The problem is public investment

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By LUIZ CARLOS BRESSER-PEREIRA*

Considerations on the current impasses of the Brazilian economy

Economic development, Brazil's fundamental problem, has always been that of a low investment rate. In Graph 1 we have this rate since 1995. It remained around 18 percent of GDP until 2006; grew from then on and between 2010 and 2015 remained at a level of almost 21 percent of GDP until 2013. Since the crisis that began in 2014, it has fallen to a very low level of 15 percent of GDP. Since 2014, the Brazilian economy has been stagnant.

Economic theory has always known the importance of investment. Marx defined capitalism as the mode of production characterized by capital accumulation and profit making. Schumpeter defined economic development as the process of innovations, that is, investments with the introduction of innovations that ensure a rate of profit above the “normal” rate of profit ensured by competition. Keynes understood that there was a structural problem of insufficient demand in capitalism, which lowered the expected rate of profit and discouraged investment. Classical developmentalists defined economic development as the process of capital accumulation with the incorporation of technical progress. The new developmentalist theory added that, given the tendency of the exchange rate to become appreciated in the long term (non-competitive) in countries that intend to develop with external debt (external savings) and/or that have Dutch disease, the competent companies of the respective countries, when evaluating their investment projects, find that they have become disconnected, without access to both external and internal demand, and do not invest.

Until 2014, the prediction of the new developmentalist theory regarding the trap of high interest rates and an appreciated exchange rate was confirmed. This forecast was based on the thesis that the exchange rate in countries like Brazil tends to appreciate in the long term – first, because the government intends to grow with “external savings”, that is, with external debt; second, because the exchange rate depends on the terms of exchange; when the prices of commodities rise, the Dutch disease worsens and the exchange rate appreciates. This is what happened in the exchange rate cycle from 2002 to 2014. From 2003 onwards, the real appreciated again and, as a result, investment in industry was discouraged, while the purchasing power of wages and income of rentiers artificially increased, financing the consumption. Thus, we used foreign debt not to finance investment, but to finance consumption.

Between 1992 and 2018, the interest rate was maintained at a very high level for two main reasons: to attract capital based on the mistaken assumption that “foreign savings” adds to domestic savings and finances investment; and thanks to the excessive power that, in neoliberal capitalism, the financial-rentier coalition – the so-called “market” – assumed.

From the beginning of the 2014-2016 recession, however, the exchange rate did not appreciate again as predicted by the new developmentalist theory. It did not return because, in the context of both an economic and political crisis, the lack of confidence in the Dilma, Temer and Bolsonaro governments and the refusal of the last two to put into practice a countercyclical fiscal policy discouraged investment in the domestic market. And also investments aimed at exports, which the exchange rate depreciation had made more profitable. In 2019, interest rates finally fell, but companies continued to lack the confidence to take advantage of the depreciated exchange rate and low interest rates to invest in exports. Service companies also do not invest because domestic demand has not grown again.

The interest rate dropped from 2019 because, given the recession and the low inflation rate, the Central Bank had no alternative but to reduce interest rates. The country, therefore, got out of the trap of high interest rates and an appreciated exchange rate, and yet companies did not increase their investments even before Covid-19. There is, therefore, a clear crisis of trust between companies.

The Brazilian economy also remains in crisis because public investment has not resumed. Another thesis – that of the fiscal crisis of the State, which I developed in the 1980s – also remained unresolved. By fiscal crisis, I understand the tendency for public savings to be very low, if not negative, and not finance the public investment necessary for the country to develop. This investment must be made in the non-competitive sectors of the economy and must be around 20 to 25 percent of the total investment; in this way total investment increases and private investment is not discouraged but encouraged.

Since the time of the great foreign debt crisis of the 1980s, Brazil has entered a fiscal crisis, no longer having public savings to finance public investment and this has dropped substantially. As we can see from Graph 2, public investment, which hovered around 7 percent of GDP in the 1970s, plummeted to close to 2 percent of GDP by 2000; there was, from 2003, a great effort to increase it and it reached 4,5 percent of GDP in 2010; but since then, and especially since the new crisis that broke out in 2014, it has fallen to 2 percent of GDP. The graph also shows how public investment is fundamental for GDP growth and particularly for the most strategic sector of the economy, the industrial sector. The deindustrialization of Brazil began in the 1980s, when public investment also fell.

The Brazilian economy is thus plunged into a long-term, structural crisis, which has lasted 40 years and has meant near-stagnation, and which has only worsened in recent years, when stagnation has become dominant. A stagnation or a growth of income per capita less than 1 percent per year. As they said recently in Market Carlos Luque, Simão Silber and Roberto Zagha, the “new normal” in Brazil has become GDP growth of 2 percent a year. I remember the turn of the 1990s to the 2000s, when the expected growth rate by orthodox economists, businessmen and the Cardoso government was 3 percent a year; I fought for it to be 5 percent. Today, as our three great economists say, we have come to "accept that growing slowly and being a laggard in the global economy is part of our destiny."

How can this brutal drop in expectations be explained? The most immediate explanation lies in the low growth rates that are being achieved. This quasi-stagnation has been caused by insufficient private and public investment that I have just briefly analyzed. More generally, it stems from the neoliberal economic policy regime that Brazil adopted from 1990 onwards. This economic policy caused high financial instability, a drop in the growth rate, and a strong increase in inequality in all the countries that adopted it, and especially in the developing countries in Latin America that adopted the policy of growth with external debt and stopped using customs tariffs on imports and export subsidies on manufactured goods to intuitively neutralize the Dutch disease and make investments in industry viable. “Intuitively” because policy makers did not know about Dutch disease but they knew that industrialization is fundamental for economic development.

graphic 1. Investment rate 1995-2018

Source: Ipeadata.

Graph 2. Public Investment and Deindustrialization 1947-2019

Source: IBGE and Manoel Pires (IBRE-FGV). Elaboration: Paulo Morceiro.

Are there any prospects on the horizon? In the current government, absolutely none. The median of projections for GDP growth, according to Boletim Focus, is 3,3% in 2021, 2,5% in 2022 and 2,5% in 2023. The 3,3% growth forecast for 2021 does not implies any recovery, but the statistical load for 2021: zero growth in all quarters implies a statistical load of 3,6%. A year, therefore, also lost.

To resume growth, Brazil needs a structural change. Contrary to what the traditional left thinks, it is not enough to reject macroeconomic austerity, invest in infrastructure and make industrial policy. It takes more than that. For the rate of investment in industry to imply a true resumption of economic development, it is necessary to define informal targets not only in relation to the inflation rate and the interest rate, but also in relation to the exchange rate, which must be competitive for the industry; the wage rate, which should grow with productivity; and at the rate of profit, which must be satisfactory for industrial enterprises.

And public investment needs to be increased. To do so, it would be necessary to increase public savings, but Brazilians do not seem willing to do this. There was progress: the lowering of interest rates reduced the drain on public assets carried out by the coalition of rentiers and financiers. But I don't see the necessary reduction in tax breaks moving forward, and the pressure to increase spending in the social area is legitimate.

On the other hand, it is now clear that it is possible to finance part of public spending with the purchase of Treasury bonds by the Central Bank. Rich countries are doing this with good results. That is why I have been proposing that a constitutional amendment be approved authorizing the Central Bank to buy from the Treasury, each year, securities up to the limit of 5 percent of GDP to exclusively finance public investments, however, the release of funds must be subject to approval of the National Monetary Council, which, every three months, will assess the risk of reaching full employment and increasing inflation. The key to monetary issues is to keep them tightly controlled.

* 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).

Originally published on Journal of Economists, April 2021.

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