Starting Over: Brazil Since 1985

3. Economic Growth Is the Priority

33 3 Economic Growth Is the Priority Over the last twenty-five years, the Brazilian economy dramatically changed. In 1985 inflation and debt owed to the outside world were the main subjects of interest. Today, a fast-growing Brazil is a respected and active participant within the Group of Twenty. That transformation is the subject of this chapter, which is organized around six topics. The first subject, not surprisingly, is inflation. Its mounting level, until successful stabilization in 1994, prevented progress. In 1999, with devaluation of the real, and once again in 2003, with Lula’s election, doubts emerged about continuity of stability. A second part deals with a revamped public sector. The focus here is twofold: privatization of state enterprises that continued until 2002, and reform of the financial sector. Both contributed to the fiscal reform undertaken in the 1990s and sustained thereafter. A third section examines Brazil’s movement outward. Tariffs declined dramatically in the early 1990s, and exports became a source of dynamism. As increased Brazilian exposure to international competition became the norm, complaints from the industrial sector arose and have intensified in parallel with appreciation of the exchange rate. Fourth is discussion of Lula’s two administrations, starting with retrenchment in 2003 and economic advance in 2004 and beyond. In his second term, the Program of Accelerated Growth highlighted efforts to grow more rapidly by imposing greater 03-2143-7 chap3.indd 33 6/1/11 3:18 PM 34 Economic Growth Is the Priority central control. Macroeconomic principles did not change and, consistently applied, yielded positive results. Return to an active industrial policy was another Lula initiative. The fifth topic treats efforts to integrate such policies within a range of competing ministries and interests. Early attempts have given way to new formulations. Last is Brazil’s rapid recovery from the Great Recession of 2008 and its economic growth of over 7 percent in 2010. Monetary easing and a larger fiscal deficit greatly helped in the midst of declines around the world. That success raised hopes for resumption of high growth levels into the future. Discovery of impressive oil reserves off the coast, deep beneath a salt layer, helped to spur expectations. But renewed global commodity inflation and approaching domestic full capacity ensure monetary and fiscal tightening over the course of 2011. The central bank has begun to increase the interest rate, and cuts in federal expenditures have been announced. Will these be enough? Stopping Inflation Brazil reverted to civilian control in 1985. Income continued its recovery begun the year before. What also did not stop was inflation. With the death of president-elect Tancredo Neves, hopes for a social pact as a solution disappeared. Following the rules of the International Monetary Fund (IMF) since 1982 had not worked. The rise of prices at a rate of more than 200 percent during 1985 required a response: in only four years, inflation had quadrupled. Some novel attempt to stabilize was required. Sarney’s Cruzado Plan The principal economic task confronting the administration of Neves’ successor, President José Sarney, was ending inflation. Figure 3-1 records monthly price increases during his administration. They are not encouraging . Apparent success in 1986 soon gave way to resurgent inflation that reached 80 percent a month by the beginning of 1990. Increasingly, by the mid-1980s, analysis of inflation had become more sophisticated, shifting away from IMF monetary models to more heterodox alternatives.1 There were good reasons. Conventional wisdom did not work very well with a highly indexed economy: Brazil went through seven amended versions of IMF plans after 1982 without success. Inflation doubled while economic growth failed to recover. The first civilian 03-2143-7 chap3.indd 34 6/1/11 3:18 PM Economic Growth Is the Priority   35 government in more than twenty years wanted something else. That alternative was heterodox, versions of which had been implemented in Argentina in June 1985 and in Israel at the beginning of July. Such heterodoxy was based upon prior application of fiscal and monetary measures to eliminate excess demand.2 Relative prices then would have adjusted, and accumulated foreign reserves would have canceled any constraint upon imports. All inflation experienced would be a result of indexation: “Prices rise today because they went up yesterday, in accordance with the perverse ricochet mechanism of an indexed economy.”3 Under such circumstances, there could be an instantaneous fall of inflation and conversion...