destabilizing stable economics

Brazil May Be About to Give Up its Financial Sovereingty

Brazil May Be About to Give Up its Financial Sovereingty

These are strange times. For those who have been drowning in the craziness milk-shake that is the United States presidential campaign and have not been able to follow other world events (we do not blame you), it should come with some assurance to know that the rest of the world is not doing much better. Case and point is that the acting president of Brasil, Michel Temer, who came to power for being the VP of impeached president Dilma Rousseff, is trying to make Brazil the least financially autonomous nation in the world.

Temer and his cabinet, who have been working towards the implementation of austerity measures in Brazil since they came to power, have proposed a constitutional amendment that will severely limit Brazil’s flexibility in government spending. It would be the 93rd amendment to Brazil’s ‘young’ 1988 constitution. In short, the Constitutional Amendment Proposal 241* (PEC 241 in Portuguese), would create an artificial limit to government spending, which would become pegged to the previous year’s inflation.

The Brazilian economy is facing a dire recession even though the Bovespa stock index and real currency BRBY rank among the world’s best-performing assets this year. The pressure towards austerity is coming from both internal and external players, and the financial markets have rallied well to the prognostic of the amendment’s approval. Despite its failure to produce meaningfully positive results elsewhere, austerity is still seen positively by international financial markets.   

The amendment makes Brazilian fiscal policy hostage to inflation, thus inverting the hierarchy of economic policy in the country; instead of using of its taxes and spending to control inflation, inflation would control Brazilian economic policy. On one hand it makes the job of lawmakers and policymakers a lot easier, on another it takes away powers granted by the constitution to the Brazilian congress and it is, as put by Brazil’s Attorney General, unconstitutional.

brazil

The amendment has been approved by a special commission in Brazil’s lower house on the 6th, and four days later was approved by the lower house as a whole. It comes as a victory to Temer’s austere aspirations for austerity measures had been failing to be implemented in Brazil even during the final days of the previous government. Temer’s own efforts had been facing serious challenges until now.

It is not to say that it all good sailing weather for PRC 241. Portions of the public have come out against the measure. Notably, economists have argued that the debt problem in Brazil is caused by a fall in tax revenue and not because of overspending. Indeed, the high unemployment rates combined with high inflation – among other factors – have caused a real decline in revenue of 2.5%. Meanwhile small business owners in retail have experienced decreases of as high as 30% to their revenue streams.

For those versed in Functional Finance and Modern Monetary Theory this will seem as completely nonsensical. Brazil, currently, is a financially sovereign nation to a good extent. It prints its own currency and taxes on that currency. It, however, has emitted debt in foreign currency, namely the dollar. The amendment would limit this sovereignty, making the Brazilian economy work only within the limits set by the (interior and exterior) factors that affect inflation.

If you have followed our posts for a while, you have read some strong arguments on why austerity is not the remedy for countries facing as recession and that smart fiscal stimulus is much more likely to succeed.

*Some of the sources for this article are in Portuguese.

*This post was written by Carlos Maciel



9 thoughts on “Brazil May Be About to Give Up its Financial Sovereingty”

  • Hey, thanks for the posts so far, keep up the good work!

    One quick question. Inflation in Brazil is currently around 8.5% (according to Trading Economics). What is the main reason for the high level of inflation? Is it the size of the fiscal deficit or something else?

    Cheers!

    • Hey Olafur! Thanks for the encouragement, we are always happy to receive feedback. While I can’t pinpoint the main reason I can think of a couple. I believe the high interest rates have an important impact (Warren Mosler warned about it last year), but there’s also the terrible drought facing many parts of the country have something to do with as well. The vast majority of Brazil’s electricity is generated through hydroelectric dams and some farming was impacted as well. Food increased in price at 12.03% while housing costs (mostly related to electricity) raised by 18.31%. That is not to say the deficit does not play an important role – Brazil has been very poorly managed in the past few years, in my opinion. I am trying to reach out to Vitor Melo who is another of our writers to go more in depth about this, he is much better informed about the current situation in Brazil than I am.

