Former Brazilian finance minister Maílson de Nobréga has shared with O Estado de São Paulo the obvious, but not necessarily widely reported conclusion that there has been a substantial change in Brazil’s economic policy. The consensus economic policies in Brazil can be traced back to the Real Plan of Fernando Henrique Cardoso and focused squarely on controlling inflation. For the last eighteen years monetary policy from the Banco Central and governmental fiscal policy has been devoted to keeping inflation down at levels familiar to Australians, not the eye-watering 8,000% plus rates that were seen episodically in 1980s and early 1990s Brazil. Understandably, Brazilian policy makers have subsequently had a bit of a phobia about inflation. Dilma appears to have cracked through this fear.
The point made by Maílson is that the government is now focusing on influencing the value of the real, Brazil’s currency, and bringing down interest rates. If this means inflation might creep up a little bit, so be it. As Maílson notes, this is the first real change in Brazil’s core macroeconomic policy since 1994.
Three things are interesting about the changes brought in by Dilma.
First and perhaps foremost, the ease with which Dilma has quietly pushed this policy through points to a real change in how Brazilians and the country’s macroeconomic literati feel about their ability to control inflation. On one level this represents a healthy shift in thinking that opens up some potentially useful macroeconomic policy options. On another level there is some room for concern if the government gets too comfortable with letting inflation drift. What often gets forgotten is the serious damage that inflation does to the poor, of which Brazil still has many, who lack access to the financial instruments necessary to manage the economic stresses of rapidly rising prices. Killing inflation in Brazil has probably been at least as important as Bolsa Familia in tackling the country’s poverty rates — it allowed the bottom quintiles to save, plan for the future, and crucially for the consumer boom, access credit.
The second interesting thing about Dilma’s policy changes is that it demonstrates a very clear recognition of just how much the over-valued real is damaging the country’s industrial base. Sure, the value of overall exports are soaring, but that has a lot to do with commodity prices. The pages of Folha, Estadão, and Valôr have been filled with stories of firms closing down in the face of cheap Chinese imports and, more recently, US markets closing in the face of a rising dollar. Dilma’s concern on this front is very real and very deep. Highly aggressive language about currency wars from her finance minister Guido Mantega was echoed by the president herself this week at the UN General Assembly opening.
The final interesting point is one that will be very welcome to Brazilian businesses struggling to find affordable credit in Brazil to finance new operations. A consistent complaint from firms has been the high domestic interest rates, which in turn helps push up the value of the real. Pushing rates down is part of a strategy of trying to stimulate the economy within the bounds of what the government is fiscally able to do — Dilma does not have as much money to play with as might appear from a survey of the country’s foreign currency reserves.
Debate in Brazil on this is vibrant is likely to heat up, which is a good thing given the very different economic scenario both in Brazil and internationally.