Coronavirus Impact on Brazil Reforms

Key reforms such as future tax cuts, privatization have been suspended as Brazil's Congress in Brasilia focuses on the coronavirus fight. (Photo: Mario Roberto Duran Ortiz)


Which economic reforms will win approval in Brazil amidst Covid-19?

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Brazilian Economy Minister Paulo Guedes on March 11 urged the leaders of the country’s Congress to speed up the government’s agenda for economic reforms as the economy appears increasingly threatened by the coronavirus pandemic. In response to the outbreak, the administration of President Jair Bolsonaro is also pushing other reforms including allowing businesses to cut workers’ hours and wages by as much as half, which the government said would help save jobs. What are the most important reforms that Latin America’s largest economy needs now? Which reforms are most likely to win approval in Congress, and which are a tougher sell? How much support does President Jair Bolsonaro have among the country’s legislators?

Erich Decat, partner and political analyst at XP Investments: Due to the coronavirus outbreak, the congressional discussion about the government’s economic reforms announced late last year has been halted. It means that future tax cuts, privatization, a new system for regulating public service and changes to the ‘federative pact’ aiming to redesign the distribution of finances between the states and the federal government are all in second place. Currently, legislators are engaged only with one issue: how to minimize the impact of Covid-19 on the health system and simultaneously reduce its effect on the economy. Over the last two weeks, Brazilian authorities have announced emergency measures trying to put society and business at ease. In a Saturday conference call with XP Investments, Economy Minister Paulo Guedes said the government intends to inject 800 billion reais ($156 billion) into the economy. Some of the intended measures would have to be approved by Congress, which wants to score political points with the solution. How long will lawmakers keep the economic reforms on the backburner? Today, nobody knows. If the crisis lasts until June or July, as some Brazilian health authorities believe, the chances of voting on structural reforms in 2020 diminish. From these months onward, lawmakers will also be paying attention to the municipal elections, which take place in October. And after the elections, Congress may well focus on the succession of the speakers of the lower house and the Senate. Therefore, the coronavirus pandemic might push the reform debate to 2021, when new congressional players will orchestrate it.

Welber Barral, senior consultant at BMJ Consultores Associados and former Brazilian foreign trade secretary: The tax reform is certainly the most important. Brazil’s tax system is unnecessarily complex and time-consuming for companies, a certain source of legal unpredictability and of transactions costs on business in Brazil. The government is also proposing an administrative reform, which is important to increase the efficiency of the public sector. Other proposals to minimize red tape and to reduce the interference on the private market are also being implemented or pending before Congress. There is no consensus about the tax reform, and resistance from the states is expected. The current proposals focus on the creation of a value-added tax, and the states are concerned that the federal government will have more power on its management. The administrative reform has the lobby of federal employees against it. None of these proposals are easy to sell, and their implementation will require strong leadership and public support. The president estranged himself from his party (PSL), while his proposed party has not yet been created. Opposition parties, however, were not able to create a common front to oppose Bolsonaro’s proposals. Chamber of Deputies Speaker Rodrigo Maia has been an important stabilizing actor who has achieved the approval of necessary measures and blocked requests of impeachment against the president.

José Pio Borges, president of the Brazilian Center for International Relations: Bolsonaro has negligible support in Congress and has broken relationships with governors. Any reforms that are passed might be approved through a direct initiative of Congress or the interaction between Congress and some competent ministers. There are three groups of reforms: First and most important are those necessary to fight the pandemic, meaning additional funding on the federal, state and municipal levels, over and above all pre-established limits imposed by laws or the constitution. These will certainly pass. Second are the reforms to help people and businesses through this difficult period—a depression we have not seen in 90 years. Third is the pension fund reform, which both houses and the president approved. Although its fiscal effect is mostly in the long term, it was important to create momentum and change expectations, especially of foreign investors. Another positive achievement was the preliminary trade agreement between Mercosur and the European Union after 20 years of negotiations. After too long being a group of countries joining to avoid opening to the world, Mercosur changed its course and made the first move to present itself as a group jointly open to the world. That change was possible because of the liberal views of Argentina’s and Brazil’s governments, and because Brazil’s economy ministry led the country’s negotiations. However, the government has insisted on passing a public employment reform, which will be very difficult to approve with GDP growing less than 1 percent a year (before the pandemic). Also a big mistake, in my view, was to spend political capital to approve a law to privatize Eletrobras, instead of selling its assets, which the Supreme Court had already approved.

Paulo Vieira da Cunha, partner at Verbank Consulting: The response to the crisis has been chaotic, and no one is more accountable than the president. So far, the administration has prepared nearly 50 measures. Less than a handful have been implemented or are likely to win approval in Congress. The central bank acted decisively, but the reach of its measures is limited. They encourage potential credit supply, but lenders are even more risk-averse, and the surge in demand is in segments least likely to have access to credit. Keeping financial markets functioning is essential to avoiding a downfall but, in the short run, it does not do enough to improve welfare. Delaying tax obligations also helps corporations but is much less valuable for the overwhelming majority with incomes below the tax threshold. Allowing for flexibility in the labor legislation, similarly, is of relevance only for a subset of the largest corporations and may benefit employers more than employees. Congress and governors have taken the initiative. The measures proposed by the speaker of the house are in the right direction. The administration’s proposed aid to informal workers was tripled and finally approved. The reach of the existing safety net will be widened. Governors are following epidemiological recommendations. To be sure, this will increase the fiscal deficit at a time when the fiscal adjustment is incomplete and the capacity to pay will crash. But Congress seems to be aware that these measures should be exceptional, with strong sunset clauses, as allowed under the ‘Budget Ceiling’ legislation that has been in effect since 2017. Of course, it would be better to approve the increase in social expenditures at the same time as the proposed constitutional amendments changing the budgetary procedures, reducing the cost of the civil service and reforming the tax code. It would be better, but impossible, and all we can hope for now is that Congress takes seriously its commitment to both help address the crisis and deal with the fiscal implications for medium-term sustainability.

Beatrice Rangel, member of the Advisor board and director of AMLA Consulting in Miami Beach: The time is ripe to do away with the 1988 constitution, which, while useful in building consensus around the relaunching of democracy in Brazil, has become a straitjacket that does not allow for a healthy growth of either the economy or civic society. To be sure, the current Brazilian constitution reflects the mobilization of special interests, client relations and protectionist economic values that aim to fend off globalization. The result has been periods of growth followed by economic crashes, mounting corruption and reduced innovation. Brazil needs the oxygen of freedom in the economic and political realms. But this cannot be achieved through a model that allows businesses to overprice products while keeping away competition. As the hemisphere further enters the digital economy, Brazil should have a huge comparative advantage in this transformation, given the size of its market. Also, Brazil did an extremely good job in liberalizing telecommunications. As a result, Internet penetration is deep in Brazil, and usage of social networks rivals that of developed countries. A new constitution guaranteeing fundamental principles and rules of procedure to aggregate interests and resolve conflicts would liberate Brazil’s growth potential.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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