Tasks of a future left-wing government

Isaac Witkin, Vermont I, 1965.


Considerations on the “Plan for the Reconstruction and Transformation of Brazil” by the Perseu Abramo Foundation

The Perseu Abramo Foundation – presided over by the economist Aloísio Mercadante – and, in particular, the Economics Nucleus of this Foundation – coordinated by the economist Guilherme de Mello – has been prodigal in producing analyzes of the problematic Brazilian economic reality and in generating proposals for confronting the current crisis. The text that serves as a more general reference is the “Plan for the Reconstruction and Transformation of Brazil”, available on the institution's website. But there are numerous texts focusing on specific issues, and the vision of those who coordinate the construction of the PT and Lula's Government program for 2022 has been announced and widely debated in the media. An excellent synthesis of the central ideas can be found in the interview that Breno Altman did with Guilherme de Mello in his program “20 Minutes of Interview”, at Opera Mundi (https://www.youtube.com/watch?v=BTvV-lr6EMk). Another excellent reference is the recent interview given by Guilherme de Mello to the newspaper Valor Econômico on September 13, 2021 and whose headline – symptomatically – was “The PT wants the end of the spending cap. And a new tax rule in place.”

The issue we are interested in analyzing here is that of the concrete political viability – that is to say, of effective implementation – of the program that the PT has been announcing. From the outset, it should be clarified that I have essential agreement with all points of the program. My only fundamental caveat lies in the lack of definition on the question of the independence of the Central Bank[I]. This independence has been correctly criticized by political leaders (such as Roberto Requião) and renowned economists (such as Bresser Pereira) whose utopian-ideological perspectives are not to the left of the PT. By this I mean: the criticism of the independence of the Central Bank is far from being a radical and leftist criticism. The Central Bank does not have the sole or exclusive function of controlling inflation. By defining the economy's basic interest rate and managing foreign exchange reserves, it influences (and ultimately determines) the exchange rate (and, by extension, the competitive exposure of domestic industry and the profitability of all export sectors) and the greater or lesser flexibility of fiscal policy and public investment (systematically circumscribed according to commitments to pay interest on the public debt). In addition, Bacen regulates the banking and financial system, stimulating (or curbing!) competition and oligopolization in the sector and is the main agent for determining the short-term dynamics of all speculative markets (stocks, exchange, futures, terms , etc.). As the late Dércio Garcia Munhoz used to say: “if the Central Bank is 'independent' from the Executive, I will give up voting for the President of the Republic, but I will not give up voting for the President of the Central Bank, because it is he who controls, in fact , the economic policy of the country”.

In addition to this (not so) punctual criticism, I agree with all the other proposals of the program. It expresses points of view that have been constructed in a broad national debate involving the best minds of the country's heterodox economy today. All issues dealt with - tax (progressive direct taxes and exemption on consumption), financial-banking (support for public banks and penalties for banks that operate with spreads abusive), monetary-fiscal (breaking with the Ceiling PEC and easing spending and issuing money, taking Modern Monetary Theory as a reference), exchange rate (volatility control through the active and creative use of reserves, which must be consolidated) are 100% correct and I wouldn't have much to add.

Nevertheless, there is, at the same time, a discrete but important difference in the analysis that I carry out and the one that, it seems to me, guides the exposition of those responsible for the production of the PT program. A difference based on the issue of timing of the proposed changes and, by extension, on the question of hierarchy (above all, temporal) of the reforms to be implemented. In the interview given by Guilherme de Mello to Breno Altman, the interviewer masterfully explores this point: all the changes proposed by the PT – tax, regulatory, break with the PEC do Teto, etc. — will require a lot of negotiation in Congress. They are unlikely to be approved in the first year. And, if they are approved, they will not be exactly in their original terms: Congress will not assume “the PT program” for itself. As if this were not enough, with the independence of the Central Bank, it will not even be up to Lula to nominate his new President in the first years of his eventual mandate. The unanswered question is: how can a policy to promote economic growth be pursued while the new government is still limited to the ceiling rule and coexisting with a liberal management by the Central Bank? This is the point! This is the node!

