Fernando Alcoforado*
This article aims to demonstrate that the increase in the economy’s basic interest rates (Selic) in Brazil does not reduce inflation rates and that the correct thing would be to adopt a policy that contributes to the increase of production and productivity of the economy. In the contemporary era, it has been a dominant practice in capitalist countries such as Brazil to combat inflation by raising interest rates whose ineffectiveness is proven by the persistence of inflation and not its reduction. In addition to not helping to reduce inflation, high interest rates represent a transfer of income from society as a whole to a relatively small portion of the population, holders of public debt bonds, the so-called rentiers. In just one year, rentiers (5 million families) receive from the government, via interest, what Bolsa Família beneficiaries (14 million families) take 14 years to earn, according to economist André Lara Resende.
How has the government controlled inflation in Brazil? In order to keep inflation under control, since 1994 the Brazilian government has promoted, based on the neoliberal economic model, the opening of the domestic market to imported products in order to force down domestic prices, as well as adopting the so-called exchange rate and monetary “anchors”. The exchange rate anchor instituted the regime of exchange rate “bands” with the exchange rate varying between certain limits that, in practice, seek to lower the cost of imported products in order to force down domestic prices. In turn, the monetary anchor seeks to reduce the volume of money in circulation by selling public securities to avoid putting pressure on prices. Complementarily, the Central Bank of Brazil raises the basic interest rate of the economy (Selic) to increase the cost of money and the level of compulsory reserves of banks (resources that they are obliged to “keep in custody” at the Central Bank) to reduce the volume of money in circulation.
As of 1999, the inflation targeting regime was adopted, in which the monetary authorities committed themselves to meeting targets established for the current year and the next. One of the ways to seek to achieve inflation targets is through the Selic rate. By raising interest rates, the government increases the cost of money, reduces the demand for products and services for sale and, consequently, seeks to promote a drop in inflation. As interest rates make credit more expensive, companies need more money to pay off debts and this can cause an increase in the price of the final product, fueling the inflationary process instead of reducing it as intended by the Central Bank. This system of inflation control by the Brazilian government has been extremely ineffective because, in addition to not effectively reducing inflation because it acts on the symptoms and not on the true causes of the problem, it has been harmful to the national economy by leading the country into recession, to falling investments, rising unemployment and rising public debt.
Recently, President Lula and ministers of his government considered that the president of the Central Bank, Roberto Campos Neto, had betrayed the confidence that the government placed in him to dialogue and participate in a joint effort for Brazil to overcome the economic problems it faces today without going through by a recession. The president of the Central Bank not only kept the basic interest rate (Selic) extremely high at 13.75% per year for the fourth consecutive meeting, the first since Lula took office, as well as said that he should keep rates at high levels longer. With this message, the Central Bank would be hindering the recovery of credit and economic activity in the country, and putting Brazil on the path of recession. President Lula and his government began to distrust the performance of Roberto Campos, appointed to the position by Jair Bolsonaro for a four-year term. His attitude is not surprising, because Roberto Campos Neto, in addition to being neoliberal and linked to the financial system to which he has always served, has always been aligned with Bolsonarism.
It is absurd what happened in recent years in Brazil when Complementary Law 179/2021 established the autonomy of the Central Bank and that its president and directors will have fixed terms of four years, not coinciding with that of the President of the Republic. This Law establishes that price stability remains the fundamental objective of the Central Bank which, without prejudice to this objective, will also ensure the stability and efficiency of the financial system, smooth fluctuations in the level of economic activity and promote full employment. However, in practice, the Central Bank neither smooths fluctuations in the level of economic activity nor encourages full employment with its emphasis on extremely high interest rates. With this Law, the National Congress made it difficult for the federal government to adopt economic, fiscal and monetary policies, articulated among themselves as is currently the case, insofar as the monetary policy imposed by the Central Bank may contribute to making the Lula government’s effort to resume national development unfeasible.
It is important to note that, in March 2021, inflation accumulated over the last 12 months surpassed the target ceiling and has not returned. To control inflation, the Central Bank began to increase the economy’s basic interest rate, in an attempt to discourage consumption.
Figure 1- Inflation in Brazil
Source: Análise Macro
The facts of life demonstrate that the adoption of the current ineffective monetary policies in the fight against inflation must be replaced by effective direct action by the government on the factors that generate inflation, with the adoption of concrete measures to eliminate demand inflation, cost inflation , monetary inflation, inertial inflation and the possibility of hyperinflation, These measures are presented below:
How to eliminate demand inflation in Brazil?
Demand inflation happens when domestic production in the country is insufficient to meet demand. To prevent this from happening, the Brazilian government should annually plan the national economy to meet the expected demand for agricultural and industrial products, raw materials and agricultural and industrial inputs, and energy, transport and communication services, and monitor their evolution to assess cases with possible imbalances between supply and demand. Having identified cases of imbalance between national supply and demand, the government should act to increase national production or import the necessary items. The priority of national production is to meet domestic demand. Only when there are production surpluses would they be exported. The government must plan in advance the level of buffer stocks of agricultural and industrial products, raw materials and agricultural and industrial inputs and energy, transport and communication services to avoid their shortage and, consequently, to avoid demand inflation.
How to eliminate production cost inflation in Brazil?
