Wednesday, 7 December 2016

BRAZIL: Protesting Austerity

In Rio de Janeiro, on Tuesday, police used tear gas to disperse state workers demonstrations outside the state assembly where lawmakers were voting austerity measures aimed at rescuing the state from a debilitating fiscal crisis. This anger is exacerbated by a state government financial crisis that has seen thousands of state employees and retirees not getting paid for months.

Brazilian's government has been a on a drive to fix Brazil's troubled economy through austerity measures. But austerity does not appear to be working. Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand, and thus worsen employment an unemployment. Brazil's public debt has snow reached alarming levels. Rising unemployment and inflation are slowly undoing the gains of Brazil's boom year

In January 2015, Brazil started to implement a fiscal policy based on austerity, following with some years of delay the path that many European countries, such as Greece, Spain and Portugal had entered into right after the 2008 financial crisis. In Europe, the results of this policy choice are well known. As the ''TROIKA'' started insisting on more and more austerity, the economies got weaker, tax revenues went down, and years later the fiscal position of those countries, the debt sustainability is even worse than when they began.

Europe may have provided a pedagogical experience for other countries, such as Brazil, but Brazilian policymakers neglected all the lesson the Eurozone crisis teaches us about austerity and its consequences. After nine quarters of economic depression, the Brazilian administration of Michel Temer is reinforcing austerity as the medicine to treat the Brazilian economic crisis.

At an empirical level, the European experience clearly shows that fiscal austerity is a descent to the abyss of economic recession, On the theoretical front, recent macroeconomic works are openly challenging this view, and we are not talking about works of heterodox economists.

In practice, as Brazilian and recent European experience show,  fiscal austerity only makes things worse. Ex President Dilma Roussef's attempt to promote a consolidation at the start of her second term only contributed to the deterioration of the Brazilian's government fiscal position and of economic activities levels.

In addition, a fiscal adjustment that comes with a pension reform will certainly increase the population's vulnerability without any foreseeable growth benefit. Social security benefits are relevant not only in their economic rationale, but also in setting people's standards of living, helping to reduce poverty and increase social mobility.

While the US and Europe are flirting with zero interest rates, and other countries are crossing the zero boundary and practicing negative rates, the Monetary Policy Committee of the Central Bank of Brazil keeps a 14% per year nominal rate.

Brazil's GDP is falling, unemployment is climbing and the Central Bank insists on a very conservative policy, providing no monetary support to the economy. But inflation is high, one might say. Yes, the consumer price index is now around 8% taken over 12 months. Nevertheless, there is no case to support demand-pull inflation in a depressed economy, in which the GDP has contracted in the last six quarters. Inflation in Brazil is a mix of indexation mechanisms and cost-push inflation, so one can argue there is space to reduce interest rates.

Lower interest rates might help reviving aggregate demand growth, though their effects are more relevant in other aspects: a smoother trajectory of public debt might follow, thereby improving the Brazilian government's fiscal picture, and Brazilian firms could benefit from better financial conditions, allowing them to restore their cushions of safety on terms that are more favorable.

By Jennifer Birich

Photo-Credit: AFP: Brazilian President Michel Temer