The economy gets a new chance

On several occasions during his first mandate as Rio de Janeiro state governor, Sérgio Cabral was exasperated by his finance secretary, Joaquim Levy. “It´s a good job Lula told me that this Levy was a hard case!” he fumed.  Levy, a 53-year-old economist from Rio, who was presented as the new finance minister on Thursday to replace Guido Mantega, is likely to exasperate President Dilma Rousseff as well. His track record in public positions and his academic convictions make this certain. About time too! After four years of camouflaging the public accounts, fiscal maneuvering and making little effort to control spending, the Brazilian government´s accountability runs the risk of losing its credibility. A change of direction brings the hope of a return to growth. Faced with the challenges of the wide-ranging scandal involving the state-controlled oil giant, Petrobras, which could weaken the government, and the tough political game in a Congress with a newly-elected intake that is less favorable to dialogue, the correction in the economic path could be the pillar that supports Rousseff´s second term of office. Levy is fiscally minded which means he believes in the need to maintain a balanced budget and ensure that spending expands at a lower rate than revenues. This is a radical change from the style of the Rousseff 1.0 government and her economic team that sold the illusion that Brazil´s growth could be powered purely by credit. This approach ended up with the government spending money it did not have and with business leaders who did not want to invest. The Rousseff 2.0 administration is getting off to a different start. This is a reason for optimism.

The Rousseff 1.0 government sowed inflation and reaped interest rates, precisely the accusation it made against the opposition PSDB party throughout the whole presidential election campaign. It was even crueler for Rousseff´s PT party which sowed Unicamp and reaped Chicago. Unicamp refers to the academic clique installed in the economics faculty at the famous University of Campinas in São Paulo state whereas Chicago refers to the American university that is the world record holder of Nobel Economic Sciences Prize winners, with 28 awards. In short, Brazil has had four years of acting like an ostrich and burying its head in the sand to avoid seeing the effect of disregarding certain economic laws. The result has been virtually no economic growth, inflation, increased social misery, a loss of credibility and trampling over a system in which prices are set by the market — with the bizarre consequences that this brings and which have been known to humanity since the Hammurabi Code was established 3,700 year ago.

Therefore, it comes as no surprise that Brazil´s GDP growth during the Rousseff 1.0 administration was lower than the average of the country´s Latin American neighbors which are a long way from being regarded as economic powerhouses. However, the Rousseff 2.0 administration is making a different start. Joaquim Levy embodies this change and will be working in an office in the presidential headquarters, the Planalto Palace, until Rousseff assumes her second term. Levy will have the new planning minister, Nelson Barbosa, and the current and future Central Bank chairman, Alexandre Tombini, by his side. The trio consists of professionals who know what they are talking about. If they are allowed to work without any interference, threats and embarrassing situations, the Brazilian economy will have a much greater chance of passing through the difficult year of 2015 without any greater damage than that inflicted by the low growth in 2014 and the lack of business leaders´ appetite for investing in Brazil.

The new man in charge of the Brazilian economy, known as Joaquim “Scissor Hands”, took advantage of the announcement of his confirmation in the post last Thursday in Brasília to outline his view of the economy´s basic problem. “We are convinced that the reduction in uncertainties over the aims of the public sector is always an important ingredient in risk taking by companies, workers and families, particularly in the decisions to increase investments and physical and human capital,” he said. In other words, as a result of the fear that irresponsible spending by the government would break Brazil, individuals and companies did not want to run the risk of investing. The correct diagnosis was followed by the right therapy. “The measures needed to balance the public accounts will be taken.” Another highly positive effect was the apparent harmony within the new economic team. Nelson Barbosa, the one who is most aligned to the PT, wanted to be the finance minister but agreed to become planning minister and is in tune with Levy. “The continuity of the processes of social inclusion depends on stability, inflation and economic growth, which depends on confidence and maintaining fiscal and monetary policies,” he added.

Joaquim Levy graduated in naval engineering and obtained a master´s degree in economics and a doctorate at the University of Chicago where 28 professors have won Nobel Prizes in Economic Sciences. Students there learn that governments do not produce wealth and the merit of governments lies in them creating favorable conditions to allow the market players to generate wealth. Chicago also teaches that those governments that spend more than they raise put pressure on inflation, the cruelest of taxes as it hits the poorest most. Levy worked at the International Monetary Fund, was vice-president of the Inter-American Development Bank in Washington and was treasury secretary in the Lula government. Rousseff went in pursuit of him at Bradesco where he had been running the bank´s asset management area, known as Bram.

The president had to put up with criticism from the opposition and friendly fire within her own party. The PSDB believes that Rousseff simply surrendered to the obvious fact that its way of running the economy was the right one. The PT´s priority was to save appearances, with variations on the following explanation: our government is not adapting to Levy but it is Levy who is adapting to our government. As what is in play is not political rhetoric but the well-being of Brazilians, what matters is Rousseff getting it right through convenience or pragmatism instead of continuing to get it wrong through conviction. Levy was recommended by Luiz Carlos Trabuco, the CEO of Bradesco. Trabuco was Rousseff´s first choice for the position and was almost invited to take the job. In the final conversation at the Planalto Palace two weeks ago, Trabuco put forward the name of Joaquim Levy. Following Rousseff´s usual consultation practice, Lula was the first to be sounded out. He had been insisting that the president needed to show that she would change the way the economic policy was being conducted. The model that prevailed in her first mandate and centered on her had failed. Even if this wounded the president´s ego, it was vital for her to make it clear that she would not accumulate the position of finance minister in her second term of office.

Once Levy had received the invitation on Thursday, November 20, it was up to him to resolve his own dilemmas. In conversations with friends, he said that Rousseff had been very tempting in her offer and he was inclined to accept it. However, he did not want his gesture to be seen as a mere act of vanity and, above all, he was not sure to what extent the president really understood the gravity of Brazil´s fiscal situation. He returned to Brasília on Monday, November 24, prepared to present the situation in the clearest way possible along with the mechanisms he felt were essential to repair it. The first statements made by the new finance minister and his colleagues on the economic team give the impression that his view prevailed.

However, nobody has illusions that Levy will have an easy life. During his time in the Rio state government and his previous passage through Brasília in the first Lula mandate, he came under constant pressure from other members of the government to raise spending but he gained authority by achieving good results. When he was at the Treasury, he managed to extend the maturity periods of the public debt and ensured strong fiscal surpluses. He made the structure of the secretariat in Rio more electronic and professional, reviewed fiscal benefits and hunted down revenues, transforming a deficit of R$ 1.8 billion into a surplus of R$ 3 billion. This story from 10 years ago gives an example of the clashes the new minister should face. In 2004, Levy opposed the current chief of staff, Aloizio Mercadante, in an argument over the inflation target. Mercadante, who was the government leader in the Senate at that time, defended the case that the target should be raised while Levy warned that the effect could end up being the opposite of what was desired. “As soon as the risk of changing the target is run, inflation rises and there is no room for nominal interest rates to fall,” he said. When he was the treasury secretary, he had the total backing of the then finance minister, Antonio Palocci, and he worked in tandem with the other secretaries, as well as the then Central Bank chairman, Henrique Meirelles. The coming months will show whether Levy will now enjoy the same level of support and operational independence to carry out the cuts required and move the economy onto the path of sustainable growth.

The positive reaction by Brazilian and foreign investors to Levy was less than euphoric. There is still a measure of skepticism over how much independence and the level of political tolerance the new minister will have over the inevitable tightening of costs. Economist Sérgio Vale of MB Associados said: “A single minister does not make a summer. The therapy we need to start growing again is complex. The combination of cuts in public spending, rising interest rates and non-existent growth are usually cruel.” It will take time for the new team to reassemble the gears needed for the process to obtain sustainable economic growth. However, the fact that efforts are now being made in the right direction is heartening. Without this effort, Brazilians would suffer even more. The world economy received a jolt at the end of last week when the oil price fell and the dollar rose in relation to other currencies. This was a taste of what is to come in 2015 and is another reason for us to celebrate the fact that professionals from the area are now in charge of the economy.

WITH ADDITIONAL REPORTING BY ANA LUIZA DALTRO, CECÍLIA RITTO AND MARCELO SAKATE