By ANDRÉ LARA RESENDE*
The Real Plan and price stability did not restore rapid growth, did not reduce the distance in relation to developed countries and, above all, did not overcome the “terrible abyss between rich Brazil and miserable Brazil, deprived of everything
The Real Plan was based on two premises: First, that at the end of a long cycle of rising prices, inflation acquires an autonomous inertial component, independent of its primary causes, which makes it chronic, very resistant to any attempt to reduce it. it through traditional mechanisms for controlling demand and activity level. It also becomes prone to accelerating in the face of any negative supply shock.
Second, to ensure that inflation does not resurface, once inertia has been overcome, it is imperative that its primary causes have been eliminated. Overcoming chronic inflation is a process that takes time.
After the successive failures of attempts to overcome inertia through price freezes, the Real Plan innovated. It adopted a virtual unit of account, daily indexed by current inflation, therefore with a stable real value. The URV, the “indexed currency”, inspired by two original articles by ALR and one co-authored by ALR and PA, was the Columbus Egg that made it possible to overcome the inertia of inflation.
As for the primary causes of inflation, Real's diagnosis was a mix of orthodoxy and heterodoxy. The orthodox component was the observation of fiscal disorder and the lack of transparency in public accounts. The heterodox component was the diagnosis that a large part of this fiscal disorder had its origins in the distributive conflict, in claims, both legitimate and illegitimate, over the national income, which did not pass through the proper institutional channels.
The PEC of the Social Emergency Fund, which was neither a fund nor a social fund, but rather a decoupling of revenues, was the solution found to find space and provide a minimum of realism and transparency to the budget. The most far-reaching measure was the subsequent Fiscal Responsibility Law, which established strict limits and criteria for public debt at the federal, state and municipal levels.
The primary causes of an inflationary process are more complex and more difficult to diagnose than conventional consensus would suggest. The current predominant macroeconomics associates inflation, primarily, if not exclusively, with the deficit in public accounts and the pressure of demand on supply capacity. Therefore, it is assumed that, under any circumstances, it must be combated by raising interest rates and fiscal austerity.
It turns out that inflation is not a unique phenomenon, but a symptom that can have very different causes. In addition to acquiring a component of inertia, chronic inflation disorganizes and makes control of public accounts unfeasible. This is the reason why the document that served as the basis for the explanatory memorandum for the Real Constitutional Amendment of December 1994 states that “fiscal reorganization is the cornerstone of the stabilization process”.
Fiscal reorganization should be understood as a multi-annual, complete and transparent budget, which reflects and organizes society's aspirations, within the limits of the economy's capacity and with a fiscal burden that does not make investment unfeasible and stifle the productivity of the private sector.
This was not the fiscal reorganization implemented over the last three decades. The Treasury's annual cash balance became the primary objective of economic policy and the basic interest rate, determined by the Central Bank, was set at an extraordinarily high level.
The high interest rates, right after the Real, could be justified. It was necessary to overcome distrust in relation to yet another stabilization plan, when external credit had not yet been reestablished. Less than a month before Real's announcement, the agreement had been signed, which ended the moratorium on external debt, but the country had low foreign exchange reserves and depended on the flow of short-term capital. High interest rates would guarantee the attraction of speculative capital, at least initially, which is essential to stabilize the exchange rate.
With exceptionally high interest rates, debt service quickly became a relevant part of Treasury expenses. Monetary and fiscal policies are interdependent and cannot be conducted in an uncoordinated or contradictory manner. However, the Treasury's primary result, which excludes debt service, has come to be adopted as the reference for good macroeconomic policy. Although the interest rate is the Central Bank's main instrument, financial and fiscal orthodoxy exempts itself from responsibility for the cost of debt service.
While austerity requires cutting expenses and increasing the tax burden to make a primary surplus viable, monetary policy is free to raise interest rates and impose a high fiscal cost on the country. Under the pretext of financing a fiscal deficit whose origin is precisely the interest rate policy, the BC is authorized to keep interest rates high.
From the beginning of FHC's second term, once confidence in the new currency was gained and external restrictions were overcome, maintaining high interest rates was a mistake that survived subsequent governments and persists to this day, more than two decades after the stabilization of the Real.
It is understandable to celebrate 30 years of a plan that managed to overcome almost five decades of chronic inflation. There is no need to remember the costs, dramatic for everyone, but especially for the poorest and wage earners, of the inflationary disorganization, which threatened to lead to open hyperinflation.
The Real was a great achievement, but the hope that the end of inflation, as the base document for the Real's Explanatory Memorandum says, could in itself “improve income distribution, combat hunger, allow the economy to grow and create jobs”, was not confirmed. Price stability did not restore rapid growth, did not reduce the gap in relation to developed countries and, above all, did not overcome the “terrible abyss between the rich, industrialized, modern and efficient Brazil, and the miserable Brazil, devoid of everything”, to which the document drew attention. Inflation was defeated, but both Brazils, sadly, persist.
Perhaps it is precisely this frustration, this unfulfilled hope, that, today, three decades later, explains the festival of celebrations and reinterpretations of what the Real Plan was. The end of inflation is celebrated, so as not to be forced to reflect on the frustrations of the recent past and the challenges of the present.
