The real will only be successful when Brazilian and international interest rates are equal, says Persio Arida
Persio Arida, managing partner of Brazil’s largest investment bank and former Wilson Center Public Policy Scholar, reflects on 18 years of the stabilization plan he helped to conceive and on current challenges facing Brazilian and global economies
SÃO PAULO – A few days after its 18th anniversary, Plano Real is still not considered a total success by one of its creators, economist Persio Arida. Arida was a Public Policy Scholar at teh Center, during which time he wrote a seminal concept paper on economic stabilization in Brazil. He is a managing partner and Chairman of the Asset Management of BTG Pactual, Latin America's largest independent investment bank. According to him, the Real project will be fully completed only “when Brazilian interest rates are the same as international rates, when Brazilian credit is on par with that of other emerging countries, and when credit is available for long periods of time and in large amounts.” The lower rates of growth Brazilian economy is experienced is not caused by a lack of optimism nor entrepreneurship, he said. “The problem for our country is the excessive tax burden and the great weight of subsidized and directed credit and excessive state intervention.”
Arida believes that maintaining stability is crucial, but criticizes strong government intervention in the economy, even when its purpose is to encourage growth. “From the viewpoint of modernizing and reducing the state’s interference in the economy, the country is regressing, not evolving,” he warns.
This point, he said, is one of the reasons for foreigners’ decreasing interest in Brazil. He is referring to the Financial Operations Tax (IOF) on capital inflows into the country, the tax on imported goods (IPI) for imported cars, and the restrictions on land purchases by foreigners.
The original version of this interview was published online in the June 28 edition of O Estado de S.Paulo. Leticia Bragaglia conducted the interview. Brazil Institute interns Lauren Phelps and Elizabeth Sweitzer translated the text into English.
What is the most salient memory that you have from Plano Real’s launch?
At that time there was huge social support for the program. Some politicians opposed it, most notably the Worker’s Party (PT), but the population as a whole endorsed the plan. When Andre Lara Resende and I wrote an academic paper in ’82.14 years earlier, saying that the solution to Brazilian inflation was a monetary reform that introduced an indexed currency, that was later, along with Plano Real, titled “URV”, we anticipated that it would take the population two years to gradually transfer old contracts to the new currency. What I then observed is that this happened over a much shorter time period, merely 3 months, which gives you a good idea of how well-supported the plan was. This is a poorly understood aspect of the stabilization program, because usually the program’s success is accredited to the technical team that wrote the Plan. This is not untrue, but without the support of the population and most of Congress, Plano Real would not have been feasible.
Did this support also exist among economists and financial institutions?
No, on the contrary. There was a contrast between the support of the people, who were hungry for stability, and the academics, who were greatly skeptical. It started in the International Monetary Fund (IMF), who refused to endorse Plano Real under the argument that the program had neither a basis nor was it clear that it had any substance. Articles were common here in Brazil saying that the plan would not work and that it was a huge mistake. Important economists said that endorsing Plano Real was like “skating on thin ice.” They also said that the new currency would immediately cause hyperinflation. Finally, there was enormous skepticism among academics, because it was an innovative plan; it was something that had never been done anywhere in the world. It was innovative because Brazil had a very peculiar characteristic, a very specific issue, something unique to Brazil, which was the widespread indexing of contracts required by law. What André and I did think about was the problem of stabilizing Brazil, taking into account not only the universal aspects of inflation, such as the fiscal adjustments and accommodation policies of the Central Bank, but also the more specific features of Brazilian inflation. Because these issues were only present here, solving them required a team of Brazilian economists, because international literature did not address our problems.
What was the relationship like between the members of the team that designed Plano Real? Was it easy to reach a consensus?
We were all united by our common work; nobody had an outside agenda other than success and stability. Moreover, there was a shared intellectual mindset, which helped a lot. There was trust. Almost everyone was a graduate of the Catholic University of Rio de Janeiro, so there were relationships between teachers and students. Somehow, there was a common cultural identity among us that allowed ideas to move ahead very quickly.
Is Plano Real a success?
The success of a monetary stabilization plan can only be confirmed with time. Eighteen years after the creation of the real, the plan is often considered very successful because we tamed the dragon of hyperinflation, which was a particular challenge in our country. However, the type of challenge for the real changed. What we have now is a global challenge, now that our inflation is more in line with that of other countries. Part of the benefit of Plano Real, in addition to disinflation, was the building of confidence in the currency. Today, if you ask how much someone has in their account, the answer is in real. Before the plan, this response was in dollars. The increase in confidence in the currency was a process that took time. Today we have confidence in the currency of our country, but at the time of the launch of the real, the financial markets were atrophying. Credit was very limited and interest rates were extremely high. Credit, therefore, was little and short. You had to buy a car in a maximum of six months. Mortgages had to go through the Federal Bank; they did not exist in the private sector. With the stability brought by the plan and the new confidence in the currency, financial relations deepened and the financial market began to normalize. Brazil, which previously had 10 or 15 percent credit, currently has 50 percent. Today, you can finance a car in five years, and the interest rates are at their lowest levels in history. Throughout these last 18 years, then, Brazil has been returning to normal. I emphasize the importance of this, because the process is not over yet, and it is essential to ensure that this stability continues.
