By LUIZ CARLOS BRESSER-PEREIRA

The Brazilian economy is trapped in a vicious circle of near stagnation

One of my sons asked me the other day why the Lula government was privatizing highways that are monopolistic and, therefore, should not be privatized. Isn't this government neoliberal? Or progressive neoliberal, I added, paraphrasing the American philosopher Nancy Fraser.

No, the current government is socially progressive and developmental: it advocates reducing inequality and government intervention in the economy to increase public investment and promote private investment. However, this government has no alternative but to privatize highways that require investment for which it does not have the resources. Brazil is trapped in a vicious circle of near stagnation.

I understand by almost stagnation the fact that a country does not carry out the “catch up" – the fact that its per capita growth is almost always lower than that of the United States, so that the average standard of living of Brazilians is increasingly moving away from the American standard. Despite reasonable economic performance this year and in the last two years, nothing new has happened in the Brazilian economy that would allow us to say that we have escaped near stagnation, also because the investment rate remains very low.

The Brazilian economy has been almost stagnant since 1980. Today, the gap with the United States is greater than it was in 1980. The direct cause of this near stagnation is the very low investment rate. Both private and public investment is systematically below 17% when it should be around 25% of GDP. Seven percentage points is a very large difference.

If we compare the current situation with the mid-1970s (the last decade in which Brazil grew satisfactorily and was achieving the “catch up“), we will see that private investment, which in that decade was around 15% of GDP, remained at that level, although it should have grown due to privatizations – it should have grown to at least 20% of GDP.

Public investment, which should have fallen somewhat due to the same privatizations, has fallen sharply; it was approximately 8% of GDP, but is now around 2,5%. As a result, total investment has fallen from 23% to approximately 16% of GDP, and the growth rate has fallen accordingly.

The first reason for this is the exorbitant interest rate that has existed in Brazil since the financial liberalization (1992). The real interest rate has been on average around 6% to 7% per year since then, when it should remain around 3% per year, that is, equal to the real international interest rate plus an additional amount to account for the risk of Brazilians investing in Brazil (not foreigners), which I estimate to be approximately 1%.

Therefore, it is twice as low as the real rate that the Central Bank has been practicing and, therefore, a rate that discourages investment. I spoke about the risk for Brazilians, which should be lower than the Brazilian risk, calculated by international markets for investors outside the country to invest here, which is higher at around 2,5%.

The second reason is the tendency for the exchange rate to appreciate in Brazil, which has four reasons behind it: (i) because the interest rate is high in order to attract capital; (ii) because Brazil systematically runs current account deficits of approximately 2% of GDP, when it should keep them around zero; (iii) because Brazil does not recognize and does not neutralize the Dutch disease, and therefore does not have a policy to prevent the exchange rate from becoming overvalued for industrial companies, which reduces the international competitiveness of these companies; and (iv) because the savings rate in Brazil is very low, which is therefore not offset by recourse to internal or external financing.

The actors

To understand the reasons for the first three reasons, we need to consider the actors that cause the low investment rate and the vicious circle of near stagnation. They are the rentier capitalists and their financiers, agribusiness, the Global North with which the first two groups are associated, industrial entrepreneurs, voters and politicians. All are responsible for the appreciated exchange rate, the low investment rate and the near stagnation in Brazil.

The rentiers and financiers, who are dominant, want a high real interest rate (after inflation is discounted) and a low inflation rate (to ensure the above objective). Both groups are liberal: they do not want the State to invest or intervene in the economy; they do not want, for example, the State to have an exchange rate policy that stabilizes the exchange rate and prevents it from appreciating.

Thus, they are happy with a current account deficit of around 2% of GDP and do not want to know about Dutch disease, although this arises when the price of commodities exported by Brazil rises and makes industrial companies uncompetitive, even if they are competitive on a technical level.

Rentiers and financiers are satisfied. They have enough power over Brazilian society to capture unduly about 3% of GDP thanks to the difference between the reasonable average interest rate (3% per year, as we saw above) and the current rate of 6% per year. These high interest rates naturally discourage investment, unless the expected profit rate is high and economic inequality is accentuated.

Agribusiness, although receiving high subsidies from the State, claims to be liberal and, like the two previous groups, does not want to know about a policy of neutralizing the Dutch disease; it wants to make extraordinary profits when there is a tree de commodities.

Dutch disease is a long-term, cyclical appreciation of the exchange rate for industry caused by a substantial increase in the prices of commodities exported by the country, which causes an appreciation of the general or current exchange rate. While for the primary goods exporting sector (agribusiness and exporters of minerals and oil), this more appreciated exchange rate is satisfactory because the increase in their prices offsets the appreciation of the national currency, for industry this appreciation is disastrous. It is the role of the State to guarantee a competitive exchange rate for industry.

