Economic challenges under Lula’s government, overestimation

In the second year of his third presidential term, President Luiz Inácio Lula da Silva (Workers’ Party) is grappling with conflicts in the economic sector caused by the overvaluation of the dollar against the Brazilian real currency.

The fluctuations of the US currency affect the economies of the Southern Hemisphere, reinforcing a capitalist mode of governance based on self-interest. This fuels the need for programs aimed at “creating a new international currency that is like a combination of other currencies, thus generating a common denominator,” as João Pedro Stédile, economist and leader of the Landless Rural Workers Movement (MST, in Portuguese), emphasizes.

This statement was made in the latest episode of the podcast. Three by fourmade by Brazil de Fatowhich discusses the offensive of the financial market and the media that covered it against the economic program of the Lula government. The guest of the episode was economist Juliane Furno, a professor at the State University of Rio de Janeiro (UERJ, in Portuguese). The podcast is hosted by journalists Nara Lacerda and Igor Carvalho.

According to Furno, for an economically healthy and less unjust future, “the new world begins with de-dollarization.” According to her, “guidelines for thinking about new international monetary systems that escape the straitjacket of the dollar” must gain support, especially from countries in the Global South that are most affected by changes in the US currency and financial speculation.

As Stedile argues, this new system cannot be centralized in one country “so as not to repeat the tragedy of the dollar”, which, being a global currency, gives the United States not only financial but also social power.

“We should pay more attention to the debate among BRICS members. We are building a new international currency. Since World War II, the dollar has been an instrument of exploitation used by the United States against workers in the Global South. (…) The dollar is a piece of paper painted green. It does not represent any commitment to anything – and it is the United States that paints it,” Stedile said.

In 2024, the American currency rose by 1.11% to exceed 5.70 BRL, the highest value recorded since January 2022, when Brazil and other countries were still struggling with the effects of the COVID-19 pandemic. As President of the Central Bank since February 2019, Roberto Campos Neto, appointed by former President Jair Bolsonaro (Liberal Party), has openly debated President Lula on the alleged economic problems the country has faced during his term.

Speculation

The Brazilian central bank forecasts GDP growth of 2.3% by the end of this year. Inflation in the first half of the year fell compared to the first six months of 2023: from 3.16% to 2.52%. Finally, in addition to the market heating up, the unemployment rate of 7.1% recorded in the quarter ending in May is the lowest in the last decade. Therefore, with market pressure to cut public spending, “we live in a somewhat schizophrenic situation”, as Stedile points out.

“There is nothing, absolutely nothing, to suggest a lack of control over the main macroeconomic variables. It is clear that market agents and their representatives are doing their homework,” agrees Juliane Furno.

The economist also points out that market participants use this discourse to exert political pressure on the government. However, they do not do this by clearly demonstrating their interests, but by using the “technical envelope that is through market behavior.”

“They say that Brazil is on the edge of the abyss, it is heavily indebted, it is facing bankruptcy, and its public accounts are insolvent. Through this terrorism, which is part of the political game, regardless of which government wins the elections, the interests of the banks will continue to be represented,” he warns.

For Stedile, this is a “manipulation of public opinion” because the economic indicators do not show the serious situation in Brazil. He emphasizes that the bourgeoisie is taking advantage of this situation, distracting people and the media from important issues, keeping the roots of the country’s public debts as a “black box.”

Debt vs. GDP

Juliane Furno explains that the increase in public spending – the main argument of critics of the financial market – should not be seen as alarming, since putting public revenues back into society is essentially an investment in the country itself. She emphasizes that the increase in GDP and the improvement of people’s lives can have a positive impact on the national situation, even if at first it means an increase in public spending, given the need and importance of creating and maintaining social initiatives.

The economist points out that when assessing the state debt, the Gross Domestic Product (GDP) should be taken into account.

“Let’s say the (public) debt is BRL 1 trillion (about $182.4 billion). If you cut spending, it doesn’t mean that it will go from 80% of GDP to 75%. It can go up (taking into account GDP),” she explains. “So let’s say you’ve gone from BRL 1 trillion to BRL 1 billion (about $178.8 million), and the debt that was 80% is now 90% of GDP. You can go from BRL 1 trillion to BRL 1.5 trillion ($273.6 billion). What matters is GDP. So, if you increase the public debt to finance public policies that distribute income and thus increase GDP, what used to be 80% is now 70%,” she added.

In this way, the professor and economist highlights how Brazil “can increase public spending and the real size of the public debt, and also reduce it in proportion to GDP (…) if we distribute the revenues and increase GDP, we will not have to worry about the debt.”

“The market, is that what you want, fiscal balance? We can achieve that by raising revenues. Let’s tax the super-rich and have tax reform so that you pay more of your bills. That’s how we achieve fiscal balance,” the economist argues.

Furno emphasizes that maintaining social policies is beneficial for the country’s economy, even if it means increasing public spending.

“During the (first) Lula government, although public spending grew by 6% or 7% a year, the debt inherited from Fernando Henrique Cardoso, amounting to 80% of GDP, was transferred from Dilma Rousseff to Temer at 30%,” he recalls.

He recalls how the country’s economic and fiscal crisis deepened after Lula’s term in office and the coup against former President Rousseff (Workers’ Party) in her second term. “To get out of the crisis, we need fiscal balance. So let’s cut spending. What’s happened since 2015? We cut spending and got deeper into the economic and fiscal crisis,” he explains. “History is on our side.”

New episodes Three by four are published every Friday morning and discuss the most important events and the political situation in the country and around the world.

Edited by: Nicolau Soares