- Interview by
- Andrea Califano
After thirteen years of Workers’ Party (PT) government, the last two years have witnessed Brazil sink into deepening economic and institutional crisis. In 2016 an “institutional coup” against PT president Dilma Rousseff saw the establishment of a new government under conservative lawyer Michel Temer, her own former vice-president.
Fresh elections are taking place today. Former president Lula da Silva, jailed earlier this year, had hoped to run again and had a strong lead in opinion polls. But he has been barred from running, and the PT is instead fielding Fernando Haddad. Haddad currently trails the “Brazilian Trump,” the far-right former army officer Jair Messias Bolsonaro, in what threatens to be a fresh electoral shock.
The stakes are extremely high, at a moment when it cannot even be assumed that there is any peaceful way out of the crisis. In recent months, violence has exploded in several cities and regions, and there is an ever more imposing army presence in the streets.
This intense political conflict also takes place against the backdrop of a much deeper malaise: the discrediting of institutions, the worsening of living standards, and cuts in public services and the welfare state. The left-wing candidates in the race, ranging from the Socialism and Freedom Party (PSOL) to the PT and the Democratic Labour Party (PDT), are all proposing different answers to this situation, based on different evaluations of Lula and Rousseff’s records in office.
Andrea Califano of the Fondazione Feltrinelli spoke to three economists about Brazil’s way out of this dramatic situation. The interviewees are Laura Carvalho, economics professor at São Paulo University (who took part in writing the economic component of PSOL’s program, though is not herself part of the party); Marcio Pochmann, an economics professor at Campinas University, a parliamentary candidate for the PT and one of the three coordinators of Haddad’s program; and Nelson Marconi, coordinator of PDT candidate Ciro Gomez’s economic program.
How would you interpret the causes of Brazil’s current economic crisis?
Econometric studies confirm the perception that the crisis half owes to external factors (particularly the fall in the price of raw materials) and half to government choices.
Fundamentally, there are two interpretations of the domestic component of this malaise. For orthodox economists, the cause is an excess of public spending and state intervention in the economy. I instead argue that the problem should be identified in the basic agenda of the recent PT governments’ economic policies: investments have wholly bet on a revival in manufacturing, and the management of this revival has been entirely delegated to the private groups that continue to be active in the sector.
These latter have called on the government to reduce the costs of production, which it has done in particular by way of tax breaks. But naturally, this has not been of any use when aggregate demand has fallen. Moreover, these tax exemptions and the resulting lower revenues coming into state coffers have been grist to the mill of the supporters of austerity policies.
Hence the ground was prepared for the measures that the Temer government then took. Its restrictive tax and monetary policies have greatly aggravated the economic crisis, in a worrying, vicious circle. For instance, as interest rates rose, so, too, did inflation because of the abolition of the ceiling on energy prices.
In fact, a decisive shift had already taken place during the PT governments with the transition from Lula to Dilma: when Lula was president, public investments grew 25 percent a year; with Dilma this growth fell to an average of under 1 percent. From 2011 onward, the government became wedded to the theory of trickle-down economics.
The economic crisis is the fruit of a political crisis, a problem left unresolved since 2014. That year, some forces did not accept Dilma’s electoral victory, and the democratic outcome thus went unrecognized. The president was weak and blackmailable, as she relied on some twenty-two parties’ parliamentary support in order to be able to govern. It was, after all, her own vice president, Temer, who promoted the coup and then took her place as president.
In this we see the clearly political nature of the crisis, even if the media insist on the fable of the budgetary crisis. The economic agenda [they promote] thus appears for what it really is, i.e. the same agenda that was defeated in the previous four electoral contexts.
Since 2014 we have suffered major defeats: at first, we cried that there was a coup against Dilma, and then the coup became an institutional fact; then we shouted “Out with Temer,” and yet he remained in place; and then we did everything we could so that Lula could stand, and he ended up in prison.
These series of critical moments have marked the disappearance of the political center, and today the political competition is between two anti-systemic forces, i.e. Bolsanaro and the PT. In what sense is the PT anti-systemic? Because our insistence that Lula should stand puts into question the legality of the justice system itself. We instead demand the creation of a National Constituent Assembly, a project which we will drive forward after the elections.
