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BRICS in Crisis

"Dilma Government Needs to Control Inflation"

January 9, 2014 | by SGI NEWS


SGI News: Professor Renno, like many emerging nations, Brazil is having a hard time at the moment. Its GDP has seen a massive decline since 2007, and more recently it has suffered from capital flight and currency decay as a result of the monetary policies of the U.S. Federal Reserve. How robust is the country’s governance capacity to overcome these current crises?

Lucio Renno © private

Lucio Renno: A political system like Brazil’s, which allows for so many parties, such strong governors and personality-centered politics, is often associated with an inability to govern. But until very recently, the results in Brazil have shown otherwise. The government, which is usually composed of coalitions and has a majority in congress, is able to advance its agenda and approve some of its more controversial legislation. It has been able to implement significant reforms in the areas of social security, the pension system and establishing fiscal limits for subnational governments. At the moment, there is no indication of any kind of decision-making stalemate or gridlock. Having said that, the government of president Dilma Rousseff has difficulties advancing other aspects of its agenda, which are, for instance, related to the vested interests of governors and unions. Among others, there hasn’t been a tax reform in Brazil because it is very hard to negotiate losses. In general, the Brazilian system is able to deal with crises but it has its limitations when it comes to vested interests of subnational governments.

SGI News: What other factors determine whether the Brazilian government is able to implement its policies?

Lucio Renno: It also depends on the style of the people who are heading the coalitions. The management style of the people who are associated with the executive legislative relations during the administration of Fernando Henrique Cardoso and Lula da Silva was different from the management style of the current period. Today we see the Dilma administration having more difficulty building stronger support in congress. President Dilma avoids dealing with congress on her own as much as she can. And she has people who deal with congress in a way that is very harsh. They are people who are strongly opposed to bargaining and negotiating with members of the coalition. As a result, the government is having a hard time implementing policies, changing legislation and approving new legislation. And the bargaining cost increases when you have bad coordination.

SGI News: Can you offer an example?

Lucio Renno: The most emblematic case here is the Forest Code, which represented significant loses for the executive branch. In the past, the federal government usually sided with environmentalists on issues of forestation. But landowners were behind the proposal that won this time. These are examples of the coalition breaking up and the government being unable to pull it together. There is an empty space in the Brazilian system that leaves room for defects in management styles. This space for individual style and personal character in Brazilian politics is often a hindrance for governance today.

SGI News: Does this affect all policy areas?

Lucio Renno: It mostly relates to the social agenda of the government. Those are issues Dilma will not negotiate on because they are the central aspects of her campaign next year. It also affects fiscal policy and rising public debt. Dilma’s government is very oriented towards spending and it’s very averse to criticism and restrictions that relate to spending on development, social programs and infrastructure programs, especially in the upcoming election year. This intersection of fiscal policy and social policy is where the government is least open to negotiation. Most analysts on the economic side see this as a dangerous course.

SGI News: Which policy areas is the president cutting to free up resources for social affairs?

Lucio Renno: It’s hard to say. A lot of the investment in healthcare and education in Brazil is constitutionally based, so Dilma can’t really touch that. I don’t see significant investments in these areas, except for certain areas of the health system. The More Doctors scheme, for instance, which the government is really pushing forward and which I think will be a leading program for next year’s elections, is consuming a lot of money. The program would allow foreign doctors to be hired to fill positions in Brazil. There are also accusations that the money is coming from accounting tricks; they take money from the general budget and invest more in social areas without compromising fiscal stability. Even if these accusations are false, they undermine the government’s credibility in the eyes of foreign investors.

SGI News: That doesn’t sound like a very sustainable path.

Lucio Renno: No, it isn’t. The result is a higher deficit because the government is spending more than it should. It is a dangerous path to take. It could lead to more inflation in the future because you have a lot of money circulating without a wealth base. This is a significant threat to the economic stability that we have had for the past 15 years. Most of these policies are implemented within the executive branch with very little negotiating with the legislative branch. Inter-branch control over these decision-making processes is very weak because of the Dilma administration’s highly centralized style of governance. Dilma centralizes too much and this is leading to bad policy.

SGI News: Now has the public been reacting to this situation? Did it play a role in the protests that took place in Brazil last summer?

Lucio Renno: Those protests had a very diffuse agenda. They didn’t target just one issue but many – corruption, public spending on stadiums for the World Cup, weak funding for the healthcare and education systems. What wasn’t expressed in those protests was the growing dissatisfaction with state of the economy. Brazil looks fine when you look at the numbers for unemployment or wages, which fueled the growth of the middle class. But this year has also seen a sharp rise in inflation. You hear it on the streets everywhere; people are complaining about the price of basic goods. They don’t say they’re going to the streets because of inflation, but because of the quality of healthcare, education and infrastructure. And those will be significant issues for next year’s campaign. But the government has noticed this growing public discontent and it is becoming more aware of the need to control inflation. The Dilma government needs to control inflation.

SGI News: Will we see new protests soon?

Lucio Renno: As the World Cup comes closer it will become more visible again. But the state of the economy has a bigger influence on the public’s mood than the quality of public services. If at the end of this year and the beginning of next year you have better control of prices and an increase in income, for instance, I see less room for those kinds of protests. They will be there, but not as intense.

SGI News: What will the upcoming election year bring?

Lucio Renno: There is nothing that tells me the government is going to stop spending. Everything that is fiscally responsible will have to be linked to controlling inflation, so this is the only motivation that I see for the government to act more conservatively when it comes to fiscal policy. It’s not a very positive scenario for the long run. The consequences could be quite dramatic in three or four years. However, it is very unlikely that interest rates will increase and public spending on social policies will decrease before the elections. Thus, opposition candidates will pose a real threat to Rousseff’s reelection, but she is still likely to win.

SGI News: Do you think Brazil will still be seen as a model for other countries in terms of development – as you write in the Brazil report of the SGI BRICS study?

Lucio Renno: In next year’s election, there is a possibility that the opposition will come to power with a conservative agenda of fiscal responsibility like in 1994. Still, the current government’s economic difficulties could be leading Brazil into a cycle of expansion of public spending through left-wing parties and retraction through right-wing parties. We can observe this pattern in most developed countries in the world. If the Dilma government continues with these high levels of spending without cuts and limits in other areas, it will run into problems. Getting re-elected could be a challenge; governing for another four years will be a problem.

Lucio R. Renno is Associate Professor at the Political Science Institute of the University of Brasilia. He received his PhD in Political Science from the University of Pittsburgh. He is a co-author of the Brazil report of the SGI BRICS Study.

Interview: SGI News


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