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How Brazil’s Rousseff Can Keep Markets Sane: Alexandre Marinis

If Brazil’s President-elect Dilma Rousseff wants to foster investment to sustain economic growth and accelerate the convergence between domestic and international interest rates without stoking inflation, she needs to keep former Finance Minister Antonio Palocci in the government’s decision-making nucleus. Anything else would be an unparalleled waste and an irreparable mistake.

As President Luiz Inacio Lula da Silva’s administration showed, the success of an economic policy, and consequently of the whole of the government, depends on the degree of credibility that it can transmit to investors and business leaders. The more credible this economic policy is, the less sacrifice required of citizens while political costs to a president and his allies are limited. Hence the importance of Palocci.

No other member of the Worker’s Party who is close to Rousseff enjoys Palocci’s stature with entrepreneurs, bankers, investors, congressmen, journalists and even political adversaries. It comes from Palocci’s personal appeal, political moderation, negotiating skills and his competent handling of the economy during Lula’s first four years in office. This gives Rousseff the unique opportunity to use Palocci to make the most of the measures needed to keep the economy growing enough to ensure her administration’s success.

Since 2008, the Lula government has eased fiscal policy too much, relying excessively on monetary policy to control aggregate demand and inflation. This makes it harder to reduce real interest rates in Brazil, where they are stuck at about 6 percent compared with near-zero or even negative rates in more developed economies.

High Rates

High interest rates, in turn, inhibit productive investments, since entrepreneurs prefer to leave their money in the bank rather than use it to expand and add to economic growth without spurring inflation.

Starting next year, Rousseff will have several big challenges. The first will be to reconsider the effectiveness that the government attributes to public spending and to interest rates in controlling inflation. A second will be to manage the effects on the Brazilian economy of the weakening U.S. dollar. A third is to stimulate the private sector to finance major infrastructure investments. Palocci can help Rousseff face these challenges and many others.

Public Spending

For example, before the world credit crisis, Brazil’s federal government spent 79 percent of its net revenue on payroll, pensions and administrative expenses. In the 12 months ended in August, these expenses already accounted for 87 percent of revenue. Over his two terms in office, Lula added 256,000 government workers, increased government workers’ wages aggressively, and boosted the minimum wage -- to which pension benefits are pegged -- by 52 percent above the inflation rate.

The fact that these expenses can’t be reduced in the short run prevents expansion of federal investments, which continue to represent a scant 7 percent of net revenue. This meager figure hasn’t increased meaningfully even after the government reduced its primary surplus to less than 3 percent of gross domestic product, down from 4.2 percent two years ago.

On top of this, the government has engaged in a series of accounting maneuvers -- the share sale by Petroleo Brasileiro SA, the excessive reliance on dividends from state ventures, or anticipation of court deposits and revenue of Centrais Eletricas Brasileiras SA -- to produce primary surpluses that are in no way the result of fiscal austerity.

Palocci’s Presence

Palocci is a key element in helping Rousseff convince investors and business leaders that public spending won’t keep growing in an uncontrolled fashion that makes it hard to restrain inflation. The simple presence of Palocci close to Rousseff would give greater weight to her words, as was demonstrated in her first speech after winning the election on Oct. 31.

Should Rousseff announce, for example, a target for reducing the net public-sector debt from the present 41 percent of GDP to 30 percent in 2014, the economic impact of such a statement would be greater if Palocci was seen as having input in the decision. The same would be true of any announcement of measures concerning foreign exchange or long-term private investments.

That is why suggesting that Palocci might be appointed minister of health or communications seems to make little sense, not only economically, but also politically.

It is true that if he were leading the Health Ministry, Palocci could pave the way to a possible candidacy for governorship of São Paulo state in 2014. It is also true that placing Palocci in the president’s office, as chief of staff, general secretary of the presidency, or in any other highly visible post close to the president-elect, wouldn’t prevent him from seeking this or any other elected post in the future. Rousseff herself, who was Lula’s chief of staff, is a living proof of this.

Palocci, a doctor and skilled political tactician, could do a good job at Health, an area in which Lula and the Workers’ Party haven’t won high marks. That wouldn’t justify taking him out of the presidential circle of economic decision-makers. It’s hard to imagine that the Workers’ Party would be successful in the 2012 municipal elections, or in the state and national elections of 2014, if Rousseff’s presidency is a failure.

(Alexandre Marinis, political economist and founding partner of Mosaico Economia Politica, is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Alexandre Marinis in Sao Paulo at amarinis1@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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