The main problem that Brazil has is the tendency toward an increasing focus on the primary sector of the economy [decisively, the production of raw materials] accompanied by the retreat of its industrial base, which among other things leads to the creation of low-quality jobs. This is the result of a long series of mistaken economic policies starting with the government of Fernando Henrique Cardoso, who preceded Lula, during which there took hold this practice of overvaluing the exchange rate and increasing interest rates in order to control inflation and attract foreign capital – a policy pursued by Lula. Only Dilma ultimately tried to reverse this, albeit also with many errors, which were then taken to an extreme by Temer.
The PT’s industrial policy has traditionally been compensatory: subsidies for businesses to make up for the loss of profits owing to an exchange rate that impeded exports and high taxes that increased the cost of finance. But macroeconomic imbalances cannot be resolved with subsidies. The issue is that so long as the world economy was growing Brazil managed to export, also with an overvalued currency, while imports were artificially inflated. Then with the global economic crisis, exports collapsed while imports remained high. Thus, even apart from the problems of the balance of payments, the industrial sector was heavily penalized, and profits fell even more on account of the state control on energy prices and wages that increased more than productivity.
In all this, the budget situation worsened. In 2015 Dilma tried to change course, combining a further tax rise with the devaluation of the real and the cancellation of many subsidies. But all this was done all at once and caused a full-blown economic storm. Temer’s subsequent intervention was based exclusively on the attempt to recover the confidence of the markets, committing himself to keeping rates high, betting on an appreciation of the real and unleashing an even deeper crisis. Businesses and families have sunk deeper into debt while unemployment is rising.
Since the institutional coup that deposed president Dilma Rousseff, the economic agenda that has been applied resembles the austerity policies that have been carried forth in Europe during the crisis period. There has been salary devaluation (through the flexibilization and precaritization of labor) and cuts in public spending (health, education, and investment); indeed, the amendment that inserted a ceiling on social security spending into the Brazilian constitution has a parallel in the insertion of the Fiscal Compact into some European states’ constitutions.
But Brazil has not returned to growth, while the effects of the cuts certainly are being felt. The question, then, as in Europe, is — what is the way out of the crisis? Has there been too much austerity or not enough?
The debate on cutting labor costs is the same the world over, because globalization has reduced all governments’ margin of autonomy. Looking at Latin America, the tools used in the 1970s and 1980s, which sought to reduce imports in order to aid industrialization, are no longer available. The tools that do remain are the devaluation of the currency and the reduction of labor costs. And while the former may seem to be a progressive policy, in reality they are two sides of the same coin, and the elites mounted the coup against Dilma only to oscillate between both policies.
The same goes for Temer’s proposal for the pension system, which would make the system both socially and economically more unsustainable. Today work contracts provide for ever-smaller pension contributions, and it would thus be necessary to set the pension age at sixty for women and sixty-five for men, across the board. But today rich Brazilians with jobs in the formal sector take their pensions after twenty-five years of contributions, even at fifty or fifty-five years of age.
Rather than correct this distortion, Temer proposes that everyone be required to make twenty-five years of contributions. Yet this would mean that the enormous majority of workers, who currently have the right to a pension at sixty or sixty-five years of age, would now never be able to retire, for most of them spend their whole lives working in the informal sector of the economy. In Brazil, as in Europe, it is necessary to reverse this logic.
There’s a dominant “single economic thought” that insists that Brazil’s problem is a budgetary one. The parties have to take a position on this, and we think that the fiscal question is an effect and not a cause of five years in which we have not seen any economic growth. So, the priority is growth, and it is possible to stimulate growth quickly and easily.
The situation is not the same as when Lula came to power, when there were high interest rates, high inflation, and Brazil had no foreign currency reserves. Lula had to operate in accordance with the International Monetary Fund. Now, instead, we can propose a mass program of financing investment, based on the vast foreign reserves held by the central bank.
We would change a lot of things, as compared to what the Temer government is doing. We think it better to speak about the “world of work” than about a “labor market”; it’s not a matter of supply and demand, but ever more a question of atypical jobs, real or presumed self-employed workers, etc. We thus propose a new labor statute which runs against the precaritization demanded by Temer, which among other things renders the pension system increasingly unsustainable.
