Policy, Plnning, and Research
K
WORKING
PAPERS-
World
Development
Reporl
Officeof the VicePresident
DevelopmentEconomics
TheWorldBank
July 1989
WPS50
Background
Paperforthe 1988WorldDevelopmernt
Repoft
Fiscal Policy
and Stabilization
in Brazil
Celso Luiz Martone
The "heterodox shock" approach to stabilization is based on a
flawed concept of inflation. The countries that entered this path
are likely to remain for a long time under a controlled economy,
sacrificing their growth potential for some stability in income
distribution and less explosive inflation.
The Policy. Planning. andReseurch Complex distibutes PPR Working Papers to disseminate the findings of work in progress andto
encoursge the exchange of ideas amrongBank staff and all others interesird in development issues. These papers carry the names of
the authors, reflect only theirviews, and should be used and cited accordingly.The fndings. interprstations, and conclusions are the
authors' own. They should not be auributed to the World Bank,its Board of Directors,its managlsement,or any of its msnbercounuiea.
Poly,Pnnirg, and Ro"arch
WorldDev3lhpmentReport|
The theoretical basis for the "heterodox shocks"
recently implemented in Argentina and Brazil is
that chronic inflation is essentially inertial - the
product of staggered prices and wage adjustments. The underlying assumpton is that the
economic process is a cooperative game. Without legal and other forms of coercion, however,
individuals tend to cheat - to fix their prices
above average to start with.
The inertial hypothesis of inflation is a good
description of the dynamics of inflation but it is
not a theory of the nature of inflation - so the
proposed remedy (the "heterodox shock")
cannot be implemented successfully.
Moreover, applying that kind of shock
destroys the spontaneous operation of the price
system by suppressing the information content
conveyed by prices and by distorting the allocation of resources.
Once a government engages in such an
experiment, it is led to repeat it periodically to
survive. The countries that entered this path are
likely to remain for a long time under a controlled economy, sacrificing their growth
potential on behalf of some stability in income
distribution and less explosive inflation.
Eventually this "muddling through" policy
may break down, precipitating hyperinflation
and consequent structural changes - but this
does not seem to be an imminent or even a
necessary outcome.
A basic flaw of the "heterodox" stabilization
programs was to assume that stabilizing the
price level (through a general freeze) was a
precondition for fiscal equilibrium and eventual
fiscal reform - instead of the reverse. The fiscal
austerity eromised after stabilization was never
accomplished - blocked by bureaucrats and
special interest groups interested in maintaining
the status quo. The challenge in these countries
is to devise economic programs that could make
long-term stabilization programs viable and
politically acceptable.
In this sense, stabilization is less a technical
economic problem than an intertemporal political problem of how to compensate the losers, on
the one hand, and on the other hand to convince
the majority that the trade-off between sacrificed
current consumption and increased future
consumption is worthwhile. The precarious
political systems in these countries have been
unable to deal with conflicts and support consistent long-term policies.
This paper is a background paper for the 1988 World Development Report. Copies
are available free from the World Bank, 1818 H Street NW, Washington DC 20433.
Please contact Lupita Mattheisen, room S13-067, extension 33757 (36 pages with
charts and tables).
The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research i
Complex. An objective of the series is to get these fmdings out quickly, even if presentations are less than fully polished.
The findings, interpretations, and zonclusions in these papers do not necessarily represent official policy of the Bank.
i
Produced at the PPR Dissemination Center
Fiscal Policy and StabilizationIn Brazil
by
CelsoLulzMartone
Tableof Contents
1. TheInsttutional
Setfing
1
2. ThePubilcSectoDefcit
6
3. FiscalPolcyandtheExternal
Secor
11
4. Fwscal
PokcyandSablizatlon
18
Tdbs
24
FIgures
34
1. The Institutional
Setting
to
difficult
it
precise
waj.
size
Consequently,
the
of
possible.
is
convenient
set
up
a
whole.
in
the
of
It
Fiscal
involve
preferential
that
benefit
political
dimension
overlooked
in
In
a
1. Lao's
policy
and of society
as
a
broad
progress
sector
public
sense
entitleme,its
government,
network
tc;
This
that
sector
would
government
societN.
developing
public
the
of
multitude
in
a
accomodate
treatment,
of
betweem
The interaction
enterprises).
in
subordination
is
is
is
the
usually
economies'-.
comprises
the
monetary
financial
(both
four
and
governments
municipal
and
state
and the
own microcosms
of financial
and non-financial
non-financial),
(with
their
complex,
it
the
the
enterprises
state-owned
and
without
of
policy
the
accounts
of
(federal)
central
the
authoriti,
sense,
are
dismantling
fiscal
analyses
economic
broad
the
branches
of
actions
no substantial
groups
special
the
support
in
and the
transfers
sources,
actions
partial
of
to
interests
that
measures
use;
political
reform
the
privileges,
income
political
and modernization
made.
necessarily
administration
accidental
any
public
the
special
other
organization
been
in
to
win
in
fiscal
of
put
and
not
is
approximate
And
Brazil
in
sector
transparency
for
groups
scrutiny
has
of
frequently
conflicting
close
onlyj
secto r
The lack
actions
of
public
public
tEe
define
makes
permissiveness
and legal
disorder
Institutional
the
sense
and control
is
these
branches
that
the
real
direction
loose
and
informal,
and
is
of
the
aspect of fiscal
description of the "transfer state" capturesthe political economn
in many developing countries. Cf. D.
Lao,
"The Political
Review,V.I, n. 2 (January, 1987).
Liberalization", TheWorld BankEconomic
-1
-
Econouyof Economic
Penalties
for transgressions
representation
different
usuallyj non-existent.
of the public sector is perhaps one in
collusions
of
interests
outcome depending on the economic
each party. Planning
a
s!stem,
The best
the
final
and Political strength
and control have no real chance
so that the resulting
unpredictable,
interact,
depending
on
which
of
in such
fiscal actions are largely
the
momentary
needs
of
the
syst em.
Table
I
is
an
attempt
at
identifying
fiscal actions taken by the Public sector.
the
Table
that the modes of government
economy are divesified
impacts
and pervasive,
on
resource
macroeconomic
balance,
institutional
economic
setting,
It is clear from
intervention
causing
allocation,
and
the types of
income
capacity
in the
first
order
d;tribution,
growth
In
it has been a mistake to
this
n.oncentrate
analysis on the public sector deficit as a primary
source of instabilitu
in the economy. The deficit
of the manifestations
- perhaps not even the major one -
the
deeper
State.
and
broader
The Keynesian
measure
of
problem of the hNpertroph!
attention
issue of the organization,
the
of
of the
vice of looking at the deficit as
fiscal policyg has distracted
more fundamental
is but one
the
from the
functions,
and the limits of the government.
In
Brazil and in many other developing
government
makes the law and changes
momentary
needs
to
serve specific
economic groups that happen to be
Government
actions,
of course,
morally or economically
justice, national
it
countries,
according
to
its
interests of social and
politically
influential.
are usually disguised
undisputable
the
motives such as
under
social
sovereignit!j, economic growth, maintenance
of high employment,
alleviation
absense
of
dominate
the state bureaucracy
of poverty and so forth. The
solid legal and social institutions which could
check the discretionary power of the government
then
leads
to a kind of
economic
dictatorship of the groups that
own interests at the expenses
and collude to improve
of
-2 -
society in general.
their
On
the
other hand,
regulations,
treatment,
market reserves, preferential
and so on, designed
to protect personal, sectoral
interests,
distort the allocation of
reduce the overall
more organized
is
likely
At
acute
can
productivity
the
As the
it
whole syjstem of policy produce a more
Personal
the
income
macroeconomic
instability
not
be
distribution
than
shocks,
impossible
attributed,
would
be
the economy has shown an
as usual,
but result from
of domestic
an institutional
level,
in real income and the price
mainly
inconsistency
the
level
which
to external or
vagaries
economic policies,
and
implemented
set-up which makes persistencyj and
the
in
control
to accomplish.