How should this be done?
The real will only be a success when this process has concluded, or perhaps, when Brazilian interest rates are equal to international interest rates, when credit has the same dimensions as other emerging countries, and when people have access to credit in meaningful amounts. The good news is that this process will still help the country grow. Another influential factor for Brazil is the aspect of demographics. We are a young country and this will also help us evolve. While these two factors favor Brazil, the country’s growth is far from brilliant, and it should stay around 2% in 2012.
Why is the economy not growing more than that?
It is neither a lack of optimism nor entrepreneurship. The problem for our country is the excessive tax burden and the great weight of subsidized and directed credit and excessive state intervention. That is what takes away from the dynamism of the Brazilian economy. The good news is that this is something that is in the government’s hands, and therefore, in theory, in our hands, to resolve.
Is Dilma’s government headed in the right direction to resolve these issues?
Obviously our leaders mean well. But that has to be analyzed objectively. Has the tax burden as a whole increased or decreased? Or perhaps, if we listen to a few aggregated statistics on state intervention in the economy, we will see a preoccupying tendency, not only in the short term. The fiscal tax when the real was launched was lower than 25% of GDP; today it is 37% of GDP. The volume of credit with government intervention, in proportion to total loans, is much greater today than when the real was created. So, although Brazil has made enormous progress in consolidating stability, in terms of modernization and reduction of state interference in the economy, the country is regressing and not evolving.
How can the government improve income distribution in Brazil?
The euphoria of recent times in Brazil is the result of three things. Brazil is a country that is rapidly growing, that has very attractive interest rates, and that is perceived as a country that is very friendly to investors. All of these factors have lost their shine recently. Today, the country has lost its strength in growth; interest rates fell sharply and there are a number of government initiatives that are perceived as populist, against foreign capital. I refer to this abrupt change in the import tax on imported cars, the instance of IOF on capital inflow, and on land-purchasing restrictions for foreigners. I believe that the government interventions really have a horrible impact, mainly because we are on Argentina’s side. The idea that Brazil could follow the same steps as those of our neighbor frightens investors. Brazil is not following a populist path, but some poorly communicated topical initiatives generate a negative perception out there. Growing economies, which slowed and made Brazil lose its charm in the eyes of foreigners, should gain pace later this year. Finally, in relation to the fall in interest rates, I think that they should continue as they are, even if this scares off foreign capital. Rates should converge to international standards, as well as to the inflation target, which should be revised from 4.5% to 3.5%.
What is your evaluation of the international scenario at this moment?
The world’s big event this year was not Europe, which just lives in another chapter of the same crisis. The major concern is China, which is suffering from growing tax inflation and the market is now questioning whether there will be a soft landing or an emergency landing. I think that it will not be a general collapse, but also it will not be a smooth landing. China is going through a structural change that will make its tax growth rate stay permanently low. The country, which grows between 10% and 12% each year, will continue to grow between 7% and 8% in the coming years. That has extraordinary importance for the world. In addition to growing less, China will become a country oriented more towards the consumer market. Yet, that doesn’t make headlines, it does not send a run on the banks, people pay less attention to this than Europe where there is a capital flight in slow motion. This is a very dangerous situation from the perspective of expectations management. But this is a crisis without a quick solution, because for it to be resolved there needs to be construction of an European fiscal sovereignty that could supersede the EU nations’ sovereignty. That is not easy because it involves the creation of institutions that need to be ratified by parliaments, with changes in the constitutions of countries, which would take time. The United States has already addressed relatively well to the two largest sources of imbalance in the country, which are banking and real estate. These are questions that are not resolved, but have been dealt with well. The growth of the country is nothing extraordinary, but it is reasonable. The problem there is not economic but rather political. If tax incentives are not renewed at the end of next year, there will be great negative impact on [economic] activity. But if there is good political sense, the country will maintain a path of sustainable growth.
Persio Arida is a managing partner and Chairman of the Asset Management of BTG Pactual. Prior to BTG Pactual, he worked in a variety of roles in the private and public sectors. Arida was Governor of the Central Bank of Brazil, President of the National Economic and Social Development Bank (BNDES), Board Member of the Central Bank of Brazil in 1986 and Special Secretary of Social-Economic Coordination, Ministry of Planning. In the private sector, he was a Board Member of Banco Itaú Holding Financeira S.A. and Banco Itaú S.A., Board Member of Sul-América S.A, Director of Opportunity Asset Management Ltda., Board Member of Unibanco S.A. and Special Adviser for the Presidency and Director of Brasil Warrant Ltd. Since the 1970s, he has also worked as an economic and financial consultant.
Arida holds a PhD in Economics from MIT and has published several papers in specialized journals and has edited several books. He was a Professor at the University of São Paulo (USP), PUC-RJ, a one_year member of the Institute for Advanced Study (Princeton), a former Public Policy at the Woodrow Wilson International Center for Scholars (Washington), a visiting scholar at the Smithsonian Institute (Washington) and, most recently, at the Centre for Brazilian Studies of Oxford University.
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