by John Fitzpatrick

Brazil´s finance minister, Antonio Palocci, told the Financial Times recently (July 16) that a bill would be put before Congress by next year to grant the Central Bank autonomy. By choosing a foreign publication to make this announcement, Palocci may have won the approval of the international financial community but his comments would not have been so well received had they appeared in a Brazilian publication. His timing was crafty – or cowardly – depending on how you look at it, since the Congress had just broken up for the recess and there was little immediate response from politicians.

"Of course there will be some controversy but I am determined to present this bill," he was quoted as saying. This is an understatement, to say the least, and gives the impression that Palocci is taking on not just the Congress but the senior members of the government who are opposed to the idea. Since the FT article was rather short, we do not know if Palocci qualified or expanded on these remarks. However, it seems a rather provocative statement for someone like Palocci, who is generally conciliatory in his public remarks, to make. Perhaps, though, Palocci is getting a little carried away with the admiring press coverage he has been receiving of late, plus some optimistic indicators which are pointing to GDP growth of around 4% this year. Perhaps he is getting too big for his boots. At the time of writing there has been no comment by President Luiz Inacio Lula da Silva, who once downplayed the urgency of having an autonomous Central Bank, but presumably Palocci is sure of his backing.   

In fact, Palocci might have been better leaving this particular issue alone for the moment and concentrating on other more important issues, such as creating better micro-economic conditions to allow companies to hire new hands. Within a couple of days of this interview appearing, he was announcing an increase in the tax companies pay for pensions in order to make up for back payments the government will have to make. This statement caused such outrage, not only from already overtaxed businessmen but also politicians, including Workers Party (PT) leaders, that the increase was quickly cancelled. Palocci was publicly humiliated, no doubt to the delight of his detractors within the government such as chief of staff, Jose Dirceu, and the PT president Jose Genoino.   

The positive spin which much of the media is putting on some good economic indicators could also backfire in Palocci´s face since there are plenty of not-so-good indicators around too, such as sky-high interest rates, which show no sign of falling, and an official unemployment rate in the São Paulo region of around 20%. The man in the street is not so gullible as to believe in statistics and Palocci´s opponents within the PT and the government will seize on any opportunity to change his free market policies.         

Palocci might also consider that granting the Central Bank autonomy or even independence is not something to be taken lightly or seen as a personal challenge. There seems to be consensus among free market supporters that an autonomous Central Bank is essential for the economic well-being of a country. However, the fact that several countries, such as the United States and the UK as well as the European Union, have granted their Central Banks autonomy does not mean that every other country has to do the same. There are many positive points about giving Central Banks autonomy, such as taking important long-term decisions out of the hands of politicians who may only be interested in short-term results. However, there are also some drawbacks such as the lack of responsibility to voters and the uncertainty over how “autonomous” or “independent” the Central Bank actually is. During the period of military rule an attempt to hand over control of the nation´s monetary policy to bankers was brusquely dismissed. This mistrust remains among right-wing nationalists as much as it does among left-wingers.

Central bankers may have the technical skills to look after a nation´s monetary policy but they are not elected representatives. It is easy for an analyst or bean counter to justify his decisions in purely economic terms but an elected representative who knows conditions on the ground has a responsibility to his constituents. It is interesting to note that the current Central Bank president, Henrique Meirelles, was elected as a Congressman on the ticket of former President Fernando Henrique Cardoso´s PSDB party yet gave up his mandate before it even began when offered the Central Bank position. This was obviously a great honor for a professional banker. Still, one cannot help but wonder whether Meirelles got cold feet and decided to stay above the political fray, where he could have been mauled by his opponents, and return to the hierarchical structure of a bank, where he could lay down the rules as he did when he was a top executive at BankBoston. If you can´t take the heat then stay out of the kitchen.

By picking a fight over this issue, Palocci also runs the risk of unmasking divisions within the government and paralyzing ongoing reforms. Much time will have to be spent ensuring that the three-fifths majority needed to alter the Constitution. Such a debate will be heated and will show that many PT members as well as those from parties within the ruling coalition are divided. This will give precisely the wrong impression of Brazil abroad as foreign investors and institutions watch the infighting. Finally, since the Central Bank is already autonomous in de facto terms, Palocci might just be better off letting sleeping dogs lie.

July 12, 2004

(c) John Fitzpatrick 2004