by Marc Castillo and Sírio Sapper
Abstract
John Williamson´s renown paper "The Washington Consensus" while causing controversy is nothing more than basic capitalist tenants. Brazil has been undergoing a "Washington Consensus" transformation for decades now. During the last several years this evolution has progressed at a more ambitious pace. This paper examines the actions and mechanisms that the Bolsonaro administration has undertaken to make free market principles more concrete in Brazil.
Keywords: Free Market Principles, Brazil Economy, Bolsonaro Administration, Brazil, Brazilian Politics
THE WASHINGTON CONSENSUS AND BRAZIL: CONTEXTUALIZATION
The ‘Washington Consensus’ has arrived in Brazil and it is there to stay. In 1989, US Treasury Secretary Nicholas F. Brady came out with a solution to the immediate debt crisis faced by countries such as Brazil, Argentina, Panama, and Peru among others at the time. Shaped as a debt refinancing agreement, the initiative proposed extended terms between creditors and debtors under specific requirements to be fulfilled. Though it is not thought of, several of the economic initiatives used by various Brazilian governments throughout the last several decades have heralded from the famous work of John Williamson called "A Short History Of The Washington Consensus, " these reforms haven given way to privatization and in a way more civil liberties, a Westernization or Americanization process is occurring in Brazil.
To understand how Brazil got to this consensus it is imperative to comprehend the initial backdrop of the so-called "Washington Consensus." One of the underlying precepts of the Washington Consensus is a process called "securitization,” this process allowed debt to be exchanged for national government bonds, which were backed by U.S. bonds. One of the main mechanisms of monetary stability adopted in Latin American economies during the late 1980s was the fixed exchange rate.
In order for Brazil to adhere to the fixed exchange rate program, which it finally did in 1993, a series of reforms and compromises had to be undertaken. In the spring of 1989, British economist John Williamson testified before a Congressional committee in favor of the Brady Plan, a plan where Latin American countries received credit from the United States to not default on debt (Williams 2004: 1). He argued that it would be good policy to help the debtor countries overcome their debt burden, since Latin American countries were slightly shifting their economic practices (Williams, 2004: 1). Those adjustments did not represent staunch radical Austrian laissez-faire changes, given that they were even advocated by mainstream economists such as Mário Simonsen and Béla Belassa (Williams, 2004: 1).
John Williamson writing in his acclaimed work, "A Short History Of The Washington Consensus," included social reforms as a means of enhanced social cohesion, opining on the merits of social stability which would in time be fundamental to the free market development process in Brazil.
Williamson´s infamous 1989 Washington Consensus paper highlights 10 points: (1) Fiscal discipline; (2) Reordering Public Expenditure Priorities; (3) Tax Reform; (4) Liberalizing Interest Rates; (5) A Competitive Exchange Rate; (6) Trade Liberalization; (7) Liberalization of Inward Foreign Direct Investment; (8) Privatization; (9) Deregulation; (10) Property Rights.
The term "Washington Consensus" became undoubtedly cliché and controversial. It belies the simple practicality of what it really is. Detractors and others who wish to criticize, enliven or even embellish the term fail to grasp that in reality it is just mainstream policy in developed nations. They constitute well-established practices shared by wealthy and successful nations.
The “Washington Consensus guidelines are only general principles, whose implementation can also vary from country to country. The manner of which such directives are going to be carried out is still dependent on national factors and cultural norms: it is not an absolute standardized top-down solution applied indiscriminately. Brazil in one way or another has been undergoing these reforms since the mid 1980s and now in the early 2020s the process of moving toward a free market directed society is more evolved and established.
Williamson´s points opposed the abolition of the market economy, which was tried in the communist countries for 70 years and proved a disastrous dead end, but to give the poor access to assets that will enable them to make and sell things that others will pay to buy. That means nation states need to develop and further four key paradigms to ensure success in a market-oriented economy: Education; Titling programs; Land reform; Microcredit (Williams, 2004: 13). These attributes of an open market economy are what Brazil has been developing and furthering during the Bolsonaro administration.
