The success of the “currency war” and “monetary tsunami” metaphors is unparalleled in strategies to confront the crisis.
Guido Mantega, Brazil’s finance minister, achieved world fame in 2010 when he coined the “currency war” metaphor to characterize the problems that the expansionist monetary policies of the central countries were causing for various emerging countries, notably Brazil. During a recent trip to Germany, President Dilma Rousseff complained about the “monetary tsunami”. Unfortunately, the success of these metaphors has not been reflected in the economic strategies used to confront the crisis. The government’s heated reactions suggest that what is lacking is a correct diagnosis of the causes of our problems with the measures adopted looking rather like palliative actions peddled by industrial sector lobbies.
It is quite reasonable to be concerned about the collateral effects of the central countries’ monetary policies. But it is not reasonable to expect that such laments will lead to changes in these policies. The Brazilian strategy should take into account that the “monetary tsunami” will continue as long as the threat of recession continues to hang over the USA, Europe and Japan, with capital coming here in search of higher returns and thus helping to appreciate the Brazilian real (BRL).
It should be emphasized that, from a broader perspective, the current situation certainly constitutes a much less serious problem than the repeated crises we experienced up to 2003 with their enormous currency devaluations. Life today, especially that of the poor, is much better than when politicians used to win elections by campaigning for a minimum wage of US$100, less than 30% of its present value.
As positive things also have their negative side, what constitutes income for a worker also represents a cost for manufacturing industry which is suffering under the effects of foreign competition. Faced with this situation, what is the government doing?Although the factors that cause Brazil’s high cost of manufacturing have been widely known for a long time (a constantly increasing tax burden to fund a large and inefficient public sector, high costs associated with labor, deficient infrastructure, an expensive and ineffective bureaucracy, a morose and costly judiciary, etc.), all that has been heard from the economic authorities is that they will deploy an “infinite arsenal” to prevent the BRL’s appreciation or strong barriers to protect domestic industry.
Currency control measures, that IMF studies have enthroned as part of the new orthodoxy, have achieved a new prominence and credibility. The problem is that the literature provides no proof as to their medium-term effectiveness in devaluing the exchange rate. If the central economies do not start growing again in the next few months, ultra-expansionist monetary policies will probably continue and, with them, an excessive entry of capital.
The sterilized interventions performed by the CB or the Sovereign Fund, through the spot or futures currency market, are extremely onerous, while controls on capital inflows are always porous. If they are kept in place for long enough, financial institutions will find a way of getting around them. Controls can only be used, at best, on a temporary basis in order to gain time while other measures are implemented such as a rigorous fiscal adjustment. Making capital controls the central feature of economic policy is a strategy that is bound to fail in the medium term.
However, protectionist measures can cause even greater harm to the Brazilian economy. The measures adopted have invariably been casuistic: imposing an IPI (Tax on Industrial Products) to protect locally-produced cars, more subsidized credit for those few sectors that supposedly employ more than others, tax exemption for certain goods and so forth; nothing that seriously tackles Brazil´s real deficiencies. Experience shows, time and time again, that protectionist measures are always intended to be temporary but, more often than not, end up becoming permanent, thus increasing the cost to Brazil and jeopardizing the productivity and competitiveness of Brazilian products. Not to mention the loss of international prestige, shown by the German chancellor’s sideways remark during President Dilma Rousseff’s visit.
One should always bear in mind that, due to Brazil´s reduced capacity to generate domestic savings (only 17.2% of GDP in 2011 against more than 40% in China), it does not seem to be possible to achieve the target of sustained growth rates of 4% or more without relying on significant inflows of foreign capital. Brazil’s current position as international investors’ favorite market has enabled it to count on the high inflows of capital needed to finance the productive investment which is indispensable for sustained growth. But other countries have already been in a similar position and lost the opportunity. It is not very difficult to put foreign capital to flight. All one needs to do is make enough mistakes. But this will not help achieve sustained growth. It would be a better idea to create conditions for a peaceful coexistence with the avalanche of capital by carrying out reforms and putting policies in place that can reduce the Brazil cost.