedness is on

an unsustainable pathH

<urthermore, from the state’s point of view, even if a shift in economic policy toward

austerity convinces capitalists that they have recovered control over the government,

nothing guarantees that, in a scenario of falling demand and piling up stoc(s, firms will

increase investment.Indeed, the substantial fiscal contraction already announced and partly eecuted has led

to a deteriorated economic situation in Brazil. =%$ is epected to fall by more than -3

this year, and a further fall net year is 6uite li(ely. <irms’ capacity utilization is very

low while stoc(s (eep increasing, unambiguously reducing profitability.

But it would be nave to thin( that the proponents of austerity simply ignore, or are

unaware of, its effects. !s Dalec(i himself noted, obstinate ignorance is usually a

manifestation of underlying political motives.C

"wo (inds of motivations are possible. "he first, more obvious one is to put the bra(es



on rising wages # and restore firms’ profit margins # by increasing unemployment.

Before the turn to austerity, some economists had already proposed this route under the

pretet of reducing inflation.

Ilan =oldfajn, for instance, argued in -/: that it would not be possible to bring down

inflation without temporarily cooling down . . . the labor mar(et.C !rmnio

<raga’s declaration during last year’s electoral campaign that wages in Brazil have

increased a lot points in the same direction. "he abrupt deterioration of the labor mar(et

in recent months, seen in rising unemployment and falling wages, has been astounding

and puts the moderate reduction of ine6uality achieved in the last decade seriously at

ris(.

"he second possible political motive is related to the trajectory of public ependitures.

!s Samuel $essKa has suggested, since /AAA public spending has increased faster than

=%$, mainly due to redistributive pressures. !lmost half of the uptic( is due to growing

social programs and the financing of public health and education.

In the absence of a fiscal crisis, real or imaginary, which forces a change in the rules of

access to social benefits and which contains the epansion of public services provision,

the tendency is an increasing ta rate and continuous pressure for the ta burden to be

borne by the richest fractions of the population, given the very high level of ine6uality of

income and wealth in Brazil.

!usterity, then, serves to bloc( demands to curb ine6uality. !t the same time, it

reestablishes capitalists’ mechanism of control over the government, by curtailing

policies to stimulate demand and strengthening the connection between capitalists’

investment decisions and economic growth and employment. !s Dalec(i said, the

social function of the doctrine of Lsound finance’ is to ma(e the level of employment

dependent on the Lstate of confidence.’C

But the shift towards austerity will not be consolidated without conflict. &ousseff’s

aboutface drastically reduced her support among traditional leftwing social movements

and trade unions. "he rightwing opposition opportunistically used this plunging

popularity to create a political crisis and call for her ousting.

!lso in the mi is a major political scandal, involving a significant fraction of the

political parties, the main corporations of the construction industry )among the most



powerful business groups in Brazil*, and the stateowned oil company, $etrobras.

"he seriousness of the political crisis, combined with the economic crisis produced by

austerity, guarantees that Brazil will not get out of this turmoil by bac(stage deals made

within the political system.

<or the ?eft, the lesson of &ousseff’s first term should be clear; a progressive

government cannot carry out policies against the interests of capital without challenging

the social basis of its domination.

"he implementation of a program that can actually transform Brazilian society

presupposes the opening up of the Brazilian state, so that popular mobilization can have

leverage against the pressures of the ruling interests. ! technocratic left that disregards

the centrality of social struggles beyond the bureaucratic disputes within the finance

ministry will not go far.

"he impetus to reverse the turn to austerity can only come from the streets. 5ne can only

hope that, after a decade of demobilization, the ?eft can rise to the occasion.

Documents

Rugitsky, Fernando - Austerity Reaches Brazil - 09.2015