Marina and Dilma: Different Visions for the Brazilian Economy

10/02/2014 12:00am

Stephan Lefebvre

Marina Silva unexpectedly became a front-runner in the 2014 Brazilian general election when her presidential running mate, Eduardo Campos, died in a plane crash this August, catapulting her to the head of the Brazilian Socialist Party (PSB) ticket. After this, Silva briefly took the lead in the polls, but in the last few weeks the incumbent, Dilma Rousseff of the Workers’ Party (PT), has recaptured the momentum and the lead in a potential second round match-up with Silva. In an opinion piece written for Al Jazeera, Zeynep Zileli Rabanea explains Silva’s appeal:

With her background being quite different from the regular ruling elite – a woman of African descent from Amazonia – she has been portrayed favourably by the international media both as a disruptive force and as a welcome departure from the usual suspects running Brazil (Rousseff’s workers’ party [sic] has been in power for more than a decade). Silva has even been depicted as a kind of “green” heroine, all of a sudden popping up on the political field to save Brazil from corruption.

The rest of the piece is dedicated to examining this reputation in light of Silva’s election platform. Silva advocates a rebalancing of foreign policy, bringing the country closer to the United States; she proposes signing trade deals with the U.S., Europe and some of the Asian country trading blocs; and she has embraced big agriculture in a series of policy changes, including dropping her opposition to genetically modified crops. In terms of macroeconomic policy she has focused on lowering the government budget deficit and raising interest rates to curb inflation. Could these policies be the appropriate response to a slowing economy?

In a paper published on Monday, CEPR concludes that much of Brazil’s recent slowdown in economic growth is due to bad and or mis-timed macroeconomic policy decisions, with external conditions contributing to a lesser degree. Contractionary monetary policy has been used in times of slow growth despite having little impact on inflation, and fiscal policy has not only been too little to make up for low demand, sometimes it has even been pro-cyclical.

The Brazilian Central Bank enacted contractionary monetary policy during periods of low growth, and in the context of an economy in which raising interest rates (via the Selic rate) is unlikely to lower inflation. Rousseff’s predecessor and mentor, former President Lula da Silva, speaking to Treasury Secretary Arno Augustin, reportedly said, “One day you will have to explain to me why, if we don’t have demand-driven inflation, why we are curbing credit … Without credit nobody is going anywhere.” If Lula had known then that the country was in recession (GDP data lags several months, and was revised for the first quarter), he might also have asked about why the Central Bank was curbing credit, by raising the Selic rate, during a recession. In fact, it has done so three times this year.

It is encouraging that this debate is happening within the PT, and of course, fixing this policy will go far toward getting the economy back on track. For her part, Marina Silva’s economic advisor has said that Brazil needs to fight inflation by increasing interest rates at the outset of the next government. Silva herself has indicated that her government would target 3 percent inflation (as opposed to the current target of 4.5 percent). This is a little strange since such a directive would presumably be implemented by the Central Bank, an institution which Silva has said needs to be more independent from the executive branch.

On the fiscal policy side, Silva has pledged to reign in public spending, a refrain which those in the U.S. are used to hearing from Republicans, not politicians who call themselves socialists. To improve and expand public services while lowering spending she plans to use concessions and public-private partnerships to cut costs. To be clear, concessions and privatizations are not something that Dilma has taken a firm stance against. Several notable concessions were part of Dilma’s efforts to increase private sector investment (ex. airports, oil fields, roads). Silva’s plans include expanding the current program of infrastructure concessions to include more public services and large parts of the Amazon rainforest.

It is reported that Silva proposes to “limit the percentage increase in public expenditure to the rate of economic growth,” and her economic advisor reportedly supports a “strong one-off adjustment that would cause some pain in the short term.” While sold to the public as the lesser of two evils (one writer for the Wall Street Journal said “economists and investors” are certain Brazil has to “reform or die”), these policies are unlikely to boost the economy. Brazil had a thriving economy before the Great Recession, and nothing has occurred in the last 5 years that would prevent it from achieving such economic growth again. What is needed is supportive macroeconomic policy: increased public investment spending, expanded social programs (to support the poverty reduction effects of job creation and rising average real wages), and accommodative monetary policy.

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