Here, too, some clarification is necessary: for us, pensions are part of social security and should be financed by the state; if we believe in a universal approach, then the citizen has the right to a dignified existence from cradle to grave. So, this question cannot be seen in isolation, but only as part of an overall perspective. Whenever people want to break down citizens’ rights into different areas, in reality what they’re trying to do is to gradually dismantle them entirely. Pensions, like other forms of social security, should be seen not as a budgetary question but as a question of dealing with inequality.
Temer has introduced a constitutional ceiling on spending which sets out a cut in spending by way of inflation (i.e., spending in nominal terms will remain the same from year to year), thus achieving an overall reduction in the size of the state relative to the country’s economy. But the ceiling ought to be tied to the rise in GDP per capita!
Another error he has made is to leave the pension reform till last, without indeed managing to get it approved: the pension system thus continues to put pressure on the public budget and, given its tie to public spending, imposes massive cuts on the welfare state.
The reform of the pension system must be the first step — and naturally, it must be designed differently. We are thinking of introducing a basic income for pensioners, but clearly distinguishing between pensions and welfare: the first must be self-sustaining, and this can only be achieved by widening the system of capitalization. . . .
We also have strong criticisms of the [Temer government’s] labor reform, even though we do not think that we should return to the previous model. Modernization requires the introduction of different levels of contracts covering the national, sector-wide, and local levels as well as individual enterprises.
Another parallel with what’s happened in Europe, especially countries like Greece, Ireland, and Italy, concerns the rise in the public debt during and after the Dilma government. As an economic adviser, would you encourage the next president to combat this tendency?
It’s the last four years that have seen the rapid rise in the public debt (three of them under Temer’s austerity policies). But this is a false problem, in that most of the debt is held by Brazilians, which among other things implies that the depreciation and the inflation of recent months have increased the value of the Brazilian Central Bank’s huge reserves, reducing the value of the stock of debt [i.e. because it’s mostly held in Brazilian currency]. The problem of public debt is exclusively a problem of distribution: high interest rates imply a massive redistribution of wealth in favor of rich investors and at the expense of the general state budget.
For this reason, I consider it opportune to reduce the debt when the country returns to growth. In [PSOL candidate] Boulos’s program, this will take place by increasing taxes for the richest. Indeed, there is a very big margin to increase taxes for the richest, as they are ridiculously low compared to other countries that have a health system and universal education. We are not suggesting Scandinavian levels, but at least to bring them up to the level they are in the USA!
With the 1988 constitution an important democratic decision was taken to align Brazil with countries with an advanced welfare state, and PSOL’s proposal is the only one consistent with this objective. While other parties propose tax reforms as if this were a zero-sum game, we have calculated that our reform would increase tax revenues by 2 percent. This would, moreover, lead to a surplus in the public budget, freeing up resources for growth and immediately resolving the false problem of public debt.
Here we get back to the question of growth and Brazil’s supposed fiscal problem. In the years of the Cardoso government [1995–2003] there were mass privatizations, budget cuts, and tax rises. The result was that the debt rose. With Lula public spending rose and debt fell.
From a taxation standpoint, we have designed a reform that does not involve any tax rises; in fact, the overall level of taxation will remain the same, but it will be distributed differently. There will be less taxes at the bottom of the social pyramid and more at the top. This means increasing the amount of income that goes untaxed while introducing taxes on big fortunes, annuities, and dividends. This will also be a question for discussion in a [planned] constituent assembly, though many of these things are already set out in parts of the constitution that have gone unimplemented.
The country needs fiscal consolidation, which is our priority, and this can only take place through a rise in tax revenues and reduced spending. Our program proposes new taxes on financial annuities and individuals’ dividends, from which we expect to receive around 50 billion reais [$13 billion]; an increase in inheritance tax from 4 percent to 20 percent [40 billion reais, $10.4 billion]; a reduction in business subsidies of 50 billion [$13 billion]; and finally a cut in waste in the public administration by 30 billion [$7.8 billion]. As against this total of 170 billion reais in higher revenue and savings [$44.2 billion], we forecast an only 10 billion fall in revenues [$2.6 billion] on account of lower taxes on business incomes. We also need to simply the confused system of taxation on added value, introducing a VAT [valued-added tax] on the European model.
