Can Free Markets Revive Brazil?

the White House in March. But I'd be interested to know whether they talked about economics on that visit, because when it comes to trade and the economy, the Brazilian president couldn't be more different. And Bosonaro admits he's no expert, but he's handed the task of turning around Brazil's anemic economy to Paolo Gidis, an alumnus of the free market

University of Chicago. Now, Chicago style reforms were all the rage after the so called Chicago Boys helped transform Chile's economy in the seventies and eighties, but they've fallen out of favor in the last few years with all the questioning of neoliberal economic policies we've seen in the wake of the global financial crisis. Looking at Brazil, thinking about it's decades of boom and bust. A bit of shock

treatment doesn't sound such a crazy idea. I'll ask Larry's Summers what he thinks of getting his plans in a few minutes. But first, Brazil economy reporter Bruce Douglas has been taking a closer look. There's an awful lot of coffee in Brazil, as Frank Sinatra once noted, and beef and soybeans and all other kinds of agricultural goods and petrochemical products. But decades of protectionism and a massive internal market boosted by membership of South America's Customers Union, has

resulted in a remarkably closed economy. Foreign trade accounts for a measly twent of Brazil's GDP compared with the global average of But as the country's new government came to power, promising to change all that, I went to Santos, Brazil's gateway to the world, to find out how song sign of Disco for perfect card. I'm perched on a yellow boat that's floating in the port of Santos, just in front of a huge black ship which is being loaded with sugar. Around ten of the world sugar passes through

this port. Santos is just forty miles from the city of South Paolo and lies on the front line of Brazil's efforts to open its economy to the world. It's the largest port in South America and Santos handles around one third the brazils foreign trade, including much of the world's coffee, orange, juice and sugar. Okay, to please, can you tell me your name and your title and where we are. My name is Sally Regina Sosa. I'm a journalist of CODESPI, the part authority of Port of Santos.

So SELLI tell me a little bit about the port of Santos. Santally, the part of Santos has around for tin kilometers of kids, enough for fifty five ships. Today. We handle all kinds of cargo, paper, sells, soybeans, sugar, wheat, chemical products, petrolum derivatives and alcohol. Good to float in and art of Santos for almost five hundred years. It's the gateway to greater Selparlo, the most industrialized region in the Southern Hemisphere and the biggest consumer market in Latin America.

The largest continued terminal of South America is in Brazil, with intelligence and logistics and efficient CTPS the biggest privately owned terminal in the port. After showing me its corporate video in Italian Nomura, BTPs commercial manager gave me a tour. So basically where you're standing right now uses to be a garage repository where all the trash would be, uh say, dispatched from the portal centers, and it was two years of remediation built on the side of a former trash dump.

The BTP terminal now boasts eight state of the art cranes that were loading containers onto two massive ships. As we start talk coffee, meat and this is going to the US, probably with lots of construction material. How does the performance in Brazil's economy as a whole impact the number of containers that passed through her? Oh, there is

a direct impact. So basically, if the country is importing more, as it was the case of last year, we get a higher volume of imports, whereas now the exports are a little bit still picking up our volume containing volume

exports are slower as well. Predictions for this year's growth through a little bit better than last year, So you're hoping that whole mean more containers will pass through this laar We are expecting bigger volumes this year, and of course the exchange rate or the political situation also have an impact on the volume. So we're expecting all the best for Brazil this year. All the economy is picking up,

hopefully our volumes are picking up as well. Since Brazil's economy dropped off a cliff between two thousand and fourteen and two thousand sixteen, the country has barely returned to growth. Boosting foreign trade would obviously help its recovery, and here there's massive room for improvement in any typicult operation. If you have a hundred spaces, you want to sell a hundred spaces. Antonio Dominos is the managing director on the East Coast of Latin America for the Shipping and Logistics

conglomerate MASK. If Brasili you only sell a hundred, you will be seen sixty or fifty, So half half of your cargo will not show up at the port. Why why won't the cargo show up? Because the costin will tell us. You know, I was unable to find a drucker. I couldn't get all the documentation on dying. It was a stock on inspections. So the carol will not arrive

to the port. So here in Brazil, we have been forced to overbook every single vetter, sometimes as much as to be able to sail at so that creates a lot of challenges for US. Mass distinctive white containers feature prominently around the port of Santos, one of the seventeen

ports the company uses in Brazil. Despite its strong presence in the country, Mr Domingez points out the Brazil remains a challenging place to do business, and while he welcomes the new government's talk of privatization and free trade, state dominance and protectionism and not the only issues Polo Gages will have to address. We love Brazil, we see brestil as a land of opportunities, but there's also a country that needs to understand that infrastructure is key for development.