In exporting countries commodities, the exchange rate is cyclical because the prices of commodities They also tend to be cyclical: it depreciates sharply when there is a financial crisis and then appreciates, reaches the general equilibrium rate (which balances the country's current account) and finally becomes more appreciated as the current account deficit increases due to the policy that countries mistakenly adopt of incurring current account deficits (“external savings”). Then external debt begins, which will ultimately lead the country to a new balance of payments crisis and a new violent depreciation of the exchange rate, thus ending the cycle.

The Global North (the group of rich countries led by the United States) has no interest in a high rate of investment in its periphery. On the contrary, it aims to prevent developing countries from industrializing, because it does not want competition in the future.

To this end, in addition to recommending that we have current account deficits as long as these do not lead the country to a balance of payments crisis, they seek to keep developing countries economically open to exporting capital (direct investments and loans) and to maintain unequal exchange – the exchange between technologically sophisticated goods, which pay good wages and profits, and less sophisticated goods that are characterized by low per capita added value.

Industrial enterprises, which do not need protection based on the infant industry argument, are in dramatic need of protection against Dutch disease which, in tree de commodities, make them uncompetitive. However, their managers or businesspeople do not know or do not want to know what Dutch disease is, which can be fatal for them.

The domestic service sector, which is very large and diversified, wants interest rates to be low, but its leaders do not have the political power to influence the Central Bank. On the contrary, they end up being jointly responsible for high interest rates because the associations that represent them are run by neoliberal economists.

Voters, especially the working class and employees, criticize high interest rates, but are satisfied with an appreciated exchange rate that increases the purchasing power of their salaries and other income.

Politicians finally follow their voters and are happy with an appreciated exchange rate that makes it easier for them to be re-elected.

Current account deficits and private investment

Liberals claim that the main problem of the Brazilian economy is the public deficit, which causes an increase in public debt in relation to GDP and causes inflation. In fact, maintaining fiscal balance is important, but it is more important to keep the country's current account (the external trade account plus services) balanced, something that only rarely happens.

In fact, rentiers, financiers, agribusiness, foreign interests, voters and politicians are all happy with a moderate current account deficit, because such deficits increase the purchasing power of their incomes and keep everything as it is, including near stagnation.

Now, one of the characteristics of populism is to seek to give voters artificial income that is, after all, harmful to the country. By accepting current account deficits as good (because they imply access to foreign savings), our actors are all populists. But aren't they right? After all, it would be more than natural for capital-rich countries to transfer their capital to capital-poor countries like Brazil.

No, the policy of growth with foreign savings or current account deficits is a policy that contains the cause of its failure). By incurring a current account deficit, capital inflows are greater than outflows, the exchange rate appreciates and, in addition to unduly stimulating consumption, it discourages investment.

This self-failing nature of the policy of growth with external debt ceases to be so if the country adopts an exchange rate policy capable of compensating for the excess capital inflows. Everything, therefore, seems to discourage private investment, which, therefore, has not increased its share of GDP as would be expected.

Finally, it is necessary to consider that Brazilian savings are very low and, although this fact can be overcome by resorting to domestic financing (which is why Keynes and Kalecki said in the 1930s that investment precedes savings), it needs to be taken into account. Savings should, in principle, be almost equal to profits, which, for industrial entrepreneurs, are necessarily low, given the high interest rate and the appreciated exchange rate.

They therefore do not have the resources needed to finance investments to modernize their factories and expand their production, which leads to deindustrialization. Furthermore, by not investing, they fall behind technologically and the economy's productivity remains stagnant.

Agribusiness, on the other hand, makes high profits, but its entrepreneurs invest in their own agriculture and livestock farming and oppose any industrial policy or policy to neutralize the Dutch disease. The rentiers and financiers, in turn, receive high interest and rent, but do not invest in industry because it does not provide the return they desire. They prefer to invest their money in the financial market and its high interest rates or in real estate that yields good rents and increases in value.

In short, the rate of investment in industry in relation to GDP has not increased despite the privatizations that have taken place since the 1970s. Throughout the period, investments were strongly discouraged because they presented an unsatisfactory expected rate of profit, incapable of motivating investments, given the high interest rates that have characterized the Brazilian economy since 1992. They were, therefore, clearly insufficient for the country to resume development and once again achieve the “catch up".

The culture of high interest rates

In addition to rentiers and financiers defending high interest rates and these being necessary to attract capital to finance a current account deficit that should not exist, there is an underlying cause for high interest rates: the culture of high interest rates, everyone's accommodation with high interest rates, which stems from the structural power of capital and a cultural habit that has existed for many years.

Two indications of this fact. In 1964, already under the military regime, savings accounts were guaranteed, in addition to monetary correction, a real interest rate of 6% per year. In 1988, the new Constitution limited the real interest rate to 12%. This was a very high limit, but capital pressured this provision so much that the Supreme Federal Court decided to rely on a complementary law from the international financial system. Thus, the Constitution became a dead letter on this point, while Congress did not move to discuss the necessary law.