  • I’m curious why you would recommend fiscal stimulus to combat inflation, given that inflation *can be* an indicator that fiscal deficits are too high? I suppose the question is, what is appropriate policy to fight stagflation, when you face real resource constraints? I see no easy way out of this circumstance.

    • Hey Wayne, thanks for the comment. Vitor Mello – who has looked into this issue in much more detail than I have posed a good response to this question, see below:
      “I highly doubt – and this is also to answer the previous commentator, Wayne Vernon – that the causes for inflation are related to high government deficit. In my opinion, there are two main reasons for the inflationary pressure that increased especially in 2015 (after the elections): 1) regulated prices that were being controlled by the government up to 2015, as electricity, fuel, and transport services; and 2) the rapid exchange rate devaluation, that has a huge impact in several consumption goods and services and to which the IPCA (extended national consumer price index) in indexed to.
      The exchange rate policy is then tightly linked to monetary policy. The CB promoted a fast increase of the short-term interest rate in order to attract foreign capital and control both currency devaluation and inflation. What is ironic is that, while doing so to control inflation, high interest rates had a feedback effect on government’s total deficit.
      With roughly 12% unemployment rate, historically low capacity utilization of 76%, 14.25% interest rate, tackling the government deficit that has been increasing due to a decline from tax revenue, as Carlos pointed, by setting a limit bounded by law is complete nonsensical.
      Indeed, Lerner is missed in Brazilian policy. We hope to provide some MMT thought for them!”

      Again, thanks for visiting The Minskys!

  • While the article clarifies that what is being lost is “fiscal” and not ‘financial’ autonomy, the rationale seems a bit misplaced, if we have the whole story.
    The problem with the Brazilian economy is ( X ). ??
    Is it too little employment?
    Is it too much general price-inflation?
    If the latter, caused by ????
    Certainly, austerity will worsen the former.
    And will have a mixed bag of impacts if the latter.
    If Mosler is correct … that the high inflation is caused by increasing interest costs, then the solution should not be austerity because it will, axiomatically, limit growth in the economy and Guv revenues.
    Plus, it sure sounds questionable on Constitutional grounds.
    The government cannot govern in such a straight-jacket.
    The real solution, as with most democracies, is to limit the government’s need for borrowing by using its money-issuance powers in support of its budget, thus freeing spending from any external interest rate intrusion into the national economic outcomes.
    Just print the money – being very Lernerian in P-K stature.
    Por favor, Brazil.

    • Hello, Joe!

      Thank you for your comment! This previous post (http://66.147.244.182/~theminsk/the-brazilian-burden/) is about what I see as being the X problem with the Brazilian economy. As in pretty much everything in economics, there are several interpretations for the crisis (short term shock, too much government spending, too much inflation etc). I give my perspective as it being a more structural issue.
      I highly doubt – and this is also to answer the previous commentator, Wayne Vernon – that the causes for inflation are related to high government deficit. In my opinion, there are two main reasons for the inflationary pressure that increased especially in 2015 (after the elections): 1) regulated prices that were being controlled by the government up to 2015, as electricity, fuel, and transport services; and 2) the rapid exchange rate devaluation, that has a huge impact in several consumption goods and services and to which the IPCA (extended national consumer price index) in indexed to.
      The exchange rate policy is then tightly linked to monetary policy. The CB promoted a fast increase of the short-term interest rate in order to attract foreign capital and control both currency devaluation and inflation. What is ironic is that, while doing so to control inflation, high interest rates had a feedback effect on government’s total deficit.
      With roughly 12% unemployment rate, historically low capacity utilization of 76%, 14.25% interest rate, tackling the government deficit that has been increasing due to a decline from tax revenue, as Carlos pointed, by setting a limit bounded by law is complete nonsensical.
      Indeed, Lerner is missed in Brazilian policy. We hope to provide some MMT thought for them!

Leave a Reply