The absence of predictable
law and social sanction,
variety
of the economy.
in a more liberal system.
autonomous
by
resources
interests are those of the upper classes,
that
concentrate
feasible
of laws,
taxes, subsidies,
or regional
and
the intricate collection
of
possible
of
given
prohibitive
the
intertemporal
investment
probably
an
enforced
actions,
has
inhibited
the
longer term financial and futures markets,
risks
linkages
insufficient,
behavior
together with the size and the
fiscal
organization
government
lower
in
the
producing
than
involved.
economy
a
Therefore,
are
sub-optimal
otherwise
capacity
thin
level
growth.
and
of
The
amount of noise and uncertaintyj introduced by fiscal actions
in the economy has
macroeconomic
not
analyses
been
sufficientlI
of Latin American
appreciated
in
countries.
In the case of Brazil, fiscal reform or at least fiscal
discipline
has been blocked by a tripartite collusion among
ideologists
of the state (socialists
state bureaucracy,
growing
and private special interests.
perception
direction
strategically
has
the
Despite a
and conviction byj society at large that
a fiscal reform will be eventually
that
of various colors),
been
required,
frustrated
any
step
in
by the organized
and
located members of the collusion
Fiscal reform, however,
is at the root of any permanent
-3-
effort
at
aiming
A
stabilization
and
at liberalizing
basic
flaw
programs
in
of
run
long
the
recent
reform
"heterodox"
austerity
fiscal
not
were
equilibrium
vice-versa.
quo.
devise
economic
problem
major
A
viable
compensate
an
that
and
is
in
pre-
an eventual
fiscal
of
fiscal
future
less
of
these countries
could
intertemporal
a
permanence
Politically
much
was
after the stabilization,
in the
challenge
programs
stabilization
than
and
never accomplished
status
sense,
stabilization
freeze)
Promises
blocked bs the groups interested
stabilization
system.
Latin America was to assume that stabilization
for
and
reforms
the economic
and modernizing
of the price level (through a general
condition
structural
a
make
long
acceptable.
technical
political
the
is to
term
In this
economic
Problem of now to
the loosers, on the one hand, and how to convince
the majority
that the trade-off between
consumption
and
increased
sacrificed
future consumption
on the other hand. The precarious political
countries have been incompetent
to support consistent
to deal with
long term economic
-4-
current
is favorable,
systems
in these
conflicts
pclicies.
and
The Struwt.
and the
Qe of
N :ure
the
Public
of Fiscal
Sector
Actions
------------------------------------------------------------
BRANCH
TYPE nF FISCAL ACTION
------------------------------------------------------------
Central Governrient
Monetary
Authority
. Level and composition of expenditure
. Changes in tax rates and tax base
. Subsidies and transfers to private sector
. Domestic and foreign government debt
. Public investment programs
Loan guarantees to Public and private
sectors
Price and wage controls over private sector
P
. Commercial policies
Regulations
R
implUing
subsidies
and/
or
blocking access to markets
Automatic financing of federal deficits
A
. Loans to other segments of public sector
selective credit
S
Loan guarantees
Management of domestic and foreign
public
debt
Exchange controls (multiple exchange rates)
-------------------------------------------------------------
Public Eterprises
__-
.
C
Current
and capital transfers from Treasury
Investment and financing programs
T
Employment, wage and price policies
Domestic arrears to private sector
Selective credit (financial enterprises)
-----------------------------------------------------
State and Local
Governments
----------------------------
__---------
. Level and composition of expenditure
. Transfers from central government
Investment and financing programs
Domestic and foreign debt
Domesti.c arrears
to private sector and to
Central Bank or federal banks.
5----------------------------------__
-5-
2. The Public Sector Deficit
The public sector deficit has been a
and pratical
deining
size
if
th1e
and
to the formal indexation
the
known
The best
(PSBR)
referring
to
(all levels of government
and
inflation
Due to the chronic and high
enterprises).
.operational"
of
sector
public
non-financial
state-owned
of
the one we are going to use in most of this paper,
and
is the Public Sector Borrowing Requirement
the
conceptual
public sector and to the effects of
on the public accounts.
inflation and indexation
concept,
of
in Brazil, both due to the difficulty
controversy
the
matter
the inflation-adjusted
schemes,
impact
PSBR is the adequate concept to measure the
deficit
or
(see section
on the real sector of the economuy
3).
An alternative
concept
for the financing needs of the public
the
change
It
1981.
sector has been Produced by the Central Bank since
which
in the net debt of the public sector (NDPS),
net
takes account of the changes in the
of
assets
is
public
the
sector against the private sector and the rest of the world.
The
usefull
for
alternative
in fact measure different
concepts
two
different
measures
purposes.
as percentages
87. Both the nominal PSBR and the
dominated
by
inflationary
and
correction
They are defective
measures
invalid policy tar-gets.
for the financing of the
stabilization
stabilizer
stringencyg
programs
for
the
of GDP for the period 1981operating
in the NDPS are
through
monetary
on the debt/ assets.
devaluation
rdte
summarizes
nominal change
effects
exchange
I
Table
things and are
analytical
purposes,
but
not
In fact, the setting of a nominal target
public
sector,
as
is
usual
ir. the
inspired by the IMF, introduces a built-in
in the economy to the extent that the degree of fiscal
becomes
a
direct
function of the rate of inflation.
The two real or inflation-adjusted
large discrepancies,
stemming
from
- 6-
concepts
the
of Table I have shown
fact
that,
while
the
operational
PSBR takes out both monetary
rate devaluation
change
change
in
from the change
or
and/
inflation produce different
rate
exchange
movements
there was a 15X real appreciation
In 1983 monetars
correction
the government
"de-indexed"
capital
on
gain
and
concepts.
The
of the differences
In 1983 there was a 30X real devaluation,
in measurement.
1986
between
devaluation
two
in the
1983 and 1986 provide opposite examples
sears
in
inflation rate from the
Year to year discrepancies
in the nominal stocks.
correction
the real
in the non;inal stocks,
takes out the effective
NDPS
monetary
correction and exchange
its
while
of the exchange
was close to inflation, while in 1986
the
assets,
financial
outstanding
debt.
As a consequence,
PSBR was much smaller than the real NDPS in 1983
higher
1986.
From
the
extent that them alleviate or aggravate
operational
The
derives
liabilities
commercial
refer
domestic
(here
given
to
included
Banco
assets
Brasil
do
banks owned by the state governments).
to
subsidized
administered
assistance
to state-owned
by
credit
Banco
programs
do
Brasil
or
should
nominal
imposed
on
them.
of
and
and
the
in
and
The
a
credits
the
Federal
to
substantial
and
the
These
financial
It is at least doubtful
banks.
these credits are fulls recoverable
real
whether
discount
NDPS are
in Tables 2 and 3 for the period 1981-87.