From my point of view, the new government can be successful and pass important reforms in Congress. But this possibility is conditioned by the performance of the economy already in the first year of the mandate. To be clear: the reforms will be approved if – and only if – the new government has the support of significant fractions of the Brazilian bourgeoisie. And this means saying – as contradictory as it may seem – that the first task that a new leftist government will have to accomplish is to guarantee the immediate increase in profitability (profit) of the main blocks of productive capital in the country.

Is this possible? Yes it is! As? Lowering the interest rate and devaluing the real. The devaluation of the real would impose a new level of protection on the industry, which would recover market, sales and profit mass, at the same time that it would immediately increase the profitability of all export sectors.

The big and obvious problem is that this same movement can lead to (actually: it tends to promote) an increase in the prices of imported and exported products. Negatively impacting real wages. This risk is huge. It could lead to a rapid deterioration in popular support for the Lula government without, at the same time, the new government gaining the necessary business support to “unlock” the reforms in Congress.

I'm going to make a bold proposal: put the issue of inflation momentarily in parentheses. Why? Because it is undoubtedly a matter of great complexity. My thesis is that it is the issue, the problem, the bottleneck of the next government. It is necessary to break definitively with the price control policy based on “Siamese anchors” (interest-exchange rate).

As much as 9 out of 10 economists (from my point of view, deluded by appearances and theoretical formalizations) differentiate between the first four years of the Real Plan (characterized by an essentially rigid exchange rate) and the subsequent years (characterized by the policy of Inflation Targets ), the truth is that, at its core, there is only one policy: when the inflationary dragon sticks its head out, Bacen raises interest rates, widens the internal and external financial profitability gap, attracts foreign exchange and depresses the value of the dollar, imposing a competitive exposure to sectors tradables, which is resolved in stabilization of internal prices. It is urgent to break with this inflationary control pattern. Why? Because it is the basis of our structural crisis, of our deindustrialization. This inflation control pattern involves imposing competitive exposure only to sectors tradables. However, of the three segments of tradables – agribusiness, mining and transformation industry –, Brazil only has a competitive deficit in industry. In addition to Brazil's structural competitive advantages in agribusiness and mining, these segments still have strong support to sustain their profitability: the accelerated growth of China, which has fueled the persistent increase in demand and international prices of commodities. Acquisitions that China itself makes with resources arising from its aggressive policy of conquering foreign markets for its industrial production. The result of this combination of factors is simple: who “pays the duck” for the Brazilian anti-inflationary policy is a single sector: the Manufacturing Industry.

So, if we want to face deindustrialization and adopt a development program based on rescuing and consolidating national sovereignty, it is necessary to overcome the Real Plan (in the broadest sense of the term) and its “Siamese anchors” (interest-exchange rates) of inflation control. This – from my point of view – should be the articulating theme of any popular government project. However, he does not even appear on the agenda. At best, there is talk of “flexibility” of the “Inflationary Targets” policy[ii].About alternative policies to combat inflation there is a deafening silence. Why?

I believe there are two reasons for this. The first is the underestimation of the positive effects of an accelerated devaluation. The second is the underestimation of its impact on the political support of business segments. Let us analyze each one of them with due attention.

The volatility of the Brazilian exchange rate (real X dollar) is unquestionable. In fact, it is so high that the industry has already “vaccinated” itself against these variations, increasing its financialization and betting on the forward and futures markets, often speculating against itself.[iii]. For this very reason, the devaluation of the real must be: 1) announced as an element of the new government's program; 2) be expressive in the first year. If these two requirements are met, the industry will regain the market share it has been losing. And, with the increase in demand and production, it will employ again.

With the increase in the level of employment, the demand for services will grow. Even before any tax reform or break with the Ceiling Rule, the recovery of the economy will lead to an increase in tax collection. And this will generate the necessary resources to increase public spending.

Yes, I am well aware that the ceiling rule prevents the increase in expenses even with fiscal relief. But one thing will be the reaction of the media and the TCU with a deficit-based “easing”. Another will be the reaction (and the audience to this reaction) to surplus-based easing. With slack for interest payments.

