Will Brazil’s president Rousseff meddle less with economic policy?

Will Brazil’s president Rousseff meddle less with economic policy?

In a document prepared for a recent conference organized by JP Morgan, Ms. Rousseff clearly exposes her new groove. Economic orthodoxy is in, experimentalism is out – or so it seems.

Guest post by Monica Baumgarten de Bolle.

President Dilma Rousseff has just outlined her very own radical shift in a gesture similar to ex-President Luis Inácio Lula da Silva’s famous “Letter to the Brazilian People” of 2002, where the former Brazilian leader spelled out his commitment to sound policymaking and to maintaining macroeconomic stability.

The document, read by Mr. Luciano Coutinho, head of the state-owned development bank BNDES, aims to restore investor confidence by highlighting both the need for fiscal adjustment and measures to curb inflation, currently dangerously close to the target ceiling of 6.5%.

In line with the renewed price stability commitment, the Central Bank has recently raised interest rates by 50 basis points, taking the Selic to 11.75% and promising to do more.

Crucially, the letter prepared by Ms. Rousseff mentions the adoption of a clear budget rule to reduce gross public sector debt over the medium term. According to the rule, the government would be willing to rein in expenditure growth, aligning it with the pace of economic expansion.

In other words, public spending will no longer be allowed to exceed GDP growth, contrary to the experience of the last four years. This proposal was recently detailed in a paper prepared by the newly appointed Finance Minister, Mr. Joaquim Levy, entitled “Fiscal robustness and expenditure quality as tools for growth.”

The paper was part of an extensive agenda to restore macroeconomic stability and growth discussed in a series of seminars organized by a Brazilian think-tank whose members are closely associated with the main opposition party, Mr. Aécio Neves’ PSDB.

It is no secret that Mr. Levy, who holds a PhD from the University of Chicago and is a former IMF economist, vehemently opposes Mr. Guido Mantega’s views on the economy. Mr. Mantega has served as Brazil’s Finance Minister for a lengthy period of almost nine years.

The emphasis on targets for expenditure flows and on gross debt (as opposed to net debt) in Ms. Rousseff’s letter to the financial community marks not only a shift in policymaking and a greater focus on fiscal transparency – net public sector debt has been plagued by accounting gimmicks introduced in late 2012 – but reveals Mr. Levy’s weight in dictating policy at this time.

This is in sharp contrast to the experience of the last four years, when President Rousseff meddled systematically with the implementation of both fiscal and monetary policy.

What has changed? Has President Rousseff really traded in experimentalism for greater policy rationality? If so, how long might this last?

To shed light on these questions it is important to bring in the Petrobras corruption scandal and its political ramifications. As investigations intensified in the weeks following the presidential elections, with the sweeping arrest of CEOs allegedly involved in the bribery scheme and mounting rumors over the involvement of key political figures, Ms. Rousseff has been increasingly cornered.

Facing an escalating institutional crisis and widespread criticism on the dismal economic results of her administration, she appears to have been forced to let go of her stronghold on policymaking, presumably prodded by former President Lula.

Thus, Ms. Rousseff’s new groove is less recognition of past mistakes, and more the imposition of harsh reality, namely, that it is simply not feasible to contain both an institutional and an economic crisis at the same time.

Economic orthodoxy is thus the name of the game for now. Its chief formulator and articulator is the new Finance Minister, Mr. Joaquim Levy. As long as the Petrobras scandal continues to haunt Ms. Rousseff’s administration, one can reasonably expect policy rationality to last.

Monica Baumgarten de Bolle holds a PhD in Economics from the London School of Economics. She is a former IMF Economist (2000-2005), a Professor of Macroeconomics at the Pontifical Catholic University of Rio de Janeiro (2006-Present), a Director at the Institute for Economic Policy Studies IEPE/Casa das Garças, a think tank based in Rio de Janeiro, Brazil (2010-2014) , and a Global Fellow at the Brazil Institute | Wilson Center.

Categories: Latin America, Politics

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