The methodological
from
than
concept
credit advanced bY the Central Bank to the
government
presented
future potential
as it is measured
with the NDPS concept,
from the equal treatment
sector
mostls
be
included,
be
of the public sector. The assets of the public sector
are basically
financial
and
PSBR as a long term measure of the deficit.
difficults
Brazil,
better
This makes the real NDPS a
deficits.
the
the eventual
an economic point of view,
capital gains and losses on the public debt should
to
a
obtaining
operational
in
rate.
base for the real
the consolidation
NDPS
of the non-financial
concept
derives
public sector with
the Central Bank, Producing the following equation:
(1)
D= (B - pB) + H + (C-pC) + E(B* + te-p) B*) - E(R* + te-p)R*)
-7-
base,
monetars
the
net domestic credit of th- financial
is
C
exchange
p is the rate of inflation,
and e
is
of
rate
the
rate devaluation
can
financing
Domestic
the
take
of
form
credit
moneN creation or net bank
securities,
financing
can
while
external
sector,
be
government
the
to
public
a the
an expansion
-ves.
r,
exchange
public debt or a run-down of foreign
forei!
the
R* is the stc.k of international
of foreign public debt,
reserves,
8* is
rate,
E is the exchange
system to the public sector,
stock
H is
domestic d¢bt,
B is the stock of
where D is the deficit,
Lookir.q
at Table 2 we see that the average proportion of the net
domestic
debt has remained around
sharp
in international
changes
a
In I98', the public sector was responsible
while
the forcign debt,
an external
represented
transfer
This
was
An
the loss of international
The proportion
and
the
proportion
48%,
IGP-DI
between money and domestic
as
the
42%,
61%,
65%,
in
and
1985
of the shares was
debt financing, on
in the period.
deflator
of money financing
in
in 1985/ 1986.
reserves
has varied wildl
the other hand,
to
source of finance,
available
reason for the constancs
additional
for 62X
increased
in 1987 this proportion
despite the fact that no new monem
1986.
that Brazil received new
of foreign debt from the private to the public sector
transfer
75%.
first,
after
in 1983 and 1984, and, second, that at the margin there was
in the period.
of
despite
period,
the
financial market conditions
1982. The reasons for that are,
money
in
40X
for
total
Using Table
2
the domestic debt,
the
financing
was
domestic
196%, and 51% for the period 1982-87. The
culminating in the
data show an upward trend in money financing,
strong
domestic debt monetiza 'in of 1986 with the Cruzado Plan.
The above proportions,
been
continuous
in the 80's,
the
conceal the fact that there has
small confiscations
produced
effective
however,
of the domestic public debt
byj rates of monetary correction
inflation rates.
If we take 1981 as a basis,
ORTN had lost about half of its real value by the
Both
the
shift
to
money
-8-
short
financing
and
end
the
of
small
of
the
1987.
debt
of
confiscations
trend
upward
thea
that
in
in
not
are
the
years
rate
to
the
of
of
There
are
of
because
cautiously,
Table.
explained
in
obeys
following
the
the
r
is the
dollar
interest
is
both
tax
sum of
of
are
fo!
the
state
be
to
taken
indirectbI,
the
+ Is
as
operational
PSBR
T
(2)
rate
and
the
basic
balance
and
revenues
and
other
and
foreign
debt
r*
the
is
(S),
gross
(for social
or
sector
public
service,
transfers
capital
and
security,
result
debt
domestic
interest
rate
year,
of
after
fall
and the
due
to
foreign
debt
despi'.e
the
the
the
has
Plan,
effective
increasing
due to
fall
total
debt
1985,
and was sharpl!
share
in
the
of the
service
the
imposed
of
public
international
real
sector
and
increased
in
1986
be expected
to
be maintained
in
the
nominal
value
sYjstem.
since
in
the
The
1984,
foreign
rates.
from
the
of
the
of
The
1981
However,
1987.
1986
for most
interest
sector
public
of
the
trend
reduced
-9-
of
financial
downward
the
public
peg
high
in
monetization
on the
of the
a
service
of inflation
rate
shown
debt
the
in
very
other
of
domestic
trend
of
financing
mentioned
already
Cr-uzado
the
service
not
in
"de-indexation"
the
the
the
depreciation
debt,
should
the
below
to
an upward
capitalization
continuous
and
The sharp
the
has shown
service
the
rates
expenditure.
fall
in
deficit
estimates
and
of
interest
as the
debt
due to
interest
debt
seen
domestic
period,
the
sector.
T.
The
was
public
obtained
+ E(r*+e-P)B*
and current
Ig,
subsidies)
real
were
domestic
domestic
consumption,
expenditures
intertemporal
partial
below
extent
rate.
between
balance
only
the
equation:
nominal
The deficit
the
basic
of
the
public sector
The decomposition
Du S + (r-p)B
where
to
of the
4
root
Brazil,
a
the
Table
items
some
the
government
Federal
The estimates
enterprises.
agents
estimates
the
in
structure
financial
at
be
inflation
of
available.
deficit
may
economic
line"
the
"Above
recent
the
reveal
inconsistency
Brazil
the
future
to
this
for
two reasons.
'rirst, because the downward
trend
interest rates reverted by the end of 1987.
strong monetizatior
once-and-for-all
frustrated
the first semester
value
of
the
of the domestic
debt,
dollar
because the
was
probably
a
The available data for
of
of 1988 show a sharp escalation
domestic
the
Second,
public debt
experiment.
in
the
real
as will be seen in the following
section.
for
The basic reason
Brazil,
however,
the
the
about
debt
is the fact that no significant
made to correct budget
contrary,
concern
imbalances of the public
non-financial
su-Plus
of
spite
that,
of
(or full-employment)
it
is
a
sector.
the
no estimates
deficit are available.
valid hypothesis
In
that the structural
Several
indications
In the first place, the real expenditures
of the Federal government
fell 14% in 1987,
On
the public sector has
deficit has been rising sharply since 1985.
support the hjpothesis.
in
effort has been
fallen since 1985, as Table 5 shows. Unfortunately,
for the structural
trends
itncreased 10% in 1985, 69X in 1986, and
wh.le the real revenues
increased only 12X per
sear in the same period. As the debt service remained constant in
1985 and fell in 1986-87,
and the public capital
expenditures
were
nearl:
should be
constant,
attributed
consumption
in
the
the
a
to
The consumption
more tIan 8% a year,
On the other hand,
and
services
The
the non-financial
increase
in
public
deficit
sector
data therefore provide strong
fiscal Policy in 1985 and particularly
boom of 1985-86,
when the economy grew
by the government.
the real
maintained
prices
real price indices of selected
of
publicly
produced
their long run downward trend in
1985-86, showing a partial recovery
state enterprises
in
should be mainly explained by the vigourous
fiscal stimulus produced
goods
sharp
period.
evidence of a pro-csclical
in 1986.
fall
in 1987. Table 6 presents
the
goods and services produced bN the
for 1970 and 1980-87'.
The pricing policy
for
2. SeeR.f. Verneck,
"Public
Sector
Adjustment
toExternal
Shocks
andDomestic
Pressures:
197X85",Discussion
Paper163,PUC,Riode Janeiro,
June1987.
-
10
-
these
goods and services
objective
to alleviate
has
oscillated
inflationary
between
pressures
the intention to improve the real incomes of
(the "social" tariff)
1985-86,
has
structure
In any case,
produced
of
most
effects
enterprises
short-run
in the economy and
the
lower
this policyJ,
devastating
public
the
on
classes
reinforced
the
in
financial
and
contributed
to the
and
beyond
highlj
overall deficit of the public sector.
The outlook of the deficit for 1988
pessimistic.
1986
On the one hand, the stagnation
of the econom! after
reduced public revenues and has created political
for a further increase
hand,
is
strong
corrections
in government real spending.
inflationary
pressures
pressures
On the other
may inhibit necessary real
of public prices. Finallyj, the rapid "demonetization"
of 1987, as inflation resumed, has forced a large increase
domestic public debt and in real interest rates,
in the
increasing
the
burden of the debt for the future.
3. Fiscal Policy and the External Sector
The
size
and
the extension
of the public sector
in Brazil
would make one suppose that fiscal policy in a broad sense has
decisive
influence
consequently
The
earlY
has
overall
supported
in response
80's
the
balance of the economy and
on the current account of the balance
evidence
decisions
on
or
have dramaticallI
this
to autonomous
hypothesis.
shocks,
of
-
policy
70's
and
as in 1985-87,
changed the current account position.
11
payments.
