By LUIZ CARLOS BRESSER-PEREIRA & NELSON MARCONI*

One of the simplest and most confirmed economic relationships by research says that the higher the investment rate of a country, the higher its growth rate.

In this article we make a proposal for overcoming the long-term quasi-stagnation of the Brazilian economy that may be surprising, but is the result of mature thinking. One of the simplest and most confirmed economic relationships by research says that the higher the investment rate of a country, the higher its growth rate. Second, an ideal ratio between public and private investment keeps the former between 1/5 and 1/4 of total investment, limited to non-competitive sectors of the economy such as investments in energy, water and sewage, roadways, digitization of the economy, health and environmental protection.^[I]

In that case, there is nocrowding out”, that is, public investments will not replace private investments, but will complement them, thus creating more opportunities for the private sector; not to mention that the private sector prefers to invest in projects whose return is more immediate, causing the public sector to end up shouldering the task, often also not fulfilled due to lack of resources, of infrastructure works in poorer regions.

The IMF, through Fiscal Monitor, has just published a report on the importance of public investment. In the executive summary of the report, the IMF stresses the high return on public investment: “empirical estimates based on 400 companies in a large number of countries show… that in advanced and emerging countries the fiscal multiplier reaches its maximum in two years. Increasing public investment in these economies by 1 percent of GDP could create 7 million jobs directly, and between 20 and 33 million jobs when indirect macroeconomic effects are considered.”

In fact, in the period when the Brazilian economy grew the most, that is, in the 1970s, the public investment rate (including public companies) surpassed 10%, reaching an average of 7,8%. It can be seen in the graph below that it fell in the following decades, only recovering between 2008 and 2014, a fact that contributed to postponing, to the following decade, the effects of the 2008 crisis and the resulting reduction in our exports of manufactured goods. Currently, this rate reaches a meager 2,2% of GDP.

After 40 years of mistakes, it seems that we are back to common sense in development. But there are two problems that need to be addressed.

The first is well discussed by the editor of Value. “Ideally, governments should have a pipeline of projects available that can be executed within two years. It seems obvious, but it isn't – just see that since the Temer government's PPI until today, it's always been the same works that come out of the drawers, when you want to announce a plan, and come back to them later (yes, the North-South Railroad is still one of them). Of 63 countries submitted to management assessment, more than half do not have a project list ready”. Therefore, it is necessary to institutionally strengthen this activity in the federal government, through a secretariat or public investment agency that would support the ministries in the formulation and execution of investment projects and deal with the problems associated with them, including the environmental issues inherent to the expansion of the infrastructure.

The second problem is that of financing. Since, in the 1980s, what I called the “State fiscal crisis” took shape, we have been defending fiscal responsibility and associating it with the need to re-establish the State's capacity to have public savings to finance public investments. This capacity was lost even in the military regime, at the beginning of that decade, when the great external debt crisis was added to the fiscal crisis. Public savings, which hovered around 4 percent of GDP at the end of the 1960s and during the 1970s, turned negative from the mid-1980s onwards. , but democratic governments proved unable to recover public savings.

In the graph below, we can observe the behavior of public savings (this time without considering public companies, as this is the portion of savings that depends on the management of fiscal resources – public companies’ savings are derived from their own revenues, in general ), compared to the evolution of public investment under the same criterion. We note that, until the external debt crisis of the 1980s, public savings, which corresponds to current revenue subtracted from current expenditure, was positive, and after that period it returned to being positive in rare years (the last period was the triennium 2010- 2012). The foreign debt crisis, followed by our growing current expenses – even when the country was generating primary surpluses, since the government has been paying, for decades, a very high amount of interest -, reduced the capacity to finance public investments with the own savings government. The government investment rate stricto sensu it was reduced to the level of 2% and remained so, currently standing at around 1,5% of GDP.

Thus, if asked what were the two main reasons that have kept the Brazilian economy almost stagnant since 1980, we would not hesitate to say that it was high interest rates and an appreciated exchange rate, which limited private investment, and negative public savings, which limited public investment, and such savings were also hampered by the policy of high interest rates.

The maintenance of negative public savings was explained, on the one hand, by pressure from rentiers and financiers for high real interest rates, offering as justification “the need to control inflation”. In fact, what was being done was responding to this pressure and, at the same time, practicing the apparently sensible, but intrinsically wrong policy – ​​exchange rate populist – of attracting capital to “grow with foreign savings”.

On the other hand, it was explained by pressure from companies and civil society organizations for tax breaks and the creation of subsidies, from high public bureaucracy for high wages and, in the latter legitimate case, from salaried workers for universal and better quality social services. There was left (and still remains), so very little for investments.