Recent months have seen a sharp depreciation of the Brazilian real. Is this a positive or negative phenomenon? What would your interest rates policy be? Is foreign investment a priority?
It is clear that the real should not be overvalued, but that is not the main question. Nor can we plan for the central bank to control the exchange rate; reserves would be put at risk, and this could even increase instability.
The central point instead concerns controls on capital, for only then is it possible to restore some autonomy (these controls should be increased also to discourage more volatile short-term movements). Moreover, faced with a drastic depreciation like the one currently underway, inflation is increasing (and thus at least in the short term, depreciation has restrictive effects on aggregate demand).
We also can’t know about the possible currency war dynamics devaluation would unleash; it’s a “fallacy of composition,” for in fact all the countries in the region could similarly [devalue] in order to stay competitive. As I said before, this is the other side of the coin of wage contraction, as you may well know in Europe. . .
The exchange rate poses two problems: overvaluation and fluctuations. We should act to control both, within the framework of a managed, flexible exchange rate. But this is insufficient.
Firstly, we should impose a tax on raw materials exports, whose price formation takes place not domestically but on the international market. When the price is higher than its historic trajectory the tax should be levied. Its proceeds will then be set aside in a fund which we will draw on when the price falls under the threshold level. Similarly, we will create a tax linked to bank interest rates: if a bank fixes the rate above a certain level it will have to pay the tax. This will incentivize competition among lenders.
Having a competitive currency is a necessary but not sufficient condition of economic growth. Today — certainly not thanks to the government’s actions, but on account of external causes and the market’s concern over the imminent elections and the uncertain scenarios that are taking shape — the exchange rate is at the right level. It allows exports and avoids an increase in imports. Moreover, this happened without creating inflation, so it did not have a negative effect on real wages. This is a good opportunity to reduce the deficit, put the public accounts in order so as to be able to invest, and to do so with the markets rather than mounting opposition.
The last few years in Europe have seen both political and scholarly attempts to rethink and redefine the role of the state in the economy, as compared to the dominant conception from the years of the “end of history” and the triumph of globalization. Where is that debate at in Brazil? What does your party consider the proper balance between state and market?
In Brazil we have an important tool that many other countries do not, the National Development Bank (BNDES). But this is just a tool, and thus it acts according to whatever the government’s industrial macro-project is; you can’t blame the BNDES if investments do not grow, and you can’t think that it’s the BNDES that controls industrial policy.
In Boulos’s program we go some way in adopting economist Mariana Mazzucato’s idea of “missions,” though enriching this idea with the term “social mission.” In Brazil millions of people live without basic infrastructure (sewers, drinking water, medicine), and [resolving] this must be the fundamental aim of industrial policy. Growth and even the revival of manufacturing would be a collateral effect of this higher aim: the PSOL program’s objective is not to industrialize the country but to satisfy the population’s basic needs. Clearly, in pursuing this objective, and especially in a continental-size market like Brazil’s, doing so will also strengthen the country’s industry, as long as the state manages investment — for instance, through the state procurement of goods and services, which should favor Brazilian (and where possible, small and medium) enterprises rather than foreign mutinationals. It should have the perspective of increasing Brazil’s technology and not cutting labor costs, also in order to compete with other medium-income economies.
The central bank can and should contribute to the country’s development, and this can happen only if there are tighter controls on capital movements. Indeed, the question of central bank independence is generally ill-posed.
First of all, it is not and will never be independent from society. And it would be illusory to think that dissolving the intermingling of elites and the central bank leadership (for instance, by intervening [to put a stop to] the phenomenon of “revolving doors”) would in itself allow the central bank to collaborate with the government to pursue the current goals of economic stability (or even other goals — for instance, reducing unemployment). The central bank will never be independent of the US Federal Reserve until greater controls are imposed on capital movements.
Let’s start out from the premise that today Brazil is a hybrid economy with a dominant private sector. What has happened is that the state has internalized the private logic. If we want a state that functions like the private sector, so the argument goes, then we may as well leave it up to the private sector! But the state cannot operate with the same logic.