And it's not only about building new ports. It's about making sure that you connect the port with the with the with the consumer centers where the population is. So you need railways, you need roads, You need infrastructure at the beginning at the end to make sure that they are able to to move that cargo. And it's not just about improving the infrastructures. Will have to look at the tariff. They are very high tariffs here in these county two imports. The customs systems, it will have to

be revampant. You have to be easier to be able to bring cargo into the country. The taxes in the country are highly unpredictable. You know, it can vary a lot from one come way to the next, and and they're not many good ideas why they are varying. So the legal systems think is overburned in this country. You know, you have a lot of hurdles that you need to to actually look through, so that that also needs to be simplified. All in all, the procedures to set up

a company needs to be easier. The sprawling megalopolis of Sal Paulo is the engine room of Brazil's economy. If Latin America's largest nation is to start motoring again, here is where it will start. Tomasato is the head director of Trade and Foreign Affairs ATSP, the Federation of Industry of the State of sal Paolo, Opening of Brazilian The government was voted into office with this promise, so it's something that Brazilians vote for, so it has a mandate

to do this. One thing is saying what you want to do the other things saying how we are going to get there right now? What the I would say that the biggest single problem that Brazil has is unemployment, So opening the economy without doing the other reforms means

more unemployment. Around twelve percent of the country's workforce is still out of a job, and Mr Zanato fears that lowering trade tariffs without simplifying the tax system and liberalizing the labor market could make matters worse among investors, unless and economists. There's also a consensus that the first priority of the new government needs to be an overhaul of Brazil's massively overstretched pension system. It's a little bit like the Titanic. I mean, you're going against the iceberg and

the pension reforms. Is that movement at the at the helm that shows that we are not hitting the iceberg anymore? With imminent disaster averted, the administration can then concentrate on opening the economy. But ensuring that such a move as a success will it requires skillful coordination between all the branches of government. Opening the economy depends only of one ministry.

Um having a better business environment depends on other ministries and the rest of the government and also on Congress. So so one thing is a given. They are there's something we have to fight, I understand. And when you when you pay attention what Ministry public is says, I mean, it makes a lot of sense. Okay, And and this is why you have this kind of bullish environmental expectations.

But you know, any professor in the strategy on a business school tell you that good strategies ten percent elaboration and implementations. Brazil ever attempted to liberalize before, uh it did. It did something like that in eighty nineteen. It was a disaster because it's just opened the economy withoubt and was not able to to to push through the other reform, so so we had hyper inflation on employment. Was such a disaster that the last twenty eight years nobody talked

about this. With a massive internnel market, bull has long since the whole reason to open its economy to the world. With the country well on the way to another lost decade, there's a feeling that this time it may be worth the risk. What are the potential dangers or pitfalls of a more liberal Brazil. Look what's sappining outside of Brazil.

I don't know if you're British or not, but seeing Brexit, seeing Donald Trump, and they are the result of the end of the day mainly Limon Brother crisis and very liberal economy. So so we have, I mean, you have very good examples of the pitfalls that you can have

in a very liberal economy. Now that's said, Brazil is getting out of almost seventy years of state driven economy and he got us what he got, So we need we need owl Maybe a neo liberal Old style or Chicago school for some time makes some sense for Brazil. There's really no precedent for the rapid liberalization of an economy the size of Brazil's South Korea in the nineties sixties, or Chiles a decade or so later. Off a few clues as to Watson Store for Latin America's largest nation.

But with Brazil still struggling to recover from years of recession, corruption, and political conflict, this new government argues that it has no choice but to find out that was Priuce Douglas. Now you might remember I spoke to Larry Summers last week, the Harvard economist and former Treasury secretary and adviser to President Obama. I took the opportunity to ask him about what was going on in Brazil and also about the radical left wing prescriptions for the economy recently coming out

of the US. Without getting into the details, Larry, I'm sort of interested. You had so many years when you were chief economist at the World Bank, and then were you at Treasury and helping Mexico with its debt crisis. How should we think about this kind of quite old style, if you like, pro market recipe coming to Brazil at a time when sort of that that kind of model of market policy is being so questioned elsewhere in the world,

and you know, not least in the US. Not an expert on the Brazilian situation, but it seems to me that a large part of credit has been allocated by government in Brazil, with vast misallocation of capital, very substantial corruption. Levels of real interest rates that for most of the last decade were six percent or more, are real interest rates that are unlike anything we saw in the United States because of the very large government role in credit markets.