We see no prospect of a resolution to this situation of lack of public savings while the country does not resume the path of growth and, in addition, carry out a tax reform and implement a reduction in expenses with subsidies and a more rational management of the disproportionately high salaries of some server groups; but, on the other hand, we will not get out of this quasi-secular stagnation without the resumption of public investments; and these, in turn, depend on the existence of such savings. We therefore have a vicious circle or impasse. There has, however, been a macroeconomic revolution in recent years that offers a solution to the problem. After 2008, rich countries, both when carrying out the policy of “quantitative easing”, as for financing expenses with Covid-19 in a monetary way, they demonstrated that the issuance of currency not causes inflation as long as the economy is not far from full employment. This is a fact that post-Keynesian economists abroad already knew when they said that money is endogenous and that inertialist economists in Brazil verified when they stated that money is not a causative factor, but a “sanctioning” factor of inflation. Thus, there is room for us to finance, in a scenario of idle capacity, at least part of the public investments with monetary resources, and provided that this practice does not reduce the Central Bank's ability to manage the basic interest rate and influence the other market rates.

Although advanced country governments do not claim to practice cash finance, they have not hesitated to resort to it. The American, European, English and Japanese central banks strongly expanded their purchases of Treasury bonds during the pandemic, as we can see in the chart below, whose source is the Deutsche Bank. Some of them had already been doing it before. We know that we do not have similar macroeconomic stability to that observed in this group of countries, but the adoption of a strategy like that of our economy, duly monitored and with a well-structured project office, technically capable and well articulated politically, including with other levels of government and the private sector, will be able to help us out of the current imbroglio that restricts the resumption of economic growth.

Between March and September 2020, the broad monetary base varied by BRL 845 billion (an increase of 15%), reaching 92% of GDP^[ii] (BRL 6,6 trillion in total). This amount did not cause inflationary pressures; the recent increase in retail food prices and wholesale raw materials is associated with other factors, such as demand and external prices for commodities, the mismatch between supply and demand for inputs as a result of the pandemic and the devaluation of the domestic currency. Therefore, we understand that our proposal, presented below, will not harm the implementation of monetary policy, nor the formation of the basic interest rate or even the market rate.

We therefore propose that Congress approve a constitutional amendment that

1 – Authorize the Central Bank to annually purchase the amount equivalent to 3 percent of GDP (approximately R$ 215 billion at current values) in public securities to be spent exclusively on public investments provided for in the Union’s budget and duly authorized by the Monetary Council Nacional, after analysis by the project office.

In this way, public investment, excluding public companies, would reach approximately 4,5% of GDP (R$ 325 billion at current values), as it is currently at a level of 1,5% of GDP, and we are assuming that the fiscal budget continues to allocate such amount to this expense. The value of public investments, as a percentage of GDP, would be slightly higher than that observed in the 1970s, but it is necessary, as the demands for social and logistical infrastructure are growing, a fact evidenced by the pandemic and the loss of competitiveness of the Brazilian economy, and it is urgent that the so-called depreciated “equipment” be replaced or modernized. ABDIB calculations indicate that public investments of approximately 5% of GDP would be necessary to recover, modernize and expand our infrastructure.

2 – Marina Liuzzi to Panelists (5:03 PM)

3 – https://www.youtube.com/watch?v=l-jgbMlygb0&feature=youtu.be.

4 – The CMN should meet, with Copom's support, every three months to assess whether the country's economy is approaching full employment or not and whether this policy is jeopardizing the management of the inflation targeting regime.

5 – If the CMN considers this to be the case, it must suspend the purchase of Treasury securities, and the Executive must suspend new investments thus financed, thus reducing the public investments forecast for the corresponding year. In this way, the measure will also have a countercyclical character that will help to smooth out fluctuations in the level of activity.

6 – Amounts not invested in the year will not constitute a reserve for investment in the following year.

The decision to double public investment through its monetary financing does not mean that fiscal discipline is secondary; it remains essential for responsible public spending and sound macroeconomic management. For this very reason, the reform we are proposing must be authorized by the CMN, and put into practice in a transparent and carefully executed manner. The quality of spending will be the determining variable for the success of the program, and all the actions necessary to ensure the judicious application and successful management of resources must accompany the option for this form of financing a significant portion of public investments.

* Luiz Carlos Bresser-Pereira He is Professor Emeritus at the Getulio Vargas Foundation (FGV-SP). Author, among other books, of In search of lost development: a new-developmentalist project for Brazil (FGV).

*Nelson Marconi he is the executive coordinator of the Center for New Development Studies at the Getulio Vargas Foundation (FGV).

Notes

[I]In Brazil, for example, this ratio between public investment (including public companies) and total investment reached its peak in the mid-1970s, reaching just over 45%, declining after that period, and currently corresponding to just under 15%; in the 1980s, it reached an average of 27,5% and, in the 1990s, 20%.

[ii] The expanded monetary base includes, in addition to paper money held by the public and bank reserves, compulsory deposits on time deposits and public securities held by the market - including committed operations -, which are close substitutes for money