Fiscal
as in the
to domestic political pressures,
-
a
Table
7
decomposes
deficit,
the
domestic
measured
resource
by the operational
resource balance, obtained
The Table also shows the
balance
A persistent
has
sector,
been
resulting
financial
markets
deficit.
composition
for the period 1981-87.
of
the
current
factor income.
characteristic
of the economy revealed
the
resour-ce
negative
from a complex
to
allow
in
the
balance of the private
crowding-out
process
in
the
the financing of the public sector
on a permanent
together
with the incapacits to reduce its
basis,
private savings.
has increasingly
As the decomposition
public sector has been faced with two
transfer
problem
transfer
and
a
problem consists
and
non-factor
order to serve the
account,
income.
Various
objective.
services
for
problem.
and
policN
mixes
can
of
the
current
that
problem arises to
the public sector owes 80% of the foreign debt
to the public sector.
which these
general
accomplish
a tranformation
most
the debt service.
80's
a
be 3% short of domestic
of
the
Again,
foreign
can
two
The macroeconomic
probably
problems
exchange
there are a variety of
means to effect the transfer of foreign currency
the
The
net exports
equilibrate
expenditure
and the private sector produces
necessary
difficulties:
capital inflow has been almost zero. This
different
that
the
of around 3% of GDP each Near in
debt
On the other hand,
extent
makes clear,
of the need to generate
foreign
since the net
required the net
distinct
transformation
in turn implies that domestic
in
account
The shift of the public sector from foreign to domestic
deficits
use of
the
the public sector
PSBR, and the private sector
as a residual,
and other
financing after 1982,
goods
into
in terms of net imports of goods an non-factor services,
interest payments,
Table
gap
from the private
behavior of the
economy
be explained by the specific ways in
have
been
dealt
with
by
economic
policies.
Brazil
was successful
1984-85 through
restraint
a
policN
in effecting
mix
at first (1981-82),
policY thereatfer
(1983-84).
second
1985
half
of
and
based
the resource transfer
on
monetary
and on an aggressive
These policies
particularlY
-
12 -
in
and
fiscal
exchange rate
were reversed
1986.
in
The
in the
fiscal
in 1985,
expansion
started
in 1986,
and by a real appreciation
been decisive
break-down
only
in simultaneousl1
in
experience
the current account,
understandable
in
the
An interesting
is
not
of
responsible
1983-84
bb
a
boom,
This
policy
mistakes
and conflicting
political
fiscal
Figure 1,
(NEX) are
deficit
since it
(DEF).
policy
on
where the net
correlated
to
The overall debt
represents
a
contractual
to fiscal actions in the short-run.
There is a clear correlation
correction
primitive
services
public sector non-financial
obligation
of
provided
service has been neglected,
have
since 1985.
exports of goods an non-factor
the
a consumption
evideqce of the effect of
account
rate,
and a hyperinflation.
confuse
that has prevailed
current
of the exchange
producing
has revealed a series
environment
the
followed by a wild monetary expansion
between the intensity of the
fiscal
(and of the fiscal expansion of 1985-87)
and the size of the NEX variable.
The year to bear correlation
not higher becduse there are probably
lags
in
the
response
is
to
fiscal policy. A moving average or some other smoothing procedure
can not be applied,
On
the
however, given the small size of the sample.
other hand,
found an efficient
it can be said that Brazil has not yet
wab to deal with the transformation
problem of
the public sector. The problem has been further aggravated by the
continuous
public
after
transfer of the foreign debt from the private
sector,
1982,
consequent
and by the general and profound
itself.
disorganization
57% was owed by the central government
state
and
this distribution
and
municipal
reasons:
incapacity
caused
bb
opportunism,
governments.
controls
to generate
of
and 6% by the
A first problem arising from
and
most
state
fail to serve their debt for several
over
public
operational
malinvestments,
and so on
billion,
(Federal government
is that some state enterprises
governments
price
90.7
37% bb the public enterprises,
municipal
and
By the end of 1987,
the foreign debt of the public sector was US$
and Central Bank),
the
on the successive debt renegociations
lack of control of the public sector
which
to
goods
and
surpluses, excess
low
productivity,
services,
indebtedness
political
Several internal transfer mechanisms
- 13 -
have
ocasional
of
the
with
in the public sector in order to cope
been established
defaults,
or sYstematic
usually implying the assumption
burden by the Central Bank,
credits of improbable
the
recuperation
which has accumulated
against other segments
large
of
the
public sector.
alternatives
Different
have
been
proposed
to solve this
problem and give a better chance to the Central Bank to follow
more independent
monetary policy.
ase of public goods and services.
the
this ma! be impossible
for instance),
or not optimal on efficiency
for
low productivity
balance
used by the enterprise).
excess
in
debt
general and
the
central
income
a
establishing
capitalize
the state enterprises,
tax
is to
the
of
on
third
way
savings
which
to
would
No one of these or other
been worked out so far,
pressure
A
compulsory
tne return
consolidate
serving it by a
surcharge.
on their future profit prospects.
that an important additional
as in
or 7ictitious debt (debt
government,
fund
of
have
grounds,
A second alternative
proportional
alternatives
however,
reasons and not effectively
of payments
consists
depend
In some cases,
(an urban sub-wa! system or an expressway,
case of malinvestments,
contracted
is to make the
through higher real prices in
Pay for the debt service,
consumer
the
One alternative
a
with the consequence
is put on the
monetary
or
debt policy of the Central Bank.
Besides
financial and cash transfers
the
inside the public
sector,
usually involving the Central Bank as a lender
of
resort,
a more substantive
point of
view is the mechanism
exchange
or,
by which the Public sector
in other words,
foreign debt service.
overall
problem from a macroeconomic
"buys"
last
foreign
how the public sector finances
This problem can not be divorced
financing of the public sector,
from
its
the
and they will be treated
together.
An increase
sector
could
means:
increase
assets.
real
in
be
the
brought
non-financial
of
the
public
about by one or more of the following
in the tax burden, expenditure
Attempts at increasing
tax
burplus
cuts,
taxes at the margin
and sale of
(not through a
reform) have been frustrated by the offseting
- 14 -
response
of
the
private
stubmerging
sector,
into
the underground
seem to be independent
with
it.
subsidies).
faced
the
same
traditicnal
economy.
tax
of
and private
government
obstacles
as
means of reducing
atztention, but no important
but to change
interests
(in
time
assets
and
of
cuts.
private
of
deposits
a
insolvency
and
some
on money and
confiscations
the composition
financial agencies,
the
53X
from
of the financial
governments
and liabilities
The public sector
required
reserve
liability is onls formal,
of the National
of
participation
that
the
financing
rate
on
demand
of savings deposits
because of the long run
Housing System.
In any
case,
it
is
largest part of private savings is channelled
through the public financial
the
debt
is left out. Also the classification
private
clear
non-
than 4/5 in the total assets is in fact underestimated,
to the extent that
as
have
attracted
into liabilities of the
financial institutions.
more
of.
The
has relied basically
by small
separated
government-owned
case
the public debt (both domestic
Table 8 presents
in Brazil,
the
of
steps have been taken so far.
complemented
to time.
inversely
assets and privatization
expenditures
the government
debt financing,
or
The tax base does not
foreign) through schemes of debt conversion have
Therefore,
evasion
cuts have been blocked by a coallision
political
Sales
increasing
of the tax rates,
Expenditure
bureaucratic,
either
institutions.
of the public sector
the private sector,
mostly
in
Part of that goes
itself,
the
form
to
and part is lent to
of
selective
credit
programs.
