Following my retrospective, I arrive at the slow recovery of 2017-19, a period I call the “Temeraro government”, as economic policy was basically the same in all three years.
Specifically, in 2017-19 there was: fiscal contraction in the primary budget, reduction of workers’ bargaining power, sale of public assets, redirection of Petrobras to its minority shareholders, retraction of public banks (with the collapse of BNDES) and greater financial and regulatory.
The Temer team’s bet was that the neoliberal turn in economic policy would bring down real interest rates and increase family and business confidence, with a rapid recovery in private spending. The real interest rate actually fell, but the GDP did not come. The neoliberal gamble went bad, and that happened before Covid hit us.
Average GDP growth per inhabitant was 0.7% per year in 2017-19, the slowest recovery of the economy after a major recession since we have GDP estimates. Why so slow? As the period is recent, there is great debate in the literature. I summarize my opinion in four points.
First, a major recession leaves its mark. For statistical purposes, annual GDP growth takes time to recover, especially after the 2016 coup prolonged that year’s recession. This factor explains part of the slow recovery in 2017.
Second, the political fragility of the Temer government took its toll. In May 2017, a year after the parliamentary coup, the President of the Republic was caught in a suspicious conversation with a big businessman, “Joesley Day”, and this compromised his political base.
There have been requests for Temer to resign or be prevented from doing so, who from mid-2017 became a figurehead. The centrão took over the Budget, and the structural reform agenda (Welfare and taxation) was shelved. There was “only” a labor reform, which, instead of reducing unemployment, increased the precariousness of work.
Third, on the fiscal side, the Temeraro triennium began with a new fiscal contraction, but the authorities quickly realized their mistake and resorted to quasi-fiscal operations (release of FGTS and PIS-Pasep) to avoid a new recession. The result was an almost neutral fiscal policy for GDP as a whole, but disastrous for investment.
On the monetary side, Ilan Goldfajn corrected his 2016 mistake and plunged with real interest rates in 2017, but the measure was insufficient to recover GDP. To make matters worse, in May 2018, the government suffered another institutional shock, partly exogenous and partly endogenous: the truck drivers’ strike, which is the fourth point of my analysis.
After the parliamentary coup, the new Petrobras command decided to transmit more quickly the variations in the international price of oil and the exchange rate to the internal price of fuels. As the price fell, the whole world applauded, but when there were successive increases in early 2018, truckers brought the country to a standstill, and that brought down the GDP of the second quarter of that year.
The truck drivers’ strike and the uncertainty regarding the 2018 elections closed the Temer government’s coffin. The economy recorded another year of slow growth, but despite this disappointment, government and market expectations remained optimistic in December of that year.
At the end of 2018, the same creators of “just take Dilma out” were betting that, with an ultra-neoliberal “Posto Ipiranga”, a series of pro-market structural reforms would finally unlock GDP growth. Again it went bad, topic for next week.
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