Synthesis of the Brazilian Economy
Just In the few weeks since assuming office, the new government has been repeating the imprudent pattern of confronting the limits imposed on its power by the established rules, as is typical of autocracies of the right or left. Unlike Bolsonaro, who left decisions on economic questions largely in the hands of Paulo Guedes and focused his ire against freedom of the press, preservation of the environment, the quality of education, and civilized values, among other examples, Lula has decided to attack the pillars that sustain the functioning of the economy based on rules that assure predictability and efficiency.
Moved by haste to obtain results to assure his popularity, and without qualified aides with experience outside the narrow circle of acolytes of his party, Lula has been exhibiting a harmful excess of confidence marked by outbursts that are damaging both to the country and his own objectives. A prime example is his injudicious battle against the independence of the Central Bank, including attacks on the Bank’s president, along with an attempt to increase the inflation target. Among the greatest virtues of the inflation targeting regime is the Bank’s technical staff and their commitment to meeting the inflation target. The greater this credibility is, the lower will be the cost of guiding inflation to the target. The efforts backfired, and instead created mistrust and increased the inflation expectations of investors, requiring the Central Bank to keep the interest rate higher for a longer period. It has also created foreboding over the qualities that will be sought when replacing the current directors as their terms expire, including the Bank’s president, whose mandate ends on December 31, 2024.
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