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Richard Mellor

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Brazil: the debt dilemma
« on: November 11, 2017, 06:00:35 AM »
Brazil: the debt dilemma

by Michael Roberts

Brazil faces a presidential election in October 2018.  This will  offer a new benchmark for which way Brazilian politics and the economy  will go.  Will a coalition of pro-big business parties and a president  win or will a coalition led by the Workers party return to power under a  leftist president (possibly Lula, the former president)?

Nobody I met in my visit to Brazil last week was sure what would  happen.  International capital is optimistic that the current  neo-liberal administration will gain a four-year term, possibly under  former vice-president Temer or maybe Sao Paulo Mayor Joao Doria, a  businessman and former TV show host.  Doria has expressed presidential  ambitions and urged ?centrist parties? (ie pro-big business) to forge a  common platform to combat ?extremist candidates? (Workers party). He  appears to be Brazil?s version of Donald Trump.  He wants to ?gradually? sell off Brazil?s greatest state asset, oil giant Petrobras. ?There  is no need for Petrobras to keep being a state-owned company. Brazil is  isolated in the world. We can?t be afraid to do what?s necessary to  insert Brazil in the global and liberal economy,? he said.  He is  also in favour of privatizing Brazil?s electricity utility Eletrobras,  ports, airports, railways, and waterways.

And he backs the usual neo-liberal measures (called ?structural economic reforms?) designed to boost the rate of exploitation: weakening the unions;  making it easier to fire workers; reducing their rights and conditions  etc.  He also wants to cut pension terms and cut taxes for the rich and  corporations. ?The next president will have to prioritize pension reform,? he says.

All this is much in line with the policies of the current President Temer who got the job after Congress (controlled by the right parties)  managed to get elected Workers party President Dilma Rousseff impeached  and removed on charges of corruption (operation car wash).

Interestingly, Doria does not agree with Trump on protectionism.  In contrast, he wants a more ?open economy? and a floating exchange rate. ?We must avoid any protectionism that limits the country?s economic growth.?   Doria also wants to preserve Brazil?s central bank independence ?  classic position of finance capital ? keeping it out of democratic  accountability.  All this is pretty similar to Temer.  Indeed, if Doria  became president, he would probably keep the same economic and financial  team as Temer has.

However, the problem for the pro-capitalist forces is that Doria and  Temer?s economic platform is unpopular among the majority of Brazilians ?  not surprisingly.  Indeed, Doria is careful to say that he will  ?preserve? the highly popular Bolsa Familia benefit scheme for the poor  that the Lula administration introduced.  As the World Bank has shown,  62% of the decline in extreme poverty in Brazil between 2004 and 2013  was due to changes in non-labor income (mainly conditional cash  transfers under the Bolsa Família program).

Also, Temer is extremely unpopular, with poll ratings well below even  Trump?s in the US.  That?s because he usurped the job from Dilmar and  also avoided charges of corruption because of the backing of the  right-wing majority in Congress.  Lula is now the most popular  politician in Brazil again and could win the presidency, except he too  has been found guilty of corruption in the courts and thus faces being  banned as a candidate.

Meanwhile, the big economic issue is whether Brazil can recover from the deep recession that it entered in 2014 and only now is making a mild and weak recovery.

Temer is relying on foreign investment from multi-nationals and  speculative investor flows to sustain this limited recovery but he may  well be disappointed.  As a result of the slump, public sector debt has  rocketed along with successive large deficits on the annual government  budget.

Discretionary spending (education, health, transport etc) has been  cut to the bone and now Temer, Doria and their backers want to destroy  the state pension scheme in order to reduce debt and ?balance the  budget?.

Together with the increase in retirement age, the government is  proposing the elimination of pensions by length of service and  increasing from 15 to 25 the number of years of contributions necessary  to qualify for an old age pension.

Brazil?s 27 states are also in deep trouble. Rio de Janeiro has had  to delay payment of civil servant salaries (currently with a two months?  delay) and defaulted on its debt repayments. Rio Grande do Sul and  Minas Gerais are also close to insolvency, while almost all other states  are facing liquidity constraints and several are running up growing  arrears with suppliers and employees.  In response the Temer government  wants to introduce a 20-year fiscal austerity plane and shift the debt  of the states into the hands of a separate off-balance sheet agency that  will ?manage? the debt using taxpayer revenues.

