‘Brazil always seeks bad solutions to complex problems’, says Marcos Mendes

​Considered one of the fathers of the spending cap, economist Marcos Mendes, 57, says he is pessimistic about the discussion of economic issues during the election in October. “I expect a discussion based on false dilemmas, such as the State versus the private sector, whether to increase spending or not. More important would be to look at the quality of spending”, says Mendes, who is also a professor at Insper and a columnist at Sheet.

He is the organizer of the book “Para Não Esquecer: Public Policies that Impoverish Brazil”, a partnership between Insper and Fundação Brava in which specialists take stock of measures implemented in recent years that have failed.

The volume brings together the analyzes of specialists such as Bráulio Borges and Samuel Pessôa (both from the Brazilian Institute of Economics at Fundação Getulio Vargas), Bernard Appy (Center for Fiscal Citizenship) and Simon Schwartzman (former president of the IBGE).

How to avoid economic policy mistakes that led to short periods of growth? Growth, in the long term, is achieved by creating an economic and institutional system that makes it possible to increase productivity. The objective is to do more and better with the available labor and equipment and facilitate access to new technologies. But the measures needed to improve productivity conflict with short-term interests and needs. Opening the economy is an example of this: in the short term, it means closing companies that are only viable when the country is more closed.

Can’t growth be stimulated through government policies? Many people believe that it is possible to grow through government induction, that this leads to increased consumption and investment, but this policy proved to be a failure in Brazil and in the world. In the end, it promotes the interests of specific groups that press for policies favorable to them, but that generate costs for society.

Since the beginning of the pandemic, governments have increased spending to compensate for the losses. Was it not the correct measurement? It is entirely justifiable to increase government spending when there is a very strong recession. The traditional remedy is to expand spending over a short period of time. But this is different from saying that the government must always spend, which is what prevails in Brazil and only serves to generate more inflation and debt.

Were the mistakes made in the past, which economists point out in the book, more due to misguided public investments than to lack of money? Not knowing where to put money is more serious than not putting any money at all. In recent years, the country has given subsidies to a lot of shipyards that had to close, Sete Brasil was made targeting pre-salt platforms and became scrap. All of this is negative for long-term growth. The private sector is better able to allocate investments, it has a series of filters that serve to analyze whether a project is viable. The government thinking that it should enter a sector because the private sector does not enter is an illusion.

With inflation and unemployment high, the economy should be one of the most important topics of the election in October. Is there any chance that the discussion will not be superficial? I believe none. I expect a discussion based on false dilemmas, such as the State versus private initiative, whether to increase spending or not. More important would be to look at the quality of spending. But the campaign, like its predecessors, must focus on the interests of specific voters. Brazil has always looked for bad solutions to complex problems. It has already been put on the agenda not to allow energy readjustments and the intervention in Petrobras so as not to increase prices is always under discussion.

Would changing the fuel price parity policy be a mistake? If the price of gasoline is pushed down, ethanol loses competitiveness. It also makes importing unfeasible. Now, the government must protect the vulnerable and increase cash transfer programs for those most in need.

Being one of the parents of the spending cap, like Mr. evaluate fiscal policy today? There was a clear deterioration in the budget process, with the increase in the mandatory nature of parliamentary amendments and the strength that the government gave to the rapporteur’s amendments. And there are several examples of how public money has been wasted in a useless way.

Another example, which you mention in the book, was the failed attempt to create a sovereign of Brazil? Yes, it mixed misdiagnosis and lack of planning. They wanted to create a fund in a country that has no money to save. We even took out loans to create it—it’s like using the overdraft to put money into savings.

In the book, measures such as the requirement for local content in oil exploration are heavily criticized. Doesn’t it make sense to take advantage of a commodity to develop the industry? It is one of the most difficult things to explain to the citizen, the first thing they will say is: we are going to create jobs here, not in China. That sounds good, but when you look at it in detail, the policy was one of high costs, unpredictability, and logistical difficulty.

The opposite argument suggests that these large companies have become successful cases because they have incentives from their countries of origin. These countries protected and achieved good results, but hundreds of others did the same and failed. Protection, in itself, does not make a sector efficient, success came associated with investing in human capital and opening up the economy to have better inputs. Embraer is one of the main importers in the country, had the freedom to carry out projects and had ITA alumni [Instituto Tecnológico da Aeronáutica].

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Marcos Mendes, 57

Economist and researcher at Insper, he was also an advisor to the former Ministry of Finance and author of ‘Why is it difficult to make economic reforms in Brazil?’