Author: Armando Castelar Pinheiro

Source: Valor Econômico, 05/12/2008

The need for reforms to accelerate economic development has been a recurring theme in Brazil since it was verified, two decades ago, that the drop in growth was not a transitory event, resulting only from the external debt crisis. Many reforms have been implemented since then, but in recent years this process has slowed down, despite some important exceptions, such as reforms in the public sector and the judiciary, in addition to infra-constitutional changes in the areas of credit and process codes. Even these, however, date from a few years ago.

The decrease in the reformist impetus is partly explained by the acceleration of growth from 2004. This reduced the malaise with the country's economic performance not only due to the higher GDP expansion rates, but also due to the drop in unemployment, the increase real income, the sharp rise in investment, the relatively loose situation in public accounts, inflation under control and the improvement in external accounts. These advances were believed to reflect structural change; in a sense, the reform cycle would have lost its meaning, since the objective it had set itself had already been achieved.

It is too early to say how much of this growth acceleration was structural and how much was the result of the benign external scenario. Regardless, however, it is almost certain that in the next biennium our economic performance will deteriorate - substantially, in the opinion of several analysts. The median of market projections collected by the Central Bank points to an expansion of 2,8% of GDP in 2009, practically half of the rate forecast for this year. The performance of the labor market and investment will also worsen next year. Will this less favorable picture bring about a resumption of reforms? There are good reasons to think not, but there are also reasons to hope so.

The political framework and the nature of the crisis make it difficult to adopt new reforms. Governor Paulo Hartung's interview with the value of the penultimate Thursday exemplifies why the crisis makes reforms more unlikely: “The time to do tax reform, and this is not a local vision, it is an international experience, it is precisely at the time of prosperity, growth ”. The governor's position is consistent with the political economy argument by which economic expansion generates a surplus - for example, higher tax revenues - that allows to accommodate the interests and fears of influential groups, who otherwise could block reform. The process of political composition becomes more difficult when production and public revenues do not grow, this surplus is not generated, and the uncertainty is greater: “The public administrator already has an uncertainty (revenue drop), an apprehension, we will put another, what is tax reform? ”

Despite the logic of this argument, experience shows that crises tend to accelerate rather than delay reforms. During the crisis, the political cost of opposing reforms increases, due to the risk of being held responsible for the problems it brings, decreasing resistance to measures that would be politically unfeasible in times of expansion. The motivation to propose reforms also increases, as they help to anchor confidence, creating the perspective that the foundations for better future economic performance are being built. This idea was well captured by President-elect Barack Obama, who argued that expansionary fiscal policy to combat the crisis should be combined with measures aimed at promoting medium-term fiscal discipline. In Brazil, a new pension reform could play a similar role, giving the prospect of long-term fiscal adjustment, despite the expected deterioration resulting from the loss of tax revenue with the lowest growth.

Other elements that have leveraged reforms in previous crises are missing this time. When the crisis occurs due to the strangulation of external financing capacity, reforms enter into negotiations with creditors interested in ensuring a sustainable dynamic for the debt. In addition, it increases the influence of actors such as multilateral organizations and foreign investors, who in the past have proved to be important allies of domestic reform groups. This crisis, however, is different from the previous ones, due to the comparatively more comfortable position of the external accounts, which reduces the influence of these actors.

Other factors also conspire against advancing reforms. The crisis has compromised the pro-market intellectual leadership exercised by the USA and England since the 1980s, due to the problems they face today and the perception that the crisis resulted from little and bad financial regulation in these countries. The defense of pro-market reforms has also been weakened by the increase in state intervention in the financial system, from new measures adopted by central banks to capital injections and even the nationalization of banks. Although these interventions are presented as emergency and transitory, it is to be expected that in the coming years there will be changes in the vision of what is the best practice in terms of economic policy. Will the reform agenda, essentially the same as two decades ago, pass through the crisis unscathed?

Another limitation is that we are entering the final quarter of the current government, with the attention of politicians increasingly focused on the 2010 presidential election - it is usually easier to pass reforms in the first year of government. Still, 2009 has no elections and offers a window of opportunity for some advances.

On the whole, these considerations suggest that the impact of the crisis on reforms will depend on its magnitude and the type of reform; for some, such as social security, labor and regulatory, the crisis helps; for others, especially the tax, it gets in the way. Much will depend, however, on the degree of mobilization of the actors involved, from the government to civil society entities.

Armando Castelar Pinheiro, analyst at Gávea Investimentos and professor at IE - UFRJ. He writes monthly on Fridays.