Due
to
the
massive
financial markets,
presence
the instability
of the public sector in the
of
the
regarding
financial assets and operations,
rate
inflation,
of
confiscations.
protective
of the
the
schemes,
financial
securities,
and
based
previous
private
sector
of
the
game
the high and unstable
experiences
has
with
developed
debt
several
largeIy based on the shortening of maturities
instruments
on
or,
in
the "tailoring"
safely said that presently
maturities
the
rules
the totality
shorter than 60 days,
-
15 -
the
Lase
of
of maturities.
government
It can be
of financial assets
80X shorter than
30 days,
have
and
50X shorter than 24 hours.
are in fact transformed
The outstanding
in a kind of indexed money,
that they are used as backing
approximately
innovations
's
deposits
earning
and financial
is that of making the monetary
the
open
traditional
source
of
economy linlwe-dto balance of
mechanisms
exist in
through the secondary market
As these securities
Brazil.
The
for government
serve as baLking for
over-night
(formalIy by 24 hour repurchase agreements),
any shift
indexed money or other financial assets in the
of the private sector produces
the composition
money
an
two additional
between money and
portfolio
in the sense
of these developments
Besides
in
operates
securities.
over-night
Policy
endogenous.
flows,
one
depos
monetary
endogeneitY
payments
first
implication
for
largely
monetary
for
securities
the rate of inflation.
An important
base
government
of the outstanding
and securites),
Central Bank
deposits,
The
pay
linkage
a
fixed
shift
in
government debt (high-powered
through the open-market
second
which
an equivalent
comes
operations
through
interest
rate
the
above
of the
savings
monetary
correction.
Depending on the difference between market rates and
that
rate,
fixed
deposits,
lender
last
enormous
mass
liquidity, of
tight
or
shifts in
to
source
of
constraint
The
on
the
in particular
Brazilian
and
use
of
exchange
American
standards,
measured
by
some
market
therefore
instability.
may
The
the
traditional
policy
and
has
according
standard
roughly
maintained
The general rule has
the
been
to the domestic rate of inflation,
price
-
except for two fancy
has been quite stable bs Latin-
of the export sector.
devaluations
large
financial system has put a
rate policy,
in 1980 and in 1986,
daily
and
to
The
those of monetaryg policy.
experiments
competitiveness
the
liquidity.
response
monetary
Brazilian
the
in
expectations,
financial
of
excess
in the economy can produce
portfolios
short-term
structure
instruments,
of the Central Bank as
absorbing
of liquid assets
and instantaneous
conditions
flow in or out of savings
resort to that segment of the financial market,
either providing
current
resources
requiring the intervention
of
become a
financial
16 -
index
(See
Table
9).
The
experiment
advance)
of
of
experiment,
1980 consisted
the
the
expectations,
February,
rate
of
purpose
produced
of the announcement
devaluation.
a large real appreciation,
in the wake of the Cruzado
has not Net been
Plan,
when
the
the
export sector and to dampen domestic
objectives:
brought
about
cathegories
incomes
of
and
that
competitiveness
inflationary
objectives
sustained
at
the
transmits
can
cost
to
of the trade-off
rate for the period
of the regression
become
of
the
exchange
rate
given
to
different
in tradeable
goods
is given in Figure 2,
is 88% excluding
policY,
can
an
te the level of
1975-87 (the coefficient
an additional
of
pressures
A real depreciation
through the increase
In more recent Nears,
the
was
oscillated between
the annual rate of inflation is correlated
the real exchange
on
policN
depreciation
A simple evidence
determination
rate
in the rate of inflation to a new higher level,
the
where
two
the
in an indexed economy.
the extent that
prices.
to maintain
between these
quite unfavorable
acceleration
in
of 1986 came
exchange
rate policy has traditionaly
conflicting
be
inflationary
again producing a real appreciation
two
onIy
style
corrected
The experiment
in
corrected.9
Tie exchange
The trade-off
Argentine
of which was to influence
1983 bN a 20* devaluation.
frozen for nine months,
This
(six months
the bear 1987).
constraint
by
of
has
existed
the impact of a real
depreciation
on the foreign debt of the public sector. A 10% real
depreciation
produces
of
GDP,
a capital loss to the public sector
and an annual real increase
of
3%
in its foreign debt service
of around 0.25% of GDP at current world interest rates.
The general conclusion
that
the
traditional
for different
economy
3. cf.
and
reasons,
in
that arises
form
this
analIsis
instruments of economic policN
have lost their efficacy
contributing
to
a
in Brazil,
in managing
reasonable
is
the
macroeconomic
C.L. Ilartoneand C.A.P. Braga, "Brazil and the Urugua!yRound", Conferenceon The
Multilateral
Trade Negotiations and the Developing Countries. The Rockefeller Foundation
Washington,D.C., September, 1988.
- 17 -
stability.
has
It seems that the time
come
for
institutional
reforms that could rescue the economic policy from the present
deadlock, and permit a better macroeconomic performance.
4.
Fiscal
Policy and Stabilization
It is clear at this point of the analysis
programs
applied
within
the
present
that stabilization
Brazilian
institutional
setting are likely to fail for at least two reasons.
scope for the management
have
expectations.
no
reason
to
change
Of course any stabilization
less competentlyi designed
difference
in
instruments
their
is
and
inflationary
program can be more or
and implemented,
and that can
make
a
its duration and degree of failure (the situation
after the Plan is abandoned
can be the same or worse).
Looked at from the above
stabilization
the
and second because private agents know that
too restricted,
therefore
policy
of the traditional
First,
point
of
view,
the
two
recent
plans in Brazil (the Cruzado Plan of Februaryj, 1986
and the Bresser than of June, 1987) could not have succeded. More
than that,
however,
ther have led to a much worse situation
the one they attempted
incompetent
The
to correct,
poor
design
and
implementation
ke!
theoretical
issues
applied to a chr-onic and moderate
contrary, to an open hyperinflation,
of the inflation process.
"heterodox
because of
than
shocks"
a
inflation
implemented
is essentially
- 18 -
stabilization
Program
(three-digit
"only"),
are the nature and
The theoretical
recently
is that chronic inflation
of
d!namics
basis for the so-called
in Argentina
and Brazil
inertial, being produced
bN staggered
prices and wage adjustments.
economy
which
in
the
price
of
each good,
(except money) adjust at a definite
continuum
of such intervals.
supply or demand shock,
situation
in
problem
with
will
converge
to
there
a
output will be constant,
in total income will
inflation,
with
individuals
and
is
a
a
If this economs does not suffer any
it
real
shares
associated
interval,
steady
prices (over the period of adjustment)
equilibrium,
functional
service and asset
state
which the rate of inflation will be constant,
average relative
in
Assume an inflationars
in
this
be
sub-optimal
will
is
be
and the average
invariant.
case,
the
the
allocation
The
onily
social
of
cost
resources:
use less money than they would under price stability
and the financial
sector uses too much
other aspect, inflation
is neutral.
real
resources.
In
any
That is the best case one can
make for the inertial hypothesis of inflation.
In
deficit
such
and
necessary
an economs,
financing
to
it
sustain
bs
the
rises aS a consequence
government
The
printing
money
to
of autonomous
variable
for any economic
period of price adjustment).
the economy and to keep them constant
real
income
convert
inflationary
relative
to
memory
current
completely
the
and
to
stabilization
financing
it
by
and
On its turn,
the
eliminating
entirelj
issuing
-
shares.
19
-
be
would
to
in
The
in the
irrelevant
inertia would
would
assume
constant after the
supply
bonds.
the
would be neutral
Inflationary
residual
his
inflation would
the government
money
any
by
prices
economy would be eliminated
decisions.
keep
(over
prevailing
income
in the price level
future
disappear.
compromise
prices
the
of
sense that past changes
for
thereafter,
in this
to convince
their
instantaneoulsyj and the stabilization
respect
Money is
automatically.
their average over the longest period of adjustment
with
extent
agent is,
If it were possible
agents at a point in time to
terminate
the
suppl! or demand shocks, the
will adjust the rate of money creation
relevant
a budget
if the rate of inflation eventually
his average price or his average
economic
is generating
current rate of inflation.
in the sense that,
passive,
case,
the government
budget
A
deficit
or
once-and-for-all
increase
higher
in the quantitN of money would be necessary
real demand after the stabilization,
to meet
the
in order to avoid a
temporary deflation.