And there will be this slack for interest payments! Why? Because it is impossible to devalue the real without falling interest rates. Roberto Campos Neto has already shown – in his management combined with Paulo Guedes – that he is open to working with a low Selic, stimulating the devaluation of the real. He only reversed his low interest policy when inflation took hold. But he could resume it if inflation drops again. And he is likely to take it even further if inflation approaches zero.

Therefore, the point that should be galvanizing all attention is: what will be the PT's inflation control policy? What will be our new “Real Plan”?

But this debate is absent. In part, due to the underestimation of the relationship between the exchange rate and internal dynamics. In part, due to the “crisis of creativity” in heterodox economics, which no longer dares to think about alternative anti-inflationary policies to “what is there” and has surrendered to the consensus of “Siamese anchors”. But there is still a third factor. And, I believe it is the most important: the disbelief that the resumption of growth would be able to galvanize important support among the conservative hosts for the new government.

This question is pertinent. There is no doubt that the Lula and Dilma governments suffered resistance and reaction from privileged social strata. But – and this point is central – not from all privileged social strata, not in the same way, and not at the same moments. At the beginning of his first government, resistance to Lula was great. But it was quickly doubled and Lula began to have such a great degree of support that, even with all the effort and articulation of the coup-mongering media, the Judiciary, the upper-toucanate – the “defenders of the old order and progress for the few” (who created the Mensalão pantomime) – social support for Lula and the government has not waned. On the contrary: it grew systematically, guaranteeing his re-election and the election of Dilma. Both Lula's re-election and Dilma's first election were uneventful. The first effectively “difficult” reappointment was Dilma's reelection. The latter only happened “by points”, conquered in the Northeast, with Bolsa Família and social policies. But Dilma and the PT were defeated in “Sul Maravilha”, where the “defenders of the old order and progress for the few” had created a new anti-corruption pantomime – Lava-Jato – which, this time, galvanized hearts and minds.

What has changed? Why was it not possible to maintain social support? There are several interpretations. André Singer makes a brilliant analysis of the “fights bought by Dilma” in “Putucando Onças with Vara Curta”. This text is absolutely basic to understand the whole process. But it's not enough. What we need to understand to effectively understand the loss of social support is that the economy has lost momentum over time. And it didn't just – or fundamentally – lose due to the repercussions of the 2008/9 crisis or the decrease in China's growth rate and, by extension, the expansion of the external market for commodities Brazilian. The economy lost dynamism due to deindustrialization. This process is like a cancer. He eats inside. It is unapparent. We do not notice it in the “faces” of the suffering person. Nor in the “features” and “simpler indicators” of the economy.

Take the level of employment, for example. What is the most employing macro-sector of the economy? The services. And they are not subject to competitive exposure. The dollar can fall or rise in real terms and this does not affect the internal demand for bars, restaurants, physiotherapists, dentists, manicurists, education, banks, transport of goods, etc. None of these services can be contracted in China. Nor does agribusiness and mining suffer, catapulted by demand … from China. Who suffers from the real strong is the industry.

For this very reason, I have been defending in several interventions: “those who think that the industrialists abandoned the PT because they are ungrateful are mistaken”. In fact, the effort that the Lava-Jato gang had to make to “extract the proper confessions” from some of the biggest national businessmen was genuinely herculean. It involved many months – sometimes even years – of “pretrial detention” for some of the country's biggest businessmen. A treatment that, until then, was only given in this country to the poor. Especially to black people.