I think the instinct to clean that up is probably the right instinct. I think the instinct to have pensions that are not unreasonably generous relative to people's final incomes, to be in line with the rest of the world in terms of the scale of your pensions relative to the scale of your economy, that feels like a reasonable urge to pursue in Brazil. So I think that broadly, Um, you can't judge which way an economy should move without

knowing where it is. And Brazil, after eight years of really quite extreme twelve years of quite ex dream quite leftist government, really had become very much a state controlled economy with a state that was not really highly competent or able to act with complete integrity. And so I think the direction of reform that the Balston Arro administration

wants to move in is broadly correct. And as I say that as someone who is very much aware of the similarities between Boston Arro and Donald Trump on many different dimensions and certainly doesn't hold a brief for either, I mean, what is interesting is that you have to the two of the most important economies in Latin America have now got new presidents who have represent a completely different approaches. In Mexico, somewhere that has had years of reform and is in a very different place in terms

of the degree of liberalization and its economy. I mean, I guess can you can you sympathize there with the idea that there's a government student that now wants to have more focus on what you might call the left behind. I can sympathize with the desire to focus on the left behind. And I think that income distribution oligarchy have been real issues in Mexico for a long time. I'm not sure I can sympathize quite as well with the idea of keeping the private sector out of sectors like

whale and telecommunications. I'm not sure I can sympathize quite as much with the more cavalier approach that sometimes seems to be taken to in Mexico on issues relating to property rights or enforcement of contracts. But I ain't the emphasis on investing in people, on education and kids, I think it's all quite appropriate. I had one more thing

I wanted to ask you about. We've had several years of you contributing debates about macro policy, and you're very much associated with the view that we should be changing our attitude to fiscal policy, and particularly in the event of another downturn, we should have a different approach to to the sort of sustainability of of fiscal stimulus, and we should expect to rely more on fiscal policy down the road because of this situation, a very low interest

rates and the fact that monetary policy is going to be constraint. And the surprise comes from people who've heard all of that. And then here you so vigorously condemning the proposals of the likes of Alexandria Cortez Um, who is also associated with sort of in a sense talk of of of fiscal stimulus and fiscal activism. Why is it so important to you to draw its distinction between those kind of radical democrat proposals and what you've been talking about over the last few years. I think it's

a fair uh fair question, Stephanie. As I hear the proposals that come from the so called modern monetary theorists, there seems to be an implication that you can do whatever you want with fiscal policy if you're just willing in some appropriate way to print money. You know. The analogy I'd like to use is with um incentives and

supply side economics. There was a valid recognition in the late nineties seventies that in addition to their demand effects, tax has had UM incentive effects on how much people wanted to work and save and invest and so forth. That was an important insight, but then it became UM a claim that tax cuts would pay for themselves, which

was completely irresponsible with the Laugher curve. And I feel the same way about modern monetary UH theory that it takes a valid idea that you know, a low interest rate environment, more expansionary fiscal policy than we would have previously thought was appropriate UM is appropriate, and turns it into an absurd free lunch kind of idea that we

don't need to think about budget constraints. But in this environment, if we have a prolonged period of super low interest rates, it is the case that we could be less concerned about I think I've been very I think I've been very clear that UH justice. People can afford to buy a more expensive house when interest rates are low than when interest rates are high. The government can afford to run a larger deficit and run up we're debt when interest rates are low than when interest rates are high.

But that doesn't remove the obligation to budget and plan and make choices, and the problematic aspect of at least much of the advocacy of modern monetary theory is the suggestion that is somehow don't have to make uh choices and you don't have to plan in careful ways around your budget. And I do think that's an irresponsible idea. Now, I just have time to give you one more piece of news, and that's the announcement of the not at all cover to prize of most Miserable Economy of the

