[OPE-L:5712] Real under attack

Thu, 13 Nov 1997 16:45:47 -0500 (EST)

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In response to Alfredo's "Real under attack" post:

After some comments on the ongoing financial turmoil affecting Brazil and
Argentina, and the likelihood of an austerity program biased in favor of
the rich, Alfredo outlines some ideas for a better policy mix:

>In this sense, if the left wants an electorally viable economic programme, I
>think it should include:
>a) industrial policy, credit lines for sectoral development, etc,

This seems like a promising idea, especially in view of the historical
success the Japanese and South Koreans have had with guided investment. How
would the recipients of the credit lines be chosen, and how could the
process be insulated from the political power of the wealthy?

>b) reduction in interest rates and faster devaluation of the currency,

I find this the least compelling suggestion, since it seems to promise a
renewal of uncontrolled inflation, which I think would be very unpopular,
and, as a purely monetary effect, to have little impact on the growth rate
or the distribution of income.

>c) increase in taxation, especially of capital gains and large landholdings,

The main problem here would be capital flight, I suppose.

>d) massive investment in education and health (this is cheap stuff, we all
>know that; it's a matter of political will),

Brazil is and will continue to be under very heavy pressure to reduce its
government deficit. If new tax revenues can't be found, will there be
financing for a big expansion of health and education services? Is
centralized funding of education and health through the Federal budget the
best way to build long-term provision of these services in Brazil?

>e) firm, sustained, and pre-announced increases in the minimum wage, to
>it from around US$80/month to much higher levels within 4-5 years (this has
>to be done before the next round of executive elections),

I presume this measure is intended to improve the distribution of income.
Are there any studies on the impact of minimum wages on unemployment in the
Brazilian economy?

>f) suspension of additional trade and financial liberalisation, to preserve
>the necessary tools for economic policy,

Would this lead to a drift back to the import substitution policies that
preceded liberalization? Weren't there some severe contradictions
developing in those policies? How could these contradictions be addressed?

>g) suspension of the privatisation programme, at least until a regulatory
>framework has been legislated, in order to prevent the transformation of
>state-owned monopolies into private ones.

This policy is closely linked to the previous one in several ways. The
theory of privatization is that trade liberalization will introduce strong
international competitive forces to prevent the exercise of monopoly
pricing power. What's the record on the performance of state monopolies in
Brazil? Have they acted effectively to prevent the concentration of wealth
in the past?


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu