Social developmentalism is back!

Leda Catunda - Soft World - 2007
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By FERNANDO NOGUEIRA DA COSTA*

Comment on the international seminar organized by the BNDES.

At the opening of the series of conferences with renowned guest foreign economists, at the Seminar held at the BNDES on Sustainable Development Strategies for the XNUMXst Century, on March 20 and 21, 2023, André Lara Resende outlined the main points under debate.

He preached the need for coordination of public policies, especially monetary policy and fiscal policy, because the exchange rate policy and the control of capital inflows and outflows have not offered problems, since when, in previous Lula administrations, the indebtedness was liquidated external public and accumulated exchange reserves to face external crises.

The change in the foundations of macroeconomic policies with the new government's strategic objective of resuming socioeconomic development imposes this need for coordination. These economic policies cannot be independent.

Historically, after overcoming the regime of high inflation, Brazil has not returned to growth. It remained in “inequality status”, below its potential as a large emerging country. Its low investment rate is, on average, half that of countries in Asia. They invest above 30% of GDP.

The “starter engine” does not work here, as productive public investment has become very low due to permanent fiscal austerity with cuts in public spending. Worse, the high tax burden and the very high real interest rate (8% pa), more than double the second highest rate, Mexico, are discouraging private investment.

Without investment, there is no growth. The false thesis of fiscal risk has been in force for years in the neoliberal media guided by chief rentier economists, as the country has a Gross General Government Debt (DBGG) controlled at 73% of GDP. The low (57% of GDP) Net Public Sector Debt (DLSP) is domestic and the domestic Federal Securities Debt (DMFi) has 91% of public debt securities held by local investors.

Neoliberals start from exaggerating the fiscal problem to justify fiscal austerity and high interest rates. In turn, the social-developmentalists think the opposite: very high interest rates and taxes is a recessive combination, mistakenly used to combat supply inflation – and not requiring control of aggregate demand.

An interest rate lower than the GDP growth rate, raising the latter and lowering the former, would provide sustainability for the public debt. The indicator of the degree of financial fragility of the country (debt service / GDP) proves this mathematically.

It is ineffective to seek a primary surplus in order to overcome the high financial burden imposed by the Central Bank of Brazil with its misguided monetary policy to combat cost inflation as if it were demand inflation. New project of public policies for the resumption of economic growth, in a sustained manner in the long term and with environmental sustainability, the condition is to understand that the State is competent to be part of this project to give dynamism to the Brazilian economy.

Joseph Stiglitz said apparent platitudes. However, they should sound like authoritative arguments, winner of the Nobel Prize in Economics, for the crude economic journalists.

For example, he said: markets alone do not solve social problems. Its key players are short-sighted, that is, they only see the near opportunity and do not address long-term issues.

It became clear that there was a need for collective actions, coordinated by the State, to face the pandemic and the recent banking crisis. For that, I think, we need institutional reform, among others, the Digital Currency of the Central Bank.

The public could now hold book-entry money directly in it, something previously impossible because access to banking required branch networks. Thus, the Central Bank would have a monopoly on supplying money to the economy. The money managed by him could be used to fund government and/or socio-economic development programs.

Traditional financial intermediation would continue to be carried out by banking institutions. They would be capitalized by shares and would be financed through funding via bonds and securities such as time and savings deposits, excluding demand deposits.

Some of the economic ideas of social developmentalism became central while others of neoliberalism were discredited, such as low growth and the concentration of income and wealth. China with developmentalism grew much more.

The assumption that everyone benefits, in a neoliberal world, from the “drip economy” from the banquet table from the rich to the poor has been proven to be false. Prosperity is not shared socially. It is time for Brazil to look for alternative economic models!

Brazil will always be the country of the future – and will it ever arrive?! On the contrary, it has gone through economic and social regression in the last four years.

The Brazilian economy grew before the era of neoliberalism, which began in the late 1980s. There is a need for a new regime of economic policies and long-term growth strategies.

The Brazilian interest rate is shocking! Interest rate of 13,75% pa or 8% pa real interest will kill any economy! In reality, survival only happens because of public banks with subsidized interest on earmarked loans.

With a more reasonable monetary policy, Brazil would have much greater economic growth. The current interest rate discourages the investment rate. The high interest rate is not justified by the inflation rate, on the contrary, it raises costs. Aggregate demand currently does not pressure either the labor market or inflation.

Recent inflation was supply-side: pandemic, war and the breakdown of global trade chains. The sources of inflation were the lack of chips for automobiles, housing, energy and food. Obviously, they are not solved with a high interest rate, on the contrary!

Investments are falling, including in the United States, because of dominant oligopolies or monopolies with market power in the most attractive commercial and technological areas. There is oligopoly inflation.

The rise in the inflation rate had nothing to do with the fiscal problem. On the contrary, the mistaken increase in interest rates increased the government's financial burden. In general, creditors are rich and debtors are poor. Therefore, the increase in the interest rate increases the concentration of financial wealth.

Stiglitz agreed with Lara Resende: the concern with fiscal stability must be related to GDP. Cutting public spending in a fiscal austerity policy, on the contrary, leads to a drop in GDP. The minimal State mentality, prevailing for three decades, condemns any public investment for fear of it increasing the public deficit.

The Central Bank has become inflation-only and excessively independent in Brazil with operational autonomy above that possessed by the US Fed. There is a demand for social responsibility with growth.

If Central Banks cause unemployment, workers must have a say in monetary policy. There is a conflict of interest in a board coming from the financial market, as it is guided by it – and feels it is their duty to represent it!

Fiscal reform must make a tax structure adequate to the social demand for environmental sustainability of growth. Tax more those who do not invest in the economy.

Taxation should format the economy for the green transition and contribute to the fight against inequality in a long-term strategy. Industrial policy returned to the debate as relevant, just as the development bank is essential.

The new BRICS Bank is a thriving financial institution and promotes the green transition in emerging economies. Commercial banks do not undertake such a task.

The Brazilian economy cannot, eternally, only depend on the primary export of commodities and minerals – and not investing in industrial, technologically advanced and environmentally sustainable growth. Industrial and ecological policies constitute the strategy for Brazil to finally reach the future.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network (Available here).


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