Fernando Alcoforado *
The world economy is faced with two gigantic problems: 1) Trade war that threatens to detonate a new global crisis; and, 2) World debt bomb that threatens to explode. All of this means that the risks to the world economy and to the Brazilian economy, in particular, become increasingly high.
- Trade war threatens to trigger new global crisis
The ongoing trade war is yet another symptom of growing imbalances in the world capitalist system after the deep economic crisis of 2008. As a reaction to the relative decline of the United States over the past few decades, the Donald Trump government has launched a series of policies that undermine the pillars of current international system of states. The rupture and revision of free trade agreements, the rejection of the Paris Climate Agreement, confrontation with traditional military and economic allies, and aggressive policies to contain China’s growing power and the strengthening of Russia are some of the line demonstrations adopted by the US government as a reaction to the relative decline of the United States.
The escalation of the trade war can precipitate a global crisis of enormous proportions. After imposing taxation on the order of US$ 100 billion in imports around the world and threatening China with new US$ 200 billion tariffs, Donald Trump maintains the commercial offensive, provoking the anger of even traditional allies. The United States has appealed to the World Trade Organization (WTO) against China, the European Union, Canada, Mexico and Turkey, claiming that US$ 67 billion in tariffs announced in retaliation for US taxation violate international treaties of trade. China did the same by pushing the WTO against US tariffs.
The unfolding of the commercial war is unpredictable. The International Monetary Fund (IMF) has warned in a report that the trade war threatens to undermine world economic growth and affects investor confidence. According to the IMF, the cost of the trade war could reach US$ 430 billion by 2020. The United States – the largest global economic and military superpower – shows its claws to reclaim lost ground. The main objective is to reaffirm the supremacy of the United States and prevent new and old rivals from occupying economic and geopolitical spaces. With clashes among the great powers intensifying, the geopolitical scenario becomes increasingly threatening.
- World Debt Bomb Threatens to Explode
The article by David Fernández Bomba da dívida mundial ameaça explodir (Bomb of the world debt threatens to explode) published in the newspaper El País, available in the website <https://brasil.elpais.com/brasil/2018/06/08/economia/1528478931_493457.html>, informs that a level of indebtedness never seen since World War II threatens to inoculate the poison of the next crisis. David Fernández states that “we are sitting on a mountain of public and private debt. The total invoice amounts to 164 trillion dollars, equivalent to 225% of the world GDP. Living on credit was the natural way out of the financial crisis. The loans made it possible to cover the imbalances in public accounts and revive growth. “He adds that “a level of indebtedness that has never been seen since World War II is a time bomb that can explode at any moment”.
David Fernández reports in the article quoted above that the IMF warns in its last fiscal monitor that “high levels of debt and high public deficits are a cause for concern”, that “China is the country that contributed most to the increase in volume in the last decade. But it is not the only one. Developed economies account for 105% of GDP on average. For emerging nations, the proportion is already 50%, a frontier last exceeded in the 1980s, which has caused a serious crisis in many of them”. “More than a third of advanced economies, for example, owe at least the equivalent of 85 percent of the size of their economy, three times as much as in 2000”. In advanced countries, indebtedness resembles that of World War II. One of the risks is the speed with which debt has grown, especially in emerging countries. It is necessary to add to the high public debt the delicate situation of private indebtedness, which doubled in a decade and already reaches 120% of the world GDP.
Attention is beginning to shift to the debt of the United States, the world’s largest economy. Increasing spending by US$ 150 billion – 0.7 percent of GDP – per year over the next two years and the tax cuts approved by the Trump government will push the US budget deficit to more than US$ 1 trillion, 5% of GDP. This situation and also the increased funding needs will cause the debt-to-GDP ratio to be 117% in 2023, according to IMF calculations. For experts, debt problems in the United States today are similar to those in 2007 and could lead to a global economic crisis.
Analysts at Moody’s Analytics warned that the growing indebtedness of non-financial organizations as well as the rise in corporate debt securities with the greatest financial risk will lead to a new financial crisis in the United States and then worldwide. According to analysts, the total volume of high-risk debt has now reached US$ 2.7 trillion. Moody’s Analytics chief economist Mark Zandi underlines that the current situation is similar to that of 2007, when the collapse of subprime mortgage lending led to the global economic crisis. The most serious threat to the current cycle is the lending to non-financial corporations with a high level of indebtedness … It should be noted that the total volume of high-risk mortgage loans was about three trillion dollars when it reached its before the financial crisis. Earlier in July, Bank of America analysts said the world could face a new deep economic crisis similar to the late 1990s. In June, the World Bank warned that a global crisis could happen later of 2019 [SPUTNIK BRASIL. Estamos à beira de nova crise global? EUA preparam ‘ bomba financeira’ em todo o mundo (We are on the verge of a new global crisis? US prepares ‘financial bomb’ worldwide). Available on the website <https://br.sputniknews.com/economia/2018082912078262-eua-crise-financeiro-global-dolar-petroleo/>, 2018].
In the article under the title IMF: debt breaks records and threatens the world economy posted on the website <https://www.em.com.br/app/noticia/internacional/2018/04/18/interna_internacional,952563/fmi-divida “the world is 12% more indebted than during the previous record in 2009,” laments the IMF, which attributes the to China, which represents 47 percent of debt growth since 2007. “Significant debt and deficits reduce governments’ ability to respond with budget policies that boost the economy in the event of a recession,” the IMF said. Emerging countries may be the first victims. If the United States raised interest rates faster than expected, emerging countries would suffer.
- Effects of the global crisis on Brazil
The downside of the trade war is that these tensions can slow global growth, which could hurt emerging countries like Brazil, both in terms of exports and the growth of foreign direct investment. Brazil can be affected in several ways: 1) a more general deterioration of the scenario could weaken the Real increasing inflation; (2) if the United States begins to impose broad tariffs on certain specific goods; and, 3) if the trade war causes the Chinese economy to slow down, causing the prices of the commodities Brazil exports to decline. In the worst case scenario, of a commercial war involving all the countries of the world, the average tariffs applied to Brazilian exports could go from the current 5% to 32%, according to several analysts.
The commercial war tends to cause turbulence in global markets, stimulating capital flight from Brazil, as well as reducing both the demand and the prices of the main Brazilian export items such as ore and grains. In short, the already weakened Brazilian economy will suffer even more with the commercial war, especially between the United States and China. The negative impacts of the trade war and world debt on the Brazilian economy as a whole are inevitable because Brazil has an extremely fragile economic system because of the crisis that broke out in 2014 and also because it has adopted since 1990 the neoliberal economic model that made make it more vulnerable to the impacts of global economic crises.
What can be done to avoid the commercial war and the explosion of world debt? At the international level, there would be only one solution to face these two problems, which is the constitution of global governance through which coordination between national economic policies would be carried out in order to generate a greater and sustained economic growth. With world governance it would be possible to make the world economy grow and mitigate the growing global debt. For Brazil to face the threat of a new and devastating global economic crisis, it would be necessary to overcome the country’s current recessionary crisis and also reduce Brazil’s vulnerability to the impact of external crises.
In Brazil, regrettably, the government does not have a development strategy, let alone a strategy to neutralize external threats to its economy. The current economic environment is very unfavorable with the internal market declining steadily, interest rates and the tax burden are extortionate, capital accumulation is low, the investment rate is insufficient for the country to grow at high rates and external dependence on technological progress and the organization of production in the primary, secondary and tertiary sectors do not contribute to the increase of the productivity and the competitiveness of the Country, industrialization has been suffering retrogression since 1985 when it represented around 30% of GDP and today corresponds to 10% of GDP and the internal market suffered a violent retraction from 2014 aggravated even more with the government recessive policy Michel Temer.
In order to overcome the country’s current recessive crisis, the Brazilian government would have to solve the public accounts problem, which would include raising public revenues by: 1) taxing large wealth with assets exceeding 1 billion reais that could approximately R$ 100 billion per year; and (2) an increase in the tax on banks whose profits have been stratospheric and, on the other hand, to reduce government spending by: 1) drastically reducing the number of ministries and public agencies and expenditures at all levels of government; and (2) a drastic reduction of the basic interest rate of the economy (Selic) to reduce the size of public debt and the burden of paying interest and amortizing public debt.
In order to make Brazil grow again economically, the Brazilian government should immediately implement a broad program of public infrastructure works (energy, transportation, housing, basic sanitation, etc.) to raise the population’s employment and income levels, and, consequently, the expansion of household consumption resulting from the increase in the wage bill and corporate income from investments in public works. In addition to the public works program, the Brazilian government should develop a broad export program, especially agribusiness and the mineral sector, a drastic reduction of bank interest rates to encourage household consumption and investment by companies, a reduction in the tax burden with the freezing of the high salaries of the public sector, the cutting of stewardships and organs of the public administration and the fall of the charges with the payment of interest and amortization of the public debt to be renegotiated with the creditors of the public debt. The Brazilian government should also reverse the deindustrialization process that has taken place in Brazil since the 1980s, promoting industrialization in strategic sectors for the country’s development.
In addition, the Brazilian government should adopt measures to reduce Brazil’s external vulnerability. Capital control is the most important piece to reduce Brazil’s external vulnerability. The Brazilian government should require that a certain percentage of the foreign investment be retained in reserve for a certain number of days with the Central Bank to limit the volatility of capital flows. This type of control, called “lock-in” policy, would prevent a sudden outflow of capital. Several countries in Asia have adopted measures to discipline the inflow and outflow of capital, which have achieved great economic success and greater stability than those applying the neoliberal model such as Brazil. In China and India, for example, capital transactions depend on government authorization. China and India, which have never abandoned control over capital, are now synonymous with continued economic growth.
Unfortunately, the measures described above are not being adopted by the Bolsonaro government, which insists on maintaining the neoliberal, anti-national and anti-social, economic model that has made the country unhappy since 1990, which tends to further aggravate the economic disaster that Brazil has been facing since 2014. At the same time, Instead of strengthening the federal government’s ability to intervene in the economy, the Bolsonaro government weakens it by privatizing state-owned companies, including Petrobras and Eletrobras. With the Bolsonaro government’s neoliberal policy, Brazil will not resume the economic growth needed to cope with the existing mass unemployment, will not prevent the rise in domestic public debt, and will be increasingly vulnerable to the effects of the commercial war and the consequences of the world debt. This means that, regrettably, the current government is not preparing Brazil to face the threat of a new and devastating global economic crisis.
* Fernando Alcoforado, 79, holder of the CONFEA / CREA System Medal of Merit, member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional Development by the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning and planning of energy systems, is the author of 14 books addressing issues such as Globalization and Development, Brazilian Economy, Global Warming and Climate Change, The Factors that Condition Economic and Social Development, Energy in the world and The Great Scientific, Economic, and Social Revolutions that Changed the World.
Site Title 