Source: O Globo Online (Rio de Janeiro - RJ) - 21/05/2012

They say cuts have limited, short-term effects and advocate for deeper reforms

The economic incentive measures announced last Monday by the Ministry of Finance - reduction of IPI for automobiles and interest for some lines of financing from BNDES - may not generate the expected impact, according to economists. For them, the government may even generate some improvement in the short term, but this will not be lasting and may even increase the risk of an increase in default in the future.

Professor Armando Castelar, from UFRJ, believes that, given the weak numbers of economic activity, the government is right to propose stimulus to the economy. However, he believes that the repetition of the IPI cut model and reduction of interest on some BNDES lines may not have the expected effectiveness:

- I believe that we are close to the exhaustion of a model that had great success between 2005 and 2010, with the incentive to consumption based on increased financing. Families are very indebted. This model can generate future problems of default, which is already worrying even with employment and income and high. The government needed to ask itself why the economy is still skating, even with such low interest rates, and to review the model, looking for a way to encourage investment - said the professor.

He believes that more horizontal measures, such as reducing bureaucracy and taxes in a more linear way, could have more effects. Castelar even questions the BNDES 'interest reduction:

- This reduction has a greater impact on large companies. And entrepreneurs do not regret the lack of financing, but bureaucracy, tax and labor problems. The government needs to improve the business environment. The results may take a little longer, but it is something more lasting - he said.

Carlos Langoni, professor of economics at FGV and former president of BC, agrees that the measures may generate some short-term relief, but that this will not be enough. In his opinion, the government should take the time to resume an audacious reform agenda, focused mainly on tax reform.

- The government is using specific and selective incentives, which have a positive but limited effect. In addition, the total government effort has been to reduce interest rates. I don't think the problem is in demand, but in supply. The government needs to encourage investment, but Brazil currently punishes investment, savings and formal employment. The government could take advantage of the moment of the world economy, of a long stagnation of the developed economies and of a strong deceleration of the big emerging countries, like China, to vote on the tax reform, which would have great support from society - he said.

Professor Fábio Kanzuc, from USP, affirms that the positive impact of these repeated measures is less and less:

- The population is very indebted, measures like this are becoming increasingly inefficient. And, beyond the limit of the families' indebtedness, there is the limit of the cities, which are already full of cars - he said.