Brazil is a curious country. With insufficient quantities of vaccines to be able to immunize its population in a timely manner, the economic context is not promising. The "V" resumption of the economy seems to be becoming a "W" as immunization is slow and insufficient, new strains of covid-19 appear and cities are decreeing lockdowns again - such as Araraquara, SP - or restricting economic activities and trade opening hours as a way to contain the “second wave”.
At the same time, despite the expectation of saturation on the part of the audience, the twenty-first edition of Big Brother Brasil (BBB) is being a public success, with the intrigues and cancellations of the confined volunteers - different from the situation of the residents of Araraquara - becoming a social media issue. Last week, one of the most commented videos was by economist Gil, a BBB participant. He, in a very didactic and relaxed way, tried to explain to another participant, Juliette, that "the cost to reduce unemployment is to increase inflation", citing the empirical relationship studied by economist William Phillips. He added by stating "(...) the issue of money generates a cost for society and that cost of generating money is inflation". Gil, unintentionally, did more to defend the Central Bank's autonomy than a lot of robust economic analysis. Within minutes, he managed to draw the attention of the general public to the problem of inflation and the need for monetary stability and inflation control by the Central Bank.
In the previous week, on February 10, the Chamber of Deputies approved a bill that guarantees the autonomy of the Central Bank - a topic on the agenda for over 30 years. Autonomy does not mean independence, but less interference on the part of the federal executive The President of the Republic continues to appoint the President of the Central Bank, whose approval is subject to a hearing in the Senate. However, the investiture of the new head and new board of the BC will only take place on the first business day of the third year of the PR's term. This prevents the coincidence of mandates and ties to any ministry.
The President of the Central Bank of Brazil will have the responsibility to maintain monetary stability, in order to control inflation and must, according to the approved autonomy project, report annually to the Senate on the results achieved and the goals for the following year. Autonomy ensures that the BC is free to use monetary instruments in order to achieve the targets. The president's political interference does not end, but it decreases. Obviously, pressures, especially those of a populist character, will exist - but it will become more difficult to put them into practice. The motivation for autonomy is precisely that we do not lose monetary control and return to a dizzying inflationary process that feeds itself - as was the case in the 1980s and early 1990s. In short, to prevent, through political interference from the President of the Republic, there is a change in the management of the Central Bank in an extemporaneous way and a change in orientation - something that tends to result in inflation and social costs, as Brother Gil warned.
Obviously, the autonomy of the Central Bank is only one step in a series of measures necessary to guarantee conditions of stability in monetary conduct. We cannot disregard that the BC is also a regulatory agency for the banking system and, therefore, is not immune to capture by regulates, especially since among them are leading institutions of an oligopoly and, therefore, with great power of influence. The distinction between the technical limits of regulatory measures and the interests of large banks is tenuous. Only clear and transparent processes to society and public scrutiny are able to minimize eventual capture by the regulatory body. Being the “bank of the banks” and monopolizing the monetary issue brings enormous responsibility and cost to society. This cost refers to the eternal vigilance and the need to minimize the spaces of political interference by the federal executive or capture by the regulated.
The importance of this discussion on autonomy and responsibility is also relevant in the case of Petrobras. The populist reaction on the part of the federal executive to pressure from truck drivers was the change of command of the company, as a “punishment” for the price adjustment policy and the provisional exemption from federal taxes in the midst of a serious fiscal imbalance. The measure is symbolically equivalent to what has been done and severely criticized over the past years - in which Petrobras has become an instrument for controlling inflation rather than a more responsible monetary policy. The expected result is decapitalization of the company and huge losses that will affect the investment capacity on the one hand and the equity of shareholders - especially minority shareholders - on the other. This same “movie” was seen years ago.
The national and international capital markets reacted badly. On Monday, February 22, 2021, IBOVESPA operated in the morning with a 5% drop and Petrobras' market value was reduced by R $ 60 billion, with its shares devaluing 17%. Petrobras' shares represent approximately 10% of the index and are highly liquid - which greatly affects the national stock market. On the other hand, Petrobras' American Depositary Receipts (ADR) - receipts for shares traded in New York - had already fallen 16.22% even before the opening of the markets.
Despite hopes that, gradually, Brazilian society will become more attentive and resistant to populist measures, Gil's speech is quite emblematic. He points out that many people think in the following way: “When I am president of the Republic, I will issue currency at the Central Bank, give money to everyone and everyone will become rich”.
In relation to Petrobrás, a true “oil is ours” campaign would involve opening up the market and privatizing the company - provisions that go in the opposite direction to populism. “Our wealth” is “ours” only if it can be used and monetized at market rates, in order to ensure that employment, income and consumption are generated in the process and are not subject to benefits to specific interest groups or the mood of the head of the executive. Brazil's true wealth, which is made up of human capital, creativity and the ability to undertake, is being put aside again.
Once again we missed the opportunity to modernize the economy and guarantee a business environment that promotes formal entrepreneurship and employment. At a time when we need to attract long-term capital to contribute to the recovery of the economy, measures like these only alienate investors and signal legal uncertainty.
The backwardness and populism spoke louder and, it may be, that we have to wait 30 years or more so that the oil sector can no longer be subject to interference and that populism harmful to the country can be the subject of comment in an eventual BBB 51.
* Vladimir Fernandes Maciel is head of the Mackenzie Center for Economic Freedom and professor of the Professional Master in Economics and Markets at Mackenzie Presbyterian University