Why have banks raked in such great profits since they were privatized? Precisely because they have ceased to play the same public function that they previously played — for instance, shutting down branches in small towns. Similarly, Petrobras used to be forced to buy Brazilian oil, even if this meant it had to do so at higher costs. In getting rid of this link, Temer has ensured that Brazil has increased its crude oil exports while importing refined petrol. This runs in the opposite direction of the needs of reindustrialization, after having experienced a rapid destruction of an industry that had, in fact, been built only belatedly.
Precisely because industry is the spine of society, we want to support it also with investments in science and technology, driving forward a great plan of ecological transition, with a change in the production structure in the direction of greater sustainability. This plan will be realized by private businesses and financed with funds based on the country’s currency reserves, to which I referred above. We will initially put in 300 to 400 billion real ($77.6 to 103.4 billion).
We are against the privatization of Embraer [the world’s third biggest aircraft constructor] and the de facto privatization of Petrobras. But the whole state apparatus ought to have a more responsible budget policy, not because the world of finance demands it but precisely in order to have a stronger state and to free up its capacities for investment.
This approach means that our neo-developmentalist agenda draws criticisms from both Left and Right (we stand to the left of the PT also in terms of interest rates and taxing dividends). In fact, we see the Brazilian Central Bank (BNDES), public companies, and the use of concessions to private companies as the main instruments of industrial policy. Ours is an expansive development policy, but it does not drain resources from the state budget: public companies and the BNDES have their own budgets which do not weigh down on the general budget and will especially be used in the strategic sectors in which the state must be the protagonist — oil, defense, healthcare — and to promote exports and, most importantly, the development of infrastructure.
Investing in infrastructure allows us to confront the employment emergency (unemployment is in fact far above the official statistics; it stands at around 25 percent, which is to say as high as the official figures tell us the youth unemployment level is), to stimulate private investment, to increase the country’s competitiveness, to increase aggregate demand, and finally to have a major social impact (we need only think what it would mean to complete the whole country’s sewer system).
How will the next government handle itself on the international stage, in which we see an ever-deeper crisis of globalization?
Even if it does not make much sense to talk about BRICS [the association of Brazil, Russia, India, China, and South Africa] (which was, in fact, an idea of JP Morgan’s) in the context of the trade war that is taking shape, there would be space for greater coordination among the countries of the Global South.
The current crisis of globalization should force these countries to react against the structure of the global economic order and stop accepting its current conditions as a given. They need to coordinate to take back control of some of the tools of economic policy. Are the bases there, for an operation of this type? Probably not, but a progressive government in Brazil could change things; Mexico has elected a socialist president, and it would be the first time in history that the two regional giants both had left-wing governments at once.
In today’s world we are seeing a polarization between the declining hegemony of the United States and the rise of an Asian, especially Chinese, alternative. In this context, the United States has changed strategy: with Obama it exercised its hegemony through multilateral accords while Trump now bases himself on the defense of the US market.
In any case the USA is not happy about Brazil becoming a leader in Latin America and coalescing the continent in a regional alliance, though this is precisely what Brazil needs to do. In other words, our development and our economic relations are Atlantic, rooted in the Atlantic coast, and projected beyond the Atlantic. We instead need to “internalize” development, to turn toward the rest of Latin America, and, if anything, look further in this direction into the Pacific and toward Asia.
Moreover, we need to be very attentive to currency questions: the cases of Russia and Turkey, for instance, remind us that currency is often a tool of war. In the 1930s Brazil broke its monetary tie to Britain and faced the alternative between falling under the influence of either the US currency or that of Germany, a country with which it had very strong links. The US was the option that won out then, but perhaps now is the moment to question that decision and find another path for our country.
The PT has tried to put Brazil at the center of an alliance with the Global South, also betting on the BRICS group. But the country’s sovereignty comes not through these alliances but through its own industrialization, which would, for instance, allow it not to have to rely on a US technological base.
The greatest pragmatism, not ideological prejudice, is necessary here. What sense does it have for us to establish ever-stronger ties with China, when they are based on us exporting raw materials and importing Chinese machinery? Moreover, in recent years Brazil ought to have acted as a mediator in Venezuela instead of attacking Maduro’s government. Reenergizing Latin American integration is also a priority.
If your candidate wins, what will be his first steps in government? What might be his international reference point?
An end to tax exemptions for the rich, and the use of the resulting higher tax revenues for mass public investments (including the creation of public sector jobs). Our program foresees the tax rate for incomes over 325,000 reais [around $85,000] rising from 27.5 percent to 35 percent.
This is a very detailed program, but the economic part — my area of expertise — is in line with what Bernie Sanders, Jeremy Corbyn, and the Portuguese Left Bloc have been saying in recent years. [PSOL] candidate Boulos sees himself like a Brazilian version of the Spanish Podemos leader Pablo Iglesias, but in fact our economic proposals aren’t the same as Podemos’s!
Emergency measures need taking in order to address unemployment. In Brazil there are some 28 million people looking for work: the only way out is to break the economy out of its paralysis, encouraging employment by creating conditions favorable to non-speculative business profits.
For two years the PT has been working with five other parties [including the PSOL and PDT] to build a progressive front to change the country, on the model of the alliance that’s currently governing Portugal. We have reached an agreement on a minimum of shared programmatic content that we would implement together, immediately after the election.
The government’s first steps will be fiscal consolidation and tax reform; not only because these are the most urgent tasks, but also because the government has to use the political capital it will have as soon as it’s elected. We will not make suicidal parliamentary alliances like the PT but devote all our forces to consolidating and winning agreement and support among society as a whole; in this sense, we consider ourselves close to the Spanish Socialists [who recently assumed office] and the current Portuguese government [the Socialist Party with outside support from the Communists and Left Bloc]. So, the stumbling bloc of [not having a] parliamentary majority will be overcome when governors and local administrators in general — even if of other parties — will pressure the parliamentarians of other parties to vote through our proposals.
Where is Brazil headed?
The simple fact that the overall electoral campaign has seen a shift to the right implies that the next government will be to the right of its electoral program, also for reasons of having to seek alliances in parliament and society. At the moment I see the PT as being the favorite, but the real question is what comes after.
Considering that Dilma was unable to remain in power even though she nominated the most orthodox of Brazilian economists as her finance minister, and thus carried out the opposition’s program, what chance does Haddad have now? In the best of the plausible scenarios, he will manage to remain in power, but without realizing any of what is in his program.
Paradoxically, [PDT candidate] Ciro Gomez, who is difficult to place on the left-right axis and has many more ambiguities at the programmatic level, would have greater possibilities of carrying out left-wing policies, because he would be less of a hostage to the elites. The best possible scenario is thus far worse than the one when Dilma was elected in 2014: this time the PT will do everything to avoid another coup, looking to be as conciliatory with the Right as possible.
Indeed, it is very worrying that we are even speaking about the possibility of military intervention; not least because the PT is well-organized and rooted enough in the national territory as to compel any military regime to mount a long and deep wave of repression. [Under the military regime created] in 1964, the repression instead began much later, for there were no political forces that had a widespread and organized layer of activists.
A mass of the shy and undecided looms large in the opinion polls. But are they shy about saying that they will vote for Bolsonaro, or shy about saying they will vote for the PT?
We also don’t know because this year’s campaign is being fought with far less resources than the last contest four years ago [on account of new spending limits], and we cannot predict the result for this right-wing force, which is closely tied to the evangelical churches and organized crime.
The thing we do know for certain is that the PT in government cannot do what partly happened with Dilma, which is to say one thing and then do another. The experience of the Socialist Party in France [which fell to 6 percent in the 2017 elections at the end of unpopular president François Hollande’s term] teaches us that whoever shifts to the center risks disappearing entirely.
I don’t know, but the situation is very clear. On the one hand there is Bolsonaro, a puppet in the hands of the army officers (indeed his running mate stands above him in the military hierarchy), and on the other hand Haddad is a puppet in the hands of Lula, as was Rousseff. He lacks credibility and faces strong social opposition.
A government with Ciro Gomez as president would escape this polarization and unite society behind a progressive economic and political agenda. The PT would instead be compelled to make ever more concessions to the Right, once again committing the same error as Rousseff, while throughout his campaign Ciro Gomez has made no concession to the Right even if doing so could have earned him the backing of many conservatives who do not want to vote for Bolsonaro.
Interviews conducted with the aid of Carolina Amadeo, Nicolò Giangrande, and Pedro Franceschini. Translated by David Broder.