LATIN AMERICA

Brazil looks to cut spending and control inflation

Dilma Rousseff changes course to confront the most obvious economic challenges

Rousseff signs autographs for Petrobras employees.
Rousseff signs autographs for Petrobras employees.S.M. / REUTERS

In December 2009, amid the global economic crisis, Brazil’s then-economy minister, Guido Mantega, compared the country’s Gross Domestic Product (GDP), which was at 2%, with Europe’s sluggish growth. “We have a pibão [big GDP]; theirs is a pibinho [small GDP].” The sentence was lauded and repeated. But, with time, it turned against its author as the growth that had astounded observers a decade ago vanished.

The latest figures published on Friday provide proof of this downward trend. The Brazilian economy grew just 0.1% in the last quarter. Optimists say that at least the country is no longer mired in the technical recession that lasted six months. One of the realists, MB Associados chief economist Sergio Vale, told O Estado de São Paulo newspaper: “The country is not out of the hole yet.” Many columnists are bringing back Mantega’s remarks by calling the current period “the era of the pibinho.”

The appointment of new economy minister Joaquim Levy may be a clue as to how the administration plans to move forward

Former president Fernando Henrique Cardoso, of the Brazilian Social Democratic Party (PSDB), succeeded in stabilizing the Brazilian real and putting an end to high inflation during his administration (1995-2003). The economy then took off during ex-president Luiz Inácio Lula da Silva’s eight years in office with successive quarterly growth rates hitting 6% or 7%. An increase in salaries and a drop in unemployment fostered the growth of a new middle class whose members entered the consumer market, boosting an economy that expanded despite the international financial crisis.

But that trend ended a year ago. President Dilma Rousseff of the Workers’ Party (PT) was reelected in October by a slim margin. During a difficult and close race, PSDB candidate Aécio Neves blamed the international crisis for Brazil’s sluggish economy. But some observers are sending the ball back to the government’s court and urging officials to change course. They highlight two factors: the fact the American economy is now making progress and that China has a growth rate in excess of 7%.

Just one day before the GDP data was published, Rousseff appointed Joaquim Levy, an economist trained in the liberal, neoclassical Chicago school, as her new economy minister. The fact that Levy specializes in reigning in spending may be a clue as to how the administration plans to move forward.

A few days after his appointment, Levy said Brazil needed to cut spending and apply a series of economic adjustments, though he did not say where or when. He will probably reveal those details after taking office on January 1. Levy did say he will focus on bringing down inflation, which has been hovering around 6.5%, the government’s target ceiling.

Former presidential candidate Marina Silva and others say Levy will not have enough autonomy to fulfill his role

High inflation, high interest rates, a stalling jobs market – although unemployment is at 5% – and slim increases in salaries have crippled consumption, which was one of the pillars of economic growth under Lula. According to the national statistics office, Instituto Brasileiro de Geografia e Estadística (IBGE), consumer spending shrank by 0.3% compared to the last quarter and GDP is tumbling down to rates not seen in Brazil since 2003. Manufacturing has also slowed. And the whirlpool of corruption uncovered at Petrobras, the country’s largest public company, does not help.

Levy will have to fight these economic challenges as he faces political obstacles. During the election campaign, Rousseff emphasized the PT’s social agenda in order to differentiate herself from other candidates. Now, some PT supporters do not approve of her choice of economy minister as a result of the spending cuts and because they believe he has a different set of principles. Former presidential candidate Marina Silva and others say Levy will not have enough autonomy to fulfill his role.

During a PT gathering in the city of Fortaleza on Friday, President Rousseff herself asked her fellow party members to show “maturity.” “The situation is changing. The country is changing and the economic conditions are changing. We have to adapt to new demands and provide answers.”

Translation: Dyane Jean François