Published on Tip News’s website, April 24, 2012.
Brazil’s president, Ms. Dilma Rousseff, prioritized macroeconomic reform in Brazil, as a strategic measure to ensure the country’s prosperity in the future. Speaking last week in Brasília at the graduation ceremony for new diplomats (class of 2010/2012), the Brazilian president singled out interest rates, exchange rates and high taxes as obstacles for Brazil’s development.
For about three decades now, critics of the country’s macroeconomic policies have denounced those three areas as serious impediments for investments, competitiveness and overall performance of its private sector. This author has repeatedly called the three elements cited by Brazil’s president as the “demonic triad” for many years.
Since the somber years of the past military governments, Brazil has adopted a policy of forced over-appreciation of its currency, with a view to making imports cheaper and thus checking inflationary pressures. This has been called “exchange anchor” by the voodoo economists abundant in the country. Of course, over the long term, this irrational practice has almost annihilated the domestic industry.
The incompetence of the public sector in Brazil to contain inflation is such that, in addition to the appreciated currency, exorbitant interest rates, very often the highest in the world, have also become necessary. This inaptitude also reflects on the quality of public expenditure.
Thus, high taxes have become a necessity to compensate the sundry and severe shortcomings of the public sector. Today, taxes in Brazil weigh almost 40% of the country’s GDP and have become a bureaucratic nightmare on account of the insane red tape and a quandary of more than 80 different types.
In the first year of President Dilma’s administration, Brazil pursued an exchange policy of appreciated currency, in exactly the same lines she now criticizes. In addition, the country’s real interest rates were the highest in the world. In order to compensate for the loss of international competitiveness of the domestic manufacturers, her administration granted some sectorial tax subsidies, which only increased bureaucracy and the cost of doing business in Brazil, with no practical results.
Accordingly, it is with great relief that the country’s private sector and national strategic observers took the president’s change of posture. It is to be hoped that she did not get carried away by the diplomatic atmosphere of Brazil’s Foreign Office, Itamaraty, and its license of speech, so that she will put her words into practice.