Structural Reform Needed

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The current fiscal crisis in Brazil is the result of a long period of economic mismanagement by the Workers Party (PT).  Beginning in 2003 with the inauguration of President “Lula” da Silva, the government enjoyed a massive increase in revenues created by the demand from China for the country’s raw materials and commodities.  Rather than undertaking fundamental structural changes, the government hired more public servants and spent lavishly.  Lula’s successor, President Dilma Rousseff, took office in 2011 as the commodity boom ended.  Rather than recognizing the need for reform, she decided to pursue a set of populist policies to avoid a severe slowdown.  The government pressured the central bank to reduce interest rates, fueling a credit spree among overstretched consumers who are now drowning in credit debt and unable to repay loans.  Dilma cut taxes for certain domestic industries and imposed price controls on gasoline and electricity, creating huge losses at Brazil’s public energy companies.

Dilma decided to expand the role of the national development bank, known as BNDES.  Borrowing money from the national treasury, the bank increased taxpayer-subsidized loans to large corporations at rates that were significantly lower than the market rate.  It is alleged that the president also began to use funds from giant government banks to cover budget shortfalls as she and the PT headed into national elections.  One former Finance Minister, Antonio Delfim Netto, was quoted in the national press as saying, “they deliberately destroyed the public finances to obtain re-election.”

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