This inflation occurs when there is an increase in production costs (machinery, raw materials, labor, taxes, etc.) of agricultural, industrial, trade and services products. This type of inflation can be generated by the increase of any of the production costs such as wages, raw materials, inputs or taxes. With the increase in production costs, the reaction of producers is to increase the price of products and services, which is higher for the final consumer. Therefore, in this scenario, the country’s economy will face cost inflation. In order to eliminate inflation in production costs, the Brazilian government should monitor the evolution of wage, raw material and input prices in order to adopt measures that contribute to avoiding their increase without a corresponding increase in productivity, as well as encouraging increased productivity in the agricultural, industrial, trade and service production. In addition, the Brazilian government should reduce its costs by eliminating unnecessary expenses and carry out a tax reform that makes taxes to the productive activity and the population as little as possible.
How to eliminate monetary inflation?
This inflation occurs when there is currency issuance out of control by the government. This situation has already occurred at various times in Brazil’s history, especially in the second half of the 20th century, when the issuance of currency contributed to the hyperinflation of the 1980s and 1990s. It is believed that an increase in money in circulation without an increase in productivity causes a loss of purchasing power, that is, an increase in inflation. Monetary inflation can contribute to demand inflation. To avoid monetary inflation, the government has to prevent the uncontrolled issuance of currency.
How to eliminate inertial inflation?
Inertial inflation refers to inflationary memory. That is, current inflation results from the past index plus the expected future inflation. This type of inflation bears no relation to increased demand or costs in this economy. Therefore, in an economy where prices are readjusted automatically from one period to another, inertial inflation occurs. In the past, Brazil has already faced problems with inertial inflation that fueled the inflationary process and contributed to the hyperinflation that took place in the 1980s and 1990s. To avoid inertial inflation, it is necessary to avoid price indexation.
How to avoid hyperinflation?
Hyperinflation is a level of inflation that is considered to be far above the tolerable level. In addition to high prices, this scenario tends to generate a strong devaluation of the local currency and may lead to economic recession. When an economy reaches hyperinflation, inflation is considered to be out of control. Brazil has faced the problem of hyperinflation at various times in its history, such as the one that preceded the creation of the Real Plan to stabilize the Brazilian economy in the 1990s. To avoid hyperinflation, it is necessary to avoid inertial inflation.
Conclusions
In view of the above, the control of inflation by the Brazilian government has been extremely ineffective because, in addition to not effectively controlling inflation because it acts on the symptoms and not on the true causes of the problem, it has been harmful to the national economy by leading the country into recession, falling investments, rising unemployment and rising public debt. The Lula government should combat demand inflation for goods and services by planning the economy together with the productive sector so that national production meets the domestic demand for goods and services. The Lula government should combat inflation in production costs by monitoring the evolution of wage, raw material and input prices, adopting measures that contribute to preventing their increase without a corresponding increase in productivity, encouraging increased productivity in agricultural and industrial production, commerce and services and to promote cost reduction in electric energy and oil production systems and in cargo transport with its planning oriented towards waterway and rail modes.
Therefore, it was demonstrated that the current strategy of the Brazilian government to combat inflation in Brazil is ineffective because it does not effectively control inflation. This means that the neoliberal economic model that has presided over the actions of the Brazilian government in the economy since 1990 needs to be abandoned immediately and replaced by the national developmental model based on Keynesian that would make the Lula government start to play an active role in the planning of the national economy. that, with feedback and control mechanisms, would successfully combat demand and cost inflation, avoid hyperinflation and promote national development. However, for this to happen, it is necessary to end the autonomy of the Central Bank and replace its president with another who is in tune with the Lula government.
* Fernando Alcoforado, awarded the medal of Engineering Merit of the CONFEA / CREA System, member of the Bahia Academy of Education, of the SBPC- Brazilian Society for the Progress of Science and of IPB- Polytechnic Institute of Bahia, engineer and doctor in Territorial Planning and Regional Development from the University of Barcelona, university professor (Engineering, Economy and Administration) and consultant in the areas of strategic planning, business planning, regional planning, urban planning and energy systems, was Advisor to the Vice President of Engineering and Technology at LIGHT S.A. Electric power distribution company from Rio de Janeiro, Strategic Planning Coordinator of CEPED- Bahia Research and Development Center, Undersecretary of Energy of the State of Bahia, Secretary of Planning of Salvador, is the author of the books Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona,http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development- The Case of the State of Bahia (VDM Verlag Dr. Müller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2010), Amazônia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011), Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012), Energia no Mundo e no Brasil- Energia e Mudança Climática Catastrófica no Século XXI (Editora CRV, Curitiba, 2015), As Grandes Revoluções Científicas, Econômicas e Sociais que Mudaram o Mundo (Editora CRV, Curitiba, 2016), A Invenção de um novo Brasil (Editora CRV, Curitiba, 2017), Esquerda x Direita e a sua convergência (Associação Baiana de Imprensa, Salvador, 2018), Como inventar o futuro para mudar o mundo (Editora CRV, Curitiba, 2019), A humanidade ameaçada e as estratégias para sua sobrevivência (Editora Dialética, São Paulo, 2021), A escalada da ciência e da tecnologia e sua contribuição ao progresso e à sobrevivência da humanidade(Editora CRV, Curitiba, 2022)and a chapter in the book Flood Handbook (CRC Press, Boca Raton, Florida, United States, 2022).
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