It is worth asking whether the resistance of some businessmen to break with the PT government is not a localized exception. How to evaluate the posture, for example, of the business community linked to Agribusiness, which is the productive sector that grows the most in the country? From the outset, it is necessary to understand that there is not ONE Agribusiness, but countless. The ruralista from the cerrado is very different from the traders that operate in the commercial links of this chain (such as Cargill, for example). And commercial links differ from industrial links. In the industrial links, there are very different agents, ranging from the powerful Agroindustrial Cooperatives of Paraná, to BrF, passing through Friboi (whose owners were also arrested and whose companies were also violated by Lava-Jato and the media!). Even if we only take the rural links, there are huge differences in this field. The soybean farmers in northern Mato Grosso and southern Pará who signed an agreement with Greenpeace on the “Soy Moratorium” are very different from the land grabbers in the interior of the legal Amazon who live off deforestation and the illegal timber trade. The plurality of Brazilian agribusiness leaders with specifically rural ties reveals this perfectly well. Kátia Abreu is not Blairo Maggi, who is not Tereza Cristina, who is not Ricardo Salles. The differences are huge. And yes, there is room for negotiation and interlocution with a not inconsiderable portion of “Agribusiness” leaders. These leaders are not blind to the risk of the European Union and China's deepening boycott of our agricultural and livestock production if we do not accept and adopt some “rules of table etiquette”. This is not to underestimate the reactionary attitude of 10 out of 10 Brazilian landowners. It is just a question of not underestimating their ability to perceive challenges and to accept compositions that are beneficial to them in strategic terms. Especially, if and when these compositions are put together and supported by the leaders of the agribusiness chain, who are located, in general, in the industrial and commercial links of the same, and who often occupy important positions in national politics.

In short: I think it is necessary to break away – and vigorously! – with the discourse created by the media (and widely inculcated, including PT leaders) that PT governments promoted agribusiness in general and national champions in particular, and that everyone turned against these same governments. This is so true – and so false! – as to say that the PT, during its governments, made alliances and supported the development and political consolidation of left-wing party organizations (such as the PSB and PCdoB) and/or that the PT gave rise to new left-wing parties (such as the PSOL) that turned against the same PT during the hegemony of the car wash. And truth? Up to (at most) the fifth paragraph. Undoubtedly, as in any courtship and marriage, there were fights, mistakes and misunderstandings. But what matters today is not who was right at each moment. And, yes, why there was so much communication noise, so much fighting and so much reciprocal misunderstanding.

Let's shift the attention of the business community a little to the middle class and youth. Why, in 2013, did so many former PT supporters, PT sympathizers, even PT supporters, take part in the festive June marches “against everything that was there”? This question is much more closely linked to the previous one than it might seem. From my point of view, the answer is the same as James Carville's motto in Bill Clinton's campaign against Bush: "It's the economy, stupid!"

In 2014, the growth of the Brazilian economy was a mere 0,5%. And rates have been gradually declining, year after year (despite the jump in 2010, which only resets the stagnation of 2009). It happens that, when the economy as a whole grows – for example – 1,5% per year, if some sectors, in that same year, grew 3%, 4% or 5%, then many others decreased -1%, -2% or even -3%. The question becomes: what sectors were these? And it's simple to know.

The Midwest, Northeast and North have been growing – before, during and after the PT governments – significantly above the country. When the country started showing mediocre growth rates, the Southeast was already decreasing in absolute terms.

Simultaneously, the PT's economic policies focused on distributing income to those at the bottom. But they also sought – through subsidies and various benefits – to keep alive an industry increasingly oppressed by Siamese anchors (exchange rate and monetary). And PT governments still sought to honor financial commitments and maintain the fiscal surplus.

Let's do a simple exercise. Imagine that income is stable and is equal to 100. Imagine that the bourgeoisie captures 40% of the total and that the vast majority of the population captures a mere 20%. The remaining 40% are taken by the middle class and small businessmen. The PT fights, fights and manages to increase the share of the poorest, from 20% to 22%. And it keeps the slice of the bourgeoisie. How is this magic performed? With the loss of the slice of the middle class, which goes from 40% to 38%. If income is growing significantly, there is no problem. The percentage loss corresponds to an absolute gain. But if income is stagnant, the loss is absolute. And the people take to the streets to “fight against corruption and for meritocracy”. Read: to fight against the loss of relative and absolute income.