The celebrations of this thirtieth anniversary reinterpreted Real's success as being due to the adoption of a conventional and conservative macroeconomic protocol, based on the tripod of high interest rates, floating exchange rates and fiscal balance, which became the Holy Grail of conventional economic policy. Its adoption would be a sufficient condition for the resumption of growth and any deviation would lead to disaster and the return of inflation.
An attempt was made to link Real's success to a conventional conservative macroeconomic agenda and to associate the return of uncontrolled inflation to any deviation from the script of orthodox conservatism, of austerity fiscalism. A stabilization plan, which started from an innovative idea, to overcome a characteristic of chronic inflation, never understood by conventional theory, has now been reinterpreted as a straitjacket in defense of macroeconomic orthodoxy.
Given the flagrant inability of the conservative prescription to lift the country out of the mediocrity in which it has become mired, the insistence on the script of austerity and high interest rates, currently prevalent among analysts and the mainstream media, despite being increasingly criticized abroad, calls for an explanation .
I have the impression that the dominance of macroeconomic neoconservatism is due to a lack of imagination on the left. It is due to its insistence on an anachronistic welfare recipe and its inability to confront the old vices of patrimonialism and corporatism. The counterpoint to fiscal reductionism cannot be an alliance with the forces of patrimonialism and corporatism. On the contrary, it is necessary to recognize and combat the forces of illegitimate “capture” of income, which oppose the “creating” sources of income. The forces to capture income are, today, both in the executive and legislative branches, and increasingly, also in the judiciary, agencies and local authorities.
The case of PEC 65/2023, which gives administrative and financial autonomy to the Central Bank, is exemplary. Under the pretext of consolidating the BC's autonomy, it withdraws its budget from the LDO, linking its expenses to a supposed revenue from “seignorage”, a concept from the time of metallic currencies, which today, when moving quickly towards digital scriptural currencies, is practically irrelevant. The proposal is just a way of linking revenue, which belongs to the State, to the BC budget. A classic corporatist expedient to escape democratic budgetary discipline. This balkanization of the budget, through the proliferation of linkages, is precisely what led to the fiscal disorder of the time of chronic inflation, as diagnosed in the document that gave rise to the Real.
Patrimonialism and corporatism are not exclusive vices of the left, as is once again evident with the BC's financial autonomy proposal, but it is the left's inability to distinguish them from legitimate welfare that opens space for the predominance of a anachronistic and flagrantly mistaken conservative recipe.
Faced with the predominance of conservative prescriptions among analysts, the mainstream media and, above all, the financial market, left-wing governments resort to a “technocratic pact”. Technocracy operates the State in vital areas, including and primarily finance and the Central Bank, while the other areas of the executive, “non-vital”, are distributed among representatives of the income capture forces of the Legislature, the Judiciary and society. A condition that is defended as necessary for governability, in a coalition presidentialism without true political parties.
The combination of the technocratic pact with coalition presidentialism, which kept the country in a quagmire of mediocrity for three decades, now shows signs of having reached its limit.
While the fiscal technocracy insists on increasing the tax burden, the BC, which with PEC 65 joins the corporatist and patrimonial forces, insists on maintaining extraordinarily high interest rates. Interest supposedly required to finance the primary deficit, but whose result is an increase in the nominal deficit and a reduction in economic growth. Rising interest rates increase debt and reduce investment, which, combined with an increase in the tax burden, suffocates the economy and reduces growth. There is no more effective recipe for an explosive trajectory in the debt/GDP ratio, currently chosen as the main indicator of economic risk. This reinforces the chorus of financial/fiscal orthodoxy in relation to a supposed “fiscal risk”.
I conclude with the outline of a roadmap to escape the dictatorship of lack of imagination and put the country back on the path to true development.
(i) Reform State governance with the aim of controlling patrimonialism and corporatism and making it in favor of the citizen, not a source of bureaucratic difficulties. Ensure safety, sanitation, health and quality education. Valuing public service, with training and permanent improvement, not an exclusive focus on cost containment.
(ii) Intelligent regulation to bring the economy closer to the ideal type of competitive economy, something diametrically opposed to “laissez-faire” neoliberal, closer to German ordoliberalism, where the strong State is the guarantor of the institutions that enable society's productivity.
(iii) Multi-annual program of public and private investments, based on major long-term objectives, with permanent and transparent monitoring of the evolution of costs and returns.
(iv) Coordination of monetary and fiscal policies – interdependent and inseparable through a small council of experts, of notorious knowledge, capable of opposing the ideological straitjacket of macroeconomics adopted by financial analysts and the mainstream media.
Without rescuing our imagination, kidnapped by financial and fiscal orthodoxy, we will be condemned to mediocrity, to the straitjacket of orthodoxy.
*André Lara Resende He has a PhD in economics from the Massachusetts Institute of Technology (MIT) and is a former president of BNDES. Author, among other books, of Consensus and nonsense: towards a non-dogmatic economy (Penguin). [https://amzn.to/3YCZNrx]
Originally published in the newspaper Economic value.
the earth is round there is thanks to our readers and supporters.
Help us keep this idea going.
CONTRIBUTE
