With Brazilian President Dilma Rousseff now facing Aécio Neves (of the Brazilian Social Democratic Party, PSDB) in the second round of elections on October 26, much of the discussion is focusing on economic issues. These are often badly reported and widely misunderstood, so a review of some of the major issues is in order.
First, the record of the Workers Party (PT), which has been in power for nearly 12 years. Their most-cited achievement has been in the area of poverty reduction, with the poverty rate falling by 55 percent since 2003, and extreme poverty by 65 percent. Can the government take credit for this? Mostly, yes. The economy grew much faster during the PT years than during the eight-year mandate of President Fernando Henrique Cardoso of the PSDB, and a good deal of this was due to less constraining fiscal and monetary policy. Income per person grew by 2.3 percent annually during the PT years, even including the world recession of 2009 and the slowdown of the past few years; whereas during the Cardoso years it barely grew at all (just 0.3 percent per year). The government’s expansion of the Bolsa Família program from 16.2 million to 57.8 million people, and an 84 percent real (inflation-adjusted) increase in the minimum wage were also a huge boost to poor people.
But the impact of government policy also raised the incomes of many Brazilians above the poverty line. This includes significant increases in public pensions, as well as a 35 percent real (inflation-adjusted) increase in average wages since 2003. The fact that wages continued increasing even after the economy began slowing in 2011 indicates that there was a structural change in favor of the bargaining power of labor. The economy remains at near-record low unemployment today.
However, since 2011 growth has slowed and the economy went into recession this year. To see how Aécio Neves would jump-start the economy, we can look to the statements of his economic coordinator, Arminio Fraga, former president of Brazil’s Central Bank and hedge fund manager. He proposes to tighten the budget and lower the government’s inflation target – which presumably means higher interest rates too. His argument is that such measures would “restore credibility” to Brazil’s economic policymaking and therefore attract more private investment.
We can see how well such a “return to economic orthodoxy,” as the Financial Times of London described it in an interview with Fraga, has worked in the eurozone or other countries where it has led to prolonged recession and record high unemployment. This is about trying to drive the economy with one foot on the brake, and hoping that investors will reward you for doing so. But investors rarely get excited about a sluggish economy. Fraga, who would be Neves’ pick for finance minister, also wants to cut back on Brazil’s public banks – which would mean less public investment as well.
Neves and Fraga also want to make the Central Bank more independent of the executive branch. In practice, this generally means a Central Bank more willing to sacrifice growth, employment, poverty reduction, and industrial policy to the interests of the financial sector in pursuing – often without success – a lower inflation rate.
President Rousseff was too generous when she said that the PSDB had “governed for just one-third of the country.” It was a much tinier group that benefitted from such giveaways as massive privatizations, while the economy stagnated. It would be surprising if a majority of Brazilians were to vote for a return to the failed, less inclusionary policies of the past.