Someone could argue that the reasoning above would only be correct if incomes were stagnant, but they weren't. Yes true. She was growing up. Sometimes even at relatively high rates. But the high growth rates occurred in the Midwest, in the Northeast, in the North. And in activities fundamentally linked to agribusiness. The industry was losing, yes. The urban middle class of the “south marvel” was losing, yes. And they were the ones who took to the streets and echoed Globo’s car wash and all the “defenders of the old order and progress for the few”.

Are the analyzes that anti-PTism is based on prejudice against the rise of the poor, black and northeastern people correct? Yes, they are correct. But it's not just because others rise that the middle class revolts. It's because others go up while your income is stagnant. Hence comes the fear. And this fear was fueled by the media. And it found an echo in the industry. Because she was going, yes, with the wind in her head: only in reverse!

The great mistake made by the economic managers of the PT governments was to have believed that the losses that were being imposed on the industry by the exchange-monetary policy could be offset by planning and public investment in a “case-by-case” management. This is the profile of the PAC: identifying strategic areas and investing money in them, with guaranteed financing and acquisitions. Not enough. The critical discourse on “national champions” has to do with this: some companies can be included in this game. But not all. And those who are left out look at the “winners-beneficiaries” with more hatred than the middle-class housewife looks at the maid's daughter who passed the entrance exam and her son didn't pass (What time does she come back?).

The support and approval ratings for Lula and Dilma were enormous. Until 2012. Mensalão did not tickle the image of Lula and the PT government. But in 2013 the protests started where least expected: from urban youth. Lava Jato boomed. The “anti-corruption” discourse took hold of hearts and minds. The 2014 elections were won “by head”. And Congress turned into a well of opposition. Leading to the coup-impeachment of 2016. We cannot repeat this scenario. To do so, you need to get the message across: It's the economy, stupid!

And, if it is the Economy, then we need to take it seriously and in an effectively global and ambitious way. It is necessary to build a new policy to control the “inflationary compulsion” in this country. The 90's were years of high theories for Brazilian Macroeconomics. The Real Plan is a work of great intelligence, a daring collective construction that proved to be extremely effective, effective and efficient. But whose expiry date has expired a long time ago. It is urgent to put a new “Real Plan” in its place. I myself have some proposals about this. I will bring them up for discussion in another text. But, even to understand its urgency and relevance, it is necessary to understand, first, why the exchange rate and monetary policy are our fundamental bottleneck. And, apparently, this is still not as clear as, from my point of view, it should be for many.

*Carlos Águedo Paiva he holds a doctorate in economics from Unicamp.


[I]In an interview with Valor Econômico, Guilherme de Mello declared: “There is no debate, at the moment, about revoking the independence of the Central Bank. We are against the way it was approved. The new government will only get a majority among the directors of the monetary authority in the third year of its mandate. Without that, you are unable to even implant a more bias.hawkish' or more 'dovish'. But that debate has not taken place so far [in the party]. The most fundamental agenda is to attack hunger, misery and unemployment. This is extremely urgent. Therefore, it is an absolute priority to discuss the fiscal framework.”

[ii]According to Guilherme de Mello, in his interview with Valor Econômico: “We are committed to price stability. No one is discussing abandoning inflation targets. The problem is that our design is from 1999. It was adopted in an inflationary crisis, leaving the fixed exchange rate, with excessive rigidity. There's been a lot of change since then. Countries that adopt inflation targets adapted their regimes to the new realities and to the advances in the literature. We still use IPCA [full]. Other countries prefer core inflation. We set goals for the calendar year. Others set targets with longer terms, precisely to accommodate temporary shocks. If we look at target systems around the world, Brazil has the strictest criteria today”

[iii] That's how Sadia went bankrupt: speculating against a possible devaluation of the real. In theory, if devaluation came, it would gain as an exporter what it would lose in the financial market. And if the real continued to appreciate, it would lose as an exporter what it would gain in speculation against the dollar and in favor of the real. What was not “predicted” was the 2008/9 crisis and the size of the financial losses associated with the devaluation of the real. Which, however, prevailed for a short time. The problem was not one of “wrong expectations”. It was just from timing.

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