Thoughts from the south: from Brasilia to Palo Alto

Current political upturn in the region has been accompanied by clear improvements in economic conditions across most countries. As prime examples of this new reality, Argentina and Brazil leave behind their respective economic and political recessions.

The case of Argentina has been particularly encouraging, as the country embarks on a gradual path towards transformation, without seeking immediate results, but rather pursuing permanent changes (as opposed to the mid-1990s with the implementation of the Convertibility Plan, for instance). The result: a country that is once again growing (2.7% per the latest quarterly figure) driven by investment and domestic demand, not by public spending.

Brazil however, is the case I consider even more striking, given the scale of reforms, in many cases involving constitutional amendments (with high quorum involved).

A recent reform that did not manage to capture many headlines was the equalization of the long-term interest rate (TLP) at which the Brazilian Development Bank (BNDES) grants loans to companies, to the Central Bank’s monetary policy rate (SELIC). This change is an example of the considerable impact smaller micro-reforms can have on the economy: on the one hand, by effectively reducing fiscal spending by restricting ultra-subsidized lending to companies or entrepreneurs "anointed" by the BNDES; and on the other, by depriving the state of the power to determine who is the creditor of such subsidies from those who are not. This situation will reduce incentives from entrepreneurs and executives trying to pressure bureaucrats in order to receive sizeable benefits. Thus, this seemingly small change to BNDES’ loan policy reflects quite a different understanding of the role government in the economy, from prevailing notions merely two years ago. In past governments led by the Worker’s Party (PT), the State clearly defined its champions: including JBS, Odebrecht and EIke Batista’s companies, to name a few, whose outcomes we are all well aware of.

But the role of the state in that Brazil from two years ago did not quite end there. The discretionary application of anti-dumping measures, sanitary barriers and other policies to protect domestic industry, only served to increase distortions in an economy where its business leaders would often spend long stays in Brasilia hoping to obtain various benefits for the companies they represented. An economy in which innovation, conquering new markets and focus on international best practices, fell outside the scope of strategic planning, since it was always enough to fabricate any program, usually given a name evoking the greater good, and take it to Brasilia. For instance: Caminho da Escola, a social program encouraging the purchase of thousands of commercial vehicles, obviously made in Brazil.

Fortunately Brazil's protectionist model has collapsed and reforms brought about by this government are moving in the right direction: generating economic growth and potentially broadening Brazilian business executives’ main destination from Brasilia to Palo Alto.