Year for eighteen, as measured in the latest Bloomberg Misery Index. Now. Katarina Survivor is an economic data editor in the Global Economic Surveys team for Bloomberg, and she put this year's index together along with our Southeast Asia economy reporter Michelle jam Risco. Katerina is here with me. Now, Katarina, tell me how this index is compiled and who's top of

the list, Who's most miserable for this year? Hi? Yes, So, our Misery Index is the classic combination of countries unemployment rate and inflation rate, and in our Bloomberg Index, we have sixty two countries for which we have a good amount of private sector estimates. So we're talking about banks, academic institutions, research institutions. And at the top of our list is Venezuela, which will come not as not much

of a surprise. In Venezuela this year has in eye popping misery score of eight million, and that is mostly due to its extremely high inflation. I imagine that's an all time records. Yes it indeed it is in the in all the five years that we've been doing. Yes, absolutely. Um And our calculation of Venezuela's actual misery score for last year, which is based on um I m F data, because the country has not published economic data in quite a while, is just about nine hundred and thirty thousands.

So you can see that that is a substantial increase even over last year's. So I guess this isn't a list that you really do want to be top off. You want to be bossom. So so who is the which is the least miserable country this year? Our least miserable country and this has been all five years that we've done this index is Thailand. They have kind of unique ways of calculating unemployment, so we don't like to

focus too much on their position in this way. When you say unique, you mean they just don't count all of them? Is that yes, I think it's great. I'm not completely I'm not an expert in in the Thaie economy, but they yeah, I think they don't quite count all of the people. Or perhaps there's a bit of a shadow job market as as we see in in quite a lot of countries. So what is it? We probably wouldn't think of Thailand as the les miserable country or

maybe even happiest country. But what are the other countries that appear low on this list? So we have are in our number two spot is Switzerland, um, and they've improved a bit over last year. We also have Singapore in the third spot, and then Japan, which I think also won't be too surprising to people as they have had persistently low inflation and and that's probably a country that's a good example of UM. You know, maybe this

this low number is not quite a great thing. I guess that's one of those things that probably the feature of this index is that it's not so bad at capturing misery because it's combining the inflation and the unemployment, and if you've got high numbers on both, you're not likely to be in a good state as an economy, but it probably doesn't doesn't really capture what's going on further down the list, because if you've got very low inflation,

you might still be quite miserable, or you certainly might have quite a slow growth, quite a stagnant economy. Exactly. Yeah, And that's been the story of the index this year because we're seeing quite a lot of countries that have improved their score, such as the US and the UK.

But it's not necessarily a positive thing because both of these countries are battling pretty low inflation, and and that's not a great barometer of economic sentiment and just well being because it shows that the consumer is not as confident as perhaps consumers should be in a healthy and strong economy. And of course we have the same old debates about whether or any of these measures GDP, inflation or I think can really get to what's going on in the country and whether a real measures of well

being and whether people are satisfied with life. But I do notice that you certainly it's as as is traditional. There are a lot of South American countries on this list. We don't just have Venezuela at the top, where it's extraordinary inflation rate nine. In two thousand and eighteen it had a nine twenty nine thousand percent inflation rate. But you also have Argentina in the top ten. You've got Argentina, Uruguay, Brazil.

So some things don't change, yeah, exactly. And Argentina has held onto that second spot for a while as well. It looked last year like things were improving a bit, but they're now in their second recession in three years, UM, battling extremely high inflation. I mean, nowhere near Venezuela's, of course, but in March it was at fifty percent year over year.

I mean that's a very high number. And the government has just rolled out some price freezes UM, I think in part to try to make things a bit easier for the consumer there. I think the past year has been one of some issues in South America again, and and it's it's kind of sad because it's in countries that UM. There. There seemed to be some good progress going on with the economies UM in the past couple of years, and that seems to have rolled back a bit,

especially for Argentina and Brazil. In the years time, we'll have you back and see whether all of these reforms in Brazil have managed to take it off the top ten slope, but Katerina Surriva, thank you very much for joining us. Yes, thank you, it's a pleasure. Thanks for listening to Stephanomics. We'll be back next week with more on the ground insight into the global economy. In the meantime, you can find us on the Bloomberg Terminal, website, app,

or wherever you get your podcasts. We'd love it if you took the time to rate and review the show so it can reach more listeners. For more news and analysis from Bloomberg Economics, follow at Economics on Twitter. You can also find me on at my Stephanomics. The story in this episode was reported and written by Bruce Douglas.

It was produced by Magnus Hendrickson and edited by Scott Lamman, who's also the executive producer of Stephanomics Special thanks to Professor Larry Summers, Katerina Survivor, Raymond Collet, and Simon Iglesias. Francesca Levy is the head of Bloomberg Podcasts. Say