Is there anNthing
of inertial
theoretically
inflation besides
difficulties?
The
error
process as a cooperative
voluntarily
above
its obvious practical
consists
game,
in
or real world
of considering
which
each
model
the economic
individual
will
the rule of the game in order to accomplish
respect
the overall result. UnfortunateIy
vision of the world and of the
Except
wrong with the
perhaps,
social
that is an idealistic
and
economic
for legal or other kinds of coertion,
processes.
each individual will
have an incentive
to cheat, by fixing his price above the average
to
That
start
some
with.
government
stabilization.
prices
authority
found
necessary
however,
to
by
produce
implies that relative
will be set at "wrong" levels at a point in time, and that
program
be
then
without
therefore,
world.
memory of the ecunomy can not be
eventually
fails,
the
freeze.
is a necessary
failure and its economic
the
Besides
suffered
the
extent
shock",
from
out.
that the
where
they
The
failure of such a program,
consequence
of its flawed vision of the
It is a question of practical
"heterodox
to
washed
succeed in setting their relative prices
individuals
would
is
The price freeze,
the inflationary
The
is why a general price freeze enforced
details the extent
of
the
consequences.
theoretical
objection
to
the design of the Cruzado
additional
conceptual
the basis of the
and Bresser
Plans
mistakes and omissions,
of
which the most important were:
(i)
No compromise
to eliminate any residual deficit was assumed
bs the government.
It turned out soon after the Plan
that
the deficit was not only high but rising.
(ii)
Nothing
Bank,
was
done
either by
government,
to
change the structure
making
it
or by prohibiting
legally
of the Central
independent
of
the
it from financing the public
sector.
(iii) Inflation was accelerating
at the
moment
of
meaning that relative prices were adjusting.
- 20 -
the
freeze,
The choice of
the
D-day was
magnifNing
(iv)
In
case
dictated
the relative
of
indexation
the
an
accumulated
Plan,
rate,
the
over-indexation
clause
inflation.
fiscal
of
wages
a
to
be
a
constraint
system,
dethe
at the same
was
introduced
trigger
at
20X
of
was done on top of a 8X real
wage increase at the start of the Plan.
out
reason,
in the economy.
in general,
with
This
than
there was a complete
and of contracts
through an escalator
rather
price distortions
of the exchange
that
dispair
Cruzado
financial markets,
time
b!
on
The trigger turned
the management
demand and retarded necessary
price
of aggregate
adjustments.
It
was
clear at the start, thus, that the economy would on'l reach
a
new
inflationary
equilibrium
with
a
monthly rate of
inflation of at least 20X, as in fact happened
semester
of
indexation
1987.
system
was introduced,
In
case
of
remained,
the
in the first
Bresser
Plan,
the
but a lagged wage indexation
which alterwards
set the pace for the rate
of inflation.
The implementation
86
-
of economic
policy in the period February
January 88 (covering the two stabilization
program) was even
worsr than its conception.
The
fiscal
consumption,
nominal
at
huge credit
per
services
Near),
during
full capacitN
subsidies
by
increasing
(to
reserves
and
the
government
extent
that
the
lagged real prices of public goods and
1986, in a situtation
use,
first semester
of near full-employment
led to the run-down
of the Near,
of
inventories
in
and
the
and the run-down of foreign exchange
in the second semester.
The price
inflation
sustained
and
freeze February
so
1986,
because of promises of zero
the fear of the effects of the wage trigger,
too long (up
elections),
the
produced
interest rate on selective credit programs was kept fixed
I1X
demand
expansion
that
to
November
an automatic
15,
mechanism
(price level increase) was locked.
Near,
general
rationing
prevailed
- 21 -
the
date
of
general
to reduce aggregate
In the second half
in
was
of
the goods markets,
that
generating a potential inflationary surge
in
materialized
1987. (See Figure 3).
Immediately
of the Cruzado Plan,
after the deflagration
Central
Bank engaged in a large monetization
Partly
to
interest
reduce
rates at the same level of real rates
Plan
and partly to
in the real demand for money consequent
for the increase
provide
the
before
of a zero rate of inflation),
(under the assumption
debt,
of the public
partly to keep nominal
interest burden,
its
thc
of the stabilization.
The guide of monetary policY
period was the nominal
interest rate. The Central Bank pegged the
rate,
amount
whatever
creating
of
during
this
was necessary.
money
The
and money
in the critical
assets
of real financial
turning points associated with the Plan is presented in Table 10.
bahavior
The
and
real quantity of money increased 216X between January,
October
1986, and fell 61X between October,
as the inflation process resumed.
had an important contribution
creating
a repressed
as the
in stimulating
(June
Plan
prevailing
a
been
1987).
program
new
it was
fiscal and monetary measures.
rapid reinflation
recent experiences
not Net completed,
The
to a level above the one
of stabilization,
has taught some important
lessons.
although
First
of
it has shown that the inertial hypothesis of inflation is a
good description
theory
the
Although
before the Plan .See Figure 3).
The Brazilian
all,
a new price freeze, known
precipitated
not followed by any supporting
has,
policy
a gregate demand and
in reversing the rate of inflation temporarily.
succeded
result
of monetary
months with rates of inflation above 26X
the governmert
Bresser
The behavior
inflation in the economy.
After two succesive
per month,
1986 and Jutie, 1987,
on
"heterodox
the
of the djnamics
nature
Second,
shock destroNs
suppressing
disarticulates
the
the
can
attempted
the spontaneous
the
inflation,
inflation.
consequently
shock")
implemented.
of
of
production
process
and
the
not
remedy
a
(the
of that kind of
of the price
conveyed
is
successfulIs
be
application
operation
- 22 -
The proposed
not
content
information
but
by
system
prices
allocation
by
and
of
resources. The social cost of so doing may be prohibitive in the
long run,
but the political cost of a return to a market econom!
may be predominant in the short run. Therefore,
once a government
engages
in such an experiment,
it is led to repeat it
periodically in order to survive. The countr-iesthat entered this
path are likely to remain for a long time .nder a controlled
economy. sacrificing their growth potential on behalf of some
stability in the income distribution and a less explosive
inflation path. Evertually this "muddling-through" policy may
break down, precipitating a hyperinflation and the consequent
structural changes, but this does not seem to be an imminent or
even a nec sary outcome.4
(February,
1989) a new stabilization
4.At thevonent
thispaper
wasrevised
forpublication
ona general
price
freeze
andthe
(theSummer
Planof Januars,
1989),based
program
wasinderwaN
ones.
fromtheprevious
de-indexation
of theeconomN.
Itsfatedoesnotlookdifferent
- 23
-
TABLE I
BRAZIL:
ALTERNATIVE
MEASURES
OF
PUBLIC
SECTOR
BORROWING
REQUIREMENTS
(PER CENT OF GDP)
-----------------------------------------------------------------
PSBR' '
Operational
Nominal
NDPS'''
Real
Nominal
1981
£2.5
5.2
-
-
1962
15.8
7.0
27.7
7.1
£983
18.6
3.5
61.8
9.3
1984
e3.8
2.7
60.8
4.2
1985
27.9
4.3
64.1
4.9
1986
10.8
3.5
21.2
1.6
i927
29 5
5.5
75.2
3.7
Source: Central Bank
MonthlygBulletin.
of
Brazil:
Brazil
Economic Program and
(1)
Refers to the IMF concept for the non-financial public
sector.
The
.operational"
deficit
excludes monetary
correction and devaluation of exchange rate from the public
debt.
