Author: Merval Pereira

Source: O Globo, 22/03/2008

President Lula has some economic obsessions that he does not give up. One is to avoid “the damn inflation” at all costs.

 

Another is the joy of saying that the IMF is no longer in Brazil and that we no longer have foreign debt. Lula likes to say that he felt the greatest envy when he visited India in 2004 and found that the country had around US $ 100 billion in foreign exchange reserves.

 

Today, we have about US $ 200 billion, which has allowed us to “zero out the foreign debt”. But defining exactly what that is is not a trivial task, because by some technical criteria it would take another US $ 45 billion to cover investments by multinationals that generate remittances of profits abroad.

 

To avoid a return to inflation, Lula is even able to accept that the Central Bank does not reduce interest rates as quickly as he would like, but he is not yet ready to accept that interest rates rise. The role of the exchange rate in controlling inflation is fundamental to current economic policy, but, on the other hand, the appreciation of the real is causing a deterioration in current accounts that may, in the medium term, lead to new external debt.

 

As always happens in all governments, the old dispute between so-called orthodox economists and developmentalists also arises in this area. We have already followed deficit figures in the trade balance, which foresees a much smaller surplus this year, and everything indicates that we will have a deficit current account result, forecasted at around US $ 7 billion.

 

After more than four years of successive surpluses, in January the first 12-month current account deficit since May 2003 was recorded, at US $ 1,169 billion, equivalent to 0,09% of GDP.

 

What scares the government is that the current account was negative by US $ 4,232 billion, a result close to the deficit of US $ 4,95 billion in October 1998, which meant that then President Fernando Henrique Cardoso was reelected that year, but he had to devalue the real right at the beginning of his second term.

 

Orthodox economists consider a small negative result in the country's goods and services transactions to be healthy, because it would mean that we are receiving foreign savings.

 

For this reasoning, as we have a very expensive social assistance system, we do not have conditions for internal savings and, consequently, we do not invest the necessary to guarantee sustained growth.

 

We would have to rely on foreign investments, and that is where privatization comes in as a bone of contention. The so-called developmentalists, on the other hand, consider that external dependence impedes the healthy growth of the economy.

 

It is for no other reason that the government is mobilized to encourage exports of manufactured goods, through an industrial policy to be announced. This chess of the economy, to keep the country on a path of healthy and sustained growth, has additional political complications.

 

The increase in public service continues to happen, and the government is being pressured by strikes in strategic sectors, such as tax auditors, which can even threaten the flow of foreign trade.

 

Two crucial projects are stalled in Congress and the government is not mobilizing its base to vote them: what regulates the strike in the public service, prohibiting sectors such as inspectors from going on strike, and what limits the increase in government spending.

 

Citizens' consumption, which causes inflationary pressures, is also accompanied by an increase in consumption by the government itself, which continues to increase its spending at a rate close to 8% per year.

 

Social security costs, the largest government expenditure, will not be controlled by a new reform, at least in this government. Also because the policy of recovering the minimum wage, which affects Social Security in full, will not be changed.

 

The primary surplus, which will remain at around 4% of GDP, even with the government being able to discount some infrastructure investment projects, is achieved mainly due to the high tax burden, which continues to break records month after month.

 

And the labor reform will not leave the paper until the union centrals continue with the prestige that they have within the governmental structure.

 

In a recent lecture to the Etco Institute (Brazilian Institute of Ethics in Competition) on the informal economy, Professor Friederich Schneider, from the University of Linz, Austria, demonstrated that the informal economy in Brazil is in the range of 41,8% of the official GDP, and one of the main causes is the high tax burden and the rigidity of labor legislation.

 

According to the study by the Austrian professor, the biggest cause of the informal economy, with 36%, is the tax burden, which in Brazil grew from 29,74% in 1998 to 36,40% in 2006. In relation to labor legislation, Brazil is the most rigid of the 21 countries he studied.

 

On a scale of up to one hundred, Brazil has 78 points, one above Mexico and no less than 26 points above the world average. BRIC countries such as China and India have 47 and 51 points, respectively. And the United States has only 22 points, demonstrating how flexible its labor legislation is.

 

Without cutting costs where it should, and without wanting to raise interest rates to contain demand, the government is looking for shortcuts in an attempt to restrict direct financing to the consumer, but not so much that it will hinder economic growth.

 

All of this, and yet another international crisis of which we have no idea of ​​its size, shows that we still need to make many structural changes so that “our dear Brazil” is really protected from the dangers of this globalized world.