Opinion – Solange Srour: An opportunity not to be missed

The sharp rise in commodity prices seen in recent weeks has the potential to greatly favor Brazil. About 70% of our exports are commodities, which brings our terms of trade — the ratio between the price of products that Brazil exports and the price of products that Brazil imports — to close to their highest historical value.

The higher this number, the more income the country can generate from foreign trade. Gains that should allow for more investments, increased productivity and improved distribution of income, schooling and health.

However, there are doubts as to how much of this higher terms of trade will translate into actual income.

Weather adversities have limited the production of some commodities, while higher prices for fertilizers, largely imported, could send part of the gains back abroad.

Furthermore, before the war, the main global economies were already facing high inflation, which reduced monetary stimulus and jeopardized strong global growth. Notwithstanding all these factors, the impact of the rise in commodities on the well-being of Brazilian society will largely depend on the effect it will have on inflation, which is already quite high and widespread.

The dynamics of inflation is strongly influenced by the behavior of the exchange rate. In general, we find an inverse relationship between the real exchange rate and terms of trade performance. Prices of exported products, increasing in relation to imported ones, favor the trade balance, and this additional injection of resources translates into an appreciation of the exchange rate. The real exchange rate also appreciates when the internal and external interest differential increases — also the largest since the beginning of the inflation targeting regime.

Will exchange rate appreciation help to contain inflationary pressures and drive interest rates down? This is not what happened between mid-2020 and 2021, when our terms of trade rose by around 20%, while the exchange rate depreciated, impacting inflation and leading to a significant monetary tightening. Uncertainty over fiscal rules prevented external manna from generating income gains for the population, and GDP began to slow.

It is true that our fiscal position has improved in 2021, and the same could happen in 2022 as the commodity sector is heavily taxed. However, the short-term improvement did not offset the weakening of the fiscal anchor.

In the face of a favorable external shock, it is recommended that fiscal policy be acyclical, with the government saving part of the extra revenue in order to be able to increase spending when the boom passes.

Unfortunately that is not what we did and we are doing. Last year, we raised the spending cap to accommodate Auxílio Brasil, and now we use the cyclical revenue gain to cut taxes, seeking a legal way to further weaken the Fiscal Responsibility Law. This is what the sustainability of the exchange rate appreciation we are witnessing will depend on.

It was not the first time in the last two years that we did not benefit as we could from the rise in export prices. Carrasco, de Mello and Duarte (“The Lost Decade: 2003 – 2012”), using the statistical technique of “synthetic control”, selected a set of countries whose economic performance prior to 2003 was the most similar to that of Brazil and analyzed the period after the huge terms of trade gain that lasted until 2010 (controlled by each country’s terms of trade gain). Comparing the trajectory of Brazilian GDP per capita with the weighted average of those countries (Turkey, Thailand, Ukraine and South Africa), they showed that our performance was clearly inferior.

Low growth is a result of the institutions we create and perpetuate. A country that is still dealing with legal and regulatory insecurity, deficient infrastructure, fiscal imbalance, distorting tax burden, closed economy and low quality education needs to take full advantage of moments when the external scenario is favorable to it.

Achieving sustainable high growth rates requires economic reforms that improve our formation of both physical and human capital. The most propitious moment to advance is precisely when the country becomes richer. If this is the case in the years to come, let us not fall behind in terms of what we could have achieved, resulting in another lost decade.