by John Fitzpatrick

If you think that the most powerful, influential body in Brazil is the Presidency or the Congress, and then think again. It is, in fact, a group of unelected financial experts and technocrats from the Central Bank who are members of the Monetary Policy Committee, known as the Copom. This committee meets once a month to set interest rates. In a stable, mature democracy, such a meeting would only be of interest to bean counters, economists and other drones and bores. However, the Copom has become the center of the Brazilian universe and everything else revolves around it. The reason is simple. Since the government of President Luiz Inacio Lula da Silva has no ideas on how to boost the economy, it concentrates on trying to stop the current mess getting worse. Its only weapon – or should I say shield – is interest rates to control inflation. The previous government of Fernando Henrique Cardoso did the same and no serious party has any alternative. The result is that there is no political debate, merely an incessant shouting match between those who feel interest rates should be lowered, as inflation is under control, and those want to keep them high in case inflation gets out of control again. If you are looking for a genuine political debate in which ideas and policies are proposed then you will need to look outside Brazil.

Since the Central Bank and the Copom have de facto administrative autonomy it is the Copom which establishes the country´s monetary policy, albeit within the framework of the government´s inflation targeting system. This system may have been a success in other places like the UK or New Zealand but has not worked here. As Senator Aloizio Mercadante, the government leader in the Senate, pointed out this week the inflation targets have only been met twice, in 1999 and 2000. In 2001 the target was 4% but inflation ended the year at 7.6%; in 2002 the target was 3.5% but inflation ended the year at 12.5% and; last year´s target was 4% but inflation ended the year at 9.3%. Considering that there is a generous 2% margin for error this shows that the system has failed, in some cases spectacularly.  This year´s target is 5.5% but observers are already but projecting higher inflation of 6%. Mercadante now wants next year´s target of 4.5% raised to 5.5%. This means that Brazil´s future lies in the hands of a discredited system and institution. 

Like the Cardoso administration, Lula´s has left the Copom – which is a technical not a political body - to take the brunt of complaints. This is not good enough. Most of the blame for this failure should be laid at the government´s door. External factors, such as the Argentina crisis, the aftermath of September 11, fears among foreign investors about the policies which Lula´s government would follow were partly to blame. However, internal factors, such as the slow pace of radical reform, the depreciation of the Real and the government´s heavy debt burden were other factors. The onus should be on the government, not the Central Bank, to resolve Brazil´s economic crisis. Lula was elected to do so and has failed miserably. Figures released this week show that both the government and the President´s popularity have fallen to record levels. In the past I have been skeptical of these polls and felt that Lula still enjoyed massive popular support. This is no longer the case. Lula´s government is paralyzed and the country is beginning to despair. Yet instead of positive policies and a political agenda all we get is an endless squabble about the Copom.

In theory, the Central Bank should have been discredited by its failure to meet the inflation targets. However, the current Central Bank president, Henrique Meirelles, and his predecessor, Arminio Fraga, have managed to hold onto to their positions. This is because everyone, including those calling for lower interest rates, knows that there is much at risk here. Loosening the tight monetary policy could have disastrous results. Meirelles was grilled by a Senate committee this week and must have had to bite his tongue at times. At one point, he said that so much discussion on reducing interest rates could give the market the “erroneous” idea that the subject was being given greater importance than it merited. Had he been less diplomatic Meirelles might have told the Senate to leave the Central Bank alone and stop trying to involve it in politics. He might also have suggested that a Central Bank committee (not the Copom) should grill the Senate and House of Representatives on what they have been doing to meet the inflation targets.  

This administrative freedom which the Central Bank enjoys is unpopular not only with many politicians but also with many of Brazil´s business leaders. These same bosses are the first to complain about government interference in industry but make no bones about calling on the government to make the Copom reduce interest rates. The pressure on the Copom is intolerable and there is no doubt in my mind that the most recent reduction in interest rates – a mere 0.25% - was made for political rather than technical reasons. I also believe that some of the reductions made over the last year were made for the same reason, although Meirelles would deny it. Several times recently Lula has stressed that interest rates are at their lowest for 10 years as though this were some kind of achievement. Since they are still amongst the highest in the world this is nothing to boast about.

Scrapping the Copom might seem like shooting the messenger or throwing the baby out with the bath water but it is time to rethink its usefulness. When it was set up in 1996 one of its aims was to make the monetary policy process more transparent, according to the Central Bank´s website. These are worthy ends but the hollowness of political thinking here has exaggerated the Copom´s importance. The Copom has become a wheel around everyone runs like a hamster – politicians, businessmen, commentators.

Although it only meets for two days a month it is, in fact, in perpetual session. In the days before the meeting starts, the media is full of articles predicting how it will act. After it publishes its decision the media switches to reports and comments on the significance of the move. The Copom´s minutes are published a week after the meeting and the whole scenario repeats itself. The brief statement issued after the meeting and the minutes themselves are dissected minutely by the Copomologists. The circle then starts up again with the media wondering what the next meeting will decide. Pundits, analysts, economists and writers make a good living out of the Copom. (I must declare a personal interest here since over a two-year period I took take part in a committee which met to discuss the decision.)

This is a complex issue and needs more space than we have available here. However, the fact is that Copom has become a monster and needs to be cut down to size or dispensed with completely. 

March 27, 2004 

(c) John Fitzpatrick 2004