Does the economy favor re-election?

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By PAULO NOGUEIRA BATISTA JR.*

Barbarism does have a chance of winning again in the presidential elections

A little over a month ago, I published an article here with a dramatic title: “Time to go for the jugular!”. I argued that Bolsonaro is going through his worst moment, but he can recover and run for re-election with a great chance. And that it is, therefore, necessary to overthrow it now, in its weakest phase. Since the article was published, the possibilities for the government's recovery have become more evident. I no longer see almost anyone daring to say, as many used to say, that the president won't even make it to the second round of next year's elections.

That's a shame, of course, but we have to be realistic. I want to resume the discussion today, focusing on the economic aspects, without repeating the arguments of the previous article.

The recovery of the Brazilian economy

Evidence is accumulating that the economy is picking up momentum, despite the second wave of the epidemic. This results from a combination of factors. From abroad comes the increase in foreign demand for Brazilian exports, led by the rapid growth of the two largest economies in the world, the United States and, above all, China. Linked to this, and especially to Chinese expansion, we have a cycle of high prices for commodities exported by Brazil and, as a result, a pronounced improvement in our terms of trade. The depreciated real also contributes to the increase in exports.

Internally, the indications are that, with great cost and suffering, companies and individuals – yet another example of the creativity that characterizes Brazilians – have adapted to the pandemic, which also favors a certain recomposition of economic activity. In addition, and despite the recent increase in the basic interest rate managed by the Central Bank, activity seems to respond, with a lag, to the decrease in interest rates that began in mid-2019. As for fiscal policy, it seems likely that it will end up being, in practice, much less restrictive than what the government's economic team had announced or wanted. There may even be fiscal expansion in the second half of the year. And it should not be ruled out that an evaluation a posteriori of fiscal policy, based for example on the variation of the primary deficit adjusted to exclude cyclical effects, will indicate neutrality or even a certain impulse in 2021. For these reasons and others, there was a general reassessment for the better of GDP growth forecasts this year. There are already those who project 5% or more.

I note, in passing, that this growth has nothing to do with the structural reforms sung in prose and verse by the market, the corporate media and Minister Paulo Guedes. Not only because they have made relatively little progress (and just as well because the government and Congress have formulated them in a highly questionable way, to say the least), but also because many of them have a dubious impact in terms of reactivation. For example, the “confidence effect” on private investment, via a decrease in long-term interest rates, is uncertain and, at best, small, and may be neutralized by contractionary effects on the demand for some of these reforms.

Recovery is not spectacular

I am well aware, reader, that the ongoing recovery is far from spectacular. It focuses, for the time being, on the primary export sector (agriculture and mineral extraction). Industry and services remain weak. The economy just returned to its pre-pandemic level, which was, remember, a depressed level after six years of recession or mediocre growth. Much of GDP growth in 2021 (calendar year over calendar year) derives from a statistical legacy, and growth over the year will be much lower than the year-on-year rate suggests. Projections for GDP in 2022 are still modest – around 2 to 2,5%, according to a weekly survey by the Central Bank.

It can be questioned whether results like these will really help the government from a political point of view. All the more so as – and this point is crucial – the job market remains disastrous. Unemployment reached record levels and real wages suffer from this and from the corrosive effect of high inflation, caused by supply shocks (exchange rate, commodities, electricity). It also cannot be ruled out that new adverse shocks may occur with effects on GDP, employment and/or inflation. For example, a blackout in the electricity supply. Or a third destructive wave of the pandemic.

Opponent has economic ammo

Despite this, it is more realistic, I believe, to admit that the general economic picture will evolve positively until the 2022 elections, favoring the president's reelection. With the exception that forecasts in the economy are always subject to rain and thunderstorms, I would say that inflation should subside, the expansion of economic activity should probably continue and may even gain momentum, providing, with some lag, the recovery of employment.

A fundamental factor is the advancement of vaccination, albeit with a truly criminal delay. Another – less commented –, the expansion of public spending from now until the election.

Readers, I do not want to spread discouragement, but I believe it is necessary to recognize that the government will have the ammunition to promote a relatively flexible fiscal policy and, in particular, the significant expansion of the Bolsa Família program, with a strong electoral impact. This is one of the reasons, as I indicated above, for revising GDP growth projections upwards. The statement may come as a surprise, since it goes against the dominant discourse in Brazil, including that of the government's economic team, that “Brazil is broke”, “The State has gone bankrupt”, “we need urgent fiscal consolidation”, etc. As it turns out, this scaremongering was never well founded, as I and other economists have repeatedly explained in recent years.

There is a specific factor that helps the government. The constitutional spending ceiling is readjusted in nominal terms, each year, by inflation accumulated in twelve months up to June of the previous year. The ceiling for 2022 will be corrected with inflation at its peak. How will the government use this space? Naive question, of course. Minister Paulo Guedes has been giving the clue in repeated statements. He said, for example, that the PT deserved to win four elections because it created Bolsa Família. He also said that he admits to extending the emergency aid for a few more months as a bridge to a new and expanded Bolsa Família. Imagine, reader, the political impact of a boosted income transfer program – and perhaps renamed so that Bolsonaro can call it his own!

If there are difficulties with the spending ceiling or some other legal obstacle, does anyone doubt that a way will be found around them? In the fight between the fight for re-election and possible fiscal scruples of the economic team or the financial market, who will win?

An appeal to the reader

For these and several other reasons, also of a non-economic nature and not addressed in this article, it must be admitted that barbarism does have a chance of winning again in the presidential elections. No wonder I've been saying and repeating: it's time to go for the jugular!

Assuming that there is no Bolsominion lost in this column, may I end with a request to my dear male or female reader? Except for really extraordinary reasons, be sure to do your part and attend the demonstration on June 19th and the ones that will follow! This is not the time for laziness and petty cowardice. It's not the time to stay at home, anguished, protesting on social media or whining to friends and family. Take all sanitary precautions and attend.

And wear black as a sign of mourning for the nearly 500 victims of Covid-19. Black, not red. The demonstrations – and I think the leaders know this – must be broad, transcending the left and including all those who oppose barbarism.

*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. Fhi vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard: backstage of the life of a Brazilian economist in the IMF and the BRICS and other texts on nationalism and our mongrel complex (LeYa).

Extended version of article published in the journal Capital letter, on June 11, 2021.

 

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