Por Marcelo Fonseca
An MP is legal act in Brazil through which the President of Brazil can enact laws effective for a maximum of 120 days, without approval by the National Congress. MP 881 is about The Economic Freedom and the real impacts for the growth of the country.
The Provisional Measure 881, published on April 30th, 2019 (called Economic Freedom MP), introduces principles based on freedom in the exercising economic activities, the presumption of the good faith of the individual and the minimum intervention of the State on the activities and economic development. In fact, these principles serve as premises for the “statement of rights” that give shape to the MP. The “rights” listed are often marked by subjectivity, or even by the fact that what is intended to be guaranteed in the MP is already part of everyday practices.
The MP introduces significant changes, such as the one observed in the article of the civil code that deals with the “confusion of assets” of the partner or manager.
However, for the purposes of this article, I will focus on the possible economic impacts that the measure may bring.
The Bolsonaro government was elected, to a large extent, for defending a liberal speech in economic terms. The interventionist bias of the Labour party governments, especially since the second term of Luiz Inácio Lula da Silva, called “New Macroeconomic Matrix”, was marked by the intervention in the economic domain with the gradual dismantling of the tripod composed of floating exchange rate, primary surplus and system of inflation targets. At the end of this political cycle, the country was facing high debt as a proportion of GDP and rising inflation, without any counterpart of economic growth. The voters only had the speech focused on a market economy, with little State interference. The MP 881 is therefore a summary (not exhaustive) of concepts and ideas on how to create an investor friendly economic environment. It mainly serves to signal that the government reads through the liberal primer and is aware of the obstacles to be undertaken in Brazil. However, the MP will still go through the congress and will certainly change.
But assuming full approval of the provisional measure, can we foresee a positive impact on economic growth?
I believe that this event by itself will not deliver the desired result. I understand that we have reached the limit of the ability of economic policies to positively affect the economy. Observe the SELIC (market interest rates) rate level. In October/17 it was already around 7.5% on an annual basis, having been reduced to 6.5% since March/18. Monetary policy is incapable of boosting the economy for structural reasons.
The banking concentration, among other reasons, causes the interest rate to be very high in Brazil; as the very high banking spread hampers the deleveraging of economic agents (firms and consumers), making it difficult to reduce debts, with negative impact on the reestablishment of investments and consumption.
From the point of view of the fiscal policy, the picture is even worse. There is no room for increase in government spending. Boosting aggregate demand through increased spending can have dubious effects on the presence of high public and private debt. In addition to the fact that the government is focusing all its efforts into approving the social security reform, which will save 1 trillion reais over the next ten years.
Therefore, how can investment and consumption effectively resume????
Resuming the investment capacity of the federal government, states and municipalities would be a good start. Heavy expenditures on transport infrastructure, basic sanitation and education would increase the quality of life of the population with positive impacts on business productivity. With the caveat that the country needs to move forward in facing the inefficiency of public spending. That is, a massive challenge.
Another key issue affecting economic growth is crime. There is no way to reconcile economic growth with high levels of violence. High volumes of investment in combat and prevention are needed. The tax reform and the restart of privatizations are other options.
The Economic Freedom MP validates campaign promises and seeks to change the business scenario in Brazil in some matters. However, we have accumulated structural problems over the years that need to be addressed. Giving the public sector tools to manage their spending and recovering the investment capacity of the federative entities is a good start.
Marcelo Fonseca – Economist and Partner of HLB Brasil
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