(2)
Computed on the basis of Table 1. The "real" change in the
Net Debt of the Public sector refers to the deflated (by
IOP-DI) change in all items of debt (except the monetaryg
base), plus the change in the monetary base.
-
24_
TAKLE
2
SECTOR`"
BRAZIL:
NETDESTOF THEPUILIC
(positions in December)
Ca$billion
1982
1983
1984
8.5
21.8
94.8
330.5 1231.4213.1 11634.9
3.8
9.7
Public
Debt
2. Domestic
2.1.Government
Securities2.4
5.2
2.0
4.2
Federal
1.4
StateandNunicipal 0.4
2.O
1.0
Base
2.2.NonetarS
2.3.NetDebtto Financial
2.5
0.4
Sector
Non-Financial
Public
7.0
2.5
Sector""b
(2.1) (4.5)
Central
Bank"C'
34.1
16.4
13.7
2.7
3.5
1308
69.2
60.7
8.5
12.7
4.7
12.1
3. Foreign
Public
Debt
3.1.Federal
Government
2.4
0.7
Dank
andCentral
3.2.StateandMunicipal
Government
andPublic
4.3
9.4
Enterprises
in Foreign
3.3.Deposits
0.6
1.2
Currencs")
Reserves(0.9) (0.9)
3.4.International
60.7
199.7 729.9 1189.9 6522.9
19.2
83.5 284.7 572.2 4235.6
38.6
133.8 503.6 673.0 2790.6
i.
Debt
TotalPublic
14.2
1985
501.5
293.7
260.2
33.5
45.5
1986
1987
1981
823.2 5112.0
410.8 2691.5
.6
349.4 2292
61.4 398.9
178.9 503.5
48.9 162.3 233.5 1917.0
77.4 30.7 541.1 2508.2
23.7
(307.6) (591.2)
(138.4)
(9.5) (28.5)
-18.4 51.0 45.2
6.8
(109.4)
(100.5) (503.3)
(3.9) (36.0)
issues.
several
Program,
Economic
Dank,Drazil,
Source:
Central
public
sector
plustheCentral
Dank.
(a)Defined
as thenon-financial
andsuppliers.
arrears
to contractors
(b)Includes
of Bancodo Drasil).
systeu
(inclusive
credit
to financial
(c)Netdomestic
(d)Private
sector
deposits
only.
- 25 -
TADLE
3
BRAZIL:NETDEITOFTHEPUBLIC
SECTOR"a'
(positions in December)
COSbillion of 1994
1. Total vublic Debt
1981
1982
19m
1984
1985
1986
171.4
219.6
396.9
330.5
367.5 364.0
1987
447.8
2. DomesticPublic Debt
76.5
97.7
110.4 130.8 149.7 148.8
19.2
2.1. overnment
Securities 49.3
52.4
53.1 69.2 87 6 74.3 94.4
41.2
42.3 44.4 60.7 77.6 63.2 90.4
Federal
8.5 10. 1I.1
14.0
StateandMunicipal
8.4
10.1
8.7
11.3
12.7 13.6 32.3
17.7
.2.
2onetar base
20.1 24.1
2.3.NetDebtto Financial
Sector
8.1
25.2 46.0 48.9 48.4 42.4 67.2
Public
Non-Financial
Sector
50.3
74.5 76.7 77.4 89.7 97.8 87.9
'55.6) 207
(42.2)
(45.3)
(30.7) (28.5)(41.3)
Central
Bank
3. Forsign
Public
Debt
94.5 121.9 196.5 199.7 217.9215.2 228.6
3.1.Federal
Government
14.1 24.2 62.2 83.5 95. 103.5 148.5
andCentral
Dank
3.2.StateandMunicipal
Government
andPublic
Enterprises
86.4 94.7 125.4 133.8 150.3121.7 97.8
3.3.Deposits
inForeign
12.1 12.1
22.0 18.4 15.2 9.2
-Currency
3.4.International
Reserves(18.1) (9.1) (12.6) (36.4)(32.7)
(18.2) (17.6)
Sources
andcriteria:
seeTable2.
(a)Deflated
by theIGP-DI
of theFundagio
Getulio
Vargas.
- 26 -
TAKLE4
IRAZIL:CONPOITION
Of THEPUtLICSECTOR
DEFICIT
(PERCENTOFGOP)
Years Operational
PSUR
(1)
Gross Fixed
Domestic
Foreign
Basic Dalance Do estic
(Surplus) DebtService DebtServiceCapital
Foreation
Transfers
(2)
(3)
(4)
(5)
(6)
1991
5.20
-16.91
1.50
2.08
7.64
10.89
1982
7.0
-16.85
2.37
2.49
7.53
11.46
19m
3.50
-19.11
3.6
3.22
5.49
10.84
1984
2.70
-18.19
3.30
3.14
5.20
9.25
1985
4.30
-16.12
3.44
2.97
5.43
8.58
1986
3.50
-15.27
2.23
2.51
5.0
9.03
1987
5.50
-12.17
2.17
2.10
5.0
8.40
Notes;
col.(2): Obtainedas residual.
givenbs the the
of theFederal
debtin securities
col.(3): Thecost(above
aonetary
correction)
centralDank.The:cost of thenetdebtto financial
sector
estimated
on thebasisof
(30.9,
27.4,24.3,23.8.23.1,14.01.and15XperNear
average
CD ratesin theearket
forthesears1981-87).
col(4): Estiaated
applying
the shareof thepublic
sector
inthetotalforeign
debton the
annual
interest
cost,minustheinterest
earned
on international
reserves,
assumed
to be
31 belowtheaverage
costof debt.
col(S):TakenfromVerneck
(1987),Table36,page47,complemented
by National
Income
Accounts.
Estimates
for1986-87.
col.(6):
National
Income
Accounts
(includes
social
security
andsubsidies).
- 27 -
TABLE 5
BRAZIL: PUBLIC SECTOR NON-FINANCIALDEFICIT
(per cent of GDP)
__------
---------------------------------------------------------------------
Years
Operational
PSBR
(1)
Public Sector
Debt Service
(2)
Public Sector
Non-Fin.Deficit
(3) - (1) - (2)
1981
5.20
3.58
1.62
1982
7.00
4.86
2.14
1983
3.50
6.28
-2.78
1984
2.70
6.44
-3.74
1985
4.30
6.41
-2.11
1986
3.50
4.74
-1.24
1987
5.50
4.27
1.23
__-------
-------------------------------------------------------------------
Source Table 4.
- 28 -
TALE 6
GOODS
ANDSERVICES
PRODUCED
OFPUDLICLY
AUIL:REALPRICEINDICES
(193.100)
Diesel Fuel Liquid
Flat Postal Gasoline
Telecouuunicationfs
Y-ears Electricity
Oil
Oil Gas
SteelServices
1970
124
-
141
28
39
1990
100
1to
1to
100
1H
1981
14
109
103
31
114
I
100
10
9
119
141
98
53
1982
98
82
108
10N
88
119
126
H
1983
95
68
96
78
81
121
136
9
1984
79
59
103
57
77
122
142
105
985
8
48
1#5
69
67
108
132
91
1986
76
51
69
76
73
74
Be
61
1987
92
44
70
85
60
81
100
76
and CentralDank of Brazil,BrazilEconomic
Verneck
(1987),page45 for1970-85,
Sources:
tor1986-87.
