posted on 09/12/2022 03:55
(credit: Personal archive)
Senior researcher at the Peterson Institute for International Economics (PIIE), a renowned American think tank, in Washington, economist and writer Monica de Bolle considers the situation of the Brazilian economy critical and warns that Brazil is not immune to the ongoing stagflation process. in the largest economies on the planet.
Stagflation is the worst of all worlds in economic terms: there is no growth, prices keep rising and unemployment rises. The current moment in the country, of a little growth and inflation losing strength – which has been used in the campaign of President Jair Bolsonaro (PL) – is temporary. The expert points out that the country is on a different timing than the rest of the world. “The detachment is temporary. It is never permanent, because Brazil is not on Mars”, she summarizes.
The analyst predicts that, at the beginning of 2023, the country will plunge into the process of global stagflation and the effects here could be much worse, because the economy is not dynamic, in addition to being disorganized. Monica analyzes that, in large part, this derangement is the fault of the current government, which, in order to win the elections at any cost, is creating unsustainable fiscal bombs. “Brazil is growing artificially. It’s like a patient surviving on ventilation, full of tubes”, she emphasizes. Therefore, the government’s optimistic speech is “from the podium”.
The following are the main excerpts from Monica de Bolle’s interview given to Mail:
The international economy is in a scenario of high inflation and deceleration. How do you assess the situation?
It is very complicated, because there is an extremely relevant supply shock in the world, which is the war in Ukraine and the countries’ response to Russian oil and natural gas. The moment is complicated for Europe in terms of growth and inflation, because of what is happening. Before the war in Ukraine, there were already several other temporary supply shocks related to the pandemic. But this one is big and permanent. I would say it is at least comparable to the first oil shock of the 1970s in terms of impact on the world. And there are still other sequels and other shocks happening in a relevant part of the world economy. China, for example, with the zero covid policy, with the lockdowns, provides supply shocks with the war. For the world economy, this scenario is somewhat stagflationary. You reduce growth and you have to live with higher inflation, which is not very responsive to traditional monetary policy, because it is a supply shock. Central banks are in a kind of snooker, because they are going to raise interest rates, yes, because there are second-round effects that need to be contained, so as not to take root inflation.
But do you think this problem tends to last as long as there is war in Ukraine?
It ends up going beyond the war, because let’s suppose that in the next few months, even if Ukraine wins the war, it wins, in quotes, having lost, because a good part of the country has been destroyed. And, on the other hand, Russia remains an international pariah. This picture of rising energy prices will continue to apply, it does not disappear overnight just because the war is over. Therefore, there will be prolonged coexistence with a somewhat stagflationary scenario for the world. This is the worst of the worlds in terms of politics and economic policy, because there is no way to respond.
Could this issue extend to 2023 and 2024? How will the world get out of this scenario?
It certainly extends to 2023 and could extend to 2024. It’s hard to say, because it depends on how countries react and whether there will be compensation mechanisms via renewable energy supplies. But most likely, you still have some stagflation in 2024. It is, yes, a long scenario.
Here in Brazil the government says that the country is taking off and taking off from the world. Isn’t it a bit contradictory?
Brazil, at the moment, is growing. But it’s a separate case, because it’s in an electoral cycle and there have been these attempts — I don’t have another word — to buy voters. These benefits end up being a short-term stimulus to the economy. None of this is sustainable. In the end, you can isolate Brazil for a few months, but not forever.
What cost can we expect from the consequences of this package of measures in the future?
This has a high cost. The stagflationary cycle that is happening now in the world does not yet occur in Brazil. This lack of synchrony between Brazil and the cycle of the global economy as a whole is normal. Things in the economy are never in perfect sync. It will affect Brazil in a much more complicated way. It is difficult for everyone, even when there is fiscal space and necessary economic dynamism, as is the case in the United States. The US economy is dynamic and does not have the energy problem of Europe. In Brazil, it’s not like that, it’s not a dynamic economy and it wasn’t before Bolsonaro. It is a country that is very dependent on the global economy in general, and this is something that has both positive and negative repercussions. Brazil will also go through a situation of stagflation. If the Fed (Federal Reserve, the US central bank) has difficulty dealing with the stagflationary scenario, imagine the Brazilian Central Bank.
At the time of Dilma, the scenario was similar and the country was at risk of entering the process of fiscal dominance. Interest rates are almost at the same level as that period. Is this scenario possible, now, after so many fiscal measures and government promises?
Of course you can, because there’s a lot out of place. The Brazilian economy is completely disorganized thanks to Paulo Guedes. This picture can, in a stagflationary scenario, end up resulting in deleterious things. What worries me the most is that Brazil is not able to articulate an economic policy in this global scenario, because monetary policy has its limits in terms of inflationary containment. It is very complicated to have a set of rational policies that are effective in this context. During the Dilma Rousseff (PT) government, there was also an important external shock, with Europe in crisis. There are parallels, but there is a fundamental difference, which is the current political polarization. In this scenario, stagflation will be a serious problem, not only for economic policymakers, but for political systems. In the stagflation scenario, politics is able to do very little. And that, in a place like Brazil, tends to be even worse.
In the campaign, all candidates talk about the need for a new fiscal framework. The spending ceiling is on the floor. The Central Bank will not be able to lower interest rates anytime soon. And what scenario will that be?
The spending ceiling has already fallen and we have known this for some time, it was inevitable. Given the volume of inheritance in the tax area, there is no room for a completely rigid rule. The main problem was the way it was implemented in Brazil, with extreme rigidity, which was going to implode. The ceiling lost credibility the moment its design went bad. Now it is not possible to replace the ceiling with another ceiling. In terms of fiscal rules, the country needs to have some dynamism, because things change and the fiscal framework has to keep up. What seems to work, in terms of international experience, are more flexible rules that are compatible with the economic cycle the country is going through.
Would the current government have the credibility to change this framework?
Neither the current government, nor any other. Brazilian society is no longer willing to tolerate anything. It is difficult to see, in the short term, someone proposing to cut and control expenses. On the other hand, you have a huge problem within the National Congress. The Congress that will emerge from this year’s elections will be more or less the same. It is a parliament that is happy to receive money from Bolsonaro, and will demand that from any other president. This is also not sustainable. I don’t want to sound apocalyptic, but I think that if we think, today, that the country is ungovernable, the tendency is for it to be even more so, whoever wins the elections.
Looking at the government proposals of the presidential candidates, do you have any solutions?
Nobody proposes a solution, this is the main problem. Government programs always tend to ignore the external economy and how it will impact Brazil. No government plan does that with that kind of lens. Brazilian economists who have been in Brazil forever since the 1990s are not part of the international debate. They are completely out. All government programs have serious problems. Some have one or another feasible proposal, but none of them will solve the magnitude of the problems that Brazil will face, in addition to the ones it already has.
But what most draws the attention of extremely unfeasible proposals?
All of them are fanciful and incomplete. I wouldn’t necessarily call the proposals absurd. The problem is that they do not take into account what Brazil means as part of planet Earth. The world has gone through a pandemic and is extraordinarily different from what it was in the last elections. There is an immense discontinuity that is not taken into account. You can’t want to think with guidelines similar to what I thought in 2018, because the world has simply changed.
And how to insert Brazil in this new world? How to prevent it from continuing to be left out of the new changes in the international scenario?
The most important thing, in this context, is that future economic policymakers think and reflect not only on what is important for Brazil internally, but also on how its insertion in the world is affected by shocks in profusion in the world economy. It lacks this view that, for better or for worse, Brazil belongs to the world and what happens in the country, in terms of economic policy, depends on what is happening abroad. Now, Brazil is growing artificially. It’s like a patient surviving on ventilation, full of tube. This growth and increase in employment are directly related to the electoral cycle and the government’s intention to win the elections at all costs. Naturally, problems manifest themselves later. We can see this, but convincing the population, in general, is an almost impossible task.
The government has an optimistic speech. He states that Brazil has resumed in V, is detached from other countries and that the economy will boom…
The detachment is temporary. It is never permanent, because Brazil is not on Mars. Brazil is on Earth. The country would only have a permanent detachment if Brazil were on another planet, but it is not. It is not convenient for the government to talk about the problems that lie ahead, because it is an election time. Economic discourse is political discourse. It is not a technical discourse about what is happening. It’s a platform.
One of the arguments is the decrease in the debt-GDP ratio due to inflation. But there are a lot of precatories under the rug…
This argument of debt-GDP decreasing because of inflation the general population cannot understand. This is an alien effect for any ordinary person. In this you fall into the communication problem. The important thing is to communicate that there are several things planted that will explode next year. It is important to say that the scenario is inflationary, regardless of what the Central Bank does. People need to be prepared for this. The trend is for Brazil’s growth to slow down. As no one speaks, the government’s discourse prevails. But people are not necessarily convinced by this because they are seeing inflation eat up wages.