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The authoritarian currency

Project discusses the delicate relationship between the authority of the Central Bank and politics

Politicians must sigh with nostalgia for the times when, as president Washington Luiz used to say, “to govern is to build roads”. One of the most significant turning points  in Latin America concerns the new criteria for legitimation, by which ‘economic’ categories were converted into social values and into criteria of political performance, by means of which society judges its governors”, analyzes political scientist Lourdes Sola. “Objectives previously perceived as ‘economic’, such as stability and monetary discipline, became intelligible for the population and for opinion makers and came to be part of their aspirations and expectations, to the point of acquiring the status of public goods´”, the researcher observes; she is the coordinator of the Thematic Project Construction of the monetary authority and democracy: the Brazilian experience in the context of economic integration on a global scale, carried out with the support of FAPESP.

Today, the professor notes, from the capacity for getting a mortgage for a new house to the overall rate of inflation of the economy, everything is, in some way, determined by the monetary and financial policy of the government. “So there has to be a broader focus, that addresses the monetary authority as a specific modality of political authority.” Lourdes notes that, with democratization, macroeconomic stability began to act as an important electoral asset, since the mass of the electorate was tired of the old economic policies based on shocks and on growth driven by hyperinflation. “This leads to a challenge for the governments of the new democracies: they depend, in great measure, on access to the international capital markets to maintain economic stability, which, in turn, is necessary for responding to other demands that the mass electorate associates with democracy, that is to say, economic development and a greater material well-being.”

A more than Hamletian political dilemma, since it means pleasing, at the same time, the interests, generally disparate, of foreign investors and of the domestic electorate. “Access to international capital is conditioned to achieving financial credibility, to win which involves deregulation of the domestic markets and the free flow of capital as main adjustment mechanisms.” This form of integration, though, leads to a growing exposure to exogenous shocks. “This occurs in a context of democratization that introduced to the political scene a mass electorate that is characterized by its low tolerance to the instability and recessive trajectories of the economy, caused by a high degree of exposure to ‘external shocks'”, she reckons. “It all became evident at the last election, when, on the side of the political class, once it was found that the bulk of the population was favorable to stability, the opposition candidates claimed it for themselves as a value, that is to say, they presented themselves as partly continuist. The PT ( Workers’ Party) and Lula, incidentally, more than any other, as one reads in the ‘Letter to the Brazilians'”, the author recalls. Hence, if the restructuring of the monetary authority is at the top of the list of institutional reforms, at the summit of this new structure is the delicate question of the autonomy of the Central Bank (BC).

“The consolidation of a new institutional design, with the autonomy of the BC, still depends on going into greater depth in the discussions and on it being understood by society”, says the Minister of Finance, Antonio Palocci. “If at some moment I understand that the autonomy of the BC may be able to bring interest rates down, I would be mad not to do it”, stated President Lula at his first press conference. “However, what seemed to be probable, the project for the BC’s functional autonomy in 2003, was frustrated, although this was a decision in the course of coming into effect, since, that year, the constitutional reform was made viable (article 192 of the 1988 Constitution, which redefined the institution’s prerogatives and structure), a step ahead in the direction of autonomy. Approved, by the way, in Congress, in the Lula government, with the support of the opposition, of the PT and of its allies.”

The great availability of funds in the international financial market, its so-called liquidity, gave the Brazilian government the opportunity to postpone the autonomy project. The great supply of money diminished the concern with risk, and this made the international pressure for the restructuring of the BC decrease. “But, sooner or later, the market is going to become less active, and the pressure will come back, bringing the project back, an important stimulus for recovering the confidence of the markets”, the researcher reckons. At the bottom of everything lies the constant fear of the foreign investors over changes occurring in the heat of electoral disputes, which make Brazil a sea of uncertainties, a word that the financial market hates. Hence the desire for a BC ‘free of political pressures’.

But free from what? President Lula himself, in an interview, declared that in his government the BC already had autonomy, which includes having an ‘armor-plated’ president, with the status of Minister of State. “It is a de facto autonomy, but a partial one”, says the author. The price of freedom is eternal vigilance: the old chestnut from the Cold War cold also be applied to the project for the BC: who is to guard the guards themselves? “The questions to be discussed are the nature and the limits of autonomy, as well as the procedures by which the inflation targets should be set, with the Executive Branch/Congress responsible for setting them and the BC endowed with operational autonomy to fulfill them”, she reckons. “A second aspect is to bring to a public debate the institutional design of an autonomous BC, respecting the characteristics of the Brazilian context. The illusion of those who defend the orthodox model (antidemocratic, in my view) is to presuppose that only one model for autonomy exists, when in actual fact, the Central Banks of the United States, Japan, Germany and France are very different”, the researcher recalls. It is worth recalling that the Bank of England gained its autonomy in 1997, in a Labour Party government.

The Brazilian Central Bank was created on December 31, 1964. Before it, monetary authority was exercised by the Currency and Credit Superintendence (Sumoc), by Banco do Brasil and by the National Treasury. “The BC was born in an authoritarian regime and has a backward nature in relation to the BCs of the other Latin American countries. Furthermore, the centralization of the monetary instruments on the institution also took place in a belated manner. From 1965 to 1985, the BC shared controls over monetary supply in the country with Banco do Brasil”, Lourdes observes.  Oddly enough, in 1964, there were serious intentions of making the institution an autonomous instrument, in relation to politics, a proposal that was overthrown three years later, in the presidency of Costa e Silva, because of the economic expansionism of the then minister Delfim Netto. “The history of the monetary authority in post-war Brazil, though, has less to do with the nature of the political regime than with the priority commitment to accelerated growth and substitutive industrialization.”

After years of public centralism, the 1988 Constitution, the author stresses, brought “the devolution of the economic and decision-making powers to the jurisdiction of the states, having been in the federal orbit, before the political liberalization, which helps to explain the difficulties faced by the Executive Branch, later on, whenever it was a question of establishing a coordinated authority and of implementing an agreed strategy that implied the support of the governors”. The states started to act as centrifugal forces for monetary decentralization, in particular by using their state banks to issue money (Banespa, Banerj, amongst others), a sort of rebellion against the constitutional authority of the BC. Furthermore, with inflation on the rise, the big winners were the banks, including the public banks: each year between 1990 and 1993 the banking sector would generate inflationary revenue in the order of 4% of the GDP, with the public banks appropriating two thirds of the total.

The end of hyperinflation, from 1994 onwards, turned the game round for the BC. “The institution’s capacity for disciplining the state banks should be seen as a gradual process that starts at the beginning of 1980 and that was imposed by the successive crises experienced by these banks.” Once again, the dilemma was a political one: reconciling decentralized democratic reality, Brazilian federalism and the need for monetary centralization on the BC, in order to institute the desired economic stability. “The model of federalism adopted gradually in the course of the process of democratization influenced the monetary order, by generating a multiplicity of power centers rivaling the federal government”, says the author. “Accordingly, until the BC’s statutory autonomy is not assured by an act of delegation of the political class and, hence, of the Legislative Branch, the present-day autonomy of the institution continues to depend on the fiat of the president, that is to say, on a political decision, and not on an institutional restriction”, Lourdes warns. “But the Legislative Branch does not seem to be interested in the subject. The agenda is poor and does not include the autonomy of the BC, because it is not a relevant objective in electoral terms.”