President Dilma Rousseff said the Brazilian economy needs to grow a minimum of 4% a year. She said her government’s big priority will be investing in education. For that, she will present again, as part of the National Education Plan, the proposal to fully allocate oil royalties to education. Ms. Rousseff also highlighted the importance of pragmatism in government management and, in special, regarding the macroeconomic tripod — fiscal surplus, floating exchange rate and inflation targeting. “I think every government needs to be pragmatic,” she said. “A government can’t think it has the recipes and that it will follow those recipes” at any cost, she said.
After having lunch with King Juan Carlos I, of Spain, and a meeting with Mariano Rajoy, Spain’s head of government, Ms. Rousseff participated of a conference organized by Valor and Spanish daily “El Pais” on Monday in Madrid. Before opening the conference “Brazil on the Road to Development,” Ms. Rousseff received Valor for an interview.
She pointed out the importance of competitiveness of Brazilian manufacturing to support the country’s growth. She announced that the government is preparing a set of actions to develop capital markets and said it’s consensus in her government that the manufacturing industry is crucial for the multiplying effect of its growth over the entire economy.
Valor: Latin-American countries complain of Brazilian duty barriers and countries from the Pacific are uniting in a bloc directed to the Pacific. Are you worried about that?
Dilma Rousseff: They are closing such an alliance because they think they will have a bigger opportunity and there was a certain induction from the US. We haven’t raised barriers. We are one of the countries that suffered the most dramatic consequences and the European Union too, of all quantitative easing, because nobody can hold a currency from devaluing at the rate they did. There is no protectionism policy more efficient than that they used, by not only devaluing the dollar, but also by reducing the cost of capital.
Valor: But is the exit to the Pacific a viable one?
Ms. Rousseff: I think they are trying such exit, but the exit to the Pacific is complex because it is an exit to where, to China? We have a relationship with China of another quality, we want to keep trade to commodities, but we want — and the Chinese themselves recognize it is possible — to increase sales of manufactured products and add value. When there’s talk about a shift in the Chinese model, it doesn’t mean they will reduce investments, they will reduce the gross fixed capital formation linked to infrastructure creation and will increase industrial production related to more sophisticated consumer spending. It is not that they will give only more wages, they will increase investments, they will have more sophisticated manufacturing. What we want is to be part of that effort because they will produce, but they will also import. I believe there is a place for everybody. Countries that make the Pacific Alliance, they have advantages in doing that and I have the impression it is more an alliance for the US. But it’s not the type of problem one poses to an economy such as Brazil’s. We have to have a relationship with the US and I’m sure that with [Barack] Obama’s reelection we can accelerate such relationship, but we are not a country of primary goods. And you can be sure of one thing: in the government there’s conviction that we won’t trail a development path if we don’t give importance to industry.
Mr. Rousseff: Manufacturing is important to articulate the other sectors, it has an innovation power that spreads out across the economy, it is decisive to us, who need to increase the gross fixed capital formation, who need to raise our investment rate. We have the obligation of having our eyes turned to the industry. It is not that we have to protect our industry, what we have to do is make it increasingly more competitive. And the industry won’t become competitive if we don’t have a public-private partnership, meaning the Brazilian state and private sector will have to make an unheard-of effort.
Valor: You mention the creation of these technology centers and…
Ms. Rousseff: Technology centers such as the one the National Confederation of Industry (CNI) is doing and that we are fully supporting.
Valor: Is the currency devaluation in the past few months, then, a way of making this transition to a more-competitive industry?
Ms. Rousseff: What currency, ours? We are seeking an exchange rate that is not one of a devalued dollar and an overvalued real. We had an overvalued currency, nobody doubts that, either by the interest rate/exchange rate ratio, either as a result of the quantitative easing that injected over our heads more than $9 trillion. After I said that at the UN there was a reaction, “But there is no such effect, of quantitative easing.” No? It happens monthly and its effects are accumulating. There are, in total, about $85 billion a month that multiplied by 12 months amounts to about $1 trillion a year. If you don’t sterilize that $1 trillion, it will go to some places, including Brazil. It has an effect of devaluing [the dollar]. I’m not going to talk about the inflow of speculative capital in Brazil, because it’s our obligation to defend ourselves of that. The effect is guaranteeing a devalued currency and simplifying the US adjustment. Behind that there is the whole talk that the others are protectionists. If we injected $1 trillion in our economy, first we would be inflationary and then we would be artificially devaluing our currency. When they do it… The US, we have to acknowledge, has an immense capacity to be pragmatic.
Valor: Is your government also pragmatic?
Ms. Rousseff: I think every government has to be pragmatic. A government can’t think it has the recipes and that it will follow those recipes. Example: I’m going to do the most austere adjustment in the world and it will be successful. What will happen? My growth falls and, then, my deficit rises. Because of that the denominator plunges, the GDP plummets and the ratio of public debt/GDP rises. They are experiencing that here in Europe. And we know what it is because we already went through that. When your GDP starts to grow, your adjustment becomes easier.
Valor: And why is the Brazilian economy taking too long to react and grow?
Ms. Rousseff: Because we have to make an effort in terms of competitiveness. That is not just rhetoric, it is real. We have to reduce the cost of capital, we are trying to do that, we have to increase the sources of financing for long-term investment, it can’t be only the BNDES [the national development bank]. We have to have cheaper capital, coming from the capital markets. Brazil will have to get more sophisticated, we have to have capitals, we have to have financial products that turn investment viable.
Valor: Is the government preparing measures for the capital markets still this year?
Ms. Rousseff: The government is preparing them, but I’m not sure they will be for now. I won’t say which measures they are because they are still being prepared. We have to change financing conditions in the Brazilian economy. We also have to increase the presence of companies in several activities. For example, in infrastructure we have to have partnerships, PPPs [public-private partnerships], and we will do it. We have to make a big effort in education, especially in professional education. We need that. We have to reduce the cost of labor, and for that we are cutting payroll taxes. We will have to advance, within the possibilities of the several involved agents, in tax cuts. We started the tax cuts in payroll, we started with 15 sectors, expanded them to 40, and we will do more. We have to solve the problem of ICMS [a state sales tax that the federal government wants to unify to avoid a tax war among states], but you can’t solve that problem without compensation to states. And also we don’t have all of the world’s money to go out doing all of that simultaneously. We will also have to have an investment in education. Another thing I think people didn’t realize is why we want to allocate [oil] royalties to education. We will have to make an effort to persuade… Because it is not only the Congress that is responsible, it is the entire society. Because if we don’t have education, we will not go far. I need to do this and the next leaders of this country will have to bet heavily on education. I need to make alphabetization at the right age, because 15% of eight-year-old children don’t know how to read, they don’t know how to write a little, they don’t have the ability to interpret a text. We have to change that, we have to have full-time education and we have to have professional education. I’m not even talking of Science Without Borders [a government-sponsored scholarship program to stimulate research], or about research. We are proposing to put all the efforts, whatever the split [of royalties revenue], on education until 2020.
Valor: Are you proposing to use the entire federal government share of oil royalties in education?
Ms. Rousseff: Yes. Ours and theirs, because responsibility over education falls mainly on municipalities and states. Where are they going to put the money? Norway solved with oil royalties a very severe problem they had, social security. Our very severe problem is education. Later we will present again the National Education Plan, PNA. And we have to do the possible and the impossible to make the country grow. Brazil needs to grow at least 4% a year.
Valor: And what else the government will do to achieve such growth?
Ms. Rousseff: I can’t say, but we will make some other things. We have some victories, such as My House, My Life [a housing program for low-income families], where we reached 1 million houses and will build 2 million more. It’s 1 million delivered and 2 million hired.
Valor: And the infrastructure problems?
Ms. Rousseff: We have several infrastructure problems. We solved several with the special procurement regime, RDC. Brazil has to have a bank for projects; we are trying to solve that. And in many things we need to make states and municipalities more efficient. Because we don’t have the means to invest in sanitation, for example. Our problem is not money, it’s execution. Ask Miriam [Belchior, minister of Planning] if it is lack of money.
Valor: Is the macroeconomic issue less relevant today?
Ms. Rousseff: No, and that notion that we stopped using the three pillars [floating currency rate, inflation targeting and primary budget surplus] is absolutely mistaken.
Valor: But isn’t the exchange rate being managed?
Ms. Rousseff: I don’t think so.
Valor: Isn’t it at R$2 to R$2.04 per dollar?
Ms. Rousseff: I don’t think so, due to the international situation it may even be… It is keeping a certain level, sometimes it rises, then people say “Tombini [Central Bank President Alexandre Tombini] will do a swap.” Then it falls and people say “it will fall”…
Valor: Would you say the tripod of fiscal surplus, inflation targeting and floating currency can also be managed with pragmatism?
Ms. Rousseff: There is no policy that is not pragmatic. Tell me one? You will be orthodox and will see that you go nowhere. Have you seen moments in history when the people are very orthodox? We are seeing that now, here [in Europe]. In the US they never are. The International Monetary Fund in our times [in the 1980s and 1990s] was totally strict. Then it decided now to make an evaluation of indicators of the effects of policy adjustments and realized the negative effect they have over growth. The problem here [in euro zone countries] is that there is a political problem too. Euro is not a complete work. You start with the currency, the currency demands a state and demands a lender of last resort and demands bond issues. Then, when there was no crisis they held it. Now you have to negotiate and how do you negotiate with 17 parliaments? You have a political problem. It’s the so-called “consensus trap.” And I think there’s very strong speculation against the euro.
Valor: Will Brazil present a candidate to the command of WTO?
Ms. Rousseff: Not necessarily. We can both present and support one of the candidates that may emerge.
Valor: Who could be the Brazilian candidate?
Ms. Rousseff: I wouldn’t tell you who. Nobody knows yet. We have to look at this in relation to all the other things that are on the table. It is not only that decision on the table, we have to see the advantages and disadvantages.
Valor: And the issue of power concessions, there is a big confusion and Eletrobras is complaining…
Ms. Rousseff: Do you think I want to make Eletrobras go bankrupt? Now, between bankrupting Eletrobras and [the company] wanting an income that doesn’t belong to it, that belongs to Brazilian companies and the population…