Brasil em estado de (des)graca (1): reversao de expectativas (The Economist)

Brazil's mediocre economy: A fall from grace

Editorial The Economist, June 6, 2013

Almost exactly 20 years ago, in May 1993, Fernando Henrique Cardoso was named as Brazil's 13th finance minister in as many years, a seemingly hopeless job in a country trapped in hyperinflation, debt and an anachronistic economic statism. Mr Cardoso's Real Plan swiftly tamed inflation and took him to the presidency. There he laid the foundations for a new Brazil, of stability and liberal economic reform. This success was reinforced by his successor, Luiz Inácio Lula da Silva, a left-wing former union leader, whose government saw 30m Brazilians get out of poverty.

The trouble is that in Lula's second term (2007-10) and especially under his chosen successor, Dilma Rousseff, the formula behind Brazil's success has been slowly abandoned. The policy secret was simple: inflation targeting by a Central Bank operating with de facto independence; transparent public accounts; a rigorous fiscal target, which brought down the public debt; and a much more open attitude to foreign trade and private investment.

But the global recession of 2008-09 prompted Lula and Ms Rousseff to shrug at decadent liberal economics and ape Chinese state capitalism. The finance ministry wrote vast cheques to boost lending by state banks. The government gave up on market reform, and spent remorselessly. When overheating turned to stagnation (the economy grew by a paltry 0.9% last year), Ms Rousseff publicly chivvied the Central Bank to slash interest rates. When inflation neared the top of its target range (6.5%), she said she cared more about growth. She unleashed a bewildering and ever-shifting barrage of tax breaks (and tariff rises) for favoured industries but failed to balance these with spending cuts. And instead of a clear fiscal target, there are some worryingly Argentine accounting fudges (see article).

The upshot is that investors have become confused about Brazil's economic policies. This uncertainty has contributed to a mediocre performance: since 2011 growth has been lower and inflation higher than in most Latin American countries.

Fortunately, Brazil still has some big strengths, including its farming and energy industries, more science and innovation than you might think and a huge, albeit less fizzy, domestic market. And whatever Ms Rousseff's mistakes, they are small compared with those of, say, Argentina's Cristina Fernández. But in any event, the going for Brazil is getting harder. A consumption and credit boom has run out of steam, the trade account has moved into deficit as Chinese demand for Brazilian iron ore slows and the imminent end of cheap money in the rich world is prompting a slide in the real. Though that will help Brazilian manufacturers, it will push up inflation.

Stay, Mr Mantega, stay

So incipient signs of a return to clearer policy in the past few weeks are welcome. To curb inflation, Alexandre Tombini, the Central Bank governor, has pushed up the benchmark interest rate (though more increases will be needed to restore lost credibility). Guido Mantega, the finance minister, has said he will no longer use fiscal policy to stimulate the economy; on June 4th he lifted a tax on capital inflows. But more change is needed if Brazil is to return to the path set by the Real Plan. Above all, Ms Rousseff's team need to curb spending and get the state out of the business of micromanaging investment decisions.

In December, when we last urged Brazil's government to stop meddling and let animal spirits roar, we called for Ms Rousseff to sack Mr Mantega. It was widely reported in Brazil that our impertinence had the effect of making the finance minister unsackable. Now we will try a new tack. We urge the president to hang on to him at all costs: he is such a success.