ONGOING FREE MARKET REFORMS
Federal Tax Reduction
Tax reform is one of the most crucial aspects of free market liberalization. The current Brazilian Tax Code dates from 1966, when the isolationist and ISI military dictatorship was in power. Little has happened regarding point three, which is tax reform, of Williamson´s paper . There are different proposals, but no ultimate deadline for Congress to act on it. Currently there are a few changes regarding federal taxation. One such alteration on industrialised products (IPI) are no longer applied to roughly 300 different capital goods, among them are diesel engines, forklifts, crane machines, printer and biometric systems’ subparts.
There are four major transformations which already took place during the Bolsonaro administration: pension reform, central bank autonomy, economic freedom law and the new regulatory framework on basic sanitation. Each one is a case study in itself. All these innovations are hallmarks of Williamson´s pragmatic approach. The four measures cover nearly all of the 10 points in the Washington Consensus points paper.
Normative Instruction 85/2020I
A very relevant initiative, but somewhat unnoticed, is the Normative Instruction 85/2020 from the National Department of Business Registration and Integration (DREI). André Santa Cruz Ramos, a renowned professor and author, known as an avid Ayn Rand supporter, is in charge of the office. This instruction promotes and cultivates deregulation. To mention a few of these new changes: (1) associations or cooperatives can freely be converted into a business without any type of new registration; (2) there is no requirement for signature authentication or authenticated copy; (3) considerable extension of automatic business registration (Art. 43); (4) any business constitutive act registration is independent from any form of government authorization; (5) any business is permitted to extend the term for the payment of capital stock; (6) acts, documents and declarations that contain mere cadastral records (for example, changes in marital status, changes in addresses) do not require contractual alterations, being presented as a simple administrative measure. These articles emphasize the swift pace at which deregulation has become a priority in Brazil as the country is moving toward being more business friendly.
PRONAMPE
As stipulated, the Washington Consensus lays down social reforms as a means of neoliberal economic improvement. One of them is microcredit access. This subject matter is targeted by Law 13.999/20, which extended the term limits of the National Support Program for Micro and Small Enterprises (PRONAMPE). Microcredit access lines have been extended by the Bolsonaro administration which provide small businesses the opportunity to continue to operate.
The New Franchise Law
The federal law nº 13.966/20 renews the franchise opportunities in Brazil. Following in the steps of federal law nº 13.874/19 (Lei da Liberdade Econômica), the pacta sunt servanda principle shall be applied as the general rule among private contractors. Unlike what has been done so far, any business contract now is taken primarily as a symmetric (Art. 421-A, Law of Economic Freedom). Thus, there can be no government intervention within the commerce sphere, until proven otherwise (Art. 421, § 4º, Law of Economic Freedom).
The prior franchise law was silent concerning the nature of the franchisor-franchisee relationships. So the Brazilian Judiciary went back and forth on the idea of franchisor-franchisee bonds being protected by consumer rights. That would represent a propitious environment for continuous government intervention, since consumer law presupposes an asymmetrical and uneven settlement. With the renewed franchise law, the parties can freely express private autonomy regarding which contract clauses should be applied or not (Art. 1, Franchise Law/2020).
State companies and non-profit organizations are also able to sign franchise contracts (Art. 1, § 2º, Franchise Law/2020). In order to be implemented, the franchisor must provide a Circular de Oferta de Franquia, similar to the American Franchise Disclosure Document (FDD) or Uniform Franchise Offering Circular (Art. 2). This document must be handed over at least ten days before the contract signature (Art. 2, § 1º). If the deadline is not duly fulfilled, the franchisee has the right to argue for a void or voidable contract (Art. 2, § 2º). Under such circumstances, the franchisee holds the right to receive all its expenditures back (Art. 2, § 2º).
The parties may also elect an arbitral tribunal to resolve disputes related to the franchise agreement (Art. 7, Franchise Law/2020). As seen, the arbitration clause is expressly guaranteed by the law. This new law does not require the presence of any witness during the contract signature, unlike its predecessor. This new law simplifies the franchise business on the whole, the franchisor-franchisee relationship and its practices.
Rule of Law
As indicated previously, rule of law represents one of the main pillars of the “Washington Consensus.” Rule of law is a basic institution that is also a pillar of Williamson´s work. As rule of law is a basic pillar of functioning democracies it is unreasonable that the Washington Consensus point of private property guarantee should be characterized as "evil machinery." According to John Williamson (Williams, 1990: 1):
"In the United States property rights are so well entrenched that their fundamental importance for the satisfactory operation of the capitalist system is easily overlooked. I suspect, however, that when Washington brings itself to think about the subject, there is general acceptance that property rights do indeed matter. There is also a general perception that property rights are highly insecure in Latin America."
As Williamson continued to elucidate regarding point 10 of his trademark piece: “This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost (inspired by the Peruvian economist Hernando de Soto’s analysis)” (Williams 2004: 4). Brazil suffered from a drastic property crimes increase between the end of the 80’s until mid 2010’s.
Property rights are inextricably linked to public safety. For several years, public safety was not viewed as a first tier subject matter. Public safety was viewed as a consequence of inequality. Violence was perceived by the authorities as a result of economic inequality. In order for Brazil to become a safer place, the income gap between the rich and the poor had to be reduced. Naturally, this view was definitely not shared by the overwhelming majority of the population, rather by a fringe minority in power. The reason is quite simple: traditionally Brazil is a High Gini coefficient economy. Reducing inequality in Brazil is an extremely complicated task (Brzezisnki 2012: 49-50). Therefore, waiting for this problem to be solved would take much time. Brazil's population is exhausted from the high crime rate. Wanting to arrest the out of control crime rate Michel Temer´s administration was noticeably successful in containing crimes in general and specifically property crimes.
The Temer administration undertook several measures that included: (1) reactivated the Institutional Security Cabinet (GSI) and hand it out to Four-Star General Etchegoyen; (2) instituted the Single Public Security System (Sistema Único de Segurança Pública), the National Plan for Public Security and Social Defense (Plano Nacional para Segurança Pública e Defesa Social) and the National Council for Public Security and Social Defense (Conselho Nacional de Segurança Pública e Defesa Social); (3) authorized direct military intervention through the Law and Order Guarantee Operation (GLO) in Rio de Janeiro state and Roraima state; (4) increased security forces funding, by enabling private investment and by redirecting sports lottery resources; (5) the Federal Military Justice now holds military personnel responsible for intentionally violent crimes committed by military personnel against civilians within the GLO framework. Michel Temer adhered to rule of law fundamentals that militarized public safety and laid the groundwork for Bolsonaro´s administration.
Bolsonaro’s election victory was partially related to public safety concerns. The mercurial Brazilian president has campaigned and continues to campaign on public safety as an ongoing concern. Through his presidency Jari Bolsonaro has pushed forth many new initiatives to deal with the grave issue of security in Brazil. Property crimes are still drastically in decline (Kadanus, 2020). His actions included: (1) passing Anti-Crime Package legislation promoted by Ex-Minister of Justice Sérgio Moro; (2) transferring various criminal organization leaders to federal facilities; (3) apprehending drugs in record numbers; (4) expreding the National Force towards many states; (5) creating the Secretary of Integrated Operations (Seop); (6) implementing the Portuguese-inspired program Em Frente Brasil, which select key-cities to receive special law enforcement treatment as role models; (7) authorizing military interventions through GLO operations in the Amazon region; (8) piling up intelligence and military agents throughout several government bodies; (9) extending the scope of action of the Institutional Security Cabinet (GSI), the Brazilian Intelligence Agency (ABIN) and the head of the Federal Police, compounding them; (10) facilitating private gun ownership.
All these measures were aimed to shore up public safety in the face of calamitous crime and insecurity that have been and continue to be prevalent in Brazil. Comparing year to year crime statistics published by the National Security Information System (Sinesp) from the Ministry of Justice and Public Security for the years 2019 and 2018 crime fell across the board with homicides experiencing a 20.3% decline, homicides involving robbery fell by 23.8% and robberies of financial institutions fell by 41.5% (March 17, 2021). However, there is still improvement needed as homicide rates have climbed during the pandemic year of 2020 with an uptick of 7% in comparison to the first six months of 2019 (Kadanus, 2020). Another attribute of public safety that coalesces with civil liberties and even manifests an air of "Americanization" is gun access policy, which the Bolsonaro administration is bolstering. Bolsonaro’s approval rating is largely attributed to Public Safety measures (Venagilia, 2019).
Regarding to Moro’s Anti-Crime Package, it is fair to briefly point out some of the legal modifications introduced: (1) extending maximum jail time from 30 to 40 years; (2) making parole opportunities stricter; (3) instituting the plea bargain; (4) judicial supervision during criminal investigations. However, this extolled new criminal legislation is partially and temporarily suspended by a Supreme Court decision. It is not clear exactly how this will come to fruition.
PRIVATIZATION
In 1988 a group of international economists formed a “National Forum,” in Brazil whose aim was to point out “ideas for the modernization of Brazil.” The forum was coordinated by João Paulo dos Reis Velloso, a former minister of the military regime and a close friend of Mário Simonsen. Although it was not the central theme of the forum, privatization appeared strongly in Velloso's speech. When discussing the “state conglomerates (Eletrobras, Petrobras, Telebras etc.)”, the former minister defended strict control of government spending, however, regarding other state-owned companies, Velloso defended the immediate sale of shares on stock exchanges. For all his talk concerning privatization, Velloso pointed out areas that should not be sold that included electricity, oil, communication and transportation (Valente, 2013). Years later several of these industries would eventually go through privatization or go bankrupt. Between 1990 and 2015 privatizations resulted in over $100 billion in sales both at the federal and state level (Romero, 2021).
A Contemporary Privatizations
Petrobrás follows the privatization example of state ownership where the state is a majority investor. Through this style of state ownership the state accepts to follow certain rules to attract private investors as minority shareholders (Romero, 2021). If Petrobrás were to be privatized, it would follow Embraer’s golden share clause model. That means the government holds a subsidiary veto power. Even though these companies are private there is still a level of government influence and a minor opportunity for government intervention. This level of government involvement in these companies also suffices as a possible vehicle for government exertion of foreign policy.
On February 23, 2021 a provisional measure was brought to the Brazilian congress by the Minister of Mines and Energy Bento Albuquerque along with the Minister of Economy Paulo Guedes to start the process of privatizing Eletrobrás, the behemoth company of Brazilian Electricity. This move has been anticipated by many as an inevitable part of the privatization process. The government stake in Eletrobrás will drop from 61% to 45% and the government is expected to generate $11 billion through the share price rise. Eletrobrás will likely follow Embraer´s privatization process and will adopt the golden share model.
In a brazen effort to stave off any impression that he is not serious about economic liberalization, Bolsonaro submitted a proposal to congress to privatize the Brazilian postal service. Whether the privatization is accomplished by direct sale, sale of majority control or sale of part of the company is yet to be determined (Miazzo, 2021). The proposal for privatization of the Brazilian postal service mandates that the Empresas de Telégrafos e Correios continue to send mail throughout the country; private companies would not be obliged to deliver to the entire country. Since there is no economic demand to establish mail service in remote places the government will continue to fulfill its public mandate.
THE POLITICAL DIATRIBES OF THE BOLSONARO ADMINISTRATION
Despite the political frantics of Jair Bolsonaro there has been an underlying motion in his administration to privatize business and develop the private sector of the country which is perennially named "the country of the future." These reforms have taken place in Brazil at a time when perhaps few are noting the significance of it. The political mayhem and polarization that has gripped Brazil distracts from some prominent yet slow developments in Brazilian economic liberalization.
Bolsonaro´s rhetoric is mainly of his own doing firstly to rouse up populist sentiment and gain popularity as this is a staple of power perseverance in Brazil, secondly this sends mixed political signals that leaves opponents and pundits off-balance that can further agendas. To popular media Bolsonaro´s presidency seems to be in a perpetual state of balance regarding his governance, however, there is no better even keel to the tumultuous president´s rhetoric than his agenda for free-market reform that serves to counter any notion of dictatorial perceptions.
Brazil's government is attempting to greatly reduce the footprint of the state in the economy whether it be through asset sales, privatizations or concessions across a range of sectors, all of which it hopes will attract foreign investment into the country (Ayers, 2019). The fact that the Bolsonaro administration exceeded its 2019 target of $20 billion in divestiture is an accolade in itself. The government of Brazil set a goal of privatizing state assets worth at least $20 billion and in the first nine months of 2019 it privatized $23.5 billion which the government tallied as revenue $19.25 billion (Ayers, 2019).
The recent firing of the CEO of Petrobras is an example of the "interesting" character of Bolsonaro, while Bolsonaro does not share the same values as Venezuela's Chavez or Maduro there has been marked concern in the media. The Brazilian president likely understands the maxim coined by LBJ "there is no such thing as bad press." Where this recent demission has caused controversy this is merely a blip in the screen of his economic liberalization program that Paulo Guedes leads. The firing of the CEO of Petrobras was quickly countered by the official start in the process of privatizing Eletrobras as well as the proposal to privatize the national mail service. These rapid initiatives contrast with Bolsonaro´s recent decision involving Petrobras which demonstrates that after all the hype the Brazilian president is still keen on privatizing state-owned enterprises.
Brazil´s complex political system has inhibited Paulo Guedes and his economic team from making the progress that some expected; nevertheless there has been pension reform, the recent autonomy of the Brazilian Central Bank and the Law of Economic Liberty.
The coronavirus pandemic has been costly to the free-market minded economy minister confiscating hope for fiscal rectitude that he hoped to push through (Pulice, 2020). Reforms on privatization have been slower than desired in 2020. The mere presence and continuation of Paulo Guedes in Bolsonaro´s cabinet portends vast credibility and political capital to ease investor worries. The Economist forecasts that even though GDP fell 4.4% in 2020, and is expected to recover in 2021 by growing 3.2% (Economist Intelligence Unit Report, 2021).
CONCLUSION
Irrespective of who wins the presidency in 2022 the neoliberal economic groundwork has been laid and it is extremely doubtful that there will be any regression as the largest South American country attempts to become a more open and less protectionist. The ideas furthered by John Williamson´s work "The Washington Consensus" seems profoundly entrenched in Brazil and there are many reasons to think so.
Plan Execution
The historical implementation of Williamson´s points has a consistent past in Brazil. At the end of the military regime, the liberalization process slowly took its first steps. However, the acceleration only began with the Itamar Franco administration, through the Plano Real implementation, an important anchor for monetary stability. In terms of privatizations, Embraer became a role model of how to proceed. With the lessons of Embraer in mind FHC privatized Telebrás and Vale do Rio Doce and pushed through a Fiscal Responsibility Law. The empowerment of Federal Agencies could be understood as another example of FHC´s commitment to the Washington Consensus paper, but it's praxis demonstrated to be more of a push-back than an effective accomplishment.
FINAL CONSIDERATIONS
A robust transformational process has taken hold in Brazil in terms of economic and financial progress with a distinct capitalist bent. Irrespective of who wins the presidency in 2022 the neoliberal economic groundwork has been laid and it is extremely doubtful that there will be any regression as the largest South American country attempts to become a more open and less protectionist. The ideas furthered by John Williamson´s work "The Washington Consensus" seems profoundly entrenched in Brazil and there are many reasons to think so.
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About the Authors:
Marc Castillo is a Master in Latin American International Affairs from The George Washington University in Washington D.C. Marc has written several articles related to Brazil and the Mercosul region. He has lived, worked, traveled, and studied in Latin America. Marc is a federal civil servant and a consultant.
Sírio Sapper is a graduate of the Federal University of Rio Grande Do Sul in Porto Alegre, Brazil. He is a lawyer who focuses on military law as well as general law. He has written several articles related to Brazil and the Mercosul region. Sirio is an alumni from Justus-Liebig-Universität Giessen in Germany. He practices law in Porto Alegre, Brazil.
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