The lack of public savings and public investment

Returning to the comparison between the 1970s (the last decade in which growth was satisfactory in Brazil) and the present, it was public sector investments that suffered the most at the turn of the 1970s to the 1980s. Public savings, which were around 4% of GDP, suddenly fell to -2%, a difference of six percentage points.

Two factors were decisive in the decline in public savings and public investment: the foreign debt crisis and the fiscal crisis of the State, which I studied extensively at the time. I now ask: would it be possible for the State to return to public savings and recover at least part of those six percentage points? This does not seem likely. Brazil continues to have negative public savings and the possibility of returning to positive public savings seems impossible.

To increase public savings, the most obvious way would be to increase taxes to offset the excess interest paid to local rentiers and those in the Global North. Since we have seen that this excess is 3% of GDP, the tax burden in relation to GDP should increase by the same proportion, but nobody wants to pay more taxes.

The solution given by rentiers and financiers or, more broadly, by neoliberals is to reduce government spending except for interest. We have seen that public investment has already been reduced to a minimum. As for social spending, it is impossible to reduce it. It would be possible, however, to reduce the perks that the public bureaucracy manages to include in their salaries. The current government has been trying to do something about this problem.

It would also be possible to reduce the incredible and absurd subsidies and tax exemptions, as the current Finance Minister has been trying to do, but in addition to having to neutralize the lobby of those interested in the subsidies and exemptions, the Finance Ministry has to convince many of the members of the government itself, who consider themselves to represent the interests of their areas, and the President of the Republic himself, who must be reelected. In this area, as in interest rates, there are billions to be saved, but the opposing interests are powerful.

Lay off employees? At the federal level, there is no excess of public servants. In state and municipal governments, the excess should be small and the problem needs to be addressed, but it will not make a big difference. Where it would make a big difference would be reducing interest expenses, which would be achieved by lowering the rate to a civilized level that is perfectly compatible with controlling inflation. But who will be able to bring the rentiers and financiers to heel?

Thus, without being able to significantly reduce expenditure and without being able to increase taxes to finance these expenditures, the State is unable to make the public savings that would be necessary to finance public investments, which would compensate for the lack of increase in private sector investment. In fact, the country is unable to eliminate its public deficit, which would allow it to make some public savings, which remain negative.

The rentiers and financiers, however, are satisfied, because they do not want the State to invest – which they call “nationalization”. The rentiers and financiers (the “financial market”) want the State to achieve a primary surplus, a metric that pleases them because it excludes (hides) interest and, nevertheless, ensures that the public debt in relation to GDP does not increase. But the government has great difficulty in achieving even this surplus.

The vicious circle closes

As a result of all this, Brazil is trapped in a vicious circle of near-stagnation. A circle that bears some resemblance to Joseph Schumpeter's secular flow, defined in 1911. In this circular flow, which derives from the logic of neoclassical or orthodox economic theory and its ideal of perfect competition, there are no profits (there is only normal profit, equal to the interest rate), investments are equal to the depreciation that actually occurred and there is no growth.

In the case of the vicious circle of Brazilian near-stagnation, there are profits, but they are low for the manufacturing industry; there are investments and there is growth because sectors of agribusiness, industry and the service sector invest, but these are few, insufficient for the country to escape the near-stagnation in which it has been immersed since the 1980s.

On the other hand, the State does not have the resources to complement the private sector. In the 1970s, it invested around 8% of GDP. Today, it invests only around 2%. It cannot even finance the public investments in infrastructure that are necessary for the country to grow. The solution proposed by liberal orthodoxy is privatization. Governments have been following this path, but the results have been meager. The private sector's appetite and possibilities are limited.

However, some infrastructure investments, whose profits are certain, such as highway concessions, attract many investors and financiers and are relatively necessary. The Lula government, therefore, is moving forward with concessions due to a lack of alternatives.

Other much-needed infrastructure investments do not attract the private sector unless the government subsidizes their investments (public-private partnerships). The potential of these partnerships, however, is limited because they involve government spending, which is kept at subsistence levels.

For 20 years, I have been saying that the Brazilian economy is trapped by high interest rates and an appreciated exchange rate. Today, supported by the new developmentalist theory, I can add that Brazil is trapped in a vicious circle of near stagnation. A circle that is closing in on itself with the state's inability to break it.

By presenting Brazil, its economy and its politics in a new way, in which we can see how the various actors try to keep the Brazilian economy trapped in this cycle, I am forced to be pessimistic about the future of Brazil and its people.

* Luiz Carlos Bresser-Pereira Professor Emeritus at Fundação Getúlio Vargas (FGV-SP). Author, among other books, of In search of lost development: a new-developmentalist project for Brazil (FGV Publishing House) [https://amzn.to/4c1Nadj]

Originally published on UOL portal.