I participated in a public hearing at the Brazilian Senate committee on human rights and an international conference on this issue of debt.   Both events were organised by Brazil?s Citizens Audit, a group with  labour union support, that has been campaigning to explain why Brazil?s  public debt is so high and the iniquity of the planned ?privatising? of  debt management into the hands of the banking sector with losses for  taxpayers and major liabilities.

I presented paper along with many other academics and activists from  Latin America attending.  In my paper, I emphasised the huge rise in  public sector debt globally ? the result of the bailouts of the global  banking crash and subsequent global recession of 2008-9 ? and the role  played by international agencies in taking over the management of debt  in distressed economies at the expense of public services.

In Brazil?s case, the public sector debt has always been high  compared to other so-called emerging economies, despite public services  being poor, because of very high interest rates on the debt and because  tax revenues are relatively low.

The World Bank claims that ?a  large structural fiscal imbalance lies at the heart of Brazil?s present  economic difficulties. While revenues are cyclical and have declined  during the recession, spending is rigid and driven by constitutionally  guaranteed social commitments, in particular on generous pension  benefits.?  So it is the fault of too much spending and too  generous pensions, according to the World Bank.  But this is ideological  nonsense.

Brazil is the most unequal society in the G20 (apart from South  Africa).  But its tax system allows the richest income and wealth  holders to get off lightly while the poor pay more ? in other words, the  tax system is very regressive and the tax base avoids the rich.  As a  result, interest costs on the public debt relative to tax revenues are  the highest in the world.

Indeed, Brazil?s Oxfam has shown in a recent report that, if the tax system was made progressive; tax avoidance schemes  were stopped; and tax evasion (including the use of offshore funds a la the Panama and Paradise papers) was ended, Brazil?s tax revenues would  be more than enough to improve public services, protect pensions and  social benefits.

The economic collapse of 2014-16 has been followed by a weak  recovery.  Indeed, the latest report on South America by the World Bank  makes dismal reading.  The bank says: ?economic activity remains on track to recover gradually in 2017-18, but long-term growth remains stuck in low gear?Growth has only turned positive because the world economy has picked up in the last year.  As the bank says: ?A  favorable external environment is helping the recovery. Global demand  is getting stronger and easy global financial conditions?low global  market volatility and resilient capital inflows?are boosting domestic  financial conditions.?

But ?despite this ongoing recovery, prospects for strong  long-term growth in Latin America and the Caribbean look dimmer. In the  next 3-5 years, Latin America is projected to grow 1.7 percent in per  capita terms. This growth rate is almost identical to the region?s  performance over the past quarter century and only marginally better  than those in advanced economies, raising concerns that the region is  not catching up to income levels in advanced countries.?
The World Bank, along with the IMF, forecasts just 0.7% growth this  year for Brazil and 1.5% in 2018.  The domestic economy remains very  weak.  Industrial production is up only on exports.  Capital investment  remains down.

Average real incomes are still below the peak of 2014 even though inflation has dropped off from the recession.

The underlying reality is that Brazilian capital is still suffering  from a long-term fall in its profitability from which it seems unable to  escape, despite squeezing the labour force.

The World Bank points out that corporate debt as a share of GDP  increased from an average of 23% of GDP in 2009 to 25% in December 2016)  and a large share of corporates are overleveraged.  It is Brazil?s  capitalist sector that is in trouble.  Naturally, the World Bank and the  IMF suggest as solutions the usual batch of neo-liberal measures  already adopted by Temer and proffered by Doria.

When the Brazilian economy boomed with the commodity price explosion of the 2000s, Brazil ?experienced an unprecedented reduction in poverty and inequality? (World Bank) and 24 million Brazilians escaped poverty. And the gini  coefficient of inequality of incomes fell from the shocking height of  0.59 to 0.51.

But after the recession of 2014-16 and under the Temer presidency, it  is rising again.  The international agencies, foreign investors and  Brazilian big business want an administration in power for four more  years from 2018 to impose austerity, labour ?flexibility? and  privatisations.  That will drive up inequality further.  Ironically, it  won?t reduce the public sector debt because economic growth and tax  revenues will be too low.  Indeed, the IMF forecasts debt will be much  higher by 2002.

The World Bank sums up the state of affairs: ?As the 2018  elections approach, the unity of the ruling coalition is likely to be  increasingly tested. The 2018 presidential race remains very open and  may result in new alliances which could reshuffle the political  landscape. Further, the debate on the need for and the appropriate  strategy to carry out fiscal adjustment and microeconomic reforms  remains polarized.?
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