Opinion – Marcos Lisboa: State captured

The PEC Kamikaze shows that we have crossed the red light. The Brazilian private sector has long benefited from subsidies and restrictions on competition that protect inefficient companies.

The novelty is that congressmen are trying to institutionalize similar practices for their own benefit, creating laws that restrict electoral competition and that expand their access to Treasury resources for parochial interests.

The dimension of state capture by organized groups is overlooked in the debate on economic growth.

Since the late 1970s, we have grown less than developed countries and much less than many emerging ones. The debate about our backwardness contrasts liberals, who advocate controlling the expansion of public spending, and developmentalists, who advocate increasing state-led investments.

Some fear that the increase in public spending will lead to higher interest and inflation rates, in addition to a reduction in investments, which would worsen the low growth scenario; others believe that the resumption of growth requires greater government intervention.

This debate usually disregards the fact that public policy in Brazil, including a relevant part of the increase in spending, is captured by unproductive activities, benefiting localized groups to the detriment of the majority.

The official discourse of the PEC dos Precatórios, for example, advocated increasing income transfers to the poorest. The measure, however, brought additional resources for amendments by parliamentarians, followed by complaints of malfeasance and inefficient spending.

This practice has no ideology; occurs under the current government as it did under previous administrations. In the 2000s, for example, there was ample subsidy for investment. However, the falling cost of financing large companies did not expand private investment, it only increased the distribution of profits to shareholders (Lazzarini et al., “What do state-owned development banks do? Evidence from BNDES 2002-09”, World Development, no. 66).

From 2009 to 2014, primary public spending grew 36% above inflation, amid exemptions for several sectors, such as the chemical industry. The subsidies granted by the BNDES cost the Treasury almost R$95 billion. The economy, however, slowed from 2010 onwards, with a brief rebound in 2013.

Frustration with these policies should not be surprising. Much of the development of countries is explained by the increase in productivity, which measures the ability to produce goods or services with the same amount of capital and labor.

About 80% of the growth in the US economy between 1948 and 2013 came from rising productivity. More than half of the income gap between rich and major emerging countries is associated with differences in productivity. The latter protect far more inefficient firms (Jones, “The Facts of Economic Growth”, Handbook of Macroeconomics).

Innovation in products, production techniques or management methods usually occurs in the private sector, induced by competition between companies for better results. It is a decentralized process of trial and error, in which it is not known in advance which one will be successful. Many fail, but successful innovations spread and increase productivity (Aghion et al., “The Power of Creative Destruction”).

On the other hand, the greater protection of inefficient companies, the restriction of competition and the state directing of investment sometimes inhibit innovation and induce the adoption of low productivity techniques, harming growth, as happened with our IT law.

This does not mean that the State should refrain from intervening in the economy, but rather that this process is politically and technically more complex than the current debate suggests.

There is also evidence that, due to design and implementation problems, public spending is less effective in Brazil than in other countries, as can be seen in the case of education. We must go beyond the simple contrast between austerity and greater public spending. What are the reasons for the inefficiency of state intervention? What mechanisms allow the great capture of public policy by organized groups, which results in little development?

Instead, state and opposition congressmen continue to grant subsidies to private interests without careful impact assessment and without control mechanisms that guarantee increased productivity and greater social inclusion. The parliamentary amendments allow each congressman to spend tens of millions of reais a year as he wishes, without coordinating public policies, reflecting the weakening of the Executive.

It does not matter to them whether the measures adopted are socially ineffective or will prolong high inflation and low growth. The responsibility rests with the Planalto, while the parliamentarians boast of the localized benefits, as if one thing had nothing to do with the others.

The PEC Kamikaze is an example of how groups with mobilization power, such as truck drivers, manage to obtain privileges at the expense of the rest of society. But she goes further than that.

Redemocratization sought to curb the use of state power to benefit electoral allies. No more. With the lone vote against José Serra, the majority of senators approved the PEC, which, a few months before the election, distributes unsustainable benefits. Coronelismo uses public resources to favor its candidates.

Electing president or governor has lost relevance. Important is being elected to Congress. Access to public resources by parliamentarians was expanded, in this government, with amendments by the bench and the rapporteur.

The Electoral Fund, created in 2017, almost tripled for this election, guaranteeing funding to allies in the party summits, to the detriment of competition. Patrimonialism politicians are tired of being supporting actors.