Brazil’s populist president names liberal finance minister

Brazil’s populist president names liberal finance minister

Brazilian president Dilma Rouseff has appointed Joachim Levy to new Finance Minister post. But Levy faces many challenges if he is to balance Brazil’s budget.

Guest post by Dr. Daniel Friedheim

After running a populist re-election campaign, Brazilian President Dilma Rousseff now promises to govern as a balanced-budget liberal. Acting under economic pressure form international markets and political pressure from the ballooning Petrobras kickback scandal, she has appointed orthodox economist Joachim Levy as her new Finance Minister and top economic policy maker.

Levy promised to deliver budget surpluses starting next year, but how long will Pres. Rousseff hold off the socialist wing of her ruling Workers’ Party once Levy starts cutting spending and raising taxes?

Levy, the 53-year-old investment head at the country’s 2nd largest private bank, Bradesco, earned his liberal reputation in statist Brazil by balancing budgets for Brazil’s first Workers Party president, Luis Inacio “Lula” da Silva, who won election in 2002 by promising voters less inequality while promising markets liberal economics. It worked, leaving Lula popular enough to anoint Rousseff his successor, assuring her election as President in 2010. Levy had been a top aide to Lula’s first Finance Minister Antonio Palocci before moving on first to the International Monetary Fund and then to balance the books in the state of Rio de Janeiro, too.

While Rousseff postponed announcing any policy specifics, Minister-designate Levy did promise that Brazil’s budget surplus (before debt payments), which have been shrinking to the vanishing point in Rousseff’s four years in office, would return to 1.2% of GDP next year and reach 2% in 2016. That was a dramatic about face for Pres. Rousseff, whose Workers Party coalition in Congress had debated her own proposal to eliminate the legal requirement for a budget surplus entirely. Reportedly, after hearing out Levy’s argument that markets blamed deficit spending for accelerating inflation and anemic growth, she reversed.

If the survival of Brazil’s Fiscal Responsibility Law, which has required the government to run a surplus before debt payments since the successful Real Plan ended hyperinflation in the 1990s, heralds further macroeconomic policy reversals by populist Pres. Rousseff, then Levy’s appointment could help convince international currency traders to stop betting against the depreciating Real and rating agencies from taking back the investment grade credit rating that Brazil only achieved in 2008. To achieve that, she will have to reduce Brazil’s inflated public debt, which Levy has pointed out is higher as a proportion of GDP than Russia’s or China’s (and tied with India’s).

And, if Rousseff acts on the liberal technocrat Levy’s micro-economic prescriptions for unclogging Brazil’s legendary bureaucratic and protectionist barriers to doing business, then both domestic and international businesses might start investing enough in infrastructure, production and jobs to pull the country back from the brink of recession. In its latest Doing Business report, the World Bank ranked Brazil only 120th out of 189 countries, below Ukraine, Egypt and even Nicaragua. According to the latest Central Bank survey, economists now expect GDP growth of barely 0.2% this year.

At the same time, though, Pres. Rousseff hedged her commitment to Levy’s new liberal policy direction in at least three ways.

First, she left in office for a transition period Finance Minister Guido Mantega, whose contrasting New Economic Matrix has not only increased deficit spending but what Levy had criticized as the creative accounting used to camouflage the size of those deficits. With Levy now sitting in a “transition” office right in the presidential palace, this will guarantee confusion.

Second, Rousseff was conspicuously absent from the repeatedly delayed press conference announcing Levy’s appointment as her Finance Minister-designate. And, she has postponed a rumored announcement of budget cutting and taxing raising policy specifics, including a small tax hike Mantega reportedly proposed.

Third, at the same time Rousseff appointed Levy to the top economic policy job, she also named less-liberal rivals for Levy’s job to the number two and three top economic positions of Planning Minister and head of the Central Bank.

Standing right next to liberal Finance Minister Levy, with his doctorate from the University of Chicago, at today’s press conference were two more Keynesian current members of Rousseff’s administration. Nelson Barbosa, a top deputy to free-spending current Finance Minister Mantega whose doctorate is from the New School of Social Research and who once ran Brazil’s budget-busting national development bank (BNDES), will be the new Planning and Development Minister.

And, Alexandre Tombini, who accommodated Mantega’s questionable financial statistics as President of the Central Bank will keep that job. Naturally, Workers Party socialists warn that liberal budget-balancing jeopardizes the social programs that lifted almost 40 million Brazilians out of poverty during Lula’s two terms in the 2000’s will see both Barbosa and Tombini as Finance Ministers-in-waiting, ready to swoop in and replace Levy on short notice should Pres. Rousseff change her mind about Brazil’s new economic direction.

Rather than installing an entirely liberal economic team, Pres. Rousseff hedged her policy bets. That may be why the Ibovespa stock market that had risen strongly when Levy’s name first emerged as a surprise compromise candidate at the end of last week, reacted much more cautiously to today’s trio of appointments. Respected liberal economist Edmar Bacha, who helped write Cardoso’s liberal Real Plan in the 1990s, told Veja newsmagazine he hopes that Rousseff’s second-term economic policies will end up looking more like Lula’s first term than her own.

Just two months ago, during the presidential race’s three-way first round, one local financial analyst controversially forecast that the Ibovespa would fall sharply if Rousseff were re-elected but rise sharply if either liberal opposition candidate defeated her. After winning re-election by just over three points, the narrowest margin since Brazil’s return to democracy, Pres. Rousseff is gambling that hiring a liberal technocrat like Levy can forestall a bear market, full recession, higher inflation and a credit rating downgrade. Liberal economist Bacha warns, though, that if she gravitates back toward Barbosa, Tombini and Workers Party socialists, “things could get very bad.”


Dr. Daniel Friedheim has taught international politics for more than a decade. His earned his PhD in political science from Yale University, has consulted for the World Bank and the US Agency for International Development, and was a Foreign Service Officer with the US Dept. of State. His research focuses on democracy, globalization and foreign policy with a regional focus on both Latin America and Post-Soviet Europe. He speaks Spanish, Portuguese and German.

Categories: Economics, Latin America

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