Brazil Political Comment’s first guest interview is with Mailson da Nobrega who has been at the center of Brazil’s financial and economic life for more than 20 years. Mr. da Nobrega has held a variety of posts in the public and private sector and was finance minister from 1988 to 1990 during the government of President Jose Sarney. He is currently a partner in the Tendencias Consultoria Integrada consultancy of São Paulo. In this interview he talks about current economic and political events, the problems facing Brazil, President Luis Inacio Lula da Silva’s foreign policy and gives us a foretaste of a book he is about to publish on the changes Brazil is undergoing which he believes could be as revolutionary as those which made the UK and later the US the most powerful economic forces in the world. Mr. da Nobrega also describes about how he overcame the disadvantages of being from a poor family in the Northeast. A Portuguese version is available on the Portuguese section of Brazil Political Comment. 

John Fitzpatrick: Why has the ongoing political crisis had no real effect on the economy until now?

Mailson da Nobrega: – For three reasons: the high international liquidity which is making investors look for assets with higher yields and assume greater risks; the good fundamentals of the Brazilian economy which have improved our internal and external solvency indicators and reduced Brazil’s vulnerability to crises of confidence;  and Brazil’s  political and economic institutions which have created mechanisms to detect populist policies so that any irresponsible behavior by the government will be immediately punished by the markets since the “pricing in” of the respective risk leads to capital flight and a quick devaluation of the currency. The average voter will lose confidence in the government if he sees uncertainties such as signs of a return to inflation and rising unemployment. Brazil is the first Latin American country, after Chile, to construct these institutions, basically in the fiscal and monetary area, by allowing the Central Bank to be autonomous in practice.

That is why both President Fernando Henrique Cardoso and Luis Inacio Lula da Silva have followed responsible macroeconomic policies. Giving in to pressure for lower interest rates and spending the primary surplus would result in a loss of legitimacy and electoral setbacks. Any populist move by the government would change the framework immediately. The essential elements in preserving confidence are, therefore, the institutions.

Do you think the worst is now over in political terms?

da Nobrega – I think so. The crisis could continue because of the ongoing judgment of those Congressman accused of breaking parliamentary decorum but the outlook is unlikely to worsen.

Do you expect President Luiz Inacio Lula da Silva to stand again? If so, can he win?

da Nobrega – I think there is a strong probability that Lula will stand for re-election, mainly because the signs are that his popularity levels will remain stable or rise in the coming months as the political crisis dies down and the expected improvements on the economic front occur. An unexpected event is the only thing which could change this scenario. I think his chances of winning or losing are even. A lot will depend on the electoral campaign and the strategy of the opposition. I believe there will be a polarization between Lula and the PSDB candidate who will have a slightly better chance if he chooses the right campaign topics and way to attack his adversary.

Do you feel optimistic about the economy, given prospects of lower interest rates, rising exports, inflation under control, better grades from the ratings agencies and the issue of bonds in Reais on the international market?

da Nobrega – The macroeconomic outlook for 2006 is one of the best in the last eight years. There is no risk of the government giving in to pressure from the Workers Party (PT) and the vice-president, Jose Alencar, to change the economic policy since Lula knows this would be a mistake in economic terms and suicidal in political terms. The risk facing the economy today comes from abroad. These are basically a big rise in oil prices and unequivocal signs of inflationary pressure in the United States which would force the Federal Reserve to adjust interest rates. This would have serious consequences for Brazil, such as devaluation and higher interest rates. However, most analysts are currently discounting any abrupt adjustment to deal with the external deficit of the American economy.

What are the main problems facing the Brazilian economy?

da Nobrega –The biggest problem is the structural deficit of the pension system which affects everything else. Over the last 18 years Brazil has tripled pension costs as a proportion of GDP - from 4% in 1987 to 12% in 2005, including pensions from the state INSS scheme and the public employees’ scheme. There is no parallel anywhere else in the world. At the same time, the 1988 Constitution increased the links between the revenues and costs and the transfer of resources to the states and municipalities. The result is that when you add the interest rates account, these obligatory costs represent 33% of GDP. That is why today Brazil has a tax burden of 37% of GDP and spends 40% of GDP in the public sector. As our per capita income rules out collecting amounts of this size in any rational way, there has been a considerable deterioration in the tax system since 1988, leading to inefficiency, tax dodging and corruption.

Increasing taxes has not been enough to resolve the problems of the higher public spending brought on by the Constitution. A part was financed by the dramatic reduction in investments by the federal government, which fell from 2.7% of GDP in 1987 to only 0.4% of GDP now. That explains the deterioration in the infrastructure. South Korea, for example, spends one-third of what it spends on education on pensions. In Brazil, the situation is the opposite, with pensions representing two and a half times the amount spent on education. There are other problems to be resolved but Brazil will not be able to achieve greater growth until the problem of the pensions is tackled.

