Can The Sinking Brazilian Economy Be Saved?
President Rousseff has abandoned big spending projects in favor of currency devaluation to fuel exports. Will it save her presidency? And more importantly, this BRICS nation's floundering economy?
SÃO PAULO — The only positive note for Brazil in the deplorable start to 2015 has been state prosecutor Rodrigo Jano's decision to leave President Dilma Rousseff out of the Petrobras corruption scandal. But economic data may not be so kind to her.
The price of the dollar most recently broke the barrier of three reais, the Brazilian currency, which means a 22.6% devaluation compared to March 2014 and an 11-year low. Likewise, there have been no optimistic reports on industries such as car manufacturing, which is a major employer.
Production has fallen 28.9% year-on-year; unsurprising, given that at least 1,800 people lost their jobs last February. Congress is expected to vote for a cost-cutting program, so the current political crisis definitely doesn't favor economic recovery.
Economists such as Luis Carlos Bresser Pereira, a minister under President Fernando Henrique Cardoso, believe that big spending cuts are necessary. According to Bresser, "Dilma is not orthodox" in economics, but "she is doing what she has to do." He says she has had to curb overgenerous subsidies, abuses of the system and "mistaken" tax breaks. "There is nothing more in tune with development policies than setting the finances straight," he says. "Instead of providing tax incentives, she is adjusting the exchange rate."
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Rousseff, "not orthodox" in economics — Photo: Porto Alegre - RS
The prominent economist maintains that circumstances have led Rousseff to change her economic model. She therefore dropped the policy of boosting growth with public works projects, which previously generated jobs and internal demand, and opted instead for an export-based project. In the case of industry, Bresser says, this should create conditions for reviving production and jobs.
Other experts — while not questioning the concept or considering whether it's orthodox or unorthodox, development-oriented or neoliberal — believe the measures Rousseff has taken in her second presidential term are not enough to push the economy out of recession. Pedro Varkanian of Mackenzie University says the economic situation is "highly challenging" for combining the worst factors: stagnation and rising inflation.
This economist believes Brazil is about to enter into stagflation, a situation Argentina has suffered on more than one occasion, most recently during the period after 2001. Varkanian says the dollar's increased value "leads to an increase in the price of imported consumer goods," and has a generalized inflationary effect. Add to this the government's price hikes for transport and electricity, and these will inevitably have an effect on working-class incomes and spending, Varkanian says.