By BRUNO MACHADO*
Any government in Brazil is in a situation of lack of monetary sovereignty and cannot seek the development of its productive forces, since it does not even have control over its own public budget.
Taking into account what is exhaustively repeated in the news, the fear of inflation seems to have become the greatest weapon against the Brazilian people. Based on the past of hyperinflation in the 1980s that hit Brazil, the fear of high inflation has been used as a brake by every current government.
However, since hyperinflation is only caused by the strong devaluation of the currency against the dollar, which occurs when there is a great shortage of dollars available in the domestic economy, this fear is not rational in today's Brazil, with a stable currency and more than 300 billion dollars in dollar reserves.
Furthermore, the hyperinflation of the 1980s was not a Brazilian jabuticaba, having occurred throughout Latin America and was caused by the option for development via external debt, associated with the abrupt rise in interest rates by the US Central Bank. The same occurred in relation to the Plano Real, which despite heterodox particularities such as the URV that scared even the IMF in the 1990s, was just one of the many economic plans that solved the problem of Latin American hyperinflation.
Now that the myths have been dispelled, there is still a debate that needs to be had about what inflation rate is expected in Brazil. Since the creation of the real, the average annual inflation in Brazil has been close to 5%, with many ups and downs, which at the very least casts doubt on whether an inflation target of around 3% (which is never met) makes sense.
The requirement for low inflation, which is usually only met in Brazil during a recession, is suspected to be much more a requirement for stability in the financial market than a search to preserve the purchasing power of workers, who depend on a growing economy to have increasing income.
In this way, the devaluation of the dollar through financial means becomes a weapon of the financial market that seeks security in its profits, serving to destabilize the national economy whenever its interests are not widely placed as a priority. The existence of dollar reserves serves as a defense against these speculative attacks in the short term, but it is not large enough to shield any government from the international financial market, especially Brazil, which has a private and poorly regulated banking system, in addition to not having a system for controlling capital flows.
But the problem is even greater. Since the economy's basic interest rate has a direct and immediate impact on the exchange rate, the Central Bank's role in setting the SELIC becomes more of an intermediary role between the government and the market than a decision-maker. On the periphery of capitalism, countries that are not central have weak currencies and, therefore, become total hostages of the dollar, placing their central banks in almost decorative positions.
The solution to reduce the instability in the domestic dollar price is to improve the economy's production sector. While in Brazil and other peripheral countries the price of the dollar can easily triple in fifteen years, in central countries this variation is usually much smaller, and this has to do with the profile of goods exported by the country in question.
While Brazil exports mainly commodities (which has strong price variations over the years), central countries that export manufactured goods (which have less price variation over the years) have more stable currencies than the real. Thus, the weaker and more unstable a national currency is, the higher the interest paid as a risk premium to holders of state debt issued in that currency.
This does not justify, however, a SELIC that means 8% annual real interest. In recent years, Andre Lara Resende has argued that the SELIC should be composed of the annual inflation forecast plus a risk premium associated with the real as a weak currency. However, such a functional finance strategy would depend on fiscal policy to control aggregate demand, and Brazilian governments have lost decision-making power over fiscal policy due to tax breaks and incentives that are in practice linked to Congress' control over the budget.
Only an economic development plan based on catching up Technological (rise) and perhaps even associated with a gradual nationalization of the banking system could make a scenario of monetary sovereignty possible, but it would face enormous economic and especially political challenges. Any attempt at development via industrialization in Brazil would involve economic risks that the national elite is not willing to assume, in addition to also signifying a change in the structure of the country's economic power, which is currently predominantly agribusiness.
From an international perspective, the political challenge would be even greater, since Brazil was not invited to develop economically by the central countries, as were, to varying degrees, the USA, Japan and South Korea, for example. A national development plan, such as the one drawn up by Ciro Gomes, could not be put into practice, therefore, without some degree of rupture in the Brazilian social structure.
Thus, being held hostage by the dollar, the Central Bank of Brazil does not have the power to set an interest rate based on a strategy of balancing inflation and employment. Furthermore, the federal government cannot even implement a rational fiscal policy that would allow for the removal of the spending cap on investments that will increase productivity in the future and therefore would not harm the notorious debt/GDP ratio in the long term.
Since the financial market, with its arsenal of dollars, is not interested in economic development, but exclusively in reducing risks and guaranteeing profits, any move of this kind by the federal government would lead to a strong outflow of dollars from the country and would require the Central Bank to raise the SELIC rate even further. In this way, any government in Brazil would be left in a situation of lack of monetary sovereignty (with the Central Bank of Brazil acting only as a decoration) and would also be unable to seek the development of its productive forces, since it does not even have control over its own public budget.
On the periphery of the system, everything is much more complicated.
*Bruno Machado is an engineer.
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