You have hands-on experience of government as a former finance minister. Why is it so difficult to put sensible ideas into action?

da Nobrega – The main difficulty is having to deal with the problems inherited from the 1988 Constitution – the biggest fiscal disaster in history. These require reforms which are difficult to carry out in a politically fragmented system where it is difficult to make decisions on complex questions. Corporate interest groups are strong enough to form powerful veto coalitions. At the same time, Congress is not very accountable and badly prepared to deal with fiscal questions. Brazil has created social policies which, to quote the American historian Peter Lindert turn Robin Hood´s ideas around. The poor pay indirect, regressive taxes to finance the pensions of those who are not poor and provide free higher education for the rich, which worsens the concentration of income. It is difficult to gain a consensus on how to confront these situations. Many Congressmen depend on the votes of older people and reciprocate by supporting parliamentary amendments in favor of this group. At the same time, nepotism is sometimes used to fill public positions.

Finally, centuries of dictatorship, centralism, paternalism and vested interests have created a culture in which growth depends only on political goodwill. Austerity and firmness in combating inflation are also seen as being against the country’s interests or, even worse, as being directed from abroad or in the interest of the financial system. Good sense is often called “neo-liberalism” in Brazil. You only have to listen to the statements made by the vice-president and the PT leaders on interest rates and economic policy to see how little they know about the subject.

One party, the PSB, is currently highlighting its TV propaganda spots with the slogan: “The PSB is against high interest rates.” I am also against high interest rates but I know you cannot reduce them by wishful thinking and shock measures. However, our socialists think you can and this makes the work of the Finance Ministry and the Central Bank difficult.

Is it more difficult for a non-party minister, as you and Pedro Malan were, to get his ideas pushed through than for a political minister like Antonio Palocci?

da Nobrega – I think this distinction depends on the circumstances, particularly the kind of the relationship between the minister and the President. Fernando Henrique Cardoso and Palocci were highly successful in leading the Finance Ministry and handling the economic policy under Itamar Franco and Lula, respectively. A non-political minister may have been weaker in these two cases. Although Malan was not a politician, his relationship with President Fernando Henrique Cardoso worked because they shared the same ideas, were highly qualified intellectually and had a precise idea of the moment they were living through and what needed to be done. Another technocrat who was not like Malan may have encountered difficulties.

What do you think of the government´s foreign policy in terms of trade talks and relations with Washington?

da Nobrega – I believe the foreign policy of the Lula government is one of the worst in the history of Brazil. I have never seen the Itamaraty (foreign affairs department) so much at the service of domestic political interests nor a presidential advisor with so much power who has set a Third World agenda. Although the foreign minister denies it, the approach to foreign relations contains elements of anti-Americanism which makes it difficult, for example, to develop a satisfactory dialogue with Washington on the proposed Free Trade Area of the Americas.

The English translation of the title of your new book would be ”The Future Has Arrived”. What is it about and do you really think that Brazil is no longer the country of the future but has finally arrived?

da Nobrega: The book is called "O Futuro Chegou - Instituições e Desenvolvimento no Brasil" (The Future has Arrived – Institutions and Development in Brazil) and” will be officially launched on November 29. It presents an analysis of the institutional development of Brazil since the Discovery. I try to draw a parallel with the changes which led Britain and later the United States to prosperity, starting with the Magna Carta (1215) and passing through the Glorious Revolution (1688) and the Industrial Revolution.

The title “The Future Has Arrived” tries to prove that Brazil began experimenting with similar changes in the 80s, with the advent of mass democracy, less interference from the State and society’s refusal to accept inflation. I believe Brazil is migrating to a new development model which will be marked by democracy, a market-oriented economy, and be founded on strong economic institutions with social policies focused on the poor. The transition will be long, difficult and risky but I believe we will arrive there. The signs of this future can already been seen. 

On a more personal note,you come from a fairly humble background in the Northeast. How did you manage to overcome the problems you faced to reach your present position? How can Brazil exploit this bank of talent which faces enormous problems in terms of social mobility?

da Nobrega – It is difficult to evaluate one’s own path but since mine is well known, I would mention three reasons for my professional development. The first was that I entered Banco do Brasil in 1963 when the only barriers to entry were if you were a woman or a foreigner. I dedicated myself to the entry course and passed. BB was (and still is to an extent) an important source of social mobility. The second was my transfer to Brasília when I joined the higher levels of the Executive Board of the bank at the age of 28. At that time many graduate employees had refused to move to Brasilia, a condition laid down by President Médici in 1969, and this made way for new talent. As a result, in 1976 when I was 34 I assumed the highest position in the technical field and became Technical Consultant of the Presidency of BB, which was the main relationship channel with the federal government.

From there I was ceded to the federal government in 1977, where I spent the rest of my career until I became finance minister in 1988. I had a two-year spell in London as executive director of the European Brazilian Bank – Eurobraz. BB held a 32% equity stake in this bank and could nominate directors. The third step, and I say this in all modesty, was the personal effort I have made to pursue constant learning. I have continued to do so until today through formal courses or teaching myself.

© John Fitzpatrick 2005