Program,
- 29 -
TAILE7
RESORMCE
SAP
DRAZIL:CINPOSITION
Of THEDONESTIC
(per cent of SDP)
Tears
Nut Internst Paments
NetImports Public Private Total
Sector Sector
of 6 NFS
(4)
(3)
(2)
(1)
Operational
Current
Other
PSBR
factor ccount
Income Deficit
(7)
(6)
(5)
Private
Sector
Dalance
(8)
1981
0.40
2.08
1.79
3.87
0.14
4.41
5.20
-0.79
1992
-1.05
2.49
1.75
4.24
*.22
3.41
7.00
-3.59
1983
-1.97
3.22
1.45
4.67
0.37
3.07
3.50
-4.43
1984
-5.36
3.14
1.68
4.82
0.38
-A.16
2.70
-2.86
1985
-4.79
2.97
1.29
4.26
0.47
-0.06
4.30
-4.36
1986
-2.29
2.51
*.84
3.35
0.46
1.52
3.50
-1.98
1987
-2.71
2.10
0.42
2.52
0.28
-0.49
5.50
-5.59
as a residual.
(8)obtained
Note:Column
andTable4.
Source:
Balance
of pasnents
statistics
- 30 -
TABLE 8
BRAZIL: COMPOSITIONOF THE FINANCIALASSETS
(December. 1997)
Public Sector Liabilits
Cz$ billion
X
Currency
Demand Deposits
Time Deposits
Savings Deposits
GovernmentSecurities
ExchangeBills
Total Assets
271.6
370.7
241.7
1239.5
9006.4
-11129.9
47.1
27.7
60.1
100 0
-84.6
Source: Central Bank Bulletin.
-
31
-
Private Sector Liabilits
Cz$ billion
X
-416.9
719.4
822.4
-72.5
2031.2
-52.9
72.3
39.9
--
100.0
15.4
TABLE 9
BRAZIL: REAL EXCHANGERATE INDICES
(1975=100)
Years
RER/ USA
(1)
REER
(2)
IPE
(3)
1975
100.0
100.0
190.0
1976
95 6
96 5
102.0
1977
95.3
97.0
105.0
1978
95.1
1,2.5
106.2
1979
102.4
113.0
117.3
1980
110.3
121.9
107.5
1981
102.2
101.5
101.2
1982
104.6
96.5
101.1
1983
126.9
115.5
110.6
1984
123.7
108.6
98.9
1985
125.9
109.4
94.5
1986
112.2
113.0
97.6
1987
111.7
116.1
100.3
Sources: iMartone
and Braga, op.cit.,Table II, and INPES/IPEA
Notes: Col. (l): Real exchangerate (Cz$/USS) based on wholesaleprice
indices.
Col (2):
Real effective exchange rate Countriesand weights
consideredwere: USA (41.5%), W. German!j (14.6X),
Japan (11.3X), Argentina (7.1%), Italy (7.2X),
Netherlands(6.8X),France (5.7X),and UK (5.7X).
Col. (3): Index of profitabilityof exports (REER corrected by
export subsidies).
- 32 -
TAKLE
t0
3AZIL:MEVUU
IFLt1WXIAL AS£1
Jaaur3,1986
October,
1986
June,I7
Otober,198
RealValue XShare RealValue I Share RealValue SShire RealValve XS;are
(1; k^}
~~~i3
(4;
(5)
to)
!?;
iSi
1. be3(!
tlU
11.2
316
27.3
123
13.5
73
8.3
2. FinaKialAssets
Savings
Dqosits
Tinbeosits
Exche lills
Governmnt
Secirities
1N
to
IN
1I
1t
E8.7
29.2
18.6
4.0
36.9
IF
96
14
1t2
76
72.7
21.4
21.0
3.1
27.2
to
107
93
31
16
86.5
3.7
16.9
1.2
37.6
78
113
68
13
Il
91.7
33.5
12.8
.5
44.9
3. TotalAssets
10
IN.0
131
100.
102
I1.I
99
1N.0
Surce:Cntral lnk hbiletin.
-
33 -
FIGURE I
FISCAL POLICY AND THE CURRENTACCOUNT
(PER CENT OF GDP)
NEX
84
9~~~~~~~
85
4
3
87
-~~~~~
~~86
2
81~~~~~~~
-3
-2
-1
0
1
2
81
-
34 -
DEF
FIGURE 2
INFLATION AND THE REAL EXCHANGERATE
~~~~~~~~~~~~~~~
Cl
87S
200
A
-
0
C,~~~~~~~~~~~~~~~~~~~~~~~~~~~00
010.
10000
86
100
RP.AL
120
31.0
EXCIHANGE RATE (1975=100)
- 35 -
BRAZIL:
1.
pi
FIGURE 3
BASIC INDICATORS
(1986-1987)
year
I e'C'1-/
2
0~
12-
g
s/
A2....
\
/
Industrial
(t/t-4) Production
Trade Surplus
A~~~~~
0
b/-
/
1987
2-
1985
1986
V
-36
-
1988
rPR Wawnlk Paw sea
WPS31 Public Finane and E
Coact
for DIerw
2
ADs
mu
Bda Balua
Augt
WPS32 MunicipalDevelopment Funds and
intermediies
Keaneth Daey
July 1968
R. Blade-Charest
33754
WPS33 Fisa Poliy in CommodityExpoing LDCa
Joint Cudd4igton
July 1968
R. Blade-Charmt
33754
WPS34 Fsal 1m in Macroeconomic
Stabilization
lAce Taylor
September 1968
R. Blade4Carest
33754
WPS35 Improvin the Aloation and Mana
ment of Pubic Spdin
Stepben L1ste
Augt
R. Blade-Charmt
33754
Dougla
Augut 198
VPS36
Meani and Implmtbn
mk Deeopmet
1968
1988
N. Campbell
33769
of Social
Secuity Finance in Dc'eloping
Countres
. Puffert
R. Biade-Charat
33754
WPS37 Back Market Pmin. Echange Rate
Unifcation and bIflatin in
Sub-Saharn Africa
Brian Pinto
July 1968
R. Blae-Chaet
337S4
WPS38 Intergvernmental Grants in
DevelopingCountries
Lay Schdeder
September 1968
R. Blade-ChAet
33754
WPS39 Fiscal PoliCyin Law-lncomeAfria
Stephen A O Connell
July 1988
R. Blade-Charest
337S4
WPS40 Fmandal Deregulationand the
Globaliation of Capital Markets
Eugene L Versluyen
August 198S
R. Blade-Chart
33754
WPS41 Urban Property Taxation in
Devdoping Countries
Wilam Dillinger
August 1988
R. Blade-Charest
337S4
WPS42 Government Pay and EmploymentPolicies
and Government Performancein
DevelopingEconomies
David L Undauer
August 1988
R. Blade-Charest
33754
WPS43 Tax Administrationin Developing
Countries Strategies and Tools
of Implementation
Tax Administration
September 1988
R. Blade-Charest
33754
Divii
WPS44 The Size and Growth of Government
Expenditures
David L Lindauer
PPR Workina Paier Serks
Contact
Tite
WPS45 State-OwnedEnterprise and Public
Sector Deficits in Developing
Countrie: A Comparative
Statistical As ment
Author
Dateer
Govidan Nair
Anastasioc Fiippide
Decembr 1988
L Mattheisen
33757
WPS46 The Managementof Public ExpenditureL
An Evovng Bank Approach
Robert Lay
January 1989
L Matthiesen
33757
WPS47 Considerationsfor the Developmentof
Tax Policy Wben Capitrl is Internationaly Mobile
Robert F. Conrad
March 1969
L Mattheien
33757
WPS48 Do Tae Matter? A Reviewof the
Incentive and Output Effects of
Taxation
Jonathan Skinner
DeAnne Juliur
Adelaia P. Alkcbn
April 1969
L Mattheisen
33757
WPSSO FFcal Policyand Stabilization
in Brazil
Ccho Luiz Martone
July 1989
L Mattheisen
33757
WPSS1 On Participatingin the Intemational
capital Market
V.V. Bhatt
WPSS2 On Financial Innovationsand Credit
Market Evolution
V.V. Bbatt
WPS49 Publc Sector Pncg Policies:
A Review of Bank Policyand Practice
